National Grid Annual Report 2019

FY2019 Annual Report · National Grid

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Annual Report
and Accounts
2018/19

Bring Energy to Life
National Grid plc is 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.

Highlights
We have continued to make strong strategic
and operational progress whilst maintaining
excellent safety levels and reliability across
all our networks. We have retained a focus
on our environmental sustainability record
and employee engagement.

Group financial highlights

Statutory EPS (p)*

Underlying EPS (p)*

Group Return on
Equity (RoE) %

102.5

56.2

58.9

11.7

12.3

11.8

49.5

48.1

44.3

16/17 17/18 18/19

* From continuing operations

Group operational highlights

Group safety
performance
(injury frequency
rate per 100,000
hours worked)

Greenhouse
gas emissions
(CO2 equivalent,
m tonnes)

0.10

8.3

0.08

6.9

7.0

Employee
engagement (%)

16/17 17/18 18/19

Contents

Strategic Report
1
Strategic Report contents
2
Business model
8
Chairman’s Statement
10
Chief Executive’s review
12
Our business environment
14
Our strategy
16
Progress against our strategy
20
Internal control and risk management
23
Viability statement
25
Financial review
34
Principal operations – UK
Principal operations – US
36
National Grid Ventures and other activities 38
Our commitment to being
a responsible business

Corporate Governance
46
Corporate Governance contents
58
Audit Committee
Finance Committee
63
Safety, Environment and Health Committee 64
Nominations Committee
65
Statement of compliance with the UK
Corporate Governance Code 2016
Other disclosures
Directors’ Remuneration Report

67
68
69

Financial Statements
Financial Statements contents
Statement of Directors’ responsibilities
Independent auditor’s report

Additional Information
Additional Information contents
The business in detail
Task Force on Climate-related
Financial Disclosures
Shareholder information
Other disclosures
Other unaudited financial information
Definitions and glossary of terms
Want more information or help?
Cautionary statement

91
92
93

196
197

210
216
221
225
238
243
244

Reporting currency
Our financial results are reported in sterling.
We convert our US business results at the weighted
average exchange rate during the year, which for
2018/19 was $1.31 to £1 (2017/18: $1.36 to £1).

Alternative performance measures
In addition to IFRS figures, management also
use a number of ‘alternative measures’ to assess
performance. Definitions and reconciliations to
statutory financial information can be found
on pages 225 – 234. These measures are
highlighted with the symbol above.

Online report
The PDF of our Annual Report and Accounts
2018/19 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:

Strategic Report

Business model: what we do
National Grid operates at the heart of the energy
system, connecting millions of people safely, reliably
and efficiently to the energy they use every day.

Principal operations – UK

UK Electricity
Transmission
We own the high-voltage transmission
network in England and Wales. We are
responsible for ensuring electricity is
transported safely and efficiently from
where it is produced; reaching homes and
businesses safely, reliably and efficiently.
In addition, we facilitate the connection
of assets to the transmission system.

Our role as Electricity System
Operator (ESO)
The ESO now operates as a separate
company within National Grid effective from
1 April 2019. We are responsible for making
sure supply and demand of electricity is
balanced in real time across Great Britain.
We are also the ESO for the Scottish
networks, but do not own them. During
2018/19 we worked to separate the ESO
from the electricity transmission system.

UK Gas
Transmission
We also own and operate the high-pressure
gas transmission network in Great Britain. We
are responsible for making sure Great Britain’s
gas is transported safely and efficiently from
where it is produced to where it is consumed.

As the Gas System Operator we are
responsible for ensuring that supply and
demand are balanced in real time on a
day-to-day basis.

4,481

miles (7,212 kilometres) of overhead lines
(2017/18: 4,474 miles; 7,200 kilometres)

4,760

miles (7,660 kilometres) of high-pressure pipe
(2017/18: 4,760 miles; 7,660 kilometres)

1,417

miles (2,280 kilometres) of underground cable
(2017/18: 969 miles; 1,560 kilometres)

Our business is organised into
segments, based upon activity
and location

Underlying operating profit (%)

11%

32%

47%

10%

Statutory operating profit (%)

14%

27%

50%

RAV, rate base and other
assets (%)

34%

15%

44%

Key:

UK Electricity Transmission
UK Gas Transmission
US Regulated

National Grid Ventures and
Other activities

National Grid Annual Report and Accounts 2018/19
Strategic Report | Business model: What we do

Principal operations – US

US Regulated:

Electricity
We own and operate transmission facilities
across upstate New York, Massachusetts,
New Hampshire, Rhode Island and Vermont.

We also own and operate electricity
distribution networks in upstate New York,
Massachusetts and Rhode Island.

Our electricity locations by state:
• New York;
• Massachusetts;
• New Hampshire;
• Rhode Island; and
• Vermont.

Gas
We own and operate gas distribution
networks across the northeastern US
and are responsible for connecting millions
of customers to the energy they use.

Our gas locations by state:
• New York;
• Massachusetts; and
• Rhode Island.

National Grid Ventures
and Other activities
National Grid Ventures (NGV) manages our
diverse portfolio of energy businesses that
are adjacent to our core regulated operations.
This operating segment represents our main
strategic growth area outside our regulated
core in competitive markets across the US
and the UK. The business comprises all
commercial operations in energy metering,
transporting primarily renewable energy
long distances through our electricity
interconnectors and storing liquefied
natural gas (LNG) in the UK.

In November 2018, we established National
Grid Partners with a focus on investment
and future activities in emerging growth areas.

Our other activities mainly relate to UK
property activities, together with corporate
activities in the UK and US.

8,881

miles (14,293 kilometres) of overhead lines
(2017/18: 8,881 miles; 14,293 kilometres)

35,560

miles (57,228 kilometres) of gas pipelines
(2017/18: 35,419 miles; 57,001 kilometres)

9.9 million

metering: gas meters
(2017/18: 11.1m)

1,000,000m3
Liquefied natural
gas tank space
(2017/18: 1,000,000m3)

7.8 GW

GW capacity of interconnectors
in operation or under construction
(2017/18: 6.4 GW)

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

National Grid Annual Report and Accounts 2018/19Strategic Report

Business model: how we operate
At National Grid we bring energy to life. In its simplest
form this means getting the heat, light and power that
customers rely on to their homes and businesses.

What we rely on

How we do business

The value we create

The key internal resources that we rely on to
do business are:
• our physical assets that move the energy;
• appropriate funding that allows us to invest

in our people and assets; and

• our talented workforce that ensures energy

is moved efficiently and reliably.

We also rely on maintaining relationships
with a number of key external stakeholder
groups, to ensure we best meet their needs
and maintain our licence to operate (see
pages 40 – 45).

We combine these input factors along
with our technical expertise to achieve
our purpose and our vision.

Our operating model creates a stable, reliable
and sustainable business that benefits both
our stakeholders and the wider society.

We do all of this in accordance with our
values, which guide everything that we do.

Our strategy is designed to maintain
and develop our business model, and
is supported by robust governance
and risk management processes.

Through constructive, transparent
engagement and consistent, reliable
delivery of our commitments, we build
trust with our stakeholders.

National Grid Annual Report and Accounts 2018/19Strategic Report | Business model: how we operate

What we rely on

Internal resources

Physical assets
We own electricity and gas networks that
transmit energy over long distances from
where it is produced and distribute it locally
to where it is consumed. These networks are
built to last for many decades and it would be
impractical for duplicate infrastructure to exist.
Such networks account for the vast majority
of our asset base. In addition, we own
various subsea electricity interconnectors
and LNG importation facilities which, while
scarce, are subject to competition.

c.£5 billion p.a.

Investment in our assets over the next three years

Funding
We fund our business through a combination
of shareholder equity and long-term debt.
We maintain an appropriate mix of the two
and manage financial risks prudently.

66%

Regulatory gearing (net debt as a proportion
of the value of regulatory assets and other
invested capital)

Employees
Our highly skilled, dedicated employees
have a strong public service ethos. They
manage and maintain the physical energy
infrastructure, and develop and sustain the
many stakeholder relationships that are
crucial to the Company’s success.

22,576

Employees worldwide

External relationships

Customers
In the UK we do not own the energy that
flows through our electricity cables and
gas pipes. This energy is owned by our
customers, such as electricity generators and
gas shippers. These industrial customers,
together with domestic consumers, pay to use
our networks. In the US we deliver electricity
and natural gas serving more than 20 million
people through our networks.

Contractors and suppliers
We work in partnership with our supply
chain that has complementary experience,
skillsets and resources. We agree mutually
beneficial contractual arrangements and,
wherever possible, leverage economies
of scale and use sustainable and global
sourcing opportunities.

Communities and governments
The fundamental societal impact of our
activities means that a range of stakeholders
have a legitimate interest in and influence on
the work we do. These include national and
regional governments, local communities,
our supply chain, and business and domestic
consumers of the energy we transport.

Economic, health, safety and
environmental regulators
We are subject to economic regulation
by bodies that are entirely independent of
National Grid. These economic regulators
set the prices we can charge for providing
an economic, efficient and non-discriminatory
service. Our regulated revenue therefore
covers day-to-day running costs, financing
capital expenditures to renew and extend our

networks, and incentives or penalties relative
to performance targets. It also affords our
shareholders a fair return on their investment.

The energy we transport is intrinsically
hazardous; our operations therefore have
to comply with laws and regulations set by
government agencies responsible for health,
safety and environmental standards.

National Grid Annual Report and Accounts 2018/19Strategic Report

Business model: how we operate
continued

How we do business

Our know-how
Over the many decades in which we have
played a vital role connecting people to the
energy they use, National Grid has built
safe and reliable networks. We have also
developed a well-respected and trusted
reputation for engineering excellence.

We couple our extensive skills, knowledge
and capabilities with innovation to ensure our
core competencies continuously create value
for shareholders and wider stakeholders alike.

We are recognised for our excellence in:

Asset management
We invest in and maintain our assets across
their life as cost-effectively as possible.

Our focus ensures efficient management
of our assets across their lifetime.

Capital delivery
We add value to our stakeholders by ensuring
safe and effective delivery of large and
complex infrastructure projects, ranging from
large portfolios of smaller works to stand-
alone mega projects.

7.2%

Asset growth 2018/19

£4.5 billion

Capital investment in 2018/19

Engineering
The skills of our engineers are vital to
delivering safe, efficient, reliable and
sustainable performance for all our
businesses. Our people:
• find practical and innovative solutions

to complex problems;

• employ risk-based decision-making; and
• adopt common approaches and

continuous improvements.

Our engineering expertise supports the
delivery of a reliable network.

Innovation
We focus our innovation activities to future
proof the business for our customers as the
energy landscape changes. Collaboration is
crucial as we search for new technologies and
techniques that will support the transformation.

£19 million

Research and development (R&D) 2018/19

Purpose, vision and values

Strategy and risk management

Our purpose is to
Bring Energy to Life

We believe it is crucial to have a clear sense
of what we stand for as a Company.

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

We have to play an active role in helping
to shape the changing energy landscape.

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

Our values define the mindset and behaviours
important for our business. They also guide
us to achieve the right outcomes and our
desired culture.

Our culture
National Grid's culture is the values, beliefs
and behaviours that characterise our
Company and guide our practices.

We are working hard to continue progress as
an inclusive employer that values diversity.
The knowledge and expertise of our
employees is fundamental to our business
success. Enabling our employees to reach
their potential requires investing in building
the skills and capabilities of all our people.

Our strategy places the customer at the
heart of our decision-making and consists
of three long-term priorities:
• optimising our operational performance;
• growing our core business; and
• evolving for the future.

We have well-established governance
structures that include comprehensive
risk management, strong controls
and financial discipline.

Further reading
Our strategy on pages 14 – 15
Principal operations
on pages 34 – 39
Internal control and risk management
on pages 20 – 22
Corporate governance from page 46

National Grid Annual Report and Accounts 2018/19Strategic Report | Business model: How we operate

The value we create

Society
We provide the energy systems that help
economies grow in a sustainable, affordable
and reliable way.

£54 million

Contribution to communities 2018/19

Investors
We aim to be a low-risk business, focused
on generating shareholder value through
dividends supported by asset growth
from investing in essential assets under
primarily regulated market conditions,
to service long-term sustainable
consumer-led demands.

Employees
We create an environment in which our
people can make a positive contribution,
develop their careers and reach their
full potential.

73%

Employee engagement score 2018/19

11.8%

Group Return on Equity 2018/19

Customers
By delivering the energy they need and
dealing with them in a transparent and
responsive manner, our customers trust
us to deliver services to them.

Contractors and suppliers
We maintain sustainable, responsible and
efficient supply chains in which our interests
and those of our suppliers are aligned with
the interests of customers.

Our customer satisfaction measures are listed in
our KPIs on page 16

£5.1 billion

Group supply chain spend 2018/19

Further reading
Our Key Performance Indicators
on pages 16 – 19
Our commitment to being a
Responsible Business
on pages 40 – 45
Stakeholder Engagement
on pages 54 – 55

Economic, health, safety
and environmental regulators
Through constructive, transparent
engagement and consistent, reliable
delivery of our commitments, we build
trust with our regulators.

0.1LTI

Group safety performance 2018/19

Communities and governments
We help national and regional governments
formulate and deliver their energy policies and
commitments. The taxes we pay help fund
essential public services. We have a role to
play in sustainability, enabling the transition
to a low-carbon future.

100%

IT equipment re-used or recycled 2018/19

National Grid Annual Report and Accounts 2018/19Strategic Report

Chairman’s
Statement

“ Our vision is of
an energy future
where bills are
kept low for
consumers, energy
is decarbonised,
and innovation is
encouraged and
where together
these efforts
support the growth
and prosperity of
the economies
we work in.”

Sir Peter Gershon
Chairman

National Grid has continued to make strong
operational progress in 2018/19, while
maintaining excellent levels of safety and
reliability. This has been in the context of a year
of wide regulatory and political uncertainty for
our stakeholders and the energy industry. In the
US, federal politics remain partisan including
the debate around the climate change agenda.
In contrast, at state level, we have strong
alignment with policymakers and regulators
who, like us, are committed to cleaner energy.

During the year we have worked to manage
the risk arising from continuing uncertainty
over Brexit in the UK. There has been strong
engagement with government and regulators.
We have conducted a number of Brexit
scenario-planning exercises and worked to
maintain access for customers to European
energy markets.

Our Group safety performance remains first
class. It is a key focus this year. We will be
introducing increased reporting on safety,
including ‘near miss’ incidents that will
support continued learning. We also
recognise the heightened concerns
among our US customers, regulators and
communities about gas safety following
the tragic explosions in the natural gas
system owned by Columbia Gas.

In November 2018, we announced our decision
to exercise our options for the sale of our
remaining 39% share in the Cadent Gas
distribution business that should complete
in June 2019.

The International Financial Reporting Standard
(IFRS) technical requirements make reporting
some of the performance measures that we
use as a regulated business challenging. We
provide additional information, on page 30,
about both our significant assets and liabilities
that do not form part of our audited accounts,
to help our investors gain a fair, balanced and
understandable view of our business. Where
practicable we reconcile these with our
statutory measures in ‘Other unaudited
financial information’ on pages 225 – 234.

Our share price, meanwhile, continues to be
affected by external factors, particularly the
uncertainty over the UK political and regulatory
environment. The Labour Party’s support of a
state ownership agenda for utilities and public
services adds further to this uncertainty. The
Board does not believe that state ownership
is in the best interests of consumers or wider
stakeholders and the disruption and
bureaucracy that would be involved would
inevitably slow down the UK’s transition to
being a low-carbon economy.

National Grid Annual Report and Accounts 2018/19Full year dividend (pence per share)

42.87 43.34 44.27* 45.93 47.34

14/15 15/16 16/17 17/18 18/19

* excludes a special dividend of 84.375p.

Final dividend of

31.26p/share

proposed to be paid on
14 August 2019

Annual General Meeting 2019
The 2019 AGM will be held at 11.30am
on 29 July 2019 at the ICC,
Birmingham.

Directors’ duties
In our effort to balance the
relationship between National
Grid and our key stakeholder
groups, the Board has taken
into consideration Financial
Reporting Council guidance.
We continue to be mindful of
the need to create value. By
considering our purpose, vision
and values together with our
strategic priorities, we balance
outcomes for our suppliers,
communities, employees,
regulators and customers
alongside long-term sustainable
growth for our investors.

The Board, advised by the
Group General Counsel &
Company Secretary of our duty
under section 172, determines
the impact of our decisions
on all stakeholders.

Further reading
Board engagement
with stakeholders
– pages 54 – 55

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

Strategic Report | Chairman’s Statement

National Grid has delivered first class safety
performance, excellent network reliability
and invested £10 billion in UK energy critical
national infrastructure during the first six years
of RIIO. This allows us to continue to play a
central role in enabling the decarbonisation
of the UK economy. Indeed, in April, the ESO
announced that it will be able to fully operate
the electricity system with zero carbon by
2025. Through innovative arrangements in
RIIO we have also generated £640 million
savings to date for UK consumers.

At a time when there is an increased urgency
to meet the challenge of climate change the
last thing that is needed is the enormous
distraction, cost and complication that state
ownership would bring. It is pleasing that
the majority of our investors agree with this
sentiment through their long-term view of
our financial and operational performance.

Ongoing dialogue with our regulators
remains an area of major focus. In the US, the
completion of a full refresh of our distribution
business rates supports one of our key strategic
pillars in the continued growth of our business.
We also considered our focus on costs and
efficiency. The resulting cost efficiency and
restructuring programmes in both the UK
and US will continue to drive performance
for both customers and shareholders.

The Board also reviewed the resolution of
the lengthy labour dispute with two of the
Massachusetts gas worker unions over
employment terms and conditions. I am
conscious that this has been a difficult period
for key stakeholders including our employees
and the communities we serve in the
Massachusetts gas business. We are now
focused on addressing the backlog of work,
re-integrating our workforce and rebuilding
the reputation of this business.

The Board and I note the progress we are
making on our strategic priorities. Against
the background of delivering on our priority
of optimising operational performance, we
continued discussions with Ofgem on the
RIIO-T2 price control. The overall framework
proposals in the sector-specific consultation
are a step in the right direction but we are
concerned that the proposals, as currently
set out, will not bring about the change
consumers need.

Similarly, the decision to apply a new and
untested regulatory model to the Hinkley-
Seabank Connection Project was disappointing.
This model seeks to impose on us the results
of simulated competition without giving us
the freedom of choice to decide to participate
and allocate scarce capital to the project.
We continue to review our option to challenge
the decision when it becomes possible to do so.

Innovation
We continue to support stakeholders, including
governments, communities and our regulators,
to review policy within a rapidly evolving energy
market. To prepare for the future, the Board
supports opportunities to adopt and embrace
technology and innovation. Two examples of
our ongoing adoption of digital come to mind:
the UK ESO now uses artificial intelligence to
improve wind and solar output forecasting; and
our US gas businesses now provide innovative
data to our field force and use technology to
improve work scheduling.

Dividend policy
Our dividend policy aims to grow the
ordinary dividend per share at least in line
with the rate of UK RPI each year for the
foreseeable future. Accordingly, the Board
has recommended an increase in the final
dividend to 31.26 per ordinary share
($2.0256 per American Depository Share). If
approved, this will bring the full year dividend
to 47.34p per share ($3.0872 per American
Depository Share), an increase of 3.07% over
the 45.93p per share for the financial year
ended 31 March 2018.

Sustainability
Our environmental sustainability performance
was strong in 2018/19. By embedding
sustainability in our business strategy and
ensuring it is integral to the way we do business,
we deliver positive outcomes for society. We
also drive more efficient performance while
identifying opportunities and managing risk in
a changing environmental and social landscape.

Our approach to environmental sustainability
focuses on those areas where we can have
the most impact and that are important to our
stakeholders. These themes are reducing our
greenhouse gases, managing waste and
natural resources efficiently and caring for
the natural environment. We will be reviewing
our strategy, targets and ambition in 2019/20.

Additional projects and awards
The Board was delighted to see recognition
and positive movement in a range of indexes,
such as The Times Top 50 Employers for
Women and Top 70 Best Employers for Race.
These awards recognise the important work
we are doing to support workplace equality
and inclusion.

People changes
We announced the appointment of Andy Agg
as Chief Financial Officer (CFO) and Executive
Director with effect from 1 January 2019. We
also announced a further strengthening of the
Board with the appointment of three additional
Non-executive Directors: Amanda Mesler,
Jonathan Silver and Earl Shipp. Andrew
Bonfield, Pierre Dufour and Nora Mead Brownell
have left the Board. You can read more details
of all our Board members’ experience and the
Committees they support in my Corporate
Governance review on pages 48 – 49.

I would like to extend my deepest appreciation
to all our employees and our wider workforce for
their hard work, dedication and commitment,
without which the Company’s achievements
this year would not have been possible.

Sir Peter Gershon
Chairman

National Grid Annual Report and Accounts 2018/19Strategic Report

Chief Executive’s
review

“ I truly believe that
a purpose-led company
delivers superior
performance for all
of its stakeholders.”

John Pettigrew
Chief Executive

This has been another extremely busy year
for National Grid, one in which we have made
significant progress, not without its challenges,
in pursuing our operational and strategic
priorities and delivering our investor proposition.

territories since 2015. Despite this, the efforts
that we have made to significantly improve our
speed of restoration means that we are now
able to reconnect the majority of customers
in less than 24 hours.

Keeping our workforce and the public safe
Let me start with safety – this is always our
top priority. This year we maintained our lost
time injury frequency rate at equivalent to
one lost time injury per million hours worked.
This is consistent with the best-performing
organisations worldwide, but this also means
striving relentlessly to do better – our ambition
is to ensure that all of our employees and
contractors are able to go home safely at
the end of each and every day. We have
continued our campaign of making safe
working second nature to all our employees
and contractors, and as instinctive as putting
on your seat belt before driving. That is the
safety culture I am proud to say we continue
to promote throughout National Grid.

Maintaining network reliability and
putting our customers first
We have also continued to maintain excellent
reliability across our networks, despite
significant winter storms in the US. In fact,
looking across our US electric businesses,
we have seen a 35% increase in the number
of adverse weather days across our service

Customer performance is also a major
priority. I am really pleased that our customer
satisfaction scores for our UK businesses have
increased by 3%. And in the US, customer
satisfaction scores increased by 5 and
12 points for electric and gas residential
customers respectively. The scores are
helped by the continued improvements we
are making to our customer portal and the
digitalisation of our customer touchpoints.

Delivering for investors
Our financial performance shows the strength
of our portfolio and of our strategy. We have
delivered another year of strong organic
growth in renewing and extending our energy
networks, investing a record £4.5 billion and
delivering asset growth of 7.2%, at the upper
end of our target range. The full year dividend,
subject to shareholder approval of the final
dividend, is up 3.1% to 47.34p, in line with our
policy, and is covered 1.2 times by underlying
earnings per share, up 5% to 58.9p. Statutory
earnings were somewhat lower because
of certain exceptional charges which I will
refer to below.

National Grid Annual Report and Accounts 2018/19Strategic Report | Chief Executive’s review

Optimising performance
Our core regulated businesses have
commenced efficiency and restructuring
programmes to create leaner, more agile
organisations that are more responsive to
customers’ needs whilst delivering sustainable
cost savings. We have made good progress
with our cost efficiency programme in the UK
as well as starting a similar exercise in the US,
recognised as exceptional charges. These are
taking action to remove costs from across the
business, simplify our supply chain, rationalise
our property portfolio and minimise future
increases to customer bills.

During the year both the NuGen and Horizon
nuclear projects cancelled their proposed
connection agreements. The regulatory
arrangements we have in place have mitigated
the economic impact of these cancellations,
though we have recognised an exceptional
charge for development costs incurred on
these projects over the last decade.

Our US business invested $3.5 billion in the
year, resulting in asset growth of 9.2%, up
180 basis points on last year. The focus of our
investment has been in modernising ageing
networks, whilst also providing better safety,
reliability and resilience.

The UK delivered another year of good
returns, with a Return on Equity of 12.4%,
within the range of 200 to 300 basis
points of out-performance that we have
committed to under RIIO-T1. The efficiency
and restructuring programme means
we are on track to maintain this strong
performance by saving operating costs
of £50 million in 2019/20 and £100 million
from 2020/21 onwards.

In the US we achieved a Return on Equity of
8.8%, representing 93% of allowed return.
This was slightly down on last year due to
additional safety compliance spend in New
York, the increased volume of minor storms,
and additional costs of restoring service to our
gas business in Rhode Island, following a low
supply issue into our distribution network.

After protracted union negotiations,
during which we brought in contractors
and additional supervision to ensure we
completed our work to the highest standard,
we reached a satisfactory agreement with
members of our Massachusetts gas
workforce. These actions led to an
exceptional charge which, whilst significant,
reflects our commitment to safety and
implementing the right contracts for the future.

We made good regulatory progress, reaching
a significant milestone, with all our distribution
businesses operating under new rates. We
agreed new rates for Rhode Island gas and
electric and Massachusetts gas during the
year and this has given us the right regulatory
platform to invest appropriately to best serve
our customers.

Pursuing disciplined, quality growth
During the year we announced the exercise
of our option to sell our remaining stake in
Cadent, and are expecting £2 billion of cash
proceeds in June 2019.

Our transmission networks in the UK have
delivered £1.2 billion of capital investment,
including two projects I am particularly proud
of. Firstly, we completed the first new electricity
overhead line route in England and Wales in the
last 16 years. The Canterbury to Richborough
connection is a 13-mile (21-kilometre) route
that was built in only 15 months enabling the
connection of the Nemo interconnector to the
grid. Secondly, our Feeder 9 tunnel project
under the Humber is now 75% complete and
is the largest single investment in our gas
infrastructure in a decade. Efficient delivery
of projects such as these is key to maintaining
our strong financial performance.

Our dialogue around RIIO-T2 also continues.
We remain committed to the importance of
a regulatory framework that fairly reflects the
risk return balance for both consumers and
shareholders. This supports the delivery of
energy innovatively and efficiently.

We have also continued to make significant
progress on our interconnector portfolio. The
Nemo Link with Belgium was commissioned
early and under budget. This was a complex
build, with 1,200 unexploded bombs and a
loaded 17th century cannon all needing to
be negotiated as we laid the cables across
the English Channel. With over 2.6 million
working hours on the project, I am pleased
to say we only had one minor safety incident.
Progress on IFA2 and North Sea Link, our
new interconnectors to France and Norway,
have continued on track, with the converter
stations’ construction on IFA2 going well
and NSL having now laid over 168 miles
(271 kilometres) of cable. On Viking Link,
the interconnector to Denmark, on which
we took the final investment decision during
the year, we have all planning approvals and
land rights and plan to start construction
in spring of 2020.

Evolving for the future
We are making major investments in improving
security of supply and connecting low-carbon
sources of energy to our networks. In addition
to the substantial interconnectors programme,
we recently announced our proposed
acquisition of Geronimo Energy and a joint
venture with the Washington State Investment
Board (WSIB). This is our first meaningful step
into renewable generation in the US, providing
us with a potential pipeline of over 6 GW of
solar and onshore wind projects at different
stages of development.

We are also helping to further New York’s
clean energy goals, with a filing in November,
for smart meter infrastructure that would
result in over 2.3 million gas and electric
meters being installed between 2021
and 2024.

We reached another milestone this year, with
the legal separation of the Electricity System
Operator from 1 April 2019, representing
another step forward in the evolution of the
energy industry in the UK.

Further, our National Grid Partners business,
which invests in innovative emerging technology
start-ups, has made great progress, investing
in over a dozen new companies which will
provide benefits across our businesses in future.

Becoming a purpose-led organisation
and inspiring future generations
Expectations on big businesses have changed.
Our purpose and how we conduct ourselves is
increasingly important. Given the role we play
at the heart of society, we are acutely aware of
this and it guides what we do. I truly believe
that a purpose-led company delivers superior
performance for all its stakeholders. During
2018/19, we commenced a holistic review of
the impact our business has on our society
and on a sustainable future. The work will
support us to build on our purpose to Bring
Energy to Life.

We are working hard to continue to inspire
the talent of the future with the promotion of
careers with science, technology, engineering
and maths (STEM) components. It is a
privilege to be able to support young people
from a wide range of backgrounds to follow
rewarding careers in these areas.

We continue to nurture the talent and
capability of our employees and our
commitment to inclusion and diversity.
Women now make up 32.1% of our
management population and 10.6% come
from ethnic minorities, but we still need to do
more. Connecting better with our customers
is enabled by diversity of thought and that
can only come from diversity of our people.

Enabling the energy transition
National Grid has a critical role to play in
enabling the energy transition. Power and
heat networks are key to the energy system.
It is our responsibility to create value for our
customers and society more broadly by
delivering affordable energy efficiently and
sustainably, whilst being agile and anticipating
and responding to the changing needs of
our customers.

We continue to help shape the debate on
creating cleaner, smarter energy networks
that future generations can rely on. Our
engineering excellence and the work we do
on a daily basis keeps the lights on and the
energy flowing, but we need to find more
sustainable and less carbon-intensive options.

Our key focus is to keep customers at the
forefront of everything we do. With that in
mind, we are continuing improvements in
customer service to deliver information to our
customers more quickly. We are also digitising
our customer-facing processes. This will make
us more efficient and make it easier for
customers to communicate with us.

Giving back to the communities in which we
operate is always important to us. We need
to maintain our absolute focus on keeping our
people and the public safe. Therefore safety
will always be the priority on our agenda.

Finally, I want to thank everybody who
has worked so hard to deliver these results
for National Grid in 2018/19.

John Pettigrew
Chief Executive

National Grid Annual Report and Accounts 2018/19Strategic Report

Our business environment
The energy industry is experiencing unprecedented
change, shaped by four key themes: affordability,
decarbonisation, decentralisation and digitisation.

Affordability
As the energy industry
transitions to a decarbonised,
decentralised, and digital
future, new investment will
be required to maintain the
reliability customers expect.
National Grid has a role to
play in helping customers
reduce their carbon footprint
and total energy costs.

UK transmission network costs per
average household dual fuel bill –
representation of the total bill

£107m

allocated to address UK fuel poverty
since 2017

Decarbonisation
Climate events during
2018 were widespread and
some, such as the wildfires
in California, impacted energy
networks significantly.
Understanding the social,
environmental and economic
impact to business
and measuring its
value is likely to become
more important as a result
of these events.

Carbon intensity of British electricity,
2013-2018 (gCO2/kWh)

529

477

443

330

266

248

2013

2014

2015

2016

2017

2018

Source: nationalgridESO

2018/19 developments

Our response

UK
In the UK, affordability of energy continues
to be a critical topic as highlighted in the
Government’s response to the ‘Cost of
Energy’ review.

US
The cost of energy remains a priority for
consumers and regulators who expect
affordable, reliable and cleaner energy. New
outcome-based performance incentives are
aligning shareholder value with customer value
and societal benefits. Such incentives are in
place in upstate New York, called Earnings
Adjustment Mechanisms (EAMs), and Rhode
Island, called Performance Incentive
Mechanisms (PIMs), and are proposed in
Massachusetts and downstate New York.

• We are focused on managing our networks over the
long term, maintaining highly reliable systems at
cost efficiency.

• Our US and UK regulated businesses are pushing
for greater affordability and innovative ways to
minimise the total cost of energy to consumers.

• In the UK, we have generated £640 million of
savings for consumers in the first six years of
the RIIO arrangements.

• In the US, we delivered an estimated $217 million
in net societal benefits in our first year of EAM
performance incentives in upstate New York. Such
benefits increase the affordability of energy and were
achieved through a range of activities. These include
reducing the electric system peak to mitigate supply
costs, enabling Distributed Energy Resource adoption
and increased adoption of energy efficiency.
• We are helping customers to lower their ‘total
energy wallet’ by enabling electric vehicle
infrastructure and encouraging adoption of electric
vehicles, as well as enabling customers to switch
from oil heating to heat pumps, helping customers
realise the benefits of lower costs.

• Our £107 million voluntary investment in Affordable

Warmth Solutions across 2017-2019, supports
addressing fuel poverty in the UK.

2018/19 developments

Our response

UK
During 2018, European carbon prices rose
above €20/tonne; three times the level seen in
2017. This increase was likely due to fossil fuels
burnt during abnormal weather conditions,
as well as the reduction in carbon permits
from 2019. Almost a third of electricity was
generated by renewables in 2018 Q3
(source: Gov.uk); however, gas remains
the primary fuel source for generation
and heating (source: Gov.uk).

US
State regulators continue to support renewable
energy. For example, a new Massachusetts
energy bill approved by the Senate in June
2018 doubles the state’s offshore wind
ambition to 3.2 GW by 2035, up from 1.6 GW
by 2027. In New York, Governor Cuomo
announced a commitment to 100% carbon-
free electricity by 2040, doubling a distributed
solar goal and more than tripling the state’s
offshore wind target.

• Reducing greenhouse gas emissions forms
part of the Company’s KPIs (see page 18).
We have also committed to meeting Task
Force on Climate-related Financial Disclosure
recommendations in full (see pages 210 – 211).
• ‘Our Contribution’ environmental strategy focuses
on the areas where we can make a difference. You
can read more about our approach and work on
page 41.

• In November 2018, NGV confirmed £850 million
of investment in the Viking Link interconnector
with Denmark.

• In both the UK and US, we are supporting the

adoption of electric vehicles through charge point
infrastructure, to support decarbonising transport
and improving air quality.

• In March 2019, NGV signed an agreement to acquire
Geronimo Energy, a leading developer of wind and
solar generation assets based in Minneapolis,
Minnesota. This provides National Grid with a
solid foundation on which to develop and grow
a large-scale renewable business in the US.

• Massachusetts, Rhode Island, and Connecticut

recently announced winners of their offshore wind
tenders totalling 1.4 GW, with Ørsted, supported
by National Grid, winning in Rhode Island and
Connecticut. Pricing on the Massachusetts contract
demonstrates the potential for US costs to reflect
the downward trend in technology costs,
spurred on by the European market.

• In June 2018, we published our Northeast US 80x50
Pathway: an integrated blueprint for New York and
New England to reduce greenhouse gas emissions
deeply below 1990 levels, while supporting
economic growth and maintaining affordability
and customer choice.

• Our recently launched energy efficiency and solar
marketplaces allow our customers to shop online
and receive instant rebates for energy-efficient
products such as LED light bulbs and smart
thermostats, receive free quotes for solar
and compare financing options.

National Grid Annual Report and Accounts 2018/19Strategic Report | Our business environment

Decentralisation
The energy system is in
transition from high to
low carbon. This change
coincides with a shift to more
decentralised generation,
from renewables to emerging
battery storage. As the
volume of this intermittent
and distributed generation
increases, a more resilient
and flexible system will be
required; one that makes
best use of available energy
resources to meet consumers’
needs in a balanced, efficient
and economical way.

65%

The Community Renewables scenario in FES
2018 suggests that 65% of all generation
could be produced locally by 2050

Source: Future Energy Scenarios July 2018, ESO

Digitisation
Businesses and lives are
being transformed by
innovations such as artificial
intelligence and virtual reality.
The energy landscape has
seen several changes as
companies look to create
new business models
and reduce energy prices
through digital technologies.
Technology commercialisation,
consumer demand and
regulatory stimulus will
continue to drive these trends.

The year-on-year reduction in
unplanned outages attributable to
use of enhanced sensors, smart meters
and advanced automation on electricity
grids in Europe and the US

Source: Bloomberg New Energy Finance

2018/19 developments

Our response

• During 2018, the UK’s transmission network made
connection offers to 47 transmission-connected
batteries, each approximately 50 MW. These
batteries represent a new type of connection for the
transmission grid. They also reflect the emergence
of new business models for grid balancing.
• National Grid Partners has invested in DER

companies. These include Leap, a marketplace
to effectively monetise distributed energy grid
services, and Omnidian, which provides
comprehensive protection plans for solar
energy systems investments.

• In the US, we expanded our partnership with

Sunrun, providing $8 million for a share in revenues
from new grid services contracts.

• The ESO has introduced new reforms to increase
market transparency and lower barriers to entry
for new providers of ancillary services, enabling
greater participation from non-traditional providers
including DER.

UK
In July 2018 the Future Energy Scenarios (FES)
document, published by the System Operator,
suggested that by 2050 up to 65% of all
generation could be locally produced. In July
2018, the first London streets received Ultra
Low Emission Zone status. This has since
expanded to the congestion zone. With
increasing local electricity demand from cars,
and potential for vehicles to both charge and
discharge electricity onto the network,
balancing demand, supply and power flows
will become increasingly complex. Electricity
storage and smart demand management will
play a key role in easing this complexity.

US
In the US, distributed and decentralised energy
resources growth and investment, including
small-scale residential and commercial solar
and storage, continue to accelerate. Seeing
this growing trend, utilities across the US are
exploring how they can best be compensated
for effectively integrating Distributed Energy
Resources (DER) into the grid. As the trend
continues, our key priority will be creating
innovative and productive ways to ensure
utilisation is effective, safe and reliable.

2018/19 developments

Our response

In 2018, the application of digital technologies
to drive sustained profitable growth by
optimising the way we work was a key global
trend. It is expected to continue exponentially
in the coming years.

The energy landscape is already being
transformed by technologies such as smart
meters and demand aggregators. These
devices employ the latest advances in artificial
intelligence to create new business models
and reduce energy prices.

Utility networks are beginning to identify
significant potential for their businesses
through digital transformations. Advances
in technologies to operate systems, manage
assets and engage with customers will be
a key facet of our business going forward.

• We are taking advantage of innovations in

digital technology and innovation to improve
our business performance. For example, we are
using the latest advances in artificial intelligence in
our UK energy forecasting to lower balancing costs
and improve energy security.

• Using state-of-the-art machine learning, the ESO team,
building on initial research by the Alan Turing Institute,
enabled improvement in forecasting for the Solar
Power Forecast. This improvement in forecasting
enables the decarbonisation and decentralisation
of the power grid and delivers efficiency savings to
consumers. The team are building on this success
to deliver the next generation of Demand
Forecasting Capabilities.

• 2018 also saw the launch of National Grid Partners,
our new venture capital and innovation group. The
group has already made several investments in
companies that are at the forefront of developing
potentially pivotal technologies.

Regulatory, political landscape
Brexit
National Grid is supportive of the EU and UK agreeing on a deal and a transition period to minimise any disruption and keep costs down for
consumers. We are working with the Government, regulators and others to ensure that the efficient flow of gas and electricity can continue
whatever the outcome of Brexit, with minimal impact to consumers. The interconnectors will continue to operate in any scenario and do not
anticipate any major disruption.

It is essential that energy is prioritised in the upcoming discussions on the EU-UK future relationship to the mutual benefit of both the EU
and the UK. We also support the UK’s continued participation in the EU’s Internal Energy Market as the most effective way to preserve
the consumer benefits and maintain certainty for investors.

State Ownership
The Labour Party has set out its aim to bring the energy networks under state ownership as part of its plans to deliver a decentralised
renewable energy future. This forms part of a wider state ownership agenda across key public utilities and services.

National Grid does not believe that this is in the best interests of consumers or stakeholders and is focused on enabling the transition
to a low-carbon energy system while maintaining a reliable and cost-effective service for consumers.

National Grid Annual Report and Accounts 2018/19Strategic Report

Our strategy
We ensure that customers are at the heart of our
decision-making and this guides everything we
do. We are focused on three strategic priorities
for our business, which will set the foundations
of our future success.

Customer first
We have a vital role to play in enabling
customers to benefit from the changes
in our industry. The energy transition and
associated technological advancements
mean we can provide our customers
with a more cost-effective service.
We measure customer satisfaction as a
KPI within each of our business segments.

National Grid Annual Report and Accounts 2018/19Strategic Report | Our strategy

We need to enhance the customer experience
and our productivity through more efficient
and customer-focused processes. Given the
scale of our core business in the UK and US,
even small improvements will have a huge
impact on our overall performance. Finding
new ways of optimising operations will
be an important factor in our ability to
compete and grow.

1. Optimise

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

We continue to look for business
development opportunities that are close
to our core business. In the US, we will
build on our successful efforts to pursue
opportunities in electricity and gas
transmission as well as large-scale
renewable options.

Interconnectors will continue to be
our focus over the next decade.

2. Grow core
business
Delivering strong operational
performance provides a
foundation from which
we can invest in our core
business and pursue
other opportunities.

Our preparations for the future have
already begun with the creation of NGV.
This collaboration brings together our
non-network businesses to focus on
targeted investment in the energy sector
outside of our core business.

We are also looking to develop new
capabilities that are essential for long-term
success. For example, the creation of National
Grid Partners allows us to increase our
capability in new and disruptive energy
technologies to meet the changing needs
of our customers and communities.

3. Evolve for
the future
We need to future-proof our
business against the effects of
a changing energy landscape.
Our networks are already
managing changes to the
generation mix, while the
needs and expectations
of our customers are evolving.

Performance in 2018/19
• Identified savings and began the transition

to leaner and more efficient operating
models in the UK and US core businesses;

• Completed union negotiations in

Massachusetts and integrated employees
back to work;

• Agreed rate case settlements for gas

in Massachusetts and gas and electric
in Rhode Island;

• Commenced embedding our Business
Management System (BMS) across
the Group;

• Gave the notice to exercise the options for

the sale of the remaining 39% of the Cadent
gas distribution business; and

• Agreed RIIO-T1 reopeners during autumn
2018, including investment in cyber and
physical security.

Further reading
See more on these in the Additional
Information section on pages 199 – 209

Performance in 2018/19
• Grew our UK and US regulated
businesses capex to £3.9 billion;

• Approved investment in the Viking Link
interconnector in September 2018;
• Delivered our first new overhead line
this century in England: Richborough
to Canterbury, connecting the Nemo
Link interconnector;

• Launched the Nemo Link interconnector,
which became operational on 31 January
2019;

• Interconnectors IFA2 and North Sea Link
are under construction and are on track
to be delivered to plan; and

• Delivered new infrastructure to replace
the century-old substation that powers
Rhode Island’s capital city.

Further reading
See more on these in the Additional
Information section on pages 199 – 209

Performance in 2018/19
• Achieved separation of the Electric

System Operator from the UK electricity
transmission company;

• Continued to participate in the debate on
decarbonisation, contributed to the 80x50
Pathway and supported electric vehicle
charging networks;

• Launched National Grid Partners with

£58 million invested to date; and

• Announced in March 2019 the proposed

acquisition of Geronimo Energy, a
developer of wind and solar generation.

Further reading
See more on these in the Additional
Information section on pages 199 – 209
and pages 223 – 224

National Grid Annual Report and Accounts 2018/19Strategic Report

Progress against our strategy
The Board uses a range of metrics, reported periodically,
against which we measure Group performance. These
metrics are aligned to our strategic priorities and were
refreshed during the year.

This year we revised our Key Performance Indicators to ensure we
measure performance against our strategy that was updated in 2017.
This revamp has resulted in 5 new KPIs, as identified below.

Key

Link to strategy

We report our performance measures as follows:

KPIs
• Principal measures that track individual progress against each

of our three strategic priorities. See below.

• Non-financial measures that underpin delivery of all three

strategic priorities. See below.

New KPI
for 2018/19

Optimise
performance

Grow core
business

Evolve for
the future

Indicates an
alternative
performance
measure

Other performance indicators
• Financial measures that result from the delivery of our strategic

priorities. These are set out within our financial review, from page 25.
• Business-unit-level measures that are specific to our three strategic
priorities. These are set out within our Principal Operations review,
on pages 34 – 39.

Link to remuneration
Remuneration of our Executive Directors, and our employees, is aligned
to successful delivery of our strategy. We use a number of our KPIs as
specific measures in determining the Annual Performance Plan (APP) and
Long Term Performance Plan (LTPP) outcomes for Executive Directors.
While not explicitly linked to APP and LTPP performance outcomes,
the remaining KPIs and wider business performance are considered.
For further detail, please see our remuneration report, on pages 69 – 90.

Principal measures

Strategy
link

KPI and performance

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

Target: 11–12.5% p.a.

11.7

12.3

11.8

16/17 17/18 18/19

Customer satisfaction
We measure customer and stakeholder satisfaction, while also maintaining
engagement with these groups and improving service levels.

£m

2018/19

2017/18

2016/17

Target

UK Electricity Transmission (/10)

UK Gas Transmission (/10)

US Residential – Customer
Trust Advice survey (%)

Domestic and Industrial and
Commercial Metering NPS
score (index)

7.9

7.8

7.7

7.6

7.4

8.0

6.9

58.7

56.6

60.7

57.4

+44

+39

–

Progress in 2018/19

Group RoE fell slightly during the year. The UK regulated
businesses delivered an improved operational return of 12.4%
in aggregate (2017/18: 12.1%). This was offset by slightly reduced
RoE in the US of 8.8% (2017/18: 8.9%) where lower operating
profits were not fully mitigated by the benefit of a lower tax
charge following US tax reform. In addition, Group RoE benefited
from the Fulham property sale and US legal settlements, partially
offset by the removal of the share of Cadent earnings, following
its classification as a discontinued operation.

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,
increased and was above target in 2018/19. The Trust Advice
metric recovered half of its decline from the prior year (two
percentage points) due to improved communications and
customer experiences.

Our customer satisfaction KPI comprises Ofgem’s UK electricity
and gas transmission customer satisfaction scores. Figures
represent our baseline targets set by Ofgem for reward or
penalty under RIIO (maximum score is 10).

Following a review, our Interconnector and LNG businesses will
no longer use NPS to measure customer satisfaction. Both units
will continue to monitor customers through an annual survey
designed to gauge the quality of services provided to wholesale
energy market participants. NPS scores reported represent the
Domestic and Industrial and Commercial Metering business.

National Grid Annual Report and Accounts 2018/19Strategic Report | Progress against our strategy

Principal measures continued

Strategy
link

KPI and performance

Progress in 2018/19

Network reliability
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 measure network reliability
separately for each of our business areas. The table below represents our
performance across all our networks in terms of availability. For both our
UK and US networks we continued to maintain excellent reliability.

For UK Gas Transmission, there was one incident at Didcot
Power station which meant that flows were restricted over
three gas days.

For UK Electricity Transmission, there were three Loss of
Supply incidents in 2018/19, of which one was incentivised,
one non-incentivised and the third not-reportable under
the Energy Not Supplied (ENS) incentive scheme. The ENS
incentive scheme returned a profit of £3.7 million in 2018/19.

£m

2018/19

2017/18

2016/17

In the US, we continued to maintain high levels of reliability.

UK Electricity Transmission (%)

99.999984

99.999964

UK Gas Transmission (%)

99.9896317

99.996151

US Electricity Transmission

US Electricity Distribution

IFA interconnector

BritNed interconnector

99.952

99.995

93.9

98.2

99.953

99.995

92.6

97.8

Total regulated asset 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 future revenue allowances.

5.9

5.4

Target: 5–7% growth each year

99.975

99.97

99.994

77.5

98.2

7.2

Cumulative investment in delivering new
low-carbon energy sources (£m)
We invest in new low-carbon energy sources
primarily through our interconnector businesses
(Nemo, North Sea Link, IFA 2 and Viking), investments
in companies delivering low-carbon energy sources
(for example our investment in Sunrun) and
investments into large-scale renewables.

Connections of renewable schemes to US
electric distribution network (MW)
The table represents the amount of customer-
owned renewable energy capacity installed on our
distribution network across our US footprint. Given
the variability and unpredictability of customer driven
projects, the Company does not presently have
an MW target. Current targets primarily focus on
regulatory compliance and customer need
date attainment.

16/17 17/18 18/19

702

395

137

16/17 17/18 18/19

381

295

281

16/17 17/18 18/19

Asset growth during the year was 7.2% (2017/18: 5.9%). This was
primarily driven by the accelerated US rate base growth of 9.2%
(2017/18: 7.4%) and higher levels of investment in other assets,
such as in NG Partners. This is partially offset by lower UK RAV
growth of 3.6% (2017/18: 4.5%).

Cumulative investment in delivering new low-carbon energy
sources was £702 million, up from £395 million in 2017/18.
This is principally from ongoing investment in our interconnector
projects, with Nemo Link successfully completed during the
year and significant progress made in the construction of IFA2
and North Sea Link.

Though the installed capacity shows a year-on-year decline,
Rhode Island actually installed a record amount of capacity
(76 MW) while the installed capacity in New York was on par
with 2017/18. The installed capacity in New York enabled the
Company to earn incentives through the state’s Peak Reduction
and DER Utilisation Earning Adjustment Mechanisms. Though
Massachusetts experienced a decline in customer-ready
projects to interconnect, attributed to a delay in the launch of
the state’s new incentive programme (SMART), it received a
record amount of capacity (1.15 GW). While non-residential
systems have represented less than 5% of connected
applications, they have accounted for 75% of the installed
capacity over the last three years.

NGV capital investment (£m)
NGV is focused on investment in a broad range of
energy businesses across the UK and US, including
our interconnector business, large-scale renewable
generation, LNG storage and regasification, and
energy metering.

225

444

363

NGV capital investment has increased in the year by
£81 million (22%). This was principally due to increased
investment in our interconnector projects under construction,
with further progress made in the construction of IFA2 and
North Sea Link. In addition, further investment has been made
to upgrade and expand the Millennium gas pipeline with our
joint venture partners.

16/17 17/18 18/19

National Grid Annual Report and Accounts 2018/19Strategic Report

Progress against our strategy
continued

Non-financial measures

KPI

Performance

Progress in 2018/19

Group lost time injury frequency
rate (LTIs per 100,000 hours worked)
This is the number of worker lost time injuries
per 100,000 hours worked in a 12-month
period (including fatalities) and includes our
employee and contractor population.

Target: < 0.1 LTIs

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

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 43).

Contribution of our corporate
responsibility work (£m)
Working with communities is important
for creating shared value. The significant
increase in donations in 2017/18 and 2018/19
is due to our contributions through the Warm
Homes Fund.

Education, skills and capabilities
We support the development of young
people’s skills and capabilities through
skills-sharing employee volunteering. In
particular, we focus on STEM subjects as
these support our future talent recruitment
and our desire to see young people gain
meaningful employment.

Climate change
This is a measure of our reduction of Scope 1
and Scope 2 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.

0.10

0.08

As at March 2019, our Group lost time injury frequency rate was 0.10. We have moved to
reporting on combined employee and contractor LTI rates to reflect our continued focus
on encouraging good safety behaviours across our entire worker community. The results
for 16/17 and 17/18 have been restated with Group LTI rates.

The majority of lost time injuries are as a result of individual issues such as slips, trips and
falls, soft tissue injuries from inappropriate lifting and carrying and non-fault road traffic
collisions – we are treating these incidents with appropriate focus whilst acknowledging
that they do not generally have the potential for more serious harm. Our analysis shows
that in 2018/19 the number of incidents with higher potential for harm has been lower
than expected.

We measure employee engagement through our employee engagement survey.
The results of our 2018/19 survey, which was completed by 76% of our employees,
have helped us identify specific areas where we are performing well and those areas
we need to improve.

Our engagement score was 73% favourable. While the score has dropped by four points
from our 2017/18 results, we remain in the range of other high-performing companies for
employee engagement. We have a range of action plans underway to support addressing
the change in our scoring during 2019/20.

During 2018/19, we have seen a reduction in the size of the UK, US and NGV
populations. Within this though, our female representation has decreased by a
greater proportion than male representation; leading to a slight decrease overall
of 0.3%, from 24.6% to 24.3%.

On the other hand, our ethnic minority representation has grown across the UK, US
and NGV populations; leading to an overall increase of 0.2%, from 17.9% to 18.1%.

16/17 17/18 18/19

Ethnic minorities
Women

17.3

17.9

18.1

24.3

24.6

24.3

16/17 17/18 18/19

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). Whilst we have no specific target, our overall aim is to
ensure we add value to society to enable communities to thrive.

16/17 17/18 18/19

41,461

35,425

29,591

16/17 17/18 18/19

8.3

62%

6.9

7.0

68%

In the UK, the overall contribution of our activities was valued at nearly £46 million. The
significant increase between 2016/17 and 2017/18 is due to our continued investment
through the Warm Homes Fund. In the US, our contribution was just over £7 million.

This gives us a combined Group-wide contribution of nearly £54 million.

We measure quality (>1 hour) interactions with young people on STEM subjects.
In the UK, in 2018/19, we have had 2,285 quality interactions with young people on
STEM subjects. We had 39,176 interactions in the US. Overall we have seen a total
of 41,461 interactions with young people on STEM, an increase of 6,036. The 2018/19
and 2017/18 data excludes UK Gas Distribution. All figures prior to 2017/18 include
UK Gas Distribution.

Our Scope 1 greenhouse gas emissions for 2018/19 equate to 4.5 million tonnes
of carbon dioxide equivalent (2017/18: 4.0 million tonnes) and our Scope 2 emissions
(including electricity line losses) equate to 2.5 million tonnes (2017/18: 2.9 million tonnes);
combined this is a 68% reduction against our 1990 baseline. These figures include line
losses and updated lower emissions factors for US Gas Distribution.

These are equivalent to an intensity of around 469 tonnes per £1 million of revenue
(2017/18: 505).

Our Scope 3 emissions for 2018/19 were 32.3 million tonnes (2017/18: 31.9 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 100% 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

Further reading
You can read more about TCFD
on pages 210 – 211

16/17 17/18 18/19

National Grid Annual Report and Accounts 2018/19We have established offices in Silicon Valley,
an incubation facility in San Francisco, and
have participated in funds based in the US,
Europe and Israel to further our outreach and
visibility in key innovation regions. We have
made a strong start, having directly invested
in 12 start-up ventures and the additional
venture capital funds in 2018/19, with a
cumulative investment of £58 million to date.

Our investment strategy largely targets
digital enabling technologies covering
five competitively attractive themes:
• Smart enterprise;
• Smart assets;
• Intelligent operations;
• Smart home, cities and mobility; and
• Energy efficiency.

More details can be found at
www.ngpartners.com including details
of each of our portfolio investments.

The value we look to create through
innovation is often associated with introducing
new methods to better manage our assets
and finding ways to more efficiently build
new infrastructure. We also aim to identify
opportunities to enhance our customer
service delivery, and continually strive to
make our businesses safer and more
sustainable over the long term.

Further reading
Further details about our R&D
and innovation activities can be
found in Additional Information
on pages 223 – 224

Strategic Report | Progress against our strategy

The System Operator has been innovating
to ensure we continue to provide secure,
affordable and sustainable supplies of energy
in a fast-changing world. The year ahead will
see even more projects generated by the
Electricity System Operator, including the
world’s first Black Start from Distributed
Energy Resources (DERs). This is a £10 million
Network Innovation Competition (NIC) project
with SP Energy Networks. It will develop and
demonstrate coordination of DERs to provide
a safe and effective Black Start service and
lower cost to consumers. The ESO also uses
innovation to accelerate market development.

In the US, we focus innovation and R&D on
the advancement of products, systems and
work methods that may be new to National
Grid. This is accomplished by working with
internal departments to identify where
strategic investment is needed and will prove
beneficial to our business and stakeholders.
In Massachusetts, under our Solar Phase II
programme, we have built 15.27 MW of
photovoltaics (PV). These PV sites have been
developed with advanced grid interactive
controls. The aim of the project is to test
and analyse the impact of future high
levels of DERs on distribution systems.

In our US gas businesses, our main R&D
priority is increasing public safety, protecting
our workforce and reducing the cost of the
work we perform. An example is the
successful deployment of new equipment to
stop the flow of gas in our distribution mains
when maintenance or repair is required. We
are now expanding the applicability to mains
sized 750mm and above. Such innovative
technology allows our workforce to operate
more quickly and safely in smaller excavations
with less customer impact.

National Grid Partners
In 2018 we launched National Grid Partners,
our dedicated corporate innovation
investment function. We completed our
first direct venture investments during summer
2018 and we continue to pursue strategically
aligned and financially attractive global
opportunities for National Grid. National Grid
Partners has brought in professional venture
capital, incubation and business development
experience to invest in start-up ventures
directly. The function also provides visibility
to emerging technologies globally.

Financial measures that result from
the delivery of our strategic priorities
In addition to the above measures, the Board
also monitors a range of financial output
indicators that measure the successful
delivery of our strategy. These measures
are listed below. Further detail can be
found in our financial review:
• Dividend growth, page 33;
• Asset growth, page 30;
• Accounting profitability:

• Underlying EPS, page 26;
• Statutory EPS, page 26;

• Value creation: Value added per share,

page 31; and

• Balance sheet strength: Regulatory
gearing, page 31 (new in 2018/19).

Research and Development
The Group’s investment in research and
development (R&D) during the year was
£19 million (2017/18: £13 million; 2016/17:
£14 million).

However, our work is wider than just R&D.
Across our organisation we have dedicated
innovation functions in several of our core
businesses. Additionally, due to the large
number of partners we work with to advance
new ideas, our disclosed R&D 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 projects.

Innovation in our UK and US principal
operations
Collaborating across the industry is crucial
to developing new ideas and delivering
value to our stakeholders. We search for new
technologies and techniques to challenge the
way we work. Partnerships are critical. One
focus area is the impact of the changing
energy landscape, which we explore through
workshops and bilateral engagements. We
are also developing innovation projects to
drive the decarbonisation of transport,
heat and industry.

We work in collaboration with technical
organisations, academia and suppliers in
the energy sector that align with our goals
and objectives. This collaboration also helps
inform our strategic direction in response to
US jurisdictional requests for modernisation.

The UK electricity transmission network is
continuing with innovation investments. We
started 23 new projects to support delivery
of secure, reliable and sustainable energy
systems. We are also continuing our
contribution to academic research, supporting
24 grants to the value of £64.4 million, working
with the Engineering and Physical Sciences
Research Council (EPSRC) to support
allocation. We are also committed to finding
sustainable solutions to our operational
challenges. A good example of this is the
use of bamboo as sound insulation to
reduce the impact on local communities
from transformer noise.

National Grid Annual Report and Accounts 2018/19Strategic Report

Internal control and risk management
The Board is committed to protecting and enhancing our reputation
and assets, while safeguarding the interests of our shareholders.

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, operational 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 Executive
Committee and the Board twice a year.
In addition to these reports, the 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.

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 page 61.

Internal control over
financial reporting
The periodic Sarbanes-Oxley (SOX)
Act 2002 reports, which contain
management’s opinion on the
effectiveness of internal control over
financial reporting, are received by
the Board in advance of the full year
results. They concern the Group-wide
programme to comply with the
requirements of section 404 of the SOX
Act 2002 and are received directly from
the Group Controls Team, and through
the Executive and Audit Committees.
For more information, including reporting,
see the report of the Audit Committee
on pages 58 – 62.

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 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 Group-level with implementation owned by
the business. Our enterprise risk management
process provides a framework through which
we can consistently identify, assess, prioritise,
manage, monitor and report risks. The process
is designed to support the delivery of our vision
and strategy, described on pages 14 – 15.

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
about the Group’s risk profile with the Executive
Committee and the Board. The risks are
reported and debated with the Executive
Committee and the Board every six months.

When determining what our principal risks
should be, a broad range of factors are
considered. In 2018/19, external events played
a large part in the assessment of threats and
opportunities. 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. During
the year, our Brexit working group assessed
these issues and devised scenarios to cover
the possible outcomes. Based on the worst
case scenario (‘no deal’), we 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 engaged with our
customers, stakeholders and especially our
regulators, as we seek to inform them of the
Brexit outcome we believe would be in the
best interests of consumers.

In the US, gas industry events on third-party
networks not only influenced companies to
incorporate lessons learnt, but also changed
significantly the regulatory environment for the
industry. These events included the Columbia
Gas Company explosion/fires incident caused
by the over pressurisation of a natural gas
pipeline system that led to one fatality, 25 people
injured and extensive property losses in three
Massachusetts towns. We incorporated
considerations from a safety and regulatory
perspective into our principal risk analysis
and viability testing scenarios.

The fires in California that caused numerous
deaths and widespread destruction led us
to review our focus on climate change
within our principal risk scenario testing.
The review considered our insurance
coverage, cash flow and reputation following
the subsequent findings concerning the liability
of California’s utility company, Pacific Gas and
Electric (PG&E).

In addition to the issues above, senior leaders
and the Board also considered certain aspects
of the principal risks in more detail, including
cyber security, emerging technology, asset
safety and Ofgem’s sector specific RIIO-T2
consultation.

We test principal risks annually to establish
their impact 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 our viability statement
(see pages 23 – 24). The Board, Executive
Committee and other leadership teams
discuss the results of the annual principal
risk testing at the end of the year.

Changes during the year
During the previous financial year, the
Executive Committee and the Board
undertook a re-assessment of the Company’s
principal risks and approach to risk appetite.
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’.

The Board also considered the potential for
state ownership of energy supply networks by
the UK Labour Party. Should the UK Labour
Party come to power, the timing and routes
for energy supply network to move to state
ownership are currently uncertain. The
impact upon National Grid remains unclear.
The Government would have to pay fair
compensation for the Company’s property
which would be determined at the time, and
could be calculated in a number of ways. We
have canvassed a wide range of stakeholders
to understand their views of state ownership.

Our Group Technology and Innovation function
re-launched in January 2018 and adopted the
National Grid Partners (NGP) brand externally.
NGP continues our mission to identify disruptive
technology and new business models. NGP
also supports us connecting disruptive
innovation more tightly with our growth strategy.
Incorporated within NGP are our corporate
venture capital and incubation functions that
make and manage investments in financially
attractive and complementary start-up
organisations. Our disruptive innovation
and business development functions foster
greater collaboration and accelerate new
ideas for growth.

National Grid Annual Report and Accounts 2018/19Strategic Report | Internal control and risk management

During this year, we worked to embed the risk appetite
framework in the business. As part of this process, we
developed Key Risk Indicators (KRIs) for our principal risks
at the Group level and for the risks at the US and UK regional
level. KRIs are useful tools to enhance the monitoring and
mitigation of risks and have multiple purposes:
• help signal a change in the level of risk exposure

associated with specific activities;

• indicate the effectiveness of controls; and
• help assess if we are operating within our risk

appetite framework.

Generally, the KRIs have been taken from our existing
business performance metrics and utilised in a way that
helps provide visibility to specific risk issues. The KRIs
may be modified as we fully assess their effectiveness
in this coming year.

Our 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 aim includes considering inherent risks, which in turn, 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 212 – 215, as well as our key financial risks,
which are incorporated within note 32 to our consolidated financial statements on pages 162 – 172. Risk trends* reported below take into account
implemented mitigation actions and may be influenced by internal or external developments.

Operational risks

Operational risks relate to the 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
that it is not in line with our vision and values.

Our operational principal risks have a low likelihood of occurring. However, should an event occur without effective prevention or
mitigation controls it would have a high level of impact. The risk owners, executive leaders, and their teams develop and monitor actions
to control the risks. Operational risks are managed through policy, standards, procedure-based controls, active prevention and
monitoring. The operational risks link to our strategic priority to ‘Optimise Performance’. Principal risk assessment includes reasonable
worst case scenario testing i.e. gas transmission pipeline failure, loss of licence to operate, cyber security attack – and the financial and
reputational impact should a single risk or multiple risks materialise. External events over this past year – the extreme weather events,
the fires in California and the Columbia Gas Company incident – were considered in the assessment and testing, as well as in the
development of mitigation actions.

Please also refer to pages 210 – 211 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:

(17/18 Neutral)

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 continued to focus on risk mitigation actions designed to reduce
the risk and help meet our business objectives. We incorporated
monitoring action status into various business processes and senior
leadership including:

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

• Putting our Group-wide process safety management system in
place to make sure a robust and consistent framework of risk
management exists across our higher hazard asset portfolio;

Risk trend:

due to the dynamic nature of the cyber
security threat (17/18 Increasing Risk)

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

Risk trend:

(17/18 Increasing Risk)

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

Risk trend:

(17/18 Neutral)

Risk trends are assessed to include any external factors outside our
control as well as the strength and effectiveness of mitigations as
reviewed by management.

• Implementing 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;

• Continually investing 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;

• Exceptional network reliability is maintained through a holistic
approach encompassing preventative and mitigating actions.
Implementation of asset health programmes which include
inspection, maintenance, refurbishment and replacement
minimises network interruptions due to asset failure. Our UK Gas
Transmission’s Winter Preparedness Plan and diversity in our US
gas procurement are additional examples of pre-emptive measures
undertaken to maintain network reliability. Should energy flow
disruptions occur, business continuity and emergency plans are in
place and practiced, including black start testing. Critical spares are
maintained to ensure we can quickly and effectively respond to
a variety of incidents – storms, physical and cyber-related attacks,
environmental incidents and asset failures; and

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

insurance, captives and direct (re)insurance placements. This
provides some financial protection against property damage,
business interruption and liability risks.

National Grid Annual Report and Accounts 2018/19Strategic Report

Internal 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, while 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 ‘Grow our core business’ and ‘Evolve for the future’.
The political climate and policy decisions of our regulators in 2018/19 were key considerations in assessing our risks.

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

Risk trend:

due to energy regulatory environment
(17/18 Increasing Risk)

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

Risk trend:

due to current political environment
(17/18 Increasing Risk)

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

Risk trend:

(17/18 Neutral)

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. We also 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, we established the
partnership with Energy Impact Partners 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 risks

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. Building 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.

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

Risk trend:

(17/18 Neutral)

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

During the year, we also improved the rigour of our succession
planning and development planning process, particularly at senior
levels. It 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 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 32
in our financial statements on pages 162 – 172.

National Grid Annual Report and Accounts 2018/19Viability statement

Strategic Report

The Board’s consideration of the longer-term
viability of the Company is an extension of
our business planning process. This process
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.

Utilising our established top-down/bottom-up
risk management process, we identify,
monitor and challenge the principal risks
facing the Company as described on pages
21 – 22. Throughout the year, the Board
considered the principal risks shown in the
table below and reviewed preventative and
mitigating controls and risk management
actions. The Board also discussed the
potential financial and reputational impact
of the principal risks against our ability to
deliver the Company’s business plan.

By assessing the potential impact of our
principal risks on the longer-term viability
of the Company, we can test the 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 timeframe over which we should
assess the long-term viability of the Company.
The following factors have been considered
in making this decision:
• we have reasonable clarity over a five-year
period, allowing us to make an appropriate
assessment of our principal risks;

• to test this timeframe, the Board considered
whether there are specific, foreseeable risk
events that are likely to materialise within
a five- to ten-year period, which might
affect the Company’s viability and should
therefore be taken into account when
setting the assessment period. No
risks of this sort were identified; and
• it matches our business planning cycle.

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

Operational impacts
Scenario 1 – A significant cyber
attack in the UK.
Scenario 2 – A wide spread electrical
network interruption in the UK.
Scenario 3 – A catastrophic gas
transmission pipeline failure in the US.
Scenario 4 – Emerging technology
leading to significant numbers of
people going ‘off grid’.

Performance impacts
Scenario 5 – A breach of personal
data information.
Scenario 6 – The state ownership
of the energy sector in the UK.
Scenario 7 – A poor outcome
to RIIO-T2 negotiations.

In addition to testing individual principal
risks, we also considered the impact of a
cluster of principal risks materialising over
the assessment period. Recent external
developments such as incidents that affected
other utilities were considered, such as
the significant financial and reputational
impacts of the Columbia Gas Company
explosion/fires incident in Woburn. We also
considered climate change-related weather
scenarios, as well as incidents such as our
gas outage on Aquidneck Island in Rhode
Island. We chose a combination of risks
which, in the opinion of the Board,
represented worst-case scenarios.

Scenario 8 – A cyber attack resulting in
a data breach and widespread electrical
outage leading to the state ownership of
UK gas and electric networks.
Scenario 9 – Catastrophic asset failure
of a gas pipeline in New York, resulting
in the loss of ability to operate local
gas networks.

The Board considered the reputational and
financial impacts for each scenario (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 results
against that headroom. The testing of risk
clusters also included an assessment of the
potential impact on the business plan. The
Board considered key financial metrics,
specifically Group gearing, RCF/Net Debt,
FFO/Net Debt and FFO/Gross Debt credit
rating metrics to ascertain the viability of
the Company. In keeping with our worst
case scenario analysis, it is assumed that
management does not take any remedial
actions over the five-year assessment period.

No single principal risk, cluster or combination
of principal risks was found to have an impact
on the viability of the Company over the
five-year assessment period. In addition, our
assurance system contains preventative and
mitigating controls to minimise the likelihood
of occurrence and/or financial and
reputational impact.

In assessing the impact of the principal risks
on the Company, the Board considered the
stability of the markets in which we operate,
the robust financial position of the Group
and our ability to sell assets, raise capital
and suspend or reduce dividends. It also took
into account Ofgem’s legal duty to consider
funding requirements for the licensed activities
of National Grid Gas plc, National Grid
Electricity Transmission plc and National
Grid Electricity System Operator Limited.

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 20, the
Directors have a reasonable expectation
that the Company will continue operating and
meet its liabilities over the period to May 2024.

National Grid Annual Report and Accounts 2018/19Viability statement continued

Strategic Report

Principal risk

Viability scenario

Matters considered by the Board

Major cyber security breach of business,
operational technology and/or CNI
systems/data.

Scenario 1 – A
significant cyber
attack.

The Board received updates on cyber security in:
• March 2018;
• June 2018;
• July 2018;
• September 2018;
• December 2018; and
• March 2019.

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

Scenario 2 – An
extended electrical
outage in the UK.

• Two Board Strategy sessions held during the year;
• Bi-annual NGV overviews; and
• Considered technology and innovation.

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

Scenario 3 – A gas
transmission pipeline
failure in the US.

• The Board reviews the current safety performance of the Company at each
meeting. Additionally, safety is a fundamental priority and is looked at in
detail by the Safety, Environment and Health Committee (‘SEH Committee’)
who have delegated authority from the Board; and

• Our Electricity and Gas Engineering Reports to the SEH Committee also

provide progress updates on our asset management improvement.

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.

• Annual updates on the Company’s information systems.

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

N/A

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

Scenario 6 – The
state ownership of
the energy sector
in the UK.

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

Scenario 7 – A
poor outcome of
RIIO-T2 negotiations.

• Bi-annual updates on people matters;
• Considered capabilities to support the delivery of strategic priorities; and
• 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 establishes the criteria for any
new position.

The Board received updates and reviews of:
• the impact of Brexit and access to the Internal Energy Market;
• the potential threat of state ownership;
• US tax reform;
• UK regulatory strategy;
• US regulatory strategy;
• bi-annual UK/US/NGV customer key issues for 2018/19; and
• US customer proposition strategy (March 2019).

The Board received updates and reviews of:
• US regulatory strategy;
• UK regulatory strategy;
• UK System Operator;
• Key regulatory policy issues for 2018/19; and
• RIIO-T2.

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’.

• Bi-annual updates from National Grid Partners; and
• During the year, Board strategy sessions considered digital strategy
as well as technology and innovation items such as electric vehicles.

National Grid Annual Report and Accounts 2018/19Financial review

Strategic Report

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

Our investment proposition
We aim to be a low-risk business, focused on generating shareholder value through dividends supported by asset growth from investing
in infrastructure assets under primarily regulated market conditions, to service long-term sustainable consumer-led demands.

The Group comprises a portfolio of high-quality, long-term assets at the heart of the energy system. These assets share certain key characteristics
– low commercial risk profile and stable cash flows, underpinned by long-term contracts or regulatory arrangements. Our core regulated
businesses in the UK and US generate nearly 90% of our operating profits. They benefit from independent and/or stable regulation and
macro-economic protection, and the chart below describes how these businesses create financial value.

Revenue and proﬁts

Cash ﬂows

Investment

The vast majority of our revenues
are set in accordance with our
regulatory agreements (see pages
199 – 209), 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.

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.

We also own a diverse and growing portfolio of commercial energy businesses operating in markets across the UK and US. These include our
Grain LNG terminal and electricity interconnectors between the UK and continental Europe, which generate revenue by selling capacity to store
or transmit energy. Our UK metering business generates revenue primarily through meter rentals. We also own a commercial property business
which develops and sells surplus land.

We deliver value for shareholders and stakeholders alike by:
• operating within our regulatory frameworks as efficiently and compliantly as possible;
• performing well against our regulatory incentives, thus delivering customer benefits and good returns;
• managing our cash flow requirements and securing low-cost funding; and
• maintaining a disciplined approach to investment in our networks.

Summary of Group financial performance
Performance management framework
In managing the business we focus on various non-IFRS measures which provide meaningful comparisons of performance between years,
monitor the strength of the Group’s balance sheet as well as profitability and reflect the Group’s regulatory economic arrangements. Such
alternative and regulatory performance measures are supplementary to, and should not be regarded as a substitute for, IFRS measures, which
we refer to as statutory results. We explain the basis of these measures and, where practicable, reconcile these to statutory results in ‘Other
unaudited financial information’ on pages 225 – 234.

Specifically, we measure the financial performance of the Group from different perspectives:
• Capital investment and asset growth: Currently we expect to invest c.£5 billion per year and annual growth in our asset base is expected

to be at the top end of the 5 – 7% range.

• Accounting profit: In addition to statutory IFRS measures we distinguish between adjusted results, which exclude exceptional items and
remeasurements, and underlying results, which further take account of: (i) volumetric and other revenue timing differences arising from our
regulatory contracts, and (ii) major storm costs which are recoverable in future periods, neither of which give rise to economic gains or losses.
In so doing we intend to make the impact of such items clear to users of the financial statements.

• Economic profit: Measures such as Return on Equity and Value Added take account of the regulated value of our assets and of our

regulatory economic arrangements to illustrate the returns generated on shareholder equity.

• Balance sheet strength: Maintaining a strong investment grade credit rating allows us to finance our growth ambitions at a competitive rate.

Hence, we monitor credit metrics used by the major rating agencies to ensure we are generating sufficient cash flow to service our debts.

This balanced range of measures of financial well-being informs our dividend policy, which is to grow the dividend per share at least in line with
UK Retail Price Index inflation for the foreseeable future.

National Grid Annual Report and Accounts 2018/19Financial review continued

Strategic Report

Summary of Group financial performance for the year ended 31 March 2019
Financial summary for continuing operations

£m

Statutory results

Operating profit

Profit after tax

Earnings per share (pence)

Dividend per share (pence), including proposed final dividend

Capital expenditure

Alternative performance measures:

Underlying operating profit

Underlying profit after tax

Adjusted earnings per share (pence)

Underlying earnings per share (pence)

Underlying dividend cover

Capital investment

Retained cash flow/adjusted net debt

Regulatory performance measures:

Asset growth

Group Return on Equity

Value added

Regulatory gearing

2018/19

2017/18

Change

2,870

1,502

44.3p

47.34p

4,321

3,427

1,998

59.0p

58.9p

1.2

4,506

9.4%

3,493

3,549

102.5p

45.93p

4,074

3,495

1,945

55.3p

56.2p

1.2

4,251

9.7%

(18)%

(58)%

(57)%

(2)%

–

(30)bps

7.2%

5.9%

130bps

11.8%

12.3%

(50)bps

2,071

66%

2,004

64%

200bps

We explain the basis of these alternative performance measures and regulatory performance measures and, where practicable, reconcile them
to statutory results on pages 225 – 234.

The Group’s statutory results for the year were impacted by exceptional charges incurred in respect of the Massachusetts Gas labour dispute
(-6.2p EPS), our UK and US cost efficiency and restructuring programme (-4.7p) and impairment of development costs in respect of the
termination of the NuGen and Horizon nuclear connection projects (-3.3p). Last year’s statutory results benefited (by 43.8p EPS) from the
reduction in deferred tax provisions as a result of The Tax Cuts and Jobs Act (tax reform) in the US.

Underlying operating profit was down 2% as the return of certain UK Gas Transmission revenue allowances and the impact of tax reform on
US regulated revenues were partly mitigated by favourable legal settlements and sales to the St William property joint venture. With net financing
costs steady at around £1 billion, the lower US federal tax rate and lower share count contributed to a 5% increase in underlying EPS to 58.9p.
Capital investment of £4.5 billion helped deliver asset growth above our targeted 5 – 7% annual range. Value added (our measure of economic
profit) increased year-on-year although Group RoE was lower, reflecting the removal of the Cadent contribution from underlying results. RCF/net
debt was consistent with the Company’s strong investment grade credit rating. The recommended full-year dividend per share of 47.34p is in line
with policy and is covered 1.2 times by underlying EPS.

Profitability and earnings
The table below reconciles our statutory profit measures for continuing operations, at actual exchange rates, to adjusted and underlying versions.

Reconciliation of profit and earnings from continuing operations

£m

Statutory results

Exceptional items

Remeasurements

Adjusted results

Timing

Major storm costs

Underlying results

Operating profit

Profit after tax

Earnings per share

2018/19

2017/18

Change

2018/19

2017/18

Change

2018/19

2017/18

Change

2,870

3,493

(18)%

1,502

624

(52)

(26)

(10)

480

3,442

3,457

n/c

2,001

(108)

(104)

142

(72)

3,549

(1,532)

(101)

1,916

(62)

(58)%

3,427

3,495

(2)%

1,998

1,945

44.3p

14.2p

0.5p

59.0p

(2.1)p

2.0p

58.9p

102.5p

(57)%

(44.3)p

(2.9)p

55.3p

(1.7)p

2.6p

56.2p

In calculating adjusted profit measures, where we consider it is in the interests of users of the financial statements to do so, we exclude certain
discrete items of income or expense that we consider to be exceptional in nature. The table below summarises such items; full details are
contained in note 5 to the financial statements together with an explanation of the process used to make this determination.

National Grid Annual Report and Accounts 2018/19Strategic Report | Financial review

Exceptional income/(expense) from continuing operations

£m

Massachusetts Gas labour dispute

UK and US cost efficiency and restructuring programme

Impairment of nuclear connections development costs

LIPA MSA settlement

US tax reform

Total

Impact on
operating profit

Impact on
profit after tax

Impact on
EPS

2018/19

2017/18

2018/19

2017/18

2018/19

2017/18

(283)

(204)

(137)

–

(624)

–

(209)

(160)

(111)

–

(480)

–

1,515

1,532

(6.2)p

(4.7)p

(3.3)p

–

(14.2)p

–

0.5p

43.8p

44.3p

This year we have classified the following items as exceptional:
• Massachusetts Gas labour dispute: As described in the Chief Executive’s review on page 11, in the period between the expiration
of contracts for the union workforce in June 2018 and their return to work in January and February 2019, we implemented a workforce
contingency plan. The £283 million of incremental costs (pre-tax) incurred principally relate to the employment of fully qualified external
contractors, alongside supervisors and workers from other areas of our business to ensure work continued safely;

• Efficiency and restructuring: A total of £204 million has been provided to reorganise our core regulated businesses in the UK (£136 million)

and US (£68 million); and

• Impairment of nuclear connections development costs: £137 million of charges relating to the write-off of costs incurred in connection
with the Horizon and NuGen nuclear connection projects that UK Electricity Transmission had been working on for the last decade, which
were cancelled during the period, net of £13 million termination income. From an economic perspective, we expect to recover the bulk of
these charges in future years through established regulatory arrangements.

In the prior year we classified the £1.5 billion gain arising as a result of US tax reform as exceptional, along with a £26 million gain on the final
settlement of contractual matters relating to the cessation of the Management Services Agreement with LIPA in 2013.

We also exclude certain unrealised gains and losses on mark-to-market financial instruments from adjusted profit; see notes 5 and 6 to the
financial statements for further information. Net remeasurement gains of £52 million on commodity contract derivatives were more than offset
by net remeasurement losses of £76 million on financing-related instruments.

Timing over/(under-recoveries)
In calculating underlying profit we exclude regulatory revenue timing over- and under-recoveries and major storm costs. Under the Group’s
regulatory frameworks, most of the revenues it is allowed to collect each year are governed by regulatory price controls in the UK and rate plans
in the US. If more than this allowed level of revenue is collected, the balance must be returned to customers in subsequent years; likewise, if less
than this level of revenue is collected, the balance will be recovered from customers in subsequent years. These variances between allowed and
collected revenues give rise to over- and under-recoveries.

The following table summarises management’s estimates of such amounts for the two years ended 31 March 2019. All amounts are shown on a
pre-tax basis and, where appropriate, opening balances are restated for exchange adjustments and to correspond with subsequent regulatory
filings and calculations.

£m

Balance at start of year (restated)

In-year over-recovery

Balance at end of year

2018/19

2017/18

299

108

407

175

104

279

Timing under-recoveries of £77 million in UK Electricity Transmission and £38 million in UK Gas Transmission were more than offset by timing
over-recoveries of £223 million in US Regulated in 2018/19. In calculating the post-tax effect of these timing recoveries, we impute a tax rate,
based on the regional marginal tax rates, consistent with the relative mix of UK and US balances. For the year ended 31 March 2019 this tax
rate was 34%.

Major storm costs
We also take account of the impact of major storm costs in the US where the aggregate amount is sufficiently material in any given year. Such
costs (net of certain deductibles) are recoverable under our rate plans but are expensed as incurred under IFRS. Accordingly, where the total
incurred cost (after deductibles) exceeds $100 million in any given year, we exclude the net amount from underlying earnings. In 2017/18 we
faced a challenging winter with the October wind storm and three northeasters storms. During 2018/19 we experienced bad weather events
across the year, with storms, unusually, in April and May as well as during the winter months.

National Grid Annual Report and Accounts 2018/19Financial review continued

Strategic Report

Segmental operating profit
The following tables set out operating profit on adjusted and
underlying bases.

Adjusted operating profit

£m

2018/19

2017/18

Change

UK Electricity Transmission

UK Gas Transmission

US Regulated

NGV and Other activities

Total

Underlying operating profit

1,015

303

1,724

400

3,442

1,041

487

1,698

231

3,457

(2)%

(38)%

73%

–

£m

2018/19

2017/18

Change

UK Electricity Transmission

UK Gas Transmission

US Regulated

NGV and Other activities

Total

1,092

341

1,594

400

3,427

1,055

505

1,704

231

3,495

(32)%

(6)%

73%

(2)%

The statutory operating profit for all three reportable segments fell in
the year primarily as a result of the £624 million exceptional charges
referred to earlier. The reasons for the movements in underlying
operating profit are described in the segmental commentaries below.
Unless otherwise stated, the discussion of performance in the
remainder of this financial review focuses on underlying results.

UK Electricity Transmission

3,351

(2,573)

778

237

1,015

1,092

1,954

(332)

(49)

(65)

(493)

1,015

1,092

4,154

(3,113)

1,041

–

1,041

1,055

1,911

(321)

(50)

(24)

(475)

1,041

1,055

£m

Revenue

Operating costs

Statutory operating profit

Exceptional items

Adjusted operating profit

Timing

Underlying operating profit

Analysed as follows:

Net revenue

Regulated controllable costs

Post-retirement benefits

Other operating costs

Depreciation and amortisation

Adjusted operating profit

Timing under-recovery

Underlying operating profit

UK Electricity Transmission statutory revenue and costs decreased
by £1.0 billion following adoption of IFRS 15, which we applied with
effect from 1 April 2018. Revenues we collect from customers but
pass onto the Scottish and Offshore transmission operators at nil
margin are now excluded from both revenue and operating costs
(in 2017/18, £1,027 million is reported in relation to these revenues
on a gross basis). There were £137 million of exceptional costs
related to the cancellation of nuclear connections (net of termination
income) and £100 million in relation to our cost-efficiency and
restructuring programme.

Underlying operating profit increased by 4%. Net revenues were
higher, reflecting the annual RPI uplift and increased incentive income.
Regulated controllable costs were slightly higher, with efficiency
savings partly offsetting the costs of separating the Electricity System
Operator, higher IT run-the-business costs and inflation. Post-
retirement benefit costs were little changed year-on-year. Other
costs were higher, principally relating to provisions against income
recognised on early termination of connections.

The increase in depreciation and amortisation charges reflects the
ongoing investment driven growth in the asset base.

UK Gas Transmission

£m

Revenue

Operating costs

Statutory operating profit

Exceptional items

Adjusted operating profit

Timing

Underlying operating profit

(19)%

(17)%

(25)%

n/a

(2)%

Net revenue

Regulated controllable costs

Post-retirement benefits

Other operating costs

Depreciation and amortisation

Adjusted operating profit

Timing under-recovery

Underlying operating profit

2018/19

2017/18

Change

896

(629)

267

303

341

669

(144)

(27)

(14)

(181)

303

341

1,091

(604)

487

–

487

505

834

(146)

(18)

(194)

487

505

(18)%

(45)%

n/a

(38)%

(32)%

(20)%

(1)%

50%

n/a

(7)%

(38)%

(32)%

(2)%

171%

(2)%

UK Gas Transmission revenue decreased, reflecting the refund
of revenues previously received in respect of the proposed Avonmouth
pipeline project that is no longer required. The exceptional charge
relates to cost efficiency and restructuring.

Underlying operating profit fell by 32%. Net revenues were lower,
reflecting the Avonmouth refund. Regulated controllable costs were
flat, with efficiency savings offsetting higher IT run-the-business costs
and inflation. Post-retirement costs were higher year-on-year, mainly
related to the Guaranteed Minimum Pension (GMP) equalisation ruling
in October 2018. Other costs were higher due to prior year
provision releases.

The depreciation charge was lower following a detailed review of asset
lives in the period.

2018/19

2017/18

Change

Analysed as follows:

National Grid Annual Report and Accounts 2018/19US Regulated

£m

Revenue

Operating costs

Statutory operating profit

Exceptional items

Remeasurements

9,846

(8,421)

1,425

351

(52)

9,272

(7,538)

1,734

(26)

(10)

Adjusted operating profit

1,724

1,698

Timing

Major storm costs

(223)

(136)

142

Underlying operating profit

1,594

1,704

Analysed as follows:

Net revenue

Regulated controllable costs

Post-retirement benefits

Bad debt expense

Other operating costs

Depreciation and amortisation

Adjusted operating profit

Timing over-recovery

Major storm costs

5,868

(1,895)

(94)

(146)

(1,309)

(700)

1,724

(223)

5,468

(1,720)

(96)

(100)

(1,219)

(635)

1,698

(136)

142

35%

(6)%

10%

46%

10%

Underlying operating profit

1,594

1,704

(6)%

US Regulated statutory operating profit fell and statutory costs
increased principally as a result of the Massachusetts Gas labour
dispute costs of £283 million and £68 million of restructuring costs.

Underlying operating profit fell by 6%. Net revenues increased
as the benefits of rate case increments came into effect, partly offset
by the impact of US tax reform (as the billing tariffs now reflect lower
tax requirements) and the adoption of IFRS 15, under which customer
connections revenues are now recognised over the life of the asset,
rather than on completion of works. A stronger US dollar increased
underlying operating profit by £69 million in the year.

US Regulated controllable costs increased as a result of workload
increases agreed with regulators and inflation. Bad debt expense
increased as a result of higher receivables, including commodity
charges. Other costs were higher due to more expenditure on ‘minor’
storms (non-deferrable) and increased cost of removal.

Depreciation and amortisation charges increased in line with the strong
growth in asset base driven by the high level of capital investment.

US timing over-recoveries mainly related to collection of the 2017/18
build-up of commodity deferrals offset by lower NYSERDA over-
recoveries. There were lower major storm costs incurred in 2018/19
than in the prior year.

Strategic Report | Financial review

2018/19

2017/18

Change

£m

2018/19

2017/18

Change

National Grid Ventures and Other activities

12%

Statutory operating profit

Exceptional items

(18)%

Adjusted operating profit

Timing

Underlying operating profit

Analysed as follows:

NGV

Property

Corporate and Other activities

Underlying operating profit

400

–

400

–

400

263

181

(44)

400

231

–

231

–

231

234

(87)

231

73%

–

73%

–

73%

12%

115%

(49)%

73%

National Grid Ventures’ operating profits were 12% higher year-on-year
reflecting lower costs incurred setting up our new business compared
to 2017/18. Last year also included an impairment of land value.

The Property business delivered a strong performance aided by
the sale of the Fulham site to the St William joint venture, which
recognised half the profit on the sale of this site.

Corporate activities include a benefit of £95 million this year of
legal settlements to recover costs associated with a US systems
implementation, partly offset by costs related to the GMP
equalisation ruling in the UK High Court in October 2018
and higher IT-related costs.

Financing costs and taxation
Net finance costs
Underlying net finance costs for the year were similar to last year at
£1 billion, the cost of higher average net debt being offset by lower RPI
rates and the efficient use of low-cost commercial paper. The effective
interest rate on treasury managed debt was 4.3%.

Joint ventures and associates
The Group’s share of net profits from joint ventures and associates
fell marginally.

Tax
The underlying effective tax rate of 19.6% was 4.2% lower than last
year mainly because of the full-year effect of the reduction in the US
federal corporate tax rate as a result of tax reform which took effect
from 1 January 2018. The tax charge for the year benefited from the
release of reserves following settlement of tax audits relating to earlier
years and gains on chargeable disposals which are offset by previously
unrecognised capital losses. The Group’s tax strategy is detailed later
in this review.

Discontinued operations
In November 2018 we announced our decision to exercise our put
options over our entire 39% interest in Cadent, and the sale is expected
to complete in June 2019 for approximately £2 billion. As described
further in note 10 to the financial statements, we have treated all items
of income and expense relating to Cadent within discontinued
operations, and re-presented the prior year accordingly. The statutory
income for the year of £12 million principally reflects £23 million of
interest on shareholder loans net of £5 million tax and £5 million share
of post-tax loss of Quadgas.

National Grid Annual Report and Accounts 2018/19Financial review continued

Strategic Report

Capital investment, asset growth and value added
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 regulated asset 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.

A key part of our investor proposition is growth in our regulated asset base. The regulated asset base is a regulatory construct, representing the
invested capital on which we are authorised to earn a cash return. By investing efficiently in our networks, we add to our regulatory asset base
over the long-term and this in turn contributes to delivering shareholder value. Our regulated asset base comprises our regulatory asset value in
the UK, plus our rate base in the US. We also invest in related activities that are not subject to network regulation and this further contributes to
asset growth.

Capital investment
Capital investment comprises capital expenditure in critical energy infrastructure, equity investments, funding contributions and loans to joint
ventures and associates, and, in the case of National Grid Partners, investments in financial assets.

£m

UK Electricity Transmission

UK Gas Transmission

US Regulated

NGV and Other activities

Total

At actual exchange rates

At constant currency

2018/19

2017/18

Change

2018/19

2017/18

Change

925

308

2,650

623

4,506

999

310

2,424

518

4,251

(7)%

(1)%

20%

925

308

2,650

623

4,506

999

310

2,521

527

4,357

(7)%

(1)%

18%

Investment in UK Electricity Transmission fell primarily due to lower load related spend. The investment in the Feeder 9 gas pipeline replacement
project under the Humber Estuary was offset by lower asset health spend, contributing to broadly similar investment in UK Gas Transmission.
In the US, investment was up 5% on a constant currency basis, reflecting capital expenditure in New York and Rhode Island, partly offset by
reduced capital expenditure in Massachusetts during the labour dispute. Investment in National Grid Ventures stepped up with the ongoing
construction of two new subsea interconnectors, IFA 2 (France) and North Sea Link (Norway). A total of £52 million (excluding JVs) was invested
by National Grid Partners in the year in 14 portfolio companies.

Asset growth and value added
To help readers’ assessment of the financial position of the Group, the table below shows an aggregated position for the 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, 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 recognised in relation to US tax
reform last year, which, from a regulatory perspective, remains as a future obligation. The UK RAV is higher than the IFRS value of property, plant
and equipment and intangibles, principally because of the annual indexation (inflationary uplift) adjustment applied to RAV, compared to the IFRS
value of these assets (held at amortised cost). 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.

£m

UK RAV

US rate base

Total RAV and rate base

NGV and Other

Total assets

UK other regulated balances

US other regulated balances

Other balances

Total assets and other balances

Dividends and share buyback costs

Increase in net debt

Value added

31 March
2019

2018/19

31 March
2018

2017/18

Change

31 March
2018

31 March
2017

Change

19,692

17,565

37,257

2,815

40,072

(278)

1,898

(158)

19,005

16,087

35,092

2,300

37,392

(474)

1,920

(343)

41,534

38,495

19,059

14,762

33,821

2,167

18,234

13,751

31,985

1,984

35,988

33,969

(519)

1,921

(343)

(479)

1,487

(260)

37,047

34,717

22%

3,039

1,160

(2,128)

2,071

2,330

1,494

(1,820)

2,004

Figures relating to prior periods have, where appropriate, been re-presented at constant currency, for opening balance adjustments following the
completion of the UK regulatory reporting pack process in 2018, and finalisation of US balances.

National Grid Annual Report and Accounts 2018/19Strategic Report | Financial review

During 2018/19, our combined regulated asset base and NGV and
Other businesses grew by £2.7 billion or 7.2% on a constant currency
basis compared to an increase of 5.9% in the prior year. UK RAV
growth was 3.6% including RPI indexation of 2.4% while US rate
base grew strongly by 9.2%.

Value added, which reflects the key components of value delivery
to shareholders (i.e. dividend and growth in the economic value
of the Group’s assets, net of growth in net debt) was £2.1 billion in
2018/19. This was slightly higher than last year’s £2.0 billion, with
improved returns, the impact of asset growth and strong performance
from NGV and Other, partially offset by cash spent on exceptional
items. Of the £2.1 billion value added, £1.2 billion was paid to
shareholders as cash dividends and £0.9 billion was retained in
the business. Value added per share was 61.2p compared with
57.9p in 2017/18.

Cash flow, net debt and funding
Net debt is the aggregate of cash and cash equivalents, borrowings,
current financial and other investments and derivatives (excluding
commodity contract derivatives and the fair value of the put options in
relation to Cadent) as disclosed in note 29 to the financial statements.
Adjusted net debt is principally adjusted for pension deficits and hybrid
debt instruments. For a full reconciliation see page 230.

The following table summarises the Group’s cash flow for the year,
reconciling this to the change in net debt.

Summary cash flow statement

£m

Cash generated from:

2018/19

2017/18

Change

Continuing operations

4,464

4,702

Discontinued operations

Total cash generated

Net capital investment

Dividends from JVs and associates

Business net cash flow

Net interest paid

Net tax (paid)/received

Ordinary dividends and
scrip share buyback costs

Return of capital

Other cash movements

Net cash flow

Non-cash movements

(Increase)/decrease in net debt

(56)

4,549

4,646

(4,135)

(4,098)

482

(846)

(75)

(1,160)

–

(1,597)

(1,930)

(3,527)

617

(823)

(1,494)

(4,010)

162

(5,540)

1,812

(3,728)

Net debt at start of year

(23,002)

(19,274)

Net debt at end of year

(26,529)

(23,002)

(5)%

n/a

(2)%

(1)%

(22)%

n/a

(22)%

n/a

(99)%

(71)%

n/a

(5)%

19%

15%

Cash flow generated from continuing operations was £4.5 billion,
£0.2 billion lower than last year as a result of cash expended on
exceptional items, partly offset by lower pension contributions and
provision related outflows. Cash expended on investment activities
increased for the reasons described above. Net interest paid increased
mainly due to the growth in net debt, partly offset by beneficial interest
income received in the year. The Group moved into a tax-paying
position. A 26% scrip take-up reduced the cash dividend and,
considering the high asset growth rate, we did not buy back any
shares this year. Last year’s return of capital related to the special
dividend and share buybacks following the sale of the majority interest
in UK Gas Distribution. Non-cash movements primarily reflect changes
in the sterling-dollar exchange rate, accretions on index-linked debt
and other derivative fair value movements.

Overall, the increase in net debt was driven by continuing high levels
of capital investment and the impact of a stronger US dollar on the
translation of US dollar-denominated debt. As at 31 March 2019
the Group maintained approximately $21 billion of its total financial
liabilities denominated in US dollars as a substantial hedge of foreign
exchange movements in the value of its US businesses.

During the year we raised over £2.9 billion of new long-term debt
including fourteen bond issues. The Group remains well funded as
it enters 2019/20. The three major credit rating agencies – Moody’s,
Standard & Poor’s (S&P) and Fitch – have all maintained their strong
investment grade ratings of National Grid plc on stable outlook.

Financial position
The following table sets out a condensed version of the Group’s IFRS
balance sheet.

Summary balance sheet

£m

31 March
2019

31 March
2018

Change

Goodwill and intangibles

6,953

6,343

Property, plant and equipment

43,913

39,853

Assets held for sale

Other (liabilities)/assets

Tax balances

Pension liabilities

Provisions

Net debt

Net assets

1,956

–

(507)

1,614

(4,000)

(3,645)

(218)

(263)

(2,199)

(2,052)

(26,529)

(23,002)

19,369

18,848

10%

n/a

10%

(17)%

15%

Property, plant and equipment increased as a result of the continuing
capital investment programme. Assets held for sale comprise our
residual 39% interest in Quadgas, which will be sold in June 2019.
Provisions include environmental provisions of £1.6 billion, unchanged
from last year and restructuring provisions of £83 million. Other
movements are largely explained by changes in the sterling-dollar
exchange rate.

Regulatory gearing, measured as net debt as a proportion of total
regulatory asset value and other business invested capital, was 66%
as at 31 March 2019. This was up slightly from 64% at the previous
year-end at constant currency but remains appropriate for the current
credit rating of A-/A3 (S&P/Moody’s).

Retained cash flow as a proportion of net debt was 9.4% (10.8%
excluding expenditure on exceptional items), which is above the
long-term average 9% level currently indicated by Moody’s as
important to maintain the A3 rating.

Off balance sheet items
There were no significant off balance sheet items other than
the commitments and contingencies detailed in note 30 of the
financial statements.

Economic returns
In addition to value added, one of the principal ways in which we
measure our performance in generating value for shareholders is
to divide regulated financial performance by regulatory equity, to
produce Return on Equity (RoE).

As explained on page 230, regulated financial performance adjusts
reported operating profit to reflect the impact of the Group’s various
regulatory economic arrangements in the UK and US. In order to
show underlying performance, we calculate RoE measures excluding
exceptional items of income or expenditure.

Group RoE is used to 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,
NGV and Other activities and joint ventures.

National Grid Annual Report and Accounts 2018/19Financial review continued

Strategic Report

Regulated RoEs 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.

Return on Equity

£m

2018/19

2017/18

Change

UK Electricity Transmission

UK Gas Transmission

UK weighted average

US Regulated

Group Return on Equity

13.7%

9.5%

12.4%

8.8%

11.8%

13.1%

+60bps

10.0%

-50bps

12.1%

8.9%

+30bps

-10bps

12.3%

-50bps

Overall RoE for the two UK transmission businesses was
12.4%, representing 230 basis points outperformance of the base
allowed return. Electricity Transmission performance improved
in the year due to improved totex incentive performance, whilst Gas
Transmission return fell due to totex underperformance as a result of
an adverse emissions re-opener outcome. The exceptional charges in
relation to the UK nuclear connection terminations do not impact RoE.

RoE for the US Regulated business was 10 basis points lower in
the year and represents 93% of the weighted average allowed return
across all jurisdictions. US returns exclude the impact of the
Massachusetts Gas labour dispute.

Overall Group RoE, which incorporates Property, Corporate and
Other, and financing performance, remained around the 12% level.

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.

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
CFO. 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.

For 2018/19 our total tax contribution to the UK Exchequer was
£1.0 billion (2017/18: £0.9 billion), taxes borne in 2018/19 were
£0.4 billion (2017/18: £0.3 billion) and taxes collected were £0.6 billion
(2017/18: £0.6 billion). The increase in our total tax contribution against
prior year is primarily due to higher corporation tax payments.

Our 2017/18 total tax contribution of £0.9 billion meant that National
Grid was the 25th highest contributor of UK taxes (2016/17: 15th)
based on the results of the 100 Group’s 2018 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 2017/18 we ranked 23rd in respect
of taxes borne (2016/17: 9th). As expected, our ranking fell as a result
of the sale of the UK Gas Distribution business on 31 March 2017
which reduced the overall size of the UK 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 2018 Total Tax Contribution Survey ranks National Grid in 4th
place in respect of UK capital expenditure on fixed assets, falling
slightly from 3rd place in 2017. National Grid’s economic contribution
also supports a significant number of UK jobs in our supply chain.

UK total tax contribution 2018/19 (taxes paid/collected)

Taxes borne

Taxes collected

Key:

VAT
PAYE and NIC
UK corporation tax
Business rates

Other
Total

£m
1
48
102
225
11
387

Key:

VAT
PAYE and NIC

Total

£m
533
122
655

National Grid Annual Report and Accounts 2018/19

Strategic Report | Financial review

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 2018/19.

The tax charge for the Group from continuing operations as reported
in the income statement is £0.3 billion (2017/18: £0.9 billion credit).
The UK tax charge is £0.1 billion (2017/18: £0.3 billion) and UK
corporation tax paid was £102 million (2017/18: £35 million), with
the principal differences between these two measures as follows:

Reconciliation of UK total tax charge to tax paid

£m

Total UK tax charge

Adjustment for non-cash deferred tax

Adjustments for current tax credit
in respect of prior years

UK current tax charge

UK corporation tax instalment payments
not payable until the following year

UK corporation tax instalment payments
(net of refunds) in respect of prior years

UK corporation tax paid

2018/19

2017/181

149

(29)

132

(69)

102

245

(63)

200

(98)

(67)

1. Comparatives have been re-presented to reflect the classification of our retained interest

in Quadgas HoldCo Limited as a discontinued operation in the current period.

Tax losses
We have total unrecognised deferred tax assets in respect of losses
of £1.5 billion (2017/18: £0.5 billion) which are predominantly capital
losses in the UK as set out on page 125. These losses arose as a result
of the disposal of certain businesses or assets, some of which were
agreed with HMRC in the current period. They may be available to
offset against future capital gains in the UK.

Development of future tax policy
We believe that the continued development of a coherent and transparent
tax policy in the UK is critical to help drive growth in the economy. We
continue to contribute to research into the structure of business tax and
its economic impact by contributing to the funding of the Oxford
University Centre for Business Tax at the Saïd Business School.

We are a member of a number of industry groups which participate in
the development of future tax policy, including the 100 Group, which
represents the views of Finance Directors of FTSE 100 companies and
several other large UK companies. 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.

Pensions
In 2018/19, the pensions and other post-retirement benefits operating
costs increased by £76 million to £294 million, principally as a
result of our UK restructuring programme and the GMP equalisation
ruling. Employer contributions during the year were £419 million
(2017/18: £475 million), including £84 million (2017/18: £81 million)
of deficit contributions.

As at 31 March 2019, the total UK and US assets and liabilities and the
overall net IAS 19 (revised) accounting deficit is shown below. Further
information can be found in note 25 to the financial statements.

Net pension and other post-retirement obligations

Plan assets

Plan liabilities

Total

15,507

9,286

24,793

(14,276)

(10,735)

(25,011)

Net surplus/(deficit)

1,231

(1,449)

(218)

As at 31 March 2019, pension assets of £1,307 million in the
UK pension schemes and £260 million in the US Niagara Mohawk
Plan were recognised on the basis that these plans were in a
surplus position.

Dividend
The Board has recommended an increase in the final dividend to
31.26p per ordinary share (£1.56 per American Depository Share)
which will be paid to shareholders on the register as at 31 May 2019.
If approved, this will bring the full year dividend to 47.34p per ordinary
share, an increase of 3.1% over the 45.93p per ordinary share in
respect of the financial year ended 31 March 2018. This is in line with
the increase in average UK RPI inflation for the year ended 31 March
2019 as set out in the announcement of 28 March 2013, in which we
stated that our dividend policy aims to grow the ordinary dividend per
share at least in line with the rate of RPI inflation each year for the
foreseeable future.

At 31 March 2019, National Grid plc had £3.5 billion of distributable
reserves, which is sufficient to cover more than two years of
forecast Group dividends. If approved, the final dividend will absorb
approximately £1.0 billion of shareholders’ funds. This year’s dividend
is covered approximately 1.2x underlying earnings. Although this
exceeds the statutory EPS of 44.6p result for the period, in proposing
the final dividend, the Directors note that total cumulative statutory
earnings per share over the last three years were some 354p,
compared to dividend payout of 222p.

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.

Brexit
As described elsewhere in the Strategic report, our Brexit working
group considered the issues and consequences of the UK’s decision
to leave the EU. In the last month of the year, and in anticipation of the
original 29 March 2019 deadline for the UK to exit the EU, we executed
our plan to bring forward the procurement of key items for capital
delivery and operations in case of delays at ports. In the context of the
Group financial statements, however, these actions did not have a
material effect.

New accounting standards
As of 1 April 2018 we adopted two new accounting standards, IFRS 9
‘Financial Instruments’ and IFRS 15 ‘Revenue from Contracts with
Customers’. These did not have a material impact on the Group’s
reported profits or earnings.

As of 1 April 2019 we will adopt IFRS 16 ‘Leases’; again, we do
not expect this will have a material impact on the Group’s results
or financial position, although as described in note 1 to the financial
statements, on transition our property, plant and equipment and
net debt will each increase by £0.4 billion to take account of lease
obligations. We note that the rating agencies already make
adjustments to impute this and accordingly we do not expect
adoption to impact our credit ratings.

Post balance sheet events
On 1 April 2019, the UK Electricity System Operator became a legally
separate company, with its own board of directors, within the National
Grid Group. This change will have no impact on the consolidated
financial results of the Group.

National Grid Annual Report and Accounts 2018/19Principal operations – UK

Strategic Report

Customer satisfaction: Electricity
(out of 10)

Our UK performance

7.9

(2017/18: 7.7)

Customer satisfaction: Gas
(out of 10)

7.8

(2017/18: 7.6)

Link to strategy

Measure

2018/19

2017/18

2016/17

Optimise
performance

Grow core
business

Return on Equity (£m)

Statutory operating profit (£m)

Underlying operating profit (£m)

RIIO-T1 customer savings (£m)

Capital expenditure (£m)

Asset growth (%)

12.4

1,045

1,433

101

1,233

3.6

12.1

1,528

1,560

1,309

4.5

12.7

1,868

1,684

126*

1,241

4.3

Includes UK Gas Distribution

Highlights
Our UK business performed well in 2018/19.
We maintained our focus on safe, reliable,
customer-led, innovative and efficient
operations. We continued to optimise our
operational performance. We are proud
to have been named in the Times Top 50
Employers for Women, which demonstrates
our commitment to creating a workplace
which is inclusive, fair and equal for everyone.
During the year, we also agreed new terms
and conditions for our Electricity Transmission
Operations field force. The new arrangements,
effective from 1 April 2019, will give us more
flexibility to deliver for our customers and give
our employees the opportunity to do a greater
variety of interesting and challenging work.

Optimise performance
We are developing a generative safety culture
within our business. Our occupational safety
strategy is to build a platform of proactive
safety management by implementing a
standard, simplified and risk-based approach.
This strategy will enable us to transition to the
highest level of safety culture maturity through
leadership and workforce engagement.

As at 31 March 2019, our Lost Time Injury
Frequency Rate (LTIFR) in the UK business
was 0.07, which exceeds our target of <0.10,
and is our best ever LTIFR performance. 55%
of our lost time injuries (LTIs) are as a result of
individual issues such as slips, trips and falls
and soft tissue injuries from inappropriate
lifting and carrying and non-fault road traffic
collisions – we are treating these incidents
with appropriate focus whilst acknowledging
that they do not generally have the potential
for more serious harm. Our analysis shows
that in 2018/19 the number of incidents
with higher potential for harm has been
less than expected.

We delivered a year of good returns, with
a Return on Equity of 12.4%. Statutory
operating profit was lower because of
exceptional charges. The decisions by
Horizon and NuGen to cancel their customer
connection requests on suspended nuclear
projects resulted in a £137m exceptional cost.
We have minimised costs by stopping work
as soon as we became aware of the projects
being suspended. Underlying operating profit
was also lower reflecting reduced revenues,
driven by allowance adjustments associated
with the Avonmouth project. The regulatory
arrangements we have in place will mitigate
the economic impact of these cancellations.

We also measure our performance with
non-financial KPIs. We were pleased to see
continued improvement in our customer
satisfaction scores in our Electricity
Transmission and Gas Transmission
businesses, achieving scores of 7.9 and
7.8 respectively against a target of 6.9.

Customer first
We work with our customers to meet their
needs and deliver successful outcomes for
all parties. This customer-first approach was
exemplified within our Gas Business, with
HS2 holding up our project as an exemplar
following the successful diversion delivery.
The project came in under budget with an
excellent safety record and no LTIs. We have
also successfully delivered a gas off-take for
Centrica as part of its construction of new
fast-response generating facilities at
Peterborough and Brigg. The existing single
gas supply was converted into a dual supply
and was completed ahead of schedule
through collaborative effort.

Electricity Transmission launched a new
customer website designed to make it easier
for people who want to connect to the
network. The website provides tools and
information to help our customers understand
more about establishing connections with us.
It generated a number of enquiries from new
customers and received positive feedback
from our customers and stakeholders.

Construction of the Hinkley-Seabank
Connection Project got underway in summer
2018. We expect to connect our customer,
EDF, to our network in 2024. Between now
and then, we will add T-pylons to our network
for the first time, as well as two new
substations and a sealing-end compound.
Keen to leave a positive legacy for the
communities affected by the project, we are
investing in STEM equipment in hundreds of
schools, providing construction skills training
among the local workforce and awarding
contracts to businesses across the region.

In July 2018, Ofgem confirmed its decision
to apply a new Competition Proxy Model
(CPM) to the delivery of Hinkley-Seabank.
This model seeks to impose on us the results
of simulated competition without giving us the
freedom to choose to decide to participate
and allocate scarce capital to the project.
We are committed to delivering EDF’s
connection in line with time and quality
obligations. Nothing in Ofgem’s decision to
implement CPM, or our decision to appeal,
will affect this commitment.

National Grid Annual Report and Accounts 2018/19Strategic Report | Principal operations – UK

Grow core business
In 2018/19, we constructed a new 12.4 mile
(20 kilometre) overhead line, made up of 60
new pylons, between an existing substation
at Canterbury and a new substation at
Richborough. This is the first new overhead
line in England and Wales since 2003,
and the first we have completed under
Development Consent Order legislation, to
enable the connection of the new Nemo Link
interconnector between the UK and Belgium.

There is an increasing need to invest in our
gas compressors to support the changing
face of gas supply in the UK and ensure
environmental sustainability. The evolution
of the network has resulted in changes to
compressor utilisation. Furthermore, we are
committed to meeting the emission standards
all European countries must comply with
by 2023 under the Industrial Emissions
Directive. We were disappointed not to receive
full funding for the compressor works as part
of the RIIO-T1 reopeners. Having reviewed
our approach to meeting the required
environmental obligations, we have developed
an integrated plan to invest in our compressor
fleet to deliver the most cost-effective network
solution. This solution is designed to meet the
current and future needs of our customers
and support environmental sustainability.

Evolve for the future
The Humber Pipeline Replacement project is
part of our programme of work to care for our
National Transmission System and keep gas
flowing for our customers, now and in the
future. Our aim is to ensure gas runs safely,
efficiently and reliably. The Feeder 9 pipeline
typically carries around 20% of the country’s
gas supplies. In April 2018, a 160-metre-long,
510-tonne tunnel-boring machine started to
excavate a 3.3-mile (5.4-kilometre) tunnel
under the River Humber to house the Feeder
9 replacement pipeline; a project which will
help to make us fit for the future. The Feeder
9 reopener was published in May 2018, in
response to our request for funding. We
issued this request after gaining planning
consent for the project and after Ofgem
changed its initial decision on the needs
case, awarding us £111 million to continue
this project.

We secured funding of £116 million for a Visual
Impact Provision (VIP) scheme in Dorset;
a project to underground 5.4 miles (8.8
kilometres) of overhead line and remove
22 pylons in the Dorset Area of Outstanding
Natural Beauty. We also continued to
progress our other VIP projects in Peak East
National Park and Snowdonia National Park.

We commenced a multi-year programme
covering a range of initiatives to drive further
efficiency and lower costs for customers.
These initiatives will continue our aim of
becoming a more agile organisation that is
positioned to be more responsive to

customers. The range of initiatives includes a
flatter, leaner organisation; further economies
of scale; simplifying our processes and ways
of workings; and making more efficient use
of IT and back-office activities. To achieve
the long-term benefits of these initiatives,
we have provided for costs of £136 million
for 2018/19. We expect these costs to help
us generate opex savings of £50 million in
2019/20 and around £100 million annually
from 2020/21.

We have focused on diversity and mental
health and rolled out diversity leadership
training to our employees. Employee
enablement is important to us and we
are focused on ensuring our people are
adequately equipped to fulfil their roles and
responsibilities. We have several enablement
programmes and have implemented a
modern, digital and future-proof HR solution.

Looking ahead
The UK political environment continues to
present a number of challenges. Our dialogue
around RIIO-T2 will be a priority leading up
to the new price control commencing in
April 2021. We remain committed to the
importance of a regulatory framework that
fairly reflects the risk return balance for both
consumers and shareholders. We submitted
our response to Ofgem on the sector-specific
methodology consultation for RIIO-T2 in
March 2019. The overall framework proposals
set out by Ofgem are a step in the right
direction but we are concerned that as
currently set out, the proposals will not bring
about the change consumers need. Our
vision is of an energy future where bills are
kept low for consumers, energy is
decarbonised, innovation is encouraged
and which together support the growth
and prosperity of the UK economy. Our
stakeholders’ opinions are important to us
and it is important that they are able to shape
our future plans. We have created RIIO-T2
stakeholder groups to support the formulation
of our business plans for the next price control
period within Gas Transmission, Electricity
Transmission and the System Operator.

As part of a joint venture with Scottish Power
Transmission, we have constructed the
Western Link – a HVDC cable which will play
an important role in bringing renewable
energy from Scotland to homes and
businesses in England and Wales, helping the
UK to meet its renewable energy targets. The
Western Link had initially been available to
operate in October 2018. However, testing
continues following the detection of cable
faults and trips during the commissioning
phase and the Link is anticipated
to be available to operate later in 2019,
delivering up to 2.2 GW power
transfer capability.

Next year, achieving greater, customer-led
efficiency in our business will continue to be
a key priority.

Electricity System Operator
In January 2017, alongside Ofgem and the
Government, National Grid agreed to the
creation of a legally separate Electricity
System Operator (ESO), within the National
Grid Group. In 2018/19 we successfully
implemented the separation arrangements,
establishing a new subsidiary company that
holds the ESO licence. To ensure appropriate
ring-fencing between itself and the rest of the
National Grid Group, the company is
governed by its own Board of Directors,
including three independent Directors.

As the ESO, we continue to help facilitate
the move to a lower-carbon economy, while
simultaneously delivering safe, reliable and
affordable energy to the end consumer. In
April 2018, new records were set with the
system operating without coal for 76 hours
and with wind output peaking at over 15 GW.
The underlying changes to the generation
portfolio meant that on 27 August 2018, the
carbon intensity of the system reached a
new low of 71 gCO2/kWh.

In October 2018, we published a thought
piece to explore how the ESO could be
funded in RIIO-T2, forming part of our wider
stakeholder engagement programme on
the new price control. This will inform both
our own thinking and Ofgem’s process
for developing and deciding upon a
funding model.

Following a European Court ruling, the UK’s
Capacity Market scheme was paused, leading
to the ESO, in its capacity as EMR Delivery
Body, postponing the T-1 auction originally
scheduled to take place in January 2019,
and to the Electricity Settlements Company
suspending capacity payments to Capacity
Market participants. We advised that there
was no additional risk to the security of supply
in the winter of 2018/19. During this period of
uncertainty, we are working with Ofgem,
BEIS, customers and stakeholders to deliver
security of supply for the next winter period.

Further reading
Find out about our innovations
in engineering at www.nationalgrid.com

National Grid Annual Report and Accounts 2018/19Principal operations – US

Strategic Report

US Residential –
Customer Trust Advice

58.7%

(2017/18: 56.6%)

Further reading
Find out about our innovations
in engineering at www.nationalgrid.com

Our US performance

Link to strategy

Measure

2018/19

2017/18

2016/17

Optimise
performance

Grow core
business

Evolve for
the future

Return on Equity (%)

Statutory operating profit (£m)

Underlying operating profit (£m)

Capital expenditure (£m)

Asset growth (%)

Rate base* (£m)

Connections of renewable
schemes to US electric distribution
network (MW)

8.8

1,425

1,594

2,650

9.2

17,565

281.45

8.9

1,734

1,704

2,424

7.4

14,762

380.50

8.2

1,278

1,514

2,247

5.7

14,571

294.57

* US rate base is as previously reported at historical exchange rates

Highlights
In the US we worked hard during 2018/19 to
find ways of operating more efficiently and
embracing innovative technology. The work
we carried out supports National Grid’s three
strategic priorities.

In June, we released our ‘Northeast 80x50
Pathway’, a blueprint for reducing greenhouse
gas emissions by 80% below 1990 levels by
2050. ‘The Pathway’ is an integrated
approach to taking action across the three
main sectoral contributors to combustion-
related CO2 emissions: electricity generation,
transportation and heat.

The US business saw a 6% increase in the
number of injuries requiring medical attention
beyond first aid and a 5% reduction in the
number of preventable road traffic collisions
during 2018/19. The US introduced new
driving programmes including an annual
requirement for all drivers to review our
safe motor vehicle operations policy. We
implemented safety, health and environment
(SHE) Business Management Standards
(BMS) to apply to all areas across our
business, and also implemented SHE plans
at local levels to address current risks and
injury trends. We also launched our first
annual Safety Culture Survey to assess
and benchmark our Safety Culture and to
establish programs and initiatives to promote
safety. We continue to focus on key risk and
hazard mitigation strategies in 2019/20.

In the spring, Influence Map, a UK-based
non-profit climate change group, named
National Grid one of the most influential
companies pushing for an ambitious
climate change agenda.

Optimise performance
During 2018/19, the US business focused
on growth, customer value and the transition
to clean energy. Overall, our net revenue
increased by 3% and we grew our rate base
by 9.2%. Our energy infrastructure spend
across our footprint during the year was
$3.5 billion. We also added 63,387 new
customer accounts across gas, electric,
and distributed generation combined.

The Buffalo River Bore project, located in
Buffalo, New York is one example of how
we are investing in energy infrastructure to
accommodate the electric load growth
associated with new and growing commercial
space. In summer 2018 we used a 14-foot-
long, 29-tonne boring machine to dig a
450-foot tunnel beneath the Buffalo River
to house new electrical cables. These cables
replaced older and outdated equipment,
including some that dates to the 1890s.

Another example is solar. In 2018, we
inter-connected 9,465 applications and
257 MW across Massachusetts, New York
and Rhode Island.

At the end of June 2018, our contracts
with two United Steelworkers Unions in
Massachusetts, representing around 1,250
employees, expired. Following months of
bargaining, union membership elected
not to accept National Grid’s final offer.
Subsequently, the Company declined to
extend the existing labour contracts, resulting
in a labour dispute, and made the decision
to mobilise its replacement workforce.

Our workforce contingency plan remained
in place until a new five-year/five-month
contract was agreed with the two Unions and
ratified in January 2019. During this time, our
contingency workforce responded to all
potential and actual gas emergencies,
ensuring the safety of our employees,
customers and the public. While we were able
to provide new connections to customers who
had a hardship, we were not able to connect
all potential customers who requested a new
service since we had to prioritise emergency
and compliance work. Our goal was to have
a long-term agreement that assured benefits
consistency across employee groups,
addressed the need for cost-sharing in health
insurance and provided a modern approach
to retirement planning. The newly ratified
contract achieves that goal, though it has
been a difficult period for all our employees
and the communities we serve.

National Grid Annual Report and Accounts 2018/19Strategic Report | Principal operations – US

In the coming year, our customers in
Massachusetts and Rhode Island will
have access to the same e-commerce
opportunities and energy-efficiency solutions.

Community commitment
Serving our communities is a cornerstone of
our business at National Grid — both today
and tomorrow. It is why we are concerned
that in our New York State service territory,
there are about a half a million residences
without access to a gas network. So we are
taking action through a Reforming the Energy
Vision (REV) demonstration project on Long
Island. We have built a shared geothermal well
system in one community to test the feasibility
of using the Earth’s own heating and cooling
properties to provide a clean alternative
energy source to off-the-grid customers.

Grow core business
In August, the Rhode Island Public Utilities
Commission (RIPUC) approved our Rhode
Island gas and electric rate case settlement.
The three-year rate plan went into effect on
1 September 2018 and encourages initiatives
for the state’s Power Sector Transformation
efforts. These include innovative proposals
on electric transport, energy storage and the
opportunity for advanced metering. It also
re-designs our low-income rates to engage
with income-eligible customers and increase
participation in assistance programmes.

At the end of September, the Massachusetts
Department of Public Utilities (MADPU)
approved our Massachusetts gas rate
settlement. New rates went into effect on
1 November 2018. The settlement includes
funding to modernise our Gas Business via our
Gas Business Enablement (GBE) programme,
as well as IT infrastructure that supports our
core gas distribution operating capabilities. In
December 2017, MADPU commenced an
independent audit to perform an assessment
of gas pipeline safety in Massachusetts. We
have provided all the information requested
and a preliminary oral report is anticipated.
We will continue to work with the MADPU
when the report is issued.

In November, we filed a rate case with the
MADPU to update our electric distribution
rates for the first time in three years. This
update to distribution rates, if approved, will
take effect 1 October 2019. A new rate plan
will enable us to continue providing safe and
reliable electric service, invest in clean energy
technologies, and help the state realise its
goal of reducing greenhouse gas emissions.

In April, we filed a proposal for new natural
gas delivery rates for our KEDNY and KEDLI
operating companies with the New York State
Public Service Commission (PSC) effective 1
April 2020. This proposal will allow us to
continue investing to make our natural gas
networks safer and more reliable, move
toward a cleaner energy future, and improve
service to our 1.8 million customers in New
York City and Long Island.

Evolve for the future
• Aiming for better service and reduced costs
for customers, we adjusted our operating
model in mid-2018. That meant changing a
number of leadership roles, accountabilities
and delivery processes. At the same time,
we are investing in new opportunities and
solutions in order to drive our ongoing
objective of leading the transition to a
clean energy economy.

• Last spring we introduced ‘Accelerate’

– a programme aimed at reducing Opex
and Capex spend by 20% by 2021.
In 2018/19 we incurred $88 million which
we have classified as an efficiency and
restructuring exceptional charge.
Accelerate is also focused on improving
customer satisfaction scores and increasing
revenue from new sources to reinvest into
the future of the business.

• One of the initiatives underway is the eBill

project, aimed at increasing adoption of eBills
from 20% to 30% by the end of 2019/20. This
project is expected to deliver approximately
$4 million in operational savings and,
more importantly, improve the customer
experience. According to JD Power, National
Grid customers enrolled in paperless billing
scored 21 points higher in satisfaction than
overall billing and payment satisfaction.
• We are also helping to speed up the
transition to a clean energy future by
making meaningful progress through:

• Large-scale renewables (LSR):

Our new battery energy storage system
(BESS) project on Nantucket Island in
Massachusetts is a classic example of
LSR. When BESS is fully installed in summer
2019, it will be the first large-scale battery
installation in New England. When combined
with a new upgraded onsite combustion
turbine, also expected for completion this
summer, the BESS should supply the island
with all the electrical power it needs should
one of the two existing submarine cables
experience an outage, or on peak summer
days when air conditioners put extra strain
on the infrastructure;

• Electrifying transportation: We launched
an electric vehicle (EV) adoption programme
for employees, facilitating the sale of more
than 250 EVs in 2018. We’ve included more
than $200 million in regulatory filings for
transport-related initiatives (includes
approved and filed plans), such as charging
infrastructure, customer outreach/education,
and grid integration – all over the next five
years in all three states; and

• Future of gas: We are committed to

becoming a leader in renewable natural
gas (RNG) generation and transmission.
For example, we are partnering with the
City of New York to convert their largest
waste-water treatment plant into a clean
energy source. We have also started a
collaborative effort in New York State
to develop revolutionary RNG
interconnection guidelines.

Looking ahead
We will stay focused on becoming a great
operating company and will work hard to
transition to a clean energy company. We will
continue to develop our employees in a safe
workplace, provide our customers with clean,
affordable energy and partner with our
communities to enable viable economies.

We will address these goals by improving our
capital and operational expenditure efficiency;
improving our customer metrics; generating
operating profit from new sources; and
limiting customer bill increases.

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

In late January, a supply disruption natural gas
incident affected all customers on Aquidneck
Island, Rhode Island. Initially, approximately
400 customers in Middletown lost gas service.

Given the local system’s low-pressure threat
and putting safety first, National Grid made
the decision to stop gas service to roughly
7,100 customers in the City of Newport,
also on the Island.

We deployed a workforce of approximately
1,000 employees and contractors to restore
gas service to impacted customers. We
ensured they were kept safe, warm and fed
during the days they were without heat, hot
water and cooking appliances. Restoration
was largely completed within eight days.

Customer first
In December 2018 we launched our US
Residential Energy Efficiency Online
Marketplace in our New York jurisdictions.
This new service provides one-stop shopping
for our residential customers, enabling them
to save money and energy while making their
homes more energy efficient.

The Marketplace offers a variety of energy
efficient products and instant rebates on,
lighting, Wi-Fi thermostats, advanced power
strips and water saving. It is designed for
both our gas and electric residential
customers in New York.

In downstate New York, we offer instant rebates
on Wi-Fi thermostats, water savings and other
gas saving products for our residential natural
gas customers. The Marketplace also provides
numerous resources such as buyer guides,
installation videos and customer reviews. These
help customers make smart and informed
choices when purchasing energy-efficient
products for their homes.

National Grid Annual Report and Accounts 2018/19Strategic Report

National Grid Ventures
and Other activities

BritNed availability

98.2%

(2017/18: 97.8%)

IFA availability

93.9%

(2017/18: 92.6%)

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

NGV, which operates separately from our
core regulated units, is focused on investment
in a broad range of energy businesses that
operate in competitive markets across the
UK and US. Its portfolio includes electricity
interconnectors, LNG storage and
regasification, energy metering and most
recently agreement to acquire large-scale
renewable generation.

Our ‘other’ activities comprise National
Grid Partners, the venture investment and
innovation arm of National Grid plc, as
well as UK Property and US non-regulated
businesses, which include LNG operations
and corporate costs.

In aggregate, the National Grid Ventures
and Other segment delivered £400 million
of statutory operating profit, £400 million
underlying operating profit and accounted
for £623 million of continuing investment
in 2018/19.

Operational performance
Electricity interconnectors: NGV is the
leading developer and operator of electricity
interconnectors to and from the UK. NGV’s
operational portfolio currently comprises
4 GW of interconnector capacity.

BritNed is an independent 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. In 2018/19
BritNed’s availability was 98.2%.

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). In 2018/19, IFA’s
availability was 93.9%.

Nemo Link, which started operating on
31 January 2019, is an independent joint
venture between National Grid and Elia,
the Belgian transmission system operator.
It owns and operates a 1 GW HVDC link
between Great Britain and Belgium.
Nemo Link’s availability was 99.9% in 2019.

LNG storage and regasification: Grain
LNG is one of three LNG importation facilities
in the UK. It operates under long-term
contracts with customers and provides
importation services of ship berthing,
temporary storage, ship reloading and
regasification into the NTS. Utilisation of
terminal capacity was 18.8% in 2018/19,
up from 5.2% in 2017/18.

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 tanker operators to load and
transport LNG in bulk across the UK via
road or rail.

Metering: National Grid Metering (NGM)
provides installation and maintenance
services to energy suppliers in the UK’s
regulated market. It maintains an asset base
of around 9.9 million domestic, industrial and
commercial meters, down from 11.1 million
in 2017/18.

National Grid Smart (NGS) supports energy
suppliers in fulfilling their UK smart meter
roll-out obligations. In 2019 National Grid
made the decision to not invest any further
in NGS growth, meaning NGS will not be
installing any more smart meters once it has
used up its current stock. NGS will continue
to own assets already in place and is working
with its customers to minimise any impact
on household consumers.

Property: National Grid Property deals with
the management and regeneration of our
brownfield surplus estate in the UK. Our
specialist team works with our communities
to return these redundant sites back into
beneficial use to provide new homes and
employment opportunities across the UK.

In 2018/19, we disposed of 33 sites and
exchanged contracts on a further three land
sales, to facilitate the delivery of thousands of
new homes across the UK. St William Homes,
our joint venture with Berkeley Group, has
entered its fifth year. Around 3,000 homes are
already under construction, with planning
permission secured for a further 2,000
homes. Our first St William residents moved
in at our Rickmansworth development in
April 2019.

One of the sites sold into St William this year
was the Fulham gas works. This site will
provide over 1,843 new homes in London,
of which 646 will be affordable, as well as over
100,000 square feet of new commercial
space. The development will include a new
public park and square where the world’s
oldest surviving gasholder will be the
centre piece.

Grow core business
Electricity interconnectors: NGV will grow
its interconnector portfolio by 3.8 GW in the
next five years, with new subsea power links
to France, Norway and Denmark.

National Grid Annual Report and Accounts 2018/19National Grid Annual Report and Accounts 2018/19

Strategic Report | National Grid Ventures and Other activities

Interconnector capacity: in
operation or under construction

7.8 GW

(2017/18: 6.4 GW)

Statutory operating profit

£400m

(2017/18: £231m)

Underlying operating profit

£400m

(2017/18: £231m)

Capital investment

£623m

(2017/18: £518m)

Evolve for the future
National Grid Partners: Previously known
as the Technology & Innovation unit, National
Grid Partners was established in 2018 as
the venture investment and innovation group
of National Grid plc. National Grid Partners
makes and manages strategically and
financially attractive investments and leads
company-wide innovation efforts. In 2018/19,
National Grid Partners made 12 new
technology investments. It also manages
National Grid’s interests in Energy Impact
Partners, a strategic energy venture
investment fund that has invested in
26 companies to date. In 2018/19 National
Grid Partners invested in two additional
venture capital funds.

US large-scale renewables: In March 2019,
NGV entered into an agreement to acquire
Geronimo Energy for $100 million plus
potential further payments subject to the
development of Geronimo’s project pipeline.
The transaction is subject to customary
closing conditions and regulatory approvals.
Geronimo Energy is a Minnesota-based wind
and solar developer. In addition, NGV is
negotiating and advancing a joint venture
arrangement with WSIB. Upon a capital
contribution of approximately $125 million,
NGV would own indirectly 51% of 378 MW
of solar and wind generation projects in
operation and construction. The joint venture
will have the right of first offer for future
projects developed by Geronimo Energy.

This investment is consistent with our
long-term strategy of evolving the Group
for the future.

Construction continues on the 149-mile
(240-kilometre) IFA2 interconnector.
Developed with RTE, the 1 GW subsea
cable will connect Great Britain and France.
The link is expected to be operational in 2020.

North Sea Link (NSL) will connect Great
Britain and Norway. Developed between
National Grid and the Norwegian transmission
system operator Statnett, NSL will be 447
miles (720 kilometres). The 1.4 GW link is
expected to be operational in 2021/22.

In September 2018, National Grid’s Board
gave final financial approval to NGV to build
the Viking Link interconnector. Developed
together with Danish transmission system
operator Energinet, Viking Link will be a 1.4
GW 472-mile (760-kilometre) long subsea link
connecting Great Britain and Denmark.

NGV will have 7.8 GW of operational
interconnector capacity when Viking
Link becomes operational in 2023/24.

US competitive transmission: Orsted-
owned renewables developer, Deepwater
Wind, partnering together with NGV, has
won competitive tenders to supply electricity
from the Revolution Wind offshore wind farm
to distribution utilities in Rhode Island and
Connecticut. The proposed 700 MW wind
farm will be located over 15 miles south of
the Rhode Island and Massachusetts coasts
in Deepwater Wind’s federal lease area.
Deepwater Wind expects Revolution Wind to
be operational in late 2023, pending permits
and final investment decisions. NGV has the
option to acquire the transmission connection
between Revolution Wind and the onshore
electric transmission network.

Property: St William continues to grow and
we now expect the joint venture to deliver over
20,000 new homes across London and the
South East over the next 15 years. A further
three sites have been sold into the joint venture
during 2018/19 with further sites expected to
be negotiated into the joint venture in the
future. In the next 12 months, we expect our
St William Homes JV to complete construction
of the first 350 homes, including 75 affordable
homes. This development will mark a major
milestone for the JV and in our partnership
with Berkeley Group.

In addition, Accord Housing Group, a Housing
Association, and National Grid Property are to
collaborate to develop new affordable housing
on land currently owned by National Grid.

Strategic Report

Our commitment to being
a responsible business
In today’s world, business needs to be a positive force for good.
This belief is critical to the way we work and why we do what we do.

Our purpose-led approach
Today more than ever, people are putting their
faith in companies that stand for something
and do the right thing. We believe the way our
Company affects the economy, environment
and society is just as important as our
financial returns. We have made great strides
to embed purpose into our organisation. We
work hard every day to bring energy to life, to
exceed the expectations of our customers,
shareholders and communities today, while
meeting the energy aspirations of future
generations tomorrow.

Our approach to responsible business is
focused on three areas: Environmental
sustainability, People, and Communities.

Environmental sustainability
We are passionate about operating our
business in an environmentally responsible
way. It is the right thing to do – for society,
the environment and our business.

We make sure sustainability shapes
our thinking and decision-making. This
focus helps us to optimise our operational
performance, provide value for our
customers and benefit the environment.

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 shifts to electrification.

Communities
For us, being a responsible business
means being a good citizen and being
involved in social progress, which covers
every aspect of our work. What we do
helps to underpin the prosperity and
wellbeing of communities in the UK and
US. For example, our work to develop
interconnectors is making energy more
secure, affordable and sustainable for
consumers across the UK.

We need to ensure we have a culture that
enables and supports a highly motivated,
diverse and multi-generational workforce,
with the right skills to deliver the future
needs of our customers.

and stakeholders to ensure their views
are fairly represented in our decisions and
actions. Our work on Hinkley-Seabank
Connection Project in Somerset,
for example, will include 5.3 miles
(8.5 kilometres) of underground cables
across the Mendip Hills instead of installing
overhead pylons. This will protect views
in this Area of Outstanding Natural
Beauty for the community, visitors
and future generations.

Meanwhile, our work on major
infrastructure projects involves continually
working with local communities, customers

You can read more about our approach
to supporting communities on page 44.

Our approach to reporting
This section contains information relating to the three focus areas that are considered material
to shareholders.

We have rigorous policies in place that support our approach to corporate responsibility and we
report on a number of non-financial performance measures relating to these policies. We were
recently awarded the 2018 Carbon Disclosure Project (CDP) A list for a third year running for
our performance in reporting and mitigating the impact of climate change.

Over the next year, we aim to better understand the holistic impact our business has on society.
This will help us identify opportunities to use our operations and capabilities to provide more
meaningful value to society.

The EU Non-Financial Reporting Directive –
Non-financial information statement

UN Global Compact and Sustainable
Development Goals

This section (pages 40 – 45) also provides
information as required by regulation in relation to:
• environmental matters;
• our employees;
• social matters;
• human rights; and
• anti-corruption and anti-bribery.

In addition, other related information can be
found as follows:
• Business model – pages 2 – 7;
• Our business environment – pages 12 – 13;
• Non-financial KPIs – pages 16 – 19;
• Principal risks – pages 20 – 22; and
• Safety, Environment and Health Committee

report – page 64.

In July 2018, we reconfirmed our support of
the 10 principles of the United Nations Global
Compact on human rights, labour, environment
and anti-corruption.

We also continue to build on our support for the
United Nations General Assembly 2030 agenda
and its Sustainable Development Goals (SDGs).
These 17 global goals are a universal call to action
to end poverty, protect the planet and ensure that
all people enjoy peace and prosperity.

Eight of the SDGs (see following page) are
particularly linked to our responsible business focus
areas. We have highlighted these where relevant
throughout this section.

Further reading
www.nationalgrid.com/group/
responsibility-and-sustainability

National Grid Annual Report and Accounts 2018/19Strategic Report | Our commitment to being a responsible business

Environmental
sustainability

The biggest impact we can have on the
environment is in our role of enabling the
transition to a low-carbon future. We also
know we have the potential to affect the
environment directly, both positively and
negatively, through our operations.

Our approach to environmental sustainability
is to manage our risks, whether short-term
through our physical operations, such as air
quality and pollution, or long-term through our
greenhouse gas emissions and resource use.
At the same time, we look for opportunities
to have a positive impact. For example, we
have committed to achieve a net gain in
environmental value for all our major
construction projects by 2020. We measure
this with an evaluation approach based on a
methodology set out by the UK Government.

As well as managing normal operating risk,
we manage the risk of an environmental event
arising from a catastrophic asset failure. You
can find out more about this on page 21.

Our strategy and priorities
Our environmental strategy, Our Contribution,
was originally developed in 2012 with a wide
range of internal and external stakeholders.
Over the years we have refined our strategy to
reflect changing priorities. It focuses on three
main 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 through
re-use and recycling, so we can reduce
our impact on the environment; and

• using our land holdings in ways that benefit

our business, the environment and the
communities in which we live and work.

These efforts are underpinned by maintaining
high environmental management standards.
In 2018 we developed an internal
Environmental Sustainability Business
Management Standard (BMS) that brings
together the commitments from Our
Contribution and our Environmental Policy,
providing clarity to all our employees on
the standards we expect. It also brings
sustainability fully into our environmental
management systems.

The Executive Committee will review and
approve changes to the BMS periodically,
including any strategies, plans and targets
within the BMS, ensuring it fully reflects the
risks and opportunities associated with
environmental sustainability. The Safety,
Environment and Health Committee tracks,
challenges and seeks assurance of the
delivery of the plans approved by the
Executive Committee.

Sustainability of our offices
In 2018, as our strategy continued to evolve,
we took steps to improve the sustainability
of our offices. In the UK, we completed many
energy and water efficiency projects and
achieved energy reductions in our offices
of 9%.

We are making progress on better ways of
managing our office waste, including working
with our supply chain to prevent waste being
generated. For example, we have pledged to
eliminate single-use plastic from sale in our
offices by 2020, and have already taken steps
to remove plastic cutlery, straws, stirrers and
cups at our UK headquarters in Warwick.
We have also developed an engagement
campaign called ‘Save Evie’s Whale’, to help
us improve our approach to recycling.

Climate change
We support climate change science.
Reducing greenhouse gas emissions is an
important area of focus for us and is one of
our KPIs.

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 pledge aligns with the trajectory
required to limit global warming to a 2˚C
temperature rise. We are currently reviewing
our targets against limiting this rise to 1.5˚C
and will update investors in next year’s
Annual Report and Accounts.

Task Force on Climate-related
Financial Disclosures (TCFD)
The TCFD’s 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 have committed to implementing the
TCFD’s recommendations, demonstrating
how climate change risk and opportunities
form part of our business, with clear targets
to measure progress.

Our disclosure is set out on pages 210 – 211,
demonstrating how we are managing our
climate impact and how our business is
evolving in response to the risks and
opportunities we see arising. We aim to
publish a full disclosure in 2020 as our
understanding and strategy evolves.

CDP A list
CDP is a not-for-profit charity that runs
a global disclosure system for investors,
companies, cities, states and regions to
manage their environmental impacts. We
are one of 126 companies globally, and one
of only eight UK companies to achieve a
position on the climate change A list (out of
7,000 submissions). We were delighted to
achieve this accolade for the third consecutive
year. It is clear recognition of our efforts to
reduce our emissions and mitigate climate
change during 2018/19.

Our environmental sustainability
targets and progress

1. Reduce carbon footprint
Greenhouse gas emissions (Scope 1
and 2 million tonnes of CO2 equivalent)

6.9

7.0

68%

70%

80%

17/18 18/19

2030 2050

(reduction from a 1990 baseline)

2. Maximise resources
% reduction in the volume of waste
that is sent to landfill (UK offices)

91%

100%

62%

17/18 18/19

2020

3. Responsible land use
Number of sites enhanced

17/18 18/19

2020

Actual

Target

Alignment to SDGs

Ensure access to
affordable, reliable,
sustainable and modern
energy for all

Ensure sustainable
consumption and
production patterns

Take urgent action
to combat climate
change and its impacts

Sustainably manage
forests, combat
desertification, halt
and reverse land
degradation and
halt biodiversity loss

Further reading
KPIs, pages 16 – 19
TCFD, pages 210 – 211
Environmental performance, page 18

National Grid Annual Report and Accounts 2018/19
Strategic Report

Our commitment to being
a responsible business continued

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 shifts
to electrification. We need to make sure we
have highly motivated people, with the right
skills, working for us and helping to 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: every day we do the
right thing and find a better way. You can read
more about our values on pages 14 – 15.

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 in this area on page 22.

Engaging our people
By developing our people and providing a
wider programme of benefits, 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 18.

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

In 2018, we also completed a mid-year pulse
survey. The aim was to get a half-yearly
update on progress in our focus areas and
to encourage a quicker response to the
survey results.

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

In the US, we have fostered relationships
with 33 colleges and universities. Leaders
from our business have been involved in these
initiatives. We have also continued to promote
internship opportunities and permanent
graduate development programmes with
more than 110 schools in the US.

Award recognition
In 2018/19, we were second in the Top
100 Companies and were also regional
winners (West Midlands) in the Rate
My Apprenticeship Awards, which are
assessed by apprentices themselves,
rather than external assessors. The
awards bring together employers,
apprentices and career champions
to celebrate success in the
apprenticeship market.

We also received recognition for our
engagement with the Procurement Skills
Accord, which is coordinated by Energy
& Utility Skills across the utility industry.

We were finalists in the Gas Industry
Awards Apprentice of the Year and
Apprentice of the Year for the UK
IT awards.

In the US, we were one of five winners of
the Age Smart Employer Award in New
York. Awarded by Columbia University,
the Age Smart Employer Award aims to
highlight industries and businesses using
strategic practices to hire and retain
valuable workers over the age of 50.

We were recognised by MilitaryHire.com
as a Top Veteran Employer. This is in
recognition of our efforts to create an
environment of opportunity for veterans
to apply their existing skills and train on
the job to develop further. It is primarily
due to our work with the Center for
Energy Workforce Development and
other utilities to help create the Troops to
Energy Jobs (T2E) initiative. We use the
T2E website to help successfully match
veterans’ and service members’ skillsets
to positions within the industry, ranging
from field operations, engineers and
analysts to the executive boardroom.

Health and wellbeing
We take a proactive, risk-based approach to
managing health and wellbeing at National
Grid. We continue to focus our efforts on
creating sustainable wellbeing behaviour
change within our workforce. We do this
mainly through education and training and
by managing our key wellbeing risks.

Our wellbeing programme focuses on
musculoskeletal injury prevention and
mitigation, chronic disease prevention,
support and mental wellbeing. We provide
training to develop the knowledge and
confidence to notice and respond to mental
health issues. We also work to reduce the
stigma and to create a culture in which
employees feel able to talk openly about
mental health.

UK Social Mobility Employer Index
For the second year running, we took
part in the UK Social Mobility Employer
Index. We were ranked 31st out of 100
companies that participated during 2018.
Following feedback, we have lowered
our minimum grade requirements for
our graduate programmes, changed
the data we capture and the range of
schools we target to help us better
address social diversity.

Living Wage
In the UK, we are accredited by
the Living Wage Foundation. Our
commitment to our direct employees
extends to our contractors and the
work they do on behalf of National Grid.
We believe that everyone should be
appropriately rewarded for their time and
effort. We also go above the Living Wage
requirements and voluntarily pay our
trainees the Living Wage.

We undertake a Living Wage review
each year to ensure continued alignment.
We also increase individual salaries
as required.

Further reading
For more information about the UK
gender pay gap, visit our website:
www.nationalgrid.com/group/
responsibility-and-sustainability/
understanding-our-uk-gender-pay-gap

Alignment to SDGs

Ensure healthy lives
and promote well-being
for all at all ages

Ensure inclusive and
quality education for
all and promote
lifelong learning

Achieve gender
equality and empower
all women and girls

Promote inclusive and
sustainable economic
growth, employment
and decent work for all

National Grid Annual Report and Accounts 2018/19Strategic Report | Our commitment to being a responsible business

Promoting an inclusive
and diverse workforce
Our inclusion and diversity policies
demonstrate our commitment to providing
an inclusive, equal and fair working
environment by:
• driving inclusion and promoting equal

opportunities for all;

• ensuring our workforce, whether part-time,
full-time or temporary, are treated fairly and
with respect;

• eliminating discrimination; and
• ensuring that selection for employment,

promotion, training, development, benefit
and reward is based on merit and in line
with relevant legislation.

A total of 18.1% of our total workforce have
declared themselves to be of ‘minority’ racial
or ethnic heritage. We recognise the value a
diverse workforce and inclusive culture bring
to our business. We have many initiatives to
encourage and promote diversity and inclusion.

During 2018/19, in the US we attracted 64%
female applicants and 42% ethnically and
racially diverse applicants to our graduate
development roles. We also took 51% female
applicants and 49% ethnically and racially
diverse applicants into our internship
programmes. Our UK Graduate Programme
attracted 20% female applicants and 58%
ethnically and racially diverse applicants.
Our UK Industrial Placement and Student
Internship programmes attracted 30% female
applicants and 55% ethnically and racially
diverse applicants.

Our US business created a record number
of opportunities for these students and
graduates, with 63 graduate development
opportunities and 206 interns starting in
the summer of 2019.

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 support a diverse workforce. For
example, Dean Seavers was featured in the
2018 Black History Month Magazine giving his
perspective on inclusion and diversity at
National Grid. We actively support Black,
Asian, and minority ethnic (BAME) initiatives,
and Nicola Shaw is actively involved in the
BAME/Diverse Leaders Programme. We are
also part of the 6th cohort of Business in the
Community’s BAME Cross Organisational
Mentoring Circles Programme. Gurvinder
Badesha, our Head of Assurance, is one of
the lead mentors on the programme, and our
UK HR Director, Sarah Stanton, is the UK
Executive Sponsor of the Accessibiility
Group that helps disabled people overcome
barriers and improve their lives.

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 Group Executive
Committee. Our definition 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.

Gender demographic as at 31 March 2019

Our
Board1

Senior
management2

Whole
Company3

Male

Female

Total6

Male (%)

Female (%)

66.7

33.3

171

252

67.9

32.1

17,084

5,492

22,576

75.7

24.3

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. For more

information, see page 18.

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

Work pattern

Full-time

Part-time5

5,212

16,414

598

NGV

Total6

22,224

95.4

99.5

97.1

98.4

249

352

4.6

0.5

2.9

1.6

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 full time equivalent.

Gender

Male

NGV

4,023

12,625

436

Total6

17,084

Female

73.7

76.5

70.8

75.7

1,438

3,874

180

5,492

26.3

23.5

29.2

24.3

Ethnicity demographic as at 31 March 2019
‘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

Declined to state

White (%)

Minority (%)

17,634

3,910

1,032

81.9

18.1

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.

Voluntary

Non-
voluntary

Total

6.4

6.6

8.3

6.6

5.9

4.5

12.8

5.1

12.3

11.1

21.1

11.7

NGV

Total6

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

Executive Directors.

Training days per employee
From 1 April 2018 to 31 March 2019, the
total number of training days delivered per
employee (as recorded in our HR systems),
across the whole of National Grid is 5.3 days
(6.5 in 2017/18). During 2018/19 there was
a 1.2 days’ reduction in training received
by employees, primarily driven by the US
workforce contingency plan for seven labour
disputes and the introduction of innovative
training design and scheduling processes.

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 %

2.7

12.8

4.8

10.0

Keeping our Board and Group Executive
Committee updated
Our Board and Group Executive Committee
receive regular updates on matters relating
to our people. For the Board, this includes
four key focus areas for our people and
organisation: our culture, diversity, the
people we need for the future and driving for
efficiency. The Board also receives updates
on our employee opinion survey results and
action plans. Additionally, this year the Board
discussed and considered the culture of the
Company. You can read more about the
Board’s culture on page 53.

The Group Executive Committee also
receives a bi-annual 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 on matters of business conduct, as
well as risk and compliance matters for
review. This includes breaches of the ‘Code
of Ethical Business Conduct’ and bi-annual
reports from the Group Ethics and
Compliance Committee.

National Grid Annual Report and Accounts 2018/19Strategic Report

Our commitment to being
a responsible business continued

Our communities highlights
in 2018/19

£54m

est. added value to communities

41k

STEM interactions with young people

£107m

allocated to address UK fuel
poverty since 2017

Alignment to SDGs

Ensure healthy lives
and promote well-being
for all at all ages

Ensure inclusive and
quality education for
all and promote
lifelong learning

Ensure access to
affordable, reliable,
sustainable and modern
energy for all

Communities

An important part of what we do at National
Grid is to exceed the expectations of our
communities as we bring energy to life. We
do this by providing a safe and reliable service,
and by helping our communities to thrive
through our responsible business activities.
We realise that, from time-to-time, our work
can have a negative impact on communities,
so we work closely with them to reduce this
impact and to help support their social or
economic needs.

Safe and reliable energy
We pride ourselves on providing a safe, reliable
energy service at an affordable price to our
customers, and to work hard in exceeding
their expectations.

The safety of all our employees, contractors and
the general public is of prime importance to us.
We measure the safety of our employees and
contractors and this is reflected in our KPIs,
shown on page 18. To ensure we maintain our
high standards of safety performance, we have
effective policies, procedures and training in
place so we can continue to perform at the level
we and our stakeholders expect.

Delivering energy every second of every day
is critical to the functioning of the economies
and communities we serve. The reliability of our
energy networks is one of the highest priorities
after safety. Our networks continue to provide
reliability running at more than 99.9% availability
in both the UK and US. You can read more
about this on page 16, and find out how we
manage our operational risks on pages 20 – 22.

We regularly seek feedback from our customers
to find out what they think of us and the services
we provide, and take the appropriate action to
improve and exceed customer satisfaction. You
can read more about our customer satisfaction
performance on page 16.

Supporting communities to thrive
We believe all companies should act responsibly
by playing an active role in the communities
where they operate and where employees
live. We work hard to help communities by
supporting initiatives that are important to them
and that will help deliver long-term benefits
to society.

In the UK, improving social mobility is a
challenge. The country has talent spread evenly
across it, yet opportunities are still not readily
available to everyone regardless of their
background. As a business, we are keen to
help improve social mobility so opportunities
are available to all.

We continue to play a part in the Government’s
Inclusive Economy Partnership, whose
membership is drawn from the business sector,
Government and civil society. We are supporting
two of the Partnership’s flagship challenges:
mental health and equipping people to transition
successfully to the world of work. To date, we
have helped to develop the Framework for
Voluntary Employer Reporting on Disability,
Mental Health and Wellbeing and agreed a
two-year partnership with UK Youth, and the
Careers & Enterprise Company. Through this
partnership, we will engage with companies
in the South West of the UK to promote our
Employability internship model and the
value of youth engagement for companies.

In March 2018, our 18-month employee-chosen
charity partnership with the Alzheimer’s Society
ended in the UK. In February 2019, we
announced our intention to further support
youth and education social action charity
City Year UK through a fundraising partnership.
The aim is to raise £150,000 for social mobility
initiatives that the charity will launch during 2019.

Many employees get involved with their
communities through volunteering and
fundraising, supporting the needs of charities
and community organisations. We also provide
grants to community groups to support
projects that meet local community needs
by delivering a range of social, economic
and environmental benefits.

In May 2018, we launched our first Responsible
Business Policy to help govern our responsible
business activities. The policy sets out our
approach to charitable giving, partnerships
with civil society and employee volunteering.
For each of these areas, we will measure
the tangible benefits being delivered to
our communities, customers and employees,
and report on progress made in future
Annual Reports and Accounts.

Also during 2018, our UK employees supported
local schools and colleges through various
STEM activities. These activities resulted in
more than 2,285 quality interactions with young
people across 41 schools.

In the UK, we continue to focus on addressing
fuel poverty through our voluntary investment
with Affordable Warmth Solutions CIC. During
2018/19 we allocated a further £49.3 million to
our Warm Homes Fund bringing the total to
£107 million since July 2017 and the installation
of 32,000 first-time central heating systems to
many vulnerable households across England,
Scotland and Wales. In the US, we have energy
efficiency programmes in place to help
residential, commercial and industrial customers
reduce their energy consumption, save money
and contribute to a more sustainable planet. We
have a long-standing relationship with United
Way, where we provide financial support to 40
agencies through employee fundraising and
corporate donations, averaging $3 million
annually over the past three years.

In addition to financial support, members of
our leadership team in the US and employees
in different regions serve on local United Way
boards, and working committees. These include
the UW Loaned Executive, Young Leaders and
Women United. Employee teams support
volunteer events in partnership with their local
agencies, bringing much needed time and
energy to the communities we serve.

The overall additional value we bring to
communities through our Responsible Business
activities is estimated to be £54 million.

Grid for Good
In 2018/19, we launched Grid for Good,
an initiative that connects people to the
services they need by partnering with
local charities, companies and
volunteers. The aim is to help encourage,
inspire and ultimately give hope to people
for a better quality of life. During the year,
we completed a pilot phase in
Birmingham, UK, and in Syracuse, US.
We now aim to use the findings to further
develop and launch the programme by
mid-2019.

National Grid Annual Report and Accounts 2018/19Strategic Report | Our commitment to being a responsible business

Good business conduct
To provide an understanding of the
Company’s development, performance and
position, we describe our approach to 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 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 Global Supplier Code of Conduct
(GSCoC) integrates human rights into the way
we do business throughout our supply chain
alongside other areas of sustainability 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 GSCoC, we expect
our suppliers to comply with all legislation
relating to their business, as well as adhering
to the principles of the United Nations
Global Compact, the International Labour
Organisation (ILO) minimum standards, the
Ethical Trading Initiative (ETI) 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 preventing
bribery and corruption, 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 and
share learnings. 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.

Governance and oversight
We review and update our framework
regularly 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 fraud and bribery. You
can read more about the Audit Committee’s
role on pages 58 – 62. 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 and other corrupt
business practices.

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.
In addition, a global methodology was
established for conducting fraud and bribery
risk assessments annually across the
business. As part of our global training
strategy, 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 global communication and
training programme to promote a strong
ethical culture. Additionally, we provide
briefings for high-risk areas of the business,
such as Procurement.

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 detect and prevent
bribery. As part of our 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).

Working with our supply chain
We have a GSCoC, which is issued to our
suppliers and sets out our requirements to
have in place a programme with procedures
to prevent and detect bribery and corruption
and standards around how we expect our
suppliers to operate, which should extend into
their own supply chains. All our suppliers
must comply with all laws relating to their
business which includes human rights,
business ethics, resilience, supplier diversity,
skills development and environmental
sustainability, as well as adhere to the
principles of the United Nations Global
Compact, 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. Our Global Procurement team carries
out regular supplier screening to identify any
requirements for prosecutions or sanctions
within our supplier base. 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.

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.

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 expect all our suppliers to be compliant
with the Modern Slavery Act and to publish a
Modern Slavery Statement if required. Each
year, we update our own Modern Slavery
Statement and publish this on our Company
website in line with the Act’s requirements.
Our Statement is independently reviewed by
the Business & Human Rights Resource
Centre alongside other FTSE 100 companies.
In 2019, we were positioned 12th and
recognised as one of a ‘small cluster of
leaders standing out’ in this space.

We work closely with our suppliers and peers
to build on our knowledge and promote best
practice in the industry to combat modern
slavery. During 2018, this included engaging
with suppliers we had identified as being
within potentially high-risk categories.
Through this engagement, which included
a workshop facilitated by the Supply
Chain Sustainability School, we have
encouraged our suppliers to conduct similar
risk assessments with their own supply chain.
We have also joined the Construction Protocol
to better understand the approach to
mitigating and resolving issues.

We are an active member of the United
Nations Global Compact Working Group,
focusing on Modern Slavery, and are working
with Achilles to develop a community
approach to address the issue. We are also
revising our procurement process, so that
modern slavery criteria and identifying risks
form part of our sourcing process.

National Grid Annual Report and Accounts 2018/19Corporate
Governance

Corporate Governance contents

46
Corporate Governance
47
Letter from the Chairman
56
Board and Committee evaluation
58
Audit Committee
Finance Committee
63
Safety, Environment and Health Committee 64
65
Nominations Committee
Diversity
66
Statement of compliance with the
UK Corporate Governance Code 2016
Index to the Directors’ Report
and other disclosures
Directors’ Remuneration Report

68
69

Structure of the report
This report sets out how we are governed and the
Board’s key governance activities during the year.

Corporate Governance Code 2016
compliance statement
This statement sets out further information on our
compliance with the UK Corporate Governance
Code for 2018/19 see page 67.

Stakeholder engagement
The Board continues to focus on stakeholder
engagement and is considering how to increase
further the employee voice in the boardroom.
For more information, see pages 54 – 55.

The Board and section 172 Companies Act 2006
Under the Companies (Miscellaneous Reporting)
Regulations 2018, the Directors will be required to
explain how they have complied with their duty to
have regard to the matters in section 172 (1) (a)-(f).
Our 2019/20 Annual Report will include this
statement.

Letter from the Chairman

Corporate Governance

“ It was important that the
Company builds on the
extensive existing range
of engagement activities
and continues to consider
workforce views in
decision-making.”

Sir Peter Gershon
Chairman

Introduction and the new UK Corporate
Governance Code 2018
This year has seen significant changes to
the Corporate Governance landscape, which
have remained high on the Board’s agenda
this year, reiterating the importance with
which we treat Corporate Governance.

Following the introduction of the new UK
Corporate Governance Code 2018 (the new
Code), the Board took the opportunity to
review stakeholder engagement (especially
workforce engagement), succession planning,
diversity and the role of the Remuneration
Committee in more depth over the year. From
the work we have completed in previous
years, I am pleased to say that we are well
placed to meet the new requirements. As
you will see throughout this report, we are
now doing more to ensure that the views
of our stakeholders are being captured in
the boardroom, and maintaining focus on
creating the right culture for the Company.
In next year’s report, we will report in detail
on our compliance against the new Code.

Other external influences on the Board agenda
included the ongoing UK regulatory and
political uncertainty and the legal separation of
the Electricity System Operator, all of which will
have a significant impact on the way we work
and operate. The Board has also taken time to
discuss topics such as our strategy, innovation,
cyber security, RIIO-T2 and the Hinkley-
Seabank Connection Project.

Stakeholder engagement and
the Board’s duty
The role and effectiveness of the Board are
essential in a successfully run company.
During the year, we discussed the Board’s
duty under section 172 of the Companies Act
2006, with a significant focus on reviewing
and mapping out our key stakeholder groups
and discussing the Board’s current level of
engagement and incorporation of its views
into decision-making. Our discussions around
RIIO-T2, the Massachusetts gas labour
dispute and workforce contingency plan, the
Hinkley-Seabank Connection Project and our
Business Plan are examples of how the Board
has had regard to its duty under section 172,
including ensuring we had regard for the
interests of key stakeholders and the likely
consequences of any decisions in the long
term. You can read more about who our
key stakeholders are and how they have
influenced key decision-making on
pages 54 – 55.

Workforce engagement
In November 2018, the Board considered the
provisions of the new Code and, in particular,
reviewed the three FRC recommended
methods of workforce engagement. Following
a detailed review of the existing mechanisms
for engagement by the Board, Executive
Committee and senior management, the
Board thought it was important that it builds
on the extensive existing range of
engagement activities that are already in place
and continues to consider workforce views in
relevant decision-making processes. The
Board determined that the workforce was not
limited to Company employees, but also
included contractors and agency workers,
in all locations. Current engagement
mechanisms include reviewing and
implementing actions from the employee
survey results, site visits by myself and
Non-executive Directors and separate
Non-executive Director sessions with a cross
section of the workforce. These mechanisms
will be enhanced to include additional
engagement sessions with the Non-executive
Directors and our approach to leadership
dinners will evolve to drive greater, more
diverse, workforce representation and
broader communications by inviting a
representative from each employee resource
group to a separate dinner. Focus will be on
the Board’s interactions with all employees,
hearing their views on the outcome of the
employee engagement survey and other
topical issues, such as gender pay. We will
continue to review and adapt our approach
during the year.

External Board evaluation
This year, we appointed Dr Sabine
Dembkowski of Better Boards Limited to
undertake an independent, formal and
rigorous evaluation of our Board and
committees. During the evaluation process,
Sabine provided the Board with insights about
the different aspects of effective boards and
how they can work together more effectively
as a team. Each Board member received an
individual evaluation and the Board had a
combined action plan. The process and
outcome can be found on page 56.

Culture
As Chairman, promoting a culture of
openness and debate in the boardroom
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 ensuring that we
establish good governance to underpin a
healthy culture. You will see from our culture
journey (on page 53) that the Company has
spent a considerable amount of time over the
last few years focusing on getting this right for
the Company. In the year, the focus has been
on the changes from the new Code and
stakeholder engagement.

Board developments and diversity
There were a number of people changes on
the Board during this year. All appointments
were subject to a formal and transparent
procedure. We welcomed two new Directors,
as mentioned in the Nominations Committee
Report on page 65. Andy Agg was appointed
Interim CFO in July 2018 and was formally
appointed to the Board as Chief Financial
Officer with effect from 1 January 2019.
Earl Shipp joined the Board as Non-executive
Director and joined the Safety, Environment
and Health Committee, Remuneration
Committee and the Nominations Committee.
On 16 May 2019, we will welcome Jonathan
Silver to the Board as a Non-executive
Director. The Nominations Committee
oversaw the rigorous selection process for
these new appointments, ensuring that
relevant skills and diversity of thought were
considered carefully as part of the
appointment process. You can read more
about this on page 65. We also said goodbye
to Andrew Bonfield and Pierre Dufour in July
2018 and Nora Mead Brownell in April 2019.

We remain focused on maintaining an inclusive
and diverse culture on the Board. We believe
this improves effectiveness, encourages
constructive debate, delivers superior
performance and enhances the success of
the Company. I was pleased to see National
Grid was mentioned in the latest Hampton-
Alexander Review and ranked 15th out of
the FTSE 100 for women on boards and in
leadership. Most recently, we were also placed
in The Times Top 50 Employees for Women.

Following the changes to the Board during the
year, we continued to meet our diversity target
of having 33% of women on the Board, until
April 2019 when Nora Mead Brownell left the
Board and it fell to 27.3%. We currently exceed
the Parker Review target for ethnic diversity on
FTSE 100 Boards. You can read more on how
we strive towards our objectives in our Board
Diversity Policy on page 66.

Business in the Community (BITC) has
recognised the Company for the work we do
to support workplace equality and inclusion,
a fact of which I am personally very proud.
We were also named in the Top 70 Employers
for Race, and we were also a finalist in BITC’s
Race Equality Awards. This acknowledged
that we are taking a proactive approach to
address racial inequalities in the Company.
Our policies are also considered to be having
a positive impact on our Black, Asian and
Minority Ethnic (BAME) employees, and we
will continue to progress our diversity
aims through the year.

Sir Peter Gershon
Chairman

National Grid Annual Report and Accounts 2018/19Corporate Governance

Sir Peter Gershon CBE FREng (72)
Chairman

John Pettigrew FEI FIET (50)
Chief Executive

Andy Agg (49)
Chief Financial Officer (CFO)

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

Tenure: 7 years

Skills and competencies: Sir Peter is
an experienced leader, having held senior
board-level positions spanning both
public and private sectors in the computer,
defence and telecommunications industries.
He has served as Chief Executive and as a
Managing Director in several high-profile
organisations. Through his broad business
experience and previous roles, Sir Peter
brings external insight, understanding of
diverse issues and the strong corporate
governance expertise required to create
and lead an effective Board.

External appointments:

• Non-executive Chairman of the Aircraft
Carrier Alliance Management Board
and Dreadnought Alliance;
• Trustee of The Sutton Trust;
• Trustee of the Education Endowment

Foundation;

• Chairman of Join Dementia Research

(JDR) Partnership Board;

• Board member of The Investor Forum.

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

Tenure: 5 years

Skills and competencies: John joined
the Group as a graduate in 1991 and
has progressed through many senior
management roles. Together with his
extensive operational experience of the
Group, John brings significant know-how
and commerciality to his leadership of
the executive team and management
of the Group’s business.

John continues to lead the implementation
and development of the Group’s strategy,
meeting new opportunities for the continued
future growth of our core businesses.
He maintains a productive dialogue with
institutional investors on Group strategy
and performance.

External appointments:

• Member of the Government’s Inclusive

Economy Partnership;

• Member of the CBI’s President’s

Committee;

• Non-executive Director and Senior

Independent Director of Rentokil Initial plc.

Appointed: Interim Chief Financial Officer
from 30 July 2018. Appointed as CFO on 1
January 2019

Tenure: Less than 1 year

Skills and competencies: Andy trained
and qualified as a chartered accountant with
PricewaterhouseCoopers and is a member
of the ICAEW. He has significant financial
experience, having previously held a number
of senior finance leadership roles across the
Group, including Group Financial Controller,
UK CFO and, most recently, Group Tax
and Treasury Director. Andy’s in-depth
knowledge of National Grid, both in the
UK and US, and his broad experience in
operational and corporate finance roles
have ensured a smooth transition to his
role as CFO.

External appointments: None.

Nicola Shaw CBE (49)
Executive Director, UK

Dean Seavers (58)
Executive Director, US

Alison Kay (55)
Group General Counsel and
Company Secretary

Appointed: 1 July 2016

Tenure: 2 years

Skills and competencies: Nicola’s career,
in the UK and overseas, has included senior
positions in several regulatory, commercial
and operational roles. She has a strong
leadership track record, including Chief
Executive Officer of HS1 and Managing
Director of the UK Business Division at
FirstGroup plc.

Her broad range of experience working
with the UK Government, the European
Commission and Parliament, and industry
regulators, as well as leading large regulated
businesses, enables Nicola to lead our UK
business with the requisite experience,
knowledge and leadership expertise.

External appointments:

• Non-executive Director of International

Consolidated Airlines Group, S.A.;
• Director of Major Projects Association;
• Director of Energy Networks

Association Limited;
• Director of Energy UK.

Appointed: 1 April 2015

Appointed: 24 January 2013

Tenure: 4 years

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. He has a proven
track record of building successful teams
and improving operations. Dean’s keen
finance and business development skills
continue to differentiate the Company as a
leading US energy distributor and innovator.

External appointments:

• Advisor to the Board at City Light Capital;
• Non-executive Director of Albemarle

Corporation.

Skills and competencies: Alison has
responsibility for the legal, compliance and
governance framework of 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.

Alison provides support and advice to the
Directors, the Board and its Committees.
She brings rigour to corporate governance
and ensures that Board procedures are fit
for purpose and adhered to. She also has
expertise in regulatory and contractual
law and legal risk management from her
previous experience at National Grid.

External appointments:

• Member and Vice-Chair of the

Association of General Counsel and
Company Secretaries working in
FTSE 100 Companies;

• Member of the Marie Curie West Midlands

Development Board.

Our Board

Committee
membership key

Audit
Committee

Finance
Committee

Nominations
Committee

Remuneration
Committee

Safety, Environment
and Health Committee

Executive
Committee

Chair of the
Committee

Tenure as at 31 March 2019

Committee membership
as at 15 May 2019

Other Board members
during the year were:
• Andrew Bonfield –

stepped down from
position of CFO
on 30 July 2018;
• Pierre Dufour –

stepped down on
30 July 2018; and
• Nora Mead Brownell
– stepped down on
8 April 2019.

National Grid Annual Report and Accounts 2018/19

Our Board diversity

Board gender

Men
Women

Executive and
Non-executive Directors

Executive
Non-executive (inc. Chairman)

Board members
by nationality

British
American

Charts as at 15 May 2019

Tenure as at 31 March 2019

< 3 years
3-6 years
> 6 years

Corporate Governance | Our Board

Jonathan Dawson (67)
Non-executive Director;
Independent

Appointed: 4 March 2013

Tenure: 6 years

Skills and competencies: Jonathan,
through his broad range of expertise within
the finance and pensions sector, brings
significant in-depth understanding in
remuneration and financial matters to his
role as Chair of the Remuneration
Committee. As a Non-executive Director,
Jonathan brings scrutiny, additional
challenge and independent oversight
to the Board.

External appointments:

• Chairman of River and Mercantile

Group PLC;

• Chairman and a founding partner

of Penfida Ltd.

Therese Esperdy (58)
Non-executive Director;
Independent

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

Tenure: 5 years

Skills and competencies: Therese
has significant international investment
banking experience, having held a variety
of leadership roles spanning 26 years.
Her career began at Lehman Brothers and
in 1997 she joined Chase Securities and
subsequently JPMorgan Chase & Co.,
where she held a number of senior
positions. 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 Chair of the
Finance Committee. Her sharp and incisive
thinking enables her to contribute and
constructively challenge on a wide range
of Board debates.

External appointments:

• Non-executive Director and Senior
Independent Director of Imperial
Brands PLC;

• Non-executive Director of Moody’s

Corporation.

Dr Paul Golby CBE FREng, FIET,
FIMechE, FEI, FCGI (68)
Non-executive Director;
Independent

Appointed: 1 February 2012

Tenure: 7 years

Skills and competencies: Paul is a
Chartered Engineer and has a lifelong
passion for engineering and innovation,
having spent his career in the energy and
regulatory sectors. He brings a valuable
engineering and industry perspective as
well as the attributes of an experienced
Chairman and Chief Executive to his role
as a Non-executive Director. Paul’s deep
understanding and specific experience in
safety and risk management is crucial to his
role as Chair of the Safety, Environment
and Health Committee.

External appointments:

• Chairman of Costain Group PLC;
• Chairman of the UK National Air

Traffic Services;

• Member of the Prime Minister’s

Council for Science and Technology.

Amanda Mesler (55)
Non-executive Director;
Independent

Earl Shipp (61)
Non-executive Director;
Independent

Mark Williamson (61)
Non-executive Director and
Senior Independent Director

Appointed: 17 May 2018

Appointed: 1 January 2019

Appointed: 3 September 2012

Tenure: 1 year

Tenure: Less than 1 year

Tenure: 6 years

Skills and competencies: Amanda
brings to the Group extensive international
leadership and general management
experience from the technology and
fintech sectors. She has over 25 years
of experience at senior management and
board level at large international companies.
She led a $1 billion global practice at
Electronic Data Services and has experience
sitting on audit, risk and remuneration
committees. Amanda provides a new
entrepreneurial perspective to the Board.

External appointment:

Skills and competencies: With an
extensive career in the chemicals industry
and having held a senior leadership role
in a safety-critical process environment
and culture, Earl brings significant safety
performance, project management,
environmental, sustainability and strategic
expertise to the Board and Committees.
This enables Earl to contribute on a
wide range of issues to Board
and Committee debates.

External appointments:

• Non-executive Director of Olin

• Chief Executive Officer of Earthport plc.

Corporation;

• Non-executive Director of CHI St. Luke’s

Health System of Texas;

• Commissioner of Brazoria-Fort Bend

Rail District (Texas).

Skills and competencies: As
a qualified chartered accountant, Mark
brings considerable financial and general
managerial experience to the Company. His
previous roles as Chief Financial Officer of
International Power plc and Non-executive
Director and Senior Independent Director
of Alent plc cement his extensive financial
experience and provide a deep
understanding of the utilities sector. This
allows him to bring a financial and strategic
outlook on diverse subjects in support of
the Board and its Committees. In his role
as Senior Independent Director, Mark brings
an excellent understanding of investor
expectations as well as having significant
experience in managing relationships
with investor and financial communities.

External appointments:

• Chairman of Imperial Brands PLC; on

11 February 2019, Imperial Brands PLC
announced that Mark would step down
as Chairman once a suitable successor
had been found;

• Chairman of Spectris plc.

National Grid Annual Report and Accounts 2018/19

Corporate Governance

Corporate Governance overview
Your Board remains committed to the highest standards
of Corporate Governance and in 2018/19 continued
to embed best practice in line with the evolving UK
governance landscape.

Board
Our Board is responsible collectively 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
to help achieve long-term success and deliver sustainable shareholder
value. The Board also plays a major role in setting and leading the
Company’s culture and wider sustainability goals. It considers key
stakeholders in its decision-making and, in doing so, ensures that
Directors comply with their duty under section 172 of the Companies
Act 2006.

To operate efficiently and give the right level of attention and consideration
to relevant matters, the Board delegates authority to its Board Committees.
Each Committee Chair reports to the Board on their Committee’s activities
after each meeting.

Key matters considered
by the Board include:
• Company’s strategy, long-term strategic objectives and business plan;
• Risk appetite and determining principal risks;
• Overall corporate governance arrangements, systems of internal

control and risk management;

• Annual business plan and budget;
• Significant changes in capital structure;
• Succession planning for Board and senior management;
• Half-year and full-year results statements, Annual Report and Accounts

and other statutory announcements;

• Determination of the framework or policy for the remuneration of the

Chairman, Chief Executive, Executive Directors, Group General Counsel
and Company Secretary, and direct reports to the Chief Executive,
following recommendation from the Remuneration Committee.

Board Committees

Audit Committee:
• Financial reporting;
• Internal controls;
• Processes for risk

management;
• Internal audit;
• External auditor.

Nominations
Committee:
• Board and Committee

composition;

• Succession planning;
• Board appointments.

Remuneration
Committee:
• Policy;
• Implementation of policy;
• Incentive design and setting

of targets.

Safety, Environment and
Health Committee:
• SEH strategy and policies;
• Performance targets;
• Sustainability.

Finance Committee:
• Financing policies and

decisions;

• Credit exposure;
• Hedging;
• Foreign exchange

transactions;
• Guarantees and

indemnities.

Executive Committee
Led by the Chief Executive, the Committee oversees the safety, operational
and financial performance of the Company. It is responsible for making the
day-to-day management and operational decisions it considers necessary
to safeguard the interests of the Company and to further the strategy,
business objectives and targets established by the Board. The Committee

members have a broad range of skills and expertise that are updated
through training and development. Some members also hold external
non-executive directorships, giving them valuable board experience.
Those members of the Committee who are not Directors regularly
attend Board and Committee meetings for specific agenda items.

Other management committees
Disclosure Committee; Investment Committee; Share Schemes Sub-Committee.

Our Executive Committee
Four Executive Directors are members of the Executive Committee, as well as being on the
Group Board. Our Group General Counsel and Company Secretary is also a member of the
Executive Committee. See their biographies on page 48.

John Pettigrew – Chief Executive and Committee Chair
Andy Agg – Chief Financial Officer
Dean Seavers – Executive Director, US
Nicola Shaw – Executive Director, UK
Alison Kay – Group General Counsel and Company Secretary

Andy Doyle
Chief Human Resources
Officer (from 1 April 2019)

Badar Khan
Group Director, Corporate
Development and
National Grid Ventures

Barney Wyld
Group Corporate
Affairs Director

Adriana Karaboutis
Group Chief Information
and Digital Officer

Governance structure
The schedule of matters reserved for
the Board and terms of reference for
each Board Committee are available at:
www.nationalgrid.com

Reports from each of the Board
Committees, together with details
of their activities, are set out on
pages 58 – 90.

Full biographies for the Executive
Committee are available at:
www.nationalgrid.com

National Grid Annual Report and Accounts 2018/19Corporate Governance | Corporate Governance overview

Matters considered by the Board

Board and Committee membership and attendance
The table below sets out the Board and Committee attendance during the year to 31 March 2019. Attendance is shown as the number
of meetings attended out of the total number of meetings possible for the individual Director during the year.

Director

Sir Peter Gershon

John Pettigrew

Andy Agg – Appointed as CFO 1 January 20191

Dean Seavers2

Nicola Shaw

Nora Mead Brownell – Stepped down on 8 April 2019

Jonathan Dawson

Therese Esperdy

Paul Golby

Amanda Mesler – Appointed on 17 May 2018

Earl Shipp – Appointed on 1 January 2019

Mark Williamson3

Former Directors who served for part of the year

Andrew Bonfield – Stepped down from position of CFO
on 30 July 2018

Pierre Dufour – Stepped down on 30 July 2018

Board

Audit

Finance

Nominations

Remuneration

Safety,
Environment
and Health

8 of 8

2 of 2

6 of 8

8 of 8

6 of 6

2 of 2

8 of 8

2 of 2

–

4 of 4

3 of 3

–

4 of 4

–

4 of 4

1 of 1

–

4 of 4

–

3 of 3

–

1 of 1

–

7 of 7

–

6 of 7

7 of 7

5 of 5

2 of 2

7 of 7

–

2 of 3

–

10 of 10

–

2 of 2

9 of 10

–

3 of 4

–

4 of 4

–

4 of 4

–

1 of 1

–

1 of 1

1. Andy Agg became Interim CFO from 30 July 2018 and joined the Board from 1 January 2019.
2. Dean Seavers missed the November and December Board meetings due to personal circumstances.
3. A Remuneration Committee meeting was held at short notice and due to other commitments, Mark Williamson was unable to attend.

Board/Committee chair

Examples of Board focus during the year include:

Key areas
of activity

Strategy

Matters considered

Outcome

Views of key
stakeholder groups
considered

In addition to the time allocated during Board meetings to
discuss business performance and key strategic objectives
for the year, the Board participated in two strategy sessions.
In the year, the Board focused on:
• developing a Business Plan that meets the Group’s

requirements underpinned by a robust financial strategy;
• growth strategies for NGV, including interconnectors and

electrification of vehicles;

• Board approval of the Company’s Business Plan

and strategy;

• Input on the direction of travel for our

digital strategy;

• In April 2019, the Board endorsed the strategic

priority areas for management focus for 2019/20;

• Approval of the investment in the Viking Link

interconnector;

All:
Investors
Suppliers
Customers
Regulators
Communities and
governments
Our people

• UK and US gas growth potential, in line with economy-wide
decarbonisation goals and the UK’s and Northeast US’s
attention on energy to provide heating;

• Received updates on cyber security and the latest
cyber scorecard. Noted that a number of cyber
initiatives were underway;

• the sale of our remaining 39% share in Quadgas;
• building capabilities and experience in distributed
energy resources in the US for our regulated and
unregulated businesses;

• a deep dive of our digital strategy, including cyber security;
• innovation – see separate section below; and
• UK and US commercial property portfolio.

• Continued focus on mapping cyber security

activities into the risk appetite framework, and the
Board agreed it was acting in accordance with its
risk appetite in this area; and

• The Board reviewed the performance of the

commercial property portfolio and discussed the
success of the St William joint venture.

Corporate
Governance
Code 2018

Following the introduction of the new Corporate Governance
Code in July 2018 for accounting periods starting on or after
1 January 2019, the Board, with assistance from the Group
General Counsel and Company Secretary, took the opportunity
to review: stakeholder engagement; workforce engagement;
succession planning; and diversity.
The purpose was to identify where the existing strong
engagement between leadership and employees across the
business needed to be developed further to support effective
Board decision-making.

• Noted the present measures in place to facilitate
the communication with stakeholders and gave
support to the wide engagement programme
currently being undertaken;

• Agreed on a number of further actions that should

be implemented;

• Annual consideration of whether all Directors

had time to discharge duties effectively, which is
established during the appointment process and is
subject to ongoing monitoring; and

• For more information on employee engagement,

see pages 42, 43 and 53.

All:
Investors
Suppliers
Customers
Regulators
Communities and
governments
Our people

Further reading
For more info about our key stakeholders,
see pages 4 – 7 of the Strategic Report

National Grid Annual Report and Accounts 2018/19Corporate Governance

Corporate Governance overview continued
Matters considered by the Board continued

Key areas
of activity

Business plan

Matters considered

Outcome

Discussed the ongoing financial strategy and business plan for
the year. Regular updates were received on key external
challenges, and particular consideration was given to these
and the current political environment.

• Approval of the initial five-year plan and the

viability and going concern statements;

• Confirmation that the Group had a financially

sustainable business model for the foreseeable
future, defined for this purpose only as the five
years to March 2023.

Views of
key stakeholder
groups considered

Investors
Customers
Communities and
governments
Our people

Electricity
system
operator (ESO)
separation

Considered at length the corporate governance arrangements
required to prevent conflicts of interest with the legal
separation of the ESO and to restrict engagement with
other parts of National Grid.

Discussed how management and staff across the Company
would need to be clear which part of the business they
represented externally.

Political and
regulatory
environment

Significant focus on the changing political and regulatory
environment, including Brexit. The Board continually reviewed
possible outcomes of the Brexit deal and the impacts on the
Company.

Received regular updates on risks and opportunities posed
by Brexit, including the potential for state ownership, and
continued engagement activities with our stakeholders on
the issue.

RIIO-T2 price
control

Ahead of our next UK regulatory price control, the Board
considered the key elements of Ofgem’s RIIO-T2 price control
framework review consultation, published in March 2018, and
the sector-specific consultation published in December 2018.

The Board scrutinised and challenged the Company’s UK
regulatory strategy, providing feedback, guidance and support
for its ongoing development.

Massachusetts
gas labour
dispute and
workforce
contingency
plan

The Board considered at length the employee terms and
conditions for two gas unions in Massachusetts this year.

As no agreement was reached before the existing contracts
expired, the Board noted the decision by US management to
implement contingency workforce plans from the end of
June 2018. The Board was kept appraised of the contingency
workforce plans, received updates throughout from the Chief
Executive and Executive Director, US and was provided
with an update on the lessons learned once an agreement
was reached.

Technology
and innovation

To support our response to the threats and opportunities
presented by emerging technology, this year the Board
reviewed the organisation and governance of our Group
Technology and Innovation function and provided
input on the strategy, including how we:
• learn from and leverage innovation that is

occurring externally;

• enhance the effectiveness of internally generated innovation; and
• measure the success of our efforts in this area.

• Updates provided regularly through the Chief
Executive’s Report and from the Executive
Director, UK;

Customers
Our people
Regulators

• Approval of a new Group-level Board,
with separate terms of reference and
delegated authority;

• A significant amount of work has taken

place internally to ensure that all employees
are clear on the separation boundaries,
including online training.

• Board input on, support for and monitoring of

the UK and US regulatory strategy;

• Political sub-group of the Executive Committee

was established to take a more hands-on
approach to the evolving political/regulatory
landscape and its implications for the Company.

• The Board reiterated the belief that RIIO-T2 must
deliver a total financial package that can fund
necessary investments as well as fairly
remunerate shareholders for this investment;
• Expectation that there would be an increasingly
challenging UK regulatory environment resulted
in the appropriate assumptions being made in
the business plan.

• Our objective was to reach a fair settlement that
allowed the business to deliver vital services at
a reasonable cost to customers, minimise any
future cost increases and protect the agreements
already in place with the other unions;

• The implementation of the workforce contingency
plan ensured that critical work continued safely
and that any disruption to our current customers
was kept to a minimum; unfortunately, those
people who wanted, but could not get new
connections, experienced disruption;

• In January 2019, an agreement was reached
with the two Massachusetts gas unions over
employment terms and conditions and the
reintegration of those employees back to work.

• The Board reviewed and endorsed the

organisation and governance of the Group
Technology and Innovation function;

• The Board reviewed and provided input on the
Company’s technology and innovation strategy;
• Focus was on enabling an innovative culture with
rapid decision-making and the acceleration of
internally sourced ideas.

All:
Investors
Suppliers
Customers
Regulators
Communities and
governments
Our people

Investors
Customers
Regulators

Our people
Communities and
governments

Our people

Looking forward, the Board’s focus for next year is expected to include:
• continued regular reviews of safety activities;
• UK, US and NGV 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 the outcome and
implications of Brexit and state ownership;

• our UK and US regulatory strategy and preparation for the RIIO-T2

price control submission;

• update on the Hinkley-Seabank Connection Project;
• technology and innovation;
• cyber security updates;
• climate change and total societal impact;
• risk; and
• our stakeholder engagement model.

National Grid Annual Report and Accounts 2018/19Corporate Governance | Corporate Governance overview

Our culture

Our culture journey
The Board is responsible for the culture of the Company. Its role is to influence and monitor
culture to ensure we are emulating desired beliefs and behaviours in and outside the boardroom
and identifying areas where culture is embedded strongly and where there are gaps. Since
2016, the Board has been on a journey to help influence the right culture throughout the
Company, as set out below.

2016/17 – Internal Board and Committee evaluation
Assessed how the Board could set the ‘tone from the top’ and gauged how
effectively this was cascaded throughout the Company.
Results of the Board evaluation for 2016/17 included:
• the need to create a common definition of culture;
• confirmation that the Board’s role was to influence and monitor culture to ensure desired
beliefs and behaviours were reinforced formally in the boardroom, and to identify where
the culture was strongly embedded or where there were gaps;

• the Executive Committee similarly committed to driving the desired beliefs and behaviours

in its role in leading the organisation directly; and

• creating a scorecard to aid the Board’s role in influencing and monitoring culture, alongside

its engagement with the business.

September 2017 – Board meeting
Re-established a clear purpose, vision and values, and a common definition
of culture was agreed as:
“our values, beliefs and behaviours that characterise our Company and guide our practices”

Agreed areas for increased Board focus were:
• shaping the right culture in the recruitment and appointment of Non-executive Directors,

Executives and senior leadership. The Board would be mindful of this key responsibility as a
driver of culture and would evaluate candidates on cultural alignment and their ability to drive
the Company’s vision, beliefs and behaviours; and

• visible leadership. The Board increasingly uses its existing engagement opportunities to get
a good sense of the culture in action across the business and encourages conversation
more broadly about all aspects of our culture. These insights would be brought back into the
boardroom to inform decision-making.

January 2018
Discussion focused on evaluating and monitoring culture, including additional
recommendations on recruiting for cultural alignment and approaches to
engaging most effectively with employees.
Decisions/actions:
• consistent evaluation criteria aligned directly to the values and leadership qualities would
be used when screening, evaluating and selecting Non-executive Directors and Executive
Committee members. Recommendations to the Board and Nominations Committee
would also include a justification of cultural fit alongside technical qualifications; and

• employee engagement sessions would be integrated into Board agendas.

March 2018
Approval of a culture scorecard to be used to help the Board in monitoring culture at
Group level. The scorecard was largely based on data from the annual employee
engagement survey.
The following principles for the scorecard were adopted:
• focus given to our values and how they were embedded in beliefs and behaviours (for

example, leadership qualities);

• 360-degree view including our processes/operations, employees and vendors/customers;
• leveraging existing data, KPIs and expectations; and
• embracing external thinking and best practices.

The results of the scorecard will be reviewed by the Board at least annually.

April 2018
Evaluation of annual employee survey results.
Areas of improvement were identified, and, in addition to the regular employee communication,
other areas that we augmented further into Board behaviours included additional on-site local
engagement sessions in the UK and US (see case study).

November and December 2018, March and April 2019
Discussions around the impacts of the new UK Corporate Governance Code 2018.
Focus throughout the end of the year was largely on the implications of the new UK Corporate
Governance Code 2018, mapping our key stakeholders and discussions around workforce
engagement which included:
• an implementation plan for workforce engagement was presented and noted by the Board; and
• the Board considered the revised culture scorecard and overall status against each of the

Company’s values that now includes measures and trend data from teams including: safety,
ethics, compliance, supply chain and customers. In all areas it was noted that activity and
initiatives were taking place within functions and business units to move the culture forward
in line with delivering on our purpose, vision and values and plans in place to ensure our
leaders have the capability to embed and deliver the change required.

Case study – UK and US employee
engagement sessions
During the year, the Non-executive
Directors held three employee
engagement sessions, in New York (April
2018), Boston (September 2018) and
Warwick (January 2019). The employee
engagement sessions provided an
opportunity for employees and Non-
executive Directors to discuss topical
subjects, including how successful
employees felt the Company had been
in embedding its values, beliefs and
behaviours throughout the organisation.
The two-way conversations were strongly
encouraged and provided a great
opportunity for the Directors and
employees to engage more widely
in a more informal environment.

April 2018, New York, US.
Topics: New England storm
response and the accelerated
development programme.
The Board praised the efforts and
successes in the storm response
programme and conversation centred
on the progress of our customer focus
strategy. Discussions around the
accelerated development programme
focused on the range of projects centred
on the initiative and the use of valuable
feedback to deliver against project and
leadership expectations.

September 2018, Boston, US.
Topics: Transforming our
corporate culture.
Employees took the opportunity to
discuss our corporate culture and
desired capabilities set against the
backdrop of two transformational
projects designed to meet the rapidly
evolving needs of our customers and
communities. The discussions centred
on ‘finding a better way’ and ‘doing the
right thing’ to develop a safe, reliable and
affordable transmission network, while
enabling the decarbonised energy future.

January 2019, Warwick, UK.
Topics: Legal separation of the
Electricity System Operator and
recruitment schemes.
Employees discussed elements of their
role and their thoughts on National Grid
as an employer. They also took the
opportunity to raise any concerns they
had, including where they felt the key
challenges within the organisation were,
and suggested how empowerment and
innovation could be used to unlock some
of these challenges. The recruitment
schemes discussion emphasised the
significance of culture in the recruitment
process, and the need for the Company
to review continually where and how we
advertise to get the best talent and
broadest diversity.

National Grid Annual Report and Accounts 2018/19Corporate Governance

Corporate Governance overview continued
How 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 on the
key relationships and shows how the relevant stakeholder engagement is
reported up to the Board or Board Committees to help inform our strategy
delivery. Not all information is reported directly to the Board. However, the
information will inform business-level decisions, with an overview of
developments being reported on a regular basis to the Board or a
Committee. In some cases, this will be through an annual or more
frequent round-up for the business area interfacing with the relevant
stakeholder (this is generally the case for customers and suppliers). In
other instances, one or more members of the Board may be involved
directly in the engagement (such as shareholder or other investor
networking). In each case, it is important for all members of the Board
to gain sufficient understanding of the issues relating to every stakeholder
so their views are taken into account in Board discussions.

In December 2018 and March 2019, the Board received an
update on the stakeholder voice in the boardroom and noted an
implementation plan to further the current programme of engagement.

In 2019, a robust framework will be established to ensure that
stakeholder considerations are suitably captured and enhancements
made to strengthen the views of our stakeholders in the boardroom.
Several actions will also be considered by the Board to ensure that
the impact on stakeholders is reflected adequately in boardroom
considerations and decision-making processes.

The Board also discussed how stakeholder groups viewed the
Company and its Board and management and whether their
perception matched the Company’s view. In 2017, we carried
out an initial survey to gain some insight, and these surveys
will now be undertaken regularly.

Stakeholder group

Form of engagement

Communities and
governments

We help national and regional
governments formulate and deliver
their energy policies and
commitments. The taxes we pay
help fund essential public
services. We have a role to play in
sustainability, enabling the
transition to a low-carbon future.

Engagement with local communities in the form of
consultations during construction phases of projects and
work with environmental education centres. Liaison with land
owners and wider communities where the Company has
assets and dedicated teams to manage relationships.

Regular discussions and satisfaction surveys to journalists
and government. Policy and public affairs and US
government relations in-house teams to develop, grow and
leverage the Company’s relationships with key politicians,
officials, wider stakeholders and influencers pertaining to
legislation and government policy.

Our customers

The users of our products and
services. 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.

By delivering the energy they need
and dealing with them in a
transparent and responsive
manner, our customers trust us to
deliver services of value to them.

Our investors – individual
shareholders

Represent more than 95% of the
total number of shareholders on
our share register.

UK customer programme – the UK Customer Experience
Board is chaired by the Executive Director, UK, and attended
by the entity and functional directors. Each member attends
regular customer meetings to listen to what matters most to
our customers and build strategic relationships. Customers
are invited to attend the Customer Experience Board and
group immersion events are held where Executive Directors
hear from customers about their concerns in the industry. An
annual survey to senior customer contacts provides useful
feedback on the level of satisfaction and customer advocacy.

Proxy co-creation stakeholder user group – created to
represent a wide range of stakeholders including large and
small customers and consumers. The group has challenged
the Company’s approach to engagement and are currently
analysing the Company’s Business Plan.

US customer team – collects and communicates
‘voice of customer’ throughout the business. Each
jurisdiction facilitates a range of listening surveys for brand
perception and customer satisfaction during transactions. A
new online panel has been created of over 6,000 residential
customers to contribute ideas and feedback continuously.

Shareholder networking programme – includes visits to UK
operational sites, presentations by senior managers and
employees over two days and an opportunity to engage
with Board members.

Annual General Meeting (AGM) – shareholders are provided
with the opportunity to ask questions and to engage
with the Board and areas of the business through the
business showcase.

How this stakeholder group influenced
the Committee/Board agenda and decision-making

The Board agenda has been strongly focused on
governmental issues this year. In the UK, discussions
have influenced key business issues such as the RIIO-T2
price control, the implications of Brexit including
scenario planning, and the potential for state ownership.
In the US, the impact on communities following the gas
safety incident was considered in depth by the Safety,
Environment and Health Committee and by the Board.

Governments and communities are strongly focused on
a cleaner energy agenda. In the US, at the state level, we
have strong alignment with policymakers and regulators
who, like us, are committed to a cleaner energy agenda.
In the UK, we continue to work to maintain access
for customers to European energy that is affordable
and renewable.

The Executive Committee approved the creation of
National Grid Partners during the year, allowing us to
increase our capability in the new and disruptive energy
technologies to meet the changing energy needs of
our customers and communities.

In the year, the Executive Committee and Board received
updates on both the UK and US customer strategies.
Biannual reports are also submitted to the Board from
UK, US and NGV.

UK – feedback received influences decision-making
at customer and entity team level. It was used to help
shape the Company’s five customer principles (care,
agility, trust, transparency and value), and the UK
customer ambition.

US – the Executive Committee and Board received
updates on, and approved the recent US rate case filings.

During the shareholder networking programme and AGM,
the Board members will listen and respond to views and
will feed back to the businesses as necessary.

National Grid Annual Report and Accounts 2018/19Corporate Governance | Corporate Governance overview

Stakeholder group

Form of engagement

Our investors – institutional

Equity investors: we earn
financial returns as per 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 how we finance our
investments.

Our people

We create an environment in
which our people can make a
positive contribution, develop their
careers and reach their potential.

At 31 March 2019, we had more
than 22,000 employees.

Our regulators

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

In the US, state utility commissions
regulate our retail activities. The
Federal Energy Regulatory
Commission regulates our
wholesale activities (including
energy generation and interstate
transmission).

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.

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 Executives and operational management. This includes:
meetings; presentations and webinars; attendance at
investor conferences across the world; holding roadshows
in major cities in the UK, Europe, Australia, Asia and North
America; and hosting site visits and stewardship meetings.

Our engagement programme focuses on updating investors
on our regulatory progress in our UK and US businesses,
as well as the growth opportunities available to the Group
through investment in UK and US regulated assets and
interconnector and renewable generation investments
through our NGV business. In September 2018, we hosted
a teach-in event on our UK business focused on the
business’ preparation for RIIO-T2.

Over the year, we held 438 investor meetings across 12
countries and 43 cities: met with over 340 institutions,
representing 58% of our share register; and hosted five site
visits; offering investors the opportunity to meet divisional
management and view our assets.

Meetings between senior group treasury representatives
and 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 met with debt
investors at various conferences over the course of the year.

Engagement with our people takes many forms, including
engagement and pulse surveys, union and town hall
meetings and other Board engagement.

The outcome of these mechanisms is reported to the Board
and affects decision-making.

UK – regular interactions with Ofgem and the Health and
Safety Executive. The Company also organises stakeholder
fora and consultations with stakeholders, including members
of the public, our suppliers and customers around specific
projects such as RIIO-T2 and the Hinkley-Seabank
Connection Project. The outcomes are reported to
the appropriate forum and ultimately to the Executive
Committee and Board.

We work with other networks and organisations outside of
the energy industry to identify good practice.

US – regular interface with both federal and state regulators
and customers on an ongoing basis, as well as the pre-filing
stakeholder engagement programme in the build-up to and
during any rate case process. Any rate case engagement is
reported up to the Executive Committee and the Rate Case
Steering Committees as appropriate. Specific engagement
was undertaken regarding the Northeast 80x50 Pathway and
the Niagara Mohawk advanced metering infrastructure.

Strategic relationship meetings conducted regularly between
suppliers and procurement. Tendering and sourcing events
are undertaken to select new suppliers.

On anti-corruption and anti-bribery matters, we expect all our
suppliers to be compliant with the Modern Slavery Act and
we work closely with our suppliers and peers to build on our
knowledge and promote best practice. In 2018, this included
engaging with suppliers we had identified as being within
potentially high-risk categories.

Review of the Company’s 2018 submission on Prompt
Payment Practices and the Company’s performance.

How this stakeholder group influenced
the Committee/Board agenda and decision-making

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.

The Chair of the Remuneration Committee, Jonathan
Dawson, the Chair of the Nominations Committee, Sir
Peter Gershon, and the Senior Independent Director,
Mark Williamson, engaged with a number of our
investors during the year. Meetings were around the
Company’s new remuneration policy, which will be put
to shareholders for approval at the 2019 Annual General
Meeting (see pages 74 – 78) and succession planning
for Board members approaching their nine year tenure
before the finalisation of the RIIO-T2 price control.

The annual employee survey provides the Executive
Committee and Board with an insight into how our
employees are feeling. You can read more about the
Board and Committee’s engagement with our people
on pages 42-43 and 53.

In the US, the Committees and Board were kept
informed of the Massachusetts Gas workforce
contingency plan.

UK – any large-scale investments at compressor
sites (for example, new turbines) require approval
from the regulators for them to issue a permit. Early
engagement around plans and decisions made, help
to ensure the relationship is maintained.

Regular discussions at the Executive Committee and
the Board with Ofgem around the RIIO-T2 consultation,
including the response to Ofgem on the RIIO-T2
price control. On invitation, members of the RIIO-T2
stakeholder panel will meet with the Board later in 2019.

US – influence the Company’s regulatory strategy
and business planning for rate cases and other US
regulatory priorities. The Company’s rate case pre-filing
stakeholder engagement programme has become a
major contributor to the Company’s successful rate
case outcomes.

Bi-annual reports submitted to the Executive Committee
and annual reports to the Board.

Elaborate on our global supplier code objectives
and outcomes. The Board annually approves the
Modern Slavery statement.

The Board requested that further updates on the duty to
report on prompt payment, practices and performance
form part of the annual update on procurement.

National Grid Annual Report and Accounts 2018/19Corporate Governance

Corporate Governance overview continued
Performance evaluation

2018/19 external Board evaluation
This year, we were required to undertake an externally facilitated
Board and Committee evaluation. We appointed Dr Sabine
Dembkowski of Better Boards Limited to work with the Board on a
Board development programme. Neither Dr Sabine Dembkowski nor
Better Boards Limited has any other connection to the Company.

The evaluation focused on Board development and was designed to
provide the Board with insights about themselves and how the Board
was working as a whole. This type of evaluation provided a foundation
upon which individuals could increase their personal impact, which in
turn could increase the overall effectiveness of the Board. The purpose
was to gain:
• Insights into the hallmarks of effective boards;
• Insights into how Directors view themselves versus how they

are perceived by their fellow Directors; and

• An understanding of the levers that individual Directors could pull
to increase their impact in the boardroom to make the Board
more effective.

The effectiveness of each of the Board Committees was
taken into account in the evaluation. All Board members
(including those who did not sit on all Committees) were
asked their opinion of each Committee, if it was effective
and whether it focused on the right matters. The results
confirmed that the Board was satisfied with the structure
of the Committees and there was no immediate need to
make any changes.

Dr Sabine Dembkowski concluded the areas for further
development, as noted below. The evaluation also
identified two actions for the Nominations Committee.

“ This type of evaluation
provided a foundation upon
which individuals could increase
their personal impact, which in
turn could increase the overall
effectiveness of the Board.”

Stages of the external evaluation process

January

February

March

April/May

1. Meetings between Sabine and the

3. Interviews between Sabine and

Group General Counsel and
Company Secretary to agree on
objectives and the online
questionnaire structure.

Board members, face-to-face or via
video conference, to gain personal
insights, including any challenges
and issues.

2. Presentation to the January
Board meeting, including
objectives, stages of the process
and time commitment required
from the Directors.

4. Individual completion of an online
questionnaire, with a focus on
key competency areas for the
Board’s role behaviours and
know-how areas.

5. Data combined from individual
meetings and the questionnaire
to create an aggregated report
and individual Director reports.

6. Better Boards held confidential

feedback and coaching sessions
with each Board member to
discuss the findings in their
individual reports, and an action
plan for each Board member
was created as a result.

7. Feedback to the Chairman and

Company Secretariat team, which
resulted in an aggregated report
for the Board that was presented
to the Board meeting.

8. An action plan was agreed for the
Board and two additional actions
were agreed for the Nominations
Committee.

Actions to enhance the Board’s effectiveness for 2019/20

Action

Responsibility

Invite our customers into the boardroom to understand and directly hear their perspectives.

Chief Executive/Chairman

Continue to invite external speakers to Board meetings/dinners on topical issues.

Chief Executive/Chairman

Use market research agencies to bring the voice of the customer and other stakeholders into
the boardroom.

Chief Executive/Chairman

Facilitated session to be held to consider how to enhance the collective strengths of the Board
in light of the individual strengths evidenced as part of the evaluation.

Chairman/Chief Human Resources Officer

Sponsor of each paper to consider why the Board is being asked to consider a particular paper.
On strategic papers, the Chairman to ask the sponsor at the beginning of the meeting what they
are hoping to achieve in the meeting.

Chairman/sponsor of the paper submitted

Add a Corporate Social Responsibility session annually to the Board agenda.

Show clearer mapping of agenda items to the Company’s risk register.

Chairman and Group General Counsel and
Company Secretary

National Grid Annual Report and Accounts 2018/19Corporate Governance | Corporate Governance overview

Progress against actions for the Board agreed in 2017/18 internal evaluation

Action

Progress made

Increase the opportunities for the Board
to engage with external experts on key
strategic topics

External attendees included: Barclays (April and November 2018), Herbert Smith Freehills (May 2018) and
the Massachusetts Governor Baker (March 2019). Discussion topics included political uncertainty, the
macro-economic climate in the US and the Massachsetts gas workforce contingency plan.

Consider Board agendas and, in particular,
whether more time can be devoted to
strategic issues

During the year, Board discussions have strongly focused on our key strategic priorities, including two
strategy sessions in the year and additional meetings to discuss strategy. The agendas were also reviewed
and appropriate items removed to allow time for these items.

Review whether enhancements
could be made to how risk appetite is
incorporated into Board papers where
a decision is required

Risk appetite disclosures have been added into the relevant papers. A review was undertaken by the Group
General Counsel and Company Secretary to ensure the main risks were being covered at Board and
Committee meetings throughout the year.

Improve the efficiency and speed of
Board decision-making by assessing the
quality of Board papers continuously

The papers are continually reviewed before they are sent to the Board to ensure they are of a high standard.
All Board and Committee papers are presented to the Executive Committee first and appropriate changes
made for the subsequent Board meeting. The Chairman and Chief Executive also feed back on papers at,
or after, the end of the Board meeting.

Directors’ induction and training

Directors’ induction programme
Following new appointments to the Board,
the Chairman, Chief Executive and Group
General Counsel and Company Secretary
arrange a comprehensive induction
programme. It is tailored based on experience
and background and the requirements of the
role. Consideration is given to committee
appointments, and where relevant, tailored
training is undertaken.

Following the appointment of Jonathan Silver
on 16 May 2019, we will be tailoring his
induction plan and will report back on this
next year.

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.

Updates on corporate governance and
regulatory matters are also provided at Board
meetings, together 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.

Amanda Mesler – Non-executive
Director induction
Amanda, appointed in May 2018, received
a tailored induction programme covering
a range of areas of the business, including
governance, remuneration and stakeholder
matters. Amanda met senior management
from key business areas and functions as
well as employees across the UK, US and
National Grid Ventures businesses during
site visits. Focus was given to matters
pertinent to her role on the Audit
and Finance Committees (some of
Amanda’s induction programme is
included below).

Finance meetings
• Chief Financial Officer – provided a summary of the financing strategy and an overview
of the current financial risks faced by the Group, including the current risk appetite and
management framework in relation to those risks. Discussions also included: treasury
controls; processes and systems; National Grid’s tax strategy; the impact of US tax
reform; and an overview of pension schemes and pension strategy.

• US Chief Financial Officer – provided an informative overview of the Group’s organisation

structure and priorities, including the recent change to the US Business Services
leadership. Amanda also heard how, following the alignment to deliver value globally,
the finance team is now integrally involved in the high-growth work within the US
business functions, and they discussed the major successes.

• Met with the Group Financial Controller and discussed financial accounting and control

issues, the statutory audit, and the annual business planning process.

Additionally, met Mark Williamson, Chair of the Audit Committee; Therese Esperdy, Chair of
the Finance Committee; and Andi Karaboutis, Group Chief Information and Digital Officer.

Site visits
Amanda visited National Grid Ventures in Solihull and California in January 2019 for a
thorough and engaging induction to technology and innovation. During her visit, Amanda
met with the Chief Technology and Innovation Officer, along with key Board members of
three of National Grid Partners’ portfolio companies.

National Grid Annual Report and Accounts 2018/19Audit Committee

Corporate Governance

New accounting standards
The Committee received periodic updates
on the impact of adoption of IFRS 16 (leases)
which is effective next year. Reviews of the
impact of IFRS 15 (revenue from contracts
with customers) and IFRS 9 (financial
instruments) were undertaken in 2017/18.
This year, the Committee considered the
effectiveness of the changes to processes,
controls and systems implemented in
the period.

Climate-related financial disclosures
We have continued to make good progress
with the recommendations set out by the
Task Force on Climate-related Financial
Disclosure (TCFD). In the year, the Committee
was presented with a roadmap to progress
towards full compliance of TCFD and
discussed the current gap analysis. We
noted that focus in the next 12 months
would be on performing scenario analysis
as regards the continuing viability of our
various businesses under various future
environmental and regulatory scenarios,
the link to our risk registers, and ensuring
the right metrics and targets were developed.

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 controls.

Cyber security and scorecard
Cyber security risk will remain at the top
of the agenda for the Committee.

New UK financial system
The Committee plans to receive updates
in September and November in respect
of the implementation of a new system
of financial record in the UK business
(scheduled to become progressively
operational through 2019/20).

Mark Williamson
Committee Chair

“ This year, we continued
our focus on internal
controls relating to
financial reporting and
received several updates
from management and
Deloitte at each meeting.”

Mark Williamson
Committee Chair

Review of the year
The Committee met four times during the year
to undertake its role in the governance of the
Group’s financial reporting, internal risk
management, control and assurance
processes, and the external audit.

Continued focus on internal control over
financial reporting
This year, we continued our focus on internal
controls relating to financial reporting and
received several updates from management
and Deloitte at each meeting. These updates
focused on the IT control weaknesses
highlighted last year, and I am pleased to see
progress continues to be made in
implementing and executing new controls,
including a significantly strengthened IT
infrastructure 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 the
Sarbanes-Oxley Act 2002 (SOX). You can read
more about these significant issues on the
following pages.

In September 2018 and March 2019, the
Group Chief Information and Digital Officer
attended to discuss IT controls in more detail.
In March 2019, cyber risk governance was
discussed in more detail, including a more
in-depth analysis of the cyber risk audit
plan and additional insight from a newly
commissioned independent external review.
I was pleased to hear that the plan had been
substantially delivered, in line with the
Committee’s expectations, and that the
external assessment of our cyber risk
coverage concluded it was comprehensive,
and did not identify any significant gaps in our
internal IT assurance activity conducted
by Internal Audit.

Changes to Committee composition:
• Amanda Mesler joined May 2018.

Key focus areas in 2018/19:
• Internal controls relating to

financial reporting, specifically IT related;

• Application of the Group’s exceptional

items framework; and

• Impact of new accounting standards.

Key focus areas in 2019/20:
• Internal controls relating to

financial reporting;

• Cyber security;
• Task Force on Climate-related

Financial Disclosure (TCFD); and
• New UK financial record system.

Composition of the Audit Committee
In accordance with the Code and DTR 7.1,
the Board is satisfied that all members of the
Committee have recent and relevant financial
experience and that Mark Williamson, as a
chartered accountant, having been Chief
Financial Officer at International Power plc,
and chairman of the audit committee at Alent
plc, is suitably qualified. The Board is also
satisfied that when considered as a whole,
the Committee has competence relevant to
the sector in which the Company operates
(including utilities, finance and engineering) to
ensure the right balance of skills, experience,
professional qualifications and knowledge.

The Committee members’ biographies are
on pages 48 – 49.

Further reading
You can view the Committee’s
Terms of Reference here:
www.nationalgrid.com

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

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

National Grid Annual Report and Accounts 2018/19Corporate Governance | Audit Committee

Significant issues relating to the financial statements
In considering the financial results announcements and the financial
results contained in the Annual Report and Accounts, the Committee
reviewed the significant issues and judgements made by management
in determining those results. The Committee reviewed papers
prepared by management setting out the key areas of risk, the actions
undertaken to quantify the effects of the relevant issues and the
judgements made by management on the appropriate accounting

required to address those issues in the financial statements.
The significant issues considered relating to the financial statements
for the year ended 31 March 2019 are set out in the following table,
together with a summary of the financial outcomes where appropriate.

In addition, the Committee and the external auditors have discussed the
significant issues addressed by the Committee during the year. You can
read more about the Independent Auditor’s Report on pages 93 – 102.

Significant issues considered
by the Committee

Internal control over financial reporting

Application of the Group’s exceptional items
framework to certain events in the period

How the Committee addressed the issues

We have continued to focus on financial controls and received specific updates from management at
our September, March and May meetings. These updates focused on the IT control weaknesses reported
last year, where we made good progress in implementing and executing new controls. We challenged
management and were satisfied with the plans in place to close the remaining items. Concerning the
broader financial control environment, a three-year Group controls roadmap has been established,
setting out initiatives to strengthen and improve controls significantly and KPIs to assess progress.

After careful consideration, the Committee concurred with management’s overall assessment that the
Group’s internal control over financial reporting is effective.

The Committee considered papers from management at each of the meetings in the year, which set out
key considerations to the application of the exceptional items framework in relation to a number of specific
transactions in the year including, but not limited to, the Massachusetts gas labour dispute and workforce
contingency plan, the UK and US cost efficiency programme, certain legal settlements, and the impairments
of UK nuclear connection assets. In each case, the Committee assessed the appropriateness of the
judgements reached (which are set out further in Note 5 to the financial statements), individually in relation
to the specific events and circumstances, and also in aggregate, considering the overall composition of
the adjusted profit and the associated disclosures in Note 5.

The Committee also paid close consideration to the classification of two items that were not treated as
exceptional. Firstly, the Committee considered the classification of £95 million of income from two legal
settlements. In concluding that it remained appropriate to classify these within adjusted profit, the Committee
specifically noted the precedent set by the previous classification of costs to which the settlements related.

Secondly, the Committee considered the treatment of sales by the UK Property business to the St William JV
and noted that such transactions are part of the Group’s ordinary course of business.

Classification of the Group’s retained
interests in UK Gas Distribution

At the September meeting, the Committee specifically considered a proposal from management to classify
the retained interests in UK Gas Distribution (all of which are subject to the Further Acquisition Agreement
and Remaining Acquisition Agreement) as a discontinued operation. The Committee concurred with
management that it was appropriate to consider the ultimate exit of these interests as part of a single
co-ordinated plan to exit the UK Gas Distribution business, which began in 2015.

2018/19 other key areas of focus

Area of focus

Matters considered

Financial reporting and financial results of
the business – including through the use of
non-IFRS measures

• Specific consideration of the financial review and the degree to which this appropriately reflects statutory
versus non-IFRS performance measures, with supporting definitions, explanations as to the relevance
and importance of these measures, and reconciliations to IFRS metrics as necessary;

• Updates on the impact of the adoption of IFRS 16 (leases) and consideration of the effectiveness of
changes to processes and controls following the implementation of IFRS 15 (revenue from contracts
with customers) and IFRS 9 (financial instruments);

• Monitored and reviewed the integrity of the Group’s financial information and other formal documents
relating to its financial performance, including the appropriateness of accounting policies and going
concern;

• Approved the key accounting judgements made by management;
• Considered the approval process for confirming and recommending to the Board that the 2018/19

Annual Report is fair, balanced and understandable;

• Reviewed and recommended to the Board the approval of the 2018/19 Annual Report and Accounts

and other reports filed with the SEC containing financial statements;

• Reviewed any significant issues and recommended approval of the preliminary results

announcements; and

• In addition, although there were no significant changes or developments in the year, the Committee also
concurred with management’s assessment that the valuation of the Group’s defined benefit scheme
pension liabilities and cash flows forecasts associated with environmental provisions continue to be
considered significant estimates in the context of the Group’s financial statements.

Task Force on Climate-related Financial
Disclosure (TCFD)

• Reviewed management’s paper commenting on the continued progress to date, the roadmap for the

next 12 months and key priorities as described on pages 210 – 211;

• Review of disclosures; and
• The Committee discussed the linkage between the work being undertaken on understanding the full

effects of the Company’s Total Societal Impact and how this related to other internal scenario planning
and external reporting.

National Grid Annual Report and Accounts 2018/19Audit Committee continued

Corporate Governance

Area of focus

Matters considered

Risk and viability statement

• Discussed the recent corporate failures in the UK, including Carillion, and any lessons learned that could

be taken away from the events. The discussion included the issues involved, the role of the Audit
Committee and the auditor’s ability to challenge;

• Monitored and assessed the effectiveness of our risk management processes;
• Received regular updates on the risk management processes and any changes as well as updates

on other risk management activities;

• Reviewed and challenged the draft viability statement in March and May 2019 for review in advance

of the Board’s consideration of the statement in May;

• Received an update on the process and a summary of the outcome of the annual testing of our

principal risks; and

• Reviewed internal control processes.

External auditors

• The approach, scope and risk assessments of external audit and the effectiveness and independence

of the external auditor;

• Ongoing consideration of the external audit plan;
• Considered the auditor’s report on the 2018/19 half and full-year results;
• Reviewed and monitored the appropriateness of the provision of non-audit services by the external

auditor in the context of reviewing the auditor’s independence;

• Reviewed and approved audit/non-audit expenditure incurred during the year; and
• Recommended to the Board the reappointment of the external auditors and for the Committee to

agree auditor’s remuneration.

Compliance, governance and
disclosure matters

• Received two reports on compliance with external legal obligations and regulatory commitments;
• Received updates on the SOX control findings and undertook an annual assessment of the effectiveness

of internal control over financial reporting;

• Received two ethics and business conduct reports, including whistleblowing, to help monitor the
management and mitigation of business conduct issues as part of the wider controls framework;
• Received an annual report on the Company’s anti-bribery procedures and reviewed their adequacy;
• Received a report from the Disclosure Committee on matters relevant to the half and full-year

announcements in November and May; and

• Received results of the Disclosure Committee’s evaluation of the effectiveness of the Company’s

disclosure controls to the Audit Committee.

• Received two reports on cyber risk control environment;
• The Committee received additional analysis of the cyber audit plan to help evaluate the assurance

coverage over cyber risk and its key controls;

• PwC had been engaged to undertake a review of our audit plan cycle to ensure it is fit for purpose and in
line with best practice. This arrangement was extended to include a deep dive on the cyber audit plan;
no significant assurance gaps had been identified and PwC considered coverage was appropriate;
however, some minor recommendations were made;

• The Committee noted progress made by management on our cyber security strategy and that Corporate

Audit continued to deliver a balanced programme of audits across cyber security; and

• Management would continue to receive regular external input into its risk management in this area.

• The Committee received regular controls updates from the Corporate Audit team, including approval of,
and updates on, progress with the corporate audit plan. 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;

• Following best practice, we reviewed the Corporate Audit Charter against the Institute of Internal Auditors
(IIA) international standards and the IIA model charter. This review ensured that the purpose, authority
and responsibility, as defined in the Charter, are sufficient to enable the Corporate Audit function to
complete its objectives; and

• The Committee confirmed that it was satisfied that the Corporate Audit function had the quality,

experience and expertise appropriate for the business.

Cyber security

Corporate audit

National Grid Annual Report and Accounts 2018/19Corporate Governance | Audit Committee

Risk management and internal control
Our internal control processes
The Board has delegated responsibility to
the Committee 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.

Several processes support our internal control
environment. Dedicated specialist teams
manage these processes, which include
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.

The Committee is responsible for keeping
under review and reporting to the Board the
effectiveness of reporting, internal control
policies, compliance with the SOX, UK
Bribery Act legislation, appropriateness of
financial disclosures and procedures for risk
and compliance management, business
conduct, and internal audit. Throughout the
year, we conduct ‘deep dive’ sessions on
significant risk issues.

Reviewing the effectiveness of our
internal control and risk management
The effectiveness of internal controls and risk
management processes are monitored
continually and assessed to make sure they
remain robust. The Committee (which
includes financial, operational and compliance
controls) undertakes this review. The
Certificate of Assurance (CoA) process
operates via a cascade system and takes
place annually in support of the Company’s
full-year results.

Following a thorough review, the Committee
confirmed that the processes provided
sufficient assurance and that the sources
of assurance had sufficient authority,
independence and expertise. The Committee
Chair reported to the Board in May and
confirmed that management’s process
for monitoring and reviewing internal
control and risk management processes
is functioning effectively. 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.

We have conducted a review of the
effectiveness of the Group’s risk management
and internal control systems, including those
relating to the financial reporting process, in
accordance with the Code. We consider that
our review of the risk management and
internal control systems, in place throughout
the year, meets the requirements of the Code
and the Disclosure and Transparency Rules.

National Grid’s values – “do the right thing”
and “find a better way” – continue to provide
a framework for reporting business conduct
issues, educating employees and promoting a
culture of integrity at all levels of the business.
These, along with the suite of policies and
procedures, communicate the behaviour
expected from employees and third parties
to prevent and investigate fraud and bribery
and other business conduct issues. The
Committee monitors and is kept informed of
any business conduct issues and monitors
and addresses any compliance issues.

Internal control over financial reporting
The Board receives, in advance of the
full-year results, a periodic SOX report on
management’s opinion on the effectiveness
of internal control over financial reporting. This
report concerns the Group-wide programme
to comply with the requirements of the Act
and is received directly from the Group
SOX and Controls Team and through
the Audit Committee.

The Company has 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. Our
financial processes include a range of system,
transactional and management oversight
controls. Also, our businesses prepare
detailed monthly management reports that
include analysis of their results, along with
comparisons to relevant budgets, forecasts
and the previous year’s results. Quarterly
performance reviews, attended by the Chief
Executive Officer and Chief Financial Officer,
supplement these reviews. They consider
historical results and expected future
performance and involve senior management
from both operational and financial areas of
the business. Each month, the Chief Financial
Officer presents a consolidated financial
report to the Board.

Fair, balanced and understandable
The Committee reviewed the content
of the 2018/19 Annual Report, together
with a well-established and documented
process. The Committee has reported
to the Board that, taken as a whole, the
Committee consider the Annual Report
to be fair, balanced and understandable.
The Committee further believes the
Annual Report provides the necessary
information for shareholders to
adequately assess the Company’s
position and performance, business
model and strategy.

External audit
In November 2018 and May 2019, as part
of the reporting of the interim and final
results statements, Deloitte reported to
the Committee on its assessment of the
Company’s judgements and estimates. This
report included considering the appropriate
accounting under IFRS and highlighted that
improved controls were in place.

Mark Williamson meets with Deloitte prior to
each meeting and outside the meeting cycle
on a regular basis.

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 into
account the observations, recommendations
and conclusions drawn by Deloitte.

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.
These checks ensure 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; consideration of Deloitte’s annual
independence letters; and an annual review
by Corporate Audit of the independence of
the external auditors.

National Grid Annual Report and Accounts 2018/19Audit Committee continued

Corporate Governance

Audit quality
To maintain audit quality, the Committee
reviews and challenges the proposed external
audit plan, including its scope and materiality,
before approval, to make sure that Deloitte
has identified all key risks and developed
robust audit procedures and
communication plans.

The Committee noted that Deloitte would
engage specialists to assist in its audit of the
Group IT systems, derivative financial
instruments, pension obligations, discount
rates and tax balances, as well as utilising
employees within the core audit team who
have significant experience of regulated
utilities in the UK and US.

Regularly throughout the year, the Committee
looks at the quality of the auditor’s 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 have an opportunity for open dialogue.
This meeting also gives the Committee the
chance to monitor the performance of the
lead engagement partner both inside and
outside Committee meetings.

The Committee specifically considered the
findings of the Audit Quality Review Team
(AQR) review of Deloitte’s 2017/18 audit. The
Committee noted the observations raised
and challenged Deloitte as to remedies being
introduced. Overall, the Committee noted the
findings did not raise any significant concerns
in respect of audit quality.

Auditor performance
In assessing auditor performance this year,
the Committee considered: the quality of
planning, delivery and execution of the audit;
the quality and knowledge of the audit team;
the effectiveness of communications between
management and the audit team; the
robustness of the audit, including the audit
team’s ability to challenge management
as well as to demonstrate professional
scepticism and independence; the quality
of the reports received; and the views of
management to gauge the quality of the
audit team and their knowledge and
understanding of the business.

In forming its conclusions, the Committee
solicited views from the senior finance team
members most directly involved in the
year-end audit.

Auditor appointment
Deloitte was appointed by shareholders as the
Group’s statutory auditors at the 2017 AGM.
Douglas King, the current lead audit partner,
will be required to rotate off in 2022.

Following consideration of the auditor’s
independence and objectivity, the audit
quality, and the auditor’s performance, the
Committee was satisfied with the
effectiveness, independence and objectivity
of Deloitte and recommended to the Board its
reappointment for the year ended 31 March
2020. A resolution to reappoint Deloitte and
giving authority to the Directors to determine
their remuneration will be submitted to
shareholders at the 2019 AGM.

Non-audit services provided by the
external auditors
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, including where 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 Financial
Reporting Council. For any services that
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 management may
seek pre-approval relate to:
• Audit, review or attest services, which

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 it is 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 management to present a
list of all approved non-audit work requests 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.

Management approves the provision of
non-audit services on the basis that the
service will not compromise independence
and is a natural extension of the audit, or if
overriding business or efficiency reasons are
making the external auditors most suited
to provide the service. We prohibit the
external auditors from performing
certain services.

Audit and non-audit services (£m)

37.1

17.3

19.8

17.8
1.9
15.9

17.3
3.3
14.0

2016/17
(PwC)

2017/18
(Deloitte)

2018/19
(Deloitte)

Audit services
Non-audit services

Total billed non-audit services provided by
Deloitte during the year ended 31 March 2019
were £3.3 million, representing 23% of total
audit and audit-related fees (excluding
expenses). In 2017/18, Deloitte billed £1.9
million for non-audit services (14% of total
audit and audit-related fees). In 2016/17, fees
paid to PwC included a substantial proportion
related to work associated with the disposal of
the UK Gas Distribution business.

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.

National Grid Annual Report and Accounts 2018/19Finance Committee

Corporate Governance

Changes to Committee
composition:
• Andrew Bonfield left July 2018;
• Amanda Mesler joined May
2018 and left May 2019; and
• Andy Agg joined January 2019.

Key focus areas in 2018/19:
• US pension and investment

strategy;

• Financial risk appetite;
• Financial implications of

RIIO-T2; and

• Review of external regulatory

and political environments and
potential impact on credit
ratings and financial risk.

Key focus areas in 2019/20:
• The potential financing
implications of RIIO-T2;
• Review of impact of the
proposed move of asset
indexation from RPI to
CPIH within UK regulated
businesses;

• The potential implications of
the upcoming Libor reform;
• Review of management of

financial risk against financial
risk appetite; and

• Continued oversight around
Brexit-related financial risks
and market reaction.

“ The external regulatory
and political environments
remained a key area of
focus…including the
developments and
proceedings of Brexit
and the ongoing debate
around state ownership.”

Therese Esperdy
Committee Chair

Review of the year
The Committee met four times during the year
to undertake its responsibility of monitoring
the financial risk of the Group, focusing on
key areas such as treasury, tax, pensions,
insurance, investments and commodities.
Andrew Bonfield stepped down as a member
of the Committee following his resignation
as Finance Director at the 2018 AGM.
The Committee welcomed Amanda Mesler,
Non-executive Director, on 17 May 2018
and Andy Agg, CFO, on 1 January 2019,
as members of the Committee.

Treasury
The Committee provided continued
assurance throughout the year over
management decision-making and execution
of financial risk. A review of the Group’s
financial risk appetite was undertaken,
resulting in policy changes to interest rate
risk and foreign exchange translation risk.

The Committee received regular updates
on management’s progress with formulating
financial strategy for the future, including the
business’s investment requirements, the
dividend policy, credit ratings, RIIO-T2 and
potential implications of US tax reform.
The Committee also approved the new
financial strategy of the Group at its
November meeting.

The Committee recognises the need to
remain informed about global market
conditions and invites external advisors to
present to the Committee on specific topics
and issues. The Committee received a
presentation from external advisors at its
January meeting, which analysed the
Company’s financial position benchmarked
against peers and proposed areas for
consideration in 2019, such as the
expectations for markets and Libor reform.

The external regulatory and political
environments remained a key area of focus for
the Committee, including the developments
and proceedings of Brexit and the ongoing
debate around state ownership. Focus was
particularly on the impact on credit ratings
and financial risk.

The Committee considered extensively the
potential financial implications of RIIO-T2,
including discussion around how Ofgem’s
consultation may impact the Company’s
credit rating and funding plans and the
proposed move of asset indexation from RPI
to CPIH for the UK regulated businesses.
This remains a key area of focus for
the Committee.

Insurance
The Committee received regular insurance
updates and considered the investment
strategy for National Grid Insurance Company
(Isle of Man) Limited, approving a new strategy
allowing for further diversification, lower risk
and expected higher returns.

The Committee also received an update
on the outcome of the insurance broker
tender and the approach to operational
insurance for the 2019 renewals and in
the longer-term.

Tax
In November, external advisors presented to
the Committee on the Company’s approach
to tax and the changing pace of the tax
landscape, including US tax reform and the
role of the Board and corporate culture
surrounding tax.

Following last year’s US tax reform, the
Committee continued to receive updates
on the implications of this, especially
concerning the regulated utility business
exception for the limitation of business
interest expense.

Pensions
The Committee received regular updates
on pensions both in the UK and US and
approved the US pension and investment
management strategy. This focused on
reducing risk and liabilities, along with
increasing engagement with regulators,
to facilitate investment de-risking and full
recovery of settlement losses.

The Committee also agreed to proposals to
offer members greater information and advice
around how they should receive their pension
benefits from the UK pension plans, utilising
the provisions of ‘Freedom and Choice’, and
on further steps to de-risk the UK plans, to
more closely match the assets and liabilities.

The Committee received updates on
topical pension issues, including on
the UK Government’s White Paper on
Pensions, ‘Protecting Defined Benefit
Pension Schemes’ and on Guaranteed
Minimum Pensions following the UK High
Court ruling.

Therese Esperdy
Committee Chair

National Grid Annual Report and Accounts 2018/19Corporate Governance

Safety, Environment
and Health Committee

“ Throughout the year,
the Committee continued
to prioritise safety, in
particular process safety
and safety culture.”

Paul Golby
Committee Chair

Review of the year
The Committee met four times in the year
to undertake its oversight responsibilities in
respect of reviewing the strategies, policies,
initiatives, risk exposure, targets and
performance of the Company in relation
to safety, environment and health. The
Committee welcomed Earl Shipp as a
member in January 2019 following Pierre
Dufour’s resignation at the 2018 AGM and
Amanda Mesler joined as a member in May
2019. Earl’s strong background in leading
safety initiatives across a global chemical
business and Amanda’s strong background
in technology has strengthened the depth
and variety of experience on the Committee.

Safety
Throughout the year, the Committee
continued to prioritise safety, in particular
process safety and safety culture. Members
of the Committee made regular site visits
and time was taken to discuss these at
each meeting, where consideration was
given to the culture and behaviours on
work sites as well as the safety processes
being followed. The Committee monitored
the results and proposed actions of an
employee safety survey completed during
the year. It will continue to monitor the
implementation of these actions.

Massachusetts labour dispute
The Committee spent a significant amount
of time throughout the year monitoring the
Massachusetts labour dispute. It received
regular updates from key management
involved in the work continuation plan,
focusing on the risks together with the
physical and mental wellbeing of employees
during this difficult period. It received regular
reports on the Company’s compliance with
regulatory and employee safety standards
to ensure that all safety standards were
being met. This included oversight of the
investigation of alleged safety violations made
by the trade unions, together with regular site
visits. The Committee also considered the
changing regulatory landscape in
Massachusetts and the wider US following the
Columbia Gas explosion in September 2018.
It will continue to monitor the effects of these
changes over the coming year.

Understanding external perspectives
Following the Committee’s annual review
of its performance last year, it recognised the
importance of ensuring that its perspective
was both inward and outward looking and
took action to introduce relevant external
industry input to the Committee’s agenda.
The Committee received a presentation from
the UK Health and Safety Executive (HSE) in
July 2018 where the key issues faced by the
HSE and wider issues within the UK were
discussed. The presentation emphasised the
challenges within the sector and the priorities
for the HSE and gave some specific thoughts
on National Grid’s performance. At the
January 2019 meeting, the Committee
received a presentation from Natural England
where the work of Natural England was
considered, alongside areas for potential
improvement that National Grid could
consider over the next few years.
The Committee will continue to introduce
external presentations to its forward agenda
and will be receiving a presentation from a
US agency later in the year to ensure that
the Committee’s perspective is both UK
and US focused.

Oversight of safety risk
The Committee received updates on the gas
pipeline maintenance programme and safety
management system strategy. It was pleased
to note that the business has moved towards
a more proactive philosophy in understanding
the risks in this area to ensure compliance
with safety obligations at both local and
federal levels in the US. The Committee also
reviewed the global LNG risk throughout the
year with consideration given to the policies
and procedures in place to mitigate the
remote likelihood of a catastrophic event at
an LNG site. These sites continue to remain
key areas of focus and oversight for the
Committee. The Committee also undertook
a deep dive into the progress relating to
switching errors, which has shown
improvement this year. However, the
Company recognises that there is continuing
work to be done in this area, in particular the
behavioural factors surrounding switching
errors. The Committee will continue to monitor
the progress being made in this area.

Mental health and wellbeing
At the January 2019 meeting, the Committee
received an update on the Company’s mental
health and wellbeing strategy. The Company
had adopted good practices regionally and
the Committee has been pleased to note
that conversations concerning health and
wellbeing are moving in a positive direction.
Good progress has been made against the
2018/19 strategic priorities and the Committee
endorsed a proposal to simplify these focus
areas in 2019/20. Leading indicators are being
developed to help show progress in this
area and the Committee will continue to
monitor this.

Paul Golby
Committee Chair

Changes to Committee
composition:
• Pierre Dufour left July 2018;
• Earl Shipp joined January 2019;
• Nora Mead Brownell left

April 2019; and

• Amanda Mesler joined

May 2019.

Key focus areas in 2018/19:
• Monitoring safety during the

Massachusetts labour dispute;
• Implementation of key safety,

environment and health
Business Management
Systems (BMS) Standards;
• SEH risk management; and
• Chief Engineers engineering

Assurance Updates.

Key focus areas in 2019/20:
• Post Massachusetts labour

dispute and workforce
integration;

• US regulatory safety changes;
• Monitoring the action plan to
achieve long-term carbon
reduction targets;

• Deep dive into employee
mental wellbeing; and
• Road traffic collision
reduction strategy.

National Grid Annual Report and Accounts 2018/19Nominations Committee

Corporate Governance

“ The Committee
recognises the importance
for the Board to ensure
that the skills, experience
and knowledge of
individuals reflect the
changing demands
of the business.”

Sir Peter Gershon
Chairman and Committee Chair

Review of the year
The Committee met seven times over the year
to review the structure, size and composition
of the Board and its Committees, review and
oversee the succession planning for Directors
and members of the Executive Committee
and to make appropriate appointment
recommendations to the Board.

Succession planning and
appointment process
The Board said goodbye to Andrew Bonfield
and Pierre Dufour following the 2018 AGM
and as a result a primary focus of the
Committee this year has been the selection
and appointment of a new Chief Financial
Officer and a new Non-executive Director
to the Board. Nora Mead Brownell stepped
down in April 2019 and, as our working
assumption had been that Nora would step
down from the Board during 2019/20, a formal
appointment process for a second new
Non-executive Director to join the Board had
already begun. As a result, we will welcome
Jonathan Silver to the Board with effect from
16 May. The Committee recognises the
importance for the Board to anticipate and
prepare for the future and to ensure that the
skills, experience and knowledge of
individuals reflect the changing demands of
the business, whilst ensuring that the culture
and values of the Group remain paramount.
This was taken into consideration throughout
the search and appointment processes
outlined below.

When considering the recruitment of new
Directors, the Committee adopts a formal and
transparent procedure with due regard to the
skills, knowledge and level of experience
required as well as to diversity.

Chief Financial Officer – Andy Agg
The Committee appointed Russell Reynolds
as search consultants and at the May and
August 2018 meetings, the Committee
considered the role of the Chief Financial
Officer (CFO) in order to formulate a more
detailed role and person specification.
This considered the experience, technical
knowledge and leadership characteristics
required for the position. A long list of potential
candidates from diverse backgrounds was
produced and the Committee agreed that
Andy Agg as Interim CFO would be included
and considered for the role on a permanent
basis, but would be benchmarked against the
candidates from the external search. By the

December 2018 meeting, the list of
candidates had been narrowed down to three.
All had been interviewed by Sir Peter
Gershon, John Pettigrew, Therese Esperdy
and Mark Williamson with the two external
candidates also interviewed by Mike Westcott
and Nicola Shaw. Following an in-depth
critique and further testing of the candidates’
credentials, the Committee made a
recommendation to the Board in December
2018. The Board approved the
recommendation to appoint Andy Agg as the
strongest candidate to the Board with effect
from 1 January 2019, subject to shareholder
approval at the 2019 AGM.

Non-executive Director – Earl Shipp
The Committee keeps the composition of
Directors on the Board under regular review
and so when notice of the resignation of
Pierre Dufour was received, the Committee
focused its external search on candidates that
had the relevant skills to enhance the Board in
areas such as safety, environment and health.

Korn Ferry was appointed as search
consultants and at the August 2018
Committee meeting the Committee agreed
that the Chairman would review the long list
of candidates to select those suitable for a
first-stage interview. It was also agreed that
a sub-group of the Committee members
and attendees made up of Sir Peter Gershon,
John Pettigrew, Paul Golby, Mark Williamson
and Therese Esperdy would interview the final
candidates. At the September 2018 meeting,
the Chairman gave feedback on first-stage
interviews and recommended two candidates
to take forward in the process. The
Committee agreed the two proposed
candidates and following further testing of
the candidates’ credentials and development
areas, the Committee agreed the preferred
candidate and made a recommendation to
the Board in December 2018. The Board
approved the recommendation and Earl Shipp
was appointed to the Board with effect from
1 January 2019, subject to shareholder
approval at the 2019 AGM.

Board composition and director tenure
The success of the Company begins with a
high-quality Board and senior management
team. With the changes made during the year,
the current composition of the Board and its
Committees remains appropriate. This is kept
under regular review, however, the range of
skills and capabilities at Board level are
assessed for their relevance to the execution
of the Company strategy. The Committee will
continue to monitor the balance of the Board
to ensure that broad and relevant expertise
is evident in the existing members, and will
recommend further appointments if desirable.
The effectiveness of the Board is also
reviewed through the annual Board evaluation;
see page 56 for further information.

The Committee believes that Non-executive
Directors should generally stay in role no longer
than nine years, in line with the UK Corporate
Governance Code; however, the Committee
may determine that it is in the Company’s best
interests for a Director with particular skills,
knowledge and experience to stay beyond
the nine-year term.

Changes to Committee
composition:
• Amanda Mesler joined

May 2018;

• Pierre Dufour left July 2018;
• Earl Shipp joined January

2019; and

• Nora Mead Brownell left

April 2019.

Key focus areas in 2018/19:
• Senior leadership succession

planning;

• Review of Chairman’s

performance and tenure; and
• Non-executive Director search

and appointment.

Key areas of focus in 2019/20:
• Board and Committee
Composition; and

• Senior leadership succession.

Chairman’s performance and tenure
Mark Williamson
Senior Independent Director
During the course of the year I have led
the Nominations Committee, without Sir
Peter Gershon present, to discuss the
Chairman’s tenure. Due to the need to
maintain continuity of knowledge and
experience during the conclusion of the
RIIO-T2 process, the Committee has
determined that it would be in the
Company’s best interests for Sir Peter to
stay beyond the nine-year term identified
in the new Code. It is proposed that he
remain as Chairman for an additional
one year to 2021 and thus go over
the nine-year recommendation for a
Chairman of a Company. As part of the
consultation meetings with investors that
myself and Sir Peter have attended, there
had been unanimous support amongst
investors that this was the right decision
for the Company.

National Grid Annual Report and Accounts 2018/19Skills and experience
Each bar shows the number of members
on the Board with strong or very strong
skills or experience in this area.

Engineering

Energy

General management

Technology/innovation

Digital/cyber challenge

Government/political

Compliance/regulation

Finance/audit/banking

International (speciﬁcally US)

Safety

Risk management

This bar chart, together with the
biographies (on pages 48 – 49) 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.

Nominations Committee continued

Corporate Governance

Talent pipeline – senior leadership
succession
The succession pipeline to the Executive
Committee and health of the high potential
talent pool further down the organisation is
discussed at quarterly Executive Global Talent
Pool meetings, as part of the ongoing focus on
our talent strategy. An example of the internal
talent pipeline in practice can be seen through
the appointment of Andy Agg as Chief
Financial Officer; details of the appointment
process are noted overleaf. This year the
annual review of members of the Executive
Committee also led to the development of
bespoke 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.

We have a strong talent pipeline with
many high performing individuals and where
possible we aim to develop talent within the
organisation, such as with the appointment
of Andy Agg. However, we also recognise the
need to ensure we have the correct balance
of skills, knowledge and experience on our
Executive Committee and as such we
continue to benchmark with potential
external candidates to ensure that the senior
leadership within the business is diverse with
an appropriate range of external experience.
As a result, during the year two external
candidates, Andy Doyle and Barney Wyld,
were appointed to the Executive Committee.

The Committee continues to take an active
interest in the development of the talent
pipeline below board level, ensuring that
appropriate opportunities are in place to
develop high-performing individuals and
to build diversity across senior roles in
the business.

Diversity and Board Diversity Policy
National Grid is fully committed to supporting
diversity and inclusion in the Boardroom
which we believe supports the attraction
and retention of talented people, improves
effectiveness, delivers superior performance
and enhances the success of the Company.

Our Board diversity policy continues to
promote an inclusive and diverse culture
and we value diversity of thought, skills,
experience, knowledge and expertise
including of educational and professional
backgrounds, alongside diversity criteria
such as gender, age and ethnicity.

The policy applies to the Board,
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.

As set out in our Board diversity policy:
• All Board appointments and succession
plans are made on merit and objective
criteria, in the context of the skills and
experience that are needed for the Board
to be effective and to guard against
“group think”;

• We will only engage executive search firms
who have signed up to the UK Voluntary
Code of Conduct on Gender Diversity; and
• 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 (set out below) in the
Annual Report and Accounts. We will also
include details of initiatives to promote
gender and other forms of diversity in
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 43.

Sir Peter Gershon
Chairman

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.

Objective ongoing: there are currently 27.3% 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 33.3% women on our Executive Committee and
26.6% women direct reports to the Executive Committee. These
figures have been taken as at the date of this report.

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 mindset when discussing talent
moves and promotions; and

• All Executive Directors have diversity targets.

The Board aspires to meet the
Parker Review target for FTSE
100 boards to have at least one
director from a non-white
ethnic minority by 2021.

Objective met: we currently have two Directors 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 from non-white ethnic minorities.

National Grid Annual Report and Accounts 2018/19Corporate Governance

Statement of application of
and compliance with the UK
Corporate Governance Code 2016

The statement 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 in the UK Corporate Governance Code 2016 (the Code).
For the year ended 31 March 2019, the Board considers that it has complied in full with the provisions of the Code, available at www.frc.org.uk.
The Corporate Governance report also explains compliance with the Disclosure Guidance and Transparency Sourcebook. The index on page 68
sets out where to find each of the disclosures required in the Directors’ Report in respect of Listing Rule 9.8.4 R.

See page 77 for further details about the
Directors’ service contracts and letters
of appointment.

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.

C. Accountability
It remains a key consideration in the drafting
and review process for Directors to state
that they consider that the Annual Report
and Accounts, taken as a whole, is fair,
balanced and understandable. The
coordination and review of the Annual Report
and Accounts are 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 92.

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 20 – 22.

Details on the Company’s risk management
and internal control systems are set out on
pages 20 – 22.

The activities of the Audit Committee, which
assists the Board with its responsibilities
relating to risk and assurance, are set out
on pages 58 – 62.

A. Leadership
Our Board is responsible collectively for the
effective oversight and long-term success of
the Company. It also determines the strategic
direction, business plan, objectives, principal
risks and viability of the Company and sets
the governance structure that will help achieve
the long-term success of the Company and
deliver sustainable shareholder and
stakeholder value.

There is a clear schedule of matters reserved
for the Board and a schedule of delegation,
which were both reviewed and updated in
January 2019. The schedule of matters
reserved for the Board is available on our
website, together with other governance
documentation.

The Board supports the separation of the
roles of the Chairman and Chief Executive.
The key responsibilities are clearly
documented and reviewed when appropriate.
See our website for more details.

B. Effectiveness
Composition
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
biographies and committee membership
are set out on pages 48 – 49 and fuller
biographies are available on our website.
Board and Committee attendance during
the year to 31 March 2019 is set out on
page 51. 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 Non-executive
Directors were independent in character
and judgement.

Further reading
www.nationalgrid.com

Appointments to the Board
The Nominations Committee 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.

Russell Reynolds and Korn Ferry provided
external search consultancy services in
relation to the appointments of the Chief
Financial Officer and new Non-executive
Director respectively. Both Russell Reynolds
and Korn Ferry do not have any other
connection with the Company.

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 whether 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, all Directors will seek election and
re-election at the 2019 AGM.

Time commitment
Non-executive Directors are advised of the
time commitment and travel expected from
them on appointment. External commitments,
which may impact existing time commitments,
must be agreed with the Chairman. Details
of external appointments are set out in the
biographies on pages 48 – 49 and on our
website. As part of the evaluation of the
Chairman, the Non-executive Directors, with
input from the Executive Directors, assessed
the Chairman’s ability to fulfil his role, taking
into account other significant appointments.

Individual performance
The Chairman held performance meetings
with each Board member to discuss their
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 each Director to have
demonstrated a commitment to the role
and that their performance continued to
be effective.

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.
They concluded that the Chairman showed
effective leadership of the Board and his
actions continued to influence the Board
and wider organisation positively.

National Grid Annual Report and Accounts 2018/19Corporate Governance

Statement of application of
and compliance with the UK
Corporate Governance Code continued

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
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

77
86
43
9 and 33
218
137
12
18
222

68
216
93
48
2
221
221
221
222

10
20

222
218
42

222
223
20
218

Under 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
Chair 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.

D. Remuneration
The Directors’ Remuneration Report on
pages 69 – 90, sets out the work of the
Remuneration Committee and its activities
during the year; Directors’ remuneration
and the new policy to be approved at the
2019 AGM.

E. Relations 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.
More information about our approach to
relations with shareholders can be found
on pages 54 – 55.

The AGM provides a key opportunity for
the Board to communicate with and meet
shareholders.

Our AGM will be held on Monday 29 July
2019, at The International Convention Centre
in Birmingham, and broadcast via our
website. The Notice of Meeting for the 2019
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.

National Grid Annual Report and Accounts 2018/19Corporate Governance

Directors’ Remuneration Report
Annual statement from the Remuneration Committee Chair

Changes to Committee
composition:
• Pierre Dufour left July 2018;
• Earl Shipp joined January

2019; and

• Nora Mead Brownell left

April 2019.

Key focus areas for 2018/19:
• Proposed 2019

Remuneration Policy;
• Items relating to the

appointment of new CFO and
other Executive Committee
appointments; and

• LTPP design.

Key focus areas for 2019/20:
• Review impact of evolving
corporate governance
standards; and
• RIIO-T2 impact on

anticipated 2021 LTPP
design and new policy.

“ This year, in addition
to the annual advisory
vote concerning the
implementation of our
current remuneration
policy, we are also seeking
shareholder approval for a
new remuneration policy.”

Jonathan Dawson
Committee Chair

Dear Shareholders,

Last year, our shareholders approved the
annual Directors’ Remuneration Report
with 96.94% of votes in favour. This year,
in addition to the annual advisory vote
concerning the implementation of our current
remuneration policy, we are also seeking
shareholder approval for a new remuneration
policy. I wrote last year that we would be
doing this a year earlier than required in order
to modify our remuneration policy to take
account of the impact of the transition to the
next UK Regulatory Framework, RIIO-T2. We
are also taking the opportunity of the policy
vote to propose some other changes in
response to the provisions in the new
UK Corporate Governance Code as well
as other developments in the corporate
governance environment.

The main policy proposals for 2019 are:
• changes to the performance measures
(but not quantum) for the Long Term
Performance Plan (LTPP);

• a reduction in the maximum company

pension contribution for newly appointed
Executive Directors;

• the introduction of a post-employment
shareholding requirement for existing
Executive Directors, together with
appropriate compliance monitoring
arrangements; and

• further detail on when and how malus

and/or clawback would apply to
incentive awards.

We engaged widely with institutional
shareholders and proxy advisory service
organisations on all of the proposed policy
changes. Through the consultation period
we refined our approach on the changes to
our maximum pensions contributions.
Additionally, John Pettigrew and Nicola
Shaw have agreed a progressive reduction
in their pension contributions to the same
rate as newly appointed Executive
Committee members.

The development and refinement of this
policy, as well as the implementation of
the current policy, occurred across ten
meetings during the year.

What is our remuneration policy
seeking to achieve?
Much of the remuneration policy remains
the same as before as we feel most aspects
continue to be appropriate for the business,
and achieve our aims of:
• attracting, motivating and retaining senior

executives while not overpaying;

• ensuring we pay our senior executives
in a way that incentivises stretching
performance;

• being fully aligned to the way National Grid
earns its returns for shareholders; and

• actively supporting our strategy and values.

The key components of our approach are:

1. Significant weighting towards long-
term value creation and alignment with
shareholder interests
Nearly three quarters of John Pettigrew’s
variable pay opportunity is represented by
the 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. For Executive Directors,
some 85% of their variable pay opportunity is
delivered in National Grid’s shares. Consistent
with our approach for aligning executive
interests to the long term, LTPP awards are
determined after a three-year performance
period with any shares that are then allocated
to Executive Directors having to be held for at
least a further two years. Our proposed LTPP
measures for 2019 and 2020 will continue to
be fully aligned with long-term value creation
and shareholder interests.

2. We 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 salary. Other UK-based
Executive Directors must hold at least four
times their pre-tax salary in National Grid’s
shares (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 (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 progressively 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. An
important characteristic of our high
shareholding requirement is that a newly
appointed Executive Director who owns no
National Grid shares should expect to take
some six to seven years (assuming target
payout levels) to have earned the minimum
shareholding requirement and will be unable
to sell shares prior to that point. Our new
post-employment shareholding requirement
further enhances the alignment of interests
between executives and shareholders.

National Grid Annual Report and Accounts 2018/19Corporate Governance

Directors’ Remuneration Report continued
Annual statement from the Remuneration Committee Chair continued

How our variable pay is determined and linked to performance

Financial measures

Individual objectives

Committee discretion

Malus/clawback

APP
1-year
performance period
(up to 125% of salary)

Group/Business Return
on Equity

Business Value Added

Business Operating Profit

Earnings per Share

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)

Group Return on Equity

Group Value Growth

n/a

Committee considers
wider financial and
business performance
as well as individual
demonstration of leadership
qualities and values, and will
adjust as appropriate

Committee has discretion to
apply malus/clawback in
exceptional circumstances

3. Achievement of short-term (APP) and
long-term (LTPP) incentive opportunities
is linked to National Grid’s performance
A key principle of our remuneration policy,
and how it operates, is that reward should be
aligned to the financial and operational
performance of the Company and to
shareholder interests. As set out in the
strategic report, a number of our financial
KPIs directly align to our APP and LTPP
rewards. In addition, non-financial KPIs and
wider business performance (for example,
safety) are also taken into account, and
discretion applied if appropriate, when
determining an executive’s performance
against their individual objectives and in
confirming the overall final payouts (APP)
and/or vesting outcomes (LTPP). Our
approach, illustrating how variable pay is
linked to performance, is illustrated above.

4. Discretion and independent
judgement is applied
As I stated last year, as a committee we
consider whether to apply discretion when
assessing remuneration outcomes for
Executive Directors. Before making any APP
payouts we reflect on both the underlying
financial and wider business performance
of the Company as well as the performance
of Executive Directors against their individual
objectives and their demonstration of
leadership qualities and our values. We also
take account of the underlying financial
performance of the Company before deciding
the performance outturns for LTPP vesting.
This year, as set out in our new policy, we
have identified for the benefit of shareholders
the sort of exceptional circumstances which
would trigger a review as to whether malus
and/or clawback should be applied.

Proposed changes to Remuneration
Policy – 2019
1. Changes to LTPP measures
As I covered in some detail last year, National
Grid’s eight-year RIIO-T1 regulatory period in
the UK will end on 31 March 2021. RIIO-T2 will
start on 1 April 2021 and will have a five-year
duration. Given that the bulk of senior
executive remuneration is by design derived
from the LTPP, we have considered what
arrangements should be made for the LTPP
awards whose performance periods straddle
the two regulatory periods. 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. This is
illustrated in figure 1.

The outcome of the RIIO-T2 framework will
not be known until at least late 2020 but we
need to determine now the performance
measures that will apply to the 2019 and 2020
awards. Our current LTPP financial measures
are weighted equally between Group RoE and
Group Value Growth. Given the present
uncertainty of the regulatory arrangements
commencing in April 2021, we cannot be sure
that Group RoE will continue to be among the
two most important performance indicators
for our business under RIIO-T2 and, even if
Group RoE remains appropriate, we will not
be able to set realistic targets for this measure
with sufficient confidence. We may therefore
be at risk of losing alignment with shareholder
interests or risk focusing senior executives
on the wrong measures by continuing to use
Group RoE in the RIIO-T2 overlap period. We
are confident that Group Value Growth will
continue to be an important indicator of
performance during RIIO-T2. It is designed to
capture the Total Shareholder Return for our
Company which senior management can
impact, representing the uplift in value of our
regulated and non-regulated assets through

investment, delivery of the dividend, and
strong cash generation (the detailed definition
can be found on page 242). It has been
applied each year since 2014 and reported in
our Annual Report. It continues to be a key
element of our financial proposition as
presented to investors by senior executives.

As part of our review, the Committee
considered carefully whether alternative
long-term incentive designs, for example,
restricted stock, could be appropriate. We
also reviewed whether other performance
measures such as Total Shareholder Return
relative to an index such as the FTSE 100
might be applied. We concluded that
introducing restricted stock was not
consistent with the emphasis on motivating
improved performance across the Group. We
also concluded that introducing an incentive
measure where the value was largely
determined by Company share price
performance against unrepresentative
comparators (where, by definition,
management could have little influence) would
not provide a direct link between individual
and collective performance and ultimate
reward. We were also concerned that this
might lead to significant swings in outturns
that potentially were unjustified one way or
the other compared with management’s
performance in running the Company.

Impact of RIIO-T2 on our Long Term Performance Plan
Figure 1: LTPP timings

19/20

20/21

21/22

22/23

23/24

24/25

2019
Award

2020
Award

Key:

RIIO-T1

RIIO-T2

Performance period

Holding period

Figure 2: LTPP measures

19/20

20/21

21/22

22/23

23/24

24/25

2019
Award

2020
Award

Key:

RIIO-T1

RIIO-T2

Group Value Growth

Group RoE

Holding period

National Grid Annual Report and Accounts 2018/19Corporate Governance | Directors’ Remuneration Report

The Committee believes that the strongest
alignment with external shareholder interests
derives from the very high shareholding
requirements imposed on senior executives.
The Committee also focused on the fact that
LTPP awards are made not just to Executive
Directors but to some 400 senior managers
below Executive Committee level across
National Grid in the UK and the US, who
are critical to the effective operation and
performance of the Company.

The Committee has therefore concluded that
LTPP vesting for the 2019 and 2020 LTPP
awards should be calculated according to
the performance of:

a) Group Value Growth measured over

the entire three-year performance period
(determining 2/3rds and 5/6ths of the total
vesting outcome for the 2019 and 2020
LTPP awards, respectively); and

b) Group RoE measured only over the RIIO-T1
performance period (determining 1/3rd and
1/6th of the total vesting outcome for the
2019 and 2020 LTPP awards, respectively).

This proposal is illustrated in figure 2.

We intend to supplement Group Value Growth
with a second performance measure once
we have clarity on the RIIO-T2 regulatory
framework. We will consult with investors and
propose a new remuneration policy at that
time which we anticipate to be at the 2021
AGM and which will enable us to make
awards in 2021 under the new policy.

2. Maximum company pensions
contributions
Included in the policy is a reduction in the
defined contribution rate (or cash in lieu) from
a maximum of 30% to a maximum of 20% of
salary for new UK-based Executive Directors
(whether external recruits or internal
promotions). We had already transitioned
to this arrangement when appointing Andy
Agg as CFO and also for other UK-based
appointments to our Executive Committee
made in October 2018 and March 2019.
This is in response to evolving shareholder
views as well as the new UK Corporate
Governance Code.

Additionally, being mindful of evolving views,
John Pettigrew (an active member of a DB
plan until 2016) and Nicola Shaw have agreed
a progressive reduction in their pension
contributions in three equal steps from 30% of
salary to 20% of salary without compensation.
This will be implemented from the start of the
next financial year following their decisions
(April 2020).

We recognise the direction of travel on
aligning pension contributions with those
available to the wider workforce. However,
it is not an issue that the Committee believes
can easily be resolved in a single move as
National Grid has a number of different
pension structures (defined benefit (DB),
defined contribution (DC) and cash in lieu)
and tiering of value in both the UK and the US.
As employees advance through the Company,

The full remuneration policy
for shareholder approval
is set out on pages 74 – 78.

progressive increases in the rates of pension
contribution will normally apply, as is the case
with other benefits such as company car
allowance. In the UK our DB pension plans,
all of which were closed to new members
by April 2006, continue to accrue for active
members. Current maximum employer
contributions in our DC schemes are tiered by
managerial band, ranging from 12% to 30% of
salary. Our assessment of the current average
annual value to our entire UK workforce
excluding Executive Directors across both
our DC and DB schemes is around 18%. We
selected 20% as an appropriate rate for future
Executive Director appointments noting in
particular that this is the cash contribution
rate currently earned by other UK-based
senior executives. We will continue to review
contribution rates in the coming years,
acknowledging contractual obligations,
evolving views of investors and wider
market movements.

3. Post-employment shareholding
requirements
The Committee also wishes to align with
the new UK Corporate Governance Code,
shareholder views and emerging market
practice in the area of post-employment
shareholding requirements. We implemented
a post-employment shareholding requirement
when Andrew Bonfield, CFO, left in July 2018.
We have now set our policy that Executive
Directors will be required to hold a minimum
of 200% of salary in shares for two years after
leaving employment, calculated at their leave
date. If any Executive Director has not yet
reached the 200% level for whatever reason
at the time of their departure, we will not
require additional shares to be purchased but
we will require them to maintain their holdings
for two years. The calculation excludes the
value of any outstanding awards (not yet
vested) for ‘good leavers’ that will vest
according to the normal schedule and which
in any event must be held for a two-year
period (as per LTPP portion of the
remuneration policy).

We have adopted a similar approach for other
Executive Committee members at a level of
100% of base salary with the same holding
period for two years after leaving employment.

Executive Committee members will be
required to provide evidence of their
shareholding at the first and second
anniversaries after leaving. We will report
annually in the Directors’ Remuneration
Report whether or not the requirement has
been met by Executive Directors. Failure to
comply could result in a financial penalty up
to the value of the shareholding requirement,
and the withdrawal/reduction of any future
vesting of shares. I can confirm Andrew
Bonfield has continued to meet his post-
employment shareholding requirement.

4. More detail related to malus/
clawback provisions
In line with best practice we have included
more detail on our approach to malus and
clawback, and have also provided examples of
those types of events that would be expected
to trigger a review under our new process.

These examples include, but are not limited to,
material misstatement, misconduct of the
participant, a significant environmental,
health and safety or customer issue and failure
of risk management, whether these events
occur before or only emerge after cessation of
employment. I emphasise, as I did last year,
that the Committee has discretion to determine
whether circumstances exist which justify
whether any or all of an award should be
forfeited, even if it has already been paid.
In each Directors’ remuneration report we
will disclose any application of malus and/or
clawback for our Executive Directors.

The full remuneration policy for shareholder
approval is set out on pages 74 – 78.

Overview of financial performance
National Grid has had a good year, delivering
£4.5 billion of investment in critical
infrastructure leading to strong asset growth
of 7.2%. Additionally, a dividend increase of
3.07% has been recommended for 2018/19.
Our new efficiency programmes were
launched in both the US and UK. In the US,
we continued to make good regulatory
progress, and we reached agreement on new
employment terms with the unions in
Massachusetts. In the UK, we delivered
another year of good returns within 200 to
300 basis points of outperformance.

Review of decisions made during
the year
APP
APP payouts for Executive Directors are
70% based on the achievement of the Group’s
financial measures and 30% based on the
achievement of individual objectives. As in
previous years, technical adjustments are
made to financial measures, where relevant,
to account for: the impact of timing, major
storm costs, the net effect of currency
adjustments, certain actuarial assumptions
on pensions, scrip dividend uptake, and to
ensure consistency of accounting treatment.

The performance of the respective financial
measures has resulted in outturns ranging
from 33.3% to 90.3% of the maximum for the
financial portion. The performance against
individual objectives has resulted in outturns
ranging from 70.0% 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 2019 range from
44.3% to 85.6% of the maximum award,
which amounts to awards of 55.4% to 106.4%
of salary. Details of the APP payouts are
presented on pages 80 – 83, including the full
range of performance levels for each of the
financial measures and also commentary on
each Executive Director’s performance
against individual objectives.

Having reflected on wider financial and
business performance, the Committee
concluded there was no reason to exercise
discretion on APP outcomes.

National Grid Annual Report and Accounts 2018/19Corporate Governance

Directors’ Remuneration Report continued
Annual statement from the Remuneration Committee Chair continued

We have increased Dean Seavers’ salary by
3.1%, which is aligned to the average salary
increase budget for our US employees.

Consistent with our approach for appointing
John Pettigrew and Nicola Shaw to the Board,
Andy Agg was appointed at a salary level
below our assessment of the appropriate level
for his role. As with John and Nicola, the
Committee may award future increases in
excess of the managerial salary increase
budget, subject to his performance. This year,
however, Andy is not eligible for a June salary
increase. This is consistent with our policy for
the rest of the managerial population whereby
employees externally hired or internally
promoted on or after 1 January are not eligible
for a salary increase until the following year’s
annual cycle.

Remuneration for new Executive
Committee members
In addition to setting the remuneration of
Andy Agg on his appointment as Chief
Financial Officer (CFO) on 1 January 2019,
the Committee reviewed and agreed the
remuneration terms concerning the
appointment of Barney Wyld, Group
Corporate Affairs Director, in October 2018
and the appointment of Andy Doyle, Chief
Human Resources Officer, in March 2019.
The Committee also approved the exit
arrangements of the outgoing Executive
Committee members in accordance with
our policy.

Fair and appropriate
The key purpose of the Committee is to
set pay for Executive Directors and other
Executive Committee members at a level
necessary to attract, incentivise and retain
high-calibre individuals, while not overpaying.
To guide the Committee in making
appropriate remuneration decisions we take
account of the policies and practices for the
wider workforce. For example, we consider:
gender and ethnicity pay gaps, annual
salary increases for the wider workforce, CEO
pay ratios, and alignment with managerial pay
principles such as mid-market approach to
total reward. We employ an individual
objective setting approach consistent with our
managerial workforce and consider the wider
business performance and resulting variable
pay outcomes impacting the remuneration
of our wider workforce when deciding
variable pay outcomes for senior
executives. All our employees are eligible
for a performance-based annual payment.

In addition, we have taken steps to review
pensions arrangements for Executive
Directors. We have already implemented the
reduction in the maximum contribution rate
for the newly appointed Executive Committee
members. As set out above, the pension
contributions for John Pettigrew and Nicola
Shaw are being reduced progressively to the
20% rate now applicable to other UK-based
Executive Committee members.

We have decided to report voluntarily on CEO
pay ratios one year early, and will continue to
be informed by the ratios when making pay
decisions for senior executives. Our CEO pay
ratio is 76:1 at the median for UK-based
employees. The position is somewhat
different, however, when comparing CEO
pay against the median level for the Group.
On a Group basis the median pay ratio is 48:1.
This reflects the higher general level of wages
in the US compared with the UK, and
especially in the regions of the US where the
Company operates. It is also important to
recognise that around three quarters of
our employees are in the US.

A further point to note is that half of John
Pettigrew’s total pay is derived from this year’s
vested long-term incentives. These long-term
incentives align John Pettigrew’s interests with
those of our shareholders and specifically
incentivise appropriate long-term decision-
making. Removing the impact of long-term
incentives from our calculations (but including
the APP) results in a UK employee pay ratio at
the median of 38:1 and a Group-wide median
ratio of 24:1. Further details of our pay ratios
can be found on page 88.

The Chairman has described in his letter on
page 47 the mechanisms for engagement
with our employees on a wide range of topics,
including pay and benefits throughout the
organisation. The Committee will take all
relevant feedback into account.

Changes to Committee membership
Pierre Dufour did not seek re-election last
year and left the Board on 30 July 2018.
The Board appointed Earl Shipp who joined
the Committee on 1 January 2019. Nora
Mead Brownell resigned from the Board on
8 April 2019.

Focus for 2019/20
In 2019/20, the Committee will continue to
monitor and reflect on the evolving corporate
governance environment and progress in the
UK on RIIO-T2 arrangements which will inform
our next policy review planned for 2021.

Conclusion
There are two separate remuneration votes
this year. First, to approve a new binding
three-year policy and second, to approve
the remuneration report for 2018/19. I believe
that the Committee has applied the current
policy correctly and that the outcomes for
senior executives properly reflect both the
performance of National Grid and their
personal contributions. I also believe that the
policy proposals we are submitting to you will
allow us to make appropriately incentivising
LTPP awards in 2019 and 2020, as well as to
reflect evolving best practice in remuneration
governance. Accordingly, on behalf of the
Committee, I commend this report to you
and ask for your support for both resolutions
at the AGM.

Jonathan Dawson
Committee Chair

LTPP
The 2016 LTPP awards vest in July 2019. The
three-year performance period ended on 31
March 2019 and vesting outcomes ranged
from 73.8% to 84.2%. Details of the LTPP
vesting are provided on pages 83 – 84. As
I mentioned last year, the LTPP vesting also
benefited from a portion of the value arising
from the sale of a majority interest in the UK
Gas Distribution business.

We note that the increase in the vested value
of John Pettigrew’s 2016 LTPP is attributable
to this being the vesting of the first award
made to him as CEO (and therefore at a
higher base salary and award level than
in prior years).

Having reflected on wider financial and
business performance, the Committee
concluded there was no reason to exercise
discretion on LTPP outcomes.

Annual salary review
As I have stated in each remuneration report
since John Pettigrew and Nicola Shaw were
appointed, the Committee decided not to
award them initial salaries at our assessment
of the appropriate levels for their roles.
Instead, we decided that we would make
progressive increases in excess of the
managerial salary increase budget,
subject to their individual performance.

In implementing this approach, we increased
both John Pettigrew’s and Nicola Shaw’s
salaries by 9% in 2017 and 6% in 2018.
I indicated that this year we would follow
the same approach, again subject to
performance, so both of their salaries would
be appropriately aligned to our assessment
of salaries for their roles.

The Committee concluded that John
Pettigrew has continued to deliver strong
performance in his third year in the role. This
has been achieved through delivery of value
to investors together with taking necessary
steps to create future value for shareholders,
strengthening external stakeholder
relationships, as well as driving our corporate
social responsibility and people agendas.

The Committee also considered that Nicola
Shaw has continued to deliver strong
performance. In particular, Nicola delivered
enhancements in the areas of customer
delivery, operational performance, and
engagement with Ofgem and other key
stakeholders. Highlights include a significant
change programme in the UK this year and
the legal separation of our Electricity System
Operator business. During this period, project
delivery, safety, reliability and environmental
performance have been strong.

Given the strong performance of both John
and Nicola over the last year, the Committee
has awarded each of them a salary increase
of 8% (comprising the UK budget of 2.9% and
a further 5.1%). The Committee feels that their
resulting salaries are appropriate given their
performance and our assessment of market
salaries for their roles. Our intention for the
future is to make salary increases that are in
line with the average salary increase budget
for our UK employees subject to performance.

National Grid Annual Report and Accounts 2018/19Corporate Governance | Directors’ Remuneration Report

At a glance – 2018/19

Our ‘At a glance’ highlights the performance and remuneration outcomes for our Executive Directors for the year ended 31 March 2019.
Further detail is provided in the Statement of implementation of remuneration policy in 2018/19.

Performance in 2018/19
A comparison of the 2018/19 single total figure of remuneration with the maximum remuneration if variable pay had vested in full is set out below
for the Executive Directors. John Pettigrew, Dean Seavers and Nicola Shaw were each in office for the full year. Andy Agg and Andrew Bonfield
were each in office for part of the year.

Total remuneration

Executive Director

Andy Agg

Andrew Bonfield

John Pettigrew

Dean Seavers

Nicola Shaw

Maximum if variable
pay vested in full
£’000

2018/19 total single figure of remuneration

£’000

Split by component (%)

392

355

5,170

4,044

2,482

360

50.7%

355

100%

43.9%

5.8%

-0.4%

4,562

29.0%

21.8%

53.3%

3,001

33.1%

15.2%

57.9%

2,196

31.2%

25.1%

51.1%

-4.1%

-6.2%

-7.4%

Key:

Fixed

APP

2016 LTPP – face value

2016 LTPP – share appreciation/depreciation and dividend equivalent values

Notes:
1. Andy Agg was appointed CFO on 1 January 2019 and his remuneration from 1 January 2019 to 31 March 2019 is disclosed above.
2. Andrew Bonfield stood down from the Board at the AGM on 30 July 2018 and left the Company on 31 July 2018. His remuneration for the period 1 April 2018 to 31 July 2018 is disclosed

above. This excludes variable pay (APP, LTPP) due to his leave reason being ‘resignation’ and therefore he was not eligible for any APP or LTPP awards.

3. For each Executive Director the share/ADS price has decreased between grant date and the estimated three months average preceding 31 March 2019. Comparing the share price at grant

of 1,021.00p for Andy Agg and John Pettigrew and 1,105.07p for Nicola Shaw, and $69.1825 for Dean Seavers, versus the average share/ADS price for the period 1 January 2019
to 31 March 2019 (837.34p and $54.73), there is a reduction of 183.66p (18%) per share, 267.73p per share (24%) and $14.4525 per ADS (21%) respectively. This results in an estimated
reduction in value (net of dividend equivalents) of £4,267 for Andy Agg (prorated), £492,852 for John Pettigrew, $534,390 for Dean Seavers and £306,658 for Nicola Shaw.

Key features of remuneration policy (adopted 2017)

Implementation of policy in 2018/19

Salary

• Target broadly mid-market against FTSE 11-40 for

UK-based Executive Directors and general industry
and energy services companies with similar revenue
for US-based Executive Directors.

• Salary increases of 6.0% for each of John Pettigrew and Nicola

Shaw (June 2018). These increases were awarded to help reduce
the gap and bring their pay closer to appropriate levels for their
roles and given strong individual performance;

Annual
Performance
Plan (APP)

• Maximum opportunity is 125% of salary;
• 50% paid in cash, 50% paid in shares which must be
retained until the later of two years and meeting the
shareholding requirement; and

• Subject to both clawback and malus.

• Salary increase of 3.0% for Dean Seavers (June 2018).

This increase was in line with the budget for US managerial
employees; and

• Andrew Bonfield was not eligible for a June 2018 salary increase

because he was leaving the business.

• 70% based on financial measures and 30% based on individual

objectives;

• Financial measures for CEO and CFO comprise 35% adjusted

EPS and 35% Group RoE;

• Financial measures for Executive Director, US and Executive

Director, UK comprise 23.3% US/UK Value Added respectively,
23.3% US/UK RoE respectively and 23.3% US/UK Operating
Profit respectively; and

• Individual objectives cover delivering value for investors,

stakeholder engagement, people, corporate social responsibility,
customer and driving efficiency.

Long Term
Performance
Plan (LTPP)

• Maximum award level is 350% of salary for CEO and 300%

• 2018 LTPP award: 50% Group RoE and 50% Group Value

for other Executive Directors;

Growth; and

• Vesting is subject to long-term performance conditions over

a three-year performance period;

• Shares must be retained until the later of two years from
vesting and meeting the shareholding requirement; and

• 2016 LTPP vesting in 2019: 50% Group RoE and 50% Group Value
Growth for CEO and CFO; 25% Group RoE and 25% US/UK RoE
for Executive Director, US and Executive Director, UK respectively
and 50% Group Value Growth.

• Subject to both clawback and malus.

• Eligible to participate in a defined contribution plan

(or defined benefit if already a member);

• Pensionable pay is salary only in UK and salary and APP

in US in alignment with market; and

• Other benefits as appropriate.

• 500% of salary for CEO; and
• 400% of salary for other Executive Directors.

Pension and
other benefits

Shareholding
requirement

• UK cash allowance for John Pettigrew and Nicola Shaw, 30%
of pensionable pay and for Andy Agg, 20% of pensionable pay;
• US defined contribution for Dean Seavers, 9% of pensionable pay

with additional match of up to 4%; and

• 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.

• Shareholdings for Andy Agg, John Pettigrew, Dean Seavers and
Nicola Shaw are 136%, 428%, 275% and 35% respectively; and
• Andy Agg, John Pettigrew, Dean Seavers and Nicola Shaw have

not yet met their shareholding requirement due to a relatively short
time in role and therefore their LTPP award levels are based on
prior roles (Andy Agg, John Pettigrew) or relatively short time with
the Company (Dean Seavers, Nicola Shaw).

National Grid Annual Report and Accounts 2018/19

Corporate Governance

Directors’ Remuneration Report continued
Directors’ remuneration policy – for approval by shareholders in 2019

The following tables provide details of the policy we intend to apply, subject to shareholder approval, for three years from the date of the 2019
AGM. Following approval, it will continue to be available within the 2018/19 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.

Shareholders’ views
We have engaged widely with shareholders and proxy advisory service organisations on our policy proposals, enabling us to refine the policy
to reflect evolving external stakeholder views. The proposed changes concern: the weighting of performance measures for LTPP, pension
contributions, a post-employment shareholding requirement and further detail on the application of malus and/or clawback. Through the
consultation period we have refined our approach on the changes to maximum pension contributions.

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.

Notwithstanding anything in this policy, any commitment made to a person before that person became an Executive Director or before this policy
came into effect will be honoured by the Company.

The Committee reviews annually the overall appropriateness and relevance of the remuneration policy and whether any changes should be put to
shareholders. Decisions on the levels of measures and targets for performance related pay (APP and LTPP) and payouts are made taking account
of overall financial and business performance. A member of the Audit Committee is required to be a member of the Committee and this ensures
the Committee receives knowledgeable input on setting financial measures and assessing outturns including any adjustments and judgements
considered by the Audit Committee. The Committee also works closely with the Nominations Committee in respect of pay and conditions of
newly appointed executives to ensure their remuneration is within policy. The Committee will interface with the Share Schemes Sub-Committee
as required. Consistent with the UK Corporate Governance Code, members of the Remuneration Committee are independent Non-executive
Directors who do not receive any variable remuneration and do not participate in decisions about their own remuneration.

Future policy tables – Executive Directors
Salary
Purpose and link to business strategy: to attract, motivate and retain high-calibre individuals, while not overpaying.

Operation

Maximum levels

Salaries are generally reviewed annually and are targeted broadly
at mid-market of our peer group. However a number of other
factors are also taken into account:
• business performance and individual contribution;
• the individual’s skills and experience;
• scope of the role, including any changes in responsibility; and
• market data, including base pay and total remuneration

opportunity in the relevant comparator group.

No prescribed maximum annual
increase although 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 if more recently
appointed in the role and broad
alignment to mid-market.

Performance metrics, weighting
and time period applicable

Not applicable.

Benefits
Purpose and link to business strategy: to provide competitive and cost-effective benefits to attract and retain high-calibre individuals.

Performance metrics, weighting
and time period applicable

Not applicable.

Maximum levels

The cost of providing benefits
will vary from year to year in line
with market.

Participation in tax-approved
all-employee share plans is subject
to limits set by the relevant tax
authorities from time to time.

Operation

Benefits provided include:
• company car or a cash alternative (UK only);
• use of a car and driver when required;
• private medical insurance;
• life assurance;
• personal accident insurance (UK only);
• opportunity to purchase additional benefits (including personal
accident insurance for US) under flexible benefits schemes
available to all employees; and

• opportunity to participate in HMRC (UK) or Internal Revenue

Service (US) tax-advantaged all-employee share plans, currently:

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.

Employee Stock Purchase Plan (ESPP) (423(b) plan): eligible US
employees may purchase ADSs on a monthly basis at a
discounted price.

Other benefits may be offered at the discretion of the Committee.

National Grid Annual Report and Accounts 2018/19Corporate Governance | Directors’ Remuneration Report

Pension
Purpose and link to business strategy: to reward sustained contribution and assist attraction and retention.

Performance metrics, weighting
and time period applicable

Not applicable.

None of the current Executive Directors are active
members of a defined benefit plan.

Operation

Maximum levels

Externally hired Executive Directors will participate
in a Defined Contribution (DC) arrangement.
UK-based Executive Directors may alternatively
choose to receive cash in lieu.

In cases of internal promotion to the Board,
the Company will recognise legacy DB pension
arrangements of existing employees in both the
UK and US where these have been provided
under an existing arrangement.

In line with market practice, pensionable pay for
UK-based Executive Directors includes basic salary
only and for US-based Executive Directors it
includes basic salary and APP award.

UK DC: annual contributions for new
appointments of up to 20% of basic salary.
Existing Executive Directors may receive annual
contributions of up to 30% of basic salary.
Executive Directors may take a full or partial
cash supplement in lieu.

Life assurance of four times basic salary and a
dependant’s pension of one third of basic salary
is provided. Executives with HMRC pension
protection may be offered lump sum life assurance
only, equal to four times basic salary.

UK DB: a pension generally payable from age
60 or 63. DB benefits are subject to capped
increases in pensionable salary. No enhancement
is provided on promotion to the Board. Funded
DB benefits are subject to HMRC maximum
allowances and limits. On death in service,
a lump sum of four times pensionable salary
and dependant’s pension of two-thirds of
the Executive Directors’ pension is provided.
DB pension plans were closed to new
members by April 2006.

US DC: annual contributions of up to 9% of basic
salary plus APP award with additional 401(k) plan
match of up to 4%.

US DB: an Executive Supplemental Retirement
Plan provides for an unreduced pension benefit at
age 62 (this plan is closed to new participants from
1 January 2015). For retirements at age 62 with 35
years of service, the pension benefit would be
approximately two thirds of pensionable salary.
DB final average pay plan is subject to capped
increases in 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).

Annual Performance Plan (APP)
Purpose and link to business strategy: to incentivise and reward the achievement of annual financial measures and strategic non-financial
measures including the delivery of annual individual objectives and demonstration of our Company leadership qualities and values.

Operation

Maximum levels

Performance metrics, weighting
and time period applicable

The APP comprises reward for achievement against
financial measures and achievement against
individual objectives.

Financial performance measures and targets are
normally agreed at the start of each financial year
and are aligned with strategic business priorities.
Targets are set with reference to the budget.
Individual objectives and associated targets are
normally agreed also at the start of the year.

APP awards are paid in June.

50% of the APP award is 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 malus and clawback
provisions as set out in the paragraph overleaf.

The maximum award is 125% of basic salary
in respect of a financial year.

At least 50% of the APP is based on performance
against financial measures.

The Committee may use its discretion to set
financial measures that it considers appropriate in
each financial year and has the flexibility to modify
the amount payable, to reflect wider financial and
business performance, demonstration of leadership
qualities and our values, or to take account of a
significant event.

The payout levels at threshold, target and stretch
performance levels are 0%, 50% and 100%,
respectively.

National Grid Annual Report and Accounts 2018/19Corporate Governance

Directors’ Remuneration Report continued
Directors’ remuneration policy – for approval by shareholders in 2019 continued

Long Term Performance Plan
Purpose and link to business strategy: to drive long-term business performance, aligning Executive Director incentives to key strategic objectives
and shareholder interests over the longer term.

Operation

Maximum levels

Performance metrics, weighting and time period applicable

Awards of shares may be granted each year, with
vesting subject to long-term performance conditions.

The performance measures have been chosen as
the Committee believes they reflect the Executive
Directors’ creation of long-term value within the
business. Targets are set for each award with reference
to the business plan.

Participants may receive ordinary dividend equivalent
shares on vested shares, from the time the award was
made, at the discretion of the Committee.

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.

Awards are subject to malus and clawback provisions
as set out in the paragraph below.

The maximum award for the
CEO is 350% of salary and it
is 300% of salary for the other
Executive Directors based on
salary at the time of the award.

The performance measures are Group Value Growth and Group RoE
for all Executive Directors. For awards made in financial year 2019/20:
Group Value Growth measured over three years (2019/20, 2020/21
and 2021/22) and Group RoE measured over two years (2019/20
and 2020/21) such that Group Value Growth represents 2/3rds
and Group RoE represents 1/3rd of the total vesting outcome.

For awards made in financial year 2020/21: Group Value Growth
measured over three years (2020/21, 2021/22 and 2022/23) and
Group RoE measured over one year (2020/21) such that Group
Value Growth represents 5/6ths and Group RoE represents 1/6th
of the total vesting outcome.

For awards made in 2016 which will vest in 2019, the performance
measures and percentage weightings are: Group Value Growth
(50%) and Group RoE (50%) for the CEO and CFO; Group Value
Growth (50%), Group RoE (25%) and UK or US RoE (25%) for
the UK and US Executive Directors respectively.

For awards made in 2017 and 2018 which will vest in 2020 and 2021
respectively, the performance measures were Group Value Growth
and Group RoE, equally weighted, for all Executive Directors.

All awards have a three-year performance period.

For each performance measure, threshold performance will
trigger only 20% of the award to vest; 100% will vest if maximum
performance is attained.

Notwithstanding the level of award achieved against the
performance conditions, the Committee may use its discretion to
modify the amount vesting to reflect wider financial and business
performance and take account of a significant event and/or
compliance with the dividend policy.

Malus and clawback
The Committee has 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, health and safety or customer issue, failure of risk management, and if certain other facts emerge after
termination of employment. The Committee also has a prescribed process to follow when determining whether and how to apply this discretion.

Future policy table – Non-executive Directors (NEDs)
Fees for NEDs
Purpose and link to business 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

Not applicable.

There are no prescribed
maximum fee levels although
fees are generally aligned to
salary increases received by
other Company employees
and market movement for NEDs
of companies of similar scale
and complexity.

The cost of benefits provided to
the Chairman is not subject to a
predetermined maximum since
the purchase cost will vary 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 (all inclusive);
• basic fee, which differs for UK- and US-based NEDs;
• committee chair fee;
• committee membership fee; and
• Senior Independent Director fee.

No additional fees are paid for membership/chair of the
Nominations Committee.

Fees are reviewed every year taking into account those
in companies of similar scale and complexity.

The Chairman is covered by the Company’s private
medical and personal accident insurance plans,
and has the use of a car and driver, when required.

NEDs do not participate in incentives, pension or any
other benefits. 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.

NEDs who also sit on National Grid subsidiary boards
may receive additional fees related to service on
those boards.

National Grid Annual Report and Accounts 2018/19Corporate Governance | Directors’ Remuneration Report

Shareholding requirement –
in employment
The requirement of Executive Directors
to build up and hold a significant 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.

Shareholding requirement – post
employment
The requirement of Executive Directors
to continue to hold National Grid shares
after leaving ensures they continue to
share a risk with shareholders and
maintain alignment with shareholders’
interests. Executive Directors will be
required to hold 200% of base salary
calculated at their leave date, or maintain
their actual holding percentage if lower,
expressed as a number of shares and
held for a period of two years. This
calculation excludes the value of any
awards not yet vested for ‘good leavers’
that will vest according to the normal
schedule and which in any event must
be held for a two-year period. The
calculation will include recently vested
LTPP awards or APP awards paid as
shares which are subject to respective
two-year holding periods, even
after employment.

Unless the post-employment
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.

Consideration of remuneration policy
elsewhere in the Company
Our remuneration policy is generally aligned
to the policies for our non-unionised
workforce. All employees are entitled to base
salary, benefits and pension contributions. In
setting the remuneration policy the Committee
considers the remuneration packages offered
to employees across the Company. As a point
of principle, salaries, benefits, pensions and
other elements of remuneration are assessed
regularly to ensure they remain competitive
in the markets in which we operate. In
undertaking such assessment our aim
is to be at mid-market for all job bands,
including those subject to union negotiation.

As would be expected, we have differences
in pay and benefits across the business
which reflect specific accountabilities and
labour markets. There are elements of
remuneration policy which apply to all, for
example, flexible benefits and share plans.

When considering annual salary increases,
the Committee reviews the proposals for
salary increases for the employee population
generally, as it does for any other changes
to remuneration being considered.

All employees are eligible for an annual
performance-based award. Eligibility and
the maximum opportunity available is based
on market practice for incentives for the
employee’s job band. In addition, around
400 senior management employees are
awarded LTPPs annually, which include the
same performance measures as those for
Executive Directors.

The Company has a number of all-employee
share plans that provide employees with the
opportunity to become, and to think like, a
shareholder. These plans include Sharesave
and the Share Incentive Plan (SIP) in the UK
and the 401(k) and 423(b) plans in the US.
Further information is provided on page 74.

The Company issues an employee
engagement survey each year, which includes
remuneration as a topic. It does not
specifically invite employees to comment on
the Directors’ remuneration policy but any
comments made by employees are noted.
The Board also regularly engages with
employees on a variety of topics,
including remuneration.

Policy on recruitment remuneration
Salaries for new Executive Directors
appointed to the Board will be set in
accordance with the terms of the approved
remuneration policy in force at the time of
appointment, and in particular will take
account of the appointee’s skills and
assessment of the experience as well as
the scope and our assessment of the
market rate for the role.

Where appropriate, salaries may be
set below market level initially, with the
Committee retaining discretion to award
increases in salary in excess of those of the
wider workforce and inflation to bring the
salary to the market level over time, where
this is justified by individual and
Company performance.

Benefits consistent with those offered to
other Executive Directors under the approved
remuneration policy in force at the time of
appointment will be offered, taking account
of local market practice. The Committee may
also agree that the Company will meet certain
costs associated with the recruitment, for
example legal fees, and the Committee may
agree to meet certain relocation expenses
or provide tax equalisation as appropriate.

Pension contributions for new Executive
Directors appointed to the Board will be
set in accordance with the terms of the
approved remuneration policy in force at
the time of appointment.

Ongoing incentive pay (APP and LTPP) for
new Executive Directors will be in accordance
with the approved remuneration policy in force
at the time of appointment. This means the
maximum APP award in any year would be
125% of salary and the maximum LTPP
award would be 300% of salary (350%
of salary for the CEO).

For an externally appointed Executive
Director, the Company may offer additional
cash or share-based payments that it
considers necessary to buy out current
entitlements from the former employer that will
be lost on recruitment to National Grid. Any
such arrangements would reflect the delivery
mechanisms, time horizons and levels of
conditionality of the remuneration lost.

In order to facilitate buy-out arrangements
as described above, existing incentive
arrangements will be used to the extent
possible, although awards may also be
granted outside of these shareholder-
approved schemes if necessary and as
permitted under the Listing Rules.

For an internally appointed Executive
Director, any outstanding APP awards will
be determined according to the original
terms but paid at the end of the year.
Any outstanding LTPP awards will be
paid according to the original terms.

Fees for a new Chairman or Non-executive
Director will be set in line with the approved
policy in force at the time of appointment.

Service contracts/letters of appointment
In line with our policy, all Executive Directors
have service contracts which are terminable
by either party with 12 months’ notice.
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.

Policy on payment for loss of office
The contracts contain provisions for payment
in lieu of notice, at the sole and absolute
discretion of the Company. Such contractual
payments are limited to payment of salary only
for the remainder of the notice period. In the
UK such payments would be phased on a
monthly basis, over a period not greater than
12 months, and the Executive Director would
be expected to mitigate any losses where
employment is taken up during the notice
period. In the US, for tax compliance
purposes, the policy is to make any payment
in lieu of notice as soon as reasonably
practicable, and in any event within two and
a half months of the later of 31 December
and 31 March immediately following the
notice date.

In the event of a UK Director’s role becoming
redundant, statutory compensation would
apply and the relevant pension plan rules
may result in the early payment of an
unreduced pension.

National Grid Annual Report and Accounts 2018/19Corporate Governance

Directors’ Remuneration Report continued
Directors’ remuneration policy – for approval by shareholders in 2019 continued

On termination of employment, no APP
award would generally be payable. However,
the Committee has the discretion to deem
an individual to be a ‘good leaver’, in which
case a pro-rata discretionary payment could
be paid, based on financial performance
(as measured at the end of the financial year)
and the achievement of individual objectives
during the financial year up to termination.
In the UK the discretionary payment would
generally be paid at the normal time. In the US
the payment would be made earlier if required
for tax compliance purposes, in which case
the Committee would apply discretion to
determine an appropriate level of financial
performance. Examples of circumstances,
whilst not exhaustive, which could trigger
‘good leaver’ treatment include redundancy,
retirement, illness, injury, disability and death.
The Committee will apply discretion to
determine if the pro-rata discretionary
payment should be made sooner than
it would normally be paid, for example,
in the case of death.

On termination of employment, outstanding
awards under the share plans will be treated
in accordance with the relevant plan rules
approved by shareholders. Unvested share
awards would normally lapse. ‘Good leaver’
provisions apply at the Committee’s discretion
and in specified circumstances. Examples of
circumstances, whilst not exhaustive, which
could trigger ‘good leaver’, include:
redundancy, retirement, illness, injury,

disability and death, where awards will be
released to the departing Executive Director
or, in the case of death, to their estate.
Long-term share plan awards held by ‘good
leavers’ will normally vest subject to
performance measured at the normal vesting
date and will be reduced pro-rata for each
completed month starting on the date of
grant. Such awards would vest at the same
time as for other participants, apart from
circumstances in which the award recipient
has died, in which case the awards vest as
soon as practicable (based on a forecast
of performance).

At the Committee’s discretion, the Company
may also agree other payments such as an
agreed amount for legal fees associated with
the departure of the Executive Director and
outplacement support.

No compensation would be paid for loss of
office of Directors on a change of control of
the Company. Further details are provided
at page 221.

No compensation is payable to the Chairman or
Non-executive Directors if they are required to
stand down or are not re-elected at the AGM.

Copies of Directors’ service contracts
and letters of appointment are available for
inspection at the Company’s registered office.

External appointments
The Executive Directors may, with the
approval of the Board, accept one external
appointment as a Non-executive Director of
another company and retain any fees received
for the appointment. Experience as a board
member of another company is considered
to be valuable personal development, which
in turn is of benefit to the Company.

Total remuneration opportunity
The total remuneration for each of the
Executive Directors that could result from
the remuneration policy in 2019 under three
different performance levels (below threshold,
when only fixed pay is receivable, on target
and maximum) is shown below. The maximum
receivable assuming 50% share price growth
(or a reduction) in LTPP awards over a
three-year performance period, and the basis
for this calculation, is set out in note 6 below.

Corporate and share capital events
The Group’s employee share plans (including
the LTPP) contain standard provisions that
allow awards (and where relevant their
exercise prices) to be adjusted, or in some
cases vest or be exchanged, on the
occurrence of a corporate or share capital
event such as a capitalisation or rights issue,
sub-division, consolidation or reduction of
share capital, demerger, special dividend or
distribution, listing or change of control,
normally at the discretion of the Committee.

Total remuneration opportunity, by Executive Director

Andy Agg
£’000

John Pettigrew
£’000

Dean Seavers
£’000

Nicola Shaw
£’000

£3,124

57%

24%

19%

£1,859

48%

20%

32%

£595

100%

Fixed
pay

£5,919

61%

22%

17%

£3,474

52%

18%
30%

£1,029

100%

Fixed
pay

£4,487

57%

24%

19%

£2,671

48%

20%

32%

£855

100%

Fixed
pay

Key:

Fixed
APP
LTPP

£2,948

57%

24%

19%

£1,755

48%

20%

32%

£562

100%

Fixed
pay

On Target Maximum

Notes:
1. Fixed pay consists of salary, pension and benefits in kind as provided under the remuneration policy.
2. Salary is that to be paid in 2019/20, taking account of the increases that will be effective from 1 June 2019 as shown on page 89.
3. Benefits in kind and pension are as shown in the Single Total Figure of Remuneration table for 2018/19 on page 79.
4. APP calculations are based on 125% of salary for the period 1 April 2019 to 31 March 2020. APP payout is 50% for on-target performance and the maximum of 100% is for

achieving stretch.

5. LTPP calculations are based on awards with a face value of 350% of 1 June 2019 salary for John Pettigrew and 300% of 1 June 2019 salary for all other Executive Directors. Share
price value used 837.34p / ADS price used $54.73 / exchange rate used $1.3054:£1. LTPP payout is 50% for on-target performance and the maximum of 100% is for achieving
stretch. Excludes changes in share price and dividend equivalents.

6. For LTPP calculations, assuming either a 50% share/ADS price growth (or reduction) over the three-year performance period, the increase (or decrease) in LTPP value and maximum

total compensation for each of the Executive Directors would be (all amounts expressed as £’000):
Andy Agg: LTI value would increase (or decrease) from £1,785 to £2,677 (or £892) and maximum total compensation would rise (or reduce) from £3,124 to £4,016 (or £2,231)
respectively
John Pettigrew: LTI value would increase (or decrease) from £3,603 to £5,405 (or £1,802) and maximum total compensation would rise (or reduce) from £5,919 to £7,721
(or £4,118) respectively
Dean Seavers: LTI value would increase (or decrease) from £2,564 to £3,846 (or £1,282) and maximum total compensation would rise (or reduce) from £4,487 to £5,769
(or £3,205) respectively
Nicola Shaw: LTI value would increase (or decrease) from £1,685 to £2,527 (or £842) and maximum total compensation would rise (or reduce) from £2,948 to £3,790
(or £2,106) respectively.

National Grid Annual Report and Accounts 2018/19Corporate Governance | Directors’ Remuneration Report

Statement of implementation of remuneration policy in 2018/19

Key

AUDITED

Audited Information
Content contained within a blue box highlighted with an ‘Audited’ tab indicates that all the information in the panel is audited.

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 the 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 2018/19 were Nora Mead Brownell (until April 2019), Jonathan Dawson (chair), Pierre Dufour (until July 2018 AGM), Earl Shipp (from
January 2019) and Mark Williamson.

The Committee’s activities during the year

Meeting

April

May (three meetings)

September

October

November

December

January

March

AUDITED

Main areas of discussion

2017/18 individual objectives scoring for Executive Committee
Approval of 2018/19 objectives for Executive Committee
Discussion on 2017/18 expected incentive plan outturns
Discussion on 2019 remuneration policy

2017/18 APP financial outturns and confirmation of awards for Executive Committee
Discussion on expected 2015 LTPP outturns
Annual salary review and LTPP proposals for Executive Committee
Review and approval of Chairman’s fees
Items related to outgoing CFO and interim CFO appointment

Discussion on 2019 remuneration policy including the impact of the new UK Corporate Governance Code

Discussion on 2019 remuneration policy

Discussion on expected outturns for outstanding LTPP awards
Review of gender and ethnicity pay gaps

Items related to CFO appointment and new Executive Committee appointment

Approval of refinements to remuneration policy following investor consultation
Items related to new Executive Committee appointment

Market data review for Executive Committee remuneration and initial proposals for base salary increases
First review of 2019/20 individual objectives of Executive Committee

Single Total Figure of Remuneration – Executive Directors
The following table shows a single total figure in respect of qualifying service for 2018/19, together with comparative figures for 2017/18:

Andy Agg

Andrew Bonfield

John Pettigrew

Dean Seavers

Nicola Shaw

Total

Salary
£’000

Benefits in kind
£’000

APP
£’000

LTPP
£’000

Pension
£’000

Total
£’000

18/19

17/18

18/19

17/18

18/19

17/18

18/19

17/18

18/19

17/18

18/19

17/18

149

255

944

825

515

–

768

887

771

484

–

158

994

457

552

–

787

919

740

383

–

2,183

2,247

1,491

1,551

1,398

959

–

2,688

2,910

166

192

2,161

2,829

4,776

5,072

283

138

155

683

–

230

266

142

145

783

360

355

–

4,037

4,562

3,648

3,001

3,075

2,196

1,026

10,474

11,786

Notes:
Salary: Base salaries were last increased on 1 June 2018 other than for Andrew Bonfield, who was not eligible to receive a salary increase due to leaving the business. Andy Agg’s
salary reflects the time in his role as CFO, 1 January to 31 March 2019. Andrew Bonfield’s salary reflects the period before he left the business, 1 April to 31 July 2018.
Benefits in kind: Benefits in kind (BIK) 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. There were no Sharesave options granted to any of the Executive Directors during 2018/19. Andy Agg’s BIK reflects the time in his role
as CFO, 1 January to 31 March 2019. Andrew Bonfield’s BIK reflects the period before he left the business, 1 April to 31 July 2018.
APP: Andy Agg’s APP reflects his contribution for the three months of his appointment as CFO, 1 January to 31 March 2019. Andrew Bonfield was not eligible to receive an award due
to leaving the business.
LTPP: The 2016 LTPP is due to vest in July 2019. The average share price over the three months from 1 January 2019 to 31 March 2019 of 837.34p ($54.73 per ADS) has been applied.
The 2017/18 LTPP figures have been restated because last year they were estimated using the average share price (January-March 2018) and they now include the actual share price on
vesting at 1 July 2018 and all dividend equivalent shares. Due to a higher share price at vesting of 841.07p versus the estimate of 787.8p (and the additional dividend equivalent shares
added for the dividend with a record date of 1 June 2018 with a dividend rate of 30.44p per share), the actual value at vesting was £189,419 and £129,414 higher than the estimate (last
year) for Andrew Bonfield and John Pettigrew, respectively. Despite a lower ADS price at vesting of $54.936 versus the estimate of $55.16, the actual value at vesting was £36,581 higher
than the estimate (last year) for Dean Seavers. This is because the change in price was more than offset by the additional dividend equivalent ADSs for the dividend with a record date of
1 June 2018 with a dividend rate of $2.0606 per ADS. For Andy Agg the LTPP value shown in the table is prorated 3/36ths in relation to his time as CFO since 1 January 2019.
Impact of share price change: The impact of share price change for the 2016 LTPP, comparing the share price at grant (of 1,021.00p for Andy Agg and John Pettigrew and 1,105.07p
for Nicola Shaw, who received her award on 12 July 2016, and $69.1825 for Dean Seavers) versus the average share price for the period 1 January 2019 to 31 March 2019 (837.34p and
$54.73), was a reduction of 183.66p (18%) per share, 267.73p per share (24%) and $14.4525 per ADS (21%) respectively. This results in an estimated reduction in value (including
dividend equivalents) of £4,267 for Andy Agg (prorated), £492,852 for John Pettigrew, $534,390 for Dean Seavers and £306,658 for Nicola Shaw.
Pension: Andy Agg’s pension reflects the time in his role as CFO, 1 January to 31 March 2019. Andrew Bonfield’s pension reflects the period before he left the business, 1 April to
31 July 2018.

National Grid Annual Report and Accounts 2018/19Corporate Governance

Directors’ Remuneration Report continued
Statement of implementation of remuneration policy in 2018/19 continued

AUDITED

Annual Performance Plan (APP)
Performance against targets for APP 2018/19
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 predetermined 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 predetermined 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 2018/19 are summarised in the table below:

Performance measure

CEO and CFO

Adjusted EPS (p/share)

Group RoE (%)

Executive Director, UK

UK Value Added (£m)

UK RoE (%)
(Percentage points above average allowed regulatory return)

Underlying UK Operating Profit (£m)

Executive Director, US

US Value Added (£m)

US RoE (%)

Underlying US Operating Profit (£m)

All Executive Directors

Individual objectives (%)

Proportion of
max opportunity

Threshold

Target

Stretch

Actual

Proportion of
max achieved

35%

52.7

11.24

56.2

11.64

59.7

12.04

59.0

11.91

90.0%

83.7%

23.3%

1,638

1,698

1,758

100.0%

23.3%

30%

1.75

1,362

2.00

1,412

2.25

1,462

2.71

1,433

100.0%

71.0%

1,330

1,380

1,430

1,563

100.0%

8.9

9.1

9.3

8.8

1,683

1,743

1,803

1,644

0.0%

Detail expanded in tables below

70%-81%

Notes:
Adjusted EPS: Technical adjustments have been made increasing the target by 2.1p to reflect the net effect of currency adjustments, the reclassification of the Group’s 39% interest in
Cadent as held for sale and discontinued operations, the impact of timing and major storm costs, certain actuarial assumptions on pensions, and to ensure the consistency of
accounting treatment.
Group RoE: Technical adjustments have been made to reflect the net effect of the reclassification of the Group’s 39% interest in Cadent as held for sale and discontinued operations,
the true-up of opening equity, and to ensure consistency of accounting treatment.
UK financial measures: Technical adjustments have been made to ensure consistency of accounting treatment (and in the case of operating profit, to also reflect the net effect of
certain actuarial assumptions on pensions).
US financial measures: Technical adjustments have been made to US operating profit to reflect the net effect of currency adjustments and to ensure consistency of accounting
treatment. A technical adjustment has been made to US RoE to true-up the equity weighting element of the calculation.

National Grid Annual Report and Accounts 2018/19Corporate Governance | Directors’ Remuneration Report

Individual Objectives
For 2018/19, 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 on the following page. As with the financial measures, the
achievement of ‘stretch’ performance and ‘target’ performance results in 100% and 50% respectively of the maximum payout.

Key — achievement against objective

not achieved

below target outcome

target outcome

between target and stretch outcome

stretch outcome

Andy Agg

Individual objective & performance commentary

Weighting

Outturn

Drive the efficiency of the business
• Major cost efficiency programmes across the Group have been substantially delivered
• Enhanced controls in our UK business

Engage with investors
• Established himself as CFO with investors and undertook an extensive investor engagement campaign

Delivering value for investors
• Successfully agreed sale for our 25% minority stake in Cadent, delivering strong cash returns
• Provided excellent support to RIIO-T2 and US rate case teams

Develop more diversity in talent
• Significantly increased both the gender and ethnic diversity among the leadership population in the Finance function

25%

Summary

Andy Agg has made a strong start in the role, both as Interim CFO and, following his appointment, as CFO. In particular, he
delivered investor value through the sale of our remaining stake in Cadent and through efficiency programmes in both the US
and UK. Andy also enhanced controls in our UK business, supported the acquisition of Geronimo Energy in the US, provided
excellent support to the RIIO-T2 and US rate case teams, and increased the diversity of our employees in the Finance function.

100%

81%

John Pettigrew

Individual objective & performance commentary

Weighting

Outturn

Delivering value for investors
• Successfully completed sale for 25% minority stake in Cadent, delivering strong cash returns
• Implemented operating model changes in both the US and UK, leading to early cost efficiencies, and on track to deliver

future reductions in operational expenditures

• Conducted comprehensive strategy and finance review to continue to support investor proposition

Engaging with external stakeholders
• Supported US business to successfully complete new rate cases, and established and/or maintained strong engagement

with multiple US stakeholders, albeit with some difficulties in relation to the labour dispute in Massachusetts

• As in 2017/18, continued to support UK business with positive management of key stakeholders and debate on RIIO-T2,

though there remains more work to be done to achieve an acceptable outcome on Hinkley-Seabank

Driving our corporate social responsibility agenda
• Initiated review to drive enhanced focus on social purpose. Grid 4 Good simulations and pilots established with growing

awareness across the business

• Established strong understanding across workforce of what it means to be a purpose-led organisation

Driving our people agenda
• Increased gender and ethnic diversity among leader population
• Created a Senior Leadership Development Programme to strengthen succession and leadership capabilities
• More work to be done to strengthen the pipeline of credible successors throughout organisation

Summary

40%

20%

John Pettigrew has had a strong year, delivering investor value and continuing to engage successfully with key external
stakeholders, with some difficulties due to the labour dispute in Massachusetts. John made significant progress in driving
our corporate social responsibility and people agendas.

100%

78%

National Grid Annual Report and Accounts 2018/19Corporate Governance

Directors’ Remuneration Report continued
Statement of implementation of remuneration policy in 2018/19 continued

Dean Seavers

Individual objective & performance commentary

Weighting

Outturn

Deliver a step change in customer delivery
• Successfully delivered customer strategy. Significant enhancements have been made in the distributed generator connection

process in particular. However, changes in First Contact Resolution, which were key components of this objective, were below
target

Define and implement a revised operating model
• Completed operating model work ahead of schedule
• Identified cost efficiencies to enable growth in a sustainable way with no detrimental impact on reliability and safety

Deliver successful outcomes in rate case filings for Massachusetts and Rhode Island
• Delivered both Massachusetts and Rhode Island rate cases successfully with potential to earn 9.5% RoE
• Reviewed impact of tax reform to mitigate negative impact for National Grid’s US business

Develop more diversity in talent
• Significantly increased both the gender and ethnicity diversity of the US Leadership Team

25%

Summary

Dean Seavers delivered considerable enhancements in customer initiatives, a revised operating model, and successful rate
cases in MA and RI. He also significantly increased the gender and ethnicity diversity of the US Leadership Team. The US had
some difficulties due to the labour dispute, but under Dean’s leadership the US maintained strong reliability and safety
performance.

100%

70%

Nicola Shaw

Individual objective & performance commentary

Weighting

Outturn

Deliver a step change in customer delivery
• Improved customer satisfaction scores; maintained Net Promoter Score
• Successfully delivered customer strategy

Deliver a step change in operational performance
• Delivered change in operational performance (including £24 million cost reduction) in line with plan while managing all key risks

and the legal separation of our Electricity System Operator business

Deliver successful regulatory outcomes
• Strong engagement with key stakeholders related to Hinkley-Seabank though there remains more to do
• Progressed engagement with Ofgem on RIIO-T2 regulatory arrangements, including a thorough response to Ofgem’s

consultation document

Develop our talent and people
• Strong leadership through period of significant change
• Developed and delivered people initiatives, though employee enablement and engagement scores, which were key

components of this objective, declined over the year

Summary

25%

Nicola Shaw has delivered enhancements in the areas of customer delivery, operational performance, and engagement with
Ofgem and other key stakeholders. In particular, Nicola has successfully undertaken and managed a significant change
programme in the UK this year and the legal separation of our Electricity System Operator business. During this period, project
delivery and safety, reliability and environmental performance have been strong.

100%

75%

National Grid Annual Report and Accounts 2018/19Corporate Governance | Directors’ Remuneration Report

2018/19 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.

Executive Directors at 31 March 2019

Max

Actual

Max

Actual

Max

Actual

Max

Actual

125%
37.50%

43.75%

106%

30.38%

36.62%

125%
37.50%

43.75%

105%

29.25%

36.62%

43.75%

39.38%

43.75%

39.38%

125%
37.50%

29.17%

55%

107%

28.13%

20.70%

29.17%

26.25%

29.17%

29.16%

Key:

Individual
UK/US Operating Proﬁt
Group/UK/US RoE
Adjusted EPS
UK/US Value Added

APP
amount

£185,938

£158,285

£1,180,266

£994,161

Andy Agg

John Pettigrew

£1,031,188 £456,940
Dean Seavers

£643,781

£551,798

Nicola Shaw

Former CFO

Max

Actual

125%
37.50%

43.75%

£321,369
Andrew Bonﬁeld

£0

Note:
1. US RoE/US Value Added/US Operating Profit pertain to Dean Seavers Executive Director, US, and UK RoE/UK Value Added/UK Operating Profit pertain to Nicola Shaw,

Executive Director, UK. US Operating Profit and US RoE payouts are zero for 2018/19.

2. The APP award shown for Andy Agg relates to his appointment as CFO from 1 January to 31 March 2019.

AUDITED

2018/19 LTPP performance
The LTPP value included in the 2018/19 single total figure relates to anticipated vesting of the conditional LTPP awards granted in 2016.

2016 LTPP
The 2016 award is determined by performance over the three years ended 31 March 2019 of RoE (50% weighting) and Group Value
Growth (50% weighting), which will vest on 1 July 2019. 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 CEO and the CFO in position at the award date, the entire RoE component is based on Group RoE.

The performance achieved against the 2016 LTPP award performance targets was:

Performance measure

Group RoE (50% weighting for the CEO and CFO,
25% weighting for the Executive Director, UK,
and the Executive Director, US)

UK RoE (25% weighting for the
Executive Director, UK)

Threshold – 20%
vesting

Maximum – 100%
vesting

Actual/expected
vesting

11.0%

12.5% or more

11.9%

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

RoE is 2.4 percentage
points above the average
allowed regulatory return

US RoE (25% weighting for the
Executive Director, US)

90% of the average
allowed regulatory return

105% of the average
allowed regulatory return

92% of the average
allowed regulatory return

Group Value Growth (50% weighting)

10.0%

12.0% or more

11.97%

Actual/expected
proportion of
maximum achieved

69.8%

65.9%

28.1%

98.7%

The Group Value Growth vesting includes an amount, consistent with the vested awards disclosed in the 2016/17 and 2017/18 reports, 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
three-year 2016–2019 performance period measured.

National Grid Annual Report and Accounts 2018/19Corporate Governance

Directors’ Remuneration Report continued
Statement of implementation of remuneration policy in 2018/19 continued

AUDITED

The amounts expected to vest under the 2016 LTPP for the performance period ended on 31 March 2019 and included in the
2018/19 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 2019 to 31 March 2019 of 837.34p ($54.73 per ADS).

Andy Agg

John Pettigrew

Dean Seavers (ADSs)

Nicola Shaw

Original number
of share awards
in 2016 LTPP

Overall vesting
percentage

Number of
awards vesting

Number
of dividend
equivalent shares

Total value of
awards vesting
and dividend
equivalent shares
(£’000)

2,448

282,810

44,447

122,164

84.2%

73.8%

83.2%

2,061

238,126

32,802

101,640

261

30,224

4,179

12,900

2,247

1,551

959

Note:
The total value of awards vesting and dividend equivalent shares are subject to a two-year holding period.
Andy Agg: The 2016 LTPP vest has been prorated by 3/36ths in relation to his time as CFO since 1 January 2019.

AUDITED

Total pension benefits
Andy Agg, 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.

John Pettigrew has, in addition, accrued defined benefit (DB) entitlements. He opted out of the DB scheme on 31 March 2016 with
a deferred pension and lump sum payable at his normal retirement date. At 31 March 2019, John Pettigrew’s accrued DB pension
was £159,759 per annum and his accrued lump sum was £479,276. No additional DB entitlements have been earned over the financial year,
other than an increase for price inflation due under the pension scheme rules and legislation. Under the terms of the pension scheme, if he
satisfies the ill health requirements, or he is made redundant, an unreduced and immediate pension may be payable earlier than his normal
retirement date. A lump sum death in service benefit is also provided in respect of these DB entitlements.

AUDITED

Single total figure of remuneration – Non-executive Directors
The following table shows a single total figure in respect of qualifying service for 2018/19, together with comparative figures for 2017/18:

Nora Mead Brownell

Jonathan Dawson

Pierre Dufour

Therese Esperdy

Sir Peter Gershon

Paul Golby

Amanda Mesler

Earl Shipp

Mark Williamson

Total

Fees £’000

Other emoluments £’000

Total £’000

2018/19

2017/18

2018/19

2017/18

2018/19

2017/18

100

108

138

523

101

130

1,235

106

136

511

100

–

128

1,178

–

108

110

153

606

106

136

125

120

1,360

106

112

151

585

104

–

134

1,298

Notes:
Receiving the US-based Board fee: Nora Mead Brownell, Pierre Dufour, Therese Esperdy and Earl Shipp.
Receiving the UK-based Board fee: Jonathan Dawson, Paul Golby, Amanda Mesler and Mark Williamson.
Nora Mead Brownell: Nora Mead Brownell stepped down in April 2019.
Pierre Dufour: Pierre Dufour stepped down at the 2018 AGM.
Therese Esperdy: Fees for 2018/19 include £25,000 in fees for serving on the National Grid USA Board.
Sir Peter Gershon: Other emoluments comprise private medical insurance and the use of a car and driver when required. Effective 1 April 2018 the Chairman waived his entitlement to
receive a cash allowance in lieu of a car. The Chairman continues to have the use of a car and driver, when required.
Amanda Mesler: Amanda Mesler joined the Board on 17 May 2018.
Earl Shipp: Earl Shipp joined the Board on 1 January 2019.
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 and these costs are included in the table above.

The total emoluments paid to Executive and Non-executive Directors in the year was £11.8 million (2017/18: £12.8 million).

National Grid Annual Report and Accounts 2018/19Corporate Governance | Directors’ Remuneration Report

AUDITED

Other Remuneration Disclosures
2018 LTPP (conditional award) granted during the financial year
The face value of the awards is calculated using the volume weighted average share price at the date of grant (28 June 2018) (£8.374083 per
share and $55.2239 per ADS) and is used to determine the value of the awards granted.

Basis of award

Face value ‘000

Proportion vesting
at threshold
performance

Andy Agg

John Pettigrew

Dean Seavers (ADSs)

Nicola Shaw

200% of salary

350% of salary

300% of salary

£920

£3,336

$3,246

£1,560

20%

Number of shares

109,886

398,398

Performance
period end date

31 March 2021

58,786 (ADSs)

31 March 2021

186,263

31 March 2021

Notes:
The 2018 LTPP grant will vest on 1 July 2021. The total value of awards vesting and dividend equivalent shares are subject to a two-year holding period.
Andy Agg: Andy Agg’s award is based upon his position as interim CFO at 28 June 2018 and not as an Executive Director.

AUDITED

Performance conditions for LTPP awards granted during the financial year

Performance measure

Group RoE

Group Value Growth

AUDITED

Conditional share awards granted – 2018

Weighting for all
Executive Directors

50%

Threshold
20% vesting

11.0%

10.0%

Maximum
100% vesting

12.5% or more

12.0% or more

Payments for loss of office
There were no payments made for loss of office during 2018/19.

Andrew Bonfield stepped down from the Board on 30 July at the AGM and was paid his salary and contractual benefits until 31 July 2018.
Since his departure was due to resignation, which does not qualify as ‘good leaver’ status, he was not eligible for an APP award for 2018/19
and his 2016 LTPP and 2017 LTPP awards were forfeited. His 2015 LTPP award vested on 1 July 2018, and since Andrew was employed
on the vesting date of 1 July 2018, he was eligible to receive the vested shares and these are disclosed in the single total figure of
remuneration table.

Payments to past Directors
Steve Holliday stepped down from the Board and retired from the Company on 22 July 2016. He held a 2015 LTPP award prorated for
time served.

Past Director

Steve Holliday

2015 LTPP

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)

141,813

86.00%

121,959

19,767

1,192

Note:
The overall vesting percentage is in line with other Executive Directors and specifically relates to the CEO role at the award date. The total value of awards vesting has been calculated
using the actual share price at 1 July 2018 and includes dividend equivalent shares.

Post-employment share ownership requirements
Andrew Bonfield stepped down from the Board at the 2018 July AGM and left the Company on 31 July 2018. He is required to maintain a
holding in National Grid shares to the value of at least 200% of his salary (at the time of leaving) for a period of three years ending on 31 July 2021.
At 31 March 2019, Andrew Bonfield had continued to meet this requirement.

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 2019,
had headroom of 3.91% and 7.83% respectively.

National Grid Annual Report and Accounts 2018/19Corporate Governance

Directors’ Remuneration Report continued
Statement of implementation of remuneration policy in 2018/19 continued

AUDITED

Statement of Directors’ shareholdings and share interests
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. The shareholding is as at 31 March 2019 and the salary used to calculate the value of the shareholding is the
gross annual salary as at 31 March 2019.

As Andy Agg was only appointed to the Board in January 2019, he is not expected to meet the requirement until 2024. Nicola Shaw is also
relatively new in post and is expected to meet the requirement in 2023. Dean Seavers is expected to meet the requirement in 2021. John
Pettigrew is expected to meet his requirement in 2020. This is one year earlier than reported last year because the calculation carried out
last year used the share price of 802.2p which projected the date of meeting the required shareholding as 2021. The calculation this year has
used a share price of 850.8p which means the value of his shareholding has increased resulting in the projection to meet the shareholding
requirement moving forward to 2020. These projections assume on-target performance/vesting outturns. Executive Directors will not be
allowed to sell shares until this requirement is met. Non-executive Directors do not have a shareholding requirement.

The normal vesting dates for the conditional share awards subject to performance conditions are 1 July 2019, 1 July 2020 and 1 July 2021
for the 2016 LTPP, 2017 LTPP and 2018 LTPP respectively. In April 2019, a further 18 shares were purchased on behalf of each of Andy Agg,
John Pettigrew and Nicola Shaw and again in May 2019. 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 15 May 2019.

Directors

Executive Directors

Andy Agg

Andrew Bonfield
(at 31 July 2018)

John Pettigrew

Dean Seavers (ADSs)

Nicola Shaw

Non-executive Directors

Nora Mead Brownell
(ADSs)

Jonathan Dawson

Therese Esperdy (ADSs)

Sir Peter Gershon

Paul Golby

Amanda Mesler

Earl Shipp (ADSs)

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
held under the
Sharesave Plan

Conditional share
awards subject to
performance
conditions (LTPP
2016, 2017 & 2018)

400%

500%

400%

–

96,056

633,091

482,758

53,341

21,153

4,583

38,787

1,587

95,238

2,291

47,460

136%

693%

428%

275%

35%

–

4,045

3,230

4,286

–

4,070

–

188,348

1,004,413

152,527

459,536

–

Notes:
Andy Agg: On 31 March 2019 Andy Agg held 4,045 options under the Sharesave Plan. 4,045 options were held at a value of 749p and they can be exercised at 749p per share between
April 2020 and September 2020. The number of conditional share awards subject to performance conditions is as follows: 2016 LTPP: 29,382; 2017 LTPP: 49,080; 2018 LTPP: 109,886.
Andrew Bonfield: The number of shares owned (633,091) and options held (3,230) are stated as at 31 July 2018. Conditional awards totalling 458,493 in respect of 2016 and 2017
LTPP have lapsed due to Andrew’s resignation.
John Pettigrew: On 31 March 2019 John Pettigrew held 4,286 options under the Sharesave Plan. 1,252 options were held at a value of 599p per share and they can be exercised at
599p per share between April 2019 and September 2019. 3,034 options were held at a value of 749p per share and they can be exercised at 749p per share between April 2020 and
September 2020. The number of conditional share awards subject to performance conditions is as follows: 2016 LTPP: 282,810; 2017 LTPP: 323,205; 2018 LTPP: 398,398.
Dean Seavers: The number of conditional share awards (ADSs) subject to performance conditions is as follows: 2016 LTPP: 44,447; 2017 LTPP: 49,294; 2018 LTPP: 58,786.
Nicola Shaw: On 31 March 2019 Nicola Shaw held 4,070 options under the Sharesave Plan. 4,070 options were held at a value of 737p per share and they can be exercised at 737p 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;
2018 LTPP: 186,263.
Dean Seavers, Nora Mead Brownell, Therese Esperdy and Earl Shipp: Holdings and, for Dean Seavers, awards are shown as ADSs and each ADS represents five ordinary
shares. Nora Mead Brownell stepped down from the Board on 8 April 2019.

National Grid Annual Report and Accounts 2018/19Corporate Governance | Directors’ Remuneration Report

External appointments and retention of fees
The table below details the Executive Directors (at 31 March 2019) who served as Non-executive Directors in other companies during the year
ended 31 March 2019:

John Pettigrew

Dean Seavers

Nicola Shaw

Company

Retained fees

Rentokil Initial plc

Albermarle Corporation (from 8 May 2018)

International Consolidated Airlines Group S.A.

£60,000

£68,818
($89,835)

£105,861
(€120,000)

Relative importance of spend on pay
The chart below 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.

4,321

4,074

Key:

2018/19 £m
2017/18 £m

12%

1,648

1,852

1,551

1,610

-16%

584

488

-1%

1,001

993

Payroll costs

Dividends

Tax

Net interest

Capital expenditure

Notes:
1. The Dividends figure for 2017/18 has been restated at £1,551 million (from £1,522 million) to reflect the actual value of dividends paid.
2. 2017/18 comparators for tax and net interest have been restated to reflect the classification of our retained interest in Quadgas HoldCo Limited as a discontinued operation in the

current financial period.

3. Percentage increase/decrease of the costs between years is shown.
4. The reduction in the underlying tax charge reflects the lowering of the federal tax rate in the US as a result of US Tax reform.

Performance graph
This chart shows National Grid plc’s ten-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
50
0

155.79

167.17

100.00

123.65

131.11

173.94

155.42

197.94

190.98

223.74

211.45

248.64

227.33

289.19

309.95

262.78

211.21

300.14

279.48

263.10

251.39

Key:

National Grid plc
FTSE 100 Index

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 31/03/19

Note:
Data source: The data source for the above graph has been changed for 2018/19 from FactSet to DataStream. This has not resulted in any changes to prior year figures.

Chief Executive’s pay in the last ten 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.

Single total figure of
remuneration (£’000)

Single total figure of remuneration
including only 2014 LTPP (£’000)

APP (proportion of
maximum awarded)

PSP/LTPP (proportion
of maximum vesting)

2009/10

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16

2016/17

2017/18

2018/19

Steve Holliday

John Pettigrew

3,931

3,738

3,539

3,170

4,801

4,845

5,151

4,623

3,648

4,562

3,931

95.33%

81.33%

68.67%

55.65%

77.94%

94.80%

94.60%

73.86%

82.90%

84.20%

100.00%

65.15%

49.50%

25.15%

76.20%

55.81%

63.45%

90.41%

85.20%

84.20%

Notes:
Single total figure 2018/19: The figure for 2018/19 for John Pettigrew is explained in the single total figure table for Executive Directors.
Single total figure 2017/18: The figure for 2017/18 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.
2014 LTPP: 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 three years to four years between the 2013 LTPP
and 2014 LTPP.
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.

National Grid Annual Report and Accounts 2018/19
Corporate Governance

Directors’ Remuneration Report continued
Statement of implementation of remuneration policy in 2018/19 continued

Percentage change in CEO’s remuneration
The table below shows how the percentage change in the CEO’s salary, benefits and APP between 2017/18 and 2018/19 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.

2018/19
£’000

Salary

2017/18
£’000

Taxable benefits

Change

2018/19
£’000

2017/18
£’000

Change

2018/19
£’000

APP

2017/18
£’000

Change

John Pettigrew

944

887

6.4%

10.6%

994

919

8.2%

Non-union employees
(average increase)

1.6%

0.9%

1.2%

Notes:
Non-union employees: The population is not a constant comparator group due to external hires and promotions which skew the salary data calculation. Calculating the salary change
comparing employees that were employed throughout the period results in a 4.8% change. Pay data for US employees have been converted at $1.3054:£1.

CEO pay ratio
Ahead of the mandatory reporting requirements we have voluntarily disclosed our UK CEO pay ratios comparing the CEO single total figure of
remuneration to the equivalent pay for the lower quartile, median and upper quartile UK employees (calculated on a full-time equivalent basis).
The ratios have been calculated in accordance with the Companies (Miscellaneous Reporting) Regulations 2018, which were published during
2018 and will first formally apply to National Grid’s financial year beginning 1 April 2019.

2019 – voluntary

Group

Method

Option A

25th percentile
pay ratio

Median
pay ratio

75th percentile
pay ratio

96:1

76:1

48:1

58:1

The comparison with UK employees is specified by the regulations. US employees represent approximately 74% of our total employees.
Our median pay ratio on a Group-wide basis is 48:1, calculated on the same basis as the UK pay ratios and an exchange rate of $1.3504:£1.
Excluding estimated 2016 LTPP vesting our median pay ratios are 38:1 and 24:1 for the UK and Group respectively. The lower Group median pay
ratio versus the UK reflects the higher labour cost in the US versus the UK, which is further influenced by the US locations in which we operate
which have even higher labour costs than the US on average. The ratio of the pay of our Executive Director, UK, to the median UK employee is
36:1 and excluding the estimated 2016 LTPP vesting is 20:1.

The regulations require the total pay and benefits and the salary component of total pay and benefits to be set out as follows:

Pay data

CEO remuneration

UK employee 25th percentile

UK employee 50th percentile

UK employee 75th percentile

Base salary

Total pay &
benefits

£944,213

£4,562,987

£33,250

£43,795

£59,577

£47,339

£60,376

£78,091

Flexibility is provided to adopt one of three methods for calculating the ratios. We have chosen Option A which is a calculation based on the pay
of all UK employees on a full-time equivalent basis as this option is considered to be more statistically robust. The ratios are based on total pay
and benefits and short-term and long-term incentives applicable for the financial year 1 April 2018 – 31 March 2019. The reference employees at
the 25th, 50th and 75th percentile have been determined by reference to the last day of the financial year, 31 March 2019, though estimates have
been used for the 2018/19 APP payouts and performance outturns of the 2016 Long Term Performance Plan and dividend equivalents.

This year the 2016 LTPP vesting represents some 53% of the CEO’s single total figure. However, only 2% of UK-based employees will receive
an estimated 2016 LTPP vest in our pay ratio calculations and all of these employees are in the upper quartile of our ranked list and so are not
selected as a 75th percentile (or below) reference employee. Removing the impact of LTPP vesting in our calculations results in lower ratios
for the reference employees of 49:1, 38:1 and 30:1 at the 25th, 50th and 75th percentiles respectively. As employees advance through
the Company there will be the opportunity to receive higher rewards commensurate with increased accountability and market practice.
All employees are eligible for a performance-based annual payment.

Our principles for pay setting and progression in our wider workforce are the same as for our executives – mid-market approach to total reward,
being sufficiently competitive to attract and retain high-calibre individuals without over-paying and providing the opportunity for individual
development and career progression. The pay ratios reflect how remuneration arrangements differ as accountability increases for more senior
roles within the organisation and in particular the ratios reflect the weighting towards long-term value creation and alignment with shareholder
interests for the CEO.

We are satisfied that the median pay ratio voluntarily reported this year is consistent with our wider pay, reward and progression policies for
employees. The median reference employee falls within our collectively bargained employee population and has the opportunity for annual pay
increases, annual performance payments and career progression and development opportunities.

National Grid Annual Report and Accounts 2018/19Corporate Governance | Directors’ Remuneration Report

Statement of implementation of remuneration policy in 2019/20
It is intended that the remuneration policy for approval at the 2019 AGM will be implemented during 2019/20 as described below.

Salary
Salary increases will normally be in line with the increase awarded to other employees in the UK and US, subject to performance. Higher salary
increases may also be awarded for a change in responsibility. Additionally, 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).

Andy Agg

John Pettigrew

Dean Seavers

Nicola Shaw

From 1 June 2019

From 1 June 2018

Increase

£595,000

£1,029,461

$1,115,690

£561,524

N/A

£953,205

$1,082,144

£519,930

N/A

8.0%

3.1%

8.0%

APP measures for 2019/20
The APP targets are considered commercially sensitive and consequently will be disclosed in the 2019/20 Directors’ Remuneration Report.

John Pettigrew and Andy Agg

Weighting

Dean Seavers and Nicola Shaw

Weighting

Underlying EPS

Group RoE

Individual objectives

35%

30%

UK or US Value Added

UK or US RoE

UK or US Operating Profit

Individual objectives

23.3%

30.0%

Performance measures for LTPP to be awarded in 2019

Group RoE

Group Value Growth

Weighting for all
Executive Directors

Threshold
20% vesting

33.33%

66.67%

11.0%

10.0%

Maximum
100% vesting

12.5% or more

12.0% or more

Note:
Group RoE will be measured over the first and second years of the three-year performance period and Group Value Growth will be measured over the entire three-year performance period,
determining 1/3rd and 2/3rds of the total vesting outcome for the 2019 LTPP, respectively.

Fees for NEDs
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 2019
£’000

From 1 June 2018
£’000

Increase

540.2

23.1

69.5

82.1

10.8

31.2

23.9

525.0

22.5

67.5

79.7

10.5

30.3

23.3

2.9%

2.7%

3.0%

2.9%

3.0%

2.6%

Note: From June 2019 the respective committee chair fee and committee member fee have been combined into a single fee. Accordingly, the 2018 figures have been restated as follows: chair
fee for Audit and Remuneration Committees have been restated to £30,300 (being the sum of £19,800 plus £10,500 stated last year) and the chair fee for other committees has been restated
to £23,300 (being £12,800 plus £10,500 stated last year).

National Grid Annual Report and Accounts 2018/19Corporate Governance

Directors’ Remuneration Report continued
Statement of implementation of remuneration policy in 2018/19 continued

Advisors to the Remuneration Committee
The Committee received advice during 2018/19 from independent consultants Willis Towers Watson. Willis Towers Watson was selected by
the Committee to become its independent advisor from 23 October 2017 following a competitive tendering process.

Willis Towers Watson is a member of the Remuneration Consultants Group and has signed up to that group’s code of conduct. The Committee is
satisfied that any potential conflicts were appropriately managed.

Work undertaken by Willis Towers Watson in its role as independent advisor to the Committee has included providing market information
for the Executive Directors and other senior employees and governance matters. This work has incurred fees of £189,704. The Committee
reviews the objectivity and independence of the advice it receives from its advisors each year. It is satisfied that Willis Towers Watson provided
credible and professional advice. Willis Towers Watson also provided general and technical remuneration services in relation to employees below
Board and Group Executive Committee level.

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 Chief Human Resources Officer, 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 adopted 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 2017/18 Directors’ Remuneration Report at 2018 AGM
The voting figures shown refer to votes cast at the 2018 AGM (in respect of our current remuneration policy adopted in 2017) and represent
60.51% of the issued share capital. In addition, shareholders holding 8.2 million shares abstained.

Number of votes

Proportion of votes

The Directors’ Remuneration Report has been approved by the Board and signed on its behalf by:

For

1,971,102,408

96.94%

Against

62,185,956

3.06%

Jonathan Dawson
Committee Chairman
15 May 2019

National Grid Annual Report and Accounts 2018/19National Grid Annual Report and Accounts 2018/19

Financial Statements

Financial
Statements

Directors’ statement and independent
auditor’s reports
Statement of Directors’ responsibilities
Independent auditor’s report

92
93

Consolidated financial statements
under IFRS

Primary statements
Consolidated income statement
Consolidated statement
of comprehensive income
Consolidated statement
of changes in equity
Consolidated statement
of financial position
Consolidated cash flow statement

103

105

106

107
108

Notes to the consolidated financial
statements – analysis of items in the
primary statements
Note 1 – Basis of preparation and

recent accounting developments 109
112
114
116

Note 2 – Segmental analysis
Note 3 – Revenue
Note 4 – Operating costs
Note 5 – Exceptional items and

remeasurements
Note 6 – Finance income and costs

118
121

122
126
127

Note 7 – Tax
Note 8 – Earnings per share (EPS)
Note 9 – Dividends
Note 10 – Discontinued operations
and assets held for sale

128
130
Note 11 – Goodwill
Note 12 – Other intangible assets
131
Note 13 – Property, plant and equipment 132
Note 14 – Other non-current assets
134
Note 15 – Financial and other investments 134
Note 16 – Investments in joint ventures

and associates

136
Note 17 – Derivative financial instruments 137
Note 18 – Inventories and current

intangible assets
Note 19 – Trade and other receivables
Note 20 – Cash and cash equivalents
Note 21 – Borrowings
Note 22 – Trade and other payables
Note 23 – Contract liabilities
Note 24 – Other non-current liabilities
Note 25 – Pensions and other

post-retirement benefits

Note 26 – Provisions
Note 27 – Share capital
Note 28 – Other equity reserves
Note 29 – Net debt

139
140
141
141
143
144
144

145
155
157
158
159

Notes to the consolidated financial
statements – supplementary information
Note 30 – Commitments

and contingencies

Note 31 – Related party transactions
Note 32 – Financial risk management
Note 33 – Borrowing facilities
Note 34 – Subsidiary undertakings,

joint ventures and associates

Note 35 – Sensitivities
Note 36 – Additional disclosures in

161
162
162
173

174
177

respect of guaranteed securities 179
Note 37 – Transition to IFRS 9 and IFRS 15 186
188
Note 38 – Post balance sheet events

Company financial statements under
FRS 101

Basis of preparation
Company accounting policies

189

Primary statements
Company balance sheet
191
Company statement of changes in equity 192

Notes to the Company financial
statements
193
Note 1 – Fixed asset investments
193
Note 2 – Debtors
Note 3 – Creditors
193
Note 4 – Derivative financial instruments 194
194
Note 5 – Investments
194
Note 6 – Borrowings
Note 7 – Share capital
195
Note 8 – Shareholders’ equity
and reserves

Note 9 – Parent Company guarantees
Note 10 – Audit fees

195
195
195

Statement of Directors’ responsibilities

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 – 90 and 196 – 237, was approved by the
Board and signed on its behalf.

Strategic Report
The Strategic Report, comprising pages
2 – 45, was approved by the Board and
signed on its behalf.

By order of the Board

Alison Kay
Group General Counsel
& Company Secretary

15 May 2019
Company number: 4031152

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 48 – 49,
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.

National Grid Annual Report and Accounts 2018/19Financial StatementsFinancial Statements

Independent 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 of National Grid plc (the Parent Company)
and its subsidiaries (the Group) give a true and fair view of the state
of the Group’s and of the Parent Company’s affairs as at 31 March
2019 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 (IFRSs)
as adopted by the European Union and IFRSs as issued by the
International Accounting Standards Board (IASB);

• the Parent Company financial statements have been properly

prepared in accordance with United Kingdom Generally Accepted
Accounting Practice, including Financial Reporting Standard (FRS)
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 which comprise:

Group:
• 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; and
• the related notes 1 to 38 of the consolidated financial statements.

Parent Company:
• the Parent Company accounting policies;
• the Parent Company balance sheet;
• the Parent Company statement of changes in equity; and
• the related notes 1 to 10 of the Parent Company financial statements.

The financial reporting framework that has been applied in the
preparation of the Group financial statements is applicable law and
IFRSs as adopted by the European Union. The financial reporting
framework that has been applied in the preparation of the Parent
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 Parent 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 (the FRC’s) 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 Parent Company.

We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.

Summary of our audit approach

Key audit matters

The key audit matters that we identified in the current year were:
• classification of exceptional items;
• IT user access controls;
• environmental provisions;
• net pension obligations; and
• treasury derivative transactions.

Within this report, any new key audit matters are identified with
identified with

and any key audit matters which are the same as the prior year

Key audit matters with increased or lower levels of risk compared to the prior year are identified with

and

Materiality

Scoping

The materiality that we used for the Group financial statements was £124 million which was determined based on the adjusted profit
before tax metric (profit before tax excluding the impact of reported exceptional items and remeasurements) and considered in the
context of statutory profit before tax.

Our scope covered seven components of the Group. Of these three were subjected to a full-scope audit whilst the remaining four were
subject to specific procedures on certain account balances.

Our scoping covered 99% of the Group’s revenue and 98% of the Group’s net assets.

Significant changes
in our approach

Three key audit matters identified in the previous year and described in our report for the year ended 31 March 2018 are not included
in our report for the year ended 31 March 2019. These were:
• the internal control refresh programme – the refresh programme was completed in the prior year and so has not been identified

as a key audit matter in the current year;

• revenue recognition – as the prior year was the first year of our audit tenure we invested significant resource in understanding the
regulatory environment and methodologies used. Our prior year audit confirmed that there is no significant judgement in revenue
recognition and accordingly we have not identified it as a key audit matter in the current year; and

• classification of capital costs – our prior year audit procedures identified no issues with the classification of costs between capital
and operating and confirmed that there is little judgement required. Accordingly, we have not identified it as a key audit matter in
the current year.

This year we have identified the classification of exceptional items as a new key audit matter, due to the significant judgement
exercised in determining whether an item is exceptional or not.

National Grid Annual Report and Accounts 2018/19Independent 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 12 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 considered as part of our risk assessment the nature of the Group, its business model and related risks including
where relevant the impact of Brexit, the requirements of the applicable financial reporting framework and the system of internal
control. We evaluated the Directors’ assessment of the Group’s ability to continue as a going concern, including challenging
the underlying data and key assumptions used to make the assessment, and evaluated the Directors’ plans for future actions
in relation to their going concern assessment.

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 9.8.6 R(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 the 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:

We confirm that we have
nothing material to report,
add or draw attention to in
respect of these matters.

• the disclosures on pages 21 – 22 that describe the principal risks and explain how they are being managed or mitigated;
• the Directors’ confirmation on page 61 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 23 – 24 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
9.8.6 R(3) is materially inconsistent with our knowledge obtained in the audit.

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 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.

National Grid Annual Report and Accounts 2018/19Financial StatementsFinancial Statements | Independent auditor’s report

Classification of exceptional items

Key audit matter
description

Account balance: Operating costs (included in the exceptional items and remeasurements column). Refer to note 5 to the
financial statements and the Audit Committee’s discussion on page 59.

The Consolidated Income Statement identifies separately exceptional items and certain remeasurements (the ‘middle column’). This
results in focus being placed on what management refer to as ‘Business Performance’ or ‘Adjusted Profit’.

Adjusted profit is a critical measure for stakeholders and underpins the Group’s segmental analysis and description of business results
and therefore the correct classification of items in the middle column is important for users of the financial statements.

We have identified a key audit matter with regards to the classification and accuracy of the amounts referred to as exceptional due
to the judgemental nature of the classification and the fact that it affects the adjusted profit of the Group.

In the current year management classified the following items as exceptional charges in the middle column:
• costs of implementing the UK and US cost efficiency and restructuring programme (£204 million);
• net incremental costs in relation to the Massachusetts Gas labour dispute (£283 million); and
• impairment of nuclear connections development costs (£137 million).

There is judgement applied in determining what is an incremental cost directly attributable to the Massachusetts Gas labour dispute,
particularly as the workforce would ordinarily have spent a proportion of their time on capital works.

There were other items which were assessed against the exceptional framework but were concluded to not meet the required criteria
to be classified as such, including the gains related to:
• property sales – in particular the Fulham site (£181 million in total); and
• legal settlements (£95 million).

We have tested the controls over the classification and accuracy of amounts presented as exceptional items in the middle column.

We have obtained management’s exceptional items framework and assessed the reasonableness of the framework for identifying
items as being exceptional, and have assessed whether the classification of these items complies with the approved framework.

We have also tested the accuracy of the underlying calculations, confirmed that the costs are incremental and directly attributable
and assessed whether there are other items which should also have been recorded as exceptional items.

We have evaluated the judgements around the Massachusetts Gas labour dispute and considered whether the Columbia Gas incident
in a neighbouring utility would have driven higher costs irrespective of the labour dispute.

How the scope of our
audit responded to
the key audit matter

Key observations

We consider that the nature of items disclosed as exceptional comply with the Audit Committee approved exceptional items framework,
and that the amounts identified as being exceptional have been correctly determined.

With regards to the judgements surrounding the Massachusetts Gas labour dispute, we have concluded that management’s
determination of the net incremental costs is materially accurate.

We have reviewed other items in line with the framework and concluded that they have been appropriately excluded from classification
in the middle column. In particular, we consider that the profit on the sale of the Fulham site is appropriately included within business
performance as it is in the ordinary course of business. We are satisfied that the legal settlements are included in business performance
because they represent recovery of amounts that were so treated when charged. We confirmed that these items are appropriately
disclosed in note 2 to the financial statements.

National Grid Annual Report and Accounts 2018/19Independent auditor’s report
to the members of National Grid plc continued

IT user access controls

Key audit matter
description

How the scope of our
audit responded to
the key audit matter

IT systems fulfil a critical role in the Group’s financial reporting and accordingly IT user access control deficiencies
potentially impact all account balances. Refer additionally to the Audit Committee’s discussion of significant issues
on pages 59 – 60.

In the year to 31 March 2018 (‘prior year’), 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 deficiencies identified increased the risk that individuals within the Group and at service organisations had inappropriate access
during the period.

Management initiated a programme in the prior year to remediate the identified deficiencies and this continued throughout the year
to 31 March 2019 (‘current year’). This involved a project to manage the risks where conflicting access rights may not be segregated,
the implementation of appropriate privileged access processes and controls across the Group and the Group’s IT service providers, and
strengthening controls over user access management. Whilst the Group has made significant progress in implementing and improving
controls over the access deficiencies, particularly within the IT systems used within the UK operations, the remediation programme
is not yet complete, resulting in a number of deficiencies still being present at year end.

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 in the prior year impacted all components of the Group but particularly the UK operations.
The deficiencies that were not remediated at year end relate primarily to the US operations.

The level of risk ascribed to our work in this area is dependent on the nature and complexity of the controls themselves and the
balances within the financial statements the controls address.

In responding to the access deficiencies for in scope IT systems and the associated IT infrastructure, we have:

• determined the impact that inappropriate levels of access could feasibly have had on the affected systems and account balances

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

The number of access deficiencies identified in the current year has reduced significantly from the prior year.

We are satisfied that the mitigating business controls address the risk of a material misstatement to the financial statements. Due to the
fact that the newly remediated controls did not operate for the entire year, 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 controls in certain areas where the IT systems were not impacted by the access
deficiencies.

Environmental provisions

Key audit matter
description

Account balance: Provisions. Refer to notes 26 and 35 to the financial statements.

How the scope of our
audit responded to
the key audit matter

The Group’s environmental provisions relate to a number of sites owned and managed by the Group together with certain US sites that
are no longer owned. In the US the most significant provisions relate to former sites that are subject both to state and federal law.

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 forecast cash flows.

In respect of one major site in the US (‘US site’), there are multiple parties named in the Environmental Protection Agency order and
particular judgement is required to estimate the proportion of the estimated clean-up costs that the Group will be required to contribute.

We have identified the forecast cash flows and discount rate used in calculating the present value of the environmental provisions as
‘higher’ risks in the current year, whereas in the previous year the discount rate had been determined to be a ‘significant’ risk. The current
year assessment has been informed by the results of our prior year audit procedures.

We have tested the controls over the determination of the discount rate and over the compilation of forecast cash flows.

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 that the expenditure forecasts prepared by management
appropriately reflect their impact. We have utilised our own environmental specialists in the US and sighted legal opinions to review and
challenge management’s estimates. In respect of the major US site, they reviewed the chemical composition of the identified pollutants
and legal opinions received by the Group in order to calculate independently a likely range for the proportion of costs the Group should
ultimately bear.

We have challenged the methodology that management has adopted for calculating the discount rate with reference to common practice
and publically 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 also tested the mechanical accuracy of the calculations performed
including the reversal or utilisation of provisions in the current period.

Key observations

We consider the estimated costs of remediation for identified sites to be reasonable and that the discount rate used by management is at
the mid-point of our internally developed ‘acceptable range’. In respect of the major US site we concluded that management’s estimate
of the proportion of costs expected to be borne by the Group was within our independently calculated range.

National Grid Annual Report and Accounts 2018/19Financial StatementsFinancial Statements | Independent auditor’s report

Net pension obligations

Key audit matter
description

Account balance: Pensions and other post-retirement benefit obligations. Refer to notes 25 and 35 to the financial
statements.

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 obligations,
which as at 31 March 2019 represent an obligation of £24.6 billion, and valuations of level 2 and level 3 pension assets (‘unquoted
assets’), which as at 31 March 2019 make up £8.4 billion out of scheme assets of £24.8 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 them can have a material
impact on the value of pension liabilities.

The pension schemes include a number of unquoted 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 assessed the risk associated with the discount rates applied to net pension obligations to be ‘higher’ in the current year,
compared with ‘significant’ in the prior year. This is informed by the results of our prior year audit which confirmed that although there is
a significant level of estimation uncertainty and judgement involved, the assumptions and methodology used by management are based
on the advice of qualified actuaries and can be benchmarked to market data and comparable plans. Furthermore there has been no
change during the year in actuarial advisor or the methodology used to develop key assumptions.

We have tested the controls over the valuation of 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.

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, GMP equalisation, 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/or our internal benchmarks.

Additionally, we have considered the independence, objectivity and competence of the independent actuaries engaged to perform
valuations of the relevant schemes.

We have engaged internal specialists to challenge the valuation of scheme assets, in particular the unquoted assets. Our work has
included assessing the reasonableness of the valuation methodologies applied, reviewing publically available information on these
assets, comparing to internal benchmarks and confirmation of inputs used by management to determine the asset values.

How the scope of our
audit responded to
the key audit matter

Key observations

We judge the discount rates and other key pension assumptions used by management to be in the middle of our internally developed
reasonable range or consistent with our internally developed assumptions. The results of our procedures performed over the valuation
of unquoted assets were satisfactory.

National Grid Annual Report and Accounts 2018/19Independent auditor’s report
to the members of National Grid plc continued

Treasury derivative transactions

Key audit matter
description

Account balances: Derivative financial assets and derivative financial liabilities. Refer to notes 17 and 32 to the financial
statements.

At 31 March 2019 the Group had total borrowings of £28.7 billion (31 March 2018: £26.6 billion) and net total level 3 derivative financial
instruments of £61 million (31 March 2018: £26 million). 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 ‘level 3’ 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 the net investment hedge accounting
requirements as a ‘higher’ risk.

In the current year, IFRS 9 ‘Financial Instruments’ was implemented for the first time. As the Group elected to employ the modified
retrospective method of transitioning, this resulted in transition adjustments being recorded to shareholders’ equity at the beginning
of the current year.

We have tested the 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 valuation 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 assessed the appropriateness of the hedge documentation, eligibility of designations and hedge effectiveness testing
performed by management and tested the disclosure within the financial statements.

We have assessed the accuracy and completeness of the IFRS 9 transition adjustments and the accounting for the classification
and measurement of financial assets and liabilities within the scope of the standard in the current year to determine whether the
appropriate accounting treatment has been adopted by the Group.

How the scope of our
audit responded to
the key audit matter

Key observations

We conclude that the valuation of derivatives and the Group’s use of hedge accounting, is appropriate.

National Grid Annual Report and Accounts 2018/19Financial StatementsFinancial Statements | Independent auditor’s report

Our 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:

Materiality

Component
materiality

Basis for determining
materiality

Rationale for the
benchmark applied

Key:

Adjusted PBT £2,489m
Group materiality

Group financial statements

Parent Company financial statements

Materiality has been set at £124 million for the current year.
In 2018 the materiality was set at £130 million.

Materiality has been set at £100 million for the current year.
In 2018 materiality was set at £125 million.

Component materiality is not relevant to our audit of the
Company financial statements.

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 and is not
profit orientated, we believe the net asset position is the most
appropriate benchmark to use. The strength of the balance
sheet is a key measure of the financial health that is important
to shareholders since the primary concern is the payment
of dividends.

The majority of the audit work is performed at a component
level and is audited to a lower materiality. The component
materiality for significant components ranged from £42 million to
£78 million. In 2018 materiality for significant components ranged
from £35 million to £75 million.

We considered a number of metrics to determine Group
materiality, most notably adjusted profit before tax (profit
before tax, exceptional items and remeasurements) for the
year as disclosed in the consolidated income statement. Our
materiality equates to 5% of adjusted profit before tax and 6.7%
of statutory profit before tax. In the prior year materiality was
also determined based on profit before tax, exceptional items
and remeasurements.

We consider adjusted profit before tax to be an important
benchmark of the performance of the Group. We consider it
appropriate to adjust for exceptional items and remeasurements
as these items are volatile and not reflective of the underlying
performance of the Group.

We conducted an assessment of which line items we
understand to be the most important to investors and analysts by
reviewing analyst reports and National Grid’s communications to
shareholders and lenders, as well as the communications of peer
companies. This assessment resulted in us considering the
financial statement line items above.

Profit before tax is the benchmark ordinarily considered by us
when auditing listed entities. It provides comparability against
other companies across all sectors, but has limitations when
auditing companies whose earnings are impacted by items which
can be volatile from one period to the next, and therefore may not
be representative of the volume of transactions and the overall size
of the business in a given year.

Whilst not an IFRS measure, adjusted profit is one of the key
metrics communicated by management in National Grid’s results
announcements. It excludes some of the volatility arising from
changes in fair values of financial assets and liabilities as well as
‘exceptional items’ and this was also the key measure applied
in the prior year.

Group materiality
£124m

Component
materiality range
£78m to £42m

Audit Committee
reporting threshold
£6.20m

Performance materiality for the current year has been set at
£86.8 million (2018: £87.5 million), or 70% of materiality (2018: 67%).

We set performance materiality at a level lower than materiality to
reduce the probability that, in aggregate, uncorrected and undetected
misstatements exceed the materiality for the financial statements as
a whole. In determining performance materiality, we considered
factors including:
• our risk assessment, including our assessment of the Group’s overall

control environment;

• the high audit coverage obtained from auditing a low number of

components; and

• our prior year experience of the audit, which has indicated a low
number of corrected and uncorrected misstatements identified.

We agreed with the Audit Committee that we would report to the
Committee all audit differences in excess of £6.20 million (2018: £6.25
million), as well as differences below that threshold that, in our view,
warranted 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.

National Grid Annual Report and Accounts 2018/19Independent 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 and US Regulated. Each of these
components was subjected to a full-scope audit for Group reporting
purposes, completed to the individual component materiality level
discussed above. In the prior year Quadgas Holdco was also identified
as a significant component but following the signing of the RAA, the
Group’s results are not significantly impacted by the performance of
Quadgas and accordingly it has not been identified as a significant
component in the current year.

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 issued detailed instructions
to the component auditors and directed and supervised their work
through a number of visits to the component auditor 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, treasury derivative transactions
and the classification of exceptional items. As part of our monitoring
of component auditors we have also attended key local audit meetings.

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 the Parent Company
financial statements including but not limited to corporate activities
such as treasury and pensions as well as on the consolidated financial
statements themselves, including entity level controls, litigation
provisions, 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 as well as analytical reviews on out of scope components.

Other information

The directors are responsible for the other information. The other information comprises the 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 9.8.10 R(2) do not
properly disclose a departure from a relevant provision of the UK Corporate Governance Code.

100

National Grid Annual Report and Accounts 2018/19Financial StatementsFinancial Statements | Independent auditor’s report

Audit response to risks identified
As a result of performing the above, we did not identify any key audit
matters related to the potential risk of fraud or non-compliance with
laws and regulations.

Our procedures to respond to risks identified included the following:
• reviewing the financial statement disclosures and testing to

supporting documentation to assess compliance with relevant laws
and regulations discussed above as having a direct effect on the
financial statements;

• enquiring of management, the Audit Committee and legal counsel

concerning actual and potential litigation and claims;

• performing analytical procedures to identify any unusual or
unexpected relationships that may indicate risks of material
misstatement due to fraud;

• reading minutes of meetings of those charged with governance,

reviewing internal audit reports and reviewing correspondence with
HMRC; and

• in addressing the risk of fraud through management override of
controls, testing the appropriateness of journal entries and other
adjustments; assessing whether the judgements made in making
accounting estimates are indicative of a potential bias; and
evaluating the business rationale of any significant transactions that
are unusual or outside the normal course of business.

We also communicated relevant identified laws and regulations and
potential fraud risks to all engagement team members, including
internal specialists and significant component audit teams, and
remained alert to any indications of fraud or non-compliance with laws
and regulations throughout the audit.

Responsibilities of directors
As explained more fully in the directors’ responsibilities statement, the
directors are responsible for the preparation of the financial statements
and for being satisfied that they give a true and fair view, 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 Parent 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 Parent 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.

Details of the extent to which the audit was considered capable of
detecting irregularities, including fraud are set out below.

A further description of our responsibilities for the audit of the financial
statements is located on the FRC’s website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our
auditor’s report.

Extent to which the audit was considered capable of detecting
irregularities, including fraud
We identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, and then design
and perform audit procedures responsive to those risks, including
obtaining audit evidence that is sufficient and appropriate to provide a
basis for our opinion.

Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect
of irregularities, including fraud and non-compliance with laws and
regulations, our procedures included the following:
• enquiring of management, internal audit, and the Audit Committee,

including obtaining and reviewing supporting documentation,
concerning the Group’s policies and procedures relating to:
• identifying, evaluating and complying with laws and regulations

and whether they were aware of any instances of non-compliance;

• detecting and responding to the risks of fraud and whether they
have knowledge of any actual, suspected or alleged fraud; and
• the internal controls established to mitigate risks related to fraud

or non-compliance with laws and regulations.

• discussing among the engagement team including significant

component audit teams and involving relevant internal specialists,
including tax, valuations, pensions, treasury and IT regarding how
and where fraud might occur in the financial statements and any
potential indicators of fraud.

• obtaining an understanding of the legal and regulatory frameworks
that the Group operates in, focusing on those laws and regulations
that had a direct effect on the financial statements or that had a
fundamental effect on the operations of the Group. The key laws
and regulations we considered in this context included the UK
Companies Act 2006, the UK Listing Rules, pensions and tax
legislation, US Securities Exchange Act 1934 and relevant
SEC regulations, as well as laws and regulations prevailing in
each country in which we identified a full scope component.
In addition, compliance with terms of the Group’s operating
licence and environmental regulations were fundamental to
the Group’s operations.

101

National Grid Annual Report and Accounts 2018/19Independent auditor’s report
to the members of National Grid plc continued
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 Parent 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 Parent Company, or returns adequate for our audit have

not been received from branches not visited by us; or

• the Parent 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 Company at its Annual General Meeting on 31 July 2017 to audit the financial statements of the Company for the year
ending 31 March 2018 and subsequent financial periods.

The period of total uninterrupted engagement including previous renewals and reappointments of the firm is two years, covering the years ended
31 March 2018 and 31 March 2019.

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).

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.

Douglas King FCA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
15 May 2019

102

National Grid Annual Report and Accounts 2018/19Financial StatementsFinancial Statements

Consolidated income statement
for the years ended 31 March

2019

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 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)

Before
exceptional items and
remeasurements
£m

Exceptional items and
remeasurements
(see note 5)
£m

14,933

(11,491)

3,442

(1,066)

2,489

(488)

2,001

2,058

2,055

–

(572)

(91)

–

(648)

149

(499)

(45)

(544)

–

Notes

2(a),3

4,5

2(b)

5,6

16,10

2(b),5

5,7

1. The non-controlling interests for the year ended 31 March 2019 relate to continuing operations.

20181

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)

Before
exceptional items and
remeasurements
£m

Exceptional items and
remeasurements
(see note 5)
£m

15,250

(11,793)

3,457

127

(1,128)

2,500

(584)

1,916

145

2,061

2,060

–

119

160

1,473

1,633

(143)

1,490

–

Notes

2(a)

4,5

2(b)

5,6

16,10

2(b),5

5,7

Total
£m

14,933

(12,063)

2,870

(1,157)

1,841

(339)

1,502

1,514

1,511

44.3

44.1

44.6

44.4

Total
£m

15,250

(11,757)

3,493

127

(1,009)

2,660

889

3,549

3,551

3,550

102.5

102.1

102.6

102.1

1. Comparatives for 2018 only have been re-presented to reflect the classification of our retained interest in Quadgas HoldCo Limited as a discontinued operation in the current period

(see note 1C and note 10).

2. The non-controlling interests for the year ended 31 March 2018 relate to continuing operations.

103

National Grid Annual Report and Accounts 2018/19Consolidated income statement
for the years ended 31 March continued

2017

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 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)

Before
exceptional items and
remeasurements
£m

Exceptional items and
remeasurements
(see note 5)
£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)

Notes

2(a)

4,5

2(b)

5,6

2(b),5

5,7

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

1. The non-controlling interests for the year ended 31 March 2017 relate to discontinued operations.

104

National Grid Annual Report and Accounts 2018/19Financial StatementsFinancial Statements

Consolidated 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 on pension assets and post-retirement benefit obligations

Net gains on financial liability designated at fair value through profit and loss attributable
to changes in own credit risk

Net losses in respect of cash flow hedging of capital expenditure

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 (losses)/gains in respect of cash flow hedges and cost of hedging

Transferred from/(to) profit or loss in respect of cash flow hedges and cost of hedging

Net (losses)/gains on available-for-sale investments

Transferred to profit or loss on sale of available-for-sale investments

Net gains on investment in debt instruments measured at fair value through other comprehensive income

Share of other comprehensive income of associates, net of tax

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 operations2

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

Attributable to:

Equity shareholders of the parent

From continuing operations

From discontinued operations

Non-controlling interests

From continuing operations

Notes

2019
£m

1,502

20181
£m

3,549

2017
£m

1,810

(13)

(15)

347

(147)

–

256

303

339

1,805

1,853

1,801

1,849

1,313

423

–

(530)

783

–

(277)

146

(505)

346

(3)

(30)

(73)

–

(559)

224

147

371

3,773

149

3,922

3,773

149

3,922

(6)

(25)

–

(34)

432

578

620

2,388

6,026

8,414

2,389

6,026

8,415

–

(1)

1. Comparatives for 2018 only have been re-presented to reflect the classification of our retained interest in Quadgas HoldCo Limited as a discontinued operation in the current period

(see note 1C and note 10).

2. The other comprehensive income from discontinued operations relates to the items of other comprehensive income of Cadent (investment through Quadgas HoldCo Limited), comprising
mainly £35 million (2018: £142 million; 2017: £nil) remeasurement gains on pension assets and post-retirement benefit obligations and a £1 million (2018: £5 million; 2017: £nil) net gain in
respect of cash flow hedges. Both items are shown net of tax.

105

National Grid Annual Report and Accounts 2018/19Consolidated statement of changes in equity
for the years ended 31 March

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 2018 (as previously reported)

Impact of transition to IFRS 9 and IFRS 153

At 1 April 2018 (as restated)

Profit for the year

Other comprehensive income for the year

Total comprehensive income for the year

Equity dividends

Scrip dividend-related share issue2

Issue of treasury shares

Purchase of own shares

Share-based payments

Cash flow hedges transferred to the statement
of financial position, net of tax

Retained
earnings
£m

Other equity
reserves1
£m

Total
shareholders’
equity
£m

Non-
controlling
interests
£m

Share
capital
£m

447

Share
premium
account
£m

1,326

–

(2)

–

16,305

7,795

7,879

(1,463)

–

(189)

(6)

–

(4,523)

13,555

–

536

–

7,795

620

8,415

(1,463)

–

(189)

(6)

–

449

1,324

22,582

(3,987)

20,368

–

452

–

452

–

(3)

–

3,550

925

4,475

(4,487)

–

(1,017)

(5)

–

(553)

–

3,550

372

3,922

(4,487)

–

(1,017)

(5)

1,321

21,599

(4,540)

18,832

–

1,321

–

(7)

–

(268)

21,331

1,511

1,600

(1,160)

–

(2)

–

(196)

(4,468)

18,636

–

249

–

(18)

1,511

338

1,849

(1,160)

(1)

(2)

(18)

Total

equity
£m

13,565

7,794

620

8,414

(1,463)

–

(189)

(6)

20,384

3,551

371

3,922

(4,487)

–

(1,017)

(5)

18,848

(196)

18,652

1,514

339

1,853

(1,160)

(1)

(2)

(18)

(1)

–

(1)

–

(1)

–

At 31 March 2019

458

1,314

21,814

(4,237)

19,349

19,369

1. For further details of other equity reserves, see note 28.
2. Included within the share premium account are costs associated with scrip dividends.
3. For further details of the impact of the transition to IFRS 9 and IFRS 15, see note 37.

106

National Grid Annual Report and Accounts 2018/19Financial StatementsFinancial Statements

Consolidated statement of financial position
as at 31 March

Non-current assets

Goodwill

Other intangible assets

Property, plant and equipment

Other non-current assets

Pension assets

Financial and other investments

Investments in joint ventures and associates

Derivative financial assets

Total non-current assets

Current assets

Inventories and current intangible assets

Trade and other receivables

Current tax assets

Financial and other investments

Derivative financial assets

Cash and cash equivalents

Assets held for sale

Total current assets

Total assets

Current liabilities

Borrowings

Derivative financial liabilities

Trade and other payables

Contract liabilities

Current tax liabilities

Provisions

Total current liabilities

Non-current liabilities

Borrowings

Derivative financial liabilities

Other non-current liabilities

Contract 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

2019
£m

5,869

1,084

2018
£m

5,444

899

43,913

39,853

264

1,567

667

608

1,045

55,017

370

3,153

126

1,981

108

252

1,956

7,946

62,963

(4,472)

(350)

(3,769)

(61)

(161)

(316)

115

1,409

899

2,168

1,319

52,106

341

2,798

114

2,694

405

329

–

6,681

58,787

(4,447)

(401)

(3,453)

–

(123)

(273)

(9,129)

(8,697)

(24,258)

(22,178)

(833)

(808)

(933)

(3,965)

(1,785)

(1,883)

(34,465)

(43,594)

19,369

458

1,314

21,814

(4,237)

19,349

(660)

(1,317)

–

(3,636)

(1,672)

(1,779)

(31,242)

(39,939)

18,848

452

1,321

21,599

(4,540)

18,832

19,369

18,848

The consolidated financial statements set out on pages 103 – 188 were approved by the Board of Directors on 15 May 2019 and were signed on
its behalf by:

Sir Peter Gershon Chairman
Andy Agg Chief Financial Officer

National Grid plc
Registered number: 4031152

107

National Grid Annual Report and Accounts 2018/19Consolidated 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

Changes in working capital

Changes in provisions

Changes in pensions and other post-retirement benefit obligations

Cash flows relating to exceptional items

Cash generated from operations – continuing operations

Tax (paid)/recovered

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 financial investments

Investments in joint ventures and associates

Loans to joint ventures and associates

Disposal of financial investments

Disposal of 61% interest in 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 investments

Net cash flow (used in)/from investing activities – continuing operations

Net cash flow from/(used in) investing activities – discontinued operations2

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

Cash and cash equivalents at start of year

Cash and cash equivalents at end of year

29(a)

Notes

2019
£m

20181
£m

2017
£m

2(b)

2,870

3,493

3,208

572

1,588

(110)

(123)

(400)

4,464

(75)

4,389

(71)

(89)

(143)

(31)

–

(306)

(3,635)

822

(3,190)

156

–

(2)

2,932

(1,969)

(268)

(914)

(1,160)

(1,364)

–

(80)

–

329

252

(36)

1,530

118

(206)

(239)

4,702

4,710

(207)

(2)

(129)

(68)

134

(20)

(173)

(3,738)

5,953

2,066

171

(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

1. Comparatives for 2018 only have been re-presented to reflect the classification of our retained interest in Quadgas HoldCo Limited as a discontinued operation in the current period

(see note 1C and note 10).

2. Receipts of dividends from Quadgas HoldCo Limited of £133 million (2018: £144 million) and interest of £23 million (2018: £27 million).

108

National Grid Annual Report and Accounts 2018/19Financial StatementsFinancial Statements

Notes to the consolidated financial statements
– analysis of items in the primary statements

1. Basis of preparation and recent accounting developments

Accounting policies describe our approach to recognising and measuring transactions and balances in the year. The accounting policies
applicable across the financial statements are shown below, whereas 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 have
summarised new International Accounting Standards Board (IASB) and EU endorsed accounting standards, amendments and interpretations
and whether these are effective for this year end or in 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.

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 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 15 May 2019.

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 2019
and in accordance with the Companies Act 2006 applicable to
companies reporting under IFRS and Article 4 of the EU IAS
Regulation. The comparative financial information has also been
prepared on this basis.

The consolidated financial statements have been prepared on a
historical cost basis, except for the recording of pension assets and
liabilities, the revaluation of derivative financial instruments and certain
commodity contracts and certain financial assets and liabilities
measured at fair value.

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. We continue to use 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 assists users of the financial statements to understand the
results. 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.
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 and 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 period on period.

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.

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 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. Losses in excess of
the consolidated interest in joint ventures and associates are not
recognised, except where the Company or its subsidiaries have
made a commitment to make good those losses.

Where necessary, adjustments are made to bring the accounting
policies used in the individual financial statements of the Company,
subsidiaries, joint 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, 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. Treatment of interests in Quadgas HoldCo Limited
(Quadgas) – discontinued operations and held for sale
Following the Group’s disposal of a 61% controlling stake in the
UK Gas Distribution business on 31 March 2017, we have decided
to exercise the options over the retained 39% interest in the business
(held through Quadgas) and the sale is expected to complete at
the end of June 2019, subject to customary regulatory approvals.
Accordingly, our interests have been classified as held for sale
with effect from 30 June 2018. The Quadgas disposal group
comprises our equity investment in Quadgas, our shareholder loan
to Quadgas, the Further Acquisition Agreement (FAA) derivative
and the Remaining Acquisition Agreement (RAA) derivative.
Refer to note 10 for further details.

We have also treated the results of the disposal group as a
discontinued operation in the consolidated income statement for
the current year and we have restated our prior year comparatives
for 2018 on the same basis. The results of the UK Gas Distribution
business were already treated as a discontinued operation for the
year ended 31 March 2017 with certain true ups (relating to completion
accounts) to the disposal of the controlling stake recorded within
discontinued operations for the year ended 31 March 2018. The
reclassification impacts the consolidated income statement, the
consolidated statement of comprehensive income and consolidated
cash flow statement, as well as earnings per share (EPS) split between
continuing and discontinued operations.

109

National Grid Annual Report and Accounts 2018/19F. 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 presentation described earlier. Exceptional items and
remeasurements are presented in a separate column on the face of
the income statement.

• Financial instruments: we normally opt to apply hedge accounting
in most circumstances where this is permitted (see note 32(e)).

G. New IFRS accounting standards effective for the year
ended 31 March 2019
The Group adopted IFRS 9 ‘Financial Instruments’ and IFRS 15
‘Revenue from Contracts with Customers’ with effect from 1 April
2018. We have applied the modified retrospective approach permitted
in the Standards whereby prior year comparatives have not been
restated on adoption. Instead, the cumulative transition adjustments
are reflected through reserves. Refer to note 37 for full details of the
impact and transition adjustments arising on adoption.

The Group has also adopted the following amendments to standards,
which have had no material impact on the Group’s results or financial
statement disclosure:
• Annual improvements to IFRSs 2014-2016 Cycle;
• Amendments to IFRS 2 ‘Share-based payment’; and
• IFRIC 22 ‘Foreign Currency Transactions and Advance

Consideration’.

1. Basis of preparation and recent accounting developments continued
D. Foreign currencies
Transactions in currencies other than the functional currency of the
Company or subsidiary concerned are recorded at the rates of
exchange prevailing on the dates of the transactions. At each reporting
date, monetary assets and liabilities that are denominated in foreign
currencies are retranslated at closing exchange rates. Non-monetary
assets are not retranslated unless they are carried at fair value.

Gains and losses arising on the retranslation of monetary assets
and liabilities are included in the income statement, except where
the application of hedge accounting requires inclusion in other
comprehensive income (see note 32(e)).

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 28).

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 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 or

remeasurements and the definition of adjusted earnings (see notes
5 and 8). In applying the Group’s exceptional items framework, we
have considered a number of key matters, as detailed in note 5.
• In addition, we have exercised our judgement in concluding that

it is appropriate to classify our investment in and shareholder loan
to Quadgas, along with the related Further Acquisition Agreement
(FAA) and Remaining Acquisition Agreement (RAA) derivatives, as
held for sale and as a discontinued operation, as detailed in note 10.

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 25); and

• the cash flows applied in determining the environmental provisions

(see note 26).

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 35.

110

Notes to the consolidated financial statements – analysis of items in the primary statements continuedNational Grid Annual Report and Accounts 2018/19Financial Statements1. Basis of preparation and recent accounting developments continued
H. New IFRS accounting standards and interpretations
not yet adopted
The Group has considered the impact of the following new IFRS
standards or interpretations that have not yet been adopted:

i) IFRS 16 ‘Leases’
IFRS 16 ‘Leases’ is effective for National Grid for the year ending
31 March 2020. IFRS 16 introduces a single lease accounting model
for lessees (rather than the current distinction between operating and
finance leases). A contract is, or contains, a lease, if it provides the
right to control the use of an identified asset for a specific period of
time in exchange for consideration. The new standard will result in our
operating leases being accounted for in the consolidated statement
of financial position as ‘right-of-use’ assets with corresponding lease
liabilities also recognised. It will therefore increase both our assets
and liabilities (including net debt). In future periods, this will change the
timing and presentation in the consolidated income statement as it will
result in an increase in finance costs and depreciation largely offset by
a reduction in the previously straight-line operating costs.

Transition options
We will apply IFRS 16 with effect from 1 April 2019 using the modified
retrospective approach. Comparatives will not be restated on adoption.
Instead, a cumulative adjustment to our opening consolidated
statement of financial position will be reflected in retained earnings as
well as recognition of the opening right-of-use assets and additional
lease liabilities and associated deferred tax. For short-term leases
(lease term of 12 months or less) and leases of low-value assets (such
as computers), the Group will continue to recognise a lease expense
on a straight-line basis as permitted by IFRS 16.

In preparing for the transition, we have elected to apply the practical
expedient to grandfather our previous assessments of whether
contracts were previously accounted for as a lease, as permitted by
the standard, instead of reassessing all significant contracts as at the
date of initial application to determine whether they met the IFRS 16
definition of a lease.

We have elected to apply the practical expedient on transition, which
permits right-of-use assets to be measured at an amount equal to the
lease liability on adoption of the standard (adjusted for any prepaid or
accrued lease expenses).

In addition, we have also elected the option to adjust the carrying
amounts of the right-of-use assets as at 1 April 2019 for onerous
lease provisions that had been recognised on the Group consolidated
statement of financial position as at 31 March 2019, rather than
performing impairment assessments on transition.

Impact of transition
As at the reporting date, the Group has non-cancellable operating
lease commitments of £0.3 billion (see note 30), of which the majority
are in the US. A further £0.3 billion of lease liabilities is recognised due
to the requirement in IFRS 16 to recognise lease liabilities for the term
that we are reasonably certain to exercise lease extension or lease
termination options for, rather than only for the period of the minimum
contractual term that is used in determining our lease liability
commitments. This is partially offset by the £0.2 billion impact of
discounting our lease liabilities at the incremental borrowing rate for
each lease. There are some immaterial short term and low value
leases, which will be recognised on a straight-line basis as an
expense in profit and loss over the remaining lease term.

As a result, the Group expects to recognise additional right-of-use
assets and lease liabilities (which are included within net debt) of
approximately £0.4 billion at 1 April 2019 with no material additional
net deferred tax. This is in addition to the £0.3 billion of finance leases
already recognised on the consolidated statement of financial position
under IAS 17. There will be no material net impact on net assets.

Accordingly, the Group does not expect the impact of IFRS 16
on profit after tax as a result of adopting the new standard to be
material. However, it will result in an increase in operating profit due
to the operating costs now being replaced with depreciation and
interest charges.

We expect operating cash flows to increase and financing cash flows
to decrease by less than £0.1 billion, because repayment of the
principal portion of the lease liabilities will be classified as cash flows
from financing activities rather than operating cash flows.

ii) 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:
• IFRIC 23 ‘Uncertainty over Income Tax Treatments’;
• 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’;
• Amendments to IAS 19 ‘Employee Benefits’;
• Amendments to IFRS 3 ‘Business Combinations’;
• Amendments to the References to the Conceptual Framework; and
• Amendments to IAS 1 and IAS 8: Definition of material.

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 adopted any other standard, amendment or interpretation that
has been issued but is not yet effective.

111

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial 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
each operating segment and determining resource allocation between them. 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 5). 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.

The results of our three principal businesses are reported to the Board of Directors and are accordingly treated as reportable operating segments.
All other operating segments are reported to the Board of Directors on an aggregated basis. The following table describes the main activities for
each reportable operating segment:

UK Electricity Transmission

The high-voltage electricity transmission networks in England and Wales and Great Britain system operator.

UK Gas Transmission

The high-pressure gas transmission networks in Great Britain and system operator in Great Britain.

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.

The National Grid Ventures (NGV) 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 currently meet the thresholds
set out in IFRS 8 to be identified as a separate reportable segment and therefore its results are not required to be separately presented. However,
certain additional disclosure is included in the footnotes below.

Other activities that do not form part of any of the segments in the above table or NGV primarily relate to our UK property business together with
insurance and corporate activities in the UK and US and the Group’s investments in technology and innovation companies through National Grid
Partners.

The segmental information is presented in relation to continuing operations only and therefore does not include the profits and losses relating
to our interest in Quadgas for 2018 and 2019 or those associated with the UK Gas Distribution business (see note 10).

(a) Revenue
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. Refer to note 3 for further details.

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.

Operating segments – continuing operations:

UK Electricity Transmission

UK Gas Transmission

US Regulated

NGV and Other1

2019

Total
sales
£m

Sales
between
segments
£m

Sales
to third
parties
£m

3,351

896

9,846

876

(20)

(12)

–

(4)

3,331

884

9,846

872

2018

Sales
between
segments
£m

(28)

(9)

–

(6)

Total
sales
£m

4,154

1,091

9,272

776

Sales
to third
parties
£m

4,126

1,082

9,272

770

2017

Sales
between
segments
£m

(29)

(99)

–

Total
sales
£m

4,439

1,080

8,931

713

Sales
to third
parties
£m

4,410

981

8,931

713

Total revenue from continuing operations

14,969

(36)

14,933

15,293

(43)

15,250

15,163

(128)

15,035

Split by geographical areas – continuing operations:

5,045

9,888

14,933

5,938

9,312

15,250

6,064

8,971

15,035

1. Included within NGV and Other is £597 million (2018: £593 million; 2017: £604 million) of revenue relating to NGV.

112

Notes to the consolidated financial statements – analysis of items in the primary statements continuedNational Grid Annual Report and Accounts 2018/19Financial Statements2. Segmental analysis continued
(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 5.

Operating segments – continuing operations:

UK Electricity Transmission

UK Gas Transmission

US Regulated

NGV and Other2,3

Total operating profit from continuing operations

Split by geographical area – continuing operations:

Before exceptional items
and remeasurements

After exceptional items
and remeasurements

2019
£m

20181
£m

2017
£m

2019
£m

20181
£m

2017
£m

1,015

303

1,724

400

3,442

1,695

1,747

3,442

1,041

487

1,698

231

3,457

1,840

1,617

3,457

1,372

511

1,713

177

3,773

2,118

1,655

3,773

778

267

1,425

400

2,870

1,422

1,448

2,870

1,041

487

1,734

231

3,493

1,840

1,653

3,493

1,361

507

1,278

3,208

1,988

1,220

3,208

Below we reconcile total operating profit from continuing operations to profit before tax from continuing operations. Operating exceptional items and remeasurements
of £237 million charge (2018: £nil; 2017: £11 million charge) detailed in note 5 are attributable to UK Electricity Transmission; £36 million charge (2018: £nil; 2017:
£4 million charge) to UK Gas Transmission; £299 million charge (2018: £36 million gain; 2017: £435 million charge) to US Regulated; and £nil (2018: £nil; 2017:
£115 million charge) 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

Profit before tax from continuing operations

3,442

(1,066)

2,489

3,457

127

(1,128)

2,500

3,773

(1,082)

2,807

2,870

3,493

127

(1,157)

(1,009)

1,841

2,660

3,208

(1,140)

2,184

1. Comparatives for 2018 only have been re-presented to reflect the classification of our retained interest in Quadgas as a discontinued operation in the current period (see note 1C and note 10).
2. Included within NGV and Other is £263 million (2018: £234 million; 2017: £239 million) of operating profit (both before and after exceptional items and remeasurements) relating to NGV.

Also included in this balance for the year ended 31 March 2019 is £181 million (2018: £84 million; 2017: £55 million) of operating profit in relation to the Property business.

3. NGV and Other includes gains of £95 million (2018: £nil; 2017: £nil) in relation to cash received in respect of two legal settlements.

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, amortisation
and impairment

2019
£m

2018
£m

2017
£m

2019
£m

2018
£m

2017
£m

13,288

4,412

24,542

2,755

44,997

19,343

25,654

44,997

43,913

1,084

44,997

13,028

4,280

20,953

2,491

40,752

12,515

4,165

21,638

2,430

40,748

18,772

21,980

40,752

18,102

22,646

40,748

39,853

39,825

899

923

40,752

40,748

925

308

2,650

438

4,321

1,584

2,737

4,321

4,015

306

4,321

999

310

2,424

341

4,074

1,527

2,547

4,074

3,901

173

4,074

1,027

214

2,247

247

3,735

1,357

2,378

3,735

3,507

228

3,735

2019
£m

(628)

(181)

(700)

(226)

2018
£m

(475)

(194)

(635)

(226)

2017
£m

(421)

(186)

(642)

(232)

(1,735)

(1,530)

(1,481)

(931)

(804)

(726)

(753)

(728)

(1,735)

(1,530)

(1,481)

(1,560)

(175)

(1,735)

(1,392)

(138)

(1,530)

(1,348)

(133)

(1,481)

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 £1,635 million (2018: £1,454 million; 2017: £1,432 million), capital expenditure of £317 million (2018: £186 million;

2017: £98 million) and depreciation, amortisation and impairment of £114 million (2018: £143 million; 2017: £143 million) relating to NGV.

Total non-current assets other than financial instruments and pension assets located in the UK and US were £30,072 million and £21,787 million
respectively as at 31 March 2019 (31 March 2018: UK £20,816 million, US £27,663 million; 31 March 2017: UK £20,045 million, US £28,951 million).

113

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements3. Revenue

Revenue arises in the course of the ordinary activities and principally comprises:
• transmission services;
• distribution services; and
• generation services.

Transmission services, distribution services and certain other services (excluding rental income but including metering) fall within the scope
of IFRS 15 ‘Revenue from Contracts with Customers’, whereas generation services are accounted for under the leasing standard as rental
income, presented within revenue. Revenue is measured based on the consideration specified in a contract with a customer and excludes
amounts collected on behalf of third parties and value added tax. The Group recognises revenue when it transfers control over a product
or service to a customer.

IFRS 15 was effective from 1 April 2018. As explained in note 37, the standard has been applied prospectively and therefore the analysis
below is only provided for the current period. The impact of adoption on the opening consolidated statement of financial position and reserves
is disclosed in note 37, with the main change to profit being in relation to customer connection income in the UK Electricity Transmission and
US Regulated businesses. Note 37 includes the quantification of the impact for the year if revenue were still to have been accounted for under
IAS 18, which arises from a change in the recognition of receipts from other UK network owners (and has no impact on profit).

The following is a description of principal activities, by reportable segment, from which the Group generates its revenue. For more detailed
information about our segments, see note 2.

(a) UK Electricity Transmission
The UK Electricity Transmission segment principally generates revenue by providing electricity transmission services (both as transmission
owner in England and Wales and system operator in Great Britain). Our business operates as a monopoly regulated by Ofgem, which has
established price control mechanisms that set the amount of annual allowed returns our business can earn. The IFRS revenues we record are
principally a function of volumes and price. Price is determined prior to our financial year end with reference to the regulated allowed returns and
estimated annual volumes. Where revenue received or receivable exceeds the maximum amount permitted by regulatory agreement, adjustments
will be made to future prices to reflect this over-recovery. No liability is recognised, as such an adjustment to future prices 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.

The transmission of high-voltage electricity encompasses the following principal services:
• the supply of high-voltage electricity (including both transmission and system operator charges); and
• construction work (principally for connections).

For the supply of high-voltage electricity, revenue is recognised based on capacity and volumes. Our performance obligation is satisfied over time
as our customers make use of our network. We bill monthly in arrears and our payment terms are up to 60 days.

For construction work relating to connections, customers can either pay over the useful life of the connection or upfront. Revenue is recognised
over time, as we provide access to our network, and where the customer pays upfront, revenues are deferred and released over the life of the
connection.

For other construction where there is no consideration for any future services, for example diversions (being the re-routing of network assets
at our customers’ request), revenues are recognised as the construction work is completed.

(b) UK Gas Transmission
The UK Gas Transmission segment of the Group principally generates revenue by providing gas transmission services to our customers
(both as transmission owner and as system operator) in Great Britain. Similar to our UK Electricity Transmission business, our business operates
as a monopoly regulated by Ofgem. The price control mechanism in place that determines our annual allowances is also similar, as is the way
in which revenue is recorded.

The transmission of gas encompasses the following principal services:
• the supply of high-pressure gas (including both transmission and system operator charges); and
• construction work (principally for connections).

For the supply of high-pressure gas, revenue is recognised based on capacity and volumes. Our performance obligation is satisfied over time
as our customers make use of our network, and we bill monthly in arrears with payment terms of up to 45 days.

For construction work relating to connections, customers pay for the connection upfront. Revenue is recognised over time, as we provide access
to our network. Where revenues are received upfront, they are deferred and released over the life of the connection.

For other construction where there is no consideration for any future services (such as diversions), revenues are recognised when the construction
work is completed.

114

Notes to the consolidated financial statements – analysis of items in the primary statements continuedNational Grid Annual Report and Accounts 2018/19Financial Statements3. Revenue continued
(c) US Regulated
The US Regulated segments of the Group principally generate revenue by providing gas and electricity distribution services in New York and
New England, high voltage electricity transmission services in New York and New England, and electricity generation in New York.

Distribution services
Provision of gas and electric distribution services in New York and New England. This comprises the following principal services:
• Gas and electricity distribution: revenue is recognised based on usage (over time) by customers and billed monthly. Payment terms are 30 days; and
• Connections: revenue is recognised over time, as we provide access to our network. Where payments are made upfront, they are

deferred over the life of the asset.

Transmission services
Provision of electricity transmission services to customers and operation of electricity transmission facilities. Our principal services are:
• Electricity transmission: revenue is recognised based on usage by customers (over time) and billed monthly. Payment terms are 30 days; and
• Connections: revenue is recognised over time, as we provide access to our network. Where payments are made upfront, they are deferred

over the life of the asset.

Electricity generation
Provision of energy services and supply capacity to produce energy for the use of customers of the Long Island Power Authority (LIPA) through
a power supply agreement. This falls within the scope of the leasing standard, where we act as lessor with rental income being recorded as other
income, which forms part of total revenue.

(d) NGV and Other
NGV and Other includes electricity interconnectors, LNG at Grain, commercial metering, property sales and rental income, and insurance.

The Group recognises revenue from transmission services through interconnectors and from LNG at Grain by means of customers’ use
of capacity and volumes. Revenue is recognised over time and is billed monthly. Payment terms are 30 days.

Other revenue in the scope of IFRS 15 principally includes revenues from our metering businesses. Revenue is recognised over time and is billed
monthly. Payment terms are 30 days.

Other revenue, recognised in accordance with standards other than IFRS 15, includes property sales by our UK commercial property business
and rental income. Property sales are recorded at a point in time (when the sale is legally completed) and rental income is recorded over time.

In the following tables, revenue is disaggregated by primary geographical market and major service lines. The table reconciles disaggregated
revenue with the Group’s reportable segments (see note 2).

UK Electricity
Transmission
£m

UK Gas
Transmission
£m

US Regulated
£m

NGV and Other
£m

Total
£m

Revenue for the year ended 31 March 2019

Revenue under IFRS 15

Transmission

Distribution

Other

Total IFRS 15 revenue

Other revenue

Generation

Other

Total other revenue

Total revenue from continuing operations

3,325

–

3,325

–

3,331

833

–

833

–

884

370

8,941

–

9,311

367

168

535

9,846

313

–

284

597

–

275

872

Geographical split for the year ended 31 March 2019

UK Electricity
Transmission
£m

UK Gas
Transmission
£m

US Regulated
£m

NGV and Other
£m

Revenue under IFRS 15

Total IFRS 15 revenue

Other revenue

Total other revenue

Total revenue from continuing operations

3,325

–

3,325

–

3,331

833

–

833

–

884

–

9,311

–

535

9,846

585

597

245

275

872

Revenue to be recognised in future periods, presented as contract liabilities of £994 million (see note 23), relates to contributions in aid of
construction. Revenue is recognised over the life of the asset. The asset lives for connections in UK Electricity Transmission, UK Gas Transmission
and US Regulated are 40 years, 36 years (to 2055), and up to 47 years respectively. The weighted average amortisation period is 43 years.

Future revenues in relation to unfulfilled performance obligations not yet received in cash amount to £3.5 billion. £1.6 billion relates to connection
contracts in UK Electricity Transmission which will be recognised as revenue over 30 years and £1.8 billion relates to revenues to be earned under
LNG at Grain contracts over 11 years. The remaining amount will be recognised as revenue over 5 years.

The amount of revenue recognised for the year ended 31 March 2019 from performance obligations satisfied (or partially satisfied) in previous
periods, mainly due to the changes in the estimate of the stage of completion, is £nil.

115

4,841

8,941

284

14,066

367

500

867

14,933

Total
£m

4,743

9,323

14,066

302

565

867

14,933

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements4. Operating costs
Below we have presented separately certain items included in our operating costs from continuing operations. These include a breakdown
of payroll costs (including disclosure of amounts paid to key management personnel) and fees paid to our auditors.

Rentals under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease.

Before exceptional items
and remeasurements

Exceptional items
and remeasurements

2019
£m

1,588

1,703

1,504

1,644

1,108

1,196

–

2,748

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

11,491

11,793

11,262

2019
£m

147

149

(50)

(2)

–

328

572

2018
£m

–

(14)

–

(26)

(36)

2017
£m

–

(46)

(22)

–

633

565

Depreciation, amortisation and impairment

Payroll costs

Purchases of electricity

Purchases of gas

Rates and property taxes

Balancing Services Incentive Scheme

Payments to other UK network owners1

Other

Operating costs include:

Inventory consumed

Operating leases2

Research and development expenditure

1. Under IFRS 15, for 2019 revenue and associated payments to other UK network owners are presented on a net basis. Refer to note 37.
2. Following a review during the year, the comparatives have been refined to provide consistency with the current year.

(a) Payroll costs

Wages and salaries1

Social security costs

Defined contribution scheme costs

Defined benefit pension costs

Share-based payments

Severance costs (excluding pension costs)

Less: payroll costs capitalised

Total payroll costs

Total

2018
£m

1,530

1,648

1,285

1,543

1,057

1,012

1,043

2,639

2019
£m

1,735

1,852

1,454

1,642

1,108

1,196

–

3,076

2017
£m

1,481

1,578

1,097

1,219

1,042

1,120

1,008

3,282

12,063

11,757

11,827

415

367

296

2019
£m

2,084

156

232

2,647

(795)

1,852

2018
£m

1,998

157

156

2,399

(751)

1,648

2017
£m

1,852

145

151

2,243

(665)

1,578

1. Included within wages and salaries are US other post-retirement benefit costs of £48 million (2018: £46 million; 2017: £53 million). For further information refer to note 25.

(b) Number of employees

Total number of employees

31 March
2019

5,962

16,614

22,576

Monthly
average

2019

6,227

16,669

22,896

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

116

Notes to the consolidated financial statements – analysis of items in the primary statements continuedNational Grid Annual Report and Accounts 2018/19Financial Statements4. Operating costs continued
(c) Key management compensation

Short-term employee benefits

Post-employment benefits

Share-based payments

Total key management compensation

2019
£m

2018
£m

2017
£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 79 and those of Non-executive Directors
on page 84.

(e) Auditors’ remuneration
Auditors’ remuneration is presented below in accordance with the requirements of the Companies Act 2006 and the principal accountant
fees and services disclosure requirements of Item 16C of Form 20-F:

Audit fees payable to the Parent Company’s auditors and their associates in respect of:1

Audit of the Parent Company’s individual and consolidated financial statements2

The auditing of accounts of any associate of the Company3

Other services supplied4

Total other services5

Tax fees:

Tax compliance services

Tax advisory services

All other fees:

Other assurance services6

Services relating to corporate finance transactions not covered above7

Other non-audit services not covered above8

Total auditors’ remuneration

2019
£m

1.6

7.2

5.2

14.0

–

1.1

–

2.2

3.3

17.3

2018
£m

2.7

9.3

3.9

15.9

0.3

–

0.7

–

0.9

1.9

17.8

2017
£m

1.5

13.7

4.6

19.8

0.4

0.1

4.6

5.9

6.3

17.3

37.1

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 year ended 31 March 2017.
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 2019, 2018 and 2017.
3. The 2018 comparative has been updated following finalisation of the 2018 audit fee with the Audit Committee.
4. 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 2018, 2017 and 2016 respectively.

5. There were no audit related fees as described in Item 16C(b) of Form 20-F.
6. Principally amounts relating to assurance services provided in relation to comfort letters for debt issuances. In 2017, 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.

7. Vendor due diligence and other transaction services in relation to the sale of UK Gas Distribution.
8. 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 2017, services

related principally to PwC assisting the Company with separation activities in relation to the sale of UK Gas Distribution.

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 Committee also considers and approves
the audit fees on behalf of the Board in accordance with the Competition and Market Authority Audit Order 2014. The auditors’ remuneration is
then put to shareholders at each AGM. Details of our policies and procedures in relation to non-audit services to be provided by the independent
auditors are set out on page 62 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.

117

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements5. 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’. Business performance (which excludes exceptional items and remeasurements as defined below) is used
by management to monitor financial performance as it is considered that it aids the comparability of our reported financial performance from
year to year. 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.

Exceptional items and remeasurements from continuing operations

2019
£m

20181
£m

2017
£m

Included within operating profit

Exceptional items:

Cost efficiency and restructuring programmes

Massachusetts Gas labour dispute

Impairment of nuclear connection development costs

Final settlement of LIPA MSA Transition

Environmental charges

Gas holder demolition costs

Remeasurements – commodity contract derivatives

Included within finance income and costs

Remeasurements:

Net (losses)/gains on derivative financial instruments

Net gains on financial assets at fair value through profit and loss

Net losses on financial liabilities at fair value through profit and loss

Included within share of post-tax results of joint ventures and associates

Deferred tax arising on the reduction in US corporation tax rate

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

(204)

(283)

(137)

–

(624)

(572)

(40)

(51)

(76)

–

(648)

–

144

149

(499)

(480)

(19)

(499)

–

119

–

119

160

–

1,510

(9)

(28)

1,473

1,633

1,532

101

1,633

–

(526)

(107)

(633)

(565)

(58)

–

(58)

–

(623)

–

227

(29)

292

(331)

(312)

(19)

(331)

1. Comparatives for 2018 only have been re-presented to reflect the classification of our retained interest in Quadgas as a discontinued operation in the current period (see note 1C and note 10).

118

Notes to the consolidated financial statements – analysis of items in the primary statements continuedNational Grid Annual Report and Accounts 2018/19Financial Statements5. Exceptional items and remeasurements continued
Exceptional items
Management uses 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, the precedent for similar items, the 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 consolidated 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.

2019
In assessing certain items of income and expenditure against our exceptional items framework, we have concluded that the costs associated
with the Massachusetts Gas labour dispute (£283 million), our cost efficiency and restructuring programme (£204 million) and impairments
relating to two nuclear connection cancellations (£137 million) should be treated as exceptional (as described further below).

We also considered whether the £95 million income from two legal settlements received in the period should be classified as exceptional.
However, we concluded it was appropriate to recognise the income in earnings before exceptional items (within NGV and Other),
in line with the treatment of the original costs.

Cost efficiency and restructuring programmes: Our UK and US businesses incurred restructuring charges as we reviewed organisational
structures, operational activities and relevant roles and responsibilities to ensure we are able to operate more efficiently and to continue to drive
outperformance for customers and shareholders. In the UK these reviews were largely completed during the first half of the year, and we reported
a £127 million exceptional charge at 30 September 2018, reflecting £100 million in severance and associated planning and support costs. A net
charge of £52 million relating to pension costs is recognised within this amount. No significant additional operational costs have been incurred
in the UK since 30 September 2018; however, during the second half of the year we commenced an equivalent programme for our US core
business, which has resulted in a charge of £68 million, relating to severance and lease terminations following a decision to exit certain of
our properties in New York City. The cash outflow for the year was £93 million.

Massachusetts Gas labour dispute: On 25 June 2018, National Grid implemented a workforce contingency plan across its Massachusetts
Gas business following the expiration of contracts for the 1,250 members of the existing workforce. In early January 2019 we reached agreement
with the two unions over employment terms and conditions, with affected staff members returning to work in late January 2019. Throughout
the duration of the labour dispute, we employed experienced contractors alongside supervisors and workers from other areas of our business
to ensure work continued safely, and external contractor activity returned to normal levels in February 2019. In presenting this year’s financial
statements, we have excluded the net incremental cost of £283 million on the basis that this ensures adjusted earnings presents a clear view
of the financial performance of the US regulated business had the workforce contingency plan not been implemented. The total cash outflow
related to the labour dispute was £320 million for the year.

Impairment of nuclear connection development costs: In November 2018, Toshiba announced the cancellation of its NuGen project
to build a new nuclear power station at Moorside in Cumbria, and on 23 November 2018, NuGen terminated its connection agreement with
UK Electricity Transmission. On 15 February 2019, Hitachi terminated its connection agreements in respect of its Horizon projects at Wylfa
and Oldbury. As there is no realistic prospect of these schemes continuing in their present form, we have concluded that it is appropriate to
impair the assets we had been developing for over 10 years. After deducting cash inflows relating to termination fees received of £13 million,
the net impairment charge was £137 million.

2018
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 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.

2017
In the US, the Group’s most significant environmental liabilities relate to former manufactured 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 2017,
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.

119

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements5. Exceptional items and remeasurements continued
Remeasurements
Remeasurements comprise unrealised gains or losses recorded in the consolidated income statement arising from changes in the fair value of
certain of our financial assets and liabilities accounted for at fair value through profit and loss (FVTPL). Consistent with prior periods, in the current
period these assets and liabilities include commodity contract derivatives and financial derivative instruments to the extent that hedge accounting
is not achieved or is not effective.

Following the adoption of IFRS 9 in the current period, this year we have also classified the unrealised gains or losses reported in profit and
loss on certain additional assets and liabilities now treated at FVTPL within remeasurements. These relate to the financial assets (which fail the
‘solely payments of principal and interest test’ under IFRS 9), the money market fund investments used by Group Treasury for cash management
purposes and certain financial liabilities which we elected to designate at FVTPL on transition. In all cases, these fair values increase or decrease
because of changes in foreign exchange, commodity or other financial indices over which we have no control.

We report unrealised gains or losses relating to certain discrete classes of financial assets accounted for at FVTPL within business performance.
These comprise our portfolio of investments made by National Grid Partners, and our investment in Sunrun Neptune 2016 LLC (within NGV and
Other). The performance of these assets (including changes in fair value) are included in our assessment of business performance for the
relevant business units.

Remeasurements excluded from business performance are made up of the following categories:
i) Net gains/(losses) on 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.
ii) Net gains/(losses) on derivative financial instruments comprise gains/(losses) arising on derivative financial instruments reported in the

consolidated income statement in relation to our debt financing and foreign exchange hedging of the investment funds held by our insurance
captives. These exclude gains and losses for which hedge accounting has been effective, and have been recognised directly in the
consolidated statement of other comprehensive income or are offset by adjustments to the carrying value of debt (see notes 17 and 32).
iii) Net gains/(losses) on financial assets measured at FVTPL comprise gains/(losses) on the investment funds held by our insurance captives

which are categorised as FVTPL (see note 15).

iv) Net gains/(losses) on financial liabilities measured at FVTPL comprises the change in the fair value (excluding changes due to own credit risk)

of a financial liability that has been designated at FVTPL on transition to IFRS 9 to reduce a measurement mismatch (see note 21).

Items included within tax
2018
The Tax Cuts and Jobs Act (Tax Reform), which was enacted on 22 December 2017, reduced the US corporate tax 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. This resulted in a one-off
deferred tax credit in the year ended 31 March 2018. However, as described in note 11, we expect the overall impact of Tax Reform to be
economically neutral for the Group.

2017
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 2019 and 31 March 2018.

120

Notes to the consolidated financial statements – analysis of items in the primary statements continuedNational Grid Annual Report and Accounts 2018/19Financial Statements6. Finance income and costs

This note details the interest income generated by our financial assets and interest expense incurred on our financial liabilities, primarily
our financing portfolio (including our financing derivatives). 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 financial instruments included in
remeasurements (see note 5). In addition, where debt redemptions relate to exceptional transactions they are typically treated as exceptional.

The Group adopted IFRS 9 with effect from 1 April 2018. The comparatives are not required to be restated and are accounted for in accordance
with IAS 39. Following the adoption of IFRS 9, finance income and costs remeasurements include unrealised gains and losses on certain assets
and liabilities now treated at FVTPL. The interest income, dividends and interest expense on these items are included in finance income and
finance costs before remeasurements, respectively.

Finance income

Interest income on financial instruments:

Bank deposits and other financial assets

Dividends received on equities held at fair value through other comprehensive income

Gains on disposal of available-for-sale investments

Other income

Finance costs

Notes

2019
£m

20181
£m

2017
£m

–

127

–

Net interest on pensions and other post-retirement benefit obligations

(22)

(65)

(107)

Interest expense on financial liabilities held at amortised cost:

Bank loans and overdrafts

Other borrowings

Interest expense on financial liabilities held at fair value through profit and loss

Derivatives

Unwinding of discount on provisions

Other interest

Less: interest capitalised2

Remeasurements – Finance income

Net gains on financial assets held at fair value through profit and loss

Remeasurements – Finance costs

Net losses on financial liabilities held at fair value through profit and loss

Net (losses)/gains on derivative financial instruments3:

Derivatives designated as hedges for hedge accounting

Derivatives not designated as hedges for hedge accounting

Total remeasurements – Finance income and costs

Finance income

Finance costs

(72)

(970)

(20)

(43)

(74)

–

135

(87)

(1,030)

–

(75)

(11)

128

(59)

(927)

–

(8)

(73)

(17)

109

(1,066)

(1,128)

(1,082)

(51)

(37)

(3)

(91)

(76)

–

119

127

(1,157)

(1,009)

–

(139)

(58)

(1,140)

Net finance costs from continuing operations

(1,069)

(882)

(1,087)

1. Comparatives for 2018 only have been re-presented to reflect the classification of our retained interest in Quadgas as a discontinued operation in the current period (see note 1C and note 10).
2. Interest on funding attributable to assets in the course of construction in the current year was capitalised at a rate of 3.9% (2018: 4.1%; 2017: 3.4%). In the UK, capitalised interest qualifies
for a current year tax deduction with tax relief claimed of £19 million (2018: £20 million; 2017: £18 million). In the US, capitalised interest is added to the cost of plant and qualifies for tax
depreciation allowances.

3. Includes a net foreign exchange gain on financing activities of £264 million (2018: £314 million loss; 2017: £264 million loss) offset by foreign exchange losses and gains on derivative

financial instruments measured at fair value.

121

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements7. Tax

Tax is payable in the territories where we operate, mainly the UK and the US. This note gives further details of the total tax charge and tax
liabilities, including current and deferred tax. The current tax charge is the tax payable on this year’s taxable profits. Deferred tax is an
accounting adjustment to provide for tax that is expected to arise in the future due to differences in the accounting and tax bases.

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 charged/(credited) to the consolidated income statement – continuing operations

Tax before exceptional items and remeasurements

Exceptional tax on items not included in profit before tax (see note 5)

Tax on other exceptional items and remeasurements

Tax on total exceptional items and remeasurements

Total tax charge/(credit) 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

2019
£m

488

–

(149)

339

2019
%

19.6

18.4

20181
£m

584

(1,510)

(1,473)

(889)

20181
%

23.4

(33.4)

2017
£m

666

(94)

(198)

(292)

374

2017
%

23.7

17.1

1. Comparatives for 2018 only have been re-presented to reflect the classification of our retained interest in Quadgas as a discontinued operation in the current period (see note 1C and note 10).

122

Current tax:

UK corporation tax at 19% (2018: 19%; 2017: 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

Total tax charge/(credit) from continuing operations

2019
£m

20181
£m

200

(18)

182

(4)

193

(2)

(1,155)

(1,145)

(1,082)

132

(12)

120

(40)

(32)

208

222

251

339

2017
£m

225

(47)

178

–

179

(9)

(18)

(27)

224

(2)

222

195

(889)

374

Tax charged/(credited) to the consolidated statement of other comprehensive income and equity

Current tax:

Available-for-sale investments

Investments at fair value through other comprehensive income

Cash flow hedges, Cost of hedging and Own credit reserve

Share-based payments

Deferred tax:

Available-for-sale investments

Investments at fair value through other comprehensive income

Cash flow hedges, Cost of hedging and Own credit reserve

Remeasurements of gains of pension assets and post-retirement benefit obligations2

Share-based payments

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

2019
£m

20181
£m

2017
£m

–

(12)

–

(11)

–

(3)

(18)

–

(4)

530

495

497

–

(2)

–

495

–

(4)

–

277

308

311

(3)

–

318

1. Comparatives for 2018 only have been re-presented to reflect the classification of our retained interest in Quadgas as a discontinued operation in the current period (see note 1C and note 10).
2. Remeasurements of gains on pension assets and post-retirement benefit obligations for the year ended 31 March 2018 includes a deferred tax charge of £281 million arising on the

reduction in the US corporation tax rate.

123

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements7. Tax continued
The tax charge for the year after exceptional items and remeasurements, for the continuing business, is lower (2018: lower tax charge; 2017: lower
tax charge) than the standard rate of corporation tax in the UK of 19% (2018: 19%; 2017: 20%):

Before
exceptional
items and
remeasurements
2019
£m

After
exceptional
items and
remeasurements
2019
£m

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

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%
(2018: 19%; 2017: 20%)

Effect of:

Adjustments in respect of prior years1

Expenses not deductible for tax purposes2

Non-taxable income2,3

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

Other4

Total tax charge/(credit) from
continuing operations

Effective tax rate – continuing operations

2,489

–

2,489

(648)

1,841

2,500

–

2,500

473

350

(36)

(3)

–

(10)

488

19.6

(36)

(3)

–

(20)

339

18.4

475

(22)

(16)

153

(7)

–

(19)

584

23.4

2,500

160

2,660

506

(14)

(26)

157

(7)

(1,510)

(16)

(889)

(33.4)

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

1. Prior year adjustment is primarily due to agreement of prior period tax returns.
2. For the year ended 31 March 2017, 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. Includes gains on chargeable disposals which are offset by previously unrecognised capital losses.
4. Other primarily comprises an adjustment in respect of post-tax profits of joint ventures and associates included within profit before tax from continuing operations.

Factors that may affect future tax charges
The main rate of UK corporation tax is reduced 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 aid investigations. At this time we do not expect this to have any material impact on our future tax charges.

124

Notes to the consolidated financial statements – analysis of items in the primary statements continuedNational Grid Annual Report and Accounts 2018/19Financial Statements7. 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:

Accelerated
tax
depreciation

£m

Share-
based
payments

£m

Pensions
and other
post-
retirement
benefits

£m

Financial
instruments

£m

Other net
temporary
differences1
£m

Deferred tax liabilities/(assets)

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 (as previously reported)

Impact of transition to IFRS 9 and IFRS 15

At 1 April 2018 (as restated)

Exchange adjustments and other2

(Credited)/charged to income statement

Charged/(credited) to other comprehensive income and equity

At 31 March 2019

7,074

(559)

(1,641)

–

4,874

4,893

275

309

–

5,477

(12)

–

(9)

–

(9)

–

(9)

(747)

(55)

530

(203)

–

(203)

(31)

(170)

(1)

(5)

(3)

(12)

(1,845)

221

598

(21)

(1,047)

(93)

(1,140)

(76)

(124)

–

Total
£m

4,479

(268)

(1,084)

509

3,636

(79)

3,557

165

243

–

(1,340)

3,965

1. The deferred tax asset of £1,340 million as at 31 March 2019 (2018: £1,047 million) in respect of other net temporary differences primarily relates to US net operating losses of £423 million

(2018: £390 million) and environmental provisions of £409 million (2018: £378 million).

2. Exchange adjustments and other comprises foreign exchange arising on translation of the US dollar deferred tax balances. In the prior period it also included reclassification of £43 million

relating to offset of the opening deferred tax balance on US net operating losses 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 £3,965 million
(2018: £3,636 million). This balance is after offset of a deferred tax asset of £423 million (2018: £390 million) which has been recognised in respect
of net operating losses. In the prior period, the deferred tax credited to the income statement of £1,084 million was 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

2019
£m

1,470

2018
£m

510

The capital losses arose in the UK on disposal of certain businesses or assets, some of which were agreed with HMRC in the current period.
They are available to carry forward indefinitely but 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 2019 and 31 March 2018, there were no recognised deferred tax liabilities 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 from the payment of dividends by the Group to its shareholders.

125

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements8. Earnings per share (EPS)

EPS is the amount of post-tax profit attributable to each ordinary share. Basic EPS is calculated on profit for the year attributable to equity
shareholders divided by the weighted average number of shares in issue during the year. Diluted EPS shows what the impact would be if all
outstanding share options were exercised and treated as ordinary shares at year end. The weighted average number of shares is increased
by additional shares issued as scrip dividends and reduced by shares repurchased by the Company during the year. 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 5.

Following the sale of the UK Gas Distribution business on 31 March 2017, National Grid plc returned £3,171 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 year ended 31 March 2018 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
began on 2 June 2017 completed in March 2018. Purchased shares are held as treasury shares.

(a) Basic EPS

Adjusted earnings from continuing operations

Exceptional items and 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 EPS

Adjusted earnings from continuing operations

Exceptional items and 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

Earnings
2019
£m

EPS
2019
pence

Earnings
20181
£m

1,915

1,633

3,548

145

(143)

2,060

1,490

3,550

1,998

(499)

1,499

(45)

2,055

(544)

1,511

59.0

(14.7)

44.3

1.7

(1.4)

0.3

60.7

(16.1)

44.6

2019
millions

3,386

Earnings
2019
£m

EPS
2019
pence

Earnings
20181
£m

1,915

1,633

3,548

145

(143)

2,060

1,490

3,550

1,998

(499)

1,499

(45)

2,055

(544)

1,511

58.8

(14.7)

44.1

1.7

(1.4)

0.3

60.5

(16.1)

44.4

2019
millions

3,401

Earnings
2017
£m

2,141

(331)

1,810

607

5,378

5,985

2,748

5,047

7,795

Earnings
2017
£m

2,141

(331)

1,810

607

5,378

5,985

2,748

5,047

7,795

EPS
20181
pence

55.3

47.2

102.5

4.2

(4.1)

0.1

59.5

43.1

102.6

2018
millions

3,461

EPS
20181
pence

55.1

47.0

102.1

4.2

(4.2)

0.0

59.3

42.8

102.1

2018
millions

3,476

EPS
2017
pence

56.9

(8.8)

48.1

16.1

142.9

159.0

73.0

134.1

207.1

2017
millions

3,763

EPS
2017
pence

56.7

(8.8)

47.9

16.0

142.3

158.3

72.7

133.5

206.2

2017
millions

3,780

1. Comparatives for 2018 only have been re-presented to reflect the classification of our retained interest in Quadgas as a discontinued operation in the current period (see note 1C and note 10).

126

Notes to the consolidated financial statements – analysis of items in the primary statements continuedNational Grid Annual Report and Accounts 2018/19Financial Statements8. Earnings per share (EPS) continued
(c) Reconciliation of basic to diluted average number of shares

Weighted average number of ordinary shares – basic

Effect of dilutive potential ordinary shares – employee share plans

Weighted average number of ordinary shares – diluted

2019
millions

3,386

3,401

2018
millions

3,461

3,476

2017
millions

3,763

3,780

9. Dividends
Interim dividends are recognised when they become payable to the Company’s shareholders. Final dividends are recognised when they are
approved by shareholders.

Pence
per share

Interim dividend in respect of the current year

16.08

Special dividend

Final dividend in respect of the prior year

–

30.44

46.52

2019

Cash
dividend
paid
£m

450

–

710

1,160

Scrip
dividend
£m

–

319

413

Pence
per share

15.49

84.375

29.10

128.965

2018

Cash
dividend
paid
£m

346

3,171

970

4,487

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

–

151

183

The Directors are proposing a final dividend for the year ended 31 March 2019 of 31.26p per share that will absorb approximately £1,066 million
of shareholders’ equity (assuming all amounts are settled in cash). It will be paid on 14 August 2019 to shareholders who are on the register of
members at 31 May 2019 (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 £3,171 million to shareholders. No scrip
dividend was offered as an alternative.

127

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements10. Discontinued operations and assets held for sale

The 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.
They only meet 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.

Following the decision that we will exercise our put option to sell the 39% equity interest we hold in Quadgas, and on the basis that we intend
to dispose of our stake by 30 June 2019, we have met the criteria to classify our interests in Quadgas as a disposal group held for sale.
The disposal group comprises our equity interests in Quadgas, the shareholder loan to Quadgas and the derivatives arising from the put/call
agreements (described further below). The Group has classified the results of the disposal group as a discontinued operation for the year,
and therefore they are presented in the income statement as a discontinued operation separately from the results of the rest of our business,
in the same way as the results of the UK Gas Distribution business were disclosed following the sale of a 61% controlling stake in the business
on 31 March 2017.

On 31 March 2017, the Group sold 61% of its UK Gas Distribution business to Quadgas BidCo Limited (the Consortium) and retained 39%
of the business. At the same time, we and the Consortium also entered into a Further Acquisition Agreement (FAA), a put/call arrangement,
to sell a further 14% of our investment in the business between 1 March 2019 and 30 June 2019 (our put, having given at least six months’ notice)
or between 1 July 2019 to 31 October 2019 (the Consortium’s call, having given six months’ notice).

On 1 May 2018, we announced that we had entered into a Remaining Acquisition Agreement (RAA) with the Consortium for the remaining 25%
stake in the business under an agreement similar to the FAA. The pricing under the RAA is less favourable to the Group than the FAA. However,
in all other material aspects, the RAA is similar to the FAA, in particular regarding the windows for the notice to be given and exercise of the put
and call options. This resulted in the recognition of a net derivative financial asset with a fair value of £110 million (2018: £110 million) relating to
the FAA. The fair value of this derivative was initially determined by comparing the pricing mechanism within the FAA against that of the agreement
concerning our remaining 25% interest. The £110 million gain as at 31 March 2018 reflected the pricing differential between the two contracts.

An impairment review of the Group’s interests in Quadgas (comprising the FAA derivative, a 39% equity interest and £0.4 billion 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. At 31 March 2018, this resulted in a charge of £213 million, recorded as an impairment against the
carrying value of the equity, largely offsetting pension accounting gains, and the recognition of the FAA derivative asset.

We have decided to exercise the options over our remaining 39% interest in Quadgas and the sale is expected to complete at the end of June 2019,
subject to customary regulatory approvals.

The aggregate carrying value of our investment in Quadgas at 31 March 2019 was £2.0 billion (2018: £2.1 billion), determined with reference to
the future proceeds expected to be received under the FAA and RAA. This comprises the carrying value of the Group’s equity interest in Quadgas
of £1.5 billion (2018: £1.6 billion), the shareholder loan to Quadgas of £0.4 billion (2018: £0.4 billion) and the derivatives described above.

Assets held for sale
Under IFRS, the reclassification of assets (and any associated liabilities) as ‘held for sale’ can only be triggered once the assets are available for
sale in their present condition and the sale is ‘highly probable’. The highly probable criterion is met when the sale is expected to be completed
within a year. We have therefore classified our interests in Quadgas as ‘held for sale’ with effect from 30 June 2018, since we expect to exit our
investment by 30 June 2019. At 31 March 2018, we had no such expectation of sale completion within a year.

The aggregate carrying value of the assets and liabilities we will sell amount to £2.0 billion (2018: £2.1 billion), reflecting the total proceeds that
remain to be received. No discounting has been applied on the basis that the period to exercise is now less than a year. The value allocated
to each element of the Quadgas disposal group at 31 March 2019 is as follows:
• the shareholder loan receivable is valued at par of £0.4 billion;
• the RAA derivative1 is valued at £nil;
• the FAA derivative asset1 is valued at £110 million; and
• the residual balance of £1.5 billion has been allocated to the investment in associate.

Treatment as a discontinued operation
We consider that the exercise of our put options is the final stage of the plan to dispose of our interest in the UK Gas Distribution business
first announced in 2015, and we have accordingly treated the results and cash flows arising from Quadgas as a discontinued operation in the
current year on the basis that the sale forms part of a ‘single coordinated plan’ to dispose of UK Gas Distribution. As a consequence, we have
classified the various elements of income, expense and cash flows within discontinued operations as set out below, with comparatives also
re-presented accordingly.

Also included within discontinued operations are the results of the UK Gas Distribution business for the year ended 31 March 2017, following the
disposal of our 61% equity interest in the UK Gas Distribution business described above. This principally comprised the Group’s equity and debt
interests in National Grid Gas Distribution Limited together with certain other assets (principally property and a 45% interest in Xoserve Limited).
The 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
2017. Further details are included in the Annual Report and Accounts 2016/17. Within the Annual Report and Accounts 2017/18, both the income
statement and the cash flow statement for the year ended 31 March 2018 included amounts relating to the transaction within discontinued
operations, primarily relating to the completion accounts settlement in November 2017, a cash outflow from operating activities of £207 million
related to the utilisation of provisions (mainly relating to payments of professional fees in respect of the disposal of the UK Gas Distribution
business), and net cash flows used in financing activities of £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).

1. The RAA and FAA are both level 3 financial instruments. No sensitivity analysis is provided in respect of the FAA and RAA derivatives. The price at which we will exit our interest in Quadgas
is fixed and accordingly reflected in the aggregate carrying value of the disposal group. Any change in the fair value of these derivatives at 31 March would have been offset by equal and
opposite adjustments to the carrying value of our equity interest, with nil net impact on profit and loss for the year. The notional value of the FAA was £739 million (2018: £739 million) and the
notional value of the RAA was £1,087 million.

128

Notes to the consolidated financial statements – analysis of items in the primary statements continuedNational Grid Annual Report and Accounts 2018/19Financial Statements10. Discontinued operations and assets held for sale continued
Summary income statement – discontinued operations
The summary income statement for discontinued operations is as follows:

Revenue

Operating costs2

Operating (loss)/profit

Net finance income/(costs)

Share of post-tax results of joint ventures and associates3

Profit before tax from discontinued operations

Tax from discontinued operations

Profit after tax from discontinued operations

Gain on disposal of UK Gas Distribution after tax4

Total profit after tax from discontinued operations5

2019
£m

–

(1)

(5)

–

20181
£m

–

(41)

137

(89)

(5)

–

2017
£m

1,887

(993)

894

(152)

–

742

(79)

663

5,321

5,984

1. Comparatives for 2018 only have been re-presented to reflect the classification of our retained interest in Quadgas as a discontinued operation in the current period (see note 1C).
2. Operating costs of £41 million for the year ended 31 March 2018 related to amounts in respect of the disposal of the UK Gas Distribution business, primarily relating to the completion
accounts settlement in November 2017. The remainder of the balances relate to the disposal group and have been re-presented to reflect the classification of our retained interest in
Quadgas as a discontinued operation in the current period.

3. For the year ended 31 March 2019, this is the net of £43 million impairment charge against investment in Quadgas (see note 16) and £38 million share of Quadgas post-tax profits

recognised prior to classification as held for sale.

4. 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.

5. Of the total profit after tax for the year ended 31 March 2019 from discontinued operations, the £43 million impairment charge against the investment in Quadgas, net operating costs of £1

million and the tax thereon are classified as exceptional items.

Statement of comprehensive income – discontinued operations
The summary statement of comprehensive income for discontinued operations is as follows:

Profit after tax from discontinued operations

Other comprehensive income/(loss)

Items that will never be reclassified to profit or loss:

Notes

2019
£m

20181
£m

2017
£m

5,984

Remeasurement losses of pension assets and post-retirement benefit obligations

Share of other comprehensive income of associate, net of tax

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

Share of other comprehensive income of associate, net of tax

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 for the year, net of tax from discontinued operations

Total comprehensive income for the year from discontinued operations

–

142

–

142

–

147

149

(75)

–

(62)

(106)

233

–

(23)

104

6,026

1. Comparatives for 2018 only have been re-presented to reflect the classification of our retained interest in Quadgas as a discontinued operation in the current period (see note 1C).

Once the assets are treated as ‘held for sale’, equity accounting ceases for our investment in our associate. We therefore ceased to record
our share of profits and share of gains/losses recorded within the consolidated statement of other comprehensive income from 30 June 2018.

Summary cash flow statement – discontinued operations
Cash outflow from operating activities of £71 million (2018: £207 million) primarily related to the payments to Affordable Warmth and professional
fees in respect of the disposal of the UK Gas Distribution business. In 2017, the amount related to outflows of cash by the UK Gas Distribution
business itself.

Cash inflows from investing activities of £156 million (2018: £171 million) was comprised of dividends received and interest received on the
shareholder loan. In 2017, this represented cash outflows from investments made by UK Gas Distribution.

There were no cash flows for financing activities in the year. In 2018, 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 sale process. In 2017, amounts
related to the liability management programme, comprising £4.8 billion of debt issued and term debt raised, offset by £3.2 billion in respect of
bond buybacks.

129

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements11. Goodwill

Goodwill represents the excess of what we paid to acquire businesses over the fair value of their net assets at the acquisition date. We assess
whether goodwill is recoverable each year by performing an impairment review.

Goodwill is recognised as an asset and is not amortised, but is tested for impairment annually or more frequently if events or changes in
circumstances indicate a potential impairment. Any impairment is recognised immediately in the income statement and is not subsequently
reversed.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and
translated at the closing exchange rate.

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 2017

Exchange adjustments

Net book value at 31 March 2018

Exchange adjustments

Net book value at 31 March 2019

Total
£m

6,096

(652)

5,444

425

5,869

The cost of goodwill at 31 March 2019 was £5,885 million (2018: £5,458 million) with an accumulated impairment charge of £16 million
(2018: £14 million).

The amounts disclosed above as at 31 March 2019 include balances relating to the following cash-generating units: New York £3,382 million
(2018: £3,137 million); Massachusetts £1,264 million (2018: £1,173 million); Rhode Island £470 million (2018: £436 million); and Federal £753 million
(2018: £698 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 2.2% (2018: 2.3%). 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%
(2018: 5.3%). The equivalent pre-tax discount rate is 5.3% (2018: 5.3%) as tax is assumed to be a pass-through cost to our customers,
recoverable under our rate plans. 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. 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 triggered the remeasurement of our deferred tax liabilities from 35% to 21% which resulted in the exceptional gain under IFRS
for the year ended 31 March 2018 (as disclosed in notes 5 and 7). However, the impact for our US business is that the amounts we have previously
received from customers assuming a 35% federal tax rate instead of a 21% federal tax rate must now be returned to customers over a period of
up to 50 years. The precise manner and timing over which this occurs remains subject to agreement with our regulators.

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 we have 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.

130

Notes to the consolidated financial statements – analysis of items in the primary statements continuedNational Grid Annual Report and Accounts 2018/19Financial Statements12. 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: i) an asset is created that can be identified; ii) it is probable that
the asset created will generate future economic benefits; and iii) 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 2017

Exchange adjustments

Additions

Disposals

Reclassifications1

Cost at 31 March 2018

Exchange adjustments

Additions

Disposals

Reclassifications1

Cost at 31 March 2019

Accumulated amortisation at 1 April 2017

Exchange adjustments

Amortisation charge for the year

Accumulated amortisation of disposals

Accumulated amortisation at 31 March 2018

Exchange adjustments

Amortisation charge for the year

Accumulated amortisation of disposals

Accumulated amortisation at 31 March 2019

Net book value at 31 March 20192

Net book value at 31 March 2018

1. Reclassifications includes amounts transferred (to)/from property, plant and equipment (see note 13).
2. Included in software is £116 million (2018: £160 million) relating to the US Enterprise Resource Planning system, which still has a remaining amortisation period of four years.

Years

3 to 10

Software
£m

1,732

(98)

173

(18)

1,797

306

(15)

2,168

(809)

(138)

(898)

(26)

(175)

(1,084)

1,084

899

131

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements13. Property, plant and equipment

The following note shows the physical assets controlled by us. The cost of these assets primarily represents the amount initially paid for them.
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.

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; and 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.

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 103

10 to 100

29 to 85

15 to 93

5 to 65

10 to 95

5 to 65

7 to 62

up to 30

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 the 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.

132

Cost at 1 April 2017

Exchange adjustments

Additions

Disposals2

Reclassifications3

Cost at 31 March 2018

Exchange adjustments

Additions

Disposals2

Reclassifications3

Cost at 31 March 2019

Accumulated depreciation at 1 April 2017

Exchange adjustments

Depreciation charge for the year

Disposals

Reclassifications3

Accumulated depreciation at 31 March 2018

Exchange adjustments

Depreciation charge for the year

Disposals

Reclassifications3

Accumulated depreciation at 31 March 2019

Net book value at 31 March 2019

Net book value at 31 March 2018

Land and
buildings
£m

Plant and
machinery
£m

Assets
in the
course of
construction1
£m

Motor
vehicles
and office
equipment
£m

Total
£m

2,979

(169)

(16)

2,930

114

(35)

295

3,338

(684)

(28)

–

(674)

(19)

(93)

49,231

(2,862)

430

(216)

2,791

49,374

2,001

391

(357)

2,974

54,383

(15,996)

695

(1,276)

199

(20)

(16,398)

(501)

(1,229)

335

(1)

(778)

(17,794)

2,560

2,256

36,589

32,976

3,951

(89)

3,358

(21)

(2,926)

4,273

3,533

(159)

(3,292)

4,425

–

(150)

150

–

4,425

4,273

834

56,995

(67)

(34)

857

(44)

930

(490)

(88)

–

(509)

(25)

(101)

–

(591)

339

348

(3,187)

3,901

(287)

57,434

2,232

4,015

(595)

(10)

63,076

(17,170)

759

(1,392)

242

(20)

(17,581)

(545)

(1,573)

536

–

(19,163)

43,913

39,853

1. Included within disposals are UK nuclear connections development costs of £150 million (before £13 million of termination income) which were written off (2018: £nil). See note 5 for further

details.

2. In 2018, this included the reversal of assets with cost of £51 million and accumulated depreciation of £51 million disposed of in previous years that remain in use in the Group. It also

included £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.

3. Represents amounts transferred between categories, (to)/from other intangible assets (see note 12), 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

Contract liabilities – current

Contract liabilities – non-current

2019
£m

1,995

241

372

933

2018
£m

1,861

253

844

–

133

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements14. Other non-current assets

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 2020.

Other receivables

Non-current tax assets

Prepayments and accrued income1

1. Includes accrued income in relation to property sales to the St William joint venture.

15. Financial and other investments

2019
£m

180

264

2018
£m

115

The Group holds a range of financial and other investments. These investments include short-term money funds, quoted investments in
equities or bonds of other companies, long-term loans to our associates and joint ventures and other loans and receivables. Other loans and
receivables typically 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.

The Group adopted IFRS 9 with effect from 1 April 2018. The comparatives are not required to be restated and are accounted for in accordance
with IAS 39. Under IFRS 9, the Group has reported four categories of financial investments, and the classification for each investment is dependent
on its contractual cash flows and the business model it is held under and recognised on trade date.

Debt instruments that have contractual cash flows that are solely payments of principal and interest, and which are held within a business model
whose objective is to collect contractual cash flows, are held at amortised cost. This category includes our long-term loans to joint ventures and
associates as well as collateral pledged balances.

Debt investments that have contractual cash flows that are solely payments of principal and interest, and which are held within a business
model whose objective is both to collect the contractual cash flows and to sell the debt instruments, are measured at fair value through other
comprehensive income. On disposal, any realised gains or losses are recycled to the income statement in investment income (see note 6).

The Group has elected to measure equity instruments at fair value through other comprehensive income as they are shares held as part of a
portfolio of financial instruments which back some long-term employee liabilities. They are not held for trading and so recognising gains and losses
on these investments in profit and loss would not be representative of performance in the year. On disposal, any realised gains and losses are
transferred to retained profits (see note 28).

Other financial investments are subsequently measured at fair value through profit and loss. This primarily comprises our money market funds,
insurance company fund investments and corporate venture capital investments held by National Grid Partners.

Financial and other investments are initially recognised on trade date. 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 to the extent available.

2018
For 2018, financial and other investments were £3,593 million reported across three 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, and the third category is other loans and receivables, which includes bank
deposits, collateral pledged against derivative holdings or other restricted deposit balances.

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 they 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 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,
is recognised in the income statement.

134

Non-current

Debt investments at fair value through other comprehensive income

Equity investments at fair value through other comprehensive income

Investments at fair value through profit and loss

Available-for-sale investments

Loans to joint ventures and associates1

Current

Investments at fair value through profit and loss

Available-for-sale investments

Other loans and receivables

Financial and other investments include the following:

Investments in short-term money funds2

Insurance company fund investments3

Equities4

Bonds4

Cash surrender value of life insurance policies4

Loans to joint ventures and associates

Corporate venture capital and other

Restricted balances:

Collateral5

Other

2019
£m

343

–

169

667

1,311

–

670

1,981

2,648

969

342

122

221

169

637

2018
£m

–

417

482

899

–

2,304

390

2,694

3,593

1,999

301

145

198

482

–

335

2,648

3,593

1. Comprises a loan to a joint venture. In 2018, £352 million related to a shareholder loan to Quadgas, which has been re-classified to assets held for sale during the period.
2. Includes £6 million (2018: £69 million) held as insurance company fund investments and £22 million (2018: £nil) US non-qualified plan investments, and therefore restricted.
3. Includes restricted amounts of £342 million (2018: £301 million) held as insurance company fund investments.
4. Primarily includes restricted amounts of £436 million (2018: £411 million) relating to US non-qualified plan investments.
5. 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.

Fair value through profit and loss, fair value through other comprehensive income and 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 2019 and 31 March 2018. 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 32(a).

For the purposes of impairment assessment, the investments in bonds are considered to be low risk as they are managed with an investment
remit to invest in investment grade securities; life insurance policies are held with regulated insurance companies; and loans to joint ventures
are individually assessed based on comparable external credit ratings and a review of forecasts. No balances are more than 30 days past due.
All financial assets held at fair value through other comprehensive income or amortised cost are therefore considered to have low credit risk
and have a loss allowance equal to 12-month expected credit losses.

In determining the expected credit losses for these assets, some or all of the following information has been considered: credit ratings, the
financial position of counterparties, the future prospects of the relevant industries and general economic forecasts.

No fair value through other comprehensive income or amortised cost financial assets have had modified cash flows during the period. There has
been no change in the estimation techniques or significant assumptions made during the year in assessing the loss allowance for these financial
assets. There were no significant movements in the gross carrying value of financial assets during the year that contribute to changes in the loss
allowance. No collateral is held in respect of any of the financial investments in the above table. No balances were written off during the year.

135

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements16. Investments in joint ventures and associates

Investments in joint ventures and associates represent businesses we do not control but over which we 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

Capitalisation of shareholder loan to Quadgas

Impairment charge against investment in Quadgas

Transfer of interest in Quadgas to assets held for sale

Share of post-tax results for the year

Share of other comprehensive income of associates, net of tax

Dividends received

Other movements1

Share of net assets at 31 March

2019

Joint
ventures
£m

361

(6)

–

(30)

(104)

317

Associates
£m

1,807

–

(43)

(1,625)

(38)

291

Total
£m

2,168

143

–

(43)

(1,625)

(68)

(93)

608

Associates
£m

1,776

(19)

(213)

–

147

(170)

1,807

2018

Joint
ventures
£m

307

–

(43)

–

361

Total
£m

2,083

(12)

129

(213)

–

173

147

(213)

2,168

1. Other movements on joint ventures relate to reducing the carrying value of the investment in St William Homes LLP to reflect deferred income we expect to recognise over the next 10 years.

A list of joint ventures and associates including the name and proportion of ownership is provided in note 34. Transactions with and outstanding
balances with joint ventures and associates are shown in note 31. Further information on the Group’s interest in Quadgas and the subsequent
reclassification of the interest to assets held for sale is provided in note 10.

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 2019, the Group invested £6 million (2018: £38 million)
alongside Sunrun into a newly incorporated partnership vehicle. The investment is measured at fair value. The fair value gain on this investment
of £8 million (2018: £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 £18 million (2018: £120 million) in
relation to joint ventures.

At 31 March 2019, the Group had one material joint venture, being its 50% equity stake in BritNed and one material associate, being its 26.25%
investment in Millennium Pipeline Company LLC. The Group’s 39% equity stake in Quadgas is held for sale and therefore all disclosures in
relation to Quadgas are included in note 10. BritNed 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 has a reporting period end of 31 December with
monthly management reporting information provided to National Grid. Millennium Pipeline Company LLC is an associate that owns a natural gas
pipeline from southern New York to the Lower Hudson Valley. Summarised financial information as at 31 March, together with the carrying
amount of the investments, is as follows:

Statement of financial position

Non-current assets

Cash and cash equivalents

All other current assets

Non-current liabilities

Current liabilities

Equity

Carrying amount of the Group’s investment

Income statement

Revenue

Depreciation and amortisation

Other costs

Operating profit

Income tax expense

Profit for the year

Group’s share of profit

BritNed Development Limited

Millennium Pipeline Company LLC

2019
£m

370

(11)

(28)

392

196

2018
£m

390

(10)

(28)

406

203

2019
£m

937

(326)

(84)

584

153

2018
£m

709

(331)

(64)

357

BritNed Development Limited

Millennium Pipeline Company LLC

2019
£m

(13)

(10)

20181
£m

121

(13)

(16)

(20)

2019
£m

166

(34)

(35)

–

2018
£m

151

(31)

(41)

–

1. Comparatives for revenue and other costs have been re-presented on a net basis in line with current year classification.

136

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, equities or other indices. In accordance with Board-approved policies, derivatives are transacted generally to
manage exposures to fluctuations in interest rates, foreign exchange rates and commodity prices. Our derivatives balances comprise two
broad categories:

• financing derivatives managing our exposure to interest rates and foreign exchange rates. Specifically we use these derivatives to manage

our financing portfolio, holdings in foreign operations and contractual operational cash flows; and

• commodity contract derivatives managing our US customers’ exposure to price and supply risks. Some forward contracts for the purchase

of commodities meet the definition of derivatives and are included here. We also enter into derivative financial instruments linked to
commodity prices, including index futures, options and swaps. These are used to manage market price volatility.

The Group adopted IFRS 9 with effect from 1 April 2018. The comparatives are not required to be restated and are accounted for in accordance
with IAS 39. There is no impact on derivatives balances as a result of the transition to IFRS 9.

Derivatives 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 IFRS 9. Where the gains or
losses recorded in the income statement arise from changes in the fair value of derivatives to the extent that hedge accounting is not applied
or is not fully effective, these are recorded as remeasurements, detailed in notes 5 and 6. Where the fair value of a derivative is positive it is
carried as a derivative asset, and where negative as a derivative liability.

We calculate the fair value of derivative financial instruments by taking the present value of future cash flows, primarily incorporating market
observable inputs. The various inputs include foreign exchange spot and forward rates, yield curves of the respective currencies, currency basis
spreads between the respective currencies, interest rate and inflation curves, the forward rate curves of underlying commodities, and for those
positions that are not fully cash collateralised the credit quality of the counterparties.

Certain clauses embedded in non-derivative financial instruments or other contracts are presented as derivatives because they impact the risk
profile of their host contracts and they are deemed to have risks or rewards not closely related to those host contracts.

Further information on how derivatives are valued and used for risk management purposes is presented in note 32.

Information on commodity contracts and other commitments not meeting the definition of derivatives is presented in note 30.

The fair values of derivatives by category are as follows:

Financing derivatives

Commodity contract derivatives

Further Acquisition Agreement derivative1

2019

Liabilities
£m

(1,084)

(99)

–

Assets
£m

1,052

101

–

Total
£m

(32)

–

Assets
£m

1,545

110

2018

Liabilities
£m

(945)

(116)

–

1,153

(1,183)

(30)

1,724

(1,061)

1. The Further Acquisition Agreement derivative is a put/call option over a 14% interest in Quadgas that has been reclassified as held for sale during the period (see note 10).

(a) Financing derivatives
The fair values of financing derivatives by type are as follows:

Interest rate swaps

Cross-currency interest rate swaps

Foreign exchange forward contracts1

Inflation-linked swaps

Equity options

2019

Assets
£m

Liabilities
£m

539

470

–

(384)

(443)

(41)

(214)

(2)

1,052

(1,084)

Total
£m

155

–

(214)

–

(32)

Assets
£m

678

687

174

1,545

2018

Liabilities
£m

(457)

(207)

(2)

(278)

(1)

(945)

1. Included within the foreign exchange forward contracts balance is £32 million (2018: £67 million) of derivatives in relation to hedging of capital expenditure.

Total
£m

600

(47)

110

663

Total
£m

221

480

172

(273)

–

600

137

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements17. Derivative financial instruments continued
(a) Financing derivatives continued
The maturity profile of financing derivatives 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

2019

Assets
£m

Liabilities
£m

416

530

996

(282)

(193)

(1)

–

(14)

(594)

(802)

1,052

(1,084)

Total
£m

(226)

(174)

415

(64)

194

(32)

Assets
£m

375

418

632

1,170

1,545

2018

Liabilities
£m

(325)

(88)

(27)

(5)

–

(500)

(620)

(945)

The notional contract1 amounts of financing derivatives by type are as follows:

Interest rate swaps

Cross-currency interest rate swaps

Foreign exchange forward contracts

Inflation-linked swaps

Equity options

2019
£m

(6,299)

(6,700)

(2,937)

(500)

(800)

Total
£m

(5)

(2)

413

132

550

600

2018
£m

(8,390)

(6,925)

(5,793)

(1,191)

(800)

1. The notional contract amounts of derivatives indicate the gross nominal value of transactions outstanding at the reporting date.

(b) Commodity contract derivatives
The fair values of commodity contract derivatives by type are as follows:

(17,236)

(23,099)

2019

2018

Assets
£m

Liabilities
£m

Total
£m

Assets
£m

Liabilities
£m

Total
£m

(12)

(64)

–

(46)

(1)

(4)

(1)

–

(116)

(4)

(39)

(1)

(3)

(1)

(47)

–

Commodity purchase contracts accounted for as derivative contracts

Forward purchases of gas

Derivative financial instruments linked to commodity prices

Electricity capacity

Electricity swaps

Electricity options

Gas swaps

Gas options

–

101

(78)

–

(19)

–

(1)

(99)

138

Notes to the consolidated financial statements – analysis of items in the primary statements continuedNational Grid Annual Report and Accounts 2018/19Financial Statements17. Derivative financial instruments continued
(b) Commodity contract derivatives continued
The maturity profile of commodity contract derivatives 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

2019

Assets
£m

Liabilities
£m

Total
£m

Assets
£m

2018

Liabilities
£m

101

(68)

(9)

(8)

(4)

(6)

(31)

(99)

(16)

(76)

(17)

(11)

(3)

(2)

(7)

(40)

(116)

Total
£m

(46)

(11)

(5)

(1)

(47)

The notional quantities of commodity contract derivatives by type are as follows:

Forward purchases of gas1

Electricity swaps

Electricity options

Electricity capacity

Gas swaps

Gas options

2019

52m Dth

12,848 GWh

10,444 GWh

–

87m Dth

34m Dth

2018

54m Dth

12,839 GWh

13,897 GWh

0.6 GWm

100m Dth

7m Dth

1. Forward gas purchases have terms up to two years. The contractual obligations under these contracts are £108 million (2018: £96 million).

18. Inventories and current intangible assets

Inventories represent assets that we intend to use in order to generate revenue in the short term, either by selling the asset itself (for example,
fuel stocks) or by using it to fulfil a service to a customer or to maintain our network (consumables).

Inventories are stated at the lower of weighted average cost and net realisable value.

Where applicable, cost comprises direct materials and direct labour costs as well as those overheads that have been incurred in bringing the
inventories to their present location and condition.

Emission allowances, principally relating to the emissions of carbon dioxide in the UK and sulphur and nitrous oxides in the US, are recorded
as intangible assets within current assets, and they 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

Current intangible assets – emission allowances

There is a provision for obsolescence of £20 million against inventories as at 31 March 2019 (2018: £18 million).

2019
£m

184

370

2018
£m

190

341

139

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements19. Trade and other receivables

Trade and other receivables are amounts which are due from our customers for services we have provided.

Trade and other receivables are initially recognised at fair value and subsequently measured at amortised cost, less any appropriate allowances
for estimated irrecoverable amounts.

Trade receivables

Accrued income

Prepayments

Other receivables

2019
£m

1,899

883

237

134

2018
£m

1,674

817

229

3,153

2,798

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. The maximum exposure of trade receivables to credit risk is the gross carrying amount of
£2,293 million (2018: £1,983 million).

Provision for impairment of receivables
IFRS 9, effective from 1 April 2018, has changed the basis upon which the impairment provision is calculated. Under IFRS 9, a provision is
recognised for credit losses at an amount equal to the expected credit losses that will arise over the lifetime of the trade receivables. Under
IAS 39, a provision is established for irrecoverable amounts when there is objective evidence that amounts due under the original payment
terms will not be collected. Comparative amounts have not been restated, with the 2018 impairment provision being calculated under IAS 39
and the 2019 impairment provision being calculated on the basis of expected losses under IFRS 9.

At 1 April

Exchange adjustments

Charge for the year, net of recoveries

Uncollectible amounts written off

At 31 March

2019
£m

309

181

(120)

394

2018
£m

424

(42)

(109)

309

The provision for retail customer receivables in the US is calculated based on a series of provision matrices which are prepared by regulated
entity and by customer type. The expected loss rates in each provision matrix are based on historical loss rates adjusted for current and
forecasted economic conditions at the balance sheet date. The inclusion of forward-looking information in the provision matrix setting process
under IFRS 9 resulted in loss rates that reflect expected future economic conditions and the recognition of an expected loss on all debtors even
where no loss event has occurred. This had no material impact on the estimation process during the year.

The average expected loss rates and balances for the retail customer receivables in our US operations are set out below:

0 – 30 days

30 – 60 days

60 – 90 days

3 – 6 months

6 – 12 months

Over 12 months

2019
%

2019
£m

736

194

109

238

2018
%

2018
£m

741

192

218

US retail customer receivables are not collateralised. Write-off policies vary as they are aligned with regulatory requirements, which differ between
regulators. Receivables are not modified but are written off when regulatory requirements are met. There were no significant amounts written
off during the period but still subject to enforcement action. Our internal definition of default is aligned with that of the individual regulators in
each jurisdiction.

There are no material bad debt provisions in the UK businesses, as they have no retail customer receivables. A provision matrix is not used in
the UK as an assessment of expected losses on individual debtors is performed. This is also the case for non-retail US customer receivables.

Trade receivables past due

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 32(a).

140

2019
£m

295

108

160

563

2018
£m

271

131

475

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 32.

Cash at bank

Short-term deposits

Cash and cash equivalents

21. Borrowings

2019
£m

177

252

2018
£m

275

329

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. We use derivatives to manage risks associated with interest rates and foreign exchange.

Our price controls and rate plans lead 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 we take account of certain other metrics used by credit rating agencies.

The Group adopted IFRS 9 with effect from 1 April 2018. The comparatives are not required to be restated and are accounted for in accordance
with IAS 39. On adoption of IFRS 9, the Group elected to change the measurement basis of one liability from amortised cost to fair value through
profit and loss, in order to eliminate a measurement mismatch. All other borrowings are accounted for at amortised cost.

Borrowings, which include interest-bearing and inflation-linked debt and overdrafts, are initially recorded at fair value, which normally reflects
the proceeds received, net of direct issue costs less any repayments. Subsequently these are stated either: i) at amortised cost; or ii) at fair
value though profit and loss. Where a borrowing is held at amortised cost 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. For the liability held
at fair value through profit and loss, the difference between the fair value at the date of reclassification and the redemption value is recognised
over the term of the borrowing using the effective interest method.

Where a borrowing or liability is held at fair value, changes in the fair value of the borrowing due to changes in the issuer’s credit risk are recorded
in the own credit reserve (see note 28). All other changes in the fair value of the liability are recognised in the income statement within
remeasurements (see notes 5 and 6).

2018
Under IAS 39, borrowings were all accounted for at amortised cost, using the effective interest method, as described above.

Current

Bank loans

Bonds

Commercial paper

Finance leases

Other loans

Non-current

Bank loans

Bonds1

Finance leases

Other loans

Total borrowings

1. In 2019 this includes a liability held at fair value through profit and loss of £667 million.

2019
£m

641

1,973

1,792

2018
£m

2,020

2,156

206

4,472

4,447

2,599

21,278

205

176

24,258

28,730

2,384

19,418

207

169

22,178

26,625

141

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements21. Borrowings continued
Total borrowings are repayable as follows:

Less than 1 year

In 1 to 2 years

In 2 to 3 years

In 3 to 4 years

In 4 to 5 years

More than 5 years:

By instalments

Other than by instalments

2019
£m

4,472

2,393

1,990

1,553

714

959

16,649

28,730

2018
£m

4,447

1,694

2,347

1,873

1,469

1,010

13,785

26,625

The fair value of borrowings at 31 March 2019 was £32,252 million (2018: £30,164 million). Where market values were available, fair value of
borrowings (Level 1) was £14,356 million (2018: £13,018 million). Where market values were not available, fair value of borrowings (Level 2) was
£17,896 million (2018: £17,146 million), calculated by discounting cash flows at prevailing interest rates. The notional amount outstanding of the
debt portfolio at 31 March 2019 was £28,417 million (2018: £26,363 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 £81 million at 31 March 2019
(2018: £392 million). During 2019, the Niagara Mohawk Power Corporation first mortgage debenture was cancelled; therefore, it is no longer
subject to liens and other charges as at 31 March 2019.

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
£558 million (2018: £878 million) in respect of cash received under collateral agreements. For further details of our borrowing facilities, refer to
note 33. 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.

Financial liability at fair value through profit and loss
The financial liability designated at fair value through profit and loss is analysed as follows:
i) the fair value of the liability was £667 million, which includes cumulative change in fair value attributable to changes in credit risk recognised

in other comprehensive income, post tax of £13 million;

ii) the amount repayable at maturity in November 2021 is £943 million; and
iii) the difference between carrying amount and contractual amount at maturity is £276 million.

This liability has been reclassified in order to eliminate a measurement mismatch with derivatives which provide an economic hedge. The
associated derivatives are collateralised and do not contain significant exposure to our own credit risk. The presentation of credit risk in other
comprehensive income does not, therefore, create or enlarge an accounting mismatch in profit or loss.

The change in the fair value attributable to a change in credit risk is calculated as the difference between the total change in the fair value of
the liability and the change in the value of the liability due to changes in market risk factors alone. The change in the fair value due to market risk
factors was calculated using benchmark yield curves as at the end of the reporting period holding the credit risk margin constant. The fair value
of the liability was calculated using observed market prices.

142

Notes to the consolidated financial statements – analysis of items in the primary statements continuedNational Grid Annual Report and Accounts 2018/19Financial Statements21. Borrowings continued
Finance lease obligations
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.

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

22. Trade and other payables

2019
£m

2018
£m

183

310

(40)

270

156

270

177

313

(42)

271

144

271

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 amounts, some of which represent 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 payables

Customer contributions1

Social security and other taxes

Other payables

1. From government-related entities.

Due to their short maturities, the fair value of trade payables approximates their book value.

2019
£m

2,404

217

159

902

2018
£m

1,977

355

173

863

3,769

3,453

143

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements23. Contract liabilities

Contract liabilities primarily relate to the advance consideration received from customers for construction contracts, mainly in relation to
connections, for which revenue is recognised over the life of the asset.

The balances have arisen on transition to IFRS 15, which has been applied using the modified retrospective approach and therefore comparatives
have not been restated.

Current

Non-current

Significant changes in the contract liabilities balances during the period are as follows:

As at 1 April 2018 (see note 37)

Exchange adjustments

Revenue recognised that was included in the contract liability balance at the beginning of the period

Increases due to cash received, excluding amounts recognised as revenue during the period

Changes due to amounts recognised as revenue

At 31 March 2019

24. Other non-current liabilities

2019
£m

933

994

2018
£m

–

2019
£m

866

(51)

155

(5)

994

Other non-current liabilities include deferred income which will not be recognised as income until after 31 March 2020. 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 income1

Customer contributions2

Other payables

1. Principally the deferral of profits relating to the sale of property, plant and equipment.
2. From government-related entities.

There is no material difference between the fair value and the carrying value of other payables.

2019
£m

372

340

808

2018
£m

114

844

359

1,317

144

All of our employees are eligible to participate in a pension plan. We have defined benefit (DB) and defined contribution (DC) pension plans.
In the US we also provide healthcare and life insurance benefits to eligible employees, post-retirement. 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
All of our employees are eligible to participate in a pension plan 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 ESPS). In the US, we have four plans and a number of healthcare and life insurance plans.

On retirement, members of DB schemes receive benefits whose value is dependent on factors such as salary and length of pensionable service.
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 consolidated income statement, the consolidated statement of other comprehensive income and the net liability recognised in
the consolidated 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
consolidated statement of other comprehensive income.

UK defined benefit plans and Guaranteed Minimum Pension (GMP) equalisation
In the UK, GMPs were intended to broadly replace State Earnings Related Pension Scheme (SERPS) benefits for members of contracted-out
occupational pension schemes from April 1978 to April 1997. Inequalities in GMP stemmed from the statutory definition of GMP, resulting in
benefits accruing at different rates between male and female members.

A High Court judgement in October 2018 confirmed that GMP benefits need to be equalised between men and women, and importantly also
provided alternative prescribed methods of equalisation. This provides much-needed clarity, as there has been uncertainty in pensions law
as it pertains to GMP equalisation.

However, schemes cannot directly equalise the GMPs, but need to adjust other benefits in order to achieve this, through correcting the ongoing
position and making back-payments to affected members. This is a highly complex issue that will have a significant effect on the eventual cost
of providing benefits, as well as significant cost implications in the calculation and implementation of the equalisation method. Under IAS 19
we have estimated the cost of equalising for the impact of GMP under the most cost-effective permissible method to be:
• Section A of NGUKPS – £17 million;
• Section B of NGUKPS – £12 million; and
• NGEG of ESPS – £5 million.

These amounts have been recognised in the consolidated income statement as past service costs.

The key drivers of these costs are the schemes’ benefit structures, the membership profile and retirement choices made by members. National
Grid will continue to work closely with the Trustees of NGUKPS and NGEG of ESPS, the actuaries and legal advisors to implement and administer
GMP equalisation, which is expected to take some years. Future administration costs related to this process will be expensed as incurred.

145

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 that is typically used for automatic enrolment of new hires. Previous DC benefits
were transferred 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 147 for the assumptions used for IAS 19 (revised) purposes.
Actuarial valuations for all the schemes are currently being performed as at 31 March 2019.

Latest full actuarial valuation

31 March 2017

31 March 2016

Actuary

Willis Towers Watson

Aon Hewitt

Section A of NGUKPS

Section B of NGUKPS

NGEG of ESPS

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

£6,716m

£6,627m

101%

£89m

£74m

£5,849m

£6,057m

97%

(£208m)

(£173m)

£2,553m

£3,053m

84%

(£500m)

(£415m)

National Grid UK Pension Scheme
NGUKPS consists of three sections, each legally and actuarially separate. Sections A and B are supported by companies within the Group,
while Section C is supported by Cadent Gas Limited. The scheme closed to new hires on 1 April 2002.

Section A
Following the last actuarial valuation, Section A was in surplus, and currently 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 costs. This rate is deemed to be sufficient to meet the statutory funding objective
during the period for which it is in force.

As part of the sectionalisation of NGUKPS 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 pension 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).

Section B
The last actuarial valuation determined that Section B was in deficit. National Grid and the Trustees agreed on a schedule of contributions,
whereby deficit funding of approximately £32 million is payable by 30 September each year from 2017 until 2022, with an additional £8 million
payable by 30 September 2023. All deficit funding amounts due will be adjusted for changes in the Retail Price Index (RPI). The funding shortfall
is expected to be eliminated by September 2023. The employer also contributes 51.4% of pensionable salary, less member contributions, in
respect of the ongoing service cost.

National Grid Electricity Group of the Electricity Supply Pension Scheme
The last full actuarial valuation for the NGEG of the ESPS determined that the scheme was in deficit. National Grid and the Trustees agreed on a
schedule of contributions, whereby deficit funding of £48 million is payable each year from 2016 to 2027, which should lead to the elimination of the
funding shortfall by March 2027. All deficit funding amounts due will be adjusted for changes in the RPI. In addition, National Grid contributes 40.7%
of pensionable salary, less member contributions, in respect of the ongoing service cost. The scheme closed to new hires from 1 April 2006.

The scheme holds a longevity insurance contract which covers improvements in longevity, providing long-term protection to the scheme, should
members live longer than currently expected.

National Grid is also responsible for the costs of administration and the Pension Protection Fund (PPF) levies for both Sections A and B
of NGUKPS, and NGEG of ESPS.

Security arrangements
National Grid has also established security arrangements with charges in favour of the Trustees.

Value of security arrangements at 31 March 2019

£315m

£179m

£250m

Principal supporting employers

Additional amounts payable1

National Grid plc and
National Grid UK Limited

National Grid Gas plc (NGG)

National Grid Electricity
Transmission plc (NGET)

£72m

A maximum of £280m

A maximum of £500m

Section A of NGUKPS

Section B of NGUKPS

NGEG of ESPS

1. These amounts are payable if certain trigger events occur which have been individually agreed between the schemes and their relevant supporting employers.

146

Notes to the consolidated financial statements – analysis of items in the primary statements continuedNational Grid Annual Report and Accounts 2018/19Financial Statements25. Pensions and other post-retirement benefits continued
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. The assets will also be paid to the relevant section or scheme where either NGG or NGET loses its licence to operate under
relevant legislation. Counter indemnities have also been taken out to ensure the obligations will be fulfilled.

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 four 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. For the current financial year, these contributions amounted
to approximately £231 million.

The assets of the plans are held in trusts and administered by the Retirement Plans Committee comprised of appointed employees
of the Company.

US retiree healthcare and life insurance plans
National Grid provides healthcare and life insurance benefits to eligible employees, post-retirement. 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. For the current
financial year, these contributions amounted to £14 million.

Actuarial assumptions
The Company has applied the following financial assumptions in assessing DB liabilities.

Discount rate – past service

Discount rate – future service

Salary increases

Rate of increase in RPI – past service

Rate of increase in RPI – future service

UK pensions

2018
%

2.60

2.65

3.40

3.15

3.10

2019
%

2.40

2.45

3.50

3.25

3.20

2017
%

2.40

2.65

3.50

3.20

3.15

The discount rates for UK 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. Since 2018, we have adopted different discount rates for future and past service based on the
duration of future and past service plan liabilities. The rate of increase in salaries has been set using a promotional scale where appropriate.
The rates of increases stated are not indicative of historical increases awarded or a guarantee of future increase, but merely an appropriate
assumption used in assessing DB liabilities. Retail Price Index (RPI) 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.

Discount rate

Salary increases

Initial healthcare cost trend rate

Ultimate healthcare cost trend rate

US pensions

US other post-retirement benefits

2019
%

3.95

3.50

n/a

2018
%

4.00

3.50

n/a

2017
%

4.25

3.50

n/a

2019
%

3.95

3.50

7.25

4.50

2018
%

4.00

3.50

7.50

4.50

2017
%

4.25

3.50

7.00

4.50

Discount rates for US pension liabilities have been determined by reference to appropriate yield on high-quality corporate bonds prevailing in the
US debt markets at the reporting date based on the duration of plan liabilities. The healthcare cost trend rate is expected to reach the ultimate
trend rate by 2028 (2018 and 2017: 2028).

Assumed life expectations for a retiree age 65

Males

Females

In 20 years:

Males

Females

2019

2018

2017

UK
years

US
years

22.0

23.6

23.3

25.2

22.1

24.2

23.7

25.9

UK
years

22.3

23.9

23.7

25.5

US
years

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

147

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements25. Pensions and other post-retirement benefits continued
Maturity profile of DB obligations
The weighted average duration of the DB obligation for each category of scheme is 15 years for UK pension schemes; 13 years for US pension
schemes and 16 years for US other post-retirement benefits.

As at the reporting date, the present value of the funded obligations split according to member status was approximately:
• UK pensions: 10% active members (2018: 10%; 2017: 12%); 16% deferred members (2018: 18%; 2017: 19%); 74% pensioner members (2018:

72%; 2017: 69%);

• US pensions: 37% active members (2018: 38%; 2017: 38%); 9% deferred members (2018: 8%; 2017: 9%); 54% pensioner members (2018: 54%;

2017: 53%); and

• US other post-retirement benefits: 39% active members (2018: 38%; 2017: 39%); 0% deferred members (2018: 0%; 2017: 0%); 61% pensioner

members (2018: 62%; 2017: 61%).

For sensitivity analysis see note 35.

Amounts recognised in the consolidated statement of financial position

Present value of funded obligations

Fair value of plan assets

Present value of unfunded obligations

Other post-employment liabilities

15,507

1,307

(76)

–

2018
£m

(14,152)

15,330

1,178

(74)

–

Net defined benefit asset/(liability)

1,231

1,104

Represented by:

Liabilities

Assets

(76)

1,307

1,231

(74)

1,178

1,104

2017
£m

(15,565)

15,489

(76)

(80)

–

(156)

(536)

380

(156)

2019
£m

(6,901)

6,646

(255)

(254)

–

(509)

(769)

260

(509)

2018
£m

(6,349)

6,030

(319)

(233)

–

(552)

(783)

231

(552)

2017
£m

(6,790)

6,322

(468)

(260)

–

(728)

(951)

223

(728)

2019
£m

(3,508)

2,640

(868)

–

(72)

(940)

–

(940)

2018
£m

(3,246)

2,498

(748)

–

(67)

(815)

–

(815)

2017
£m

(3,535)

2,564

(971)

–

(78)

(1,049)

–

(1,049)

The recognition of the pension assets in both the UK in relation to the NGUKPS, the NGEG of ESPS 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 all three 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 and the NGEG
of ESPS, 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.

148

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

Past service cost – plan amendments

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

2019
£m

2018
£m

2017
£m

193

232

(7)

280

–

316

(101)

(33)

(1)

–

202

–

283

1,313

175

1,488

(1)

–

239

105

399

348

(345)

1. Amounts recognised in the income statement include operating costs of £nil (2018: £nil; 2017: £1 million); payroll costs of £nil (2018: £nil; 2017: £35 million); and net interest of £nil (2018: £nil;
2017: £2 million income) presented within profit from discontinued operations. These amounts all relate to UK pensions. In addition there is a net charge of £52 million (2018: £nil; 2017: £nil)
relating to redundancy pension costs in respect of the UK cost efficiency and restructuring programme included within exceptional items.

2. Amounts recognised in the statement of other comprehensive income include remeasurements of pension assets and post-retirement benefit obligations of £nil (2018: £nil; 2017: £75 million

loss) presented within discontinued operations. These amounts all relate to UK pensions.

The geographical split of pensions and other post-retirement benefits is as shown below:

UK Pensions

US Pensions

US other post-retirement benefits

2019
£m

2018
£m

2017
£m

2019
£m

2018
£m

2017
£m

2019
£m

2018
£m

2017
£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

Past service cost – plan
amendments

Included within finance income
and costs

Net interest cost

Included within gain on disposal
of discontinued operations

Administration costs

Disposal of UK Gas Distribution

(7)

128

(31)

–

(1)

–

Total included in income statement

103

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

104

103

(1)

–

104

–

128

(541)

–

(541)

–

132

(14)

(42)

(56)

–

134

102

–

103

–

155

319

(140)

179

–

(59)

(34)

–

109

100

209

–

116

570

(205)

365

149

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

2019
£m

(263)

(316)

(33)

419

(25)

(218)

2018
£m

(1,933)

(283)

1,488

475

(10)

(263)

2017
£m

(2,585)

(399)

1,073

(25)

(1,933)

The geographical split of pensions and other post-retirement benefits is as shown below:

UK pensions

US pensions

US other post-retirement benefits

Opening net defined benefit
asset/(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)

2019
£m

1,104

(103)

174

(1)

2018
£m

(156)

(67)

1,177

150

–

1,231

1,104

2017
£m

2019
£m

2018
£m

2017
£m

2019
£m

2018
£m

2017
£m

(15)

(552)

(728)

(1,009)

(815)

(1,049)

(1,561)

(128)

(132)

(134)

(155)

(81)

(82)

(116)

(541)

528

–

(156)

(56)

231

–

102

208

–

179

257

–

(34)

(24)

209

117

(10)

365

288

(25)

(509)

(552)

(728)

(940)

(815)

(1,049)

150

Notes to the consolidated financial statements – analysis of items in the primary statements continuedNational Grid Annual Report and Accounts 2018/19Financial Statements25. Pensions and other post-retirement benefits continued
Changes in the present value of defined benefit obligations (including unfunded obligations)

Opening defined benefit obligations

Current service cost

Interest cost

Actuarial (losses)/gains – experience

Actuarial gains – demographic assumptions

Actuarial (losses)/gains – financial assumptions

Past service credit – redundancies

Special termination benefit cost – redundancies

Past service cost – augmentations

Past service cost – plan amendments

Medicare subsidy received

Obligations transferred on disposal of UK Gas Distribution

Employee contributions

Benefits paid

Exchange adjustments

2019
£m

2018
£m

2017
£m

(24,054)

(26,230)

(28,952)

(193)

(771)

(69)

266

(619)

(55)

(5)

(34)

(19)

–

(1)

(193)

(775)

(100)

671

174

(9)

(1)

–

(21)

–

(1)

1,376

(768)

1,285

1,145

(232)

(1,057)

166

225

(3,377)

(7)

(1)

–

(14)

6,970

(1)

1,443

(1,394)

Closing defined benefit obligations

(24,939)

(24,054)

(26,230)

The geographical split of pensions and other post-retirement benefits is as shown below:

Opening defined benefit obligations

(14,226)

(15,645)

(19,416)

(6,582)

(7,050)

(6,145)

(3,246)

(3,535)

(3,391)

UK pensions

US pensions

US other post-retirement benefits

2019
£m

2018
£m

2017
£m

2019
£m

2018
£m

2017
£m

2019
£m

2018
£m

2017
£m

Current service cost

Interest cost

Actuarial (losses)/gains – experience

Actuarial gains – demographic
assumptions

Actuarial (losses)/gains – financial
assumptions

Past service credit – redundancies

Special termination benefit cost
– redundancies

Past service cost – augmentations

Past service cost – plan amendments

Medicare subsidy received

Obligations transferred on disposal
of UK Gas Distribution

Employee contributions

Benefits paid

Exchange adjustments

(41)

(358)

(56)

224

(568)

(55)

(5)

(34)

–

(1)

837

–

(49)

(366)

(95)

565

604

(9)

(1)

–

(1)

770

–

(76)

(615)

106

214

(104)

(277)

(52)

–

(98)

(273)

(38)

(3,751)

(24)

(279)

–

(7)

(1)

–

6,970

(1)

931

–

(103)

(285)

(2)

–

(48)

(136)

(46)

(136)

(27)

(151)

–

(53)

(157)

337

–

(19)

(21)

(14)

–

141

(254)

–

153

381

–

163

(491)

398

(514)

362

764

349

(903)

Closing defined benefit obligations

(14,276)

(14,226)

(15,645)

(7,155)

(6,582)

(7,050)

(3,508)

(3,246)

(3,535)

151

Opening fair value of plan assets

Interest income

Return on plan assets in excess of 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

2019
£m

2018
£m

2017
£m

23,858

24,375

26,434

749

490

(14)

419

(1,377)

667

–

710

568

(16)

475

(1,285)

(970)

–

24,793

23,858

1,239

307

1,278

363

952

3,334

(21)

1,073

(1,443)

1,049

(7,004)

24,375

4,286

491

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

15,330

15,489

19,401

2019
£m

2018
£m

2017
£m

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

389

457

(6)

174

(838)

–

363

103

(6)

150

(770)

–

Closing fair value of plan assets

15,507

15,330

Actual return on plan assets

Expected contributions to plans
in the following year

846

148

466

140

615

2,890

(11)

528

(931)

–

(7,004)

15,489

3,505

2019
£m

6,030

256

(7)

231

–

(398)

472

–

6,646

318

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

2019
£m

2,498

104

(29)

(1)

–

(141)

195

–

2,640

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

134

128

150

221

229

Asset allocation strategy
Each plan’s investment strategy is formulated specifically in order to target specific asset allocations and returns, and to manage risk. The asset
allocation of the plans as at 31 March 2019 is as follows:

UK
pensions
%

pensions
%

US other
post-retirement

benefits
%

12.7

23.4

39.4

5.5

5.0

11.1

–

1.9

1.0

100.0

40.8

26.4

16.0

4.7

10.1

–

1.5

0.3

0.2

100.0

60.2

0.7

20.6

–

12.9

–

5.6

100.0

Equities

Corporate bonds

Government securities

Property

Diversified alternatives

Liability matching assets

Infrastructure

Cash and cash equivalents

Other

152

Notes to the consolidated financial statements – analysis of items in the primary statements continuedNational Grid Annual Report and Accounts 2018/19Financial Statements25. Pensions and other post-retirement benefits continued
Defined benefit investment strategies and risks
DB pension schemes can pose a significant risk to future cash flows, as National Grid underwrites the financial and demographic risks
associated with these plans. Although the governing bodies have sole responsibility for setting investment strategies and managing risks,
National Grid closely works with and supports the governing bodies of each scheme, to assist them in mitigating the risks associated with
their schemes and to ensure that the schemes are funded to meet their obligations.

In the UK, each scheme has a Trustee that is the governing body. The Trustees’ responsibilities are set out in the Trust Deed and Rules. In the US,
the fiduciary committee for all the retirement plans is the Retirement Plan Committee (RPC). The RPC is structured in accordance with US laws
governing retirement plans under the Employee Retirement Income Security Act (ERISA).

The Trustees and RPC, after taking advice from professional investment advisors and in consultation with National Grid, set the key principles,
including expected returns, risk and liquidity requirements. In setting these they take into account expected contributions, maturity of the pension
liabilities, and in the UK, the strength of the covenant. The Trustees and RPC formulate an investment strategy to manage risk through
diversification, including the use of liability-matching assets, which move in line with the long-term liabilities of the scheme, and return-seeking
assets, some of which are designed to mitigate downside risk. Where appropriate, the strategies may include interest rate and inflation hedging
instruments, and currency hedging to hedge overseas holdings.

Investments are usually grouped into:
• Return-seeking assets: equities, property and diversified funds where the objective is to achieve growth within the constraints of the schemes’
risk profiles. These assets should produce returns greater than the liability increase, so improving the funding position, and are assessed by
reference to benchmarks and performance targets agreed with the investment managers; and

• Liability-matching assets: liability-driven investment (LDI) funds and swaps, where the objective is to secure fixed or inflation-adjusted cash

flows in future. These investments are generally expected to match the change in liability valuation, so protecting the funding position. Bonds
and securities are also measured against certain market benchmarks.

Investments are predominantly made in assets considered to be of investment grade. Where investments are made in non-investment grade
assets, the higher volatility involved is carefully judged and balanced against the expected higher returns. Similarly, investments are made
predominantly in regulated markets. Where investments are made either in non-investment grade assets or outside of regulated markets,
investment levels are kept to prudent levels and subject to agreed control ranges, to control the risk. Should these investments fall outside
the pre-agreed ranges, corrective actions and timescales are agreed with the investment manager to remedy the position.

The governing bodies ensure that the performance of investment managers is regularly reviewed against measurable objectives, consistent with
each scheme’s long-term objectives and accepted risk levels. Where required, the portfolios are amended, or investment managers changed.

The Trustees and RPC can generally delegate responsibility for the selection of specific bonds, securities and other investments to appointed
investment managers. Investment managers are selected based on the required skills, expertise of those markets, process and financial security
to manage the investments. The investment managers use their skill and expertise to manage the investments competently. In some cases they
may further delegate this responsibility, through appointing sub-managers.

The schemes hold sufficient cash to meet benefit requirements, with other investments being held in liquid or realisable assets to meet
unexpected cash flow requirements. The schemes do not borrow money, or act as guarantor, to provide liquidity (unless it is temporary).

The NGUKPS Trustee believes that long-term shareholder value and financial success can be protected and enhanced by a responsible
environmental, social and corporate governance (ESG) policy. As such, the NGUKPS’ appointed investment managers are expected to be mindful
of ESG issues when managing the scheme’s assets. Day-to-day stewardship (voting and engagement) is delegated to the investment managers
and they are encouraged to adhere to the UK Stewardship Code.

The most significant risks associated with the DB plans are:
• Asset volatility – the schemes invest in a variety of asset classes, but principally in equities, government securities, corporate bonds and

property. Consequently actual returns will differ from the underlying discount rate adopted, impacting on the funding position of the scheme
through the net balance sheet asset or liability. Each scheme seeks to balance the level of investment return required with the risk that it can
afford to take, to design the most appropriate investment portfolio. Volatility will be controlled through using liability-matching asset strategies,
interest rate hedging and management of foreign exchange exposure, as well as diversification of the return-seeking assets;

• Changes in bond yields – liabilities are calculated using discount rates set with reference to the yields in high-quality corporate bonds

prevailing in the UK and US debt markets and will fluctuate as yields change;

• Member longevity – longevity is a key driver of liabilities and changes in expected mortality 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 (swap)
which covers exposure to improvement in longevity, providing long-term protection to the scheme in the event that members live longer than
expected at the time the swap was entered into;

• Deficit risk – the risk that the increase in the liability will outpace the growth in assets is managed through assessing the progress of the

actual growth of the liabilities relative to the selected investment policy and adjusting the policy as required;

• Manager risk – expected deviation of the return, relative to the benchmark, is carefully monitored, as is the process, team and expertise of
the manager. Where appropriate, the Trustee or RPC will move assets under management to a more robust manager, whom they consider
will have a better expectation of performing well in the future;

• Currency risk – fluctuations in the value of foreign denominated assets due to exposure to currency exchange rates is managed through

a combination of segregated currency hedging overlay and currency hedging carried out by some of the investment managers.

153

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements25. Pensions and other post-retirement benefits continued
Defined benefit investment strategies and risks continued
• Interest rate and inflation risk – changes in inflation will affect the current and future pensions but are partially mitigated through investing

in inflation-matching assets and hedging instruments;

• Investment funds – the credit risk arising from investing in investment funds is mitigated by the underlying assets of the investment funds

being ring-fenced from the fund managers, the regulatory environments in which the fund managers operate and diversification of investments
among investment fund arrangements;

• Political risk – an adverse influence on asset values arising from political intervention in a specific country or region is managed through

regular review of the asset distribution and through ensuring geographical diversification of investments within the managers;

• Counterparty risk – is managed by having a diverse range of counterparties and through having a strong collateralisation process.

Measurement and management of counterparty risk is delegated to the relevant investment managers; and

• Custodian risk – the creditworthiness and ability of the custodians to settle trades on time and provide secure safekeeping of the assets
under custody is managed by ongoing monitoring of the custodial arrangements against pre-agreed service levels and credit ratings.

Asset allocations
Within the asset allocations below, there is significant diversification across regions, asset managers, currencies and bond categories.

UK pensions

Equities1

Corporate bonds

Government securities

Property

Diversified alternatives

Liability-matching assets

Cash and cash equivalents

Other (including net current
assets and liabilities)

2019

Quoted
£m

Unquoted
£m

1,181

3,625

6,114

108

–

1,751

–

12,819

784

–

749

771

(35)2

259

160

2,688

Total
£m

1,965

3,625

6,114

857

771

1,716

299

160

Quoted
£m

1,420

3,949

5,629

129

1,174

211

–

15,507

12,611

2018

Unquoted
£m

813

–

834

690

–

215

Total
£m

2,233

3,949

5,629

963

789

1,174

426

2017

Quoted
£m

Unquoted
£m

2,624

3,526

5,406

250

1,162

211

596

–

708

628

–

412

Total
£m

3,220

3,526

5,406

798

878

1,162

623

167

2,719

167

15,330

(148)

13,121

2,368

(124)

15,489

1. Included within equities at 31 March 2019 were ordinary shares of National Grid plc with a value of £nil (2018: £nil; 2017: £2 million).
2. Comprises the longevity insurance contract within the NGEG of the ESPS.

US pensions

Equities

Corporate bonds

Government securities

Property

Diversified alternatives

Infrastructure

Cash and cash equivalents

Other (including net current
assets and liabilities)

US other post-retirement benefits

Equities

Corporate bonds

Government securities

Diversified alternatives

Other1

1. Other primarily comprises insurance contracts.

2019

Quoted
£m

Unquoted
£m

533

1,329

422

–

183

–

(8)

2,178

425

640

316

487

–

Total
£m

2,711

1,754

1,062

316

670

Quoted
£m

577

1,085

414

–

198

–

2018

Unquoted
£m

1,954

413

565

279

421

–

Total
£m

2,531

1,498

979

279

619

2017

Quoted
£m

Unquoted
£m

698

1,130

872

–

209

–

1,915

537

335

433

–

Total
£m

2,613

1,667

943

335

642

2,480

4,166

6,646

2,294

3,736

6,030

2,940

3,382

6,322

2019

Quoted
£m

Unquoted
£m

404

540

175

–

1,184

–

166

149

Total
£m

1,588

543

341

149

2018

Quoted
£m

Unquoted
£m

412

508

161

–

1,110

–

144

137

Total
£m

1,522

510

305

137

2017

Quoted
£m

Unquoted
£m

405

520

166

–

1,162

–

149

142

Total
£m

1,567

521

315

142

1,138

1,502

2,640

1,105

1,393

2,498

1,110

1,454

2,564

154

Notes to the consolidated financial statements – analysis of items in the primary statements continuedNational Grid Annual Report and Accounts 2018/19Financial Statements26. Provisions

We make provisions when an obligation exists resulting from a past event, and it is probable that cash will be paid to settle it, but the exact
amount of cash required can only be estimated.

The main estimates relate to environmental remediation and decommissioning costs for various sites we own or have owned and other
provisions, including restructuring plans and lease contracts we have entered into that are now loss making. The evaluation of the likelihood
of the contingent events has required best judgement by management regarding the probability of exposure to potential loss. Should
circumstances change following unforeseeable developments, the likelihood could alter.

In the current year we recognised a charge to restructuring provisions, reflecting the review and reorganisation of our core regulated
businesses in both the UK and US.

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

1,721

(158)

(45)

(75)

–

1,531

103

(36)

(53)

–

1,639

221

(9)

(19)

(6)

–

194

(10)

(26)

–

188

–

(6)

(7)

(12)

–

125

(3)

–

(42)

–

(2)

–

(34)

–

(6)

–

(9)

–

At 1 April 2017

Exchange adjustments

Additions

Unused amounts reversed1

Unwinding of discount

Utilised2

Transfers3

At 31 March 2018

Exchange adjustments

Additions

Unused amounts reversed1

Unwinding of discount

Utilised2

Transfers3

At 31 March 2019

Current

Non-current

1. Unused amounts reversed from other provisions include £nil (2018: £16 million) in relation to discontinued operations.
2. Utilised amounts for other provisions include £20 million (2018: £77 million) in relation to discontinued operations.
3. Represents net amounts transferred to trade and other payables (see note 22) of £3 million (2018: £115 million).

Other
£m

597

(26)

(37)

(146)

(103)

316

(10)

(79)

(3)

Total
provisions
£m

2,588

(195)

(107)

(268)

(115)

2,052

124

226

(65)

(209)

(3)

280

2,199

2019
£m

316

1,883

2,199

2018
£m

273

1,779

2,052

155

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements26. Provisions continued
Environmental provisions
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

2019

2018

Discounted
£m

Undiscounted
£m

189

1,450

1,639

210

1,555

1,765

Real
discount
rate

Discounted
£m

Undiscounted
£m

213

1,318

1,531

235

1,410

1,645

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 2076 although the weighted average duration of the cash flows is 12 years. A number of estimation uncertainties affect the
calculation of the provision, including the impact of regulation, the accuracy of 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
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 provisions
The decommissioning provision represents £80 million (2018: £71 million) of expenditure relating to asset retirement obligations estimated to be
incurred until 2115, and £90 million (2018: £104 million) of expenditure relating to the demolition of gas holders estimated to be incurred until 2026.
It also includes the net present value of the estimated expenditure (discounted at a real rate of 1%) expected to be incurred until 2044 in respect
of the decommissioning of certain US nuclear generating units that National Grid no longer owns.

Restructuring provisions
During the year, a cost-efficiency and restructuring programme was undertaken in both our UK and US businesses, as detailed in note 5. This
resulted in the recognition of a £125 million charge in the year and a closing provision of £83 million. We expect the majority of the provision to
be utilised within one year.

Other provisions
Included within other provisions at 31 March 2019 are the following amounts:
• £30 million (2018: £50 million) in respect of legacy provisions recognised following the sale of UK Gas Distribution;
• £29 million (2018: £48 million) in respect of onerous lease commitments and rates payable on surplus properties with expenditure expected

to be incurred until 2039;

• £164 million (2018: £152 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 (2018: £13 million) in respect of obligations associated with investments in joint ventures and associates.

156

Notes to the consolidated financial statements – analysis of items in the primary statements continuedNational Grid Annual Report and Accounts 2018/19Financial Statements27. Share capital

Ordinary share capital represents the total number of shares issued which are publicly traded. We also disclose the number of treasury shares
the Company holds, which are shares that the Company has bought itself, predominately to actively manage scrip issuances and settle
employee share option and reward 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 2017

Effect of share consolidation1

Issued during the year in lieu of dividends2

At 31 March 2018

Issued during the year in lieu of dividends2

At 31 March 2019

Allotted, called-up and fully paid

million

3,943

(328)

3,638

3,687

£m

449

–

452

458

1. 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.

2. The issue of shares under the scrip dividend programme is considered to be a bonus issue under the terms of the Companies Act 2006, and the nominal value of the shares is charged

to the share premium account.

The share capital of the Company consists of ordinary shares of 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 2019, the Company held 277 million (2018: 283 million) of its own shares. The market value of these shares as at 31 March 2019
was £2,359 million (2018: £2,270 million).

The Company made the following transactions in respect of its own shares during the year ended 31 March 2019:
i) During the year, 3 million (2018: 3 million) treasury shares were gifted to National Grid Employee Share Trusts and 3 million (2018: 5 million)

treasury shares were re-issued in relation to employee share schemes, in total representing approximately 0.2% (2018: 0.2%) of the ordinary
shares in issue as at 31 March 2019. The nominal value of these shares was £1 million (2018: £1 million) and the total proceeds received were
£18 million (2018: £33 million).

ii) During the year, the Company made payments totalling £2 million (2018: £5 million) to National Grid Employee Share Trusts 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.

During the prior 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 ordinary shares for aggregate consideration of £1,017 million including transaction costs. The shares
repurchased had a nominal value of £14 million and represented approximately 3.1% of the ordinary shares in issue as at 31 March 2018.

The maximum number of ordinary shares held in treasury during the year was 283 million (2018: 283 million) representing approximately
7.7% (2018: 7.8%) of the ordinary shares in issue as at 31 March 2019 and having a nominal value of £35 million (2018: £35 million).

157

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements28. 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 and the cost of hedging
reserve (see note 32), available-for-sale reserve, debt instruments at fair value through other comprehensive income reserve (FVOCI debt)
and equity investments at fair value through other comprehensive income reserve (FVOCI equity) (see note 15), 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. 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 32). Cost of hedging, FVOCI debt, and FVOCI equity reserves arose as a result of
the adoption of IFRS 9 on 1 April 2018. See note 15 for further detail on FVOCI debt and FVOCI equity reserves and note 32 in respect of cost
of hedging reserve.

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

Cost of
hedging
£m

Available-
for-sale
£m

FVOCI
equity
£m

FVOCI
debt
£m

Own
credit
£m

Capital
redemption
£m

Merger
£m

Total
£m

At 1 April 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 of associates taken
to equity

Transferred from profit or loss

Tax

At 31 March 2018 (as previously reported)

Transfer on transition to IFRS 9

At 1 April 2018 (as restated)

Exchange adjustments1

Net (losses)/gains taken to equity

Share of net gains of associates taken
to equity

Transferred to profit or loss

Net losses in respect of cash flow hedging
of capital expenditure

Tax

Cash flow hedges transferred to the
statement of financial position, net of tax

548

346

–

894

(504)

–

390

–

390

346

–

At 31 March 2019

736

(45)

–

(36)

227

(43)

103

–

(3)

128

(3)

125

–

(40)

–

(13)

(18)

–

(107)

–

120

–

(25)

(14)

162

–

(30)

–

(73)

(88)

–

(1)

–

(5,165)

(4,523)

–

346

202

(57)

(5,165)

(3,987)

–

(504)

(11)

(76)

(5,165)

(4,540)

–

(5,165)

(4,468)

–

346

(138)

(13)

(18)

(5,165)

(4,237)

1. The exchange adjustments recorded in the translation reserve comprise a gain of £896 million (2018: loss of £1,304 million; 2017: gain of £1,364 million) relating to the translation of foreign
operations offset by a loss of £550 million (2018: gain of £800 million; 2017: loss of £1,018 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.

158

Notes to the consolidated financial statements – analysis of items in the primary statements continuedNational Grid Annual Report and Accounts 2018/19Financial Statements29. Net debt

Net debt represents the amount of borrowings and overdrafts less cash, current 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 further important 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 212 and in note 32 to the
consolidated financial statements.

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

(Increase)/decrease 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

Impact of transition to IFRS 9

2019
£m

(80)

(822)

(708)

866

(744)

(1,648)

(1,076)

–

(27)

(3,495)

(23,002)

(32)

2018
£m

(807)

(5,953)

1,209

808

(4,743)

2,098

(1,017)

–

(66)

(3,728)

(19,274)

–

2017
£m

984

5,675

(3,715)

1,955

4,899

(2,273)

(2,401)

5,890

(64)

6,051

(25,325)

–

Net debt (net of related derivative financial instruments) at end of year

(26,529)

(23,002)

(19,274)

Composition of net debt
Net debt is made up as follows:

Cash, cash equivalents and financial investments

Borrowings and bank overdrafts

Financing derivatives1

2019
£m

2,233

2018
£m

3,023

2017
£m

9,880

(28,730)

(26,625)

(28,638)

(32)

600

(516)

(26,529)

(23,002)

(19,274)

1. The financing derivatives balance included in net debt excludes the commodity derivatives (see note 17).
2. Excludes £23 million (2018: £27 million; 2017: £nil) cash interest from the Quadgas shareholder loan included within discontinued operations in the cash flow statement.

159

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements29. Net debt continued
(b) Analysis of changes in net debt

At 1 April 2016

Cash flow2

Fair value gains and losses and exchange movements

Interest income/(charges)3

Other non-cash movements

Disposal

At 1 April 2017

Cash flow2

Fair value gains and losses and exchange movements

Interest income/(charges)3

Other non-cash movements

At 31 March 2018

Impact of transition to IFRS 9

At 1 April 2018 (as restated)

Cash flow2

Fair value gains and losses and exchange movements

Interest income/(charges)3

Other non-cash movements

At 31 March 2019

Balances at 31 March 2019 comprise:

Non-current assets

Current assets

Current liabilities

Non-current liabilities

Cash
and cash
equivalents
£m

Bank
overdrafts
£m

Net cash
and cash
equivalents
£m

Financial
investments
£m

127

1,001

–

(5)

1,139

(807)

(3)

–

329

–

329

(80)

–

252

–

252

–

252

(3)

(17)

–

Borrowings
£m

(28,341)

(2,196)

(1,527)

(2,221)

(294)

5,941

(28,638)

2,108

1,088

(1,117)

(66)

2,998

5,624

141

–

(75)

8,741

(5,983)

(149)

–

2,694

(26,625)

–

2,694

(846)

(32)

(26,657)

(240)

(733)

(1,062)

(38)

124

984

–

1,139

(807)

(3)

–

329

–

329

(80)

–

252

1,981

(28,730)

–

252

–

1,981

–

(4,472)

(24,258)

252

1,981

(28,730)

Financing
derivatives
£m

(106)

487

(903)

(233)

230

(516)

(61)

1,162

–

600

–

600

422

(1,011)

(43)

–

(32)

996

(282)

(802)

(32)

Total1
£m

(25,325)

4,899

(2,273)

(2,401)

(64)

5,890

(19,274)

(4,743)

2,098

(1,017)

(66)

(23,002)

(32)

(23,034)

(744)

(1,648)

(1,076)

(27)

(26,529)

996

2,289

(4,754)

(25,060)

(26,529)

1. Includes accrued interest at 31 March 2019 of £223 million (2018: £197 million; 2017: £210 million).
2. Cash flow from financing activities relating to financing liabilities (proceeds and repayment of loans, net movement in short-term borrowings and derivatives and interest paid) includes

cash outflow on non-debt-related items of £24 million (2018: £12 million; 2017: £nil) and excludes derivative cash inflow in relation to capital expenditure of £13 million (2018: £12 million;
2017: £18 million) and items relating to discontinued operations of £nil (2018: £231 million; 2017: £(1,611) million).

3. An exceptional income of £nil (2018: £3 million income; 2017: £1,313 million expense) is included in net interest charge on the components of net debt.

160

Notes to the consolidated financial statements – analysis of items in the primary statements continuedNational Grid Annual Report and Accounts 2018/19Financial StatementsFinancial Statements

Notes to the consolidated financial statements
– supplementary information

This section includes information that is important to enable a full understanding of our financial position, particularly areas
of potential uncertainty that could affect us in the future.

We also include specific disclosures for Niagara Mohawk Power Corporation 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. Additional disclosures have also been included in respect of the guarantor company. These disclosures are in lieu of
publishing separate financial statements for these companies (see note 36 for further information).

30. 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 provided

Operating lease commitments1

Less than 1 year

In 1 to 2 years

In 2 to 3 years

In 3 to 4 years

In 4 to 5 years

More than 5 years

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

Guarantees3

Guarantee of sublease for US property (expires 2040)

Guarantees of certain obligations of Grain LNG (expire up to 2025)

Guarantees of certain obligations for construction of HVDC West Coast Link (expires 2019)

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 (expected expiry 2021)3

Guarantees of certain obligations of National Grid Viking Link Limited (expected expiry 2024)

Other guarantees and letters of credit (various expiry dates)

2019
£m

2018
£m

1,973

1,843

123

301

122

292

1,353

1,237

779

651

827

862

11,237

15,709

173

139

865

505

872

341

700

563

449

410

1,969

5,328

178

213

1,009

729

–

333

2,975

2,669

1. Following a review during the year, the comparatives have been refined to provide consistency with the current year.
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 (see note 32(f)). 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 17(b).

3. Included within total guarantees are guarantees to both joint ventures and Engineering, Procurement and Construction contractors regarding the construction of interconnectors

of £470 million (2018: £739 million).
4. Includes guarantees to related parties.

The total of future minimum sublease payments expected to be received under non-cancellable sub-leases is £86 million (2018: £42 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.

161

National Grid Annual Report and Accounts 2018/1931. 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

2019
£m

151

192

141

584

368

171

2018
£m

220

135

160

376

–

170

2017
£m

–

168

169

457

–

1. During the year, £139 million (2018: £5 million) of property sites were sold to joint venture St William Homes LLP.
2. Sales in the year relate to transactions with Quadgas. Within this is other income of £52 million (2018: £54 million) relating to a Transitional Service Agreement following the sale of the

UK Gas Distribution business to Quadgas.

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, in 2018, goods

and services were received from UK joint ventures for the construction of an electricity transmission link in the UK.

4. Amounts receivable from associates includes a loan receivable balance from Quadgas of £352 million (2018: £352 million) which is classified as held for sale as at 31 March 2019, a loan
receivable balance of £258 million (2018: £130 million) from Nemo Link Limited (a joint venture) and £325 million (2018: £24 million) in relation to St William Homes LLP (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. Includes £133 million (2018: £144 million) of dividend income from Quadgas.

Details of investments in principal subsidiary undertakings, joint ventures and associates are disclosed in note 34, and information relating
to pension fund arrangements is disclosed in note 25. For details of Directors’ and key management remuneration, refer to the Directors’
Remuneration Report on pages 69 – 90 and note 4(c).

32. Financial risk management

Our activities expose us to a variety of financial risks including credit risk, liquidity risk, capital risk, currency risk, interest rate risk, inflation
risk and commodity price 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 these risks.

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. The Finance Committee has delegated
authority to administer the commodity price risk policy and credit policy for US-based commodity transactions to the Energy Procurement
Risk Management Committee and the National Grid USA Board of Directors. Details of key activities in the current year are set out in the
Finance Committee report, on page 63.

We have exposure to the following risks, which are described in more detail below:
• credit risk;
• liquidity risk;
• currency risk;
• interest rate risk;
• commodity price risk; and
• capital risk.

Where appropriate, derivatives and other financial instruments used for hedging currency and interest rate risk exposures are formally designated
as fair value, cash flow or net investment hedges as defined in IFRS 9. Hedge accounting allows the timing of the profit or loss impact of qualifying
hedging instruments to be recognised in the same reporting period as the corresponding impact of hedged exposures. To qualify for hedge
accounting, documentation is prepared specifying the risk management objective and strategy, the component transactions and methodology
used for measurement of effectiveness.

162

Notes to the consolidated financial statements – supplementary information continuedNational Grid Annual Report and Accounts 2018/19Financial Statements32. Financial risk management continued
Hedge accounting relationships are designated in line with risk management activities further described below. Categories designated
at National Grid are as follows:
• currency risk arising from our forecasted foreign currency transactions (capital expenditure or revenues) is designated in cash flow hedges;
• currency risk arising from our net investments in foreign operations is designated in net investment hedges; and
• currency and interest rate risk arising from borrowings are designated in cash flow or fair value hedges.

Critical terms of hedging instruments and hedged items are transacted to match on a 1:1 ratio by notional values. Hedge ineffectiveness
can nonetheless arise from inherent differences between derivatives and non-derivative instruments and other market factors including credit,
correlations, supply and demand, and market volatilities. Ineffectiveness is recognised in the remeasurements component of profit or loss.
Hedge accounting is discontinued when a hedging relationship no longer qualifies for hedge accounting.

The Group adopted IFRS 9 with effect from 1 April 2018. The comparatives are not required to be restated and are accounted for in accordance
with IAS 39. As a result of adoption, certain hedging instrument components are now treated separately as costs of hedging. Cost of hedging
gains and losses are deferred in a newly established component of other equity reserves and released systematically into profit or loss to
correspond with the timing of hedged exposures. The impact of adopting IFRS 9 is described in note 37.

2018
Under IAS 39, hedging instruments were designated for hedge accounting in their entirety or, where qualifying forward points were excluded
from hedging relationships, unrealised gains and losses on excluded components were recognised in the income statement.

Refer to sections (c) currency risk and (d) interest rate risk below for further details about hedge accounting.

(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 derivative financial instruments, deposits
with banks and financial institutions, as well as credit exposures to wholesale and retail customers, primarily trade 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 2019,
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 2019 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.

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 19.

163

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements32. 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 arrangements 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
North American Energy Standards Board (NAESB) agreements.

For bank account balances and bank overdrafts, the ‘Gross amounts offset’ under cash pooling arrangements is £19 million as at 31 March 2019
(2018: £34 million). Our UK bank accounts for National Grid subsidiaries participate in GBP, EUR and USD Composite Accounting System
overdraft facilities subject to offsetting gross and net overdraft limits. In the US, no offsetting arrangements exist, and cash transactions are
settled through Service Company bank accounts with subsequent intercompany payables and receivables reported by subsidiaries with the
Service Company.

The gross amounts offset for trade payables and receivables, which are subject to general terms and conditions, are insignificant.

At 31 March 2019

Assets

Financing derivatives

Commodity contract derivatives

Liabilities

Financing derivatives

Commodity contract derivatives

At 31 March 2018

Assets

Financing derivatives

Commodity contract derivatives

Further acquisition agreement derivative1

Liabilities

Financing derivatives

Commodity contract derivatives

Gross
carrying
amounts
£m

Gross
amounts
offset
£m

Net amount
presented in
statement of
financial
position
£m

Related amounts
available to be offset but
not offset in statement
of financial position

Financial
instruments
£m

Cash
collateral
received/
pledged
£m

Net amount
£m

1,052

101

1,153

(1,084)

(99)

(1,183)

(30)

–

1,052

101

1,153

(1,084)

(99)

(1,183)

(299)

(270)

299

(29)

270

(30)

–

(551)

–

(551)

615

–

615

202

130

332

(170)

(128)

(298)

Gross
carrying
amounts
£m

Gross
amounts
offset
£m

Net amount
presented in
statement of
financial
position
£m

Related amounts
available to be offset but
not offset in statement
of financial position

Financial
instruments
£m

Cash
collateral
received/
pledged
£m

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

1. The Group is party to the Further Acquisition Agreement (FAA) and Remaining Acquisition Agreement (RAA) which contain put and call options over 14% and 25% respectively, of the

equity and loan balances it holds in Cadent (through its investment in Quadgas). These are classified within the disposal group as at 31 March 2019 (see note 10).

164

Notes to the consolidated financial statements – supplementary information continuedNational Grid Annual Report and Accounts 2018/19Financial Statements32. Financial risk management continued
(b) Liquidity risk
Our policy is to determine our liquidity requirements by the use of both short-term and long-term cash flow forecasts. These forecasts are
supplemented by a financial headroom analysis which is used to assess funding requirements for at least a 24-month period and maintain
adequate liquidity for a continuous 12-month period.

We believe our contractual obligations, including those shown in commitments and contingencies in note 30, 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 a maturity profile of our financial liabilities and derivatives as at the reporting date:

At 31 March 2019

Non-derivative financial liabilities

Less than

1 year
£m

1 to 2
years
£m

2 to 3
years
£m

More than
3 years
£m

Borrowings, excluding finance lease liabilities

(4,129)

(2,348)

(1,998)

(19,673)

Interest payments on borrowings1

Finance lease liabilities

Other non-interest-bearing liabilities

Derivative financial liabilities

Derivative contracts – receipts2

Derivative contracts – payments2

Commodity contract derivatives

Derivative financial assets

Derivative contracts – receipts2

Derivative contracts – payments2

At 31 March 20183

Non-derivative financial liabilities

(800)

(72)

(3,306)

3,045

(3,421)

(73)

1,928

(1,251)

(8,079)

(733)

(63)

(340)

1,703

(2,029)

(19)

561

(459)

(721)

(52)

–

163

(223)

(2)

863

(783)

(13,465)

(123)

–

2,560

(3,276)

(1)

1,112

(875)

Less than
1 year
£m

1 to 2
years
£m

2 to 3
years
£m

More than
3 years
£m

(3,727)

(2,753)

(33,741)

(48,300)

Total
£m

(28,148)

(15,719)

(310)

(3,646)

7,471

(8,949)

(95)

4,464

(3,368)

Total
£m

(26,089)

(14,948)

(313)

(3,199)

2,244

(3,327)

(138)

13,621

(12,358)

(44,507)

Borrowings, excluding finance lease liabilities

(4,099)

(1,642)

(2,325)

Interest payments on borrowings1

Finance lease liabilities

Other non-interest-bearing liabilities

Derivative financial liabilities

Derivative contracts – receipts2

Derivative contracts – payments2

Commodity contract derivatives

Derivative financial assets

Derivative contracts – receipts2

Derivative contracts – payments2

(730)

(60)

(2,840)

1,111

(1,468)

(80)

6,536

(6,000)

(7,630)

(692)

(60)

(359)

424

(608)

(33)

(629)

(45)

–

441

(547)

(26)

(18,023)

(12,897)

(148)

–

268

(704)

2,225

(1,703)

(2,448)

1,726

(1,678)

(3,083)

3,134

(2,977)

(31,346)

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.

2. The financial derivative payments and receipts include the gross undiscounted cash flows for interest rate and cross currency derivatives. The cash flows for these derivatives are presented

as gross payments and receipts where the cash flows are not net settled either due to timing or currency.

3. The comparatives have been refined to provide consistency with the current period.

165

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements32. Financial risk management continued
(c) Currency risk
National Grid operates internationally with mainly the pound sterling as the functional currency for the UK companies and the US dollar as that
of the US businesses. Currency risk arises from three major areas: funding activities, capital investment and related revenues, and holdings in
foreign operations. This risk is managed using financial instruments including derivatives as approved by policy, typically cross-currency interest
rate swaps, foreign exchange swaps and forwards.

Funding activities – our policy is to borrow in the most advantageous market available. Foreign currency funding gives rise to risk of volatility in
the amount of functional currency cash to be repaid. This risk is reduced by swapping principal and interest back into the functional currency
of the issuer. All foreign currency debt and transactions are hedged except where they provide a natural offset to assets elsewhere in the Group.

Capital investment and related revenues – capital projects often incur costs or generate revenues in a foreign currency, most often euro
transactions done by the UK business. Our policy for managing foreign exchange transaction risk is to hedge contractually committed foreign
currency cash flows over a prescribed minimum size, typically by buying euro forwards to hedge future expenditure, and selling euro forwards
to hedge future revenues. For hedges of forecast cash flows our policy is to hedge a proportion of highly probable cash flows.

Holdings in foreign operations – we are exposed to fluctuations on the translation into pounds sterling of our foreign operations. The policy for
managing this translation risk is to issue foreign currency debt or to replicate foreign debt using derivatives that pay cash flows in the currency
of the foreign operation. The primary managed exposure arises from dollar denominated assets and liabilities held by our US operations, with
a smaller euro exposure in respect of joint venture investments.

During 2019 and 2018, derivative financial instruments were used to manage foreign currency risk as follows:

Cash and cash equivalents

Financial investments

Sterling
£m

965

Euro
£m

–

2019

Dollar
£m

153

1,016

Other
£m

–

Total
£m

252

1,981

Sterling
£m

294

1,471

Borrowings

(10,591)

(4,787)

(12,126)

(1,226)

(28,730)

(10,912)

Pre-derivative position

Derivative effect

Net debt position

(9,529)

(1,055)

(10,584)

(4,785)

(10,957)

(1,226)

(26,497)

4,803

(5,245)

1,465

(32)

(16,202)

239

(26,529)

(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)

(17,902)

Other
£m

–

(851)

(822)

1,051

229

Total
£m

329

2,694

(26,625)

(23,602)

600

(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.

The currency exposure on other financial instruments is as follows:

Trade and other receivables

Trade and other payables

Other non-current liabilities

Sterling
£m

398

(1,221)

(93)

Euro
£m

–

2019

Dollar
£m

1,635

(2,085)

(247)

Other
£m

–

Total
£m

2,033

(3,306)

(340)

Sterling
£m

253

(1,124)

(144)

Euro
£m

–

2018

Dollar
£m

1,528

(1,793)

(254)

Other
£m

–

Total
£m

1,781

(2,917)

(398)

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.

Hedge accounting for currency risk
Where available, derivatives transacted for hedging are designated for hedge accounting. Economic offset is qualitatively determined because the
critical terms (currency and volume) of the hedging instrument match the hedged exposure. If a forecast transaction was no longer expected to
occur, the cumulative gain or loss previously reported in equity would be transferred to the income statement. This has not occurred in the current
or comparative years.

Cash flow hedging of currency risk of capital expenditure and revenues is designated as hedging the exposure to movements in the spot
translation rates only; the timing of forecasted transactions is not designated as a hedged risk. Gains and losses on hedging instruments arising
from forward points and foreign currency basis spreads are excluded from designation and are recognised immediately in profit or loss, along
with any hedge ineffectiveness. On recognition of the hedged purchase or sale in the financial statements, the associated hedge gains and
losses, deferred in the cash flow hedge reserve in other equity reserves, are transferred out of reserves and included with the recognition of the
underlying transaction. Where a non-financial asset or a non-financial liability results from a forecast transaction or firm commitment being
hedged, the amounts deferred in reserves are included directly in the initial measurement of that asset or liability.

Net investment hedging is also designated as hedging the exposure to movements in spot translation rates only: spot-related gains and losses on
hedging instruments are presented in the cumulative translation reserve within other equity reserves to offset gains or losses on translation of the
hedged balance sheet exposure. Any ineffectiveness is recognised immediately in the income statement. Gains and losses arising from forward
points and foreign currency basis spreads are excluded from designation and are treated as a cost of hedging, deferred initially in other equity
reserves and released into profit or loss over the life of the hedging relationship. Amounts deferred in the cumulative translation reserve with
respect to net investment hedges are subsequently recognised in the income statement in the event of disposal of the overseas operations
concerned. Any remaining amounts deferred in the cost of hedging reserve are also released to the income statement.

Hedges of foreign currency funding are designated as cash flow hedges or fair value hedges of forward exchange risk (hedging both currency
and interest rate risk together, where applicable). Hedge accounting for funding is described further in the interest rate risk section below.

166

Notes to the consolidated financial statements – supplementary information continuedNational Grid Annual Report and Accounts 2018/19Financial Statements32. Financial risk management continued
(d) Interest rate risk
National Grid’s interest rate risk arises from our long-term borrowings. 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). Hedging instruments principally consist of interest rate and
cross-currency swaps that are used to translate foreign currency debt into functional currency and to adjust the proportion of fixed-rate and
floating-rate in the borrowings portfolio to within a range set by the Finance Committee of the Board. The benchmark interest rates hedged
are currently based on Libor.

We also consider inflation risk and hold some inflation-linked borrowings. We believe that these provide a partial economic offset to the inflation
risk associated with our UK inflation linked revenues.

The table in note 21 sets out the carrying amount, by contractual maturity, of borrowings that are exposed to interest rate risk before taking into
account interest rate swaps.

During 2019 and 2018, 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

Floating
rate
£m

104

1,944

(19,043)

(3,045)

(18,978)

1,740

(17,238)

(997)

(1,559)

(2,556)

2019

Inflation
linked
£m

–

(6,642)

(213)

(6,855)

Other1
£m

–

Total
£m

252

1,981

(28,730)

120

(26,497)

–

(32)

Fixed rate
£m

–

(16,144)

(16,113)

1,735

120

(26,529)

(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

(26,625)

(23,602)

600

(23,002)

1. Represents financial instruments which are not directly affected by interest rate risk, such as investments in equity or other similar financial instruments.

Hedge accounting for interest rate risk
Borrowings paying variable or floating-rates expose National Grid to cash flow interest rate risk, partially offset by cash held at variable rates.
Where a hedging instrument results in paying a fixed-rate, it is designated as a cash flow hedge because it has reduced the cash flow volatility
of the hedged borrowing. Changes in the fair value of the derivative are initially recognised in other comprehensive income as gains or losses
in the cash flow hedge reserve, with any ineffective portion recognised immediately in the income statement.

Borrowings paying fixed-rates expose National Grid to fair value interest rate risk. Where the hedging instrument pays a floating-rate, it is
designated as a fair value hedge because it has reduced the fair value volatility of the borrowing. Changes in the fair value of the derivative
and changes in the fair value of the hedged item in relation to the risk being hedged are both adjusted on the balance sheet and offset in
the income statement to the extent the fair value hedge is effective, with the residual difference remaining as ineffectiveness.

Both types of hedges are designated as hedging the currency and interest rate risk arising from changes in forward points. Amounts accumulated
in the cash flow hedge reserve (cash flow hedges only) and the deferred cost of hedging reserve (both cash flow and fair value hedges) are
reclassified from reserves to the income statement on a systematic basis as hedged interest expense is recognised. Adjustments made to the
carrying value of hedged items in fair value hedges are similarly released to the income statement to match the timing of the hedged interest
expense.

When hedge accounting is discontinued, any remaining cumulative hedge accounting balances continue to be released to the income statement
to match the impact of outstanding hedged items. Any remaining amounts deferred in the cost of hedging reserve are released immediately to the
income statement.

167

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements32. Financial risk management continued
(e) Hedge accounting
In accordance with the requirements of IFRS 9, certain additional information about hedge accounting is disaggregated by risk type and hedge
designation type in the tables below:

Fair value hedges of
foreign currency and
interest rate risk
£m

Cash flow hedges of
foreign currency and
interest rate risk
£m

Cash flow hedges of
foreign currency risk
£m

Net investment hedges
£m

Consolidated statement of comprehensive income

Net losses in respect of:

Cash flow hedges

Cost of hedging

Transferred to profit or loss in respect of:

Cash flow hedges

Cost of hedging

Consolidated statement of changes in equity

Other equity reserves – cost of hedging balances

Consolidated statement of financial position

Derivatives – carrying value of hedging instruments1

Assets – current

Assets – non-current

Liabilities – current

Liabilities – non-current

Profiles of the significant timing, price and rate
information of hedging instruments

Maturity range

Spot foreign exchange range:

GBP:USD

GBP:EUR

EUR:USD

Interest rate range:

GBP

USD

–

(6)

–

(4)

168

(9)

(25)

(40)

(12)

(1)

–

(28)

(134)

(12)

–

(3)

(4)

–

(90)

–

(43)

(249)

Nov 2019 – May 2038

Aug 2019 – Feb 2039

Apr 2019 – Dec 2023 Mar 2020 – Jun 2025

1.64 – 1.65

1.19 – 1.24

1.13 – 1.16

1.52 – 1.66

1.14 – 1.24

1.13 – 1.14

Libor +30bps/+561bps

1.795% – 5.850%

Libor -44bps/+115bps

1.103% – 3.864%

1.29 – 1.41

1.07 – 1.32

n/a

1.49

1.15

n/a

1. The use of derivatives may entail a derivative transaction qualifying for more than one hedge type designation under IFRS 9. Therefore, the derivative amounts in the table above are grossed

up by hedge type, whereas they are presented net at an instrument level in the statement of financial position.

168

Notes to the consolidated financial statements – supplementary information continuedNational Grid Annual Report and Accounts 2018/19Financial Statements32. Financial risk management continued
(e) Hedge accounting continued
The following tables show the effects of hedge accounting on financial position and year-to-date performance for each type of hedge:
(i) Fair value hedges of foreign currency and interest rate risk on recognised borrowings as at 31 March 2019:

Hedge type

Foreign currency and interest rate risk on borrowings1

Balance of fair value hedge
adjustments in borrowings

Change in value used for
calculating ineffectiveness

Hedging
instrument
notional
£m

(1,707)

Continuing
hedges
£m

Discontinued
hedges
£m

Hedged item
£m

Hedging
instrument
£m

Hedge
ineffectiveness
£m

(117)

(6)

1. The carrying value of the hedged borrowings is £1,810 million, of which £202 million is current and £1,608 million is non-current.

(ii) Cash flow hedges of foreign currency and interest rate risk as at 31 March 2019:

Hedge type

Foreign currency and interest rate risk on borrowings

Foreign currency risk on forecasted cash flows

Balance in cash flow hedge reserve

Change in value used for
calculating ineffectiveness

Hedging
instrument
notional
£m

(3,804)

(697)

Continuing
hedges
£m

Discontinued
hedges
£m

Hedged item
£m

Hedging
instrument
£m

Hedge
ineffectiveness
£m

(17)

–

(39)

(12)

–

(iii) Net investment hedges of foreign currency risk as at 31 March 2019:

Hedge type

Currency risk on foreign operations

Balance in translation reserve

Change in value used for
calculating ineffectiveness

Hedging
instrument
notional
£m

(2,974)

Continuing
hedges
£m

Discontinued
hedges
£m

Hedged item
£m

Hedging
instrument
£m

Hedge
ineffectiveness
£m

(329)

(2,502)

550

(550)

–

(f) Commodity price 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 and IFRS 9. They are, therefore, not
recognised in the financial statements until they are realised. Disclosure of commitments under such contracts is made in note 30.

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 exemption of IFRS 9/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.

169

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements32. Financial risk management continued
(g) Fair value analysis
Included in the statement of financial position are financial instruments which are measured at fair value. These fair values can be categorised
into hierarchy levels that are representative of the inputs used in measuring the fair value. The best evidence of fair value is a quoted price in
an actively traded market. In the event that the market for a financial instrument is not active, a valuation technique is used.

Assets

Available-for-sale investments1

Investments held at FVTPL1

Investments held at FVOCI1

Investments in associates2

Financing derivatives

Commodity contract derivatives

Further Acquisition Agreement derivative3

Liabilities

Financing derivatives

Commodity contract derivatives

Liability held at fair value4

2019

2018

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

–

1,311

–

343

–

1,050

–

1,373

436

1,052

101

–

2,406

310

–

1,544

–

1,404

1,426

222

3,052

2,406

1,862

–

(667)

737

(868)

(32)

–

(900)

526

(216)

(67)

–

(283)

(61)

(1,084)

(99)

(667)

(1,850)

1,202

–

2,406

(725)

(54)

–

(779)

1,083

–

110

256

(220)

(62)

–

(282)

(26)

Total
£m

2,721

–

1,545

110

4,524

(945)

(116)

–

(1,061)

3,463

1. The available-for-sale investments have been reclassified, with the adoption of IFRS 9 (see notes 15 and 37).
2. Our Level 3 investments include investments relating to Sunrun Neptune 2016 LLC accounted for at fair value.
3. The Group is party to the Further Acquisition Agreement (FAA) and Remaining Acquisition Agreement (RAA) which contain put and call options over the equity and loan balances it holds in

Cadent (through its investment in Quadgas). These are classified within the disposal group as at 31 March 2019 (see note 10).

4. On adoption of IFRS 9 the Group elected to change the measurement basis to fair value through profit and loss (see notes 21 and 37).

Level 1:

Financial instruments with quoted prices for identical instruments in active markets.

Level 2:

Financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments
in inactive markets, and financial instruments valued using models where all significant inputs are based directly or indirectly on
observable market data.

Level 3:

Financial instruments valued using valuation techniques where one or more significant inputs are based on unobservable market data.

Our Level 1 financial investments and liabilities held at fair value are valued using quoted prices from liquid markets.

Our Level 2 financial investments held at fair value are valued using quoted prices for similar instruments in active markets, or quoted prices
for identical or similar instruments in inactive markets. Alternatively, they are valued using models where all significant inputs are based directly
or indirectly on observable market data.

Our Level 2 derivative financial instruments include cross-currency, interest rate and foreign exchange derivatives. We value these derivatives
by discounting all future cash flows by externally sourced market yield curves at the reporting date, taking into account the credit quality of both
parties. These derivatives can be priced using liquidly traded interest rate curves and foreign exchange rates; therefore we classify our vanilla
trades as Level 2 under the IFRS 13 framework.

Our Level 2 commodity derivatives include over-the-counter gas and power swaps as well as forward physical gas deals. We value our contracts
based on market data obtained from the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE) where monthly prices
are available. We discount based on externally sourced market yield curves at the reporting date, taking into account the credit quality of both
parties and liquidity in the market. Our commodity contracts can be priced using liquidly traded swaps; therefore we classify our vanilla trades
as Level 2 under the IFRS 13 framework.

Our Level 3 derivative financial instruments include cross-currency swaps, inflation linked swaps and equity options, where the market is illiquid.
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 for at fair value (see note 16),
and further equity investments accounted for at fair value through profit and loss. These equity holdings are part of our corporate venture capital
portfolio held by National Grid Partners and comprise a series of small minority interest unquoted investments where prices or valuation inputs
are unobservable. These investments are new this year and as such the valuation is based on the latest transaction price, being the price we paid
for the investments.

170

At 1 April

Net gains/(losses) for the year1,2

Purchases

Settlements

Reclassification to held for sale3

At 31 March

Financing derivatives

Commodity contract
derivatives

Other3,4

Total

2019
£m

(219)

–

(214)

2018
£m

(465)

–

231

–

(219)

2019
£m

(1)

(16)

(26)

–

2018
£m

(16)

(20)

–

(1)

2019
£m

194

(4)

(110)

152

2018
£m

110

(3)

–

194

2019
£m

(26)

101

(29)

(110)

(61)

2018
£m

(435)

133

208

–

(26)

1. Gain of £4 million (2018: £15 million gain) is attributable to derivative financial instruments held at the end of the reporting period and has been recognised in finance costs in the income

statement.

2. Loss of £21 million (2018: £35 million gain) is attributable to commodity contract derivative financial instruments held at the end of the reporting period.
3. The Group is party to the Further Acquisition Agreement (FAA) and Remaining Acquisition Agreement (RAA) which contain put and call options over 14% and 25% respectively, of the

equity and loan balances it holds in Cadent (through its investment in Quadgas). These were classified to held for sale as at 31 March 2019 (see note 10). The fair value was £110 million
as at 31 March 2018.

4. Other comprises our investments in Sunrun Neptune 2016 LLC and the investments made by the National Grid Partners accounted for at fair value through profit and loss.

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

+10% market area price change

-10% market area price change

+20 basis points change in Limited Price Inflation (LPI) market curve2

-20 basis points change in LPI market curve2

+50 basis points change in discount rate

-50 basis points change in discount rate

Financing derivatives

2019
£m

2018
£m

–

(88)

–

(84)

–

Commodity contract
derivatives

Other3

2019
£m

(1)

(10)

–

2018
£m

2019
£m

2018
£m

(1)

(6)

–

(3)

–

(5)

1. Level 3 commodity price sensitivity is included within the sensitivity analysis disclosed in note 35.
2. A reasonably possible change in assumption of other Level 3 derivative financial instruments is unlikely to result in a material change in fair values.
3. The investments acquired in the period were on market terms, and sensitivity is considered insignificant at 31 March 2019.

The impacts disclosed above were considered on a contract-by-contract basis with the most significant unobservable inputs identified.

171

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements32. Financial risk management continued
(h) 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 29). 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. We monitor our balance sheet efficiency using several metrics including retained cash flow/net debt (RCF),
regulatory gearing and interest cover. For the year ended 31 March 2019, these metrics for the Group were 9.4% (2018: 9.7%), 66% (2018: 64%)
and 4.4 (2018: 4.4), respectively – see pages 26 and 229. We believe these are consistent with the current credit ratings for National Grid plc in
respect of the main companies of the Group, based on guidance from the rating agencies.

We monitor the RAV gearing within 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,
typically around 50%.

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;
• the securities of 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 2019 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.

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.

172

Notes to the consolidated financial statements – supplementary information continuedNational Grid Annual Report and Accounts 2018/19Financial Statements33. Borrowing facilities

To support our 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 committed credit facilities have never been drawn, and our
undrawn amounts are listed below.

At 31 March 2019, we had bilateral committed credit facilities of £5,463 million (2018: £5,438 million). In addition, we had committed credit
facilities from syndicates of banks of £264 million at 31 March 2019 (2018: £245 million). All committed credit facilities were undrawn in 2019
and 2018. 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

2019
£m

–

2,190

1,668

1,869

–

5,727

2018
£m

–

3,910

–

1,773

–

5,683

Of the unused facilities at 31 March 2019, £5,463 million (2018: £5,438 million) is available for liquidity purposes, while £264 million (2018:
£245 million) is available as backup to specific US borrowings. Of the £1,869 million of undrawn committed borrowings facilities due to expire
within four to five years, £270 million was renegotiated before 31 March 2019, with the expiry extended by a further year, with effect from
1 June 2019.

In addition to the above, the Group has Export Credit Agreements (ECAs) totalling £859 million (2018: £797 million), of which £510 million
(2018: £704 million) is undrawn. The Group has also negotiated a new facility of £550 million, with effect from 1 April 2019, for the separately
regulated business of National Grid Electricity System Operator Limited. This facility is not available as Group general liquidity support.

173

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements34. 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 2019 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
National Grid Partners Limited (previously National Grid Thirty Four Limited)

1. Registered office: Shire Hall, PO Box 9, Warwick CV34 4RL, UK

National Grid Property Holdings Limited
National Grid Seventeen Limited
National Grid Smart Limited
National Grid Ten
National Grid Thirty Five Limited
National Grid Thirty Six 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

174

Notes to the consolidated financial statements – supplementary information continuedNational Grid Annual Report and Accounts 2018/19Financial Statements34. Subsidiary undertakings, joint ventures and associates continued
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
Granite State Power Link LLC
GridAmerica Holdings Inc.
Grid NY LLC3
KeySpan CI Midstream Limited
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 Partners Inc. (previously National Grid Technologies Inc.)3
National Grid Port Jefferson Energy Center LLC
National Grid Services Inc.
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
NGV Emerald Acquisition Co. LLC5
NGV Emerald Holdings LLC5
Niagara Mohawk Energy, Inc.
Niagara Mohawk Holdings, Inc.3
Niagara Mohawk Power Corporation3
NM Properties, Inc.3
Northeast Renewable Link LLC
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

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 Isle of Man
Registered office: Third Floor, St George’s Court, Upper Church Street, Douglas,
IM1 1EE, Isle of Man, UK

National Grid Insurance Company (Isle of Man) Limited
NGT Holding Company (Isle of Man) Limited

Incorporated in Jersey
Registered office: 44 Esplanade, St Helier, Jersey JE4 9WG, UK

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: c/o Moore Stephens Nathans, Third Floor, Ulysses House,
23/24 Foley Street, Dublin 1, D01 W2T2, Ireland

National Grid Company (Ireland) Designated Activity Company (previously
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: 404 Wyman Street, Waltham MA 02451 USA.
*

In liquidation.

175

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statementsOther investments
A list of the Group’s other investments
as at 31 March 2019 is given below.

Incorporated in England and Wales
Registered office: 1 More London Place,
London SE1 2AF, UK

Energis plc (33.06%)‡

34. Subsidiary undertakings, joint ventures and associates continued
Joint ventures
A list of the Group’s joint ventures as at
31 March 2019 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
2019 is given below. Unless otherwise stated,
all associates are included in the Group’s
financial statements using the equity method
of accounting. Principal associates
are identified in bold.

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

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%)
Goldendale Energy Storage 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

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%)3
Connecticut Yankee Atomic Power Company (19.5%)4
Direct Global Power, Inc. (26%)5
Energy Impact Fund LP (9.42%)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

IFA2 SAS (50%)

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.
‡
# Quadgas HoldCo Limited is included in the financial statements from 30 June 2018 as an asset held for sale.

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.

176

Notes to the consolidated financial statements – supplementary information continuedNational Grid Annual Report and Accounts 2018/19Financial Statements35. Sensitivities

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 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 benefits (pre-tax):1

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%4

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

2019

2018

Income
statement
£m

Net
assets
£m

1,064

688

908

610

406

503

Income
statement
£m

–

Net
assets
£m

1,075

623

965

588

359

448

165

154

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 2019. 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.

177

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements35. 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.

The Group adopted IFRS 9 with effect from 1 April 2018. The comparatives are not required to be restated and are accounted for in accordance
with IAS 39. For further information on the impact of adopting IFRS 9 in respect to financial instruments, please see notes 15, 17, 21 and 32.

Our net debt as presented in note 29 is sensitive to changes in market variables, primarily being UK and US interest rates, the UK RPI and
the dollar to sterling exchange rate. These impact the valuation of our borrowings, deposits and derivative financial instruments. The analysis
illustrates the sensitivity of our financial instruments to reasonably possible changes in these 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 2019 and 2018 respectively;

• the statement of financial position sensitivity to interest rates relates to items presented at their fair values: derivative financial instruments;

our investments measured at fair value through profit and loss (FVTPL) and fair value through other comprehensive income; and our liability
measured at FVTPL. Further debt and other deposits are carried at amortised cost and so their carrying value does not change as interest
rates move;

• the sensitivity of 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
presented in equity as costs of hedging, with a one-year release to the income statement. The impact of movements in the dollar to sterling
exchange rate are recorded directly in equity.

Financial risk (post-tax):

UK RPI change of 0.5%1

UK interest rates change of 0.5%

US interest rates change of 0.5%

US dollar exchange rate change of 10%2

2019

2018

Income
statement
£m

Other equity
reserves
£m

Income
statement
£m

Other equity
reserves
£m

–

246

–

479

1. Excludes sensitivities to LPI curve. Further details on sensitivities are provided in note 32(g).
2. The other equity reserves impact does not reflect the exchange translation in our US subsidiaries’ net assets. It is estimated this would change by £1,119 million (2018: £1,040 million) in the

opposite direction if the dollar exchange rate changed by 10%.

Our commodity contract derivatives are sensitive to price risk. Additional sensitivities in respect to commodity price risk and to our derivative fair
values are as follows:

Commodity price risk (post-tax):

10% increase in commodity prices

10% decrease in commodity prices

Assets and liabilities carried at fair value (pre-tax):1

10% fair value change in derivative financial instruments2

10% fair value change in commodity contract derivative liabilities

2019

2018

Income
statement
£m

Net
assets
£m

Income
statement
£m

Net
assets
£m

(27)

(3)

–

(27)

(3)

–

(23)

(5)

(23)

(5)

1. Excludes sensitivities to the Further Acquisition Agreement derivative. These were classified to held for sale as at 31 March 2019 (see note 10).
2. The effect of a 10% change in fair value assumes no hedge accounting.

178

We have 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 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, which amount to £29 million. 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.
These guarantors commit to honour any liabilities should the company issuing the debt have any financial difficulties.

On 1 June 2018, the Group repaid the 6.625% Guaranteed Notes due 2018 that were issued in June 1998 by British Transco Finance Inc.,
then known as British Gas Finance Inc. (issuer of notes).

The following financial information for National Grid plc 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 2019. Summary
statements of comprehensive income of National Grid 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 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, Niagara Mohawk Power Corporation and other subsidiaries.

179

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements36. Additional disclosures in respect of guaranteed securities continued
Summary statements of comprehensive income for the year ended 31 March 2019 – IFRS

Parent
guarantor

National
Grid plc
£m

Issuer of notes

Niagara
Mohawk
Power
Corporation
£m

Other
subsidiaries
£m

Consolidation
adjustments
£m

National
Grid
consolidated
£m

2,483

12,450

–

(1,712)

–

(1,712)

(36)

14,933

(1,735)

(1,852)

(1,454)

(1,642)

(1,108)

(1,196)

(3,076)

(12,063)

2,870

(1,069)

1,841

(339)

1,514

303

(1,519)

(1,492)

(895)

(1,453)

(908)

(1,196)

(2,507)

(9,970)

2,480

(693)

1,827

(333)

1,506

(45)

1,497

(1,707)

1,853

1,493

(1,707)

1,849

–

1,497

(1,707)

1,853

(216)

(360)

(559)

(189)

(200)

–

(569)

(2,093)

390

(124)

–

266

(56)

–

210

–

214

–

214

Continuing operations

Revenue

Operating costs:

Depreciation, amortisation and impairment

Payroll costs

Purchases of electricity

Purchases of gas

Rates and property taxes

Balancing Services Incentive Scheme

Other operating costs

Total operating profit

Net finance costs

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 operations1

Amounts recognised in other comprehensive income from discontinued operations1

Total comprehensive income for the year

Attributable to:

Equity shareholders

Non-controlling interests

1. Includes other comprehensive income relating to interest in equity accounted affiliates.

–

(252)

1,712

1,460

–

1,510

303

1,849

–

1,849

180

Notes to the consolidated financial statements – supplementary information continuedNational Grid Annual Report and Accounts 2018/19Financial Statements36. Additional disclosures in respect of guaranteed securities continued
Summary statements of comprehensive income for the year ended 31 March 20181 – IFRS

Continuing operations

Revenue

Operating costs:

Depreciation, amortisation and impairment

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

Total operating profit

Net finance income/(costs)

Interest in equity accounted affiliates

Profit before tax

Tax

Profit after tax from discontinued operations

Profit for the year

Amounts recognised in other comprehensive income
from continuing operations3

Amounts recognised in other comprehensive income
from discontinued operations3

Total comprehensive income for the year

Attributable to:

Equity shareholders

Non-controlling interests

Parent
guarantor

National
Grid plc
£m

Issuer of notes

Niagara
Mohawk
Power
Corporation
£m

British
Transco
Finance Inc.
£m

Subsidiary
guarantor

National
Grid Gas
plc
£m

Other
subsidiaries
£m

Consolidation
adjustments
£m

National
Grid
consolidated
£m

–

889

2,622

3,511

–

3,551

224

147

3,922

–

3,922

2,416

(190)

(318)

(537)

(166)

(183)

–

(397)

(1,791)

625

(100)

–

525

321

–

846

–

847

–

847

–

–2

–

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

(1,497)

782

631

(15)

–

(2,630)

–

(1,530)

(1,648)

(1,285)

(1,543)

(1,057)

(1,012)

(1,043)

(2,639)

(11,757)

3,493

(882)

2,660

889

1,398

(2,630)

3,551

457

(730)

224

147

2,002

(147)

(3,507)

147

3,922

2,002

(3,507)

3,922

–

2,002

(3,507)

3,922

1. Comparatives have been re-presented to reflect the classification of our retained interest in Quadgas as a discontinued operation in the current period (see note 1C and note 10).
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.

181

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-presented
£m

Other
subsidiaries
re-presented
£m

Consolidation
adjustments
£m

National
Grid
consolidated
£m

Continuing operations

Revenue

Operating costs:

Depreciation, amortisation and impairment

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

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

5,005

2,660

(7,979)

5,005

–

5,005

2,661

(7,979)

8,415

(1)

–

(1)

2,660

(7,979)

8,414

1. Profit for the year for British Transco Finance Inc. is £nil as interest payable to external bond holders is offset by interest receivable on loans to National Grid Gas plc.
2. Includes other comprehensive income relating to interest in equity accounted affiliates.

182

Notes to the consolidated financial statements – supplementary information continuedNational Grid Annual Report and Accounts 2018/19Financial Statements36. Additional disclosures in respect of guaranteed securities continued
Statements of financial position as at 31 March 2019 – IFRS

Non-current assets

Goodwill

Other intangible assets

Property, plant and equipment

Other non-current assets

Amounts owed by subsidiary undertakings

Pension assets

Financial and other investments

Derivative financial assets

Total non-current assets

Current assets

Inventories and current intangible assets

Trade and other receivables

Current tax assets

Amounts owed by subsidiary undertakings

Financial and other investments

Derivative financial assets

Cash and cash equivalents

Assets held for sale

Total current assets

Total assets

Current liabilities

Borrowings

Derivative financial liabilities

Trade and other payables

Contract liabilities

Amounts owed to subsidiary undertakings

Current tax liabilities

Provisions

Total current liabilities

Non-current liabilities

Borrowings

Derivative financial liabilities

Other non-current liabilities

Contract liabilities

Amounts owed to subsidiary undertakings

Deferred tax liabilities

Pensions and other post-retirement benefit obligations

Provisions

Total non-current liabilities

Total liabilities

Net assets

Equity

Share capital

Share premium account

Retained earnings

Other equity reserves

Shareholders’ equity

Non-controlling interests

Total equity

Parent
guarantor

Issuer of notes

Niagara
Mohawk
Power
Corporation
£m

National
Grid plc
£m

Other
subsidiaries
£m

Consolidation
adjustments
£m

National
Grid
consolidated
£m

–

358

–

23,573

–

745

6,985

–

260

5,124

1,081

36,928

260

2,073

1,307

3,434

1,036

–

(2,431)

–

(25,754)

–

5,869

1,084

43,913

264

–

1,567

1,275

1,045

23,931

8,028

51,243

(28,185)

55,017

329

2,617

260

14,101

1,073

165

1,956

20,581

71,824

(2,563)

(346)

(3,298)

(57)

–

12,514

895

110

–

13,595

37,526

(1,275)

(92)

(58)

–

(14,104)

–

535

–

476

–

1,098

9,126

(634)

(15)

(413)

(4)

–

(148)

(24)

–

(134)

(27,091)

–

(103)

–

(27,328)

370

3,153

126

–

1,981

108

252

1,956

7,946

(55,513)

62,963

–

103

–

(4,472)

(350)

(3,769)

(61)

–

(161)

(316)

(12,987)

27,091

(147)

(292)

134

–

(15,529)

(1,238)

(19,690)

27,328

(9,129)

(346)

(228)

–

(2,074)

–

(2,048)

(21,864)

(8)

(301)

(181)

–

(678)

(872)

(271)

(597)

(507)

(752)

(357)

(3,287)

(913)

(1,612)

–

2,431

–

(24,258)

(833)

(808)

(933)

–

(3,965)

(1,785)

(1,883)

(2,648)

(4,359)

(29,889)

2,431

(34,465)

(18,177)

19,349

(5,597)

3,529

(49,579)

29,759

(43,594)

22,245

(25,754)

19,369

458

1,314

21,814

(4,237)

19,349

144

2,394

991

–

180

9,032

13,048

(35)

(324)

(11,426)

(14,039)

458

1,314

21,814

(4,237)

3,529

22,225

(25,754)

19,349

–

19,349

3,529

22,245

(25,754)

19,369

183

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements36. Additional disclosures in respect of guaranteed securities continued
Statements of financial position as at 31 March 2018 – 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
£m

Other
subsidiaries
£m

Consolidation
adjustments
£m

National
Grid
consolidated
£m

–

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

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

184

–

220

–

220

(218)

–

107

4,433

3,426

412

101

591

4,753

789

29,272

2,593

766

–

(6,369)

–

12,340

(31,112)

708

–

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)

–

(218)

–

(444)

(855)

(3,778)

(2,568)

(907)

(1,402)

(25,637)

(42,555)

23,465

182

9,032

14,217

–

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)

(157)

(181)

(500)

(441)

–

(129)

(5,043)

(6,849)

4,501

204

2,929

1,323

4,501

23,449

(31,112)

18,832

–

4,501

23,465

(31,112)

18,848

Notes to the consolidated financial statements – supplementary information continuedNational Grid Annual Report and Accounts 2018/19Financial StatementsIssuer of notes

Subsidiary
guarantor

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

36. Additional disclosures in respect of guaranteed securities continued
Cash flow statements

Year ended 31 March 2019

Net cash flow from operating activities – continuing operations

Net cash flow used in operating activities – discontinued operations

Net cash flow from/(used in) investing activities – continuing operations

Net cash flow from investing activities – discontinued operations

Net cash flow (used in)/from financing activities – continuing operations

Net cash flow from financing activities – discontinued operations

Net increase/(decrease) in cash and cash equivalents in the year

Year ended 31 March 2018

Net cash flow from operating activities – continuing operations

Net cash flow used in operating activities – discontinued operations

Parent
guarantor

National
Grid plc
£m

–

121

–

(79)

–

Net cash flow from/(used in) investing activities – continuing operations

4,660

Net cash flow from investing activities – discontinued operations

–

Net cash flow (used in)/from financing activities – continuing operations

(5,785)

Net cash flow used in financing activities – discontinued operations

Net (decrease)/increase in cash and cash equivalents in the year

Year ended 31 March 2017

Net cash flow from operating activities – continuing operations

Net cash flow from operating activities – discontinued operations

–

(1,090)

–

Net cash flow from/(used in) investing activities – continuing operations

4,181

Net cash flow from/(used in) investing activities – discontinued operations

–

Net cash flow (used in)/from financing activities – continuing operations

(3,146)

Net cash flow from financing activities – discontinued operations

Net increase/(decrease) in cash and cash equivalents in the year

–

1,088

572

–

(823)

–

259

–

662

–

(473)

–

(189)

–

757

–

(469)

–

(288)

–

n/a

–

n/a

888

(98)

656

–

(15)

(1,041)

–

(15)

–

(125)

280

918

450

215

5,618

(8,322)

1,120

(1)

3,784

(71)

(3,570)

156

(462)

–

(163)

3,125

(109)

(1,930)

171

(1,148)

(106)

2,592

459

(1,118)

(6,298)

3,771

491

(103)

–

1,082

–

(1,082)

–

(862)

–

862

–

(6,458)

–

6,458

–

Cash dividends were received by National Grid plc from subsidiary undertakings amounting to £nil during the year ended 31 March 2019
(2018: £950 million; 2017: £6,006 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

2019
£m

1,275

–

346

–

4,389

(71)

(3,190)

156

(1,364)

–

(80)

4,710

(207)

2,066

171

(7,316)

(231)

(807)

4,320

909

(3,634)

(680)

(1,542)

1,611

984

2018
£m

781

438

–

335

–

1,621

1,554

185

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements37. Transition to IFRS 9 and IFRS 15
The Group has adopted IFRS 9 and IFRS 15 with effect from 1 April 2018. The impact of the transition on the opening consolidated statement
of financial position is set out in the following table:

31 March 2018
As previously
reported
£m

Transition adjustments

IFRS 9
£m

IFRS 15
£m

1 April 2018
£m

5,444

899

39,853

115

1,409

899

2,168

1,319

52,106

341

2,798

114

2,694

405

329

6,681

58,787

(4,447)

(401)

(3,453)

–

(123)

(273)

(8,697)

(22,178)

(660)

(1,317)

–

(3,636)

(1,672)

(1,779)

(31,242)

(39,939)

18,848

452

1,321

21,599

(4,540)

18,832

18,848

–

–1

–

–2

–

–1

–

(32)3

–

(27)

–

(99)5

726

(27)

–

(27)

–

(3)

–

(3)

–

597

(53)7

–

5677

(813)7

748

–

(172)

(166)

(169)

–

(169)9

–

(169)

–

(169)

5,444

899

39,853

115

1,409

899

2,168

1,319

52,106

341

2,795

114

2,694

405

329

6,678

58,784

(4,447)

(401)

(3,394)

(53)

(123)

(273)

(8,691)

(22,210)

(660)

(750)

(813)

(3,557)

(1,672)

(1,779)

(31,441)

(40,132)

18,652

452

1,321

21,331

(4,468)

18,636

18,652

Impact of transition

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

Contract liabilities

Current tax liabilities

Provisions

Total current liabilities

Non-current liabilities

Borrowings

Derivative financial liabilities

Other non-current liabilities

Contract 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

186

Notes to the consolidated financial statements – supplementary information continuedNational Grid Annual Report and Accounts 2018/19Financial Statements37. Transition to IFRS 9 and IFRS 15 continued
Both standards were applied using the modified retrospective approach whereby comparative amounts have not been restated on transition,
but a cumulative adjustment has been made to retained earnings in the opening consolidated statement of financial position as at 1 April 2018.

IFRS 9: Financial Instruments
IFRS 9 has changed the rules concerning the classification and measurement of financial instruments, impairment of financial assets, and hedge
accounting. Details of the impact of applying IFRS 9 for the year ended 31 March 2019 are set out below.

Adjustments arising as a result of the transition to IFRS 9:

1. The available-for-sale category for financial assets has been replaced with investments held at fair value through profit and loss (FVTPL)

and investments held at fair value through other comprehensive income (FVOCI). Changes to the classification and measurement of financial
assets have not altered the carrying value of any financial assets held by the Group. The net impact to retained earnings of the reclassification
on transition was an £8 million gain.

As described in note 15, all recognised financial assets that are within the scope of IFRS 9 are initially recorded at fair value and subsequently
measured at amortised cost or fair value based on the Group’s business model for managing the financial assets and the contractual cash flow
characteristics of the financial assets. Therefore on 1 April 2018, the Group reclassified its investments as follows:
• Money market funds and fund investments held by captive insurance companies have been classified as financial assets at FVTPL because

their contractual cash flows are not solely payments of principal and interest;

• Investments in debt securities that have contractual payments that are solely payments of principal and interest, and which are held as part
of the liquidity portfolio or to back employee benefit liabilities, have been classified as financial assets at FVOCI because they are held in a
business model whose objective is to collect the contractual cash flows and to sell the debt instruments;

• The Group has elected to hold investments in equity securities, which are held to back employee benefit liabilities, as financial assets at

FVOCI as the Group does not believe that changes in their fair value is reflective of the financial performance of the Group; and

• Loans to joint ventures and associates, cash at bank, and short-term deposits are classified at amortised cost as they have contractual cash

flows which are solely payments of principal and interest and the Group holds them to collect contractual cash flows.

Aside from derivative financial instruments, which remain classified as FVTPL, the Group did not previously have any financial assets or
liabilities classified at FVTPL.

The table below illustrates those financial assets and liabilities that have been reclassified at 1 April 2018:

Financial asset/liability

Note

Original measurement category under IAS 39

New measurement category
under IFRS 9

Original
carrying
amount under
IAS 39
£m

Change to
measurement
basis under
IFRS 9
£m

Money market funds and fund
investments in equities and bonds

Cash surrender value of life
insurance policies and investments
in debt securities

Investments in equity securities

Loans to joint ventures and
associates and restricted balances

Borrowings

Available-for-sale investments

Financial assets at FVTPL

2,294

Available-for-sale investments

Financial assets at FVOCI

Available-for-sale investments

Loans and receivables

Financial liabilities at amortised cost

Financial assets at FVOCI
(equity instruments)

Financial assets at
amortised cost

Financial liabilities at fair
value through profit and loss

343

872

New carrying
amount under
IFRS 9
£m

2,294

343

872

–

(570)

(32)

(602)

Note that the table above does not include derivative assets, derivative liabilities, trade receivables, cash at bank and short-term deposits,
borrowings measured at amortised cost or trade payables. This is because neither the classification nor the measurement of these items
has changed on transition to IFRS 9.

187

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statements37. Transition to IFRS 9 and IFRS 15 continued
2.

The change from the incurred loss impairment model of IAS 39 to the expected loss model in IFRS 9 has not had a material impact on the
Group’s credit loss provision. The Group calculates its impairment provision on trade receivables using a sophisticated provisions matrix.
The inclusion of forward-looking information has not had a significant impact on the matrix as the relevant short-term future economic
conditions affecting our retail customers in the US are expected to be similar to recent experience.

The Group elected to reclassify an existing liability with a carrying value of £570 million from amortised cost to fair value through profit
and loss to reduce a measurement mismatch. At transition, the resultant impacts include an increase in the carrying value of the liability
of £32 million, a reduction in retained earnings of £40 million and the establishment of an own credit reserve (within other equity reserves)
of £7 million.

4. Deferred tax is recognised on the adjustments recorded on the transition to IFRS 9. Reserve impacts are stated net of related deferred tax.

5. Retained earnings includes the impact from adjustments 1, 3 and 6.

The Group has adopted the hedge accounting requirements of IFRS 9, which more closely align with the Group’s risk management policies.
On transition, it was concluded that all IAS 39 hedge relationships are qualifying IFRS 9 relationships with the treatment of the cost of hedging
being the main change. The effect was a reclassification in reserves of a £67 million gain from retained earnings and a £10 million gain from
the cash flow hedge reserve, into a new cost of hedging reserve (within other equity reserves). In this reserve, qualifying unrealised gains and
losses excluded from hedging relationships are deferred and released systematically into profit or loss to match the timing of hedged items.

IFRS 15: Revenue from Contracts with Customers
IFRS 15 has primarily changed the accounting for our connection and diversion revenues in our regulated businesses. No practical expedients
on transition were applied.

The accounting for revenue under IFRS 15 does not represent a substantive change from the Group’s previous practice under IAS 18 for
recognising revenue from sales to customers with the exception of the following items:
• Certain pass-through revenues (principally revenues collected on behalf of the Scottish and Offshore transmission operators) will be recorded
net of operating costs, whereas previously they were recognised gross of operating costs. Had we not adopted IFRS 15, our revenues and
operating costs for the year ended 31 March 2019 would have been £1,197 million higher, with no impact to operating profits;

• Contributions for capital works relating to connections for our customers are now deferred as contract liabilities on our consolidated statement

of financial position and released over the life of the connection assets. This is a change for our US Regulated business and our UK Gas
Transmission business, where previously revenues were recorded once the work was completed. Had we not adopted IFRS 15, our revenues
and operating profit for the year ended 31 March 2019 would have been £57 million higher; and

• In the UK, contributions for capital works relating to diversions are now recognised as the works are completed. This is a change for the
UK regulated businesses where revenues were previously deferred over the life of the asset. Had we not adopted IFRS 15, our revenues
and operating profit for the year ended 31 March 2019 would have been £26 million and £23 million lower, respectively.

Adjustments arising as a result of the transition to IFRS 15:

7. Deferred income from contributions for capital works have now been reclassified to contract liabilities. In addition, these liabilities for capital
works relating to connections have increased as these capital contributions for connections are cumulatively adjusted for on 1 April 2018
and are now deferred and released over the life of the connection assets. This is a change for our US Regulated business and our UK Gas
Transmission business where previously revenues were recorded once the work was completed.

Partially offsetting the increase in contract liabilities for connections is the change in accounting treatment for contributions relating to
diversions in our UK businesses. These contributions are recognised as revenue as the works are completed where previously revenue was
recognised over the life of the assets.

8. Deferred tax is recorded on the incremental amounts recorded against capital contributions and contract liabilities on the transition to IFRS 15.

Deferred tax balances have been calculated at the rate substantially enacted at the balance sheet date.

9. The transition adjustment reflects the net of adjustments 7 and 8 above.

38. Post balance sheet events
In March 2019, National Grid Ventures entered into an agreement to acquire 100% of Geronimo Energy, a clean energy developer based
in Minneapolis in the United States for $100 million with potential further payments of up to $100 million subject to successful development
of the project pipeline. Completion of the acquisition is dependent on the execution of a joint venture agreement with Washington State
Investment Board and regulatory approvals being obtained (expected in the summer of 2019).

188

Notes to the consolidated financial statements – supplementary information continuedNational Grid Annual Report and Accounts 2018/19Financial Statements
Company accounting policies

Financial Statements

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 2019 were approved by the Board of Directors on 15 May
2019. 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 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 2018 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
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 IFRS standards.

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 has adopted IFRS 9 and IFRS 15 with effect from
1 April 2018. The adoption of IFRS 9 has had no material impact
and the adoption of IFRS 15 has had no impact on the Company.

There are no areas of judgement or key sources of estimation
uncertainty that are considered to have a significant effect on
the amounts recognised in the financial statements.

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.

189

National Grid Annual Report and Accounts 2018/19Company accounting policies
continued

D. Foreign currencies
Transactions in currencies other than the functional currency of the
Company are recorded at the rates of exchange prevailing on the dates
of the transactions. At each balance sheet date, monetary assets and
liabilities that are denominated in foreign currencies are retranslated at
closing exchange rates. Gains and losses arising on retranslation of
monetary assets and liabilities are included in the profit and loss
account.

E. Financial instruments
The Company’s accounting policies are the same as the Group’s
accounting policies under IFRS, namely IAS 32 ‘Financial Instruments:
Presentation’, IFRS 9 ‘Financial Instruments’ from 1 April 2018,
IAS 39 ‘Financial Instruments: Recognition and Measurement’ for
the comparatives 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 15, 17, 19, 20, 21 and 22 to the
consolidated financial statements. The Company is taking the
exemption for financial instruments disclosures, because IFRS 7
disclosures are given in notes 32 and 35 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 32 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 69 – 90.

190

National Grid Annual Report and Accounts 2018/19Financial StatementsFinancial Statements

Company 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 (liabilities)/assets

Total assets less current liabilities

Creditors (amounts falling due after more than one year)

Net assets

Equity

Share capital

Share premium account

Cash flow hedge reserve

Other equity reserves

Profit and loss account

Total shareholders’ equity

Notes

2019
£m

2018
£m

9,923

9,896

12,625

11,563

358

895

368

938

–

13,953

12,869

(15,529)

(12,839)

(1,576)

8,347

(2,648)

5,699

458

1,314

380

3,546

5,699

9,926

(2,906)

7,020

452

1,321

353

4,892

7,020

The Company’s loss after tax for the year was £202 million (2018: £930 million profit). The financial statements of the Company on pages 189 – 195
were approved by the Board of Directors on 15 May 2019 and were signed on its behalf by:

Sir Peter Gershon Chairman
Andy Agg Chief Financial Officer

National Grid plc
Registered number: 4031152

191

National Grid Annual Report and Accounts 2018/19Company statement of changes in equity
for the years ended 31 March

At 1 April 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

Loss for the year

Other comprehensive loss for the year

Transferred from equity in respect of cash flow hedges (net of tax)

Total comprehensive loss for the year

Other equity movements

Scrip dividend-related share issue1

Issue of treasury shares

Purchase of own shares

Share awards to employees of subsidiary undertakings

Equity dividends

At 31 March 2019

1. Included within the share premium account are costs associated with scrip dividends.

Share
capital
£m

449

Share
premium
account
£m

1,324

–

(3)

–

452

1,321

–

(7)

–

458

1,314

Cash flow
hedge
reserve
£m

–

(9)

–

(1)

–

Other
equity

reserves
£m

337

–

353

–

380

Profit

and loss
account
£m

Total
shareholders’
equity
£m

9,438

930

11,559

930

–

930

–

(9)

921

–

(1,017)

(5)

–

(4,487)

4,892

(202)

–

(202)

–

(2)

–

(5)

(4,487)

7,020

(202)

(1)

(203)

(1)

(2)

(1,160)

3,546

(1,160)

5,699

192

National Grid Annual Report and Accounts 2018/19Financial StatementsNotes to the Company financial statements

1. Fixed asset investments

At 1 April 2017

Additions

At 31 March 2018

Additions

At 31 March 2019

Shares in
subsidiary
undertakings
£m

8,880

1,016

9,896

9,923

During the year there was a capital contribution of £27 million (2018: £16 million) which represents the fair value of equity instruments granted
to subsidiaries’ employees arising from equity-settled employee share schemes. In the prior year, the Company acquired further 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 2019 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 34 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

2019
£m

2018
£m

110

12,514

308

11,254

12,625

11,563

–

358

350

368

The carrying values stated above are considered to represent the fair values of the assets. For the purposes of the impairment assessment, loans
to subsidiary undertakings are considered low credit risk as the subsidiaries are solvent and are covered by the Group’s liquidity arrangements.

3. Creditors

Amounts falling due within one year

Borrowings (see note 6)

Derivative financial instruments (see note 4)

Amounts owed to subsidiary undertakings

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 1 to 2 years

In 2 to 3 years

More than 5 years

The carrying values stated above are considered to represent the fair values of the liabilities.

2019
£m

1,275

14,104

2018
£m

781

187

11,809

15,529

12,839

346

228

2,074

–

2,648

1,077

–

997

2,074

773

2,091

2,906

–

1,095

996

2,091

193

National Grid Annual Report and Accounts 2018/19Financial Statements | Notes to the consolidated financial statementsNotes to the Company financial statements
continued

3. Creditors continued
A reconciliation of the movement in deferred tax in the year is shown below:

At 1 April 2017

Credited to equity

At 31 March 2018

Credited to equity

At 31 March 2019

4. Derivative financial instruments
The fair values of derivative financial instruments are:

Amounts falling due within one year

Amounts falling due after more than one year

2019

Assets
£m

Liabilities
£m

110

–

110

(92)

(228)

(320)

Total
£m

(228)

(210)

Assets
£m

308

326

For each class of derivative the notional contract1 amounts are as follows:

Interest rate swaps

Cross-currency interest rate swaps

Foreign exchange forward contracts

1. The notional contract amounts of derivatives indicate the gross nominal value of transactions outstanding at the balance sheet date.

5. Investments

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 loans

Bonds

Commercial paper

Amounts falling due after more than one year

Bonds

Deferred tax
£m

(2)

(1)

–

Total
£m

121

(23)

2018
£m

(2,501)

(3,613)

(13,929)

(20,043)

2018
£m

919

938

2018
£m

230

551

–

781

773

1,554

2018

Liabilities
£m

(187)

(41)

(228)

2019
£m

(1,208)

(2,900)

(7,920)

(12,028)

2019
£m

672

–

223

895

2019
£m

–

435

840

1,275

346

1,621

The maturity of total borrowings is disclosed in note 21 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 2019 was £1,618 million (2018: £1,531 million).

194

National Grid Annual Report and Accounts 2018/19Financial StatementsFinancial Statements | Notes to the Company financial statements

7. Share capital
The called-up share capital amounting to £458 million (2018: £452 million) consists of 3,687,483,073 ordinary shares of 12204/473 pence each
(2018: 3,637,747,827 ordinary shares of 12204/473 pence each). For further information on share capital, refer to note 27 of the consolidated
financial statements.

8. Shareholders’ equity and reserves
At 31 March 2019, the profit and loss account reserve stood at £3,546 million (2018: £4,892 million) of which £86 million (2018: £86 million)
related to gains on intra-group transactions which were 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 9 of the consolidated financial statements.

In 2017/18, the Company recognised £950 million of dividend income from subsidiaries. In 2018/19, no such income was recognised and the
Company continues to recognise a loss on intra-group financing arrangements.

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 2019, the sterling equivalent amounted to £2,152 million (2018: £2,398 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 25 of the consolidated
financial statements.

10. Audit fees
The audit fee in respect of the Parent Company was £26,000 (2018: £25,000). Fees payable to Deloitte for non-audit services to the Company
are not required to be disclosed as they are included within note 4 of the consolidated financial statements.

195

National Grid Annual Report and Accounts 2018/19Additional
information

The business in detail
Key milestones
Where we operate
UK regulation
US regulation

Task force on Climate-related
Financial Disclosures

Internal control and risk factors
Disclosure controls
Internal control over financial reporting
Risk factors

Shareholder information
Articles of Association
Depositary payments to the Company
Description of securities other than
equity securities: depositary fees
and charges
Documents on display
Events after the reporting period
Exchange controls
Material interests in shares
Share capital
Share information
Shareholder analysis
Taxation

197
198
199
201

210

212
212
212
212

216
216
217

217
217
218
218
218
218
219
219
219

221
221
221
221
221

Other disclosures
All-employee share plans
Change of control provisions
Code of Ethics
Conflicts of interest
Corporate governance practices:
differences from New York Stock
Exchange (NYSE) listing standards
221
Directors’ indemnity
222
Employees
222
222
Human Rights
Listing Rule 9.8.4 R cross-reference table 222
222
Material contracts
222
Political donations and expenditure
222
Property, plant and equipment
Research and development and
innovation activity
Unresolved SEC staff comments

223
224

Other unaudited financial
information

Commentary on consolidated
financial information

Definitions and glossary of terms

Want more information or help?

Cautionary statement

225

235

238

243

244

196

National Grid Annual Report and Accounts 2018/19Additional InformationThe business in detail

Additional Information

Key milestones
Some of the key dates and actions in the corporate history of National
Grid are listed below. Our full history goes back much further.

1986
British Gas (BG) privatisation

1990
Electricity transmission network in England and Wales transfers
to National Grid on electricity privatisation

1995
National Grid listed on the London Stock Exchange

1997
Centrica demerges from BG

Energis demerges from National Grid

2000
Lattice Group demerges from BG and is listed separately

New England Electric System and Eastern Utilities Associates acquired

2002
Niagara Mohawk Power Corporation merges with National Grid in US

National Grid and Lattice Group merges 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 we adopt National
Grid as our name

2006
Rhode Island gas distribution network acquired

2007
UK and US wireless infrastructure operations and the Basslink
electricity interconnector in Australia sold

KeySpan Corporation acquired

2008
Ravenswood generation station sold

2010
Rights issue raises £3.2 billion

2012
New Hampshire electricity and gas distribution businesses sold

2016
National Grid separates the UK Gas Distribution business

2017
National Grid sells a 61% equity interest in our UK Gas
Distribution business

2019
National Grid separates the UK Electricity System Operator business

197

National Grid Annual Report and Accounts 2018/19The business in detail continued

Where we operate
Our UK network

St. Fergus

Teesside

to/from
Northern Ireland

to Ballylumford

to Dublin
Barrow

to/from Ireland

Burton Point

South Hook

Dragon

UK Transmission1

Scottish electricity transmission system

English and Welsh electricity
transmission system

Approximately 7,212 kilometres (4,481 miles)
of overhead line, 2,280 kilometres (1,417 miles)
of underground cable and 347 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

Easington

Theddlethorpe

from the
Netherlands

Bacton

Leased office space:

Solihull, London and Warwick (Telent)

Leased office space totalling 12,515 square
metres (134,704 square feet) with remaining
terms of 4 to 7 years.

to/from
Belgium

Grain LNG

BritNed to/from
the Netherlands

to/from
Belgium

to/from
France

Our US network

Canada

Vermont

US Regulated1

Electricity transmission network

Gas distribution operating area

Electricity distribution area

Gas and electricity distribution
area overlap

Maine

New Hampshire

An electricity transmission network of approximately
14,293 kilometres (8,881 miles) of overhead line,
169 kilometres (105 miles) of underground cable
and 377 transmission substations.

An electricity distribution network of approximately
117,230 circuit kilometres (72,844 miles) and 763
distribution substations in New England and upstate
New York.

New York

Massachusetts

Connecticut

Pennsylvania

New Jersey

A network of approximately 57,228 kilometres
(35,560 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 (490 miles)
of gas transmission pipe, as defined by the
US Department of Transportation.

Generation

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 6 to 10 years.

198

National Grid Annual Report and Accounts 2018/19Additional Information

Additional Information | The business in detail

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). These 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 licensed activities are regulated by Ofgem, which has a statutory
duty under the Acts to protect the interests of consumers. To protect
consumers from the ability of companies to set unduly high prices,
Ofgem has established price controls that limit the amount of revenue
such regulated businesses can earn. In setting price controls, Ofgem
must have regard to the need to secure that licence holders are able to
finance their obligations under the Acts. Licensees and other affected
parties can appeal licence modifications which have errors, including in
respect of financeability. This should give us a level of revenue for the
duration of the price control that is sufficient to meet our statutory
duties and licence obligations with 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;

• innovate so we can continuously improve the services we give

our customers, stakeholders and communities; and

• efficiently balancing the transmission networks to support the

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. In November 2018, we
announced our decision to exercise our Options for the sale of our
remaining 39% share in the Cadent Gas distribution business that
should complete in June 2019.

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 and also regulation of our electricity interconnector interests.

In January 2017, National Grid issued a joint statement with Ofgem and
the UK Government about the enhanced role of the Electricity System
Operator function and the intention to establish a greater separation
between this and the rest of National Grid. Since then, we have created
a legally separate electricity transmission system operator company
(ESO) within the National Grid Group. We have also sought and
received permission to transfer parts of the NGET transmission licence
to the ESO with effect from April 2019. The ESO function has consulted
on its longer-term goals and its plan for 2018/19, proposing how it will
take an enhanced role in facilitating the transition to a low-carbon
energy system.

While the existing eight-year RIIO price controls apply to our gas and
electricity SO operations, these activities are also subject to additional
regulatory incentives schemes and are reviewed more frequently.
Ofgem has consulted on how the ESO incentive schemes will develop
in the remaining part of the RIIO-T1 period. This aims to encourage the
ESO to operate the system efficiently and to proactively identify how it
can maximise consumer benefits across the full range of its activities.

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’. This is because the market price differences
result from congestion on the established interconnector capacity
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.

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
price controls historically used in the UK. There are, however, 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 were
determined through an extensive consultation process, which gave
stakeholders a greater opportunity to influence the decisions.

There are five output categories for transmission under the current
RIIO price controls:

Safety: ensuring the provision of a safe energy network.

Reliability (and availability): promoting networks capable of
delivering long-term reliability, minimising the number and duration of
interruptions experienced during 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.

199

National Grid Annual Report and Accounts 2018/19The business in detail continued

Within each of these output categories are a number of primary and
secondary deliverables that reflect what our stakeholders want us to
deliver over the remaining price control period and in preparation for
future periods. The nature and number of these deliverables varies
according to the output category. Some are linked directly to our
allowed revenue and some to legislation, while others have only a
reputational impact.

Using information we have submitted, along with independent
assessments, Ofgem determines the efficient level of expected costs
necessary for these deliverables to be achieved. 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 required 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.

Where we under- or over-spend the allowed totex for reasons that
are not covered by uncertainty mechanisms, there is a ‘sharing’ factor.
This means we share the under- or over-spend with 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 eight-year length of the first round of RIIO price controls
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 year of expenditure. Slow money is
added to our Regulatory Asset Value (RAV) – effectively the regulatory
IOU. (For more details on the sharing factors under RIIO, please see
the table below).

In addition to fast money, each year we are allowed to recover a
portion of the regulatory depreciation and a return on the outstanding
RAV balance. RAV in electricity and gas transmission permits recovery
of RAV consistent with each addition, bringing 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.

During the eight-year period of the price control, our regulator included
a provision for a mid-period review. This was completed during 2017
and led to some changes in allowances relating to certain specific
costs. Further to the mid-period review, National Grid volunteered
that £480 million (in 2009/10 prices) of allowances for electricity
transmission investments should be deferred. In August 2017,
Ofgem determined how the RIIO allowances would be
correspondingly adjusted.

In addition, the RIIO-T1 price controls for transmission included a
‘re-opener mechanism’. This covered specific cost categories where
there was uncertainty about expenditure requirements at the time of
setting allowances. The mechanism specifies two windows during
which networks could propose adjustments to allowances; May 2015
and May 2018. Both UK ET and UK GT requested additional funding
under this mechanism in May 2018, leading to some changes to the
allowed revenues.

Competition in onshore transmission
Ofgem stated in its final decision on the RIIO-T1 control for electricity
transmission that it would consider holding a competition to appoint
the constructor and owner of suitably large new transmission projects,
rather than including these new outputs and allowances in existing
transmission licensee price controls. In the absence of the legislation
needed to support a competition, at the end of July 2018, and after
consultation, Ofgem decided to fund the delivery of the Hinkley-
Seabank electricity transmission project by National Grid the
‘Competition Proxy Model’. This regulatory model seeks to replicate
the outcome of an efficient competitive process for the financing,
construction and operation of the project and to provide National Grid
Electricity Transmission with a project-specific revenue allowance over
the period of its construction and 25 years of operation, but with
reduced allowances reflecting prices that Ofgem has observed in other
competitions. In addition, in September 2018 Ofgem consulted on the
commercial and regulatory framework for the Special Purpose Vehicle
(SPV) model of competition in onshore electricity transmission. This is
an alternative model that could in the future be used for projects
meeting the competition criteria (new, high value and separable). Under
this model, the incumbent transmission owner would run a competition
for the construction, financing and operation of a new, separable and
high-value project through a project-specific SPV.

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 (1.91% for 2018/19)

62.5%

3.74%

60.0%

3.95%

1. Vanilla WACC = cost of debt x gearing + cost of equity x (1-gearing).

200

National Grid Annual Report and Accounts 2018/19Additional Information
Additional Information | The business in detail

Sharing factors are used to share over- and under-spends of allowed
totex between the businesses and customers. The sharing figures
displayed in the table below are the sharing factors that apply to
UK ET and UK GT, for both TO and SO.

Sharing factors and fast:slow money ratios 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%

44.36%

85.00%

27.90%

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.

RIIO-T2
Ofgem has started work on the next round of RIIO price controls,
(RIIO-T2) for the energy network sectors it regulates, including both gas
and electricity transmission. It has consulted on a wide range of topics,
including incentives, outputs, the cost of capital and other financial
parameters. Decisions that have already been taken include reducing
the price control duration back to five years from eight years, extending
the role of competition where appropriate from electricity transmission
to other sectors and moving away from RPI to CPIH for inflation
measurement when calculating RAV and allowed returns. In addition,
Ofgem has proposed a methodology the baseline allowed cost of
equity which it said, based on evidence available in December 2018,
points to a value that is lower than under the current RIIO price
controls. The RIIO-T2 price controls will also apply, in part, to the ESO,
however, due to the nature of its activities some elements are less
applicable to the ESO, and Ofgem has proposed that the duration
of its price control will be two years rather than five.

We and other stakeholders will continue to work with Ofgem to develop
the framework and parameters for RIIO-T2. We will submit business
plans in December 2019 and Ofgem is expected to publish a final view
on the price control allowances for transmission companies by the end
of 2020.

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 services at just and
reasonable prices. The commissions establish service standards
and approve public utility mergers and acquisitions.

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, either 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 where we operate, it can take nine to
13 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; typically it 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. This is 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. These 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).

Utilities are regulated at the federal level by the Federal Energy
Regulatory Commission (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.

Our operating companies have revenue decoupling mechanisms that
de-link their revenues from the quantity of energy delivered and billed to
customers. These mechanisms remove the natural disincentive utility
companies have for promoting and encouraging customer participation
in energy-efficiency programmes that lower energy end use and
distribution volumes.

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Our rate plans are designed to a specific allowed Return on Equity (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 several factors may
prevent us from achieving the allowed RoE. These 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 available energy-efficiency programmes; and

• filing a new rate case when achieved returns are lower than those
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. This means they are
fully recoverable from our customers. We recover ‘pass-through’ costs
through making separate charges to customers, designed to recover
those costs with no profit. We adjust rates from time to time to make
sure that any over- or under-recovery of these costs is returned to, or
recovered from, our customers.

US regulatory filings
The objectives of our rate case filings are to make sure we have the
right cost of service, and are able to earn a fair and reasonable rate of
return, while providing safe, reliable and economical service. To
achieve these objectives and 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.

We explain these terms below the table on page 209.

Below, we summarise significant developments in rate filings and the
regulatory environment during the year. Following the final stabilisation
upgrade to our new financial systems and the availability of 12 months
of historical test year data from those financial systems, we concluded
a first round of full rate case filings in fiscal year 2017, with a final rate
case decision for Massachusetts Electric in September 2016, and
followed by approval of three-year rate plans for KEDNY and KEDLI in
December 2016. 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 The
Narragansett Electric Company 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. An Amended Settlement Agreement setting forth a
three-year rate plan for The Narragansett Electric Company was
approved by the Rhode Island Public Utilities Commission in August
2018. In fiscal year 2018/19, we made a full rate case filing again for
Massachusetts Electric in November 2018, and, most recently, in fiscal
year 2019/20, we made another full rate case filing for KEDNY and
KEDLI in April 2019. 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
electric and gas distribution activities.

Our FERC-regulated transmission companies use formula rates (instead
of rate cases) to set rates annually that 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. We must make annual formula rate filings
documenting the revenue requirement that customers can review
and challenge.

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%, resulting from the enactment
of the federal Tax Cuts & Jobs Act of 2017 (the Act), is significantly
beneficial to customers. The lower tax rate will be reflected in the
collection of a lower tax allowance from customers.

Revenue for our wholesale transmission businesses in New England
and New York is collected from wholesale transmission customers.
These are typically other utilities and include our own New England
electricity distribution businesses. With the exception of in 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. They 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 the Long Island
Power Authority (LIPA) under 15-year and 25-year power supply
agreements and within wholesale tariffs approved by FERC. Through
the use of cost-based formula rates, these long-term contracts provide
a similar economic effect to cost of service rate regulation.

Our upstate New York, Massachusetts Gas and Rhode Island utilities
were all undergoing rate negotiations at the time the legislation was
enacted. We have now 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. As a result, the majority of the full annual revenue
impact (approximately $50 million) of tax reform in these businesses
was included in rates for the year ended 2018/19.

New York and Massachusetts regulators have conducted open generic
proceedings to address the treatment of any tax savings. In New York,
the regulator adopted proposals by KEDNY, KEDLI and Niagara
Mohawk regarding the means and timing of how the tax benefits would
be passed to customers. In Massachusetts the lower tax rate began to
reduce revenue on 1 July 2018 for the electric business and 1 October
2018 for the gas business. In Rhode Island, the revenue effect of the
lower federal rate began on 1 September 2018. 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 there is no
offsetting reduction in cash tax payments.

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Massachusetts
Boston and Colonial rate cases
The Company filed a rate case for Boston Gas and Colonial Gas with the
Massachusetts Department of Public Utilities (MADPU or Department)
on 15 November 2017. The new rates were to be effective on 1 October
2018 for usage on and after 1 November 2018. The Massachusetts gas
rate case, the first rate case for Boston Gas and Colonial Gas since
2010, more closely aligns revenues with the cost of service. This case
brings earned RoEs closer to the allowed RoE. New rates were
approved with an allowed RoE of 9.5% on an equity ratio of 53%.
Compared to our revenue request of $87 million, the Department
allowed an increase of $56 million. As expected, this outcome has been
adjusted by $44 million, primarily reflecting the lower US tax rate
resulting from the passage of the Tax Cuts and Jobs Act of 2017 (Tax
Reform). The lower US corporate income tax rate from 35% to 21%
resulted in a net revenue increase of $12 million.

Gas System Enhancement Programmes (GSEP)
On the gas side, on 30 April 2018, MADPU approved our recovery of
approximately $67 million. This related to $241 million of anticipated
investments in 2018 under an accelerated pipe replacement
programme, through rates effective from May 2018 to April 2019. Due
to the application of the GSEP revenue cap, we were required to defer
recovery of an additional $2.2 million of the 2018 revenue requirement.
This delay was until the Boston Gas and Colonial Gas rate case with
new rates effective from 1 October 2018.

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. This proposed
multiple investment options aiming to further MADPU’s goals to reduce
the effect of outages, optimise demand, integrate distributed resources
and improve 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.

We received an order from MADPU approving the proposed grid-facing
investments on 10 May 2018, but MADPU did not approve the proposed
customer-facing investments at that time. The MADPU preauthorised a
budget of up to $82 million for the years 2018 to 2020 for the grid-facing
investments and approved the separate recovery mechanism for both
capital, operations and maintenance expenditures. We are in the
process of implementing our grid modernisation plan and will be making
annual cost recovery and annual update filings in conjunction with the
plan, respectively in March and April of each year. MADPU stated it
would open an additional investigation to examine whether there were
cost-effective ways to make the customer-facing investments but are yet
to open the investigation. From 1 January 2015 to 31 December 2018,
we also operated a Smart Energy Solutions pilot with approximately
15,000 customers in Worcester, Massachusetts. This pilot has allowed
us 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.

Massachusetts Electric and Nantucket Electric rate cases
We filed a rate case for Massachusetts Electric and Nantucket Electric
with MADPU on 15 November 2018 with new rates to be effective on
1 October 2019. The Massachusetts Electric rate case is the first for
Massachusetts Electric and Nantucket Electric since 2015. It updates
the electric companies’ rates to more closely align revenues with the
cost of service and bring their earned RoEs closer to the allowed RoE.
Our proposed net revenue increase is $56.1 million, including a
five-year performance-based rate-making proposal, supported by
performance incentive metrics and scorecard metrics. Additionally,
in the light of Massachusetts’ aggressive climate change policies,
we have proposed the second phase of our Electric Vehicle (EV)
programme. In this, we will increase the availability of EV charging
throughout Massachusetts and expand an energy storage programme
that is designed to install approximately 14 MW of storage to support
our distribution system. MADPU held evidentiary hearings from
29 April to 24 May 2019. An order is expected by 30 September 2019.

Statewide assessment of gas pipeline safety
In December 2017, MADPU hired an independent auditor to perform
an assessment of gas pipeline safety in the Commonwealth of
Massachusetts. The independent auditor had requested information
from, and held meetings with, us and the other local distribution
companies in Massachusetts. We have provided all the information
requested. A preliminary oral report from the auditor is expected,
which is to include recommendations for the next phase of the audit.

Tax Cuts and Jobs Act – the impact on Massachusetts jurisdiction
In February 2018, MADPU initiated docket D.P.U. 18-15 to investigate
the impact of the Federal Tax Act on the rates of the investor-owned
electric, gas and water utilities in Massachusetts.

The Department ordered each company, as of 1 January 2018, to
account for revenues associated with the difference between the
previous and current corporate income tax rates. It also required them
to establish a regulatory liability for recovery in rates where excess
accumulated deferred income taxes resulted from the lower federal
corporate income tax rate. The utilities were directed to file plans for
refunding these amounts by 1 May 2018, with an expectation that a
prospective rate reduction would go into effect by 1 July 2018.

Based on our initial filing on 1 May 2018, by Order dated 29 June
2018 (Order D.P.U. 18-15-A), the Department directed our electric
companies (Massachusetts Electric and Nantucket Electric) to:
• prospectively reduce rates effective 1 July 2018; and
• reduce the annual target revenue in the electric revenue decoupling

mechanism (RDM) by $28 million, subsequently corrected to
approximately $26 million.

MADPU allowed our gas companies (Boston Gas and Colonial Gas) to
defer the effect of the tax reduction until new rates resulting from its then
pending rate case became effective on 1 October 2018. At this time, we
were directed to refund the three-month tax savings deferral (from 1 July
to 1 October) to customers over one year. We, together with several
other Massachusetts utilities, opposed the Department’s directive to
calculate and issue refunds for the period from 1 January 2018 to 30
June 2018 on the grounds that the refunds would violate the prohibition
against retroactive rate-making. The Department, therefore, deferred
ruling on the issue of retroactive refunds until a later date.

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On 21 December 2018, MADPU issued an order requiring all
utilities to begin crediting in rates the amortisation of excess deferred
federal income taxes. This requirement was to the extent that such
amortisation was not already included in base distribution rates, due to
factors associated with certain reconciling mechanisms and a separate
factor for the amortisation of the remaining amounts. The Department’s
order on its legal authority to order retroactive refunds was issued on
15 February 2019, and the Department determined refunds for the
period from 1 January to 30 June 2018 would not be appropriate. The
Attorney General has moved for clarification and reconsideration of
the Department’s order, and for an extension of the period in which
to appeal the decision to the Massachusetts Supreme Judicial Court.

Electric Vehicle Market Development Programme
On 13 February 2017, Massachusetts Electric Company and
Nantucket Electric Company filed a supplemental petition with
MADPU. This petition was for approval of the Electric Vehicle Market
Development Programme (EV Programme) and a tariff to recover the
EV Programme’s costs and performance incentive (EV Programme
Provision). Specifically, the companies proposed to increase the
development of charging stations in their service territory over a
three-year period by assisting site hosts with design, construction
and funding of infrastructure to support charging stations. On 10
September 2018, MADPU approved our EV Programme, with certain
modifications. The Department also allowed us to earn a performance
incentive based on the number of charging stations in use as a result
of the EV Programme. The Department approved our ability to seek
recovery of the programme’s incremental costs and performance
incentive through an annual reconciling charge. Our tariff is pending
approval from the Department. The total allowed cost, including a
performance incentive, is approximately $20 million.

MA large-scale renewable contracts/clean energy contracts
In 2018, pursuant to state legislation enacted in 2016, our
Massachusetts electric distribution companies, Massachusetts
Electric and Nantucket, filed with MADPU a request for approval of one
long-term contract for hydroelectric generation from Canada (including
associated transmission of approximately 1,200 MW) and for approval
of one long-term contract for offshore wind energy generation
(approximately 800 MW) from a project to be located on the outer
continental shelf.

Both contracts were jointly and competitively solicited in 2017 by all
of the Massachusetts electric distribution companies in consultation
with the Department of Energy Resources (DOER) and an independent
evaluator. Hearings on the contract for hydroelectric generation
concluded in early 2018, and briefs were submitted in late March and
early April. While MADPU has no specific deadline to approve the
hydroelectric generation contract, it will not become effective without
regulatory approval. In April 2019, MADPU approved the contract for
offshore wind energy generation. Also, to satisfy the requirements of
the 2016 legislation seeking to procure a total of 1,600 MW of offshore
wind energy generation, another competitive solicitation for generating
offshore wind energy is expected before the end of 2019.

Solar Massachusetts Renewable Target programme
On 26 September 2018, the Department approved a petition jointly
filed by the Massachusetts electric distribution companies, including
Massachusetts Electric Company and Nantucket Electric Company,
to offer their customers a new solar programme. Following state
legislation enacted in 2016, the Solar Massachusetts Renewable
Target (SMART) programme is required by state regulations issued by
DOER. The programme’s objective is to develop a further 1,600 MW
of customer-based solar power. It aims to do this by providing on-bill
credits and incentive payments, directly from the Company to the
customer, at a lower cost than previous programmes. In consultation
with DOER, our SMART programme team has been finalising the
implementation details and the first enrolments of projects under
SMART are expected any day.

New York
Downstate New York 2019 rate cases
KEDNY and KEDLI filed a rate case with the NYPSC on 30 April 2019
seeking to increase delivery revenues by $236.8 million and $49.4
million, respectively, for the 12 months ending 31 March 2021.
The companies filed three additional years of data to facilitate the
possibility of a multi-year settlement. New rates are expected to
come into effect on 1 April 2020, subject to NYPSC approval. We
aim to update our allowed revenues to more closely reflect our cost
of service. Our current rate plan will be applicable until we file this
rate case and it is approved.

New York regulatory audits
Under the New York Public Service Law, the NYPSC is required to
conduct periodic audits of various aspects of public utility activities.
In 2018 the NYPSC initiated a comprehensive management and
operations audit of our three New York regulated businesses. New
York law requires periodic management audits of all utilities at least
once every five years.

National Grid’s New York regulated business last underwent a New
York management audit in 2014 and 2015, when the NYPSC audited
our New York gas business.

The audit will be process-oriented and forward-looking; it will present
opportunities to obtain feedback on how to improve customer service
and meet regulatory expectations. Areas of focus are likely to include
the traditional audit areas of corporate governance, budgeting and
finance, customer, work management and long-term planning.
Organisation design, information systems and gas safety are also
likely to feature. A final audit report is expected in September 2019.

Tax Cuts and Jobs Act of 2017
In response to the Tax Act, the NYPSC initiated a generic open
proceeding to solicit comments on the Tax Act’s implications. It also
places New York utilities on notice of the NYPSC’s intent to protect
ratepayers’ interests and ensure that any cost reductions from the
changes in federal income taxes are preserved for customer benefit.
On 9 August 2018, the NYPSC approved the proposals of our New
York utilities regarding treatment of Tax Act benefits.

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Specifically, the NYPSC agreed that the treatment of tax benefits by
Niagara Mohawk, as described in the joint proposal approved by the
NYPSC in March 2018, should continue. The NYPSC also agreed with
the proposal that KEDNY and KEDLI should implement a sur-credit,
effective 1 January 2019, to:
• return prospective tax savings to customers;
• moderate the impacts of scheduled rate increases; and
• use the 2018 deferred tax benefits and the amortisation of excess

accumulated deferred federal income tax balances as a rate
moderator when base rates are next revised.

The return of a deferred tax balance liability in the amount of $587
million will be made over an average period of up to 50 years. It is
expected to benefit our operating profit and cash flow in the long term.
These items are expected to flow through the income statement in the
medium term, having a negative impact on operating profit that we
expect to be more than offset by the full-year impact of the lower tax
charge.

NY street light sales
In response to customer interest and legislative action, Niagara
Mohawk agreed to a process for selling its street lighting assets to
interested municipalities during the three-year term of the rate plan.
This transaction was part of the joint proposal approved by order of the
NYPSC in March 2018. We currently own more than 200,000 such
street lights that could be subject to the asset sales mechanism. To
complete a sale, we and the customer must first execute a purchase
and sales agreement, which is then subject to NYPSC review and
approval. The Commission has approved one such transfer to date,
with five additional sales pending approval.

One pending petition: the sale of street lights to the City of Albany
represents more than 10,000 lights.

NY advanced metering infrastructure
As set out in the joint proposal, Niagara Mohawk launched an
advanced metering infrastructure (AMI) collaborative process with
stakeholders in April 2018. The Company held eight formal
collaborative meetings over the following four months, in which 17
stakeholder groups participated, with the goal of refining and updating
the Company’s AMI proposal. On 15 November 2018, Niagara Mohawk
filed its AMI implementation plan report with the NYPSC, incorporating
the work completed through the collaboration.

The proposal represents a once-in-a-generation opportunity to
address asset condition improvements in a manner that can deliver
increased benefits for customers, the environment and shareholders
alike. As well as anticipated reductions in greenhouse gas emissions,
the benefits include:
• greater customer choice and control over energy use;
• improved modelling, load forecasting and capital investment

planning; and

• increased system efficiency; operational efficiencies for outage

response and remote connect/disconnect capabilities.

Under the proposal, Niagara Mohawk would begin the six-year
implementation of AMI with two years of process development and
back-office system installation. This project would be followed by a
four-year phased replacement of approximately 1,690,000 electric AMI
meters and approximately 640,000 gas modules. In total, the Company
anticipates the project to cost $106.45 million (20-year nominal value),
representing a significant capital investment that will modernise
customer- and grid-facing components of the distribution system. A
60-day public comment period commenced on 2 January 2019, and
the proposal currently remains under Commission review.

Reforming the Energy Vision
In April 2014, the NYPSC instituted the Reforming the Energy
Vision (REV) proceeding, which envisions a new role for utilities as
distributed system platform (DSP) providers that create markets for
distributed energy resources (DER) and integrate DER more fully in
distribution system operations and planning. The REV proceeding’s
objectives include:
• enhanced customer energy choices and control;
• improved electricity system efficiency, reliability and resilience; and
• cleaner, more diverse electricity generation.

The 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 (EAMs));
• competitive market-based earnings;
• customer data access;
• non-wires alternative solutions to displace or defer 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.

We filed our initial Distributed System Implementation Plan (DSIP) with
the NYPSC on 30 June 2016. This identified incremental investments in
utility infrastructure necessary for developing within the first five years:
• DSP capabilities;
• market enablement and operations;
• advanced metering functionality;
• grid modernisation; and
• cyber security and privacy measures.

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The DSIP needs to be updated and filed with the NYPSC every two
years. The NYPSC subsequently extended the 2018 filing date to
31 July 2018, and we filed our 2018 DSIP update with the NYPSC on
that date. The update provides detailed information about our planned
DSP implementation over the five-year period ending 31 July 2023.
It includes:
• a report on DSP actions and progress since the initial DSIP filing

in 2016;

• a description of the Company’s plans to develop necessary

tools, policies, processes, resources and standards;

• identification of available tools and information for REV developers
and other third parties to aid understanding of the Company’s
system needs and potential business opportunities; and

• a description of how the Company’s planning and implementation
efforts are organised and managed to support DER integration.

Two recent initiatives adopted by the NYPSC are designed to increase
dramatically New York’s energy efficiency and energy storage targets
to combat climate change. The new energy-efficiency target for
investor-owned utilities will more than double utility energy-efficiency
progress by 2025, which is equivalent to the energy consumed by 1.8
million New York homes. The energy storage initiative sets New York
on a trajectory to achieve 1,500 MW of storage by 2025, enough
electricity to power 1.2 million homes and up to 3,000 MW of
storage by 2030.

The NYPSC approved the electric and gas rate plan joint proposal in
March 2018, including investments related to grid modernisation, cyber
security and new electricity and gas products and services. It also sets
out a process to progress AMI in Upstate New York. The joint proposal
also includes outcome-based EAMs to target energy and system
efficiency, carbon reductions and customer engagement.

Clean Energy Standard (CES)
The NYPSC issued an order on 1 August 2016 to adopt a CES,
consistent with the State Energy Plan, that 50% of New York’s
electricity is to be generated by renewable sources by 2030.
This instruction is part of a strategy to reduce greenhouse gas
emissions by 40% by 2030 and by 80% by 2050.

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

• obligations 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
respectively on 1 January 2017 and 1 April 2017. On 16 March 2018,
the NYPSC approved the New York State Energy Research and
Development Authority’s (NYSERDA) 2018 compliance period
programme budgets. It also authorised the reallocation of previously
approved but unspent funds from the 2017 compliance period.

In addition, it authorised the further reallocation of funds from
uncommitted System Benefits Charge (SBC), Energy Efficiency
Portfolio Standard (EEPS) and/or Renewable Portfolio Standard
(RPS) funds to pay for 2018 CES administrative costs. All unspent
compliance funds are to be reallocated rather than returned to LSEs
during the annual reconciliation process, as proposed by NYSERDA.
As a result of this reallocation, there was no need to collect additional
funds for the 2018 compliance period. On 16 November 2018, the
NYPSC issued an order approving NYSERDA’s proposed 2019
compliance period programme budgets. It also authorised the
reallocation of $562,149 in remaining funds from the authorised
budgets in the 2017 compliance period. This was to cover a portion
of the administrative costs for both the Renewable Energy Standard
(RES) and ZEC programmes for the 2019 CES compliance period.
Additionally, the NYPSC directed the reallocation of additional
uncommitted SBC, EEPS and/or RPS funds, totalling $8,040,048,
to cover the remaining 2019 RES and ZEC administrative costs.

In pursuit of the offshore wind energy development goal of 2,400 MW
by 2030, NYSERDA launched the first step by calling for the
competitive procurement of 800 MW of offshore wind renewable
energy certificates. The NYPSC authorised this tender in its 12 July
2018 Order Establishing Offshore Wind Standard and Framework for
Phase 1 Procurement. NYSERDA’s solicitation was issued in April 2019
with initial submissions due in June 2019.

NY gas pipeline safety
Recent industry events have focused attention on various aspects of
gas safety in New York and other jurisdictions. Following the Columbia
Gas event in Massachusetts, New York regulators considered the likely
contributing factors to that incident and opportunities to mitigate
potential risks. We are participating in statewide proceedings to
implement safety improvements and working with New York regulators
to resolve enforcement actions.

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. It also enables the recovery of
certain expenses outside base rate proceedings through the
submission of annual electric and gas ISR plans designed to improve
the safety and reliability of the electric and gas distribution systems.

The Rhode Island Public Utilities Commission (RIPUC) approved the
fiscal year 2020 gas and electric ISR plans on 19 March 2019. The
electric ISR plan encompasses a $101.8 million spending programme
for capital investment as well as $11.5 million for operating and
maintenance expenses for vegetation management and inspection
and maintenance. The gas ISR plan encompasses $162.5 million
for capital investment.

Rhode Island combined gas and electric rate case
On 27 November 2017, we filed a one-year rate plan (but submitted
two additional years of data to facilitate a multi-year settlement) for
our Rhode Island electric distribution and gas businesses.

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On 16 August 2018, we filed an amended settlement agreement
setting out a comprehensive three-year rate plan for our electric
and gas businesses, to take effect from 1 September 2018. The
rate plan includes:
• a 9.275% RoE and 51% equity ratio;
• cumulative combined electric and gas revenue increases of $19.9
million (rate year 2019), $18.0 million (2020) and $8.4 million (2021);
• funding for IT investment, staffing level increases to meet our electric

and gas work plans over the next three years, projects and
programmes to support the Rhode Island Power Sector
Transformation Initiative – this includes investments in advanced
metering functionality, grid modernisation, electric vehicle
infrastructure and two storage demonstration projects; and

• funding for a performance incentive mechanism for system efficiency.

The revenue increases reflect an estimate of the impact of changes to
the federal corporate tax rate. It also takes into account bonus
depreciation that is subject to true-up at the end of calendar year 2018.
The RIPUC approved the terms of the amended settlement agreement
on 24 August 2018.

Rhode Island Aquidneck Island gas service interruption
On 21 January 2019, we suffered a significant loss of gas supply to the
distribution system that serves our customers on Aquidneck Island in
Rhode Island. As a result we made the decision to interrupt the gas
service to the Aquidneck Island system to protect the safety of our
customers and the public. Overall, approximately 7,500 customers lost
their gas service. The event is currently under summary investigation
by the Rhode Island Division of Public Utilities and Carriers (Division) to
determine if it believes there are grounds to open a formal investigation.
On 28 February 2019, the RIPUC opened a docket to investigate and
determine the causes of the January loss of gas utility service on
Aquidneck Island. In addition, the Rhode Island Office of Attorney
General has sent us a letter to preserve evidence, which is an
indication of intent to investigate. We have also received enquiries from
the Federal Energy Regulatory Commission and Pipeline and
Hazardous Materials Safety Administration that may initiate
investigations. National Grid and our natural gas supplier – Algonquin
Gas Transmission, LLC, which is owned by Enbridge, Inc. – have also
been named in two class action lawsuits related to this event. We
have also received thousands of claims related to the incident and
anticipate that more claims will be filed.

Power Sector Transformation (PST) 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.
This team effort, known as the Power Sector Transformation Initiative,
aims to develop a state action plan for modernising the electric power
sector and integrating clean energy. It resulted in a Phase One Report
being delivered to Governor Raimondo in November 2017. We filed our
combined electric and gas distribution rate case at around the same
time. As part of the amended settlement agreement in the rate case,
we received funding for certain investments to support the PST Initiative.
The amended settlement agreement also established the PST Advisory
Group, a stakeholder group that we chair. It reviews progress of,
and provides input into, all PST components of the rate plan, including
grid modernisation, advanced meter functionality (AMF), electric
transportation, storage and performance incentive mechanisms. It also
provides guidance and prioritisation to support the successful delivery
of the components as a holistic suite. The PST Advisory Group and
sub-committee meetings have commenced and are ongoing.

On 20 February 2019, we released a request for proposal (RFP) for
an up to 250kW-2hr Behind the Meter energy storage system. We
are also in the process of developing the RFP for a second storage
demonstration project, consisting of an approximate 500kW-3hr
Front of the Meter energy storage system.

We plan to file an updated business case for AMF to request approval
for full deployment of meters, together with a Grid Modernisation Plan,
with the RIPUC in fiscal year 2020.

Tax Cuts and Jobs Act 2017 – Rhode Island jurisdiction impact
An open proceeding in Rhode Island is currently underway to address
the treatment of any tax savings for our Narragansett Electric
customers prior to the effective date for the new base rates that were
reset through the November 2017 rate case filing. In January 2019, we
filed a settlement agreement with the RIPUC to prospectively refund
the tax savings in full, starting this autumn. We are awaiting a decision
by the RIPUC.

Rhode Island large-scale renewable contracts
On 7 February 2019, the Company’s Rhode Island electric distribution
company, The Narragansett Electric Company, filed with RIPUC for
approval of a long-term contract to generate offshore wind energy
generation from an approximately 400 MW project that will be located
on the outer continental shelf. This contract is a voluntary obligation
consistent with Governor Raimondo’s 1,000 MW clean energy goal
for Rhode Island. The bid was submitted in response to the
Massachusetts solicitation for offshore wind energy generation,
which is shared with Rhode Island. RIPUC has 120 days to review
the petition, and hearings have been scheduled for late April and
early May 2019.

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National Grid Annual Report and Accounts 2018/19The business in detail continued

Tax Cuts and Jobs Act – FERC jurisdiction impacts
On 15 March 2018, FERC initiated multiple proceedings intended to
adjust FERC-jurisdictional rates to reflect the corporate tax changes
resulting from the reduction in the corporate tax rate. Relevant initiated
proceedings are a Notice of Inquiry (NOI) seeking comments on the
effects of the Tax Act on all FERC-jurisdiction rates and a Notice of
Proposed Rulemaking (NOPR) issued as a result of the NOI. In
response to the FERC NOI, we had made recommendations designed
to mitigate the cash flow impacts of the expected refunds. These
included providing flexibility regarding:
• the methods used to refund Accumulated Deferred Income Tax

to customers; and

• the time period of the flow back.

In the NOPR, FERC proposes to give the flexibility we proposed.
Comments on the NOPR were due on 22 January 2019 and FERC
will issue a final rule on an undetermined date.

Federal Energy Regulatory Commission
Complaints on New England transmission allowed RoE
In September 2011, December 2012, July 2014 and April 2016, a
series of four complaints was filed with Federal Energy Regulatory
Commission (FERC) against certain transmission owners, including
our New England electricity transmission business. These complaints
aimed 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. This required FERC to reconsider the methodology it
adopted in its order. On 5 June 2017, the New England Transmission
Owners (NETOS), including the Company, submitted a filing to FERC
to document the reinstatement of their transmission rates that had
been in effect at 15 October 2014. FERC denied this filing and stated
that, until further notice, the base RoE in New England must remain
at the filed rate of 10.57%. On 16 October 2018, FERC issued a
Preliminary Order Directing Brief on our four New England RoE
complaints. In this, FERC proposes a new methodology for
determining whether an existing RoE remains just and reasonable and
also for determining a new RoE where an existing RoE is found to be
unjust and unreasonable. FERC also proposes to set the base RoE
in New England at 10.41% with a 13.08% cap on incentives. Briefs
were due in January 2019 and responses to the briefs were filed on
8 March 2019. FERC is under no deadline to act on the briefs and it
is too early to determine when or how FERC will come to a decision.

Formula Rate 206 proceeding
On 28 December 2015, FERC initiated a proceeding under Section 206
of the Federal Power Act. It found that ISO-New England Transmission,
Markets, and Services Tariff is unjust, unreasonable and unduly
discriminatory or preferential. FERC found that ISO-NE’s tariff lacks
adequate transparency and challenge procedures regarding the
formula rates for ISO-NE Participating Transmission Owners (ISO-NE
PTOs). In addition, the Commission found that the ISO-NE PTOs’
current Regional Network Service and Local Network Service formula
rates appear to be unjust, unreasonable, unduly discriminatory or
preferential, or otherwise unlawful. FERC explained that the formula
rates appear to lack sufficient detail to determine how certain costs are
derived and recovered in the formula rates. Accordingly, FERC
established hearing and settlement judge procedures. Several parties
are active in the proceeding, including FERC staff, various interested
consumer parties, New England States Committee on Electricity
(NESCOE), and several municipal light departments. In August 2018,
the parties to the proceeding agreed to the terms of a settlement and
subsequently filed the proposed settlement with the settlement judge
in the proceeding. It was opposed by certain municipal parties, making
it a contested settlement. On 5 November 2018, the settlement judge
reported the contested settlement to FERC, which will have to
approve the settlement but is under no time obligation to act.

208

National Grid Annual Report and Accounts 2018/19Additional InformationAdditional Information | The business in detail

Summary of US price controls and rate plans

5
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(upstate, electricity)

Niagara Mohawk
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KEDLI (downstate)3

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$2,564m 51:49

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$2,761m 50:50

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Public Utilities
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Narragansett Electric

Narragansett Gas

Federal Energy
Regulatory
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Narragansett

Canadian
Interconnector

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Long Island Generation

$779m 51:49 9.28% 10.7%

$887m 51:49 9.28% 4.7%

$744m 50:50 10.57% 11.3% n/a

$79m

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).
4. The chart shows the anticipated date rates are to be in effect.

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 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.

209

National Grid Annual Report and Accounts 2018/19

Task Force on Climate-related
Financial Disclosures (TCFD)

National Grid has committed to implementing the recommendations
of the Financial Stability Board’s Task Force on Climate-related
Financial Disclosures in full, and below we include our second set
of disclosures following on from our initial disclosure in 2017/18.

In February 2019, the Executive Committee considered the current
status of compliance with TCFD and three key areas where further
work is planned in the next 12 months:
a) ensuring senior leadership has an appropriate understanding
of the risks and opportunities associated with climate change;
b) the use of climate-related scenarios to inform our strategy (and

disclosure of the possible outcomes under those scenarios); and
c) the development of metrics and targets to assess performance,

and influence decision-making and remuneration.

The Audit Committee also considered our progress to date in
March 2019. We continue to engage with investors, peers and
other stakeholders and welcome feedback on these disclosures.

How do we approach the governance of climate-related risks
and opportunities?
The Board of Directors is responsible for the oversight of climate-
related risks and opportunities impacting the Group. Our Group risk
register contains a strategic risk around disruptive forces, which
includes climate change.

Examples of relevant Board discussions in the last 12 months include:
i) understanding impact on electricity networks of decarbonisation
of transport and National Grid’s role in advancing the build-out of
electric vehicle charging infrastructure;

ii) strategic intent to enter large-scale renewables, directing capital
towards build-out of low carbon energy systems, and we have
recently announced our first acquisition (Geronimo Energy) due
to close later this year;

iii) continual challenge and review of investment into UK

interconnectors and US competitive transmission, which help
provide the flexibility critical to managing a high-renewables
electricity system; and

iv) discussions on future of heat and National Grid’s role in advancing
heat decarbonisation pathways, with a focus on the consumer.

How does the Board delegate responsibility for day-to-day
operational activity?
Responsibility for asset investment and maintenance planning is
delegated to the Executive Committee and onto the core regulated
businesses, each of which operate robust investment appraisal and
review processes.

In the case of National Grid Ventures, responsibility for new
investments up to £250 million has been delegated to the Group
Investment Committee, chaired by the Group CEO. This Committee
also oversees investments made by National Grid Partners, which
over the last 12 months have included a number of early stage
innovative businesses working at the forefront of climate change
impacts as they concern utilities.

What is the oversight process for climate change related
risks and opportunities?
The Safety, Environment and Health Committee (SEH Committee)
is responsible for assessing how the Company adapts its business
in light of climate change.

The SEH Committee does not have a remit to consider the financial
implications of climate change. The Audit Committee remains
responsible for reviewing and approving the content of our TCFD
disclosures and will take an increasingly active role in overseeing
disclosures around metrics and targets. A paper summarising
our progress in our journey towards full compliance with the
recommendations was considered at the March 2019 Audit
Committee meeting.

Future intent
In view of the centrality of decarbonisation of electricity and heat
to our day-to-day operations, we believe we have a good base level
of experience and knowledge within senior management (including
at Board and Executive levels). However, we are not complacent
and the Executive Committee will review and consider our position
and any plans for enhancement, later in 2019.

What are the risks and opportunities from climate change?
We consider risks and opportunities in terms of physical and transition
risks. Reports concerning our UK operations under the 2008 Climate
Change Act were released in 2010 and updated in 2016.

Physical risks
In the short term, physical risks are most relevant, and we are principally
focused on the risks from weather-related events in the US, and
flooding events (in both the UK and US).

• Weather-related events in the northeastern US: Storm

planning and preparation is core to what we do, given they are an
increasingly regular feature of autumn, winter and spring seasons
and the impact on our customers and other operating activities is
significant. These activities are principally focused on our electric
businesses (with above-ground wiring). However, we have also
experienced impact within our gas distribution business since
extreme temperatures can impact gas supplies throughout the
continental pipeline network. As noted in the financial review, this
year we incurred over $100 million of local and major storm costs,
the majority of which are recoverable under our rate plans.
Significant storm hardening activities for gas assets continue on
Long Island and in New York City as a key element of our response
following hurricane Sandy.

• Flood defence (UK and US): In the UK, at 31 March 2019, we
had invested £88 million in flood defences and expect to invest
additional amounts in RIIO-T2. The National Flood Resilience Review
(NFRR) carried out in 2016 and agreed by government has resulted
in flood resilience investment works being developed to cover over
100 sites in line with a sector-wide response to flooding. This is
supported by assessment of further sites with increasing exposure
of assets to geo-hazards resulting from climate change, sea level
rise, changes to rainfall patterns and secondary impacts from
increased flooding and surface water issues. In the US, Flood
Contingency Plans (FCPs) are being developed for our most
at-risk US substations and extreme weather is considered the
‘new normal’. Our coastal substations are being built and maintained
to elevated levels in response to an increased risk of flooding.
• Other potential physical risks: We are investigating other
potential risks such as the impact of rising temperatures and
widening temperature ranges on the performance and operation
of the equipment on our networks. Disruption to our global supply
chain (continuity of supply) is recognised as a key risk within our
global procurement division’s risk register.

Transition risks and opportunities
• Decarbonisation: Facilitating the transition to a low carbon

economy is central to our purpose as a business and the Strategic
Report on page 41 sets out certain key actions in relation to
decarbonisation and decentralisation.

• Electricity grid reliability and peak capacity: Our principal
focus is around ensuring that our electricity network is able to
actively support and contribute to a future where demand for and
supply of electricity are ever changing. With growth in renewables
increasing intermittency on the network, and electrification of
transport and heat likely, we are working with our stakeholders to
ensure that grid reliability is understood, managed and planned at
appropriate levels. Even with increased decentralisation of electricity,
our long-term analysis demonstrates a key role for Electricity
Transmission in the UK in a range of scenarios that meet the
UK’s 2050 climate change goals.

210

National Grid Annual Report and Accounts 2018/19Additional InformationAdditional Information | Task Force on Climate-related Financial Disclosures (TCFD)

• Electric vehicles: As we enter the key phase of discussion and

negotiation around the RIIO-T2 Framework for our UK transmission
businesses, the role of electric vehicles and the associated electric
charging infrastructure in the UK is an area where we will continue
to develop and evolve our strategy. For example, we are working
with the UK Government on a build-out of fast-charging stations
across UK highways to meet this demand, and ensure EVs can
always find somewhere to charge, quickly.

In the US, we are building an EV charging infrastructure, and to date,
we have installed and manage 150 publicly accessible charging
stations. We have filed a proposal with the MADPU to build nearly
18,000 charging ports by 2025 to reduce emissions in the
transportation sector.

• Energy-efficiency programmes: Across Massachusetts, Rhode
Island and New York our various energy-efficiency programmes
(which range from installing wifi-controlled thermostats for residential
customers to complex heating and lighting retrofits for commercial
buildings) contributed to an estimated reduction in electricity
consumption of 1.2 million megawatt hours and a 36 million therm
reduction in gas consumption, lowering CO2 emissions by more than
800,000 tonnes.

• Facilitating zero carbon operation of the GB electricity

system: In April 2019, NGESO announced its ambition to transform
the operation of the electricity system by 2025. Our goal is to be able
to operate the system safely and securely at zero carbon whenever
there is sufficient renewable generation online and available to meet
the total national load.

• Future of heat: The transition to a low carbon economy is and

will continue to change the sources of energy used (e.g. heat pumps
and hybrid solutions), and the way energy is supplied and consumed
(e.g. building retrofits to improve energy efficiency). Gas remains
core to our strategy in both the UK and US, and we believe it will
remain central to the energy mix in both countries for decades to
come. In the US, we are working with regulators to understand how
the pathway to cleaner energy sources will evolve, while in the UK
we are specifically considering how our transmission network can
best support a long-term future where potentially hydrogen
becomes a mainstay of the energy mix.

What is the process for identifying and managing climate
related risks?
Our approach to identifying and managing the risks in our business
is set out on page 20, with our principal risks set out on page 21.

Our risk registers typically include risks that are thought possible or
likely to manifest within the short to medium, rather than longer term.
Accordingly, weather-related event risks feature, as do transition risks
associated with the decarbonisation of heat and electricity.

Risk registers form a key element of our governance framework and
drive the agenda, focus and discussions of the various oversight
bodies. There is an increasing focus and debate on climate-related
matters throughout the Group. For example, at a recent risk workshop,
NGV management discussed the risks and opportunities from climate
change at different levels of their organisation.

Future intent
Over the last 12 to 18 months the Enterprise Risk Management
function has facilitated workshops with each of the core business
areas to ensure completeness of risk capture. Over the next 12 months
we expect to consider whether the individual or combined risks arising
from, for example, increased variability in temperature, and/or greater
wear and tear on assets under more extreme conditions, should
feature more prominently. The Executive Committee will review the
results as part of the regular semi-annual review of Group risks later
in 2019 and as part of that discussion will specifically consider whether
climate change is appropriately reflected.

How do we use scenarios?
Our long-term investment plans in the UK draw on forecasts from the
System Operators’ Future Energy Scenarios publications (available on
our website), which provide credible pathways for the future of energy
supply in Great Britain out to 2050.

The scenarios are the starting point for our regulated long-term
investment, as well as a reference point for other reports, such
as the Gas Ten Year Statement, Electricity Ten Year Statement and
the System Operability Framework. Our UK transmission businesses
use this information to inform their long-term scenarios which are
used to refine capital investment plans. The key inputs concern
demand assumptions (contemplating EVs), generation assumptions
(with particular views around offshore wind, interconnectors, gas,
nuclear and transmission connected energy storage).

In the US, our long-term investment decisions are informed by internal
and stakeholder views on the impact of changing environmental
conditions and customer needs, and 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 in 2016, we prepared an
Electric and Gas Grid Resiliency Plan as well as a Distributed System
Implementation Plan (DSIP) for the electric system.

Future intent
We are currently developing our detailed scenario analysis and in future
TCFD disclosures we will provide more information on the outcomes
and sensitivities for our key businesses under various scenarios,
including at least one 2-degree scenario.

What metrics are used to assess these risks and opportunities?
We recognise that the metrics used to assess the risks and
opportunities arising from climate change need to consider not just
the performance of National Grid, but also of the energy systems
we influence.

At present the principal target we have is our commitment to reduce
our own Greenhouse Gas emissions by 80% of our 1990 baseline by
2050, with interim targets of a 45% reduction by 2020 and a 70%
reduction by 2030. As set out in the Strategic Report (page 41), we are
making good progress towards achieving this. We recognise that many
of our peers have now set more demanding targets for greenhouse
gas reduction, aligned with a zero-carbon future. The Executive
Committee is due to consider the case for a revised emissions
reduction target in summer 2019.

In our UK electricity business, carbon pricing now forms part of the
information used to assess options and sanction our capex, and we
will continue to roll out this approach across our business in 2019/20.

Our sustainable construction programme continues to drive the
carbon out of our construction projects and we are on track to
reduce the carbon intensity of our construction projects in the UK
by 50% by 2020 (from a 2015 baseline).

Future intent
We plan to set a science-based target for carbon emissions and are
currently reviewing our 2050 greenhouse gas target.

The Group has begun work on a programme to assess its total societal
impact. Our analysis extends to consider our human capital contribution,
and the role that innovation and reliability play in our wider contribution
to society.

We plan to identify a number of metrics that measure our wider
contribution in a meaningful way, and, as a result, will be used to drive
decision making to ensure we can sensibly assess trade-offs between
different stakeholders and take actions that benefit society as a whole.
We expect to report further progress in next year’s TCFD disclosure.

211

National Grid Annual Report and Accounts 2018/19
Internal control and risk factors

Additional Information

Disclosure controls
Working with management, including the Chief Executive and
Chief Financial Officer, we have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures
as at 31 March 2019. Our disclosure controls and procedures are
designed to provide reasonable assurance of achieving their
objectives; however, their effectiveness 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 Chief Financial Officer concluded
that the disclosure controls and procedures are effective to provide
reasonable assurance that information required for disclosure 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 Chief Financial
Officer, as appropriate, to allow timely decisions regarding disclosure.

Internal control over financial reporting
Our management, including the Chief Executive and Chief Financial
Officer, 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 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.

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. Using this
evaluation, management concluded that our internal control over
financial reporting was effective as at 31 March 2019.

Deloitte LLP, which has audited our consolidated financial statements
for the year ended 31 March 2019, has also audited the effectiveness
of our internal control over financial reporting.

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 20 – 22. 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.

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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 be unable 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 to our systems, these may
not be sufficient.

Decisions or rulings concerning, for example:
• the RIIO-T2 price controls; 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 199 – 209, 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.

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Internal control and risk factors
continued

Growth and business development activity

Failure to respond to external market developments and execute our
growth strategy may negatively affect our performance. Conversely,
new businesses or activities that we undertake alone or with partners
may not deliver target outcomes and may expose us to additional
operational and financial risk.

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.

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 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.

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 are therefore subject to the
exchange rate risks normally associated with non-UK operations including the
need to translate US assets, liabilities, income and expenses into sterling
(our reporting currency).

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.

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.

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.

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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
unsecured debt credit ratings that certain companies within the Group must
hold or the amount of equity within their capital structures, including a limit
requiring National Grid plc to hold an investment-grade long-term senior
unsecured debt credit rating.

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.

In addition, some of our regulatory arrangements impose restrictions on the
way we can operate. These include regulatory requirements for us to maintain
adequate financial resources within certain parts of our operating businesses
and may restrict the ability of National Grid plc and some of our subsidiaries
to engage in certain transactions, including paying dividends, lending cash
and levying charges.

The inability to meet such requirements, or the occurrence of any such
restrictions, may have a material adverse impact on our business and
financial condition.

Our debt agreements and banking facilities contain covenants, including
those relating to the periodic and timely provision of financial information by
the issuing entity, and financial covenants, such as restrictions on the level of
subsidiary indebtedness.

Failure to comply with these covenants, or to obtain waivers of those
requirements, could in some cases trigger a right, at the lender’s discretion,
to require repayment of some of our debt and may restrict our ability to draw
upon our facilities or access the capital markets.

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 213.

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.

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National Grid Annual Report and Accounts 2018/19Shareholder 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.
We set out the committee structure on page 50.

General
The Company is incorporated under the name National Grid plc and
is registered in England and Wales with registered number 4031152.
Under the Companies Act 2006, the Company’s objects are
unrestricted.

Directors
Under the Articles, a Director must disclose any personal interest in
a matter and may not vote in respect of that matter, subject to certain
limited exceptions. As permitted under the Companies Act 2006,
the Articles allow non-conflicted Directors to authorise a conflict or
potential conflict for a particular matter. In doing so, the non-conflicted
Directors must act in a way they consider, in good faith, will be most
likely to promote the success of the Company for the benefit of the
shareholders as a whole.

The Directors (other than a Director acting in an executive capacity)
are paid fees for their services. In total, these fees must not exceed
£2,000,000 per year or any higher sum decided by an ordinary
resolution at a general meeting of shareholders. In addition, special
pay may be awarded to a Director who acts in an executive capacity,
serves on a committee, performs services which the Directors
consider to extend beyond the ordinary duties of a director, devotes
special attention to the business of National Grid, or goes or lives
abroad on the Company’s behalf. Directors may also receive
reimbursement for expenses properly incurred, and may be awarded
pensions and other benefits. The compensation awarded to the
Executive Directors is determined by the Remuneration Committee.
Further details of Directors’ remuneration are set out in the Directors’
Remuneration Report (see pages 69 – 90).

The Directors may exercise all the powers of National Grid to borrow
money. However, the aggregate principal amount of all the Group’s
borrowings outstanding at any time must not exceed £35 billion or any
other amount approved by shareholders by an ordinary resolution at
a general meeting.

Directors can be appointed or removed by the Board or shareholders
at a general meeting. Directors must stand for election at the first AGM
following their appointment to the Board. Each Director must retire at
least every three years, although they will be eligible for re-election. In
accordance with best practice introduced by the UK Corporate
Governance Code, all Directors wishing to continue in office currently
offer themselves for re-election annually. No person is disqualified from
being a Director or is required to vacate that office by reason of
attaining a maximum age.

A Director is not required to hold shares in National Grid in order to
qualify as a Director.

Rights, preferences and restrictions
(i) Dividend rights
National Grid may not pay any dividend otherwise than out of profits
available for distribution under the Companies Act 2006 and other
applicable provisions of English law. In addition, as a public company,
National Grid may only make a distribution if, at the time of the
distribution, the amount of its net assets is not less than the aggregate
of its called-up share capital and undistributable reserves (as defined in
the Companies Act 2006) and to the extent that the distribution does
not reduce the amount of those assets to less than that aggregate.
Ordinary shareholders and American Depositary Share (ADS) holders
receive dividends.

Subject to these points, shareholders may, by ordinary resolution,
declare dividends in accordance with the respective rights of the
shareholders, but not exceeding the amount recommended by the
Board. The Board may pay interim dividends if it considers that
National Grid’s financial position justifies the payment. Any dividend or
interest unclaimed for 12 years from the date when it was declared or
became due for payment will be forfeited and revert to National Grid.

(ii) Voting rights
Subject to any rights or restrictions attached to any shares and to any
other provisions of the Articles, at any general meeting on a show of
hands, every shareholder who is present in person will have one vote
and, on a poll, every shareholder will have one vote for every share they
hold. On a show of hands or poll, shareholders may cast votes either
personally or by proxy. A proxy need not be a shareholder. Under
the Articles, all substantive resolutions at a general meeting must
be decided on a poll. Ordinary shareholders and ADS holders can
vote at general meetings.

(iii) Liquidation rights
In a winding up, a liquidator may (in each case with the sanction of a
special resolution passed by the shareholders and any other sanction
required under English law): (a) divide among the shareholders the
whole or any part of National Grid’s assets (whether the assets are
of the same kind or not); the liquidator may, for this purpose, value
any assets and determine how the division should be carried out
as between shareholders or different classes of shareholders, or (b)
transfer any part of the assets to trustees on trust for the benefit of
the shareholders as the liquidator determines. In neither case will
a shareholder be compelled to accept assets upon which there
is a liability.

(iv) Restrictions
There are no restrictions on the transfer or sale of ordinary shares.
Some of the Company’s employee share plans, details of which are
contained in the Directors’ Remuneration Report, include restrictions
on the transfer of shares while the shares are subject to the plan.
Where, under an employee share plan operated by the Company,
participants are the beneficial owners of the shares but not the
registered owner, the voting rights may be exercised by the registered
owner at the direction of the participant. Treasury shares do not attract
a vote or dividends.

Variation of rights
Subject to applicable provisions of English law, the rights attached to
any class of shares of National Grid may be varied or cancelled. This
must be with the written consent of the holders of three quarters in
nominal value of the issued shares of that class, or with the sanction of
a special resolution passed at a separate meeting of the holders of the
shares of that class.

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General meetings
AGMs must be convened each year within six months of the
Company’s accounting reference date upon 21 clear days’ advance
written notice. Under the Articles, any other general meeting may be
convened provided at least 14 clear days’ written notice is given,
subject to annual approval of shareholders. In certain limited
circumstances, the Company can convene a general meeting by
shorter notice. The notice must specify, among other things, the nature
of the business to be transacted, the place, the date and the time of
the meeting.

Rights of non-residents
There are no restrictions under the Articles that would limit the rights
of persons not resident in the UK to vote in relation to ordinary shares.

Disclosure of interests
Under the Companies Act 2006, National Grid may, by written notice,
require a person whom it has reasonable cause to believe to be or to
have been, in the last three years, interested in its shares to provide
additional information relating to that interest. Under the Articles, failure
to provide such information may result in a shareholder losing their
rights to attend, vote or exercise any other right in relation to
shareholders’ meetings.

Under the UK Disclosure Guidance and Transparency Rules (DTR)
sourcebook, there is also an obligation on a person who acquires or
ceases to have a notifiable interest in shares in National Grid to notify
the Company of that fact. The disclosure threshold is 3% and
disclosure is required each time the person’s direct and indirect
holdings reach, exceed or fall below each 1% threshold thereafter.

The UK City Code on Takeovers and Mergers imposes strict disclosure
requirements regarding 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, the 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 2018 to 15 May 2019, the Company received
a total of $1,993,813.16 in reimbursements from the Depositary
consisting of $1,330,665.54 and $663,147.62 received in October
2018 and February 2019 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 243.

Description of securities other than equity securities:
Depositary fees and charges
The Bank of New York Mellon, as the Depositary, collects fees by
deducting them from the amounts distributed or by selling a portion
of distributable property, for:
• delivery and surrender of ADSs directly from investors depositing
shares or surrendering ADSs for the purpose of withdrawal or
from intermediaries acting for them; and

• making distributions to investors (including, it is expected,

cash dividends).

The Depositary may generally refuse to provide fee-attracting
services until its fees for those services are paid.

Persons depositing or
withdrawing shares must pay:

For

$5.00 per 100 ADSs (or portion
of 100 ADSs)

Registration or transfer fees

Expenses of the Depositary

Taxes and other governmental
charges the Depositary or the
Custodian has to pay on any ADS
or share underlying an ADS, for
example, stock transfer taxes,
stamp duty or withholding taxes

Issuance of ADSs, including
issuances resulting from a distribution
of shares or rights or other property;
cancellation of ADSs for the purpose
of withdrawal, including if the
Deposit Agreement terminates; and
distribution of securities distributed
to holders of deposited securities
that are distributed by the
Depositary to ADS holders.

Transfer and registration of shares on
our share register to or from the name
of the Depositary or its agent when
they deposit or withdraw shares.

Cable, telex and facsimile
transmissions (when expressly
provided in the Deposit Agreement);
and converting foreign currency
to dollars.

As necessary.

The Company’s Deposit Agreement under which the ADSs are
issued allows a fee of up to $0.05 per ADS to be charged for any
cash distribution made to ADS holders, including cash dividends.
ADS holders who receive cash in relation to the 2018/19 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. Some of our filings
are also available on the SEC’s website at www.sec.gov.

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National Grid Annual Report and Accounts 2018/19Shareholder information
continued

Events after the reporting period
Other than as described in note 38 to the financial statements, there
were no events after the reporting period.

When purchasing shares, the Company has taken, 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 2018 AGM, the Company sought authority to purchase 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.
During the year, the Company did not purchase any of its own shares.

Number of
shares

Total
nominal
value

% of
called

up share
capital

282,960,111

£35,175,590.972

7.781

–

Shares held in Treasury
purchased in prior years1

Shares purchased and held
in Treasury during the year

Shares transferred from
Treasury during the year
(to employees under
employee share plans)

Maximum number of shares
held in Treasury during the year 282,960,111

£35,175,590.97²

5,696,887

£708,196.54²

0.153

7.673

1. Called-up share capital: 3,637,747,827 as at 31 March 2018.
2. Nominal value: 12204/473p.
3. Called-up share capital of 3,687,483,073 ordinary shares as at the date of this report.

As at the date of this report, the Company held 275,597,944 ordinary
shares as treasury shares, this represented 7.47% of the Company’s
called-up share capital.

Authority to allot shares
Shareholder approval was given at the 2018 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 that 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.
This is 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 that would effectively alter control of the
Company without the sanction of shareholders in a 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 annum.

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
219 – 220 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).

Material interests in shares
As at 31 March 2019, 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.

Number of
ordinary
shares

244,216,445

Competrol International Investments Limited

125,733,926

The Capital Group Companies, Inc.

145,094,617

% of
voting
rights1

7.29

3.69

3.88

1. This number is calculated in relation to the issued share capital at the time the holding

was disclosed.

As at 15 May 2019, no further notifications have been received.

The rights attached to ordinary shares are detailed on page 216.
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 15 May 2019, the share capital of the Company consists of
ordinary shares of 12204/473 pence nominal value each and ADSs,
which represent five ordinary shares each.

Authority to purchase shares
Shareholder approval was given at the 2018 AGM to purchase up to
10% of the Company’s share capital (being 335,635,105 ordinary
shares). The Directors intend to seek shareholder approval to renew
this authority at the 2019 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 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.

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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. They have also 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 information
National Grid ordinary shares are listed on the London Stock Exchange
under the symbol NG. The ADSs are listed on the New York Stock
Exchange under the symbol NGG.

Shareholder analysis
The following table includes a brief analysis of shareholder numbers
and shareholdings as at 31 March 2019.

Number of
shareholders

% of
shareholders

Number
of shares

% of
shares

1-50

51-100

101-500

501-1,000

1,001-10,000

10,001-50,000

50,001-100,000

100,001-500,000

500,001-1,000,000

1,000,001+

Total

177,679

214,748

348,114

47,549

44,884

1,771

233

445

124

300

21.26

25.69

5,421,073

15,107,795

41.65

72,404,255

5.69

5.37

0.21

0.03

33,105,293

110,331,077

31,801,893

16,808,775

0.05

105,375,558

0.01

88,564,399

0.15

0.41

1.96

0.90

2.99

0.86

0.46

2.86

2.40

0.04 3,208,562,955

87.01

835,847

100 3,687,483,073

100

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 who:
• 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.

This discussion is not a comprehensive description of all the US federal
income tax and UK tax considerations that may be relevant to any
particular investor (including consequences under the US alternative
minimum tax or net investment income tax). Neither does it 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 investors may include:
• 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;
• individual investors who have ceased to be resident in the UK

for a period of five years or less;

• 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 that were 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 depending on their particular circumstances, including the
effect of any state, local or other tax laws.

219

National Grid Annual Report and Accounts 2018/19Shareholder information
continued

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. We also (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 2019. 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
that is generally allowed to corporations.

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 American
Depositary Receipts 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.

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 that
is 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.

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. Such obligations include
reporting requirements related to the holding of certain foreign
financial assets.

UK inheritance tax
An individual who is domiciled in the US for the purposes of the Estate
Tax Convention and who is not a 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.

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).

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.

The SDRT liability will be cancelled 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. 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.

220

National Grid Annual Report and Accounts 2018/19Additional InformationOther disclosures

Additional Information

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.

Share Incentive Plan (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.

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 401k plans). These are defined contribution (DC) pension
plans that give participants the opportunity to invest up to applicable
federal salary limits. The federal limits for calendar year 2018 were: 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 aged 50 and
above; for post-tax contributions, up to 15% of salary. The total amount
of employee contributions (pre-tax and post-tax) could not exceed
50% of compensation, and was further subject to the combined
federal annual contribution limit of $55,000. For the calendar year
2019, participants may invest up to the applicable federal salary limits:
for pre-tax contributions, this is a maximum of 50% of salary limited to
$19,000 for those under the age of 50 and $25,000 for those aged 50
and above; for post-tax contributions, this is up to 15% of salary. The
total amount of employee contributions (pre-tax and post-tax) may not
exceed 50% of compensation, and is further subject to the combined
federal annual contribution limit of $56,000.

Employee Stock Purchase Plan (ESPP)
Employees of National Grid’s US companies are eligible to participate
in the ESPP (commonly referred to as a 423b 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 2019, the Company
had borrowing facilities of £4.2 billion available to it with a number of
banks, which, on a change of control of the Company following a
takeover bid, may alter or terminate; however, the Company is currently
not drawing on any of such borrowing facilities. 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, the 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.

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 to review
and confirm their external interests annually. During the year ended
31 March 2019, no actual or potential conflicts of interest were
identified that required approval by the Board. The Board has
considered and noted a number of situations in relation to
which no actual conflict of interest was identified.

Corporate governance practices: differences from New York
Stock Exchange (NYSE) listing standards
The Company is listed on the NYSE and is therefore required to
disclose differences in its corporate governance practices adopted
as a UK listed company, compared with those of a US company.

The corporate governance practices of the Company are primarily
based on the requirements of the Code but substantially conform to
those required of US companies listed on the NYSE. The following is
a summary of the significant ways in which the Company’s corporate
governance practices differ from those followed by US companies
under Section 303A Corporate Governance Standards of the NYSE.

The NYSE rules and the Code apply different tests for the
independence of Board members.

The NYSE rules require a separate nominating/corporate governance
committee composed entirely of independent Directors. There is
no requirement for a separate corporate governance committee in
the UK. Under the Company’s corporate governance policies, all
Directors on the Board discuss and decide upon governance issues,
and the Nominations Committee makes recommendations to the
Board with regard to certain 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 Company’s
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 the appointment,
retention and termination of such advisors.

221

National Grid Annual Report and Accounts 2018/19Material 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, we entered into an agreement with the Consortium for the
potential future sale and purchase of an additional 14% equity interest
in Quadgas. 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 Quadgas. In November 2018, we
announced we had decided to exercise those two options, and the
sale of our remaining 39% equity interest to the Consortium is
expected to complete at the end of June 2019.

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 that is,
or may be, material, or that contains any provision under which any
member of the Group has any obligation or entitlement that 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
UK and the European Union (EU). In each case, donations will be in
amounts not exceeding £125,000 in aggregate. The definitions of these
terms in the Companies Act 2006 are very wide. 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 UK or 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 $60,081 (£46,025) 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 in note 13 property, plant and equipment
on pages 132 – 133, note 21 borrowing on pages 141 – 143 and where
we operate on page 198.

Other disclosures continued

Directors’ indemnity
The Company has arranged, in accordance with the Companies
Act 2006 and the Articles, qualifying third-party indemnities against
financial exposure that Directors may incur in the course of their
professional duties. Equivalent qualifying third-party indemnities were,
and remain, in force for the benefit of those Directors who stood down
from the Board in prior financial years for matters arising when they
were Directors of the Company. Alongside these indemnities, the
Company places Directors’ and Officers’ liability insurance cover
for each Director.

Employees
We negotiate with recognised unions. It is our policy to maintain
well-developed communications and consultation programmes. Other
than the implementation of the Massachusetts workforce contingency
plan in June 2018 in response to a union work stoppage involving
1,250 employees over employment terms and conditions under an
expired Massachusetts Gas union collective bargaining agreement,
there have been no material disruptions to our operations from labour
disputes during the past five years. The agreement under dispute was
satisfactorily renegotiated in January 2019 between National Grid and
the Massachusetts Gas unions. National Grid believes that it can
conduct its relationships with trade unions and employees in
a satisfactory manner.

Human rights
Respect for human rights is incorporated into our employment
practices and our values, which are integral to our Code of ethical
business conduct. The way in which we conduct ourselves allows
us to build trust with the people with whom we work. 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 our
employees want to work for. Although we do not have specific policies
relating to human rights, slavery or human trafficking, our Global
Supplier Code of Conduct (GSCoC) integrates human rights into the
way we do business throughout our supply chain alongside other
areas of sustainability. This Code ensures 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
GSCoC, we expect our suppliers to comply with all legislation relating
to their business, as well as adhere to the Principles of the United
Nations Global Compact, the International Labour Organization (ILO)
minimum standards, the Ethical Trading Initiative (ETI) 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

Page 121

Publication of unaudited financial information

Not applicable

Details of long-term incentive schemes

Not applicable

Waiver of emoluments by a director

Waiver of future emoluments by a director

Page 84

Page 71

Non-pre-emptive issues of equity for cash

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 219

Agreements with controlling shareholders

Not applicable

222

National Grid Annual Report and Accounts 2018/19Additional InformationAdditional Information | Other disclosures

The year ahead will see even more projects come to life from the ESO,
including our Black Start NIC project with SP Energy Networks, which
will develop and demonstrate coordination of DERs to provide a safe
and effective Black Start service at lower cost to consumers. From
June 2019, the largest NIA project from the ESO, worth a combined
£1.1 million, will trial same-day frequency response procurement for the
first time, thus enabling non-programmable generation such as wind to
participate, while giving demand-side response providers a clearer
picture of what may be required of them and when.

The ESO and UK Power Networks continue to work on the Power
Potential project to enable more distributed electricity generation
across the South East of England. A technical and commercial solution
is being developed that will allow electricity generators to connect to
the distribution grid and provide transmission services to the ESO,
deferring transmission network reinforcements. This new service is a
significant step towards UK Power Networks becoming a Distribution
System Operator (DSO) and enabling customers to connect to the
network more efficiently. If successful, Power Potential could save
energy consumers over £400 million by 2050 and generate an
additional 3.72 GW in the South East of the UK, possibly being rolled
out to 59 other transmission sites within the UK.

The Enhanced Frequency Control Capability (EFCC) project, which
concluded in December 2018, explored how response providers
can play a larger role in providing the ESO with faster, coordinated
frequency response to help keep the transmission system stable in the
most efficient way. The project developed and tested a novel wide-
area Monitoring and Control System (MCS), which coordinates and
maximises the contribution of fast frequency response from a range
of providers. Conclusions from the project provide valuable insight
as to how to manage system frequency within a low-inertia system.

GT Innovation has continued to focus on developing innovation
programmes across safety, reliability and asset health, while adapting
to external factors, such as the future of gas and increasing threats
to cyber security. Highlights from the year include:
• the Open Source SCADA project to develop a modularised

cyber security solution to provide greater resilience at
our compressor sites;

• the Mobile Condensate Tank project, which removes the need for
larger, more expensive permanent tanks on site, bringing safety
enhancements and significant time and cost efficiencies;

• the Hydrogen Feasibility Study working with the Health and Safety
Executive (HSE) to understand the opportunities and challenges
of transporting hydrogen through the National Transmission
System (NTS); and

• in addition, both of the NIC projects – Project GRAID and Project

CLoCC – ended this year, successfully achieving their goals
to deliver cost savings and efficiencies to our customers.

Research, development and innovation activity
Investment in research and development during the year for the
Group was £19 million (2017/18: £13 million; 2016/17: £14 million). 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. Collaborating across the
industry has played a crucial role in our ability to develop new
programmes and deliver value to our stakeholders throughout 2018/19,
with increased investment across our UK regulated business areas:
UK Electricity Transmission (ET), UK Gas Transmission (GT) and the
Electricity System Operator (ESO).

Collaboration remains crucial in search of new technologies and
techniques to challenge the way we work. A focus has been on
articulation of the impact of the changing energy landscape on our
innovation strategies and programmes to the wider stakeholders
through workshops and bilateral engagements; and the development
of innovation projects to drive the decarbonisation of transport, heat
and industry. We are committed to investigating sustainable solutions
to our problems. One example is the use of bamboo to try and reduce
the impact of transformer noise on our communities.

ET’s innovation investment continues to advance our strategic ambitions
to reduce the cost of delivering a secure, reliable and sustainable
electricity transmission system now and in the future, with 23 new
projects started this financial year. We have also started nine projects
looking at supporting the decarbonisation of energy, transport and heat.
With this aim, we have also actively supported the Flexis initiative in
Wales and the Cheshire Energy Hub. Our engagement and in kind
contribution to academic research remains strong. We are providing
strategic direction, expertise and support to 24 projects funded by the
Engineering and Physical Sciences Research Council (EPSRC), helping
them and the associated academic partners leverage £64.7 million of
grant funding to deliver maximum value and impact to society. These
include large consortium initiatives such as the Supergen Energy
Networks Hub and the Faraday Institute.

We have also engaged with a wider range of stakeholders by
starting our own bi-weekly podcast, Talking Transmission, where
we communicate the work we are doing and our views of the energy
landscape. We have also launched an electromagnetic field (EMF)
website to provide factual, comprehensive information to the wider
community and interested parties.

At the Deeside Innovation Centre, the overhead line area and control
room are under construction. The first innovation projects are starting
to deliver consumer value and contributing to over £21 million savings
across UK networks.

This year has been a special one for the ESO, as we legally separated
from Electricity Transmission, thus finding new opportunities to deliver
innovation projects focused on the specific challenges we are ideally
placed to address, helping us realise maximum benefits for our
customers and the end consumers in a fast-changing world. As the
System Operator (SO), following a refresh of our dual-fuel Innovation
Strategy, first published in February 2018, we continue to develop
projects that support our priority challenges. To this end, over the last
year, the SO has committed over £3.6 million of spend on nine new
Network Innovation Allowance (NIA) projects and was awarded £10
million Network Innovation Competition (NIC) funding for our £11.7
million Black Start from Distributed Energy Resources (DERs) project.
As the SO sits at the heart of the energy system, we firmly believe in
following an Open Innovation approach, and thus strive to collaborate
across a range of partners, from academia to industry. The success of
our very first SO Open Innovation Day and Gas System Operator (GSO)
Hack in 2018 have resulted in new partnerships across our innovation
portfolio, which in turn have helped the SO deliver more value to
customers and consumers, while exposing us to some of the
latest technological solutions out there.

223

National Grid Annual Report and Accounts 2018/19Other disclosures continued

Research and Development (R&D) work in the US 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 us. 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
REV 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 2018/19, we continued to invest and participate in several significant
pilot projects with the intention of obtaining operational knowledge and
experience of technology-driven system impacts. Below are a few
examples of our R&D projects:
• In Massachusetts under our ‘Solar Phase II’ programme, we

contracted and built 15.27 MW of company-owned photovoltaics
(PV). These PV sites have been built with advanced grid interactive
control features, beyond what typical PV facilities are required to
provide. Operating and analysing the performance of these grid
interactive controls will help prepare and future-proof our system
to enable a high penetration of distributed energy resources on
the distribution system. In the ‘Solar Phase III’ programme, we have
contracted for 14 MW of PV and 5.8 MW of energy storage. The aim
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. In February 2019, the Company received an
Electric Power Research Institute (EPRI) Technology Transfer award,
entitled Smart Inverter Requirements and Application, for our work
on testing smart inverters’ functionalities in support of distribution
grid operations.

• We are engaged with the EPRI on a number of programmes,

including distributed energy resources integration, energy storage,
asset management, system operations, information and
communication technology and system planning.

• We have completed two New York REV pilot projects: Fruit Belt
Neighbourhood Solar and Community Resilience. We are also
progressing an additional four REV pilot projects, to test new
technologies and business models in which distributed energy
resources are integrated for grid operations:
• Residential Demand Reduction with time-of-use-rates;
• Distributed System Platforms;
• Distributed Generation Integration; and
• Smart Cities.

• We are also working on developing a new REV pilot project to test

strategies to increase residential energy-efficiency uptake.

• We support several US Department of Energy projects under the

SunShot programme, aimed to further the integration and
proliferation of solar PV.

• We are preparing to demonstrate online monitoring technology at

transmission substations and lines in our New England service area.
This will help the move towards enhanced condition-based asset
management. These technologies will allow the Company to utilise
the capacity of lines and transformers more efficiently, enabling the
investment to upgrade the asset to be deferred.

• We are preparing to demonstrate power flow control technology in
New England to improve the operation of our transmission network
and to defer capital investment.

• We are developing an energy storage playbook that would help us to
deploy energy storage to improve system reliability and defer capital
investment.

• We are building equipment testing and training labs to support our
initial upgrades of transmission substations across our service area
to the IEC 61850 communications standard.

• Building on the successful development and deployment of new

equipment to stop the flow of gas in our distribution mains, we are
expanding the applicability of the equipment to mains sized 750mm
and larger. These mains are some of the largest operating in our
system and will provide some of the greatest cost savings when
deployed. This equipment is much smaller than previous equipment.
It operates at a higher pressure, allowing our workforce to work
more quickly and safely in smaller excavations with less
customer impact.

• We are currently selecting projects to field-test alternative trenchless
technologies using main insertion and plastic pipe splitting. Main
insertion introduces high-pressure gas mains to regions utilising the
old gas infrastructure. When using this main replacement technique,
gas service is maintained to the customer until it is convenient to
transfer the customer to the new high-pressure gas main.

• While partnering with a robotics company and another utility, we
are developing and testing new technology to locate inadvertent
sewer cross bores created when using some trenchless technology.
This technology is deployed in our gas main immediately after
installation, prior to the introduction of natural gas. It differs from the
current process, which requires us to gain access to the municipal
sewer system. Deployment will reduce the risk and cost associated
with sewer cross bores.

• We utilised a drone to perform a regulated inspection of a high-

pressure gas pipe line suspended under a bridge linking Cape Cod
to Massachusetts. This remote vehicle was able to inspect sections
of the pipeline not visible from the catwalk. The inspection was
performed faster, with more detail and more safely, without putting
an inspector forty metres above the water.

Unresolved SEC staff comments
There are no unresolved SEC staff comments required to be reported.

224

National Grid Annual Report and Accounts 2018/19Additional InformationAdditional Information

Other 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.

We also have a number of 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, 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.

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. 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 and 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 UK system balancing costs, gas and electricity commodity costs in the US and, prior
to the adoption of IFRS 15, payments to other UK network owners. 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

2019

Pass-
through
costs
£m

Gross
revenue
£m

Net
revenue
£m

Gross
revenue
£m

UK Electricity Transmission

3,351

(1,397)

1,954

UK Gas Transmission

896

(227)

669

US Regulated

NGV and Other

Sales between segments

9,846

(3,978)

5,868

876

(36)

–

876

(36)

4,154

1,091

9,272

776

(43)

2018

Pass-
through
costs
£m

(2,243)

(257)

(3,804)

–

Net
revenue
£m

Gross
revenue
£m

1,911

834

5,468

776

(43)

4,439

1,080

8,931

713

(128)

2017

Pass-
through
costs
£m

(2,293)

(223)

(3,411)

–

Net
revenue
£m

2,146

857

5,520

713

(128)

Total

14,933

(5,602)

9,331

15,250

(6,304)

8,946

15,035

(5,927)

9,108

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 26 – 32 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 5 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 2018/19, as highlighted on page 226, our underlying results
exclude £108 million (2017/18: £104 million) of timing differences, as well as £93 million (2017/18: £142 million) of major storm costs (which are
significant in aggregate) where we expect to recover the bulk of the costs incurred through regulatory mechanisms in the US.

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.

225

National Grid Annual Report and Accounts 2018/19Other unaudited
financial information continued

Reconciliation of statutory, adjusted and underlying profits and earnings – at actual exchange rates – continuing operations

Year ended 31 March 2019

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 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

Statutory
£m

Exceptionals and
remeasurements
£m

Adjusted
£m

Timing
£m

Major storm
costs
£m

Underlying
£m

778

267

1,425

400

2,870

(1,069)

1,841

(339)

1,502

237

299

–

572

–

648

(149)

499

1,015

303

1,724

400

3,442

(993)

2,489

(488)

2,001

(223)

–

(108)

–

(108)

(72)

–

(24)

1,092

341

1,594

400

3,427

(993)

2,474

(476)

1,998

Statutory
£m

Exceptionals and
remeasurements
£m

Adjusted
£m

Timing
£m

Major storm
costs
£m

Underlying
£m

1,041

487

1,734

231

3,493

(882)

2,660

889

3,549

–

(36)

–

(36)

(119)

(5)

(160)

(1,473)

(1,633)

1,041

487

1,698

231

3,457

(1,001)

2,500

(584)

1,916

(136)

–

(104)

–

(104)

(62)

–

142

–

142

–

142

(51)

1,055

505

1,704

231

3,495

(1,001)

2,538

(593)

1,945

Statutory
£m

Exceptionals and
remeasurements
£m

Adjusted
£m

Timing
£m

Major storm
costs
£m

Underlying
£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

226

National Grid Annual Report and Accounts 2018/19Additional Information
Reconciliation of adjusted and underlying profits – at constant currency

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

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

At constant currency

Adjusted
at actual
exchange
£m

Constant
currency
adjustment
£m

Adjusted
£m

Timing
£m

Major storm
costs
£m

Underlying
£m

1,041

487

1,698

231

3,457

(1,001)

2,500

–

(4)

(27)

1,041

487

1,766

227

3,521

(1,028)

2,538

(141)

–

(109)

–

(109)

–

148

–

148

–

148

1,055

505

1,773

227

3,560

(1,028)

2,577

At constant currency

Adjusted
at actual
exchange
£m

Constant
currency
adjustment
£m

Adjusted
£m

Timing
£m

Major storm
costs
£m

Underlying
£m

1,372

511

1,713

177

3,773

(1,029)

2,807

–

(38)

(37)

–

(25)

1,372

511

1,675

178

3,736

(1,017)

2,782

(137)

(62)

(195)

–

(394)

–

(394)

–

1,235

449

1,480

178

3,342

(1,017)

2,388

Earnings per share calculations from continuing operations – at actual exchange rates
The table below reconciles the profit before tax from continuing operations as 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 2019

Statutory

Adjusted (also referred to as headline)

Underlying

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

Profit
after tax
£m

1,502

2,001

1,998

Profit
after tax
£m

3,549

1,916

1,945

Profit
after tax
£m

1,810

2,141

1,862

Non-
controlling
interest
£m

Profit after tax
attributable to
shareholders
£m

Weighted average
number of shares
millions

Earnings
per share
pence

(3)

1,499

1,998

1,995

3,386

44.3

59.0

58.9

Non-
controlling
interest
£m

Profit after tax
attributable to
shareholders
£m

Weighted average
number of shares
millions

Earnings
per share
pence

(1)

3,548

1,915

1,944

3,461

102.5

55.3

56.2

Non-
controlling
interest
£m

Profit after tax
attributable to
shareholders
£m

Weighted average
number of shares
millions

Earnings
per share
pence

–

1,810

2,141

1,862

3,763

48.1

56.9

49.5

227

National Grid Annual Report and Accounts 2018/19Additional Information | Other unaudited financial informationOther unaudited
financial information continued

Timing and regulated revenue adjustments
As described on pages 199 – 209, 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 £108 million (2017/18: £104 million over-collection).
Our closing balance at 31 March 2019 was £407 million over-recovered. In the UK, there was cumulative under-recovery of £59 million at 31
March 2019 (2018: over-recovery of £49 million for continuing operations). In the US, cumulative timing over-recoveries at 31 March 2019 were
£248 million (2018: £230 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, outperformance against allowances as a result
of the totex incentive mechanism, together with changes in output-related allowances included in the original price control, will almost always be
adjusted in future revenue recoveries, typically starting in two years’ time. We are also recovering revenues in relation to certain costs incurred (for
example pension contributions made) in prior years.

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
a return of £243 million in the year (2017/18: £40 million recovered). 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 2019, these extend until 2069.

1 April 2018 opening balance1

Over/(under) recovery

31 March 2019 closing balance to (recover)/return

1 April 2017 opening balance1

Over/(under) recovery2

31 March 2018 closing balance to (recover)/return1

1 April 2016 opening balance1

Over/(under) recovery2

31 March 2017 closing balance to (recover)/return1

UK Electricity
Transmission
£m

UK Gas
Transmission
£m

US Regulated
£m

(41)

(77)

(118)

(38)

241

223

464

UK Electricity
Transmission
£m

UK Gas
Transmission
£m

US Regulated
£m

(30)

(14)

(44)

111

(18)

106

141

247

UK Electricity
Transmission
£m

UK Gas
Transmission
£m

US Regulated
£m

(167)

137

(30)

112

(97)

195

Total
£m

297

108

405

Total
£m

187

109

296

Total
£m

(214)

394

180

1. Opening balances have been restated to reflect the finalisation of calculated over/(under)-recoveries in the UK and the US.
2. US over/(under) recovery and all US Regulated balances have been translated using the average exchange rate for the year ended 31 March 2019. The over-recovered closing balance

at 31 March 2019 was £407m (translated at the closing rate of $1.30:£1).

228

National Grid Annual Report and Accounts 2018/19Additional InformationCapital investment
‘Capital investment’ or ‘investment’ refer to additions to property, plant and equipment and intangible assets, and contributions to joint ventures
and associates, other than the St William Homes LLP joint venture during the period. We also include the Group’s investments by National Grid
Partners during the period which are classified for IFRS purposes as non-current financial assets in the Group’s consolidated statement of
financial position.

Investments made to our St William Homes LLP arrangement are excluded based on the nature of this joint venture arrangement. We typically
contribute property assets to the joint venture in exchange for cash and accordingly do not consider these transactions to be in the nature of
capital investment.

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

2019
£m

925

308

2,650

438

4,321

185

4,506

2018
£m

999

310

2,424

341

4,074

177

4,251

% change

(7)

(1)

2019
£m

925

308

2,650

438

4,321

185

4,506

2018
£m

999

310

2,521

346

4,176

181

4,357

% change

(7)

(1)

1. Excludes £47 million (2018: £19 million) equity contribution to the St William Homes LLP joint venture. 2018/19 includes £58 million National Grid Partners investment, of which £6 million is
in an associate.

Net debt
See note 29 on page 159 for the definition and reconciliation of net debt.

Funds from operations (FFO) and interest cover
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 (income statement)

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)

FFO interest cover ((FFO + adjusted interest expense)/adjusted interest expense)

2019
£m

1,066

(51)

135

(4)

(74)

–

1,084

4,389

(914)

201

(40)

260

(186)

(13)

(52)

(71)

–

3,727

4.4x

20181
£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

1. Numbers for 2018 and 2017 reflect the calculations for the total Group as based on the published accounts for the respective years and have not been restated for discontinued operations.

229

National Grid Annual Report and Accounts 2018/19Additional Information | Other unaudited financial informationOther unaudited
financial information continued

Retained cash flow (RCF)/adjusted net debt
RCF/net debt is one of two credit metrics that we monitor in order to ensure the Group is generating sufficient cash to service its debts,
consistent with maintaining a strong investment-grade credit rating. We calculated RCF/net debt applying the methodology used by Moody’s,
as this is one of the most constrained calculations of credit worthiness. The net debt denominator includes adjustments to take account of
off-balance sheet leases and the equity component of hybrid 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 shares

RCF (net of share buybacks)

Borrowings

Less:

50% hybrid debt

Cash and cash equivalents

Financial and other investments

Restricted cash

Underfunded pension obligations

Operating leases adjustment

Derivative balances 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)

RCF (excluding share buybacks)/adjusted net debt

RCF (net of share buybacks)/adjusted net debt

2019
£m

3,727

(51)

(1,160)

2,516

–

2,516

28,730

(1,039)

(252)

(1,311)

–

845

248

141

(558)

(223)

26,637

9.4%

2018
£m

3,744

(51)

(1,316)

2,377

(178)

2,199

26,625

(1,050)

(329)

(2,304)

–

857

408

(479)

117

(878)

(195)

22,777

10.4%

9.7%

2017
£m

4,723

(51)

(1,463)

3,209

(189)

3,020

28,638

(1,033)

(1,139)

(7,432)

1,487

526

(709)

(210)

20,290

15.8%

14.9%

Regulatory Performance Measures
Regulated financial performance – UK
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 and through the key adjustments
required to approximate regulatory profit. This measure also provides the foundation to calculate 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

Adjusted operating profit

Movement in regulatory ‘IOUs’

Deferred taxation adjustment

RAV indexation (average 3% long-run inflation)

Regulatory vs IFRS depreciation difference

Fast money/other

Pensions

Performance RAV created

Regulated financial performance

230

2019
£m

1,015

174

391

(394)

(51)

2018
£m

1,041

374

(377)

(49)

2017
£m

1,372

(288)

356

(379)

(47)

1,361

1,262

1,184

National Grid Annual Report and Accounts 2018/19Additional InformationUK Gas Transmission

Year ended 31 March

Adjusted operating profit

Movement in regulatory ‘IOUs’

Deferred taxation adjustment

RAV indexation (average 3% long-run inflation)

Regulatory vs IFRS depreciation difference

Fast money/other

Pensions

Performance RAV created

Regulated financial performance

Regulated financial performance – US Regulated

Year ended 31 March

Adjusted operating profit

Major storm costs

Timing

US GAAP pension adjustment

Regulated financial performance

Total regulated financial performance

Year ended 31 March

UK Electricity Transmission

UK Gas Transmission

US Regulated

UK Gas Distribution

Total regulated financial performance

2019
£m

303

179

(42)

(10)

(33)

(30)

443

2019
£m

1,724

(223)

(80)

1,514

2019
£m

1,361

443

1,514

n/a

3,318

2018
£m

487

(91)

173

(29)

(11)

(32)

(16)

499

2018
£m

1,698

142

(136)

(73)

2017
£m

511

(120)

168

(21)

(14)

(53)

(11)

499

2017
£m

1,713

–

(199)

(155)

1,631

1,359

2018
£m

1,262

499

1,631

n/a

3,392

2017
£m

1,184

499

1,359

864

3,906

US timing, major storms and movement in UK regulatory ‘IOUs’ – Revenue related to performance in one year may be recovered in later
years. Revenue may be recovered in one year but be required to be returned to customers in future years. In the UK, this is calculated as the
movement in other regulated assets and liabilities.

Performance RAV – UK performance efficiencies are in-part remunerated by the creation of additional RAV which is expected to result in future
earnings under regulatory arrangements. This is calculated as in-year totex outperformance multiplied by the appropriate regulatory capitalisation
ratio and multiplied by the retained company incentive sharing ratio.

Pension adjustment – Cash payments against pension deficits in the UK are recoverable under regulatory contracts. In US Regulated operations,
US GAAP pension charges are generally recoverable through rates. Revenue recoveries are recognised under IFRS but payments are not
charged against IFRS operating profits in the year. In the UK this is calculated as cash payments against the regulatory proportion of pension
deficits in the UK regulated business, whereas in the US, it is the difference between IFRS and US GAAP pension charges.

3% RAV indexation – Future UK revenues expected to be set using an asset base adjusted for inflation. This is calculated as UK RAV multiplied
by 3% (long-run RPI inflation assumption).

UK deferred taxation adjustment – Future UK revenues are expected to recover cash taxation cost including the unwinding of deferred
taxation balances created in the current year. This is the difference between: (a) IFRS underlying EBITDA less other regulatory adjustments; and
(b) IFRS underlying EBITDA less other regulatory adjustments less current taxation (adjusted for interest tax shield) then grossed up at full UK
statutory tax rate.

Regulatory depreciation – US and UK regulated revenues include allowance for a return of regulatory capital in accordance with regulatory
assumed asset lives. This return does not form part of regulatory profit.

Fast/slow money adjustment – The regulatory remuneration of costs incurred is split between in-year revenue allowances and the creation of
additional RAV. This does not align with the classification of costs as operating costs and fixed asset additions under IFRS accounting principles.
This is calculated as the difference between IFRS classification of costs as operating costs or fixed asset additions and the regulatory classification.

231

National Grid Annual Report and Accounts 2018/19Additional Information | Other unaudited financial informationOther unaudited
financial information continued

Regulated asset base
The regulated asset base is a regulatory construct, based on predetermined 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.

‘Total Regulated and other balances’ includes the under- or over-recovery of revenues that National Grid’s UK regulated businesses target to
collect in any year, which are based on the regulator’s forecasts for that year. Under the UK price control arrangements, revenues will be adjusted
in future years to take account of actual levels of collected revenue, costs and outputs delivered when they differ from those regulatory forecasts.
In the US, other regulatory assets and liabilities include regulatory assets and liabilities which are not included in the definition of rate base within
that jurisdiction, including working capital where appropriate.

The investment in ‘NGV and other businesses’ includes net assets excluding pensions, tax and items related to the UK Gas Distribution sale.

As at 31 March
(£m at constant currency)

UK Electricity Transmission

UK Gas Transmission

US Regulated

Total regulated

NGV and other businesses

Total Group regulated and other balances

RAV, rate base or
other business assets

Total Regulated
and other balances

2019

13,537

6,155

17,565

37,257

2,815

40,072

20181

13,045

5,960

16,087

35,092

2,300

37,392

2019

13,302

6,112

19,463

38,877

2,657

41,534

20181

12,676

5,855

18,007

36,538

1,957

38,495

1. Figures relating to prior periods have, where appropriate, been re-presented at constant currency, for opening balance adjustments following the completion of the UK regulatory reporting
pack process in 2018, and finalisation of US balances.

US rate base and Total Regulated and other balances for 31 March 2018 have been restated in the table above at constant currency. At actual
currency the values were £14.9 billion and £16.7 billion respectively.

Other business assets and other balances for NGV and Other businesses for 31 March 2018 have been restated in the table above at constant
currency. At actual currency the values were £2.2 billion and £1.9 billion 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 targets for Group RoE are 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% RPI inflation, less adjusted interest and adjusted taxation
divided by equity investment in assets:
• adjusted interest removes interest on pensions, capitalised interest in regulated operations and unwind of discount rate on provisions;
• adjusted taxation adjusts the Group taxation charge for differences between IFRS profit before tax and regulated financial performance less

adjusted interest; and

• 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.

232

National Grid Annual Report and Accounts 2018/19Additional InformationYear 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 other

Opening goodwill

Opening capital employed

Opening net debt

Opening equity

Return on Equity

UK and US regulated RoE

Years ended 31 March

UK Electricity Transmission

UK Gas Transmission

US Regulated

2019
£m

3,318

424

3,742

(3)

(1,037)

(488)

(34)

2,220

35,045

–

2,298

5,852

43,195

(24,345)

18,850

11.8%

2018
£m

3,392

255

3,647

238

(1)

(980)

(639)

2,292

32,446

512

1,787

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

–

1,987

5,984

48,406

(27,346)

21,060

11.7%

Regulatory
Debt: Equity
assumption

60/40

62.5/37.5

Avg. 50/50

Achieved
Return on Equity

Base or Allowed
Return on Equity

2019
%

13.7

9.5

8.8

2018
%

13.1

10.0

8.9

2019
%

10.2

10.0

9.4

2018
%

10.2

10.0

9.4

UK regulated RoE
UK regulated RoEs are a measure of how the businesses are performing against the assumptions used by our UK 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%. They are calculated by dividing elements of
out/under-performance versus the regulatory contract (i.e. regulated financial performance disclosed above) 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 the APP scheme.

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 RoE
US regulated RoE is a measure of how a business is performing against the assumptions used by the US regulators. This US operational return
measure is calculated using the assumption that the businesses are financed in line with the regulatory adjudicated capital structure and allowed
cost of debt. 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 the APP scheme.

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 for the RoE measure has been presented, as we do not believe it would be practical to reconcile
our IFRS balance sheet to the equity base.

The table below shows the principal differences between the IFRS result of the US Regulated segment, and the ‘return’ used to derive the
US RoE. In outlining these differences, we also include the result for the US regulated Operating Companies (OpCo) entities aggregated under
US GAAP.

In respect of 2017/18 and 2016/17, this measure is the aggregate operating profit of our US OpCo entities’ publicly available financial statements
prepared under US GAAP. For 2018/19, this measure represents our current estimate, since local financial statements have yet to be prepared.

233

National Grid Annual Report and Accounts 2018/19Additional Information | Other unaudited financial informationOther unaudited
financial information continued

Underlying IFRS profit for US regulated segment

Weighted average £/$ exchange rate

Underlying IFRS operating profit for US regulated segment

Adjustments to convert to US GAAP as applied in our US OpCo entities

Adjustment in respect of customer contributions

Pension accounting differences1

Environmental charges recorded under US GAAP

Storm costs and recoveries recorded under US GAAP

Other regulatory deferrals, amortisation and other items

2019
£m

1,594

2018
£m

1,704

2017
£m

1,514

$1.305

$1.358

$1.277

2019
$m

2,081

(50)

(10)

(117)

(112)

121

2018
$m

2,313

(151)

(101)

(106)

(113)

(146)

2017
$m

1,931

(96)

(120)

(91)

(57)

(29)

Results for US regulated OpCo entities, aggregated under US GAAP2

1,913

1,696

1,538

Adjustments to determine regulatory operating profit used in US RoE

Levelisation revenue adjustment

Net other

Regulatory operating profit

Pensions1

Regulatory interest charge

Regulatory tax charge

Regulatory earnings used to determine US RoE

(48)

(1)

1,864

1,818

1,654

(95)

(457)

(345)

967

–

(395)

(520)

903

2018
$m

10,092

8.9%

–

(391)

(499)

764

2017
$m

9,267

8.2%

1. Following a change in US GAAP accounting rules, an element of the pensions charge is reported outside operating profit with effect from 2019.
2. Based on US GAAP accounting policies as applied by our US regulated OpCo entities.

US equity base (average for the year)

US RoE

2019
$m

11,045

8.8%

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 regulated asset base, for regulated entities), net of the growth in net 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 30. Value Added per share is calculated by dividing Value Added by the weighted average number of shares (3,386 million) set out in
note 8 on page 126.

Asset growth
Asset growth is the annual percentage increase in our RAV and rate base and other business balances (including the assets of NGV and NGP)
calculated at constant currency.

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 NGV, UK property and other assets and US other assets) is funded through debt. Comparative amounts as at March 2018 are
presented at historical exchange rates and have not been restated for opening balance adjustments.

As at 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)

234

2019
£m

19,692

17,565

2,815

40,072

26,529

66%

64%

2018
£m

19,059

14,762

2,167

35,988

23,002

64%

61%

change

2% pts

3% pts

National Grid Annual Report and Accounts 2018/19Additional InformationAdditional Information

Commentary on consolidated financial statements
for the year ended 31 March 2018

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 2019
financial review included on pages 25 – 33.

Share of post-tax results of joint ventures and associates before
exceptional items for the year ended 31 March 2018 of £44 million
was £19 million lower, principally due to a lower contribution
from BritNed.

Exceptional items and remeasurements relating to taxation for 2017/18
comprised a net credit of £1,473 million, including a £1,515 million
decrease in net deferred tax liabilities due to the reduction in the US
corporate tax rate.

Adjusted earnings and EPS from continuing operations
Adjusted earnings and EPS, which exclude exceptional items and
remeasurements, are provided to reflect the Group’s results on
a ‘business performance’ basis, described further in note 5. 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 227 for a reconciliation of adjusted
basic EPS to EPS.

£2,141m

56.9p

£1,915m

55.3p

£1,675m

£1,812m

48.0p

43.9p

£1,465m

38.4p

13/14

14/15

15/16

16/17

17/18

Adjusted earnings
Adjusted EPS

The above earnings performance translated into a decrease in
adjusted EPS in 2017/18 of 1.6p (3%).

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)

2017/18

2016/17

% change

1.36

1.40

1.28

1.25

12%

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.

Analysis of the income statement for the year ended
31 March 2018
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 £284
million, including a reduction in pass-through costs, the absence of
the recovery of outstanding timing balances in 2016/17 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 £57 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 £28 million lower
than 2016/17 at £1,001 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.

Tax
The tax charge on profits before exceptional items and
remeasurements of £584 million was £82 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 £633 million of exceptional
costs primarily associated with environmental charges and gas
holder decommissioning, offset by a net £68 million gain on
remeasurement of commodity contracts.

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.

235

National Grid Annual Report and Accounts 2018/19Additional Information

Commentary on consolidated financial statements
for the year ended 31 March 2018 continued

Analysis of the adjusted operating profit by segment for
the year ended 31 March 2018
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 2016/17’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 2016/17.

Capital expenditure decreased by £28 million compared with 2016/17
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 2016/17. 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 2016/17, 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
2016/17, 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
2017/18 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 incurred £142 million of major storm costs in 2017/18 including
a sequence of heavy storms this winter that caused substantial
damage to our electricity networks. Separate from these costs,
regulated controllable costs were broadly in line with 2016/17 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 in 2017/18, £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
2016/17 at £341 million, including the start of construction of a second
French Interconnector and increases in smart meter installations in
the UK.

236

National Grid Annual Report and Accounts 2018/19Summary consolidated financial information

Additional 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 2019. It should be read in conjunction with the consolidated financial statements and related notes, together with the
Strategic Report. The information presented below is adjusted for the matters described in footnote 1 for the years ended 31 March 2019, 2018,
2017, 2016 and 2015 and has been prepared under IFRS as issued by the IASB and as adopted by the EU1.

Summary income statement (£m)

2019

20181

2017

20162

20152

14,933

15,250

15,035

13,212

13,357

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 on disposal of UK Gas Distribution after tax

3,442

(572)

2,489

(648)

2,001

(499)

(45)

–

3,457

2,500

160

1,916

1,633

145

(143)

–

Total profit for the year

1,514

3,551

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 ($)

2,055

(544)

–

1,511

44.3

44.1

44.6

44.4

3,386

3,401

46.52

47.34

0.607

0.618

2,060

1,490

–

3,550

102.5

102.1

102.6

102.1

3,461

3,476

128.965

45.93

1.751

0.624

3,773

(565)

2,807

(623)

2,141

(331)

606

5,321

7,794

2,747

(273)

5,321

7,795

48.1

47.9

207.1

206.2

3,763

3,780

43.51

128.65

0.555

1.642

1. Items previously reported for 2018 have been re-presented to reflect our investment in Quadgas HoldCo Limited being presented as a discontinued operation in the current year.
2. Items previously reported for 2015–2016 have been re-presented to reflect UK Gas Distribution being presented as a discontinued operation.
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

2019

55,017

7,946

62,963

(9,129)

(34,465)

(43,594)

19,369

19,349

2018

52,106

6,681

58,787

(8,697)

(31,242)

(39,939)

18,848

18,832

2017

52,266

13,574

65,840

(10,511)

(34,945)

(45,456)

20,384

20,368

2016

52,622

6,312

58,934

(7,721)

(37,648)

(45,369)

13,565

13,555

3,214

2,417

(88)

1,813

576

116

–

3,034

(83)

2,208

(248)

1,665

(172)

516

–

2,594

2,011

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

2015

49,058

6,031

55,089

(7,374)

(35,741)

(43,115)

11,974

11,962

237

National Grid Annual Report and Accounts 2018/19

Definitions and glossary of terms

Additional Information

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 abbreviations. We summarise the principal ones below, together with an explanation of their meanings. The descriptions
below are not formal legal definitions. Alternative and Regulatory Performance Measures are defined on pages 225 – 234.

A
Adjusted interest
A measure of the interest charge of the Group, calculated by making
adjustments to the Group reported interest charge.

Adjusted net debt
A measure of the indebtedness of the Group, calculated by making
adjustments to the Group reported borrowings, including adjustments
made 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 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.

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 these terms 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 that purchased a 61% equity interest in Cadent on
31 March 2017. It comprised 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.

B
BAME
Black, Asian, and Minority Ethnic (being the UK term used to refer
to members of non-white communities).

bps
Basis point (bp, 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.

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 2019,
which was $1.31 to £1. The average rate for the year ended 31 March
2018 was $1.36 to £1, and for the year ended 31 March 2017 was
$1.28 to £1. Assets and liabilities as at 31 March 2018 have been
retranslated at the closing rate at 31 March 2019 of $1.30 to £1.
The closing rate for the balance sheet date 31 March 2018
was $1.40 to £1.

BEIS
The Department for Business, Energy and Industrial Strategy, the UK
Government department responsible for business, industrial strategy,
and science and innovation with energy and climate change policy.

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.

Board
The Board of Directors of the Company (for more information
see pages 48 – 49).

CPIH
The UK Consumer Prices Index including Owner Occupiers’
Housing Costs as published by the Office for National Statistics.

BritNed
BritNed Development Limited.

C
Cadent
Cadent Gas Limited, the former UK Gas Distribution business. A 61%
equity interest in it was sold to the Consortium on 31 March 2017, and
the sale of the remaining 39% is expected to complete in June 2019.

Called-up share capital
Shares (common stock) that have been issued and have been
fully paid for.

Capital tracker
In the context of our US rate plans, this is a mechanism that allows 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.

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.

Deposit agreement
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.

238

National Grid Annual Report and Accounts 2018/19Additional Information | Definitions and glossary of terms

Depositary
Depositary means The Bank of New York Mellon acting as depositary.

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, we exclude contracts for the sale or purchase of
commodities that are used to supply customers or for our own needs
from this definition.

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.

Directors/Executive Directors/Non-executive Directors
The Directors/Executive Directors and Non-executive Directors of the
Company, whose names are set out on pages 48 – 49 of this document.

Financial year
For National Grid this is an accounting year ending on 31 March.
Also known as a fiscal year.

Distributed Energy Resources (DER)
Decentralised assets, generally located behind the meter, covering
a range of technologies including solar, storage, electric vehicle
charging, district heating, smart street lighting and combined
heat and power.

FRS
A UK Financial Reporting Standard as issued by the UK Financial
Reporting Council (FRC). It applies to the Company’s individual
financial statements on pages 189 – 195, which are prepared in
accordance with FRS 101.

Dollars or $
Except as otherwise noted, all references to dollars or $ in this Annual
Report and Accounts relate to the US currency.

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.

E
Earnings per share (EPS)
Profit for the year attributable to equity shareholders of the Company
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 (KPI), based on the percentage of
favourable responses to certain indicator questions repeated in each
employee survey. It is used to measure 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. We
use employee engagement as a measure of organisational health in
relation to business performance.

Employee resource group (ERG)
A group of employees who join together in their workplace based
on shared characteristics or life experiences.

Estate Tax Convention
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 (EU) is the economic and political union of 28
member states located in Europe, currently including the UK. As at the
date of this document, the timing for Brexit and the UK’s leaving the EU
is not confirmed.

Exchange Act
The US Securities Exchange Act 1934, as amended.

G
Grain LNG
National Grid Grain LNG Limited.

Great Britain
England, Wales and Scotland.

Group Value Growth
Group Value Growth is Group-wide value added expressed as a
proportion of Group equity. See page 234 for an explanation of
Value Added.

GW
Gigawatt, an amount of power equal to 1 billion watts (109 watts).

GWh
Gigawatt hours, an amount of energy equivalent to delivering 1 billion
watts (109 watts) of power for a period of one hour.

GWm
Gigawatt month, 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 that uses
direct current for the bulk transmission of electrical power in contrast
to the more common alternating current systems.

239

National Grid Annual Report and Accounts 2018/19Definitions and glossary of terms continued

Additional Information

I
IAS or IFRS
An International Accounting Standard (IAS) or International Financial
Reporting Standard (IFRS), 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.

Injury frequency rate (IFR)
The number of lost time injuries (LTIs) per 100,000 hours worked in a
12-month period.

Interest cover
A measure used by the credit rating agencies, calculated as FFO plus
adjusted interest divided by adjusted interest.

J
Joint venture (JV)
A company or other entity that is controlled jointly with other parties.

K
KEDLI
KeySpan Gas East Corporation, also known as KeySpan Energy
Delivery Long Island.

KEDNY
The Brooklyn Union Gas Company, also known as KeySpan Energy
Delivery New York.

KPI
Key performance indicator.

kV
Kilovolt, an amount of electric force equal to 1,000 volts.

kW
Kilowatt, an amount of power equal to 1,000 watts.

kWm
Kilowatt month, an amount of energy equivalent to delivering 1kW of
power for a period of one month.

L
LIPA
The Long Island Power Authority.

LNG
Liquefied natural gas is 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 that leads to an
injury where the employee or contractor normally has time off for 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, and was reported to the supervisor at
the time and was subject to appropriate investigation.

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, an amount of power equal to 1 million watts.

N
National Grid Metering (NGM)
National Grid Metering Limited is National Grid’s UK regulated
metering business.

National Grid Partners (NGP)
The Company’s new unit, established in November 2018 as the venture
investment and innovation arm of the Group.

National Grid Ventures (NGV)
The Company’s division that operates 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.

New UK Corporate Governance Code (the New Code)
Revised guidance, issued by the Financial Reporting Council in
2018 and having effect for financial years commencing on or after
1 January 2019.

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.

National Transmission System (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 is part of the UK Gas and
Electricity Markets Authority (GEMA) that 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.

240

National Grid Annual Report and Accounts 2018/19Additional Information | Definitions and glossary of terms

P
Paris Agreement
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.

Regulatory IOUs
Net under/over-recoveries of revenue from output related allowance
changes, the totex incentive mechanism, legacy price control cost
true-up and differences between allowed and collected revenues.

Retained cash flow (RCF)
A measure of the cash flows of the Group used by the credit rating
agencies. It is calculated as funds from operations less dividends paid
and costs of repurchasing scrip shares.

Revenue decoupling
Revenue decoupling is the term given to the elimination of the
dependency of a utility’s revenue on the volume of gas or electricity
transported. The purpose of decoupling is to eliminate the disincentive
a utility otherwise has, to encourage energy-efficiency programmes.

RIIO
Revenue = Incentives + Innovation + Outputs, the regulatory
framework for energy networks issued by Ofgem.

RIIO-T1
The regulatory framework for transmission networks that was
implemented in the eight-year price controls that started on 1 April
2013.

RIIO-T2
The regulatory framework for transmission networks 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. Examples
include 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 is 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.

Share premium
The difference between the amount shares are issued for and the
nominal value of those shares.

Stranded cost recoveries
The recovery of historical generation-related costs in the US, related to
generation assets that are no longer owned by us.

STEM
Science, technology, engineering and mathematics.

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.

241

National Grid Annual Report and Accounts 2018/19Definitions and glossary of terms continued

Additional Information

T
Taxes borne
Those taxes that represent a cost to the Company and are reflected in
our results.

U
UK
The United Kingdom, comprising England, Wales, Scotland and
Northern Ireland.

Taxes collected
Those taxes that are generated by our operations but 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.

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.

Tax Convention
Tax Convention means the income tax convention between the US
and the UK.

UK GAAP
Generally accepted accounting principles in the UK. These differ
from IFRS and from US GAAP.

Tonne
A unit of mass equal to 1,000 kilogrammes, equivalent to
approximately 2,205 pounds.

US
The United States of America, its territories and possessions,
any state of the United States and the District of Columbia.

Tonnes carbon dioxide equivalent (CO2e)
A measure of greenhouse gas emissions in terms of the equivalent
amount of carbon dioxide.

US GAAP
Generally accepted accounting principles in the US. These differ
from IFRS and from UK GAAP.

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, an amount of energy equivalent to delivering 1 billion
watts of power for a period of 1,000 hours.

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 growth
Value growth is the value added expressed as a proportion of Group
equity. See page 234.

242

National Grid Annual Report and Accounts 2018/19Want more information or help?

Additional Information

Equiniti
For queries about ordinary shares:

The Bank of New York Mellon
For queries about American Depositary Shares:

0800 169 7775
This is a Freephone number from landlines within the UK,
mobile costs may vary. Lines are open 8.30am to 5.30pm,
Monday to Friday, excluding public holidays. If calling from
outside the UK: +44 (0) 121 415 0931. Calls from outside
the UK will be charged at the applicable international rate.

Visit help.shareview.co.uk for information regarding your
shareholding (from here you will also be able to email a
query securely).

National Grid Share Register
Equiniti
Aspect House
Spencer Road, Lancing
West Sussex BN99 6DA

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:
https://investors.nationalgrid.com

Beware of share fraud
Investment scams are often sophisticated and difficult to spot.
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 unsolicited communication, please check the company
or person contacting you is properly authorised by the Financial
Conduct Authority (FCA) before getting involved. Be ScamSmart
and visit www.fca.org.uk/scamsmart. You can report calls from
unauthorised firms to the FCA by calling 0800 111 6768.

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 sometimes get lost in the post; and
• 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.

Financial calendar
The following dates have been announced or are indicative:

Electronic communications
Please register at www.shareview.co.uk.

16 May 2019

2018/19 full-year results

30 May 2019

Ordinary shares and ADRs go ex-dividend for
2018/19 final dividend

31 May 2019

Record date for 2018/19 final dividend

6 June 2019

Scrip reference price announced

17 July 2019
(5pm London time)

Scrip election date

29 July 2019

2019 AGM

14 August 2019

2018/19 final dividend paid to qualifying shareholders

14 November 2019

2019/20 half-year results

27 November 2019

ADRs go ex-dividend for 2019/20 interim dividend

28 November 2019

Ordinary shares go ex-dividend for 2019/20
interim dividend

29 November 2019

Record date for 2019/20 interim dividend

5 December 2019

Scrip reference price announced

16 December 2019
(5pm London time)

15 January 2020

Scrip election date for 2019/20 interim dividend

2019/20 interim dividend paid to qualifying
shareholders

Dividends
The Directors are recommending a final dividend of 31.26 pence per
ordinary share ($2.0256 per ADS) to be paid on 14 August 2019 to
shareholders on the register as at 31 May 2019. Further details on
dividend payments can be found on page 33. If you live outside the
UK, you may be able to request that your dividend payments are
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 2018/19
final dividend will be charged a fee of $0.02 per ADS by the Depositary
prior to the distribution of the cash dividend.

It only takes a few minutes to register – just have your 11-digit
Shareholder Reference Number to hand. You will be sent a PIN
number to complete registration.

Once you have registered, you can elect to receive your shareholder
communications electronically.

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
Postal share dealing: Equiniti offer our European Economic Area
resident shareholders a share dealing service by post. This service
is available to private shareholders resident within the European
Economic Area, the Channel Islands or the Isle of Man. If you hold your
shares in CREST, you are not eligible to use this service. For more
information and to obtain a form, please visit www.shareview.co.uk
or call Equiniti on 0800 169 7775.

Internet and telephone share dealing: Equiniti also offer telephone
and online share dealing at live prices. For full details together with
terms and conditions, please visit www.shareview.co.uk. You can call
Equiniti on 03456 037037 for further details, or to arrange a trade.
Lines are open Monday to Friday, 8.00am to 4.30pm for dealing,
and until 6.00pm for enquiries.

ShareGift: If you only have a small number of shares that 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 or
contact Equiniti.

Individual Savings Accounts (ISAs): ISAs for National Grid
shares are available from Equiniti. For more information, call
Equiniti on 0345 300 0430 or visit www.shareview.co.uk/ISA.

243

National Grid Annual Report and Accounts 2018/19

Cautionary statement

Additional Information

This document comprises the Annual Report and Accounts for the
year ended 31 March 2019 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 – 90
and 196-237 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 RIIO-T2 price controls
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; 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.

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 212 – 215 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.

244

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