Annual Report
and Accounts
2019/20
Bring Energy to Life
National Grid plc Annual Report and Accounts 2019/20
Bring Energy to Life
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.
Highlights
Contents
We have continued to make strategic and
operational progress while maintaining
excellent safety levels 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
58.2
58.9
56.2
11.7
11.8
12.3
44.3
36.8
19/20
18/19
17/18
19/20
18/19
17/18
19/20
18/19
17/18
* From continuing operations
Group operational highlights
Group safety
performance (lost
time injuries per
100,000 hours worked
in 12-month period)
Scope 1 and 2
greenhouse
gas emissions
(CO2 equivalent,
m tonnes)
0.12
0.10
0.10
7.0
6.9
6.5
Employee
engagement (%)
77
77
73
19/20
18/19
17/18
19/20
18/19
17/18
19/20
18/19
17/18
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Further reading
Online report
The PDF of our Annual Report and
Accounts 2019/20 includes a full
search facility. You can find the
document by visiting the ‘About us’
section at www.nationalgrid.com/
about-us/annual-report-and-
accounts.
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More detail
Throughout this report you can
find links to further detail within
this document.
The job that can’t wait
We believe that people are the key
to unlocking a clean energy future,
and we ran a recruitment campaign
in the UK to attract talent to ‘the
job that can’t wait’. We were
delighted with the response to the
campaign, which saw a sevenfold
increase in applications to our
Advanced Apprenticeship scheme
and started a national conversation
about the importance of STEM at
all stages of education.
1. Strategic Report
2
Business model
8
Chairman’s Statement
10
Chief Executive’s review
12
Evolving our strategy for the future
13
Our business environment
16
Delivering against our strategy
18
Progress against our strategy
21
Innovation
22
Internal control and risk management
26
Viability statement
28
Financial review
38
Principal operations – UK
Principal operations – US
40
National Grid Ventures and other activities 42
Our stakeholders
– Section 172(1) statement
Our commitment to being
a responsible business
Task Force on Climate-related
Financial Disclosures (TCFD)
44
48
57
2. Corporate Governance
Letter from the Chairman
Performance evaluation
Audit Committee
Finance Committee
Safety, Environment and
Health Committee
Nominations Committee
Diversity
Statement of application of and
compliance with the UK Corporate
Governance Code 2018
Index to the Directors’ Report
and other disclosures
Directors’ Remuneration Report
3. Financial Statements
Statement of Directors’ responsibilities
Independent auditor’s report
4. Additional Information
The business in detail
Internal control and risk factors
Shareholder information
Other disclosures
Other unaudited financial information
Commentary on consolidated
financial statements
Definitions and glossary of terms
Want more information or help?
Cautionary statement
64
74
76
82
83
84
85
86
87
88
109
110
217
227
231
236
240
250
253
257
258
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
2019/20 was $1.29 to £1 (2018/19: $1.31 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 240 – 249. These measures are highlighted
with the symbol above.
1
National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Business model
What we do
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.
Our core regulated businesses
National Grid owns a range of high-quality,
long-term assets. All our assets share low
commercial risk profiles and are typically
supported by long-term contracts or stable
regulatory arrangements. Our core regulated
businesses in the UK and US generated over
90% of our operating profits this year.
Our other energy businesses
Supporting the core regulated businesses, we
also own a diverse and growing portfolio of
commercial energy businesses also operating
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.
Our business is organised into segments,
based upon activity and location
Key:
UK Electricity Transmission
UK Gas Transmission
US Regulated
National Grid Ventures and other activities
Statutory operating profit (%)
47%
12%
32%
9%
Underlying operating profit (%)
34%
12%
47%
7%
RAV, rate base and other assets (%)
31%
14%
46%
9%
2
Core regulated
UK Electricity
US Regulated
Electricity
Our UK electricity business comprises both
the electricity transmission network (ET) and
a separate Electricity System Operator (ESO).
Electricity
We own and operate transmission facilities
across upstate New York, Massachusetts,
New Hampshire, Rhode Island and Vermont.
Our electric locations by state:
• New York;
• Massachusetts; and
• Rhode Island.
9,109
miles (14,659 kilometres) of overhead lines
(2018/19: 8,881 miles; 14,293 kilometres)
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.
35,682
miles (57,425 kilometres) of gas pipelines
(2018/19: 35,560 miles; 57,228 kilometres)
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.
We also facilitate the connection of assets
to the transmission system.
4,481
miles (7,212 kilometres) of overhead lines
(2018/19: 4,481 miles; 7,212 kilometres)
1,391
miles (2,239 kilometres) of underground cable
(2018/19: 1,437 miles; 2,312 kilometres)
Our role as 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 (GB). While
we operate as the ESO across GB, we do
not own the transmission assets in Scotland.
Although the ESO is legally separate from
ET, its results are still presented to the Board
as part of the UK segment, and therefore
no change has been made to our
reportable operating segments.
UK Gas Transmission
Our UK Gas Transmission (GT) business
comprises both the gas transmission assets
and an integrated gas system operator.
We also own and operate the high-pressure
gas transmission network in Great Britain.
We are responsible for making sure GB’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.
4,740
miles (7,630 kilometres) of high-pressure pipe
(2018/19: 4,760 miles; 7,660 kilometres)
National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Business Model: How we operate
National Grid Ventures
and other activities
National Grid Ventures (NGV) manages our diverse
portfolio of energy businesses that are similar to
our core regulated operations. This operating
segment represents our main strategic growth
area outside our regulated core business, in
competitive markets across the US and the UK.
The business comprises commercial operations
in energy metering, electricity interconnectors,
renewables development and the storage of
liquefied natural gas (LNG) in the UK.
In July 2019, we completed the acquisition of
Geronimo, a leading wind and solar developer in
North America. In December, we announced the
start of commercial operations at the 200 MW
Crocker Wind Farm in Clark County, South Dakota.
Our other activities that do not form part of any
of the segments over the page 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 (NGP).
8.8 million
metering: gas meters (2018/19: 9.9 million)
1,000,000 m3
liquefied natural gas tank space (2018/19: 1,000,000 m3)
7.8 GW
GW capacity of interconnectors in operation
or under construction (2018/19: 7.8 GW)
3
National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Business model
How we operate
Our operating model creates a
stable, reliable and sustainable
business that benefits our
What we rely on
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 workforce and assets; and
• our talented workforce that ensures energy
is moved efficiently and reliably.
We also rely on maintaining strong relationships
with a number of key external stakeholder groups
to ensure we best meet their needs and maintain
our licence to operate (see pages 44 – 47).
How we do business
We combine these input factors with our technical
expertise to achieve our purpose and vision.
We do all of this in accordance with our culture
and 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.
The value we create
We deliver value for our stakeholders, which include our
customers, as well as financial value for shareholders, by:
• operating within our regulatory frameworks thereby
being efficient and compliant;
• performing well against our regulatory incentives,
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.
4
National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Business Model: How we operate
What we rely on
Internal resources
Strong relationships
Physical assets
We own electricity and gas networks that
transmit energy over long distances from
where it is produced. In the US, we also
distribute it locally to where it is consumed.
These networks are built to last for many
decades. Such networks account for the vast
majority of our asset base. We also own three
subsea electricity interconnectors, with three
further subsea cables under construction as
well as LNG importation facilities.
c.£4.8bn p.a.
average investment in our assets over the past
three years (on a constant currency basis)
Funding
We fund our business through a combination
of shareholder equity and long and short-term
debt. We maintain an appropriate mix of the
two and manage financial risks prudently.
63%
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 assist and develop the many stakeholder
relationships that are crucial to the Company’s
success.
As we support the changes needed to build
a net zero energy system, we are providing
employment opportunities and supporting
our workforce to build the skills necessary
to support these changes. By attracting and
retaining the people capable of supporting
the journey to net zero in the energy sector
we can help the places we operate reach
their emissions targets.
23,069
employees worldwide
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 through a small portion
of their energy bills, pay to use our networks.
In the US, we have nearly seven million
residential and commercial accounts.
Contractors and suppliers
We work in partnership with our supply chain,
which 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 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 the
Company. 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 and the activities we
undertake are intrinsically hazardous; therefore
our operations have to comply with laws and
regulations set by government agencies
responsible for health, safety and
environmental standards.
5
National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Business model
How we operate continued
How we do business
Our technical expertise
Our culture
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 continue in our
efforts to develop a well-respected and trusted
reputation for engineering excellence.
We combine our extensive skills, knowledge
and capabilities with innovation to ensure our
core competencies continuously create value
for shareholders and wider stakeholders alike.
National Grid’s culture is the values, beliefs
and behaviours that characterise our
Company and guide our practices.
We are working hard to progress as an
inclusive employer that values diversity. The
knowledge and expertise of our employees
is fundamental to our business success.
To enable our employees to reach their full
potential, we are investing in building the
skills and capabilities of our workforce.
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.
We maintain high standards of ethical
business. We also promote the right
behaviours that are aligned with our values and
culture by recognising our employees through
a company-wide reward system that supports
both what they achieve and how they have
delivered their achievements.
9.0%
Asset growth 2019/20
Strategy and risk
management
Engineering
The skills of our engineers are vital in delivering
safe, efficient, reliable and sustainable
performance for all our businesses. Our
workforce strives to:
• 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.
Capital delivery
We add value for 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.
£5.4bn
Capital investment in 2019/20
Innovation
Our innovation activities are focused on
future-proofing the business for our customers
as the energy landscape changes. Collaboration
is crucial as we search for new technologies and
techniques that will support this transformation.
We are therefore investing in technologies
through our venture capital and innovation arm,
NGP, while continuing to partner with industry,
academia, and policymakers.
£134m
Fair value of NGP portfolio at 31 March 2020
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.
As the energy industry continues its transition
to a cleaner future, we have evolved our strategy
so that it clearly articulates our priorities, while
positioning our business to continue to deliver
long-term economic benefits in the regions in
which we operate.
The evolved strategy is founded on four
strategic pillars which are to:
• enable the energy transition for all;
• deliver for our customers efficiently;
• grow our organisational capability; and
• empower our people for great performance.
We have well-established governance structures
that include comprehensive risk management,
strong controls and financial discipline.
Further reading
About our strategy on pages 16 – 17 and
how it is evolving on page 12.
Internal control and risk management on
pages 22 – 25.
Our commitment to being a responsible
business on pages 48 – 56.
6
National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Business model: How we operate
The value we create
For stakeholders and wider society
Society
We provide the energy systems that help
economies grow in a sustainable, affordable
and reliable way. We continue to work with
partners and customers on the technologies
required to make net zero a reality.
70%
Current reduction in greenhouse emissions
Investors
We aim to be a low-risk investment proposition,
focused on generating shareholder value
through dividends, supported by asset growth
from investing in essential assets under primarily
regulated market conditions, to servicing
long-term sustainable consumer-led demands.
11.7%
Group Return on Equity 2019/20
Our employees
We seek to create an environment in which our
workforce can make a positive contribution,
develop their careers and reach their full potential.
77%
Employee engagement score 2019/20
Customers
By delivering the energy they need and dealing
with them in a transparent and responsive
manner, we seek to build trusted relationships
with our customers as we deliver services
to them.
Economic, health, safety and
environmental regulators
Through constructive, transparent engagement
and consistent, reliable delivery of our
commitments, we build trust with our regulators.
0.12 LTIs
(per 100,000 hours worked in a 12-month period)
Group safety performance 2019/20
Contractors and suppliers
We maintain responsible and efficient supply
chains in which our interests and those of
our suppliers are aligned with the interests
of customers.
£6.0bn
Group supply chain spend 2019/20
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 an
important role to play in sustainability, enabling
the transition to a low-carbon future.
£47m
Contribution to communities 2019/20
Further reading
Our Key Performance Indicators (KPIs) on pages 18 – 20
Our stakeholders on pages 44-47
Our commitment to being a responsible business
on pages 48 – 56
Financial value
The chart below describes how our businesses create financial value.
Further detail can be found in our financial review on pages 28 – 37.
1
2
3
Revenue and profits
The vast majority of our revenues are set in accordance with our
regulatory agreements (see pages 28 – 37), and are calculated based
on a number of factors including investment in network assets;
performance against incentives; allowed returns on equity and cost
of debt; and customer satisfaction.
Cash flows
Our ability to convert revenue to profit and cash is important. By managing
our operations efficiently, safely and for the long term, we generate
substantial cash flows. Coupled with long term debt financing, as well as
additional capital generated through the take up of the shareholder scrip
dividend option during periods of higher investment, we are able to invest
in growing our asset base and finance returns through dividends.
Investment
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.
Capital allocation
Our capital allocation is determined by the need to fund our businesses
to deliver the investment and outputs required under our regulatory
frameworks in the UK and US. The investments we make in our
business seek a balance between growth and cash flow.
7
National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Chairman’s Statement
“National Grid evolved
its vision to reflect our
belief that a responsible
business needs to
stand for something
beyond profit.”
As we all continue to face the unprecedented
challenge of COVID-19 around the world,
National Grid remains committed to doing the
right thing for our employees, our customers,
our communities and our suppliers.
Our priority throughout this period continues to be keeping our key
workers safe. We have well-developed procedures in place to manage
the effect of a pandemic, and we swiftly and successfully implemented
our business continuity plans which allowed us to maintain safe working
environments for our workforce. That ensured they could play their part
in this time of global crisis by keeping our networks running and the
energy flowing to hospitals, care homes, businesses and homes. I would
like to thank them for their dedication and resilience.
In mid-April, after our financial year end, the extraordinary resilience of
our US employees also enabled power to be quickly restored to over
200,000 customers across New York, Rhode Island and Massachusetts
following extensive storm damage, despite the additional constraints
arising from COVID-19.
Some short-term delay to our capital programmes was inevitable given
the lockdown measures put in place by governments to control the
spread of COVID-19. However, work on our capital programmes has
now resumed. In the US, the suspension of debt collection and customer
termination activities across our jurisdictions resulted in lower customer
collections and additional provisioning for bad and doubtful debts.
We are now working diligently to prepare for the future, in which the safety
of our employees and customers will remain of paramount importance.
The Board’s ongoing priorities are our societal responsibilities, the
balance sheet and liquidity. In support of these and in recognition of the
uncertainty surrounding the evolution of the pandemic, we are keeping
a number of scenarios under regular review. Our current base case
assumes a scenario of continued gradual easing of restrictions in all our
operating territories, to keep the spread of the pandemic under control.
Against that backdrop, I am pleased that we are able to use our
extensive resources to help support the communities we serve to get
through and recover from the pandemic. Although the Company has
implemented a number of measures to limit discretionary external
spending, it has not implemented pay reductions, furlough or
compulsory redundancy schemes.
Sir Peter Gershon
Chairman
Final dividend of
32.00
p per share proposed to be paid on 19 August 2020
Full year dividend (pence per share)
48.57 47.34
45.93
44.27*
43.34
19/20
18/19
17/18
16/17
15/16
* excludes a special dividend of 84.375p.
The Annual General Meeting will be held on
27 July 2020. This year, it will be held behind
closed doors as a result of the COVID-19
pandemic. More details on how to watch a
presentation following the AGM can be found
on our website: www.nationalgrid.com.
8
National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Chairman’s Statement
Nationalisation
The Board spent a lot of time in 2019 considering our response to the
Labour Party’s proposal to nationalise nearly all of National Grid’s UK
assets. We implemented some measures which would have strengthened
our ability to secure a fair price for these assets, should the Labour Party
have won the General Election. Although the Conservative Party secured
a majority at this election, we note that the new Labour leader pledged
his support for common ownership in a range of sectors, including
energy, in his leadership campaign.
The path to net zero
Our focus for the future is to lead the way in the delivery of a clean
energy transition. During the year, National Grid committed to reduce
its own emissions to net zero by 2050, and we also saw significant
legislative action towards a net zero ambition.
The UK and States of New York and Massachusetts each established
legally-binding targets to achieve net zero emissions by 2050, while
Rhode Island maintained its legally-binding target of 80% emission
reductions by 2050. We welcome this progress as it is clear that
decarbonisation and the pathway to reach net zero will remain one of the
major long-term issues facing our economies.
While the pathway to decarbonisation of electricity has been identified,
there is no obvious solution for the decarbonisation of heat. We continue
to work with governments and others in the industry to identify solutions,
but it is clear that the right regulatory and policy frameworks will be
critical to enable a fair and affordable transition to a clean energy future.
Reviews
Although the power outage in Great Britain on 9 August 2019 caused
significant disruption, the Board is pleased that the subsequent internal
and external reviews confirmed our systems operated correctly and
identified the failure of certain generators and railway assets as the cause.
The external reviews highlighted a number of recommendations which
we hope are implemented to improve the resilience of the overall GB
infrastructure in future. The Board believes it is important that the current
external review of the structure of the ESO results in a stable outcome
which best enables the UK to meet its 2050 net zero commitment.
The Board was deeply concerned that the actions taken to implement
a moratorium on new gas connections in downstate New York resulted in
strong public criticism of the Company by Governor Cuomo, significant
reputational damage, difficulties for customers, and a settlement with
the New York Public Services Commission. The Board commissioned
two external reviews which have provided valuable insights into how our
US business got into this situation and a number of recommendations,
which are being implemented at pace by our new President of the US
business. As we continue working with the Public Services Commission
to find a long-term solution, we will ensure our approach to meeting
increasing demand for energy in New York State takes account of all
key stakeholders.
Financial reporting
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 32, 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 240 – 249.
How we generate and preserve value
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.
As is usual practice, the Board reviews this policy regularly, taking into
account a range of factors including expected business performance
and regulatory developments. Following stress testing of the finances
of the Company against a number of potential COVID-19 scenarios, the
Board has decided to recommend a final dividend in line with this policy.
Accordingly, the Board has recommended an increase in the final dividend
to 32.00p per ordinary share ($2.0126 per American Depository Share).
If approved, this will be paid on 19 August 2020 bringing the full year
dividend to 48.57p per share ($3.0799 per American Depository Share),
an increase of 2.60% over the 47.34p per share for the financial year
ended 31 March 2019.
We completed the sale of our remaining stake in Cadent in June 2019
for £1,965 million, and the proceeds were reinvested in the business to
support the significant capital investment programme and asset growth
across the Group over the medium term.
Regulatory issues
We continue an open dialogue with our regulators. In the UK, we submitted
our final business plans for RIIO-2 in December 2019.
We are resuming settlement negotiations in the KEDNY/KEDLI rate
cases in the interest of agreeing on a multi-year rate plan that mitigates
bill impacts for our customers while allowing us to maintain safe and
reliable service, advance our clean energy goals, and earn a reasonable
return. If we are unable to reach a negotiated settlement, the rate cases
will continue to a litigated outcome at which time we would then plan to
file a new multi-year rate case proposal.
In light of the financial hardships that our customers have experienced
from the COVID-19 pandemic, Niagara Mohawk Power Corporation
(NMPC) delayed the implementation of certain previously approved rate
increases. NMPC also delayed the filing of a rate case this spring and
are exploring options including an extension of the current rate plan
or a rate case filing later this summer.
Appointments and Board changes
US Executive Director Dean Seavers stood down from the Board for
personal reasons in November 2019. The Board appointed Badar Khan,
who was already a member of the Executive Committee, as interim
President of the US business. Following a thorough process to identify
a permanent successor, which included both internal and external
candidates, I’m pleased that Badar was confirmed as President of the
US business in April 2020.
The Board was pleased to welcome two new Non-executive Directors
during the year – Jonathan Silver, who has a strong background in
finance and US government policy, and Liz Hewitt, who brings extensive
business, financial and investment experience from international
companies across a range of sectors.
You can read more details of all our Board members’ experience
and the Committees they support in the Corporate Governance review
on pages 63 – 107.
Culture and Responsible Business
The recent tragic death of George Floyd and the subsequent widespread
expressions of public support for the Black Lives Matter movement have
reinforced the right of everyone to equal opportunities, to have their voice
heard, and to feel safe as they go about their daily life. These recent
events highlight that companies have a vital role to play in addressing
inequality and injustice wherever we see it, encouraging our employees
to speak up, challenge and act where something does not feel right.
We will not condone intolerance of any kind at National Grid.
The Board hosted several meetings throughout the year with a
cross-section of employees to ensure the voice of the employee
was heard by the Board, and was pleased with the effectiveness
of these sessions.
During the year, National Grid evolved its vision to reflect our belief that
a responsible business needs to stand for something beyond profit.
We have a responsibility to demonstrate our commitment to society
more broadly, and that’s why our vision is to be at the heart of a clean,
fair and affordable energy future.
Our purpose and values are key to our Company’s DNA. In particular,
they have enabled all our employees to respond with huge commitment,
agility and flexibility to the challenges of COVID-19. I am immensely
grateful to them.
Sir Peter Gershon
Chairman
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National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Chief Executive’s review
“ National Grid has
a leading role to play
in ensuring a cleaner
energy future in all
our regions.”
by 2040. Rhode Island maintained a legally binding target to reduce
carbon emissions by 80% by 2050 and the Governor signed an
executive order targeting 100% renewable electricity by 2030.
At National Grid, we have evolved our strategy and vision to reflect our
belief that we have a responsibility to ensure that the energy future we
help to shape is one where everyone shares the benefits and where
we enable the communities we serve to deliver a clean transition.
That’s why our vision is to be at the heart of a clean, fair and
affordable energy future. You can read more about our new strategy
on page 12. Throughout this report, we have reported our performance
against the strategy that was effective until 31 March 2020, and which
is set out on pages 16 – 17.
During the year, we committed to reducing our own emissions to net
zero by 2050 and to continue to facilitate the industry-wide transition
to a low-carbon future.
We worked with the UK government to accelerate the transition to
electric vehicles to cut carbon emissions and improve air quality for
communities the length and breadth of the country. We were pleased to
see a £500 million commitment in the 2020 Budget to support the rollout
of new rapid-charging hubs so drivers are never more than 30 miles
from a charging point.
We are developing the world’s first zero-carbon industrial cluster in the
UK’s Humber region in partnership with Drax and Equinor. The Zero
Carbon Humber consortium will use carbon capture and storage to
create a zero-carbon region by 2040.
We are developing hydrogen trials and investing to understand the impact
of hydrogen on our existing gas assets to address the decarbonisation
of heat. While gas clearly has a role to play for many years to come, we
understand the urgency of finding a solution to decarbonise heat in a
way that is fair, affordable and not overly disruptive to consumers.
We’ve started construction work on our Viking Link interconnector,
connecting Great Britain and Denmark, and continue construction on
IFA2 and North Sea Link. Our interconnectors have a key role to play
in a decarbonised energy sector, enabling the most efficient use of
renewable energy across Europe.
Delivering for investors
During the year, we spent more than £5 billion growing and enhancing
our US and UK energy networks, through a combination of organic
growth, reinvesting the proceeds from the Cadent sale and innovative
financing methods such as our green bond. We achieved this strong
performance while also delivering a high level of asset growth of 9%.
The proposed final dividend of 32.00p, which is still subject to shareholder
approval, brings our full year dividend to 48.57p, an increase of 2.60%
and in line with our policy. This is covered 1.2 times by our underlying
earnings per share of 58.2p.
Safety
In the UK and NGV businesses, we’ve seen a strong safety performance
this year. We continue to focus our efforts on developing a generative
safety culture, and in the UK we’ve seen our lowest ever number of lost
time injuries.
In the US, we’re focused on improving safety and ensuring it is front
of mind for all our workforce after seeing a deterioration in performance
over the last 12 months. Tragically, we also had a fatality in the US where
one of our colleagues was struck by a vehicle which had driven into a
clearly marked out area where he was working.
John Pettigrew
Chief Executive
We’ve made strong progress against our
strategic priorities despite a challenging year.
The far-reaching and devastating global consequences of COVID-19
cannot be underestimated and we all owe a debt of gratitude to those
who have been on the frontline fighting this virus across the world.
At National Grid, our role throughout this crisis has been to play our part
in keeping the lights on and the gas flowing. Keeping the networks
running, keeping our customers connected to the power they rely on
and expect, and protecting the communities where we live and serve
has never been more important.
I’m immensely proud of the way all our workforce have responded to this
pandemic, and particularly those who go out to work every day in the
field and in our control rooms to ensure we continue to power hospitals,
homes and society during such a challenging period.
We took immediate action to lessen any financial hardship our
customers may have faced, suspending debt collection and customer
termination activities across our US jurisdictions, and delaying planned
bill increases in New York State. We have also strengthened customer
support activities to help lower-income customers manage their energy
bills during the crisis and beyond.
We donated a total of £600,000 to the National Emergencies Trust, the
Trussell Trust and University Hospitals Birmingham Charity in the UK,
and $1 million to community-based charities across our US jurisdictions
to provide help and support to the people that needed it most. We also
introduced a programme of practical help, encouraging our thousands
of UK employees to volunteer for half a day per week with charities
working on the COVID-19 response.
We are planning additional support activities for the communities we
serve for the post COVID-19 environment, including employability skills
support and helping small and local businesses in our supply chain.
We recognise that the impact of COVID-19 will be felt over the long term,
and we are committed to applying our Responsible Business principles
for our workforce, our communities and the economy in our response.
While the end of the financial year was dominated by responding to the
COVID-19 pandemic, 2019 saw uncertainties particularly in the UK where
the external environment was dominated by Brexit and a General Election.
Leading the clean energy transition
It’s been a year of significant progress in the clean energy transition
with climate change rising up the agenda for the public and politicians
alike. We’ve seen climate change protests across the world, and an
increased commitment from governments to take action, including in
the geographies in which we operate. The UK legislated for net zero
emissions by 2050, and New York and Massachusetts each set an
economy-wide limit of net zero carbon emissions by 2050, with New
York additionally legislating the target of 100% carbon-free electricity
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National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Chief Executive’s review
Delivering for our customers
Customer performance remains a key metric and I’m pleased we’ve
seen a steady increase in our customer satisfaction scores for GT and
ET. However, our scores were below target in the US, our metering
business and the ESO. We have identified areas of improvement and
action has already started to address some of these.
IFA2, the 149-mile (240-kilometre) subsea cable between Great Britain
and France is on track to become operational later this year, and work
also continues on our North Sea Link to Norway which is expected to
be operational in 2021/22. Construction is now underway on Viking
Link, the 472-mile (760-kilometre) subsea cable between Great Britain
and Denmark.
Optimising performance
We set out our ambition last year to increase efficiency in our UK and US
regulated businesses, becoming more responsive to customers’ needs,
while also delivering sustainable cost savings. This year we reduced our
costs in both regions by significantly more than our £50 million UK target
and the $30 million US target through a variety of measures including
careful contract management and negotiation and improving workforce
productivity. Removing these costs from our business will help to
minimise future increases to customer bills.
In the UK Transmission businesses, the weighted average Return on
Equity of 12.4% was maintained and within the 200 to 300 basis points
outperformance that we committed to under RIIO-T1. In the US, Return
on Equity of 9.3% represented 99% of our allowed return, benefiting
from revenues from rate case increases in addition to control of our
costs and was up 50 basis points on last year. Our Group Return on
Equity was marginally lower at 11.7%, down 10 basis points from last
year, partly due to lower income from our other businesses.
National Grid has continued to deliver world-class reliability and responded
well to storms in the US. We were recognised with the EEI’s Emergency
Assistance Award and the Emergency Recovery Award for our fast and
effective response to storms in 2019. In the UK, we regret the disruption
caused by the power outage on 9 August 2019 but welcomed the
Ofgem and government reports into the incident which confirmed that
the outage was not caused by National Grid infrastructure. We were
pleased that they agreed with our view that, given an increasingly complex
and challenging energy network, it is appropriate to carry out a review of
the Security and Quality of Supply Standards.
We were pleased with the stakeholder group support we received for
the RIIO-2 business plans we submitted in December 2019. The Open
Hearings expected in April 2020 were delayed due to COVID-19, but we
continue to work with Ofgem and all our stakeholders to find the most
appropriate framework to balance the needs of our customers and
investors. You can read more about the composition of the stakeholder
group on pages 45 – 47.
We welcomed Ofgem’s decision to apply the Strategic Wider Works model
as part of the RIIO-T1 framework to the Hinkley Seabank Connection
Project, which we believe is in the best interests of consumers.
In the US, we secured our Massachusetts Electric rate order with a
five-year performance-based mechanism and an allowed Return on
Equity of 9.6%.
In New York, we enforced a temporary gas moratorium in May 2019,
which led to a very challenging period for all our stakeholders. We found
operational solutions to resolve the issue for the short term and have
now submitted our report into long-term solutions to the State of New
York Public Services Commission (NYPSC). We are listening to our
stakeholders’ concerns and will continue to work with the NYPSC as
we try to resolve the issue in the coming months.
Growing our assets
We completed the sale of our remaining stake in Cadent for £1,965 million
and reinvested the proceeds in our capital investment programme.
In the US, we invested £3.2 billion in the year on projects including the
completion of the Gardenville substation upgrade in West Seneca, New
York, which will supply an affordable and reliable source of renewable
power for decades to come. We delivered asset growth in the US of
12.2%, up 300 basis points on the prior year.
In the UK, we awarded the £400 million tunnelling contract for our London
Power Tunnels 2 project in December 2019. This 20.85-mile
(33.5-kilometre), £1 billion link will provide resilience across South London
from Wimbledon to Crayford and is due to complete in 2028. Another
highlight has been the completion of the tunnelling for our Feeder 9
project under the Humber, which has been a critical investment in our
gas infrastructure. These are just two of the projects which contributed to
capital investment during the year of £1.3 billion and asset growth of 4%.
Our interconnector portfolio continues to grow with new subsea power
links to France, Norway and Denmark planned over the next four years.
Evolving to a low-carbon future
In our role at the heart of the clean energy transition, we have continued
to take action to enable decarbonisation across our business.
We completed our acquisition of Geronimo, a leading wind and solar
developer in North America, in July 2019. Since the acquisition,
Geronimo has announced the commercial operation of its 200 MW
Crocker Wind Farm in South Dakota, along with the signing of a power
purchase agreement with Basin Electric Power Cooperative for its
128 MW Wild Springs solar project, also in South Dakota.
The ESO is also preparing to enable a green energy future and by 2025,
aims to have transformed the operation of Great Britain’s electricity
system so it can operate with zero carbon.
I was pleased to note that 2019 was the cleanest year on record for the
UK as, for the first time, the amount of zero carbon electricity used by
the UK’s homes and businesses outstripped that from fossil fuels for a
full 12 months.
As the UK energy industry continues to evolve, we are working closely
with the government and regulator to review the most appropriate
structure for the ESO following legal separation last year.
Unlocking future potential
I was pleased that our focus on diversity was recognised with Forbes
naming us one of the Best Employers for Diversity 2020, and the US
Human Rights Company Foundation awarding us Best Place to Work
LGBTQ Equality. Our environmental commitments were also recognised
with a place for the fourth consecutive year on the CDP A list, which
names the world’s most pioneering companies leading on environmental
transparency and performance.
National Grid continues to focus on being a responsible business and
increasing our positive impact on society. The unprecedented global
challenge of COVID-19 demonstrated more than ever the importance of
being a responsible business, and we concentrated our efforts on how best
to support our workforce and our communities through this difficult time.
In addition to the immediate volunteering programme we set up to
support those who needed it most during the COVID-19 pandemic,
we partner with charity organisations to encourage and enable our
employees to volunteer with them. In early 2020, we launched a
community investment strategy which will provide access to skills
development for 45,000 people across the US and the UK, as we help
to equip future generations to be part of the clean energy transition.
We invest millions every year in training to ensure our workforce have
the skills to meet the changing needs of a net zero economy, as well
as supporting STEM-related activities for tens of thousands of
schoolchildren around our key infrastructure projects.
Looking ahead
I’d like to end by expressing my gratitude to all our workforce who have
worked tirelessly to achieve the performance we have delivered this
year, and to ensure the networks keep running as efficiently and safely
as ever through unprecedented times.
John Pettigrew
Chief Executive
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11
National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Evolving our strategy for the future
We have evolved our strategy in order to better reflect our purpose and
in response to our business environment.
The evolved strategy reflects a belief that we have a responsibility to
ensure that the energy future we help to shape is one where everyone
shares its benefits. We will continue to connect people to the energy
they need for the lives they lead, safely, reliably and securely.
Our purpose
Our purpose remains to Bring Energy to Life, providing the heat,
light and power people and businesses rely on and supporting local
communities to prosper.
Vision
To be at the heart of a clean,
fair and affordable energy future
Values
Every day we…do the right thing,
find a better way and make it happen
Strategy
National Grid builds, owns and
operates large-scale, long-life energy
assets primarily in networks and
renewables that deliver fair returns and
high societal value. The Company’s
portfolio of largely regulated assets in
stable geographies is underpinned by
a strong and efficient balance sheet.
Bring Energy
to Life
Priorities
Enable the energy transition for all
Deliver for customers efficiently
Grow organisational capability
Empower colleagues for great performance
Our vision
National Grid stands for more than profit. The Company is committed
to making a positive contribution to society, whether that’s helping
the young people of today to become the energy problem-solvers
of tomorrow, supporting customers to use energy more efficiently,
or tackling climate change.
Deliver for customers efficiently
Providing safe, reliable and affordable energy for customers around the
clock, ensuring operational excellence and fiscal discipline in everything
National Grid does, building productive partnerships with regulators and
policymakers, and unlocking real value for customers and the
communities they live and work in.
That’s why the Company’s vision is to be at the heart of a clean, fair
and affordable energy future, ensuring everyone benefits from the
energy transition, that bills are not a burden for individuals or families,
and that no one gets left behind.
Grow organisational capability
Anticipating and adapting to changes in the energy sector in faster and
smarter ways, remaining at the cutting edge of engineering and asset
management, and innovating more sustainable energy solutions.
Our strategy
National Grid’s strategy is to build, own and operate large-scale, long-life
energy assets primarily in networks and renewables that deliver fair
returns and high societal value. The Company’s portfolio of high-quality,
low-risk assets in stable geographies is underpinned by a strong and
efficient balance sheet.
This strategy sets the bounds of National Grid’s business and will ensure
it is set up to play a leading role in the energy future. It will be delivered
through four priorities.
Our priorities
We have four strategic priorities to make our purpose possible and
achieve our vision.
Enable the energy transition for all
Fully decarbonising the electricity grid through modernisation, increased
flexibility and by connecting renewables quickly and efficiently. Leading
the way in the decarbonisation of gas, investing in a range of solutions
like renewable natural gas, blending hydrogen in networks and carbon
offsetting. Decarbonising transport by building electricity network
flexibility and supporting charging infrastructure.
Empower colleagues for great performance
Building diverse and inclusive teams that reflect the communities the
Company serves, attracting the best talent, prioritising learning and
developing the skills needed now and in the future to accelerate the
energy transition.
Our values
As a purpose-led, responsible business, how National Grid delivers for
its customers and communities is as important as what is delivered.
Colleagues right across the Company, in the United Kingdom and the
United States, are committed to:
Doing the right thing, keeping customers, communities and the wider
public safe.
Finding a better way, delivering excellent performance at best value
and innovating new energy solutions.
Making it happen, with a strong focus on excellence, efficiency
and results.
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Strategic Report
Our business environment
As well as managing through the COVID-19
pandemic, our societal ambition remains to
achieve net zero, with emphasis on fairness
and affordability, digitalisation and
decentralisation during the transition.
2019/20 developments
Our response
Climate risk continues to rise up the
corporate agenda, against the rapidly
evolving societal attitudes to climate
change and the role of energy companies
in leading and meeting net zero
commitments.
At least 9 countries have legislated or
are in the process of legislating, and
at least 112 countries are discussing
legislating, net zero targets by 2050
or sooner.
UK
The UK became the first major
economy to commit to a legally
binding target of net zero emissions
by 2050.
2019 was the cleanest year on record
for the UK as, for the first time, the
amount of zero carbon electricity used
by the UK’s homes and businesses
outstripped that from fossil fuels for
a full 12 months.
US
The states of New York and
Massachusetts each set an
economy-wide limit of net zero carbon
emissions by 2050, with at least 85%
of reductions from their states’ own
energy and industrial emissions (and
the remainder possible via carbon
offsets). New York additionally
legislated the target of 100%
carbon-free electricity by 2040.
Rhode Island maintained a legally
binding target to reduce carbon
emissions by 80% below 1990 levels
by 2050, and Governor Raimondo
signed an executive order targeting
100% renewable electricity by 2030.
Across the wider US, one in three
Americans – more than 110 million
people – live in a community which
has committed to or achieved a 100%
clean electricity target.
• In both the UK and US, we are taking important steps to address the future
of heat, engaging across the industry and with government and regulatory
bodies. In the US, we collaborated with industry partners to develop
interconnection guidelines for renewable natural gas (RNG) in New York
State that seek to facilitate growth of this clean energy resource. In the UK,
we have conducted three feasibility studies on the potential role of
hydrogen and how our networks could facilitate its uptake.
• For our UK regulated business, the single biggest contributor towards
our net zero target to reduce is Sulphur Hexaflouoride (SF6), and we will be
leaders here. In the US, through our gas pipeline replacement programme,
we replaced 460 miles (740 kilometres) of pipe in 2019/20, reducing
greenhouse gas emissions from the unintended release of natural gas.
• The ESO has agreed contracts with five parties, worth £328 million over
a six-year period, in a world-first approach to managing the stability of the
electricity system. This aids our ambition to be able to operate GB’s
electricity system carbon free by 2025.
• The world’s largest offshore wind farm, the 1.2 GW Hornsea Project One
wind farm, is connected to our electricity transmission network and first
generated power in 2019.
• In January 2020, we announced the launch of our first ever green bond.
Raising approximately €500 million, the bond’s proceeds will finance or
refinance UK electricity transmission projects with environmental benefits.
• We have partnered with Drax Group and Equinor to explore how large-scale
carbon capture usage and storage and hydrogen could convert the UK’s
Humber region into the world’s first net zero carbon industrial cluster.
• New York Transco, a joint venture in which NGV is a partner, was selected
to develop the New York Energy Solution transmission project, unlocking
renewable energy upstate for customers downstate.
• NGV completed its acquisition of Geronimo, a leading US onshore wind and
solar developer, to establish a foundation on which to grow a large-scale
renewables business, such as the 200 MW Crocker Wind Farm in South
Dakota. The £209 million deal also secured a controlling share of a 379 MW
solar and wind generation joint venture, Emerald Energy Venture LLC
(‘Emerald’), with Washington State Investment Board.
• Interconnectors played an important role in helping the UK use more zero
carbon electricity than that from fossil fuels, and we are currently
constructing three additional interconnectors: IFA2 to France, North Sea
Link to Norway and Viking Link to Denmark.
• We believe our gas businesses can facilitate the transition to a
decarbonised gas system and are investing in solutions such as renewable
natural gas and blending hydrogen in our network.
• We have committed to meeting the Task Force on Climate-related Financial
Disclosures (TCFD) recommendations in full (see pages 57 – 62).
Net zero
2019 was a turning point for climate
action, from protests on the street to
legislative action. Governments
around the globe are considering
and acting on ambitious carbon
reduction targets.
70%
National Grid’s reduction in carbon
emissions since 1990.
Net zero
by 2050
Our net zero commitment is to reduce
our own greenhouse gas emissions to
net zero by 2050.
The future of heat
In the absence of both clear
technology roadmaps and public
policy frameworks that underpin the
decarbonisation of heat by 2050, we
currently continue to believe that our
gas assets will have useful purposes
beyond 2050. In common with the
Committee on Climate Change’s Net
Zero report in May 2019, we believe
that the future of heat is one reliant on
multiple technologies and fuels, with
an enduring role for natural gas.
However, the scale and purpose
for which the networks will be used
is dependent on technological
developments and, crucially,
policy choices of governments
and regulators.
The future of heat is uncertain, and its
decarbonisation is reliant on relatively
nascent technologies, such as
hydrogen and carbon capture usage
and storage, as well as biogas and
heat pumps. These new and evolving
technologies will need to be used in
new contexts and on a scale that has
not yet been demonstrated. We
do not believe that any of these
technologies can, in the next 30 years,
reach sufficient scale to represent an
existential threat to our gas businesses.
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National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Our business environment
continued
2019/20 developments
Our response
UK
Cost of energy remains a key priority,
evidenced by 2019’s implementation
of the energy price cap, and two of
Ofgem’s key priorities: to ‘drive down
prices’ and ‘decarbonise to deliver a
net zero economy at the lowest cost
to consumers’.
With the government’s recent
commitment to net zero, industry
participants and advisors, such as
the Committee on Climate Change,
have stressed the importance that
net zero is delivered in a fair way as
a ‘just transition’ across society, with
vulnerable consumers protected.
US
Energy costs remain a priority for
consumers and regulators, and
fairness is high on the agenda in the
discussion about decarbonisation
pathways and their associated costs.
State regulators continue to explore
innovative regulatory frameworks
that reward utilities for managing
customer bill impacts, while delivering
desired regulatory and policy
outcomes. This includes adjustments
to the cost-of-service model that
are more forward-looking, and which
establish new shareholder incentives
for cost efficiency.
UK
Last year 29% of generation was
connected at the distribution network
level or behind-the-meter. The July
2019 Future Energy Scenarios (FES)
document suggested that by 2050
this could rise to 58%. This is driven
by new technology and business
models enabling solutions such as
solar panels, electric vehicles and
battery storage to be more accessible
to all consumers.
US
Distributed energy resource
investments and installations
continue to grow across the US.
This includes not only small-scale
solar photovoltaics, but also electric
vehicles, distributed storage and
demand-side resources. Utilities
across the country are exploring
how to integrate these resources
into the grid, ensuring their utilisation
is effective, safe and reliable.
• 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 £603 million of savings for consumers
in the first seven years of the RIIO arrangements, excluding any share
from Cadent.
• Our £150 million Warm Homes Fund has helped over 42,000 households
suffering from fuel poverty access heating systems and become more
energy efficient. This is the largest private sector investment in energy
efficiency ever made in the UK.
• Our utility energy efficiency programmes continued to deliver excellent
results for US customers, achieving annual electricity savings equal to 3.7%
of sales in Massachusetts and 1.1% in New York. All three states that we
serve rank in the top five in energy efficiency performance nationally
according to the ACEEE.
• In response to the COVID-19 crisis, we have expanded customer support,
paused late payment collections activities, and placed a freeze on related
service cutoffs.
• In our Massachusetts Electric Company rate order, we gained approval
for our proposed five-year forward-looking ratemaking mechanism that
includes a consumer dividend and earnings sharing mechanism that
rewards efficient company performance.
• In upstate New York, we delivered an estimated $200 million in net societal
benefits in our second year of performance incentives. Such benefits
increase the affordability of energy and were achieved by reducing electric
system peak to mitigate supply costs, increasing adoption of energy
efficiency and facilitating uptake of heat pumps for beneficial electrification,
among other initiatives.
• In Albany, New York, we worked with the public transit authority to launch
four electric buses to test customer experience with the technology and
enable expansion to other fleets across our territory. This is an example of
our efforts to make electric transport options more widely accessible to all.
• We are supporting growth in distributed energy resources (DERs) in our US
service territories, where our US regulated business connected 314 MW of
generation in calendar year 2019. We also made investments in the grid to
enable future growth, including to increase distribution system capacity and
to deploy advanced communications, monitoring and controls technologies
essential to enhanced DER integration.
• We continued our partnership with leading home solar panel and battery
storage company, Sunrun, securing new contracts for grid services from
rooftop solar and storage across the US, with nearly 40 MW capacity and
ancillary services in calendar year 2019.
• Our ‘bring-your-own’ device demand response programme expanded in
Massachusetts and Rhode Island and received the Energy Storage North
America (ESNA) Innovation Award and the Peak Load Management Alliance
(PLMA) Program Pacesetter Award. It enables residential customers to
receive a financial incentive for enrolling their devices to be managed by us
to create grid flexibility.
• Since the start of financial year 2019/20, ET continues to process or has
processed 207 connection applications, of which 20% have been made for
transmission connected batteries, and a further 14% have been made up of
a new customer type, where the customer mixes their generation make-up,
for example solar with batteries.
• The ESO is working on a £10.3 million innovation project to explore how
DERs can be used to restore power in the highly unlikely event of a total or
partial blackout of the UK electricity transmission network.
Fairness and
Affordability
National Grid delivers energy safely,
reliably and affordably to the
communities we serve. As well as
affordability, we will play our role
in ensuring that no one is left behind
in the short term during the COVID-19
crisis, or in the longer-term transition
to clean energy.
#1
The US national ranking of our
Massachusetts Electric utility energy
efficiency programme by the
American Council for an Energy-
Efficient Economy (ACEEE).
3%
UK transmission network costs per
average household dual fuel bill.
Decentralisation
The energy system continues its
transition from high to low carbon.
This change coincides with a shift
to more decentralised generation,
including renewables and 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.
6 MW
48 MWh
The largest battery storage facility
in northeastern US was installed
by National Grid on the island of
Nantucket in 2019 as a flexible and
reliable alternative to undersea cables.
14
National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Our business environment
2019/20 developments
Our response
• For our digital transformation, we are adopting a Group-wide centralised
hub model supported by regional delivery. Strategy for the transformation
is formed centrally with regional autonomy.
• We expanded a personalisation platform to serve more than two million
customers in Massachusetts and Rhode Island. Advanced data and
analytics proactively identify eligible customers and present the next best
offer to individuals, increasing offer enrolment and reducing bad debt.
• ConnectNow, our ET network connections project, will improve the
customer experience of connecting to the network. Focusing on small
scale connections such as solar, storage, electric vehicle charging and data
centres, this digital platform assists customers through the application
process, providing transparency and facilitating communication.
• We are harnessing advances in digital technology and innovation to
improve business performance. For example, the ESO in collaboration with
the Alan Turing Institute has used data science and machine learning to
deliver a 33% improvement in solar forecasting. This will help the ESO run
the system more efficiently, and enable more solar capacity to be
connected and utilised.
• In 2020, the ESO launched a free Carbon Intensity application, aimed at
empowering people to make conscious decisions about how they consume
energy by showing them the greenest times of day to use electricity.
• NGP invested in Dragos, a leading cybersecurity provider of industrial
control systems and operational technology. Our cybersecurity team
conducted a pilot of Dragos’ asset identification, threat detection and
response software platform to help secure National Grid’s critical
infrastructure in the UK and US.
• Dragos was among eight new investments and six follow-on investments
made by NGP, whose portfolio at the close of the fiscal year comprised
21 investments at a fair value of £134 million ($167 million).
Case study – NGV
Our response to COVID-19 in our communities
NGV has helped the University Hospitals Birmingham (UHB) Charity to
launch a special appeal, to raise £1 million to support patients and staff
through the COVID-19 pandemic.
The donation has been used to purchase almost 400 tablet computers
that will be used by patients to help them speak to their loved ones while
they are in isolation. The tablets will be distributed across the UHB Charity’s
five hospitals, including the Nightingale Hospital, which has recently been
established at the National Exhibition Centre in Birmingham, UK.
Scan here for the full story.
In 2019, the application of digital
technologies across the energy
industry continued at pace globally.
Bloomberg New Energy Finance
tracked 379 applications, projects,
partnerships and product developments
for industrial digitalisation. This is 78%
more than in 2018, and they expect a
further increase in activity in 2020, as
positive results of digitalisation drive
its increased use.
Utility networks in all geographies
are identifying 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.
Digitalisation
Businesses and lives are being
transformed by innovations such as
artificial intelligence and virtual reality.
The energy landscape has seen many
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.
>80%
The reduction in the US call centre
volume during major storms, after
implementing proactive two-way
outage texting to improve
communications with customers
about service outages and
restoration.
Our response to COVID-19
COVID-19 is affecting countries, communities, supply chains and
markets, including the UK and our service territory in the US. Since the
World Health Organisation declared the outbreak as a pandemic on
11 March 2020, National Grid has applied UK and US Federal and State
government advice and guidance on dealing with the potential and actual
spread and impact on our business and our customers.
The Company has successfully activated its crisis management
framework which includes identifying the areas that are deemed critical
and the corresponding level of reliability and service continuity needed
to deliver normal services during the pandemic. Our plans include
continued safe and reliable service during large numbers of workforce
absence due to illness. Under government guidelines in both the UK
and the US, utility workers are identified as key/essential workers and
have been subject to specific guidance and permissions on family
arrangements and movements. We have moved to working from home
arrangements, where possible, and have also identified critical areas
including control rooms, call centres, dispatch and key sites including
generation and LNG facilities, terminals, substations and compressor
stations. For all these activities plans are in place to maintain critical
safety and maintenance activities, which includes sequestering
some employees.
Some of our work, especially in the US, requires contact with members
of the public. To safeguard our employees and the public we are
following government requirements and recommendations for social
distancing. This includes our collections, meter installations and shut-off
arrangements while continuing to provide a safe and reliable network.
We have also made arrangements to ensure that those customers with
financial difficulties who cannot make payments do not have services
cut off.
Finally, we are also working with our supply chains so that our systems
and networks have the necessary materials and parts. Our regular
engagement with government agencies and our regulators, as well
as following all advisory services regarding management of the
spread of COVID-19, is expected to continue for the foreseeable future.
15
National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Delivering against our
strategy
Our strategy in 2019/20 focused on three
strategic priorities for our business,
delivering for customers safely and
efficiently today while setting a growth
pathway for the future.
Customer first
We have a vital role to play in
enabling customers to benefit
from the changes in our industry.
The clean energy transition and
associated technological
advancements mean we can
provide our customers with a
more cost-effective service,
while leaving no-one behind.
We measure customer
satisfaction as a KPI within
each of our business segments.
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National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Delivering against our strategy
Our three strategic priorities
Examples of progress in 2019/20
1. Optimise performance
Our customers want us to be more efficient to make their
energy more affordable, so we must find ways to improve
how we run our business.
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.
• Continued the transition begun through our UK and US programmes
to leaner and more efficient operating models in the UK and US core
businesses;
• Submitted price controls for the UK electricity, gas and system
operator business as part of RIIO-2;
• Received authorisation of a new five-year rate plan for our electric
distribution companies in Massachusetts; and
• Continued embedding our Business Management System (BMS)
across the Group by publishing BMS standards through the
employee handbook, the National Grid Book, in order to increase
standardisation across business activities.
2. Grow core business
Delivering strong operational performance provides a
foundation from which we can invest in our core business
and pursue other opportunities.
In the US and UK, we continue to look for business development
opportunities that are close to our core business.
In NGV, we will build on our successful efforts to pursue opportunities
in interconnectors and large-scale renewables.
• Grew our UK and US regulated businesses capex to £5.4 billion
• In January 2020 we celebrated the completion of the new, three-mile
;
(five-kilometre) Humber Tunnel that will house a key gas pipeline
between Yorkshire and North Lincolnshire;
• Interconnectors IFA2, Viking Link and North Sea Link are under
construction and are on track to be delivered to plan; and
• Delivered the largest battery storage facility in the northeastern
US on Nantucket as a flexible alternative to undersea cables.
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.
Our preparations for the future are underway. For example, at 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, NGP is increasing our capability in new
and disruptive energy technologies to meet the changing needs of our
customers and communities.
• Following legal separation on 1 April 2019, this is the first year
the ESO operated as a separate entity from the UK electricity
transmission company, evolving for its customers and stakeholders;
• We are expanding a software platform using advanced data and
analytics to proactively identify and present offers to customers
in Massachusetts and Rhode Island;
• NGP, launched in 2018, growing with a portfolio fair value of £134m
at 31 March 2020; and
• NGV completed the acquisition of Geronimo, a developer of wind
and solar generation.
Further reading
See more on these in the Principal
Operations sections on pages 38 – 43
17
National Grid plc Annual Report and Accounts 2019/20
Strategic 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.
Performance reported in this section is based on the strategy that is
outlined on pages 16 – 17. We report our performance measures
as follows:
Link to strategy
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.
Other performance indicators
• Financial measures that result from the delivery of our strategic
priorities are set out in our financial review, on pages 28 – 37.
• Business-unit-level measures that are specific to our three strategic
priorities. These are set out within our Principal Operations review,
on pages 38 – 43.
Optimise
performance
Grow core
business
Evolve for
the future
Indicates an alternative
performance measure
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 Directors’ Remuneration Report, on pages 88 – 107.
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% each year
11.7
11.8
12.3
19/20
18/19
17/18
Customer satisfaction
We measure customer and stakeholder satisfaction, while also maintaining
engagement with these groups and improving service levels.
UK Electricity Transmission (/10)
UK Electricity System Operator (/10)
UK Gas Transmission (/10)
US Residential – Customer
Trust Advice survey (%)
Metering NPS score (index)
2019/20 2018/19
2017/18
Target
8.2
7.6
8.0
59.8
+40
7.9
–
7.8
58.7
+44
7.7
–
7.6
56.6
+39
6.9
8.1
6.9
61.6
–
Progress in 2019/20
The UK regulated businesses delivered a weighted average RoE
of 12.4%, consistent with the return achieved in the prior year.
US RoE increased to 9.3% (2018/19: 8.8%), with increased
revenues from new rates driving improved US regulatory
performance. Group RoE of 11.7% was marginally lower than
2018/19 (11.8%), with benefits arising in the prior year from the
Fulham property sale and US legal settlements.
Our UK customer satisfaction (CSAT) KPI comprises Ofgem’s
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). We have seen
a steady increase in CSAT for GT, through our efforts to
understand the impact that our actions have with a particular
focus on responding to their queries. In the first year post
separation from ESO, we have also focused on building direct
relationships with our ET customers, to understand the
experience they need us to deliver and redesigning our service
accordingly. Due to legal separation in April 2019, the scores
also reflect the independent ESO result. The ESO CSAT score
was below target for the year 2019/20 and we have identified
query response times and tailoring communications as
improvement areas for the next 12 months. Action has already
begun to take place within the value streams to address these
areas and they will form part of new insight plans for the ESO
in 2020/21.
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, has
improved over the past few years yet was below target in 2019/20.
NPS scores reported represent the Metering business. Although
the score has dropped since 2018/19, we have identified areas
of improvement, for example, making sure metering queries
raised by our customers are progressed more efficiently.
18
National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Progress against our strategy
Principal measures continued
Strategy
link
KPI and performance
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.
%
2019/20
2018/19
2017/18
UK Electricity Transmission
99.999974
99.999984
99.999984
UK Gas Transmission
99.999589
99.989632
99.996151
Progress in 2019/20
In both the UK and US, we continued to maintain high levels of
reliability on all our networks.
IFA interconnector availability was lower in 2019/20 as this was
the first year of a major refurbishment project at IFA, where we are
rebuilding the site to remain operational for the next 30 years.
US Electricity Transmission
US Electricity Distribution
IFA interconnector
BritNed interconnector
NEMO Link interconnector
99.955
99.994
91.4
98.6
96.1
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.
Target: 5–7% growth each year
99.952
99.995
93.9
98.2
–
9.0
99.953
99.995
92.6
97.8
–
7.2
5.9
Asset growth during the year was 9.0% (2018/19: 7.2%). This was
primarily driven by the accelerated US rate base growth of 12.2%
(2018/19: 9.2%) and higher levels of investment in other assets,
such as in NGP. This is combined with increased UK RAV growth
of 3.8% (2018/19: 3.6%).
Cumulative investment in delivering new
low-carbon energy sources (£m)
We invest in new low-carbon energy sources
primarily through our interconnector businesses
(North Sea Link, IFA2 and Viking Link), investments
in companies delivering low-carbon energy
sources (for example, our investment in Sunrun)
and investments into large-scale renewables
(for example, our new investment in Geronimo).
Cumulative low-carbon generation connected
to our UK network (GW)
Low-carbon generation supported by our network
to date.
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 a MW target. Current targets primarily focus
on regulatory compliance and customer need
date attainment.
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.
19/20
18/19
17/18
1,440
702
395
19/20
18/19
17/18
18
17
16
19/20
18/19
17/18
381
329
281
19/20
18/19
17/18
815
444
363
19/20
18/19
17/18
Investment in delivering new low-carbon energy sources increased
in the year by £738 million (105%). Principally from increased
investment in our interconnector projects under construction, with
IFA2 nearing completion, further progress made on North Sea Link
and the commencement of construction on Viking Link. In addition,
the acquisition of Geronimo was made in July 2019, a leading wind
and solar developer in North America.
A total of 18.3 GW of low-carbon generation is currently connected
to our network, following additional offshore wind capacity
connecting at Hornsea 1 (+800 MW) and East Anglia 1 (+680 MW).
The government’s offshore wind sector deal and continued cost
reductions observed in the latest Contracts for Difference (CfD)
allocation round, indicates further increases in capacity over the
coming years.
There has been a 17% increase in the installed capacity compared
to the previous year. Rhode Island installed a record amount of
capacity (100 MW) while the installed capacity in Massachusetts
was on par with 2018/19. Although New York experienced a
decline in customer-ready projects to interconnect, it received a
record amount of capacity (3,000 MW). The Company continues
to make progress in Massachusetts and Rhode Island to enable
greater renewable energy integration by completing area-wide
transmission and distribution studies. While non-residential
systems have represented less than 7% of connected applications,
they have accounted for 78% of the installed capacity over the last
three years.
Excluding NGP, NGV capital investment has increased in the year
by £371 million (84%). There has been increased investment in our
interconnector projects under construction, with IFA2 nearing
completion, further progress made on North Sea Link and the
commencement of construction on Viking Link. In addition, an
acquisition of Geronimo was made in July 2019, a leading wind
and solar developer in North America.
19
National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Progress against our strategy
continued
Non-financial measures
KPI
Performance
Progress in 2019/20
0.12
0.10
0.10
As at 31 March 2020, our Group lost time injury frequency rate (LTIFR) was 0.12, which is
higher than the Group target of 0.10. This is a combined employee and contractor LTI rate,
which reflects our continued focus on encouraging good safety behaviours across the
entire workforce.
19/20
18/19
17/18
77
73
77
19/20
18/19
17/18
Ethnic minorities
Women
18.3
18.1
17.9
24.7
24.3
24.6
19/20
18/19
17/18
73
54
47
19/20
18/19
17/18
53,226
41,461
35,425
19/20
18/19
17/18
7.0
6.9
6.5
70%
68% 68%
The majority of lost time injuries are a result of individual issues such as slips, trips and
falls, and soft tissue injuries from inappropriate tooling, lifting and carrying. We continue
to address these and other incidents by implementing best practice injury prevention
techniques that mitigate potential for harm factors. Although this fiscal year saw injury
challenges in our US business, where, tragically, we lost a colleague in a road traffic
accident, we will continue to focus on improving our generative safety culture.
We measure employee engagement through our employee engagement survey (EES).
The results of our 2019/20 survey, which was completed by 82% of our employees, have
helped us identify specific areas where we are performing well and those areas we need
to improve. At Group level, the overall results of the 2019/20 EES showed a positive trend
from the 2018/19 survey, with 26 questions significantly improving and just seven questions
showing a significant decline.
Our engagement score was 77%, which is four points ahead of the 2018/19 results.
During 2019/20, the representation of our female and ethnic minority groups has increased
as we continue to build our diverse talent pipeline.
We use the London Benchmarking Group measurement framework to provide an overall
community investment figure which includes education (but excludes investment in
university research projects). While we have no specific target, our overall aim is to ensure
we add value to society to enable communities to thrive.
In the UK, the overall contribution of our activities was valued at nearly £39 million. In the
US, our contribution was just over £7.5 million.
This gives us a combined Group-wide contribution of nearly £47 million. This was lower
than prior years because some events were cancelled due to COVID-19.
We measure quality (>1 hour) interactions with young people on STEM subjects. In the UK,
in 2019/20, we have had 1,707 quality interactions with young people on STEM subjects.
We had 51,519 interactions in the US. Overall we have seen a total of 53,226 interactions
with young people on STEM, an increase of 11,765.
Our Scope 1 greenhouse gas emissions for 2019/20 equate to 3.9 million tonnes of carbon
dioxide equivalent (2018/19: 4.5 million tonnes) and our Scope 2 emissions (including
electricity line losses) equate to 2.6 million tonnes (2018/19: 2.5 million tonnes). This is a
total of 6.5 million tonnes of carbon dioxide equivalent for Scope 1 and 2 emissions.
These figures include line losses and are equivalent to an intensity of around 447 tonnes
per £1 million of revenue (2018/19: 469 tonnes).
Our Scope 3 emissions for 2019/20 were 29.8 million tonnes (2018/19: 32.3 million tonnes).
19/20
18/19
17/18
Our global underlying energy use is 28,223 GWh where the UK and US are responsible for
8,112 GWh and 20,111 GWh respectively. This includes gas and electricity network losses
and fuel used for US power generation.
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, 2 and 3 emissions, are independently assured against ISO 14065 Greenhouse
Gas assurance protocol. This data complies with the UK government’s Streamlined Energy
and Carbon Reporting (SECR) requirements and is our first disclosure to comply with SECR.
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 53).
Contribution of our corporate
responsibility work (£m)
Working with communities is important for
creating shared value.
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 - Scope 1 and 2
emissions
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
80% by 2030, 90% by 2040 and net zero by
2050, compared with our 1990 emissions
of 21.6 million tonnes. The percentages in the
adjacent chart reflect a reduction in our
emissions from a 1990 baseline.
We seek to continuously improve our
environmental performance, in instances
going beyond regulatory requirements,
through implementation of our ISO 14001-
certified Environmental Management System
and Environmental Sustainability Standard.
Further reading
You can read more about the
Task Force on Climate-related
Financial Disclosures and our
wider sustainability activities and
performance on pages 57 – 62.
20
National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Innovation
In our US gas businesses, our innovation continues to prioritise
increasing public safety, protecting our workforce, reducing the cost
of the work we perform and reducing our impact on the environment.
For example, we are testing robotics to enhance existing pipelines and
reduce gas emissions and have several programmes exploring the
introduction of renewable natural gas and alternative low-carbon
heating solutions for our customers.
National Grid Partners
NGP, our dedicated corporate innovation and investment function, has
had a strong second year of operation delivering value to the Group. In
2019, we established and built our central disruptive innovation capability
while continuing to make strategic investments in our incubation and
corporate venture capital portfolios. NGP also expanded its programming
to include culture and entrepreneurial programming and founded a global
utility council branded as the ‘Next Grid Alliance’ to encourage collaboration
within our peer group on solutions for the industry. This forum of peers
allows National Grid to tap into the wealth of innovation and investment
learnings from across the industry and share our own best practices.
Our investment portfolio includes direct investments in seventeen start-up
companies and four venture funds to date with a fair value of £134m at
31 March 2020. The venture fund investments are focused on expanding
access to start-ups in key innovation regions including Israel and the
United Kingdom. We also successfully exited our positions in Pixeom
and Aporeto during 2019, providing financial returns from those investments.
NGP’s investments provide valuable insights, collaborations and
deployment opportunities that strengthen and future-proof our core
business activities. For example, we have deployed cyber detection and
response solutions from Dragos, asset management decision software
from Copperleaf, and demand response management services from
Autogrid. Several portfolio companies are in pilot on areas such as gas
infrastructure risk prevention and manhole explosion prevention.
In April 2019, we created a central innovation team, targeting disruptive
innovations and introduced design thinking, agile delivery, and lean
start-up methods to our organisation. While in its infancy the team
has explored innovation opportunities in collaboration with our core
businesses with several projects progressing into prototype stages
during 2020. This organisation is also tasked with creating centralised
innovation reporting to allow National Grid to track the value created
through its sustaining innovation efforts across the Group.
NGP has launched a series of initiatives designed to provide our employees
with the types of experiences to further foster an entrepreneurial culture
and skill set. These activities include an apprenticeship programme,
entrepreneur-led speaker series, employee immersions and sprints in
Silicon Valley, and secondments and advisory board positions within
NGP’s portfolio. These initiatives aim to provide strong training and
retention programmes to develop the next generation of entrepreneurial
leaders within the Group.
NGP has delivered strategic and financial value to the core businesses
and looks forward to delivering on our mandate to invest in valuable
start-ups, to tackle innovation and business development projects that
can improve our business, and to act as a catalyst for change across
the broader Group.
More details can be found at www.ngpartners.com including details of each
of our portfolio investments.
Further reading
Further details about our R&D and
innovation activities can be found in
Additional Information on pages 237 – 239.
Our innovation activities are focused
on future-proofing the business for our
customers as the energy landscape
changes. Collaboration is a key part
of our approach to innovation.
Innovation in our UK principal operations
Our commitment to net zero continues to shape our innovation strategy.
Our innovation portfolio enables us to identify and target carbon savings
for our own operations and we are also developing innovation projects to
ensure we are prepared and play a pivotal role in the decarbonisation of
energy for power and heat, transport and industry. We also search for
new technologies and techniques to improve the way we work.
We place a high value on collaboration to inform, generate ideas and
solve the challenges we see ahead of us. We work in collaboration with
technical organisations, academia and suppliers in the energy sector
that align with our goals and objectives.
The ESO has been innovating to ensure we continue to provide secure,
affordable and sustainable supplies of energy in a fast-changing world.
Our innovation programme is used to learn and then accelerate market
development. The year ahead will see even more projects generated by
the ESO, 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 UK electricity transmission network is continuing with innovation
investments. We are focused on reducing our carbon footprint from our
construction activities and seeking ways to reduce the greenhouse gas
impact from gas-insulated assets. We have engaged extensively with
regional stakeholders in our Zero 2050 South Wales project to better
understand the changes in decarbonising society and our role as a
transmission business as our energy landscape evolves. We have made
progress in the construction of our transmission accelerator at Deeside,
recognising the need to test and adopt new technologies faster, and we
continue to research technologies to enhance our cyber security and
further digitise our grid infrastructure.
Similarly, our UK gas transmission business has led our research to better
understand the role of transitioning to a hydrogen future. Our Hydrogen
Portfolio of projects aims to identify the opportunities and potential
challenges to hydrogen injection into the National Transmission System
(NTS). Working in collaboration with industry we aim to fill the gaps in the
vision for a national hydrogen deployment. The portfolio includes safety
and integrity reviews, demonstrating how existing networks can
transition from gas to hydrogen.
Additionally in the UK, NGV has been active in establishing consortia
to better integrate offshore renewables, and to commercially deploy
hydrogen and Carbon Capture and Storage technologies targeting
industrial decarbonisation in the Humber and London regions.
Innovation in our US principal operations
Similar to the UK, our US innovation approach is designed to enable our
networks and customer services to adapt to a low-carbon, distributed and
digitised future. We focus innovation and Research and Development
(R&D) on the advancement of products, systems and work methods that
prepare the way for more efficient and safer networks that further
proliferate the integration of renewables.
In Massachusetts, we continue to explore how best to integrate solar
energy, storage and electric vehicle charging into the distribution
network. Our Solar Phase III programme comprises an additional
14 MW of photovoltaics (PV) and 5.8 MW of energy storage. The aim
is to analyse the impact of future high levels of distributed renewables
on distribution systems and in this stage the programme will also test
the economic and technical benefits of localised balancing from energy
storage. Several New York Reforming the Energy Vision (REV) pilots
are also underway, testing market solutions in support of Distribution
System Operation (DSO) developments, smart city opportunities and
renewable heating technologies. These projects are providing the
knowledge and experience to evolve our systems for the grid of the future.
21
National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Internal control and risk management
The Board is committed to protecting and
enhancing our reputation and assets, while
safeguarding the interests of our shareholders.
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, strategy and
business model as described on pages 2 – 7.
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. 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
26 – 27). The five-year period was carefully considered in light of the
current COVID-19 pandemic. The Board considered, with appropriate
assumptions, that this period remained appropriate for our stable
regulated business model. The Board, Executive Committee and other
leadership teams discuss the results of the annual principal risk testing
at the end of the year.
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 our 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. These are collated and reported at
functional and regional levels on a regular cadence. The most
significant risks for the UK, US and NGV businesses are highlighted
in regional risk profiles and reported to the Executive Committee and
the Board through a formal process twice a year. Additionally, the
Executive Committee and the Board may also identify and assess
other principal risks. These risks and any associated management
actions are cascaded through the organisation as appropriate.
Emerging risks
We have an established process to identify and monitor emerging risks,
which is designed to provide sufficient warning of concerns which may
impact the business. The process is designed to ensure adequate steps
are taken to prevent the occurrence or manage the impact of surprises.
The Enterprise Risk Management (ERM) process monitors management
information from a wide variety of sources to take into account
consideration of emerging risks. This includes:
• Top-down analysis which is performed through the annual risk
management process of broad thinking to consider the biggest
impacts for the Company.
• Facilitation of risk discussions across our various businesses. Most
importantly, we review various sources of management information,
internal and external factors to identify potential emerging risks.
• Monitoring the external market to consider other emerging risks
within the regions we operate in. The following diagram shows our
approach and inputs used to analyse the emerging risks.
22
Continuous cycle to identify and manage emerging risks:
1
2
3
External Criteria
• Determine priority
indicators
• Update watch list
of emerging risks
Scenario Analysis
• Perform scenario
analysis on
emerging risks
• Assess cumulative
impact of risk
clusters
• Identify gaps in
capability to
manage/monitor
risks
Source and
Accountability
• Determine what
areas of the
organisation are
impacted by
emerging risks
• Assign
accountability
for monitoring and
reporting these
emerging risks
5
4
Prioritise
• Preliminary
assessment
Identification
• External vs.
internal analysis
• Velocity of onset
and time frame
occurrence
• Periodic vs.
continuous
assessment
Changes during the year
The Company’s risk profile has been developed drawing upon the
most significant risks across our business profiles. With the addition
of principal risks addressing climate change and our response to the
COVID-19 pandemic, 10 principal risks are now carried at Executive
Committee and Board level as detailed below. All of our principal risks
were reviewed at least twice across the year, including Key Risk Indicators
(KRIs), developed last year to help embed the risk appetite framework
in the business and enhance the monitoring and mitigation of risks.
Principal risks
In 2019/20, we reviewed our assessment of the potential threats,
opportunities and impacts from climate change. This included the
impact of both our operations on climate change and of climate change
on our operations, as well as the transitional risk during the journey to
a net zero economy in developing a new climate change principal risk
(see case study on page 23).
Since the onset of the COVID-19 pandemic, we have continually
assessed its impact on our workforce, finances and all aspects of our
operations, including the impact on the Electricity System Operator on
managing the rapid decrease in energy demand across all UK networks,
with regular reports provided to the Board. The Board has agreed that a
new principal risk is included (see page 25). A negative outcome from
RIIO-2 and the continuing possibility of a hard Brexit remain our most
important emerging threats in the UK business. However, the Board
considers, after testing with management, that these events do not need
to be classified as principal risks as they are well covered below this level
of risk and are regularly reviewed by the Directors.
More recently, political escalations have been considered as a threat
against the Company’s ability to operate in New York. Following the
failure to obtain necessary permits to build a new pipeline, and the
Company’s associated decision to enact a moratorium, various actions
have been taken to address the threat of loss of licence in New York.
During November 2019, a settlement was agreed to immediately resume
connecting gas services in Brooklyn, Queens and Long Island for
applications that had been put on hold. A total of $36 million in customer
assistance, gas conservation measures and clean energy investments
has been committed by the Company along with the appointment of an
external monitor and the requirement to deliver a plan to address service
to customers through winter 2020/21. The settlement agreement also
provides a framework for identifying longer-term solutions to address
the supply constraints in downstate New York. In considering this
emerging threat, we have supported the Company’s other jurisdictions
to take into consideration the possibility of New York governmental
decisions influencing other states in the area. Both our Rhode Island
and Massachusetts businesses have been working to lay solid
foundations regarding clean energy strategies, investments and close
monitoring of pipeline operations to help address these issues.
National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Internal control and risk management
Case study on climate change moving from an emerging risk
to a principal risk
Our risk registers typically include risks likely to manifest within the
short to medium, rather than longer term. In the case of climate
change, weather-related event risks previously featured, as did
transition risks associated with the decarbonisation of heat and
electricity and these were included as a threat in several of our
existing principal risks (e.g. energy interruption, disruptive forces).
Over the last 12 to 18 months, facilitated workshops were held with
each of the core businesses to ensure completeness of risk capture
specifically relating to climate change and our net zero commitment,
considering both physical and transitional risks.
Consideration was given to whether the individual or combined
risks arising from increased variability in temperature, and/or greater
wear and tear on assets under more extreme weather conditions
such as flooding and higher temperatures, should feature more
prominently. This was especially pertinent in the light of updates
in climate science, observations of the changing weather such as
increased intensity and frequency of storms on the US east coast,
and wildfire ferocity in locations such as South America, California
and Australia. We also understand the growing urgency to find a
solution to decarbonise heat and the future of gas in a way that is fair,
affordable and not overly disruptive to consumers.
As a result, a recommendation to develop a bespoke climate change
risk was considered by the Executive Committee and Board, and
discussed with US, UK and NGV executives and subject matter
experts. The addition of a bespoke climate change principal risk was
finalised in autumn 2019.
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 227 – 230, as well as our key financial
risks, which are incorporated within note 32 to our consolidated financial statements on pages 182 – 194. Risk trends reported below take into
account controls, any additional mitigation actions and may be influenced by internal or external developments.
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
Actions taken by management
Failure to build sufficient capability and leadership
capacity (including effective succession planning)
required to deliver our vision and strategy.
*Risk trend: Neutral (18/19 Neutral)
* Risk trends are assessed to include any external factors
outside our control as well as the strength and
effectiveness of our controls and additional mitigations as
reviewed by management up to 31 March 2020.
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.
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.
We also continue to develop the rigour of our succession planning and development planning process,
particularly at senior levels. It is now being applied deeper into the organisation as well as continued
attention in relation to the ethnic diversity of both our management and field force population.
There are multiple activities underway to drive this agenda, including ‘neutral’ talent and selection
processes, development interventions and a global review of our inclusion and diversity strategy and
resources.
During the year, in the UK, a three-year labour agreement was reached with our trade unions, introducing
revised terms and conditions.
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 are described in note 32 to our financial statements on pages 182 – 194.
23
National Grid plc Annual Report and Accounts 2019/20
Strategic 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 2019/20 were key
considerations in assessing our risks.
As referred to above, the new climate change related risk is classed as a strategic and regulatory risk but is also an operational risk, in particular as regards
weather-related events in the northeastern US (where storm planning and preparation are key to what we do), flood defence in both the UK (where flood resilience
works are being developed) and the US (where flood contingency plans are in place) and the investigation of the impact of rising temperatures and widening
temperature ranges on the performance and operation of our networks.
Risks
Actions taken by management
Failure to identify and/or deliver upon actions
necessary to ensure our business model, strategy,
asset management and operations respond to
the physical and transitional impacts of climate
change and demonstrate our leadership of climate
change within the energy sector.
*Risk trend: Increasing
(New Principal Risk)
* Risk trends are assessed to include any external factors
outside our control as well as the strength and
effectiveness of our controls and additional mitigations as
reviewed by management up to 31 March 2020.
Failure to influence future energy policy and secure
satisfactory regulatory agreements.
Risk trend: Increasing
due to energy regulatory environment
(18/19 Increasing Risk)
Failure to respond to shifts in societal and political
expectations and perceptions leads to threats to
the Company’s licence to operate and ability to
achieve its objectives.
Risk trend: Increasing
due to current political environment
(18/19 Increasing Risk)
Putting in place measures to develop:
• evolution of our environmental sustainability metrics to better reflect our strategy, measure our impact
and track our progress;
• organisational design changes appropriate to meet this challenge with a single point of contact for all
climate change actions and activities;
• approval of a revised environmental sustainability strategy, including our strategy for heating and gas,
with granular actions identified to achieve net zero; and
• working with regulators and industry parties in the UK and the US on the future of heat and the role
of gas in the long term.
Note that a number of the above measures also address the physical impacts of climate change on
our operations.
We have committed to full compliance with the Task Force on Climate-related Financial Disclosures
(TCFD) requirements including physical and transitional scenario analysis (see pages 57 – 62).
Ongoing work to address transition risks and opportunities includes:
• ensuring our electricity network is reliable and able to actively support and contribute to a future where
renewables and intermittency of supply are increasing;
• supporting the charging infrastructure required for increased use of electric vehicles;
• promoting energy efficiency programmes for customers in the US;
• facilitating decarbonisation in the US and UK including zero carbon operation of the GB electricity
system through ESO in the UK; and
• continuing work on programmes to develop skills in our current and future workforce.
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-2
and US rate case filings.
Ongoing work to support our regulatory relationships includes:
• our internal teams focused on messaging around gas capacity, large-scale renewables, utilities of the
future and electric vehicles;
• establishment of US and UK Regulatory Steering Committees; and
• increased focus on understanding the needs and expectations of all our stakeholders through
regulatory relationship surveys, investor surveys and review of media sentiment.
Processes and resources are in place to review, monitor and influence perceptions of our business and
our reputation by:
• enhancing and consolidating our digital roadmap and social channels;
• developing an internal forum to increase management of stakeholder and media reputational issues;
• delivering on our commitment to be a responsible business (see pages 48 – 56);
• implementing campaigns to recruit for the future – e.g. ‘the job that can’t wait’, (see page 1); and
• promoting partnerships and discussions of decarbonisation across the jurisdictions where we operate.
These processes, along with twice-yearly Board strategy 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.
Failure to adequately anticipate and minimise the
adverse impact from disruptive forces such as
technology and innovation on our business model.
NGP, our central innovation function, is developing our strategy with regards to new technology and
monitoring disruptive technology and business model trends, acting as a bridge for emerging technology
into the core regulated businesses and business development teams.
In addition, NGP is investing in emerging start-up companies and in venture funds and the NGV function
will further the focus on new strategies, business development and technology and innovation.
Risk trend: Neutral
(18/19 Neutral)
24
National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Internal control and risk management
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, as it will not be 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 be
likely to 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.
Risks
Actions taken by management
Failure to prepare and respond to significant
disruptive factors caused by the COVID-19
pandemic because of poor development and
execution of our response plans resulting in an
impact on our ability to maintain our networks,
provide service, support our people and meet our
liquidity/financial targets, as well as reputational
and regulatory obligations.
*Risk trend: Increasing
(New Principal Risk)
* Risk trend for COVID-19 was assessed outside our standard
assessment period due to the risk being added as a
principal risk after 31 March 2020.
Catastrophic cyber security incident caused by
the abuse of digital systems leading to the loss of
confidentiality, availability and integrity.
Risk trend: Increasing
due to the dynamic nature of the cyber
security threat
(18/19 Increasing Risk)
Catastrophic asset failure results in a significant
safety and/or environmental event.
Risk trend: Neutral
(18/19 Neutral)
Failure to predict and respond to a significant
disruption of energy that adversely affects our
customers and/or the public.
Risk trend: Increasing
(18/19 Neutral)
The COVID-19 pandemic impacts multiple areas of our business, therefore our response to this risk
involves a comprehensive plan, to support the safety of our workforce and customers, that is frequently
revised and adjusted due to the dynamic profile of this risk. This includes:
• people: monitoring of absence and wellbeing, and monitoring of current working practices; employee
360 degree communications planning;
• operations: prioritisation of critical processes, sequestering of essential staff and redeployment of
workforce, assessment of our supply chain resilience and analysis of network availability and reliability;
• stakeholders: frequent engagement with internal and external stakeholders, including customers,
shareholders and regulators;
• safety procedures: customer and workforce engagement for essential repairs, monitoring of agreed
regulatory deviations; and
• finance: monitoring of cash flow levels, review and where necessary suspension of customer collection
arrangements; access to short and long-term debt facilities.
We continue to commit significant resources and financial investment to maintain the integrity and security
of our systems and our data by continually investing in strategies that are commensurate with the
changing nature of the security landscape. This includes:
• collaborative working with UK and US government agencies including the Department for Business,
Energy and Industrial Strategy (BEIS), the Centre for Protection of National Infrastructure (CPNI) and the
Department for Homeland Security on key cyber risks;
• development of an enhanced critical national infrastructure security strategy;
• our involvement in the US with developing the National Institute of Standards and Technology
Cyberspace Security Framework;
• awareness, training and self-assessments; and
• cyber response incident procedures and contingency planning.
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:
• putting a 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, with
safety-critical assets clearly identified on the asset register;
• 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; and
• in support of this, we developed a capability framework to make sure our workforce have the
appropriate skills and expertise to meet the performance requirements in these standards.
We continue to apply a holistic approach encompassing preventative and mitigating actions including
pre-emptive measures to maintain network reliability such as:
• flood contingency plans for substations;
• system operator supply and demand forecasting;
• our UK GT Winter Preparedness Plan;
• US gas mains replacement programmes;
• US storm hardening programme; and
• diversity of suppliers in our US gas procurement.
Should energy flow disruptions occur:
• business continuity and emergency plans are in place and practised, including Black Start testing; and
• 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.
The ESO considered the significant impact on the UK power networks on responding to the
unprecedented decrease in energy consumption and demand during the COVID-19 restrictions.
Failure to adequately identify, collect, use and keep
private the physical and digital data required to
support the Company’s operations and future growth.
Controls for our IT processes have been redefined and are aligned to the National Institute of Standards
and Technology (US) and the Network Information and System Regulations (UK).
Risk trend: Decreasing
(18/19 Decreasing Risk)
We continue to progress and improve our data management processes including:
• implementation of our data and other related business management standards;
• data governance councils for UK and US regions; and
• increased levels of data leadership and capability with the recruitment of a Chief Data Officer and
establishment of an associated function.
25
National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Viability statement
The Board’s consideration of the longer-term viability of the Company
is an extension of our business planning process. The process includes
financial forecasting, a robust risk management assessment, regular
budget reviews as well as scenario planning incorporating industry
trends, considering any emerging issues 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, the principal risks facing the Company as described on pages
23 – 25 are identified, monitored and challenged. Over the course of the
year, the Board has considered the principal risks shown in the table
below in detail. The Board considered the preventative and mitigating
controls and risk management actions in place and discussed the
potential financial and reputational impact of the principal risks against
our ability to deliver the Company’s business plan. These factors were
also carefully reassessed in light of the COVID-19 factors.
The assessment of the potential impact of our principal risks on the
longer-term viability of the Company tests the significant solvency and
liquidity risks involved in delivering our business objectives and priorities.
After careful consideration of the uncertain and dynamic COVID-19
events, including reviewing the fast-changing external factors and
their cumulative impact in the medium and long term, and other
considerations including: our long-term business model, high-quality,
long-term assets and stable regulatory arrangements; the Board’s
stewardship responsibilities; and the Company’s ability to model a range
of severe but plausible reasonable worst-case scenarios, the Board
concluded that it remains appropriate to consider a five-year timeframe
over which we should assess the long-term viability of the Company.
Operational impacts
Scenario 1 – A significant cyber-attack.
Scenario 2 – Significant supply disruption event occurring in the
US leading to loss of licence.
Scenario 3 – A catastrophic gas pipeline failure in the US.
Scenario 4 – Emerging technology leads to significant numbers of
people going ‘off grid’.
Scenario 5 – Significant physical damage due to climate change
events in the US and the UK along with reputational damage
through failure to adjust our business model to meet customer
expectations.
Performance impacts
Scenario 6 – The breach of personal data information.
Scenario 7 – The result of a ‘Hard Brexit’ in the UK.
Scenario 8 – A poor outcome to RIIO-2 negotiations.
Cluster impacts
Scenario 9 – A significant supply disruption event in the US leading
to loss of licence coupled with a ‘Hard Brexit’ and challenging
RIIO-2 results in the UK.
Scenario 10 – Failure to adequately respond to the COVID-19
pandemic including triggering a gas pipeline failure and supply
disruption in the US leading to loss of licence coupled with
challenging RIIO-2 results in the UK.
The following factors have been taken into account in making this decision:
• we have reasonable clarity over a five-year period, allowing an
appropriate assessment of our principal risks to be made;
• in order to test the five-year period, the Board considered whether
there are specific, foreseeable risk events relating to the principal
risks that are likely to materialise within a five to ten-year period, and
which might be substantial enough to affect the Company’s viability
and therefore should be taken into account when setting the
assessment period; and
• each principal risk was considered for inclusion within the testing and,
where appropriate, a reasonable worst-case scenario was identified
and assessed for impacts on operations and/or financial performance
over the five-year assessment time period as detailed below.
In addition to testing individual principal risks, the impact of a cluster
of the principal risks materialising over the assessment period was
also considered. COVID-19 and our management of the issues the
business faces during the pandemic, was also noted as an emerging
risk that resulted in the addition of a new principal risk. Recent external
developments such as the Northeast Supply Enhancement (NESE)
Pipeline and events in the downstate NY gas business regarding National
Grid’s licence and the ability to provide continuing supply to our customers
were also considered along with the ongoing regulatory environment in
our operating jurisdictions. We also carefully considered the impact of
our response to COVID-19 on our business plans and financial models.
In the opinion of the Board, the reasonable worst-case scenarios
represent the estimated cumulative impact with principal risk clusters.
The reputational and financial impacts for each scenario were
considered (to the nearest £500 million). The principal 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. Further, considering the breadth of ramifications COVID-19 may
have across different areas of the Company and its consequential power
to exacerbate the negative consequences of other principal risks, any
potential undesired outcome of COVID-19 was considered in
aggregation with other principal risks in the scenarios.
The Board assessed our reputational and financial headroom and
reviewed principal risk testing results against that headroom. The testing
of risk groups and clusters also included an assessment of the impact
upon the business plan, as adjusted for expected impacts of COVID-19.
No principal risk or cluster of principal risks was found to have an impact
on the viability of the Company over the five-year assessment period.
Preventative and mitigating controls in place to minimise the likelihood of
occurrence and/or financial and reputational impact are contained within
our assurance system.
In assessing the impact of the principal risks on the Company, including
our two new principal risks of Climate Change and Response to
COVID-19, the Board has considered the fact that we operate in stable
markets and the robust financial position of the Group, including the
ability to sell assets, raise capital and suspend or reduce the payment of
dividends. It has also considered Ofgem’s legal duty to have regard to
the need to fund the licensed activities of National Grid Gas plc, National
Grid Electricity System Operator Limited and National Grid Electricity
Transmission plc.
Each Director was satisfied that they had sufficient information to judge
the viability of the Company. Based on the assessment described above
and on pages 22 – 25 the Directors have a reasonable expectation that
the Company will be able to continue operating and meet its liabilities
over the period to May 2025.
26
National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Viability statement
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.
Failure to predict and respond
to a significant disruption of
energy that adversely affects
our customers and/or
the public.
Scenario 2 – An extended outage in the US.
Included in the cluster testing of Scenario 9
and 10.
Catastrophic asset failure
resulting in a significant safety
and/or environmental event.
Scenario 3 – A gas transmission pipeline
failure in the US.
Included in the cluster testing of Scenario 10.
The Board received updates on cyber security in:
• March 2019;
• July 2019;
• December 2019; and
• March 2020.
Two Board Strategy sessions held during the year:
• bi-annual overviews;
• review of the gas business strategies;
• external reviews of operational issues within the US gas business;
and
• review of the sequence of events on Friday 9 August.
• the Board reviews the current safety performance of the Company at
each meeting;
• 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
improvements.
Failure to adequately identify,
collect, use and keep private
the physical and digital 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 capability and
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.
• 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 Hard Brexit and access to the Internal Energy Market;
• proposed response to the Labour Party’s proposal to nationalise
UK’s assets;
• implementation of measures to strengthen ability to obtain fair price
for UK assets if potential threat of state ownership materialised; and
• UK and US regulatory strategies.
Failure to influence
future energy policy and
secure satisfactory
regulatory agreements.
Scenario 7 – A poor outcome of
RIIO-2 negotiations.
Included in the cluster testing of Scenario 9
and 10.
The Board received updates and reviews of:
• US regulatory strategy;
• UK regulatory strategy;
• UK ESO regulatory strategy;
• key regulatory policy issues for 2019/20; and
• RIIO-2.
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.
Included in the cluster testing of Scenario 9
and 10.
• Board briefings including a weekly update from the CEO and CFO on
our crisis management response;
Failure to respond to the
asset failure resulting in a
significant safety and/or
environmental event.
Failure to respond to
disruptive factors caused
by the COVID-19 pandemic
resulting in an impact on our
networks, our people and
our financial targets.
Failure to respond to physical
and transitional impacts of
climate change and
demonstrate our leadership
within the energy sector.
N/A
• COVID-19 updates on operational issues, people absences and
wellbeing to the Board; and Finance Committee consideration
of liquidity;
• review of our Business Continuity Planning response and effectiveness
of the Crisis Management controls to the SEH Committee; and
• briefings from the CFO and finance team on possible financial
impacts including a range of scenario modelling and planning.
• Board briefings reviewing our sustainability metrics to reflect and
track our impact and progress; and
• disclosures with the TCFD including physical and transitional
scenario analysis.
27
Financial review
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 240 – 249.
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.
• 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 doing so, we intend to make the
impact of such items clear to users of the financial information in
this Annual Report.
• 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.
Initial assessment of the potential impact of the COVID-19
pandemic on the Group’s position and results
The COVID-19 pandemic has affected our reported results in the year.
To date, we have experienced a more significant impact in our US
businesses than in our UK businesses, mainly due to our large US
customer base. The most significant impact on our results for 2019/20
is the increase in the bad debt charge, which rose from £181 million last
year to £234 million this year for the Group as a whole, and increased in
the US from £146 million last year to £231 million this year. The increase
in the US charge reflects the impact of moratoriums in response to
regulatory instructions as requested by regulatory authorities in the US
states in which we operate, which restrict our ability to collect debts due.
However, we remain committed to continuing to supply our customers
and termination of customer connections has been cancelled.
Additionally, in the US, lower gas volumes (reduced customer demand)
increased timing outflows in March 2020, with warm weather also a factor
in this increase. In our UK Transmission businesses, the disruption has
resulted in a pause to some capex work and although some adaptations to
the new environment have been required, there has been no significant cost
increase in 2019/20. COVID-19 has not caused a significant disruption to
our NGV businesses. In total, other than the US bad debt charge, there has
been a relatively small impact on our underlying results for 2019/20 and
incremental operating costs of around £10 million have been incurred as
a direct consequence of the disruption caused by the pandemic.
For 2020/21, we expect some continuing impact, driven largely by our
US operations where we are expecting (i) higher levels of bad debt,
(ii) additional direct COVID-19 costs, and (iii) deferral of rate increases.
However, given regulatory mechanisms and precedents, we expect to
recover a large part of this. In the UK, we do expect to see some limited
cost impact from COVID-19. We are also currently working with regulators
on support mechanisms for our customers, which may lead to cash flow
impacts in 2020/21, but we would ultimately expect to be recoverable.
Therefore whilst COVID-19 will impact earnings and cash flow in the short
term, we currently anticipate limited economic impact longer term.
However, there could be a range of impacts on cash flows and earnings,
which could be different from our current assessment.
Summary of Group financial performance for the year ended
31 March 2020
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
2019/20
2018/19
Change
2,780
1,274
36.8p
48.57p
5,079
3,454
2,015
55.2p
58.2p
1.2
5,405
9.2%
9.0%
11.7%
2,040
63%
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)%
(15)%
(17)%
3%
18%
1%
1%
(6)%
(1)%
–
20%
20bps
7.2%
180bps
11.8%
2,071
(10)bps
(1)%
66%
(300)bps
We explain the basis of these alternative performance measures and
regulatory performance measures and, where practicable, reconcile
them to statutory results on pages 240 – 249.
The Group’s statutory results for the year were adversely impacted by
exceptional charges. The impact on statutory EPS as a result of these
charges is presented after each item. These included additional
environmental provisions and a reduction in the discount rate applied
to certain provisions across the Group (8.6p)and a deferred tax charge
due to the reversal of the expected reduction in the UK corporation
tax rate originally enacted by the Finance Act 2016 (5.6p). Last year’s
statutory results were adversely impacted by exceptional charges
incurred in respect of the Massachusetts Gas labour dispute (6.2p),
our UK and US cost efficiency and restructuring programme (4.7p) and
the impairment of development costs in respect of the termination of
the NuGen and Horizon nuclear connection projects (3.3p).
Statutory operating profit was also adversely impacted by commodity
remeasurement losses of £125 million in 2019/20 (2018/19: £52 million
gains) from mark-to-market movements on derivatives which are used
to hedge the cost of buying wholesale gas and electricity on behalf of
our US customers.
Underlying operating profit was up 1% as higher rate case revenues
in our US Regulated businesses and lower operating costs more than
offset higher deferrable storm costs, higher bad debts costs, increased
depreciation, the non-recurrence of favourable US legal settlements
and sale of our Fulham property site in 2018/19. The combination of
these factors was partly offset by higher net financing costs, driven by
the implementation of IFRS 16 and higher average net debt. Underlying
profit after tax increased by 1% and, combined with a higher share
count, resulted in a 1% decrease in underlying EPS to 58.2p.
Capital investment of £5.4 billion increased our asset growth to 9%.
We delivered Value Added (our measure of economic profit) of £2.0
billion in 2019/20, slightly lower than in 2018/19. Group RoE of 11.7%
was comparable to 11.8% in 2018/19, reflecting the higher new rate
allowances in our US businesses, while 2018/19 benefited from the
Fulham sale and legal settlements. RCF/net debt at 9.2% remained
consistent with the Company’s strong investment grade credit rating.
The recommended full-year dividend per share of 48.57p is in line with
policy and is covered 1.2 times by underlying EPS.
28
National Grid plc Annual Report and Accounts 2019/20Strategic Report The adoption of IFRS 16 ‘Leases’ during the year increased our net debt by £474 million, with a corresponding increase in right-of-use assets
recorded on the balance sheet. This standard has resulted in lower operating costs within our businesses, offset by a higher depreciation charge
and a higher interest cost.
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
Operating profit
Profit after tax
Earnings per share
£m
2019/20
2018/19
Change
2019/20
2018/19
Change
2019/20
2018/19
Change
Statutory results
Exceptional items
Remeasurements
Adjusted results
Timing
Major storm costs
2,780
2,870
(3)%
1,274
1,502
(15)%
402
125
624
(52)
491
148
480
19
3,307
3,442
(4)%
1,913
2,001
(4)%
147
–
(108)
93
102
–
(72)
69
Underlying results
3,454
3,427
1%
2,015
1,998
1%
36.8p
14.2p
4.2p
55.2p
3.0p
–p
58.2p
44.3p
14.2p
0.5p
59.0p
(2.1)p
2.0p
58.9p
(17)%
(6)%
(1)%
Exceptional income/(expense) from continuing operations
£m
Changes in environmental provision
Massachusetts Gas labour dispute
UK and US cost efficiency and restructuring programme
Impairment of nuclear connections development costs
Deferred tax arising on the reversal of the
reduction in UK corporation tax rate
Total
This year we have classified the following items as exceptional:
Impact on
operating profit
Impact on
profit after tax
Impact on
EPS
2019/20
2018/19
2019/20
2018/19
2019/20
2018/19
(402)
–
–
–
–
(402)
–
(283)
(204)
(137)
–
(624)
(299)
–
–
–
(192)
(491)
–
(209)
(160)
(111)
(8.6)p
–
–
–
–
(6.2)p
(4.7)p
(3.3)p
–
(5.6)p
–
(480)
(14.2)p
(14.2)p
• Changes in environmental provisions: a £326 million net increase in the provision for estimated costs and cost sharing allocations borne
by the Company associated with environmental clean-up related to former manufacturing gas plant facilities, formerly owned or operated by
the Group or its predecessor companies and additionally, £76 million for the impact of a reduction of 0.5% in the real discount rate applied to
the environmental provisions across the Group; and
• Deferred tax arising on the reversal of the reduction in UK corporation tax rate: The Finance Act 2016 reduced the UK corporation
tax rate to 17% with effect from April 2020. A £192 million deferred tax charge has been made, following the reversal of this legislation, which
retains the UK corporation tax rate at 19%, resulting in an increase in deferred tax liabilities.
In the prior year we classified the £283 million cost arising as a result of the Massachusetts Gas labour dispute as exceptional, along with the
£204 million charge relating to the UK and US cost efficiency and restructuring programme and the £137 million impairment charge relating to
nuclear connection development costs.
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 losses of £125 million on commodity contract derivatives were incurred in addition to net
remeasurement losses of £64 million on financing-related instruments and a further £1 million of remeasurement losses related to our share of
post-tax results of joint ventures.
29
National Grid plc Annual Report and Accounts 2019/20Strategic Report | Financial Review
Financial review
continued
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 we are 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. We also collect revenues from customers and pass
these on to third parties (e.g. NYSERDA). These variances between allowed
and collected revenues and timing of revenue collections for pass-through
costs give rise to over- and under-recoveries.
The following table summarises management’s estimates of such
amounts for the two years ended 31 March 2020. 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. All amounts are
translated at the current year average exchange rate of $1.29:£1.
UK Electricity Transmission
£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
£m
2019/20
2018/19
Other operating costs
2019/20
2018/19
Change
3,702
(2,386)
1,316
4
1,320
(146)
1,174
2,174
(306)
(48)
(31)
(469)
1,320
(146)
1,174
3,351
(2,573)
778
237
1,015
77
1,092
1,954
(332)
(49)
(65)
(493)
1,015
10%
(7)%
69%
(98)%
30%
(290)%
8%
11%
(8)%
(2)%
(52)%
(5)%
30%
77
(290)%
1,092
8%
Balance at start of year (restated)
In-year (under)/over-recovery
Balance at end of year
403
(147)
256
301
111
412
Timing over-recoveries of £146 million in UK Electricity Transmission
were more than offset by timing under-recoveries of £54 million in UK
Gas Transmission and timing under-recoveries of £239 million in US
Regulated in 2019/20. 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 2020 this tax rate was 31%.
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 costs from underlying earnings. In 2019/20,
although we experienced a number of storms, the $98 million of
deferrable storm costs we incurred (in aggregate) fell just below this
threshold. During 2018/19 we experienced bad weather events across
the year, with storms unusually occurring during April and May as well
as in the winter months. In that year the total net costs exceeded the
$100 million threshold and were excluded from our underlying results.
Segmental operating profit
The tables below set out operating profit on adjusted and underlying bases.
Adjusted operating profit
£m
2019/20
2018/19
Change
Depreciation and amortisation
Adjusted operating profit
Timing
Underlying operating profit
Although we legally separated our NG ESO plc business from NGET plc
during the year, we continue to report these two businesses in aggregate,
within our UK Electricity Transmission segment.
UK Electricity Transmission statutory operating profit increased by
£538 million in the year. In 2018/19, 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. Timing over-recoveries of £146 million in 2019/20 compared
to under-recoveries of £77 million in the prior year primarily due to the
collection of prior year balances.
Adjusted operating profit increased by £305 million (30%), driven by
£223 million favourable year-on-year timing over-recoveries. Underlying
operating profit increased by 8%. Net revenues (excluding timing) were
relatively flat, with higher re-opener allowances for cyber and data centres,
funding for ESO legal separation and the RPI uplift, being fully offset by
output and allowances true-up in the annual iteration, along with lower ESO
incentive income. Regulated controllable costs were lower, with efficiency
savings and lower Electricity System Operator separation costs, partly offset
by higher IT costs and inflation. Post-retirement benefit costs were little
changed year-on-year. Other costs were lower, mainly relating to 2018/19’s
provisions against income recognised on early termination of connections.
The decrease in depreciation and amortisation charges reflects a benefit
from the release of provisions related to prior years.
UK Electricity Transmission
UK Gas Transmission
US Regulated
NGV and Other activities
Total
Underlying operating profit
£m
UK Electricity Transmission
UK Gas Transmission
US Regulated
NGV and Other activities
Total
1,320
348
1,397
242
3,307
1,015
303
1,724
400
3,442
30%
15%
(19)%
(40)%
(4)%
2019/20
2018/19
Change
Timing
1,174
402
1,636
242
3,454
1,092
341
1,594
400
3,427
8%
18%
3%
(40)%
1%
The statutory operating profit for all three reportable segments fell in the
year primarily as a result of the £402 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.
30
UK Gas Transmission
£m
Revenue
Operating costs
Statutory operating profit
Exceptional items
Adjusted operating profit
Underlying operating profit
Analysed as follows:
Net revenue
Regulated controllable costs
Post-retirement benefits
Other operating costs
Depreciation and amortisation
Adjusted operating profit
Timing
Underlying operating profit
2019/20
2018/19
Change
927
(580)
347
1
348
54
402
685
(127)
(19)
(20)
(171)
348
54
402
896
(629)
267
36
303
38
341
669
(144)
(27)
(14)
(181)
303
38
341
3%
(8)%
30%
(97)%
15%
42%
18%
2%
(12)%
(30)%
43%
(6)%
15%
42%
18%
National Grid plc Annual Report and Accounts 2019/20Strategic Report NGV and Other activities
£m
2019/20
2018/19
Change
UK Gas Transmission statutory operating profit increased £80 million in
the year. In 2018/19, £36 million of costs in relation to our efficiency and
restructuring programme were treated as exceptional. Timing under-
recoveries of £54 million in 2019/20 compared to £38 million in the prior
year reflecting lower than expected volumes and higher shrinkage costs.
Adjusted operating profit increased by £45 million (15%), including
£16 million year-on-year adverse timing under-recoveries. Underlying
operating profit increased by 18%. Net revenue (excluding timing) was
higher, reflecting the re-opener allowances for cyber and data centres,
the RPI uplift and the impact of 2018/19’s Avonmouth pipeline project
revenue allowance clawback. Regulated controllable costs were £17
million lower, driven by efficiency savings. Post-retirement costs were
lower, mainly related to the 2018/19 Guaranteed Minimum Pension
(GMP) ruling. Other costs were higher principally due to the non-
recurrence of provision releases in 2018/19.
Statutory operating profit
Exceptional items
Adjusted operating profit
Timing
Underlying operating profit
Analysed as follows:
NGV
Property
The depreciation charge was lower than in 2018/19 as a result of an
additional charge in the prior period following a detailed review of asset lives.
Corporate and Other activities
Underlying operating profit
237
5
242
–
242
269
63
(90)
242
400
–
400
–
400
263
181
(44)
400
(41)%
n/a
(40)%
n/a
(40)%
2%
(65)%
105%
(40)%
US Regulated
£m
Revenue
Operating costs
Statutory operating profit
Exceptional items
Remeasurements
Adjusted operating profit
Timing
Major storm costs
Underlying operating profit
Analysed as follows:
Net revenue
Regulated controllable costs
Post-retirement benefits
Bad debt expense
Other operating costs
Depreciation and amortisation
Adjusted operating profit
Timing
Major storm costs
2019/20
2018/19
Change
9,205
(8,325)
880
392
125
1,397
239
–
1,636
5,745
(1,871)
(95)
(231)
(1,296)
(855)
1,397
239
–
9,846
(8,421)
1,425
351
(52)
1,724
(223)
93
1,594
5,868
(1,895)
(94)
(146)
(1,309)
(700)
1,724
(223)
93
(7)%
(1)%
(38)%
12%
(340)%
(19)%
(207)%
(100)%
3%
(2)%
(1)%
1%
58%
(1)%
22%
(19)%
(207)%
(100)%
3%
Underlying operating profit
1,636
1,594
US Regulated statutory operating profit fell partly as a result of
the £177 million year-on-year adverse swing in commodity contract
remeasurements. Exceptional charges also increased reflecting
£392 million environmental costs detailed above. In 2018/19,
£283 million of exceptional costs were incurred for the Massachusetts
Gas labour dispute in addition to £68 million of restructuring costs.
Timing under-recoveries of £239 million in 2019/20 compared to timing
over-recoveries of £223 million in 2018/19, driven by revenue decoupling,
commodity recoveries and lower net energy efficiency collections
contributed to a reduction in statutory and adjusted operating profit.
Adjusted operating profit decreased by £327 million (19%), including
£462 million year-on-year adverse timing under-recoveries, partly
offset by £93 million of deferrable storm costs qualifying as major (in
aggregate) in 2018/19. Underlying operating profit increased by 3%.
Net revenues (excluding timing) increased by £257 million as the benefits
of rate case increments (including KEDNY, KEDLI and Niagara Mohawk)
and £82 million from foreign exchange movements. A stronger US dollar
increased underlying operating profit by £23 million in the year. US
Regulated controllable costs decreased as a result of cost efficiencies
(principally from benefit of restructurings and contract management),
partly offset by workload increases and inflation. Bad debt related costs
increased by £85 million, driven by £117 million additional provision
for receivables related to the impact of COVID-19. Depreciation and
amortisation increased due to the growth in assets. Other costs were
higher due to increased property taxes and higher storm costs partly
offset by lower cost of removal. Deferrable storm costs were removed
from underlying results last year.
National Grid Ventures’ statutory operating profits were broadly in line
with 2018/19, with higher use of our LNG import terminal at Grain and
lower business development costs, offset by lower revenues from our
declining meter population and costs related to the Geronimo business.
In ‘other’ activities, we incurred net costs of £27 million, compared to
a net profit of £137 million in 2019/20. The performance of the Property
business was lower than prior year reflecting the sale of the Fulham site
to the St William joint venture in 2018/19. Corporate and other activities
did not include last year’s benefit of £95 million of legal settlements
to recover costs associated with a US systems implementation. The
National Grid Partners operating loss of £11 million was £3 million higher
than in 2018/19.
Financing costs and taxation
Net finance costs
Net finance costs (excluding remeasurements) for the year were 6%
higher than last year at £1,049 million, with the £56 million increase
mostly driven by the impact of IFRS 16, lower capitalised interest and
adverse foreign exchange movements, partly offset by interest on tax
settlements. The effective interest rate of 4.1% on net debt was 20bps
lower than the prior year rate of 4.3%.
Joint ventures and associates
The Group’s share of net profits from joint ventures and associates
increased as a result of St William’s first year of profits. Our Minnesota-
based joint venture, Emerald Energy Ventures LLC, which we acquired
in July also contributed £1 million of post-tax earnings in 2019/20.
Tax
The underlying effective tax rate of 19.9% was 30bps higher than last
year. 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. In the prior year, significantly higher gains on property
disposals that were offset by previously unrecognised capital losses
resulted in a lower underlying effective tax rate. The Group’s tax strategy
is detailed later in this review.
Discontinued operations
We completed the sale of our remaining 39% interest in Quadgas
HoldCo Limited, the holding company for the Cadent gas networks,
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 the disposal of Quadgas HoldCo
Limited within discontinued operations.
31
National Grid plc Annual Report and Accounts 2019/20Strategic Report | Financial Review Financial review
continued
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, the acquisition of Geronimo during 2019/20 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
2019/20
2018/19
Change
2019/20
2018/19
Change
1,043
249
3,228
885
5,405
925
308
2,650
623
4,506
13%
(19)%
22%
42%
20%
1,043
249
3,228
885
5,405
925
308
2,688
626
4,547
13%
(19)%
20%
41%
19%
Investment in UK Electricity Transmission increased primarily due to Hinkley-Seabank and London Power Tunnels 2 spend. In UK Gas Transmission,
investment reduced due to completion of the Feeder 9 gas pipeline replacement project and lower asset health spend. In the US, investment was up
20% on a constant currency basis, reflecting increased capital expenditure in New York (gas pipe replacement and mandated gas works) and higher
spend in Massachusetts due to 2018/19’s disruption to capex spend caused by the labour dispute. Investment in National Grid Ventures continued
to increase with ongoing construction on three new subsea interconnectors, IFA 2 (France), North Sea Link (Norway) and Viking Link (Denmark) and
the acquisition of Geronimo, a renewable energy business based in Minneapolis, Minnesota in July 2019 for total consideration of £209 million. In
addition, a total amount of £61 million (including joint ventures) was invested by National Grid Partners in the year.
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 from 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 in 2017/18, 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. In our Value Added calculation, we have recognised an asset to reflect expected future recovery of the
£117 million COVID-19 related provision for bad and doubtful debts that we have included in 2019/20. 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. Adjusted
net debt movements exclude proceeds from the Cadent disposal and, in 2019/20, exclude movements on derivatives which are designated in
cash flow hedging arrangements and for which there is no corresponding movement in total assets and other balances.
£m
UK RAV
US rate base
Total RAV and rate base
NGV and Other
Total assets
UK other regulated balances¹
US other regulated balances²
Other balances
2019/20
2018/19
31 March
2020
31 March
2019
Change
31 March
2019
31 March
2018
Change
20,431
20,644
41,075
4,105
45,180
(357)
1,791
(514)
19,692
18,407
38,099
3,351
41,450
(302)
1,987
(679)
4%
12%
8%
23%
9%
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)
4%
9%
6%
22%
7%
Total assets and other balances
46,100
42,456
3,644
41,534
38,495
3,039
Increase in goodwill
Cash dividends
Adjusted net debt movement
Value added
81
892
(2,577)
2,040
–
1,160
(2,128)
2,071
1. Includes totex-related regulatory IOUs of £411 million (2019: £519 million), over-recovered timing balances of £24 million (2019: £68 million under-recovered) and under-recovered legacy
balances related to previous price controls of £78 million (2019: £149 million).
2. Includes assets for construction work-in-progress of £1,510 million (2019: £1,813 million), other regulatory assets related to timing and other cost deferrals of £642 million (2019: £189 million)
and net working capital liabilities of £361 million (2019: £15 million).
32
National Grid plc Annual Report and Accounts 2019/20Strategic Report 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 2019, finalisation of US balances, to reflect the impact of IFRS 16
and to remove the investment in Cadent.
During 2019/20, our combined regulated asset base and NGV and Other
businesses’ assets grew by £3.7 billion or 9% on a constant currency
basis compared to an increase of 7.2% in the prior year. UK RAV growth
was 3.8% including RPI indexation of 2.6% while US rate base grew
strongly by 12%.
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 £2.0 billion in 2019/20.
This was slightly lower than last year’s £2.1 billion, with improved US
returns and the impact of asset growth, offset by the loss of interest and
dividend income from Cadent and higher cash tax. Of the £2.0 billion
value added, £0.9 billion was paid to shareholders as cash dividends
and £1.1 billion was retained in the business. This measure excludes
any benefit arising from the sale of our 39% interest in Quadgas Holdco
Limited. Value added per share was 58.9p compared with 61.2p
in 2018/19.
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) as disclosed in note 29 to the financial
statements. ‘Adjusted net debt’ used for the RCF/adjusted net debt
calculation is principally adjusted for pension deficits and hybrid debt
instruments. For a full reconciliation see page 245.
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
2019/20
2018/19
Change
Cash generated from continuing
operations
Cash capital expenditure and
acquisition of investments
Dividends from joint ventures and
associates
Business net cash flow from
continuing operations
Net interest paid
Net tax (paid)/received
Ordinary dividends
Other cash movements
Net cash flow from continuing
operations
Quadgas sale proceeds
Discontinued operations
Non-cash movements
Increase in net debt
4,914
4,464
(5,098)
(4,148)
75
(109)
(884)
(199)
(892)
10
(2,074)
1,965
(91)
(1,387)
(1,587)
68
384
(846)
(75)
(1,160)
15
(1,682)
–
85
(1,930)
(3,527)
Net debt at start of year
(26,529)
(23,002)
Impact of adoption of IFRS 16
(474)
–
Net debt at end of year
(28,590)
(26,529)
10%
23%
10%
(128)%
4%
165%
(23)%
(33)%
23%
n/a
(207)%
(28)%
(55)%
15%
n/a
7.8%
Cash flow generated from continuing operations was £4.9 billion,
£450 million higher than last year, principally due to exceptional items
in 2018/19 and favourable working capital (mainly higher inflows from
collection of prior year winter receivables), partly offset by adverse timing
on revenues and provisions. Cash expended on investment activities
increased for the reasons described above. Net interest paid increased
due to the growth in net debt and also higher interest income received
in 2018/19. The Group made net tax payments of £199 million during
2019/20. A 46% scrip take-up in the year reduced the cash dividend to
£892 million, £268 million lower than in 2018/19, when the scrip take-up
was 26%. Proceeds of £1,965 million (plus £6 million of interest) from the
Quadgas HoldCo Limited disposal, were partly offset by outflows for
residual provisions and accruals classified within discontinued operations.
In 2018/19, discontinued operations included dividend and interest income
of £156 million from our investment in Quadgas. Non-cash movements
primarily reflect changes in the sterling-dollar exchange rate, the impact
of adopting IFRS 16 ‘Leases’, accretions on index-linked debt, finance
lease additions 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 2020
the Group reduced its total financial liabilities denominated in US dollars
from $21 billion at the start of the year to $20 billion at 31 March 2020, as
a 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 senior
debt including 13 bond issues, and £1.1 billion of hybrid debt refinancing.
The Board has considered the Group’s ability to finance normal
operations at the same time as funding a significant capital programme,
in light of the potential impacts of COVID-19. This includes stress-testing
of the Group’s finances under a ‘reasonable worst case’ scenario and
consideration of levers available to ensure our businesses are adequately
financed. As a result, the Board has concluded that the Group will have
adequate resources to do so. In April, we issued £0.9 billion of debt
through 2 bonds, evidencing our ability to raise new finance. In addition,
as at 17 June 2020, we have £5.8 billion of undrawn committed facilities,
all of which have expiry dates beyond June 2021. 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
Goodwill and intangibles
Property, plant and equipment
Assets held for sale
Other (liabilities)/assets
Tax balances
Pension liabilities
Provisions
Net debt
Net assets
31 March
2020
31 March
2019
Change
7,528
48,770
–
(349)
(4,168)
(953)
(2,654)
6,953
43,913
1,956
(507)
(4,000)
(218)
(2,199)
(28,590)
(26,529)
19,584
19,369
8%
11%
n/a
(31)%
4%
338%
21%
7.8%
1%
33
National Grid plc Annual Report and Accounts 2019/20Strategic Report | Financial Review Financial review
continued
Property, plant and equipment increased as a result of the continuing
capital investment programme, foreign exchange gains and the impact
of adopting IFRS 16 ‘Leases’. Assets held for sale comprised our 39%
interest in Quadgas, which was sold in June 2019. Pension liabilities
increased in the US, as a result of lower asset valuations and foreign
exchange movements, partly offset by a lower discount rate. Provisions
increased principally as a result of additional environmental provisions
recognised in the year and foreign exchange movements. Other
movements are largely explained by net working capital inflows and
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 63% as
at 31 March 2020. This was down from 66% at the previous year-end
and remains appropriate for the current Group credit rating of A-/A3
(S&P/Moody’s).
Retained cash flow as a proportion of adjusted net debt was 9.2%,
which is above the long-term average 9% level currently indicated by
Moody’s as consistent with maintaining our current Group 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 245, 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.
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
2019/20
2018/19
Change
UK Electricity Transmission
UK Gas Transmission
UK weighted average
US Regulated
Group Return on Equity
13.5%
9.8%
12.4%
9.3%
11.7%
13.7%
9.5%
12.4%
8.8%
11.8%
-20bps
30bps
–bps
50bps
-10bps
The overall weighted average RoE for the two UK transmission
businesses was 12.4%, representing 230 basis points outperformance
of the base allowed return. Electricity Transmission performance
reduced in the year with improved totex incentive performance offset by
lower SO incentives including a reversal of profits recognised in 2018/19.
Gas Transmission return increased due to improved totex performance
in 2019/20.
RoE for the US Regulated business of 9.3% was 50bps higher in
2019/20, with improved performances in KEDNY, across Massachusetts
and in Rhode Island all contributing to this increase. The achieved
RoE represents 99% of the weighted average allowed return across
all jurisdictions. US returns exclude the impact of the Massachusetts
Gas labour dispute in 2018/19. They are also not impacted by the
COVID-19 related bad debt provision recognised in 2019/20 and include
an adjustment reflecting our expectation for future recovery of these
bad debt costs.
Overall Group RoE, which incorporates Property, Corporate and Other,
and financing performance was 11.7%, slightly lower than 2018/19.
Tax transparency
As a responsible tax payer, we have voluntarily increased our tax
disclosures, which continue to be an area of significant interest to
many of our stakeholders.
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 do not have
operations in tax havens or low tax jurisdictions without commercial
purpose.
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 of 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.
34
National Grid plc Annual Report and Accounts 2019/20Strategic Report Country-by-country reporting summary
In the current year for the first time we have disclosed in the table
below data showing the scale of our activities in each of the countries
we operate in. This allows our stakeholders to see the profits earned,
taxes paid and the context of those payments.
Revenue
Tax jurisdiction
United Kingdom
United States
Ireland
Isle of Man
Luxembourg
Netherlands
Unrelated
party
£m
Related
party1
£m
Total
£m
5,282
9,258
–
–
–
–
113
5,395
82
–
16
–
55
9,340
–
16
–
55
Profit/(loss)
before
income
tax2
£m
Income
tax accrued
– current
year3
£m
1,821
(82)
–
3
–
12
179
(2)
–
–
–
–
Reconciliation of Group’s total tax charge to tax paid
£m
2019/20
2018/19
Total Group tax charge/(credit)
Adjustment for Group non-cash deferred tax
Adjustments for Group current tax (charge)/credit
in respect of prior years
Group current tax charge/(credit)
Group tax instalment payments payable/
(repayable) in respect of the prior year
Group tax instalment payments payable/
(repayable) in the following year
Repayment due to the Group in respect of current
year estimated payments
Group tax payments/(refunds) in respect of prior
years paid in the current year¹
Group tax payments relating to tax disclosed
elsewhere in the income statement
480
(348)
45
177
78
5
47
(113)
5
199
339
(251)
52
140
92
(69)
–
(93)
5
75
Total
14,540
266 14,806
1,754
177
Group tax paid/(repaid)
1. Related party revenue only includes cross-border transactions.
2. Profit/(loss) before income tax from continuing operations after exceptionals.
3. See the tax charge to tax paid reconciliation below for further information.
Our Hong Kong entity is UK tax resident and our entities in Australia
and Canada are dormant. Therefore, those jurisdictions have not been
included in the table above.
Our Isle of Man company is a captive insurance company which
is treated as a controlled foreign company for UK tax purposes and
as such UK corporation tax is paid on its profits by National Grid. In
the Netherlands, we have a finance company which raised external
finance for the Group and an old holding company which held trading
investments which were sold many years ago, which is in the process
of being liquidated. The finance company is taxed on its profits in
the Netherlands at the corporate tax rate of 25%, whilst the holding
company’s profits are offset by tax losses on which deferred tax has
not previously been recognised.
Transfer pricing is not a significant issue for the Group since there are
limited transactions between Group companies, but any transactions
between related parties are made on an arm’s-length basis and aligned
to OECD principles.
Group’s total tax charge to tax paid
The total tax charge for the year disclosed in the financial statements
in accordance with accounting standards and the equivalent total
corporate income tax paid during the year will differ.
The principal differences between these two measures are as follows:
Profit/(loss) before income tax²
1,754
1,841
Effective cash tax rate
Effective tax rate (see note 7)
%
11.3
27.4
%
4.1
18.4
1. Tax refunds in respect of prior years are primarily driven by a refund received in respect of tax
losses carried back to earlier years following agreement of historical US Federal tax audits.
2. Profit/(loss) before income tax from continuing operations after exceptionals.
Effective cash tax rate
The effective cash tax rate for the Group is 11.3%. The difference
between this and the accounting effective rate of 27.4% (see note 7
on page 143) is due to the following factors.
National Grid is a capital-intensive business, across both the UK and
the US, and as such invests significant sums each year in its networks.
In 2019/20 the total capital expenditure was £5,079 million. To promote
investment, tax legislation allows a deduction for qualifying capital
expenditure at a faster rate than the associated depreciation in the
statutory accounts. The impact of this is to defer cash tax payments
into future years.
Given the substantial amounts of expenditure qualifying for deduction
incurred by National Grid this has left us in a net tax loss position in the
US in the year ended 31 March 2020. Consequently, in the current
period we made no significant federal tax payments.
In the current year we made significant cash tax payments in the UK
(£306 million). This was offset by the receipt of cash for tax losses
carried back to earlier years in the US as a result of settlement of prior
year audits. These receipts in the US also contributed to a lower overall
effective rate of cash tax for the Group.
The Group continues to fund deficit payments into its defined benefit
pension schemes and has made significant payments into the Gas and
Electricity schemes during the course of the year. These payments have
further reduced the overall cash tax paid in the UK.
35
National Grid plc Annual Report and Accounts 2019/20Strategic Report | Financial Review Financial review
continued
Group’s total tax contribution
In the current year we have expanded this disclosure to cover our global
total tax contribution. The total amount of taxes we pay and collect
globally year-on-year is significantly more than just the tax which we pay
on our global profits.
Group’s total tax contribution 2019/20 (taxes paid/collected)
For 2019/20 our total tax contribution globally was £2,794 million
(2018/19: £2,620 million), taxes borne were £1,635 million (2018/19:
£1,422 million) and taxes collected were £1,159 million (2018/19:
£1,198 million). Whilst total tax collected in 2019/20 has remained
consistent with the prior year, the total taxes borne by the Group has
increased from the prior year primarily as a result of higher property
and profit taxes being paid.
Taxes borne
Taxes collected
Key:
People
Product
Profit
Property
Miscellaneous
Total
Key:
People
Product
Miscellaneous
Total
£m
164
185
199
1,076
11
1,635
£m
533
625
1
1,159
Tax contribution
Income
tax paid/
(repaid)
on cash
basis1
£m
Property
taxes
£m
Other
taxes
borne
£m
Taxes
collected
£m
Total tax
contribution
£m
Number of
employees
as at
31 March
2020
306
(107)
226
57
850
303
586
573
1,175
1,619
6,321
16,748
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Tax jurisdiction
United Kingdom
United States
Ireland
Isle of Man
Luxembourg
Netherlands
Total
199
1,076
360
1,159
2,794
23,069
1. See the tax charge to tax paid reconciliation above for further information.
Two thirds of the tax borne by the Group is in relation to property taxes
of which c. £850 million are paid in the US across over 1,100 cities and
towns in Massachusetts, New Hampshire, New York, Rhode Island and
Vermont. These taxes are the municipalities principal source of revenue
to fund school districts, police and fire departments, road construction
and other local services.
In the UK we participate in the 100 Group’s Total Tax Contribution
Survey. The survey ranks the UK’s biggest listed companies in terms
of their contribution to the total UK government’s tax receipts. The
most recent results of the survey for 2018/19 ranks National Grid as
21st highest contributor of UK taxes (2017/18: 25th), 18th in respect of
taxes borne (2017/18: 23rd) and 5th in respect of capital expenditure
(£1,200 million) on fixed assets (2017/18: 4th). Our ranking in the survey
is proportionate to the size of our business and capitalisation relative
to the other contributors to the survey.
However, National Grid’s contribution to the UK and US economies is
broader than just the taxes it pays over to and collects on behalf of the
tax authorities.
Both in the UK and the US we employ thousands of individuals directly.
We also support jobs in the construction industry through our capital
expenditure, which in 2019/20 was £5,079 million, as well as supporting
a significant number of jobs in our supply chain.
Furthermore, as a utility we provide a core essential service which allows
the infrastructure of the country/states we operate in to run smoothly.
This enables individuals and businesses to flourish and contribute to
the economy and society.
Development of future tax policy
We believe that the continued development of a coherent and
transparent tax policy across the Group is critical to help drive growth
in the economy. In the UK 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, such as the Electricity Tax Forum
and CBI Employment Taxes Working Group, together with the 100
Group in the UK, which represents the views of Finance Directors
of FTSE 100 companies and several other large UK companies. 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 Global Business Alliance. This helps to ensure that we are
engaged at the earliest opportunity on tax issues which affect our
business.
We continue to engage on consultations where 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 tax
legislation.
36
National Grid plc Annual Report and Accounts 2019/20Strategic Report 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 2018/19, 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 2019, we adopted IFRS 16 ‘Leases’. This did not have a
material impact on the Group’s results or financial position, although
as described in note 37 to the financial statements, on transition our
property, plant and equipment and net debt each increased by
£0.5 billion to take account of the additional lease obligations. We
note that the rating agencies already made adjustments to impute
this and accordingly, adoption of the new standard does not impact
our credit ratings.
Post balance sheet events
In the period between 31 March 2020 and 17 June 2020, there
have continued to be substantial environmental, economic and
social changes in both the UK and US. As described further in the
Strategic Report, these have had, and will continue to have, significant
ramifications for the Group. Other than as disclosed in respect of those
areas where forward-looking forecasts are relevant (notably goodwill
impairment reviews (note 11 to the financial statements), expected credit
losses on financial instruments including trade receivables (notes 19
and 32) and the presumption of the going concern basis generally
(note 1)), none of these developments have impacted or caused
adjustment to the financial statements.
Pensions
In 2019/20, the defined benefits pensions and other post-retirement
benefits operating costs decreased by £97 million to £197 million,
principally as a result of our UK restructuring programme and the
GMP equalisation ruling. Employer contributions during the year
were £327 million (2018/19: £418 million), including £86 million
(2018/19: £84 million) of deficit contributions.
As at 31 March 2020, 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
UK
14,364
US
9,384
Total
23,748
(12,844)
(11,857)
(24,701)
Net surplus/(deficit)
1,520
(2,473)
(953)
As at 31 March 2020, pension assets of £1,589 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 32.00p
per ordinary share ($2.0126 per American Depository Share) which will
be paid on 19 August 2020 to shareholders on the register of members
as at 3 July 2020. If approved, this will bring the full year dividend to
48.57p per ordinary share, an increase of 2.6% over the 47.34p per
ordinary share in respect of the financial year ended 31 March 2019.
This is in line with the increase in average UK RPI inflation for the year
ended 31 March 2020 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 2020, National Grid plc had in excess of £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 £1,123 million of shareholders’ funds. This year’s dividend
is covered approximately 1.2x by underlying earnings.
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.
37
National Grid plc Annual Report and Accounts 2019/20Strategic Report | Financial Review National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Principal operations – UK
Our UK business performed well in
2019/20. We maintained our focus on
safe, reliable, customer-led, innovative
and efficient operations.
Our UK performance
Optimise performance
Measure
Return on Equity (£m)
Statutory operating profit (£m)
Underlying operating profit (£m)
Adjusted operating profit (£m)
RIIO-T1 customer savings (£m)
2019/20 2018/19
2017/18
12.4
1,663
1,576
1,668
128
12.4
1,045
1,433
1,318
101
12.1
1,528
1,560
1,528
78
Grow core business
Capital expenditure (£m)
1,292
1,233
1,309
Asset growth (%)
3.8
3.6
4.5
Customer first
Customer satisfaction: ET
(out of 10)
Customer satisfaction: ESO
(out of 10)
7.6
(2018/19: N/A)
8.2
(2018/19: 7.9)
Customer satisfaction: GT
(out of 10)
8.0
(2018/19: 7.8)
Highlights
Our UK business performed well in 2019/20 as we maintained our
focus on safe, customer-led, reliable, innovative and efficient operations.
On 1 April 2019, we completed the legal separation of the ESO within
a newly formed subsidiary company which 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. Following separation,
we moved the Gas System Operator (GSO) function to become part
of the Gas Transmission business to further simplify our structure.
Optimise performance
Our safety ambition is to have a culture where we always do the right
thing regarding safety. Our strategy is to be proactive in our safety
management by engaging our leaders and employees and implementing
a consistent and simple risk-based approach. This strategy will enable
us to develop the highest level of safety culture maturity. To support this
ambition, we are focusing more on leading indicators that measure our
positive efforts on safety management to help prevent incidents, while
continuing to track more traditional lagging indicators.
As at 31 March 2020, our LTIFR was 0.06. This is better than our UK
target of <0.08, and is our best ever LTIFR performance. Our Electricity
Capital Delivery business has worked more than a year without having
any LTIs in approaching five million person hours of complex
construction activity. This outstanding result was driven by a relentless
focus on the work we do and commitment to keeping one another safe.
38
We delivered a good year of returns, with a Return on Equity of 12.4%.
Statutory operating profit and underlying operating profit were higher
at £1,663 million and £1,576 million respectively.
We have committed to reduce our direct emissions to net zero by 2050
and to increase our influence to support the overall industry-wide
transition to a low-carbon future. We have developed solutions to enable
the rollout of a strategic backbone for electric vehicles throughout the
UK and are working in partnership with industry to develop Carbon
Capture and Storage (CCS) solutions. We continue to engage with
stakeholders to shape and define the delivery of the £500 million funding
commitments to help grow the UK’s rapid charging network made in the
Chancellor’s March 2020 Budget. In addition, the Chancellor announced
at least £800 million for a CCS Infrastructure Fund which will support
CCS in at least two sites.
Following the floods of 2007, we instigated an investment programme
to protect assets against future flooding. The programme ensures overall
resilience of the network to threats, focusing on protection of specific
sites against the threat of flooding and reducing the likelihood of
consumers being affected by a flooding incident on the ET system.
Following detailed modelling and consultation with the Environment
Agency, permanent flood defences were installed at Thorpe Marsh
400 kV substation in 2014 and a demountable barrier was procured to
protect the 275 kV substation which is located on higher ground. Neither
of the substations were jeopardised during the flooding event. The ET
network remained resilient during Storm Ciara in February 2020.
Customer first
As noted in the Chief Executive’s review, at the end of 2019/20, we found
new ways to put the customer first in the face of the COVID-19 pandemic.
We work with our customers to meet their needs and deliver successful
outcomes for all parties. We were pleased to see continued improvement
in our CSAT scores in our ET and GT businesses, achieving scores of
8.2 (2018/19: 7.9) and 8.0 (2018/19: 7.8) respectively. For the ESO, our
CSAT score in 2019/20 was 7.6.
In October 2019, we welcomed Ofgem’s ‘minded-to’ position on
Hinkley-Seabank connection to use the existing Strategic Wider Works
(SWW) mechanism for this vital project. In May 2020, we reached
agreement on the final cost and the regulatory funding model. The
allowance for the project is £656 million and will be funded through
the existing SWW mechanism rather than the Competition Proxy Model
(CPM). The project remains on target to be ready for connection in 2025.
Grow core business
In December we awarded the £400 million tunnelling contract
associated with our London Power Tunnels 2 project, a 20.8 mile
(33.5 kilometre), £1 billion link from Wimbledon to Crayford which will
provide significant resilience across South London when completed in
2028. We have embarked on a partnership with a social enterprise, My
Kinda Future, to inspire the next generation of engineers in South London
and to help us with local recruitment and upskilling required around our
key sites. The team will work on designs and set up across key sites this
year, launching four different tunnel-boring machines in 2021. Four other
major contracts associated with the cable and substation works will be
let this year. These partners will form an enterprise, focused on innovation
and collaboration to successfully deliver the project outcome, rewiring
London and connecting with the capital.
We took over the Western Link HVDC cable with our Joint Venture
partner Scottish Power Transmission on 23 November 2019. The link is
a submarine HVDC link between Scotland and England and Wales which
delivers up to 2,250 MW. We are working with Ofgem after they opened an
investigation into the delivery and operation of the cable in January 2020.
A particular highlight has been the completion of the tunnelling for Feeder 9
under the Humber estuary, a critical reinforcement of the gas network.
Evolve for the future
We published and submitted our business plans to Ofgem in December
2019 for our ET, GT and ESO businesses for the 2021–2026 RIIO-2 price
control period. These plans have been developed following our largest
ever engagement exercise to date, with customers, industry stakeholders,
businesses and households across the country.
National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Principal operations – UK
Our plans include investment to maintain network reliability and provide
flexibility and optionality for the UK to achieve net zero greenhouse gas
emissions by 2050, while being protected against new threats:
• Our ET plan has a baseline total expenditure spend of £7.1 billion over
the five-year period. Our ET business assumes connection of 15.3 GW
of customer capacity, providing the UK with clean power and flexible
storage, as well as increased investment to maintain reliability and
resilience. The baseline spend for ET, under our proposed financial
plan, would see consumer bills reduce slightly in real terms.
• Our GT plan has a baseline total expenditure spend of £2.8 billion
over the five-year period. Our GT business, which comprises GB gas
system operator and gas transmission, includes an increase in asset
health and cyber resilience investment, as well as a programme of
work to test and prove hydrogen conversion options. The baseline
spend for GT, under our proposed financial plan, would see
consumer bills reduce slightly in real terms.
These plans will deliver a safer, cleaner, greener and more affordable
energy system. We have challenged ourselves to ensure our business
plans deliver at the lowest cost and create optionality as we develop
the pathway to net zero. We continue to constructively work with our
regulator, Ofgem, ahead of draft determinations in the summer and final
determinations in November 2020.
The wellbeing of our workforce is important to us. 38% of our UK
employees have undertaken mental-health-related training courses
during the year, an increase of 30% compared to last year.
The UK cost efficiency programme that we announced in 2018
continues to deliver a more efficient and agile business ahead of RIIO-2.
Through this initiative we have simplified ways of working with a leaner
organisation and more efficient IT and back office activities. In 2019/20,
the programme enabled us to deliver efficiency savings of £54 million
in ET, and £19 million in GT.
We have made good progress on the £116 million Dorset Visual Impact
Provision (VIP) project, with site establishment and preliminary civil works
well underway. We are on track to underground 5.5 miles (8.8 kilometres)
of overhead line and remove 22 pylons in the Dorset Area of Outstanding
Natural Beauty (AONB) by 2022. Funding and planning applications have
been submitted for the Peak District East VIP project. This £43 million
project will remove six pylons and 1.2 miles (2 kilometres) of overhead
line in the Peak District National Park. The planning application for
Snowdonia VIP project has been submitted. This project will replace a
Get to know our
net zero workforce
Sarah Woolham-Jaffier
Civil Engineer
25-year-old Sarah Woolham-
Jaffier undertook a Masters
in Civil Engineering and now
works as part of the London
Power Tunnels project team,
helping to improve the capital’s
electricity infrastructure.
Scan here to view the story
section of overhead line which goes through Snowdonia National Park
with cables in a 2.1 mile (3.4 kilometre) tunnel. Engineering and
consenting activities have also commenced on the first of our RIIO-2
portfolio of VIP projects: the undergrounding of 2.7 miles (4.4 kilometres)
of overhead line through the North Wessex Downs AONB.
Our GSO became part of the GT business with effect from 1 January
2020, providing even greater transparency and clarity around the
management of Great Britain’s gas and electricity networks. A unified
GSO and GT structure is a better way to be organised, offering greater
alignment, simplified governance, clearer accountability, and better
coordination between system operator and gas asset management.
It makes the legal separation of the ESO even clearer.
In our GT business we are reviewing the potential to decarbonise the gas
network through a transition to carbon-free hydrogen. Working with the
UK gas networks on the Gas Goes Green programme, we are identifying
the steps required to repurpose our assets to carry hydrogen either as a
blend or up to 100%.
System Operator
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. We operate an electricity system that is
transitioning towards net zero and have seen several new energy
records set, as greater levels of renewables continue to connect to
the network and coal power stations close. During the spring of 2019
there were 18 consecutive days where coal-fired generation was not
part of the generation mix; solar output peaked in May 2019 at
around 9.5 GW and the maximum wind output of 16.86 GW was
recorded in December 2019. In combination, these changes to the
generation mix have led to 2019 being the first year on record in
which low-carbon sources generated more electricity than fossil fuel
sources. In 2020, we have continued to see further records set.
Further details about the ESO power generation mix can be found at:
www.nationalgrideso.com/great-britains-electricity-explained
Our ESO RIIO-2 plan proposes new activities that will generate net
benefits of around £2 billion for consumers over the five-year RIIO-2
period and spend over its two-year price control (2021–2023) of £514
million. The ambitious ESO plan focuses on how the ESO must
evolve to meet the challenges of the changing energy landscape.
Supported by a new, bespoke regulatory model designed to drive the
right behaviours and outcomes, the ESO will facilitate the transition to
a zero-carbon power system. Under RIIO-2, the ESO will lower
average annual consumer bills by around £3.
Following the cessation of the UK’s Capacity Market scheme in
November 2018 due to the ruling of the European Court of Justice,
we worked closely with BEIS and Ofgem to initiate contingency plans
making sure that security of supply could be maintained during the
2019/20 winter period. On 24 October 2019, the EU Commission
ruled on the validity of the Capacity Market state aid challenge,
confirming their original decision in 2015 to grant state aid approval.
Following the announcement, we have resumed our role as the
Electricity Market Delivery Body and ran auctions in early 2020.
On 15 May 2018, Ofgem opened an investigation into the ESO (when
it still formed part of National Grid Electricity Transmission plc)
pertaining to an alleged breach of its licence condition to operate the
system in an economic and efficient manner, including the production
and publication of forecasts of demand on the electricity transmission
network. The investigation is ongoing.
On 9 August 2019, following the near simultaneous tripping of two
large power generators, we experienced power outages in various
parts of England and Wales. The frequency on our network dropped
resulting in low frequency demand disconnections, preventing further
issues. Service was restored within 45 minutes to all customers. In
September 2019, we published the technical report into the event. In
January 2020 Ofgem published its findings which supported many of
the recommendations we included in our report. We operate one of
the safest and most resilient power networks in the world and, while
we recognise the disruption that the outage caused, our systems
performed as they should. We have worked closely with Ofgem,
the government, the wider energy industry and other sectors like
transport to learn the lessons from this incident.
On 1 April 2019, National Grid ESO became a separate legal entity
within the National Grid Group. The major programme to achieve this
saw the creation of the NGESO Board, which includes three
Non-executive Directors and the creation of a new office space,
physically separate from other parts of National Grid. Following
separation, we moved the GSO function to become part of the GT
business to further simplify our structure and to provide greater clarity.
We will continue to regularly review the way we are structured to make
sure we are delivering the best possible service for our customers.
39
National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Principal operations – US
Our US business performed well
operationally and financially in 2019/20,
despite challenges across our jurisdictions.
We maintained our focus on safe, reliable,
customer-led, innovative and efficient
operations. We continued to optimise
our operational performance.
We were pleased to accept a number of awards that demonstrate our
commitment to our workforce and customers in 2019/20. National Grid
was listed in the top ten of DiversityInc Top Utility and we earned a
designation as a “Best Place to Work for LGBTQ Equality” by the Human
Rights Campaign Foundation in the Corporate Equality Index 2020.
Forbes named National Grid one of the Best Employers for Diversity in
2020. Edison Electric Institute honoured National Grid in 2019 with an
Emergency Assistance Award and Emergency Recovery Award for
restoration efforts during hard-hitting storms.
Our US performance
Optimise performance
Measure
Return on Equity (£m)
Statutory operating profit (£m)
Underlying operating profit (£m)
Adjusted operating profit (£m)
2019/20 2018/19
2017/18
9.3
880
1,636
1,397
8.8
1,425
1,594
8.9
1,734
1,704
1,724
1,698
Grow core business
Capital expenditure (£m)
3,228
2,650
2,424
Asset growth (%)
Rate base* (£m)
12.2
9.2
7.4
20,644
17,565
14,762
* US rate base is as previously reported at historical exchange rates
Customer first
US Residential –
Customer Trust Advice
59.8%
(2018/19: 58.7%)
Highlights
In the US, in 2019/20 we improved our storm restoration efforts,
successfully replaced hundreds of miles of leak-prone pipe in our gas
network, exceeded our electric vehicle charging deployment goals
ahead of schedule, reached record-setting Distributed Generation (DG)
in Rhode Island, and renewed our focus on safety culture.
The clean energy future continues to be a focus in the US. The
Company’s net zero by 2050 announcement was in line with the
ambitious targets and important steps being taken by governments,
regulators and across our communities, to deeply decarbonise
economy-wide. The US business is currently building a plan to achieve
this new target, which will impact our fleet, building stock, and pipeline
replacement efforts. At the end of March 2019, we had already reduced
emissions by 71% below 1990 levels in the US, exceeding our interim
target of 45% by 2020 group wide. We achieved this by focusing on a
range of activities, which include a major pipeline replacement
programme to minimise gas losses through leakage and the reduction
of a high-emission greenhouse gas called SF6 in our electricity networks.
An important milestone we reached, contributing to decarbonisation,
was exceeding our electric vehicle charging station deployment goals
ahead of schedule in New York. We enabled over 1,405 ports at roughly
184 customer sites and have a number of customers who are eagerly
awaiting an extension of the programme, which will be proposed to our
New York State regulator in a future rate case.
In the renewable space, we interconnected a record number of DG
projects for our customers in Rhode Island, totalling 99.8 MW and
connecting 1,938 applications.
40
Safety continues to be a critical pillar of our daily operations. The Company
is fully committed to the well-being and safety of our workforce and
customers alike. This year, a tragic event took the life of one of our
employees and reminded us to continue striving to ‘find a better way’
to improve our safety culture. As at 31 March 2020, our LTIFR was 0.16.
We have focused safety culture transformation programmes to engage
our workers on hazard and risk awareness, and required controls to
prevent safety incidents. We have asked our workforce to direct their
attention to the safety of themselves and their colleagues every day.
Optimise performance
During 2019/20, the US business focused on growth, customer value,
and deep decarbonisation. Our US Regulated net revenue was
£123 million (2%) lower, with £257 million of incremental rate cases and
£85 million of exchange rate benefit, more than offset by £465 million
adverse timing (lower volumes and commodity recoveries). We invested
£3.2 billion in energy infrastructure and technology solutions during the
year. We also added 41,043 active new customer accounts across gas,
electric and DG combined.
Our energy infrastructure investments are designed to bring cleaner
energy to our customers and enhance reliability. One of our larger
investments, The Metropolitan Reliability Infrastructure Project, will
increase system reliability and operational flexibility of the existing
transmission system in Brooklyn, New York. It will also increase supply
diversity options and provide capacity for operation in case there is an
outage. The project consists of roughly 40,000 feet of transmission main
that will connect the Southern line to the Brooklyn Backbone and our
Greenpoint Facility by autumn 2021.
Through our gas pipeline replacement programme, we have
successfully replaced 460 miles (740 kilometres) of pipe in 2019/20,
compared to 400 miles (644 kilometres) in 2018/19. By replacing
leak-prone pipe, we are significantly reducing unintended release of
natural gas, reducing methane emissions and keeping our customers
and communities safe. An innovative robotic sealing technique has
helped us to seal cast iron pipes in congested urban areas like Boston
and New York City. We are on schedule to replace our leak-prone pipe
inventory across the US enterprise within the next 20 years.
A challenge we are currently facing that came to the forefront in 2019/20,
is significant growth in demand for natural gas across our service area
in New York City and Long Island. That growth is expected to continue
over the next 10 years due to increased demand from new construction
and conversion of oil to natural gas. As a solution to the gas supply
issue, we supported the NESE Pipeline project to meet increased
demand. When NESE was not approved by New York State, we ceased
to connect new customers to gas in order to ensure we could continue
to deliver gas to our existing customers safely and reliably. The New York
Public Service Commission ultimately ordered us to connect some of
those new customers, which we accomplished by increasing use of
temporary supply solutions. We are now working with New York State,
our stakeholders and our customers to find long-term solutions to gas
supply constraints in the region.
In 2019, we experienced an unprecedented gas supply disruption on
Aquidneck Island that required temporarily stopping service to about
7,500 customers. This was caused by a reduction in transmission flow
coming into our system in Rhode Island. Since then, we have been
working hard to learn from the event and have cooperated with a federal
investigation and the Division of Public Utilities and Carriers in a summary
investigation. The Division’s report, released in autumn 2019, reflected
National Grid’s fundamental commitment to safety and exemplary
emergency response. We have already addressed many of the proposed
recommendations included in their report, securing additional winter
gas supply, expanding our energy efficiency and demand response
programmes and improving long-range planning. We now remain
focused on securing the ongoing needs of Aquidneck Island and
Rhode Island’s energy future.
National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Principal operations – US
Customer first
As noted in the CEO review, at the end of 2019/20, we identified new
ways to put the customer first in the face of the COVID-19 pandemic.
Our unwavering commitment to our customers was demonstrated
by a few initiatives designed to make it easier for our customers to
do business with us. We converted more customers to paperless
billing by improving our paperless capabilities, strengthened our online
marketplace where customers can purchase energy efficiency and
smart home products, increased the speed at which we verify our
customers’ identity who call into the customer service line, and
improved estimated time of restoration calculations during storms.
Our proactive outage communications and our Interactive Voice
Recording upgrades increased our customer satisfaction scores,
while storms and challenges with gas shortages in Rhode Island and
downstate New York have caused some headwinds. As a result,
customer ease has remained relatively flat and improvements in trust
have increased slightly.
We continue to work towards quick and efficient storm response to
improve these scores. We have improved our restoration efforts over
the past decade by developing an emergency response team that
works hard to service our customers. The team focuses on forestry,
staging crews, materials, advanced analytics and reporting tools,
while employing a classification index that anticipates restoration
times based on storm types. We demonstrated efficient and successful
storm response in April 2020 when 70 mph+ winds caused power
outages for over 200,000 customers across all of our jurisdictions.
National Grid has a long history as a leader in economic development,
investing in the communities across our territory. We have seen
record-breaking economic development grant activity in New York over
the past five years. We help our customers evaluate infrastructure needs
and improve productivity, efficiency and profitability so that they remain
and grow in the region.
The town of Lima, New York, recently experienced a significant
economic boost with the expansion of Bristol ID Technologies creating
new jobs within this rural community. The Company’s electric capital
investment grant provided $118,000 to help offset the new electric
infrastructure required for this impactful business expansion, resulting
in higher-volume production at a reduced cost and more clients.
Grow core business
In September, the Massachusetts Department of Public Utilities (MADPU)
approved an electric rate case, which enables us to deliver on important
investments in reliability and storm response, provide greater assistance
to income-eligible customers and support electric transportation and
energy storage policies that are helping drive us towards a clean energy
future. The Company had not updated its rates since 2016 and will not
file a new rate case for Massachusetts Electric until 2023.
In December, our Rhode Island Gas and Electric Infrastructure, Safety,
and Reliability (ISR) plans were filed with the Rhode Island Public Utilities
Commission (RIPUC). The plans provide mechanisms to fund maintaining
and upgrading the gas and electric distribution systems by replacing aging
equipment, addressing load growth, and responding to emergencies.
In addition, the Gas ISR plan allows for proactive replacement of
leak-prone pipe. Both of these plans were approved by the RIPUC in
March 2020.
In the latest gas rate case, filed April 2019 for KEDNY/KEDLI, the
Company proposed a suite of demonstration projects to explore
low-carbon heating solutions. The solutions are divided into programmes
or technologies. The rate case is still underway. Over the past year, we
have taken meaningful steps to develop low-carbon heating solutions.
In coordination with all New York’s gas utilities, we have developed the
RNG Interconnection Guideline. RNG is pipeline-compatible, gaseous
fuel with lower lifecycle carbon dioxide equivalent emissions than
geologic natural gas. The purpose of the guideline is to provide a
necessary technical framework that can incorporate RNG into the
natural gas distribution network.
Get to know our
net zero workforce
Emma Burke
(Associate Engineer,
Transmission Network
Technology Deployment)
What attracted Emma Burke to
National Grid was the opportunity
to work with new technologies in
energy efficiency and storage.
She began in the Graduate
Development Programme (GDP),
which introduced her to the
energy industry and the
technologies that improve the
electric grid, and then moved
onto the Technology Deployment
programme. Alongside a network
of supportive colleagues she
met while participating in the
programme, she strives to make
a positive impact on energy
technology and evolve with a
changing industry.
Scan here to view the story
Evolve for the future
Over the past few years, the Company has been hard at work
decarbonising the transportation sector.
In partnership with the Capital District Transportation Authority, National
Grid deployed four electric public buses in Albany, New York. National
Grid and the transportation authority will monitor the range, charging
timelines, electricity usage and performance of the vehicles throughout
its route network. If the demonstration proves to be successful, the
Company will work with other transportation authorities to deploy more
electric buses across the region.
In upstate New York, National Grid’s EV charging programme surpassed
its EV charging installation goal. The Company originally planned to
complete 56 projects through this programme with an approximate
$3 million allocation. However, we have more than tripled that goal with
the completion of over 184 projects. Over 40 of the programme’s site
hosts serve disadvantaged communities.
Looking ahead
In 2018/19, the Company announced the Accelerate Programme,
an ambitious, three-year efficiency challenge that set out an aspirational
target of a 20% efficiency improvement in operational and capital
expenses across the US business by 2020/21. The Accelerate Programme
is aimed at improving both the quality and cost-effectiveness of our
services to customers. This programme will continue to allow us to find
a better way, so we can grow and serve customers long into the future.
As we forge ahead into our clean energy future, we continue to identify
pathways for deep decarbonisation along with the states we serve,
focusing on the power, heat and transportation sectors. As one of the
world’s largest investor-owned utilities, we will work alongside
policymakers to ensure we can deliver clean, safe, reliable and
affordable energy to customers today and tomorrow.
41
National Grid plc Annual Report and Accounts 2019/20
Strategic Report
National Grid Ventures
and other activities
Our NGV and other activities business
performed well in 2019/20. We maintained
our focus on safety and reliability while
developing new projects to support the
energy transition.
Customer first
BritNed availability
98.6%
(2018/19: 98.2%)
IFA availability
91.4%
(2018/19: 93.9%)
Nemo Link availability
96.1%
(2018/19: NA)
Interconnector capacity by 2024
7.8 GW
Optimise performance
Statutory operating profit
Underlying operating profit
£242m
(2018/19: £400m)
£237m
(2018/19: £400m)
Adjusted operating profit
£242m
(2018/19: £400m)
Grow core business
Capital investment
£885m
(2018/19: £623m)
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, large-scale renewable generation and competitive transmission.
Our ‘other’ activities comprise NGP, 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 NGV and other segment delivered £237 million of
statutory operating profit, £242 million underlying operating profit and
accounted for £885 million of continuing investment in 2019/20.
As at 31 March 2020, our LTIFR was 0.05. This is better than our NGV
target of 0.08.
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 GB and the Netherlands. In 2019/20 BritNed’s
availability was 98.6%.
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 2019/20, IFA’s availability was 91.4%.
Nemo Link 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 GB and Belgium. Nemo Link’s availability
was 96.1% in 2019/20.
LNG storage and regasification: Grain LNG is one of three LNG
importation facilities in the UK. It operates under long-term take or pay
contracts with customers and provides importation services of ship
berthing, temporary storage, ship reloading and regasification into the
NTS. Utilisation of terminal capacity was 30.8% in 2019/20, up from
18.8% in 2018/19. Grain LNG set a record for the highest single-day
gas send-out from a European terminal in November 2019.
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.
UK 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 8.8 million domestic, industrial and
commercial meters, down from 9.9 million in 2018/19.
US competitive transmission: NGV is a part-owner of Millennium
Pipeline, which provides consumers in the northeastern US with
additional natural gas infrastructure to meet growing demand for cleaner
and more reliable energy. It is strategically positioned to serve utility and
power plant loads across New York State and into New England.
NGV is also a part-owner of New York Transco, which energised three
new transmission upgrade projects in New York in 2016 that provide
several ongoing benefits, including reducing upstate to downstate
transmission congestion to save money for electricity consumers and
offering better access to clean energy, and supporting the retirement
of traditional power generation. The assets include the Ramapo to Rock
Tavern 345 kV Line, Frasers-Coopers Corner 345 kV Line and Staten
Island Unbottling.
42
National Grid plc Annual Report and Accounts 2019/20
Strategic Report | National Grid Ventures and other activities
Get to know our net zero
workforce
Erinn Sapsford,
Business Readiness
Engineer
27-year-old Erinn Sapsford was
tempted away from her original
career plans after enjoying an
‘industry year’ at National Grid
during her Mechanical
Engineering degree. As a
Business Readiness
Engineer, she applies her
skills to one of our key
projects, enabling
the UK to import
more green
energy from
Norway.
Scan here to view the story
National Grid Property entered into a new joint venture agreement with
Places for People, one of the largest regeneration, development and
property management companies in the UK and a registered provider
of affordable housing. As part of the venture, we aim to build up to 500
new homes on the first three sites, and delivering 10 sites into the joint
venture over the next three years.
Evolve for the future
UK Carbon Capture, Utilisation & Storage (CCUS): In 2019 NGV
launched Zero Carbon Humber, a consortium looking to develop the
world’s first zero-carbon industrial cluster in the UK’s Humber region
by 2040. Such a project would protect 55,000 jobs in the region and
establish the UK as a world leader in CCUS technology.
US offshore wind: Ørsted and Eversource, with support from NGV, are
developing the Revolution Wind offshore wind farm which was awarded
competitive tenders to supply electricity to distribution utilities in Rhode
Island and Connecticut. The proposed 704 MW wind farm will be
located over 15 miles (24 kilometres) south of the Rhode Island and
Massachusetts coasts. The project is expected to be operational by
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.
National Grid Partners: NGP is the venture investment and innovation
arm of National Grid. NGP’s portfolio at the close of the fiscal year
comprises 21 companies at a fair value of £134 million.
US battery storage: NGV is a 50-50 joint venture partner with NextEra
Energy Resources in two battery energy storage systems on Long
Island. These include two 5 MW, 40 MWh battery energy storage
systems in East Hampton and Montauk, New York. The batteries have
helped decrease emissions and enabled energy peak-shaving during
the busy summer months on the eastern end of Long Island.
UK 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 2019/20, we disposed of 34 sites and exchanged contracts on a
further five land sales, to facilitate the delivery of thousands of new
homes across the UK. Our joint venture with Berkeley Group, called
St William Homes, has entered its sixth year and recorded its first profit
in 2019/20. Around 7,600 homes are already under construction
across London and the South East.
Grow core business
Electricity interconnectors: NGV will grow its interconnector portfolio
by 3.8 GW in the next four years, with new subsea power links to France,
Norway and Denmark.
Construction continues on the 149-mile (240-kilometre) IFA 2
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.
Preliminary construction works have now also commenced on 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 large-scale renewables: NGV completed its acquisition of
Geronimo, a leading wind and solar developer in North America based
in Minneapolis, in July 2019. Since the acquisition, National Grid has
announced the commercial operation of its 200 MW Crocker Wind Farm
in South Dakota, along with the signing of a Power Purchase Agreement
with Basin Electric Power Cooperative for its 128 MW Wild Springs solar
project, also in South Dakota. These developments, together with further
activities that build on their strong pipeline of future renewable energy
projects, complement the 379 MW portfolio of operational wind and
solar assets which are held in joint venture with Washington State
Investment Board and operated by National Grid.
US competitive transmission: In April 2019, New York Transco’s
New York Energy Solution (NYES) was selected by the New York
Independent System Operator to provide transmission upgrades that
will relieve congestion of New York’s bulk electric power system, while
enhancing reliability and facilitating upstate clean energy resources to
the downstate demand centers. The upgrades will be taking place on an
existing 54.5-mile (88-kilometre) utility corridor and on utility-owned land.
New York Transco is well into the consenting and permitting process for
the NYES project, which remains on track for a late 2023 service date.
NGV expects to participate in additional public policy electric transmission
projects in New York that will be necessary to accommodate increasing
amounts of renewable energy, in particular offshore wind.
UK property: St William continues to grow and we now expect the
joint venture to deliver around 20,000 new homes across London and
the South East. A further four sites have been negotiated into the joint
venture during 2019/20 with further sites expected to be negotiated into
the joint venture during 2020/21. In the next 12 months, we expect our
St William Homes joint venture to complete construction of over 100
new homes across London.
43
National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Our stakeholders
As the Board of Directors, we prioritise
our responsibilities to our different but
interrelated stakeholder groups and wider
society. We endeavour to ascertain the
interests of our stakeholders and reflect
them in the decisions that we make.
We recognise that in balancing those
different perspectives, it isn’t always
possible to achieve each stakeholder’s
preferred outcome.
You can find out more about our key stakeholders and their
interests, how we engaged with them and how this influenced
decision-making in our ‘Section 172(1) Statement’ that follows.
For more details on how our Board operates, including the matters
it discussed and debated during the year, see pages 64 – 87.
Communities and
governments
Our
customers
Our
suppliers
Society
Our
investors
Our
regulators
Our
colleagues
44
National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Our stakeholders
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 by maintaining levels of
business conduct that are governed by our values. We continue doing
so as the energy landscape changes.
How our Board keeps up to date with stakeholder interests
Reporting and monitoring: Our Company-wide engagement collates
information on stakeholder interests that informs business-level
decisions, with an overview of developments being reported on a
regular basis to the Board or a Board 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).
Direct engagement: 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.
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 decisions made by Directors.
We have provided some examples of how particular engagement
outcomes were considered by the Board below, noting that these
examples are not exhaustive in summarising all our stakeholder
considerations. Within each example, when outlining how the Board
considered the impact on a particular stakeholder group, we also list
the broader range of stakeholders the Board considered as part of
its discussions.
We considered the interests of our stakeholders in reviewing matters
such as our liquidity and financial arrangements, our dividend,
operational matters, for example resolving the gas supply issues in
New York City and Long Island and developing our business plans.
You can also read more about how the Board showed regard for the
interests of various stakeholder groups through a worked example of
its response to the COVID-19 pandemic on page 65.
This section, How we create value for our stakeholders, serves as our
section 172 (1) statement.
Stakeholder
group
How we engage and communicate
How stakeholder interests have influenced decision-making
and the execution of our strategy
Our investors
– individual
shareholders
Our investors
– institutional
(equity
investors and
debt investors)
Company engagement
The Company Secretariat team, together with the Company’s
Registrar, engage with our retail shareholders throughout the year
to deal with enquiries relating to shareholdings.
Board-level engagement
Updates from Company-level engagement with shareholders
are provided to the Board as appropriate.
The AGM and shareholder networking programme provide the
Board with valuable opportunities to engage with our shareholders.
All members of the Board attended the 2019 AGM to discuss
proposals and answer shareholder questions as necessary. The
shareholder networking programme in 2019 included presentations,
and a visit to our Gas National Control Centre in Warwick where
shareholder attendees had direct one-to-one contact with senior
management, Board members and engineers across a two-day period.
During the shareholder networking programme and 2019 AGM, the
Board members listened and responded to views of our shareholders.
Any resulting actions were fed back to the businesses as necessary.
We recognise the importance of keeping an engaged shareholder
base so that we can closely monitor their interests. As such, the
Company Secretariat team, in collaboration with our Registrar,
implemented an asset reunification programme in January 2020.
This exercise provided us with an opportunity to re-unite as many
shareholders as possible with their unclaimed assets. The
programme will continue throughout 2020 and so far, as at 30 May
2020, £13 million was reunited with the respective shareholders
and we have re-engaged 8,372 shareholders on the register.
Ongoing engagement between our investors and the political
sub-group of our Executive Committee highlighted concerns
around the UK Labour Party’s policy for state ownership of the UK
operating companies. The Board, in line with its fiduciary duty to
its shareholders, took steps to protect the value of shareholdings
in the event of UK state ownership.
Views of other stakeholder groups considered
Customers, Regulators, Communities and governments, Our
colleagues, Suppliers
Company engagement
Over the year, the Investor Relations team held 436 investor
meetings across 10 countries and 26 cities: met with over 400
institutions, representing 49.9% of our share register; and hosted
three site visits, offering investors the opportunity to meet divisional
management and view our assets.
The investor perception study highlighted that senior management
was held in high regard and that the ability to maintain operational
excellence is taken for granted. The survey further noted that there
was an opportunity for the Company to raise the profile of the role it
is playing in the energy transition and also emphasised the strategic
benefits of the combination of the Company’s UK and US assets.
Our engagement programme focuses on updating investors on
the regulatory and operational progress in our UK, US and NGV
businesses, as well as the growth opportunities available to us.
During the year, the Debt Investor Relations team in Treasury held
meetings between senior Group Treasury representatives and debt
investors in the UK, Continental Europe and the US. Topics
covered included our financial results, US rate case filings and
bond issuance. The team also met with debt investors at various
conferences over the course of the year.
Board-level engagement
The Board received regular feedback on investor perceptions
and opinions about the Company and as part of our engagement
programme we provide the opportunity for our current and
potential investors to meet with the Chairman, the Executive
Committee and operational management.
Additionally, the Board received the results of an independent
audit of investor perceptions where interviews were carried out
with investors to establish their views on the performance of the
business and management. The findings and recommendations
of the audit were then reviewed by the Board.
Our investors also expect that we stand for something far more than
providing economic returns. To facilitate the change towards net
zero, in January 2020, we also announced the launch of our first
green bond, issued by National Grid Electricity Transmission plc.
The €500 million proceeds from the bond issuance will finance
electricity transmission projects with environmental benefits.
An ESG data book was published in the year to measure the overall
performance of the Company in operating responsibly, while
creating positive social impact. In preparing this data book, we held
discussions with investors to identify the most commonly used ESG
data providers, and reviewed these questionnaires to determine the
most relevant data to communicate to investors. During this process
over 400 questions were reviewed. Subsequently, these were
consolidated and refined down to those included in this document.
Views of other stakeholder groups considered
Regulators, Communities and governments, Our colleagues
45
National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Strategic Report
Our stakeholders continued
How we create value for our stakeholders continued
Stakeholder
group
How we engage and communicate
How stakeholder interests have influenced decision-making
and the execution of our strategy
Our colleagues
Our regulators
Company engagement
Engagement with our people takes many forms, including
reviewing and implementing actions from the EES results;
Employee Resource Group (ERG) sessions, which provide the
opportunity for ERG chairs and leads to discuss the importance
and impact of their group and provide valuable feedback on
inclusion and diversity related topics; meetings with trade union
representatives, and leadership offsites located at a range of
different business locations in the UK and US.
Board-level engagement
The annual EES provides senior leaders and the Executive Committee
and Board with an insight into how our employees are feeling about
the Company and its direction. Action plans are developed to
progress any areas of improvements that are identified.
The Board also conducts site visits and meets with a wide range
of employees through our employee engagement programme:
you can read more on this on page 73.
The Executive Committee also received regular talent updates
and considered the remuneration structure for senior management.
Company engagement
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 and
proposed business plan submissions for RIIO-2.
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. Specific engagement was undertaken
regarding the decarbonisation pathways and the Niagara Mohawk
Power Corporation advanced metering infrastructure.
Board-level engagement
The Board met with the Chair, CEO and incoming CEO of Ofgem in
November 2019. The topics of conversation included our net zero
ambition, with a focus on practical solutions to move the agenda
forward. The discussions also covered RIIO-2.
The outcomes of engagement activities are reported to the
appropriate forum and ultimately to the Executive Committee and
Board. In the US, any rate case engagement is reported up to the
Executive Committee and the ordering of Executive Committee and
Board as appropriate.
The Board met with the Governor of Massachusetts and a member
of the Governor’s office in March 2019. Recognising the severity of
the adverse reaction of various stakeholders to the gas moratorium
that was enforced by the Company in downstate New York, the
Board commissioned two external reviews to understand how the
US business had made the original decision. Long-term solutions
are being implemented.
The topics discussed and actions from Board and Executive
Committee’s engagement with our people can be found on page 73.
The Board was pleased to see a continued improving trend in
overall employee engagement through the 2020 EES results. The
introduction of the Leadership Index has allowed leaders to gain
feedback from their direct reports on areas where their personal
actions, style and behaviours can have an immediate impact on
enablement and engagement. The Leadership Index will be a key
focus area for 2019/20.
In the UK, discussions with our regulators have contributed to the
productive outcome of key business issues such as:
• the 9 August 2019 power outage: the Company had regular
engagement with Ofgem and the UK government, and the Board
regularly discussed the outcome of investigations and reports
focused on this, including the response to Ofgem on the findings
from the investigation. In January 2020, the Board welcomed
Ofgem’s report on this incident which confirmed that our actions
did not cause the outage.
• the future of our ESO business, which will be reviewed by Ofgem
following legal separation last year.
• RIIO-2 business plans: for the development of the RIIO-2
business plans, we have followed Ofgem’s enhanced stakeholder
engagement process, which is based on greater engagement
with our industry and end consumers to prioritise their needs in
our RIIO-2 business plans. Three independent groups were
established to provide challenge throughout this process – two
independently Chaired User Groups, (one for the ESO and one for
the transmission businesses) and an Ofgem Challenge Group.
Regular discussions were held at the Executive Committee and
the Board on progress with stakeholder engagement, the
development of the RIIO-2 business plans and on interactions
with the challenge groups. On invitation, the Chairs of the Chaired
Independent User Groups met with the Board in 2019.
Following a period of engagement with Ofgem, we submitted
our final business plans for RIIO-2 in December 2019. Thereafter,
engagement has continued with Ofgem evidencing various aspects
of the Company’s RIIO-2 business plans such as the formal
question and answer process to explore our RIIO-2 business plan
submission ahead of its draft and final determinations later in 2020.
In the US we refined 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.
The external reviews conducted on the gas moratorium have
highlighted lessons and recommendations which are already being
implemented. In the short term, all affected customers have been
contacted and plans are in place to make sure that they are
connected to a gas supply in the near future. Medium- to long-term
solutions that are in the best interests of our customers and
regulators continue to be progressed. The Board is closely
monitoring the output of these developments.
Views of other stakeholder groups considered
Customers, Investors, Communities and governments, Suppliers,
Our colleagues.
46
National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Our stakeholders
Stakeholder
group
How we engage and communicate
How stakeholder interests have influenced decision-making
and the execution of our strategy
Company engagement
Regular discussions and satisfaction surveys to journalists
and government.
Communities
and
governments
Policy and public affairs and in house US government relations teams
develop, grow and leverage the Company’s relationships with key
politicians, officials, wider stakeholders and influencers to ensure the
Company is connected with legislation and government policy.
Our customers
Engagement with local communities in the form of consultations
during construction phases of projects and work with
environmental education centres.
We liaise with land owners and wider communities where the
Company has assets and we have established dedicated teams
to manage relationships.
Board-level engagement
During the year, the Board received regular updates on the
potential impact of renationalisation which had been included as a
policy in the Labour Party manifesto ahead of the December 2019
UK General Election. Regular updates were also received in relation
to Brexit.
The downstate New York gas moratorium and feedback from
engagement with the Governor of New York formed an important
part of the Board’s agenda for the US business.
Company engagement
UK customer programme – we use several channels such as
operational fora, liaison meetings, market research, stakeholder
events and interactive customer listening sessions to engage with
our customers. We have in place a robust governance structure
to ensure our engagements and insights are shared at all levels.
This includes a strategic meeting accountable for customer and
stakeholder experience across the UK core business. It is chaired
by our UK Executive Director and attended by the UK Executive
Committee members on a quarterly basis. To support this, we have
a committee made up of senior leaders from across the UK
business. This governance is designed to ensure our pipeline of
work addresses customer needs and continuously raises the bar.
We also ensure customer experience remains one of our top
priorities by measuring and tracking progress against our customer
experience strategy throughout the Company.
US customer team – collects and communicates
‘voice of customer’ feedback throughout the business, gathered
via customer surveys on a tracking and ad hoc basis to measure
customer sentiment of residential, commercial and wholesale
customers. An online community of 6,000 residential customers
enhances insight with fast and continuous feedback. We are also
leveraging design to inform customer experience solutions,
process changes and product development.
Board-level engagement
In the year, the Board received updates on both the UK and US
customer strategies. Bi-annual reports were also submitted to
the Board from the UK, US and NGV businesses.
Company engagement
Strategic relationship meetings are conducted regularly between
suppliers and the procurement team.
Our suppliers
We work closely with our suppliers and peers to build on our
knowledge and promote best practice in the industry to combat
issues such as climate change.
Board-level engagement
Bi-annual reports relating to our suppliers were submitted to the
Executive Committee and annual reports to the Board.
The Board agenda continued to be strongly focused on community
and governmental issues this year such as:
• the December 2019 UK General Election and the resulting exit
from the European Union on 31 January 2020. We have continued
to work with our UK regulators and the UK government to ensure
that free trade agreements are negotiated for our interconnectors
so that consumers continue to reap their benefits. We have also
looked after the interests of our European staff and sought to
ensure continued co-operation in energy balancing across
Europe in the future.
• in the US, the impact on communities following the gas
moratorium in downstate New York was considered in depth by
the Board and the Safety, Environment and Health Committee.
We progressed dialogue with the New York State Governor and
enacted settlement agreements and are now developing
long-term solutions.
• the clean energy agenda: UK and US governments and
communities are strongly focused on carbon reduction activities.
To focus on meeting our net zero commitment and embedding
sustainability into our culture, we applied a sustainability lens
across our operations and challenged our businesses to commit
to challenging targets. 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, and the Board also approved
the Company’s announcement of its target to become carbon
neutral by 2050.
Views of other stakeholder groups considered
Customers, Investors, Regulators, Suppliers, Our colleagues
In the UK, feedback received through our stakeholder-led RIIO-2
business plan provided an understanding on how satisfied our
customers are with the service we provide. Their views on the
outputs we should provide during RIIO-2, how these should be
delivered and the effect on their bills, were considered by the Board.
In the US, we have incorporated ‘voice of the customer’ in Executive
Committee and Board papers and received feedback to support our
five new strategic imperatives which will guide our customer focus.
The Executive Committee and Board also received updates on the
US KEDNY/KEDLI and Niagara Mohawk rate case filings.
Views of other stakeholder groups considered
Investors, Regulators, Our colleagues, Communities and
government
In collaboration with our suppliers, our focus is on delivering
low-carbon and sustainable schemes for our projects. We
established major contracts that will support our role in accelerating
the clean energy transition. For example:
• the Board were updated on the six-year, £400 million contract
with Hochtief-Murphy Joint Venture, who will deliver the tunnelling
and shaft work for the London Power Tunnels 2 project; and
• the Board received an update on the chosen supplier, Balfour
Beatty, who had been chosen to be the civil works supplier for the
Company’s interconnector to Denmark. The four-year, £90 million
contract will deliver the British onshore civils works for the project.
Views of other stakeholder groups considered
Investors, Regulators, Communities and government, Customers
47
National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Our commitment to being
a responsible business
In 2019, National Grid conducted a
comprehensive review of where we can
create the most positive impact on society.
The resulting principles of responsibility
are being embedded to inform everything
we do as a business.
Responsibility at National Grid
Our purpose is to “Bring Energy to Life” and we do this through the
delivery of the electricity and gas that powers our customers and
communities; safely, reliably, and efficiently. But we also have an
important role as a responsible citizen in society as a whole, in our
communities, and as a responsible employer.
To further this ambition, during 2019/20 we applied the lens of being a
purpose-led organisation, including the principles of an ESG (Environmental,
Social and Governance) framework, to review and adapt the way we
manage our business responsibly, looking at everything from our strategic
investment process, to our role in the community, to our procurement
processes and policies. This brings together, and enhances, our focus
on the environment, people and communities that have been at the core
of our approach to responsible business for many years.
We have committed to embedding the following five key elements of
being a responsible business into our strategy and goals. These are
areas where the Company can create maximum total societal impact:
the environment, our governance, our colleagues, the communities
we serve and operate within, and the economy.
This approach has informed and guided our response to the COVID-19
crisis, with a focus on caring for our colleagues, supporting the
communities and customers we serve, and helping protect and
restore the economies we operate within.
Our approach to reporting
This section contains information relating to the key focus areas that are
considered material to shareholders, as identified by our internal review
of total societal impact.
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.
Our principles of responsible business
Governance
Ensuring that our governance
mechanisms reflect our
commitments and ensure that
the principles of responsibility
guide us in everything we
do as a business.
Our communities
Delivering sustainable
energy safely, reliably,
and affordably; ensuring
they get the benefits.
Environmental
Enabling a fair and
affordable transition
to a clean energy
economy.
Our purpose
To Bring Energy
to Life
Our vision
To be at the heart
of a clean, fair and
affordable energy
future
Our colleagues
Delivering sustainable energy
safely, developing the right
skills to enable and accelerate
the energy transition.
The economy
Powering society,
partnering with
regulators, our business
partners and suppliers.
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National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Our commitment to being a responsible business
Our communities
We are committed to delivering sustainable energy safely, reliably and
affordably for the communities we serve. In 2019 we recognised the
importance of ensuring that our communities enjoy the benefits of
the clean energy transition and that no one should be left behind in
delivering those benefits.
These shifts in our sector will require investment. We are committed to
working with the communities we serve to help them meet, or exceed,
their overall climate and carbon ambitions, and we will look to do so in
an affordable way. As we develop long-term affordability targets, we
will ensure that National Grid’s cost to our customers is reported
transparently on an annual basis.
As well as affordability, the principle of fairness is also important. We
will play our role in ensuring that no-one is left behind in the transition to
clean energy, and that the associated benefits are enjoyed by all. A fully
decarbonised transportation infrastructure, for example, should be
accessible by everyone across the communities we serve.
Finally, we embrace our responsibility to maintaining the delivery of energy
to the communities we serve, safely and reliably.
Engaging with our communities
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 18.
Supporting communities to thrive
Responsibility in our communities means safely maintaining the resilient
energy systems society expects and has become accustomed to, as
well as ensuring that our economic and social role in the community has
the greatest possible positive impact. That’s why we partner with charity
organisations and encourage and enable our employees to volunteer to
work with them. In early 2020 we launched a Company-wide community
investment strategy to ensure that our programmes enable skills development
with a focus on lower-income communities. These programmes are
intended to create employment opportunities in the energy sector, related
to the clean energy transition. We are committed to tracking programme
participants from initial interaction all the way through to eventual
employment either at National Grid, our partners, suppliers or other
organisations involved in the challenge of meeting net zero. Our goal is
to create 45,000 jobs across the US and UK through this new initiative.
Case study – UK
The Hinkley Connection Project
Our project will connect the UK’s first nuclear power station for a
generation; introduce T-pylons to our network; and release low-carbon
and renewable energy from the south west. It’s a positive and exciting
future. Getting there, however, means impacting communities with
construction for seven years.
In return, we’re helping local people create a future of their own and are
investing in the local economy via adult skills and employment. Working
with stakeholders we have created bespoke training and support for the
long-term unemployed. Our aim is to help more than 300 long-term
unemployed into work; so far, 49% of those under training have gained
employment.
We listened to government agencies, local authorities, job centres and
charities – as well as our customer, EDF. Their feedback helped us
design a course that responds to local labour markets and, with retention
a key challenge, encourages trainees to complete it. Based on
stakeholder feedback, we emphasised traffic management training.
Stakeholders challenged us to focus training in areas most affected by
construction and we are now revisiting our approach.
Through our commitment to benefit the communities in which we
operate, we are connecting with people, as well as low-carbon
generation, leaving a legacy of job creation and upskilling.
“In early 2020 we launched
a Company-wide community
investment strategy to
ensure that our programmes
enable skills development
with a focus on lower-income
communities.”
45,000
£47m
(2018/19: £54m)
Jobs to be created across
the UK and US to support
lower-income communities
Contribution of our corporate
responsibility work
Part of our responsibility is to serve society fairly and affordably. In the US
we already care for vulnerable customers with low-income programmes,
bill discounts and free energy efficiency advice. In response to the COVID-19
crisis, we have expanded customer support, paused late payment
collections activities, and placed a freeze on related service cutoffs.
In the UK, National Grid established a £150 million Warm Homes Fund.
This is the largest private sector investment in energy efficiency ever
made in the UK, and is designed to support local authorities, registered
social landlords and partnerships to help approximately 50,000
households suffering from fuel poverty. Protecting vulnerable customers
remains a key priority as we seek to ensure that no-one gets left behind
in the transition. And by engaging with customers to reduce their energy
usage, we can also help them reduce their carbon emissions,
contributing to the overall decarbonisation of the economy.
Reliability and resilience are part of our regulatory duty, but also our social
contract. There isn’t a choice between a clean energy system and a
reliable one. Due to the effects of climate change, we expect our network
will need to be more prepared to recover from extreme weather events,
and we are committed to ensuring the reliability of supply, as well as
playing a leading role in disaster recovery.
Case study – US
Ideal Dairy Farm, New York
The New York State Energy Research and Development Authority and
National Grid work collaboratively to deliver technical and financial
resources to the agriculture community across New York State. We are
pleased Ideal Dairy, LLC has been a beneficiary of this scheme.
Energy costs are a significant expense for a farm. Expansion has always
been part of Ideal Dairy farm. Recognising the importance of greater
economies of scale, Ideal Dairy decided to proceed with a multi-million
dollar expansion project. National Grid provided financial incentives for
the energy-efficient equipment as well as an economic development
grant for a new commercial underground three-phase 1,600 amp service
to support this expansion. The new well-lit parlour and barns with
efficient ventilation systems keep the areas bright and comfortable for
the cows and workers. This optimises production.
Ideal Dairy has grown from 1,230 cows in 2016 to 2,300 cows while
doubling production to 22,000 gallons of milk a day through efficiencies.
With the success of this project, they added a freestall barn in 2019 and
plan for another one in 2021. They anticipate this will enable them to grow
to 3,000 cows. Through this expansion, Ideal Dairy is improving the
environment by reducing their energy consumption, and keeping their
workers satisfied, whilst serving their community.
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National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Strategic Report
Our commitment to being
a responsible business continued
Environmental: The path to net zero
We are embracing our role at the heart of the energy system and
understand the critical role we play in tackling climate change.
The markets in which we operate have announced ambitious carbon
reduction targets and further legislative actions are anticipated in all
our markets. These targets will be challenging and we embrace
the opportunity to support the delivery of these goals.
While the biggest impact we can have is supporting the economy-wide
clean energy transition, it is important we also reduce our own direct
impact on the environment.
In 2012, we developed our environmental sustainability strategy, “Our
Contribution”, to set a framework for embedding sustainable decision-
making into our business operations. We focused on three key areas –
climate change, responsible use of natural resources and caring for the
natural environment – and set targets to deliver progress through the
end of 2020. In 2019/20, we have continued to advance our work.
We continue to focus on carbon reduction being factored into both
our major investment decisions and our tender process for major
construction projects. These actions encourage not only our teams,
but also our supply chain to deliver lower-carbon solutions. Supply chain
emissions are classified as Scope 3 emissions and, as such, the tender
carbon weighting will help us reduce our Scope 3 emissions.
We also have programmes in place to ensure that we are making
improvements to the natural environment. One such programme focuses
us on finding better ways to deliver an increase in environmental benefits
on non-operational land, while working with local partners and communities.
Work under this programme prioritises local environmental benefits, for
example increasing pollination, community access to green space and
bio-diversity (see the Pollinator Meadow Project case study below).
“In 2019 we furthered our
commitment to combating
climate change with the
announcement that we will
aim to achieve net zero for
our direct emissions by 2050.”
Our Contribution Progress Highlights
Metric
Reduce Scope 1 and 2
GHG Emissions
Send zero office waste
to landfill
Reuse or recycle
recovered assets
Recognise and
enhance the value of
our natural assets
Carbon pricing
End of Calendar
Year 2020 Target
Progress through
2019/20
45% reduction
70% reduction
100% from major sites
95%
100% by 2020
100%
50 sites
50 sites with 8
additional sites
in progress
Implement carbon
pricing in major
investment decisions
On track to complete
in major business
areas by end of 2020
Case study – US
Pollinator Meadow Project – Pawtucket, Rhode Island
Our electric transmission corridors must be regularly maintained to
prevent vegetation from endangering the wires. We see this as an
opportunity to practise environmental stewardship.
As meadows are becoming rare as more New England pastures grow
back into forests, transmission line corridors are increasingly important
as low growing-shrub and meadow habitat. To assess the viability and
practicality of incorporating wildflower plantings into our vegetation
management program, we implemented a pollinator pilot project in
Pawtucket, Rhode Island. During this pilot, we converted almost two
acres of transmission line corridor to wildflower meadow. The project
was a success and the flowers continue to flourish. We will continue to
monitor the project and are committed to creating at least one new
pollinator site in the US per year, over the next five years.
Projects like these not only help the environment, but also allow us to build
connections with local environmental organisations and customers and
increase public understanding of our vegetation management programmes.
Case study – UK
Chairman’s Awards: Save Evie’s Whale
The annual Chairman’s Awards are a demonstration of how we use
governance to bring our purpose, vision and values and the role we play
in society to life. Every year more than 150 teams submit entries that
show how the work we do at National Grid contributes positively to our
people, our customers and communities now and in the future.
In 2019 the “Save Evie’s Whale” campaign was chosen as the winner
of the Chairman’s Awards at an event in New York. The campaign was
inspired by Evie O’Grady, the seven-year-old daughter of one of our
employees, who made a drawing of a whale – because she was so upset
about the number of whales dying due to plastic pollution in our oceans.
Evie’s drawing and her story became an inspiration to encourage
employees to think about the environmental impact of single-use plastics.
In June 2019 we made a commitment to remove single-use plastics from
sale at our UK offices by 2020.
The “Save Evie’s Whale” campaign brought that commitment to life and
provided a platform to engage with employees and suppliers about
reusable cups and other materials, and effective recycling behaviours.
Piloted in our Warwick UK offices, with the campaign we have successfully
eliminated plastic straws and plastic cutlery and eliminated over 46,000
polystyrene containers and 22,000 plastic containers going into general
waste annually. The programme also created significant cost savings by
reducing the use of consumables, improving recycling rates, and cutting
the volume of waste generated. “Save Evie’s Whale” has since been rolled
out in offices across the UK, and also at local schools and community
groups, inspiring behaviour change in society. Over 4 million pieces
of single-use plastic have so far been eliminated.
4 million+
pieces of single-use plastic eliminated
50
National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Our commitment to being a responsible business
Building on earlier actions to manage office waste, we launched waste
reduction campaigns across our offices in the UK and the US. In the UK
we have eliminated over four million items of single-use plastics, mainly
related to food and beverages (see the Save Evie’s Whale case study
on the previous page). In 2019, we also diverted 95% of office waste
from our targeted sites away from landfill, and are aiming to complete
work at the remaining sites in 2020.
Our Further Commitments to Reducing our Impact and
Achieving Net Zero
As we work to meet our 2020 ‘Our Contribution’ commitments, we
will continue to reduce our carbon footprint, maximise the value of
our resources and enhance the environment; however, we recognise
that we can do more to combat climate change and improve the
environment. To accomplish this, as part of our Responsible Business
review, we are developing new metrics and targets to further challenge
us and allow for monitoring and evaluating our performance. These will
be announced later this year.
The cornerstone of our revised targets is our commitment to achieve net
zero for our scope 1 and 2 greenhouse gas emissions by 2050 that was
announced in November 2019. This replaces our previous target of an
80% reduction by 2050 to better align with our ambitions. We also set
more ambitious interim targets for our emissions reductions of 80% by
2030 and 90% by 2040.
To achieve these targets, we will also progress our emission reductions
by continuing, and accelerating, current emissions reduction
programmes, and by looking for new, innovative ways to reduce our
emissions. We are reducing leakage from our gas pipelines through our
gas mains replacement programmes and through innovative robotic
pipe sealing techniques. We are piloting the use of parts of our gas
network for the distribution of hydrogen and RNG. We are working with
suppliers to evaluate potential alternatives to SF6.
Energy efficiency is one of our key focus areas. We have ongoing energy
reduction targets in our US and UK core office facilities. As an example
of our progress, in the UK, we have exceeded our target by reducing
energy consumption by 11% from a 2015/16 baseline. In the US, we
performed whole-building LED replacements at two of our key locations
and expect to yield annual site electricity savings of 6% and 17%. We are
also working to reduce our transport energy use through the purchase
of alternative fuel fleet vehicles and employee programmes promoting
the purchase/lease of electric vehicles.
For the US and UK, our operational energy use is 2,330 GWh, our
facilities energy use is 285 GWh, our transport energy use is 405 GWh
and electricity energy losses from our networks are 12,311 GWh. US
generation is also responsible for 12,892 GWh. In these figures, facilities
energy use is defined as the energy used in powering and heating our
offices, whilst operational energy accounts for energy used in fulfilling
our primary business. Transport covers business travel, including our
own fleet, hire cars and personal car use for business.
Understanding National Grid’s greenhouse gas emissions
We monitor and report our greenhouse gas emissions in accordance with
the World Resources Institute and World Business Council on Sustainable
Development Greenhouse Gas Protocol.
Scope 1: Direct Emissions from the operational activities of National Grid.
Scope 2: Indirect Emissions from gas and electricity purchased and used
by National Grid.
Scope 3: Other Indirect Emissions from activities occurring from
sources that National Grid does not own or control.
Our main sources of greenhouse gas emissions
are shown below.
Key:
included in our net zero target
Greenhouse gas emissions
We have committed to achieving net zero
emissions for our Scope 1 and 2 emissions
by 2050. Most of our Scope 3 emissions are
emitted from two key business activities:
the sale of gas and electricity to customers
in the US (82%) and the purchase of goods
and services (18%). We are working with
our customers and our supply chain to
reduce Scope 3 emissions and assessing
appropriate targets for our Scope 3
emissions to align with pathways to
2050 targets.
Scope 2: Indirect
Scope 3: Indirect
Scope 1: Direct
Scope 3: Indirect
Upstream
Scope 2
• Line losses from
our electricity
transmission and
distribution lines
• Energy purchased for
use at our facilities
• Use of electric drive
compressors in our
gas business
Scope 3
• Purchased goods
and services
• Business travel
• Employee
commuting
Our operations
Downstream
• Waste management
Scope 3
• Use of ‘sold product’
or emissions from
our customers’
use of the gas
and electricity we
purchase on
their behalf
Scope 1
• LIPA electricity
generation
• Leaks and venting
from our gas
transmission and
distribution systems
• SF6 leaks from our
electric equipment
• Fleet vehicle use
• Gas-fired
compressor use
51
National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Our commitment to being
a responsible business continued
Our colleagues
We employ around 23,000 people, located both in the UK and the US.
Our people are the lifeblood of National Grid. Their safety and wellbeing
are our primary concern and a priority for every one of us at National Grid
– they underpin everything we do. Any safety incident is one too many
and we continually strive to improve safety for our employees. 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.
Our COVID-19 response started with supporting our people to work
safely from home or as required in the field for essential activity, and to
support their physical and mental health needs wherever they are. We
have also facilitated volunteering opportunities during the crisis, and
increased paid-time available for volunteerism.
Preparing our colleagues for the clean energy transition
Responsibility towards our people also means training them and
(re)skilling them for the evolving needs of our businesses. The necessary
skills and profiles of our employees and those at our partners and
competitors are changing. We need forward-thinking, creative minds
to help meet the challenges we face in connecting people to the energy
they use. We anticipate a number of areas of increased focus in the
future, such as data analytics to manage more complex grid flows and
the customer interactions needed to balance supply and demand. We
will also need skills to design and implement new energy technologies,
such as renewables and heat pumps. Technicians will have skills to
install and maintain energy efficiency measures and technologies as
well as skills to support the deployment and enablement of new
heating technologies such as hydrogen and change management skills
to bring society along in the green transition. In 2019 National Grid
commissioned a “Net Zero Skills Report” to identify the jobs needed
to help society achieve net zero and provide a basis for engagement
with stakeholders working on the challenge alongside us.
Investing in our colleagues
Our people and our communities will benefit from the time and financial
investments we are making in ensuring that the future skills needed for
National Grid, and the broader energy industry, are available. We are
developing national and local skills development partnerships and
initiatives, with a focus on the lower-income communities we serve.
We aim to give access to 45,000 young people from these communities
over the next five years, tracking their progress from first interaction right
through to employment at National Grid, our partners and suppliers,
or adjacent companies and industries. Our employees are expected
to play a critical role in these programmes.
Keeping our colleagues safe
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 20.
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 19,
and find out how we manage our operational risks on pages 22 – 25.
Engaging with our colleagues
Through a third-party partner, we carry out an annual EES 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 20.
“We create an environment
in which our employees can
make a positive contribution,
develop their careers and
reach their full potential.”
Employee engagement score
The Times
77
(2018/19: 73)
Top 50
Employers for women
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.
Our culture
The culture we strive for stems from embracing our values: every day we
do the right thing, find a better way and make it happen. You can read
more about our values on page 12. We also know that building sufficient
capability and leadership capacity (including effective succession planning)
is an important factor in delivering our vision and strategy. You can read
more about how we are mitigating the risks in this area on pages 22 – 25.
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 for a healthy lifestyle
and mental wellbeing. We engaged in mental health awareness week
focusing on tools to support managers and employees dealing with
mental health and wellbeing. The training has been well attended.
We supported World Mental Health Day to focus on suicide prevention
and encouraging employees to talk and help remove stigma. In 2019,
the UK and NGV businesses signed up to the Mental Health at Work
Commitment focusing on six key commitments which are implemented
and monitored through the Thriving at Work standard. In the US, we are
tackling musculoskeletal and soft tissue injuries through preventive
athletic training programmes to encourage stretching and flexing
before undertaking manual tasks. In 2019, the US launched a Fatigue
Risk Management System, with essential training for employees and
supervisors to identify and mitigate fatigue risk in each area of Operations.
Gender pay gap
We review gender and ethnicity pay gaps annually in both the UK and
US and although we are broadly comfortable with our performance,
we continue to strive to recruit and develop more women and ethnic
minorities. For more information about our UK gender pay, visit our
website at: www.nationalgrid.com/careers/understanding-our-uk-
gender-pay-gap
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National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Our commitment to being a responsible business
Promoting an inclusive and diverse workforce
National Grid is dedicated to building a workforce which is representative
of the communities we serve, in all aspects of diversity. We also continue
to provide an inclusive culture across each stage of our colleague journey.
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,
is 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.
We are committed to transparency and reporting annually on our progress
on BAME and female representation on our Board, at manager level,
among new joiners and our workforce as a whole. We remain focused
on bringing the best diverse talent into our organisation and supporting
them to reach their full potential.
We also adopt this approach to our future talent, with our Apprenticeship
and Graduate programmes actively encouraging applications from diverse
candidates. During 2019/20, in the US we attracted 31% female applicants
and 51% ethnically and racially diverse applicants to our graduate
development roles. We also took 36% female applicants and 52%
ethnically and racially diverse applicants into our internship programmes.
Our UK Graduate Programme attracted 25% female applicants and 57%
ethnically and racially diverse applicants. Our UK Industrial Placement
and Student Internship programmes attracted 28% female applicants
and 45% ethnically and racially diverse applicants.
A total of 18.3% of our workforce have declared themselves to be
of ‘minority’ racial or ethnic heritage and we currently have 24.7%
females across our total workforce. We are very much aware, however,
of the number of ‘declined to state’ responses we have across all diverse
characteristics and as a result in 2019/20 we launched our #thisisme
campaign, not only to increase our disclosure rates, but also to demonstrate
our commitment to a culture of openness and security for colleagues to
share who they are. This year also saw a number of our most senior leaders
participate in reverse mentoring. This allowed them to get a different
perspective on life, not only at National Grid but also more generally.
This has provided a mutual knowledge share and dialogue between
senior individuals from our organisation and more junior individuals from
a diverse range of background with fantastic feedback from all parties.
We continually work to ensure our application, assessment,
development and training provisions more broadly, are all inclusive
and accessible. We offer our current colleagues training and
development programmes which ensure they are aware of acting
on bias, while providing specific development programmes for our
diverse colleagues in both the UK and US. We have 17 Employee
Resource Groups (ERG) (11 in the US; 6 in the UK), which are all
highly active and visible across the business, with events and
awareness-raising campaigns throughout the year (including a
strong presence at WorldPride in New York this year). Our ERGs
also provide a crucial support network to our diverse colleagues.
We continue to participate in numerous awards and benchmarks
to recognise the great work of our colleagues (including Disability
Confident, The Times Top 50 Employers for Women, Best Places
to Work for LGBT Equality and Forbes 2019 Best in State Employer;
we were also shortlisted in the Top 10 Outstanding Employers at The
Ethnicity Awards for 2019). These also offer us the opportunity to learn,
focus our strategy and continually improve our approach to inclusion
and diversity. We have close partnerships with external best practice
organisations and are active members of sector- and industry-wide
groups which ensure we are sharing best practice and campaigning
at a sector-wide level for greater inclusion for all.
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.
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, the 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 2020
Male
Female
Total6
Male (%)
Female (%)
Our
Board1
Senior
management2
Whole
company3
number
number
number
8
4
12
66.7
33.3
165
82
247
66.8
33.2
17,379
5,690
23,069
75.3
24.7
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 20.
53
National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Our commitment to being
a responsible business continued
Total headcount as at 31 March 20204
The tables below show the breakdown of employees by work pattern
and diversity.
Work pattern
UK
US
Total6
Full-time
Part-time5
number
% number
6,027
16,629
22,656
95.3
99.3
98.2
294
119
413
%
4.7
0.7
1.8
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
UK
US
Total6
Male
Female
number
% number
4,548
12,831
17,379
72.0
76.6
75.3
1,773
3,917
5,690
%
28.0
23.4
24.7
Ethnicity demographic as at 31 March 2020
‘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 (%)
17,482
3,918
1,669
81.7
18.3
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 and severance.
UK
US
Total6
Voluntary Non-voluntary
Total
%
6.4
7.7
7.4
%
4.8
1.6
2.4
%
11.2
9.3
9.8
6. Included in ‘Total’ are Non-executive Directors and Executive Directors.
National Grid traditionally has low voluntary turnover and high employee
tenure, driven by high engagement and good career opportunities as
evidenced by our high internal churn rates. Non-voluntary attrition is in
the majority comprised of severance.
Training days per employee
From 1 April 2019 to 31 March 2020, the total number of training days
delivered per employee (as recorded in our HR systems), across the whole
Company was 6.0 days (2018/19: 5.3). There was also a reduction in
training activity towards the tail-end of March as a result of the COVID-19
lockdown in both our UK and US businesses.
Promotion rate
The table below shows the rate of promotion within the business.
Promotion rate is defined as the number of employees who were
promoted to a higher grade as a percentage of headcount last year.
UK
US
Total
Promotion rate %
14.1
16.1
15.5
“We are fair to our suppliers
and committed to paying
them promptly.”
We are fair to our suppliers and committed to paying them promptly.
We also influence our supply chain to operate as responsible businesses,
requiring all suppliers to share our commitment to respecting, protecting
and promoting human rights.
This includes alignment to the United Nations Compact Guiding
Principles, the International Labour Organisation standards and the
Ethical Trade Initiative Base Code as a reference standard.
The economy
Our economic contribution to society comes primarily through the
delivery of safe and reliable energy. Crucially, we make sure energy
reaches homes and businesses safely, reliably and efficiently. But our
contribution as a responsible, purpose-led business also comes as an
employer, a tax contributor, a business partner, and community partner.
We help national and regional governments formulate and deliver their
energy policies and commitments. Our approach to regulatory
consultation is to seek a framework that puts consumers at the centre
of our price control, while enabling the clean energy transition. Evolving
that partnership to help enable the clean energy transition and slow the
pace of climate change before it cannot be reversed, will also be key in
protecting future economic growth, and safety and wellbeing in society.
Our geographic footprint means that our economic contribution is felt
in lower-income communities that can truly benefit from the ripple effect
of our local presence, from rural communities in New England, to the UK
where most of our economic contributions are made outside London.
Our tax contribution helps to fund services and we are committed to a
coherent and transparent tax policy and recognise our economic role
in society in doing this (more information on tax can be found on
pages 28 – 37).
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National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Our commitment to being a responsible business
Governance
Our approach to corporate governance plays an important role in
helping us develop our culture at National Grid – a culture that embraces
diversity and inclusion, and an environment where everyone can fulfil
their potential. Our Board will continue to play a vital role in setting the
tone right from the top. We apply a robust framework to ensure that
stakeholder considerations are suitably captured and enhancements
made to strengthen the views of stakeholders in the boardroom.
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. We were recently recognised by Ethisphere as one of 2020’s
World’s Most Ethical Companies. 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 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, the US
Trafficking and Violence Protection Act 2000 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 financial crimes, fraud, 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 76 – 81. None of our investigations
over the last 12 months have identified cases of bribery.
Anti-financial crimes policy
We have launched a new Anti-Financial Crimes policy which applies
to all employees and those working on our behalf. It sets out our
zero-tolerance approach to bribery, fraud, money laundering, tax
evasion and other corrupt business practices.
To ensure compliance with the UK Bribery Act 2010 and other relevant
legislation, we operate an anti-financial crime risk assessment process
across the Company to identify higher-risk areas and make sure
adequate procedures are in place to address them. Fraud and bribery
risk assessments are conducted 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.
“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, Find a Better Way
and Make it Happen.”
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, Find a Better Way and Make it Happen. 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. Our Code is updated every three years and is currently
being updated with a release date later in 2020. In addition, we have
a new Ethics Business Management Standard which provides a
framework around our ethics programme and describes what is
expected of the business.
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
Our GSCoC is issued to our suppliers annually and sets out our
expectations and fundamental principles, including preventing and
detecting bribery and corruption, which should extend into the supply
chain. 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 adherence to the principles of the United Nations Global
Compact, in accordance with all applicable local, state, federal, national
and international laws or regulations including the UK Bribery Act 2010
and the US Foreign Corrupt Practices Act 1977. We provide specific
guidance and briefings for high-risk areas, so contractors, agents and
others who are acting on behalf of National Grid do not engage in any
illegal or improper conduct.
Whistleblowing
We have confidential external speak-up 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.
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National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Our commitment to being
a responsible business continued
Preventing modern slavery
We strive to prevent modern slavery from taking place anywhere in our
business or in our supply chain.
We also facilitated an industry masterclass to discuss common issues
in the sector and work more closely together to increase awareness and
drive positive change.
We expect all our suppliers to be compliant with the Modern Slavery Act
and to publish a Statement if required. Each year, we update our own
Statement and publish this on our Company website in line with the
Modern Slavery Act’s requirements. In 2019, our Statement was
independently assessed by Development International, a new ranking
of the nation’s largest publicly listed organisations, and we were listed
in the top quartile for FTSE 100 listed companies. In 2018, we were also
assessed by the Business & Human Rights Resource Centre (BHRRC)
and were positioned 12th in the FTSE 100 ranking and recognised as one
of a ‘small cluster of leaders standing out’ in this space. BHRRC did not
publish a ranking in 2019.
We are an active member of the United Nations Global Compact
Modern Slavery Working Group, signatories to the Construction
Protocol, 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 human rights
risks form part of our sourcing process.
In 2019 we signed up to the People Matter Charter which has been
created by the Supply Chain Sustainability School, of which we are
a partner member, to develop and implement consistent workforce
standards throughout our industry.
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 2019, we continued to engage with suppliers identified as being
within potentially high-risk categories. Through this engagement, which
included a US workshop following on from the UK workshop in 2018,
we encouraged our suppliers to conduct similar risk assessments with
their own supply chain.
Non-financial information
This section 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 information describing the business relationships,
products and services which are likely to cause adverse impacts in
relation to the matters above, can be found as follows:
• business model – pages 2 – 7;
• KPIs – pages 18 – 20;
• principal risks – pages 22 – 25; and
• Audit Committee Report (our due diligence) – pages 76 – 81.
Our policies and related governance
Descriptions of the policies and the outcomes pursued in relation
to the above matters are discussed, where material, throughout
this section. A full list of our policies can be found online, at
www.nationalgrid.com/about-us/corporate-governance
In addition to our policies, we have a suite of Business Management
System (BMS) standards. These standards provide the foundation for
bringing energy to life for our stakeholders. They act as our guiderails
by defining the minimum requirements for the high value and risk
activities most important to our business – allowing our leaders to
effectively drive change instead of responding to it.
The BMS delivers benefit in four key ways:
Risk Mitigation: The BMS defines and sets minimum requirements
for our principal and other risks so they can be effectively and
consistently managed across our businesses.
Best Practice: The BMS establishes a common language and
framework for what constitutes best practice and provides the
opportunity for Communities of Practice (CoP) to share across
the organisation.
Standardisation: The BMS helps us build efficient processes and
lean functions in our business areas with global responsibilities – HR,
IT, Procurement, Finance and Corporate Affairs. By building one way
of doing things, we can capture the maximum benefit from our work.
Simplification: The BMS acts as a catalyst to challenge and remove
documentation and rules that don’t deliver value. The standards will
also increase the freedom of leaders to act, knowing the boundaries
which can’t be compromised as they strive to work in new and
innovative ways.
Some of the BMS standards that we pursue to ensure consistent
governance on a range of non-financial matters, can be seen below.
They are not limited to this selection. These have been summarised
for the purpose of the Non-Financial Information Statement.
Policies and documentation
People
• Our Code of Ethical Business Conduct for employees: helps our ethical
reputation while ensuring we maintain stakeholder confidence in our ability
to deliver on our ethical commitments.
• The Wellbeing and Health BMS Standard: enables our business to
proactively manage our health risks and controls by fostering a proactive
approach to wellbeing that can measure and target areas of greatest impact
for the business.
• The Occupational Safety BMS Standard: ensures that no matter where in
the world our employees or contractors work, they can expect to receive the
same consistent and high level of protection for their own safety.
• The Process Safety BMS Standard: helps to protect people and the
environment from the risk of major accidents by establishing a safety-
focused culture. Process safety is an important commitment at National
Grid. Our aim is to be recognised as a high performer in process safety
through the demonstration of industry-leading risk controls, performance
and cultural maturity across the management of all of National Grid’s major
hazard assets.
• The Human Resources BMS Standard: sets out what is expected of our
leaders when managing their employees throughout the employment
lifecycle.
• The Performance Excellence BMS Standard: sets out how we at National
Grid ‘find a better way’. It provides the basis for continuous improvement
across everything we do.
Environment
• The Environmental Sustainability BMS Standard: establishes environmental
compliance and environmental sustainability performance requirements for
all operational and non-operational activities.
Society
• The Stakeholder Engagement BMS Standard: defines performance
requirements for digital and physical external stakeholder engagement by
creating a consistent approach towards addressing the most important
stakeholder issues and opportunities.
Human rights and anti-corruption and anti-bribery matters
• Procurement Standard: defines how to improve efficiency within our supply
chain expenditure.
• Global Supplier Code of Conduct.
• Modern Slavery Act.
• Human rights.
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National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Task Force on Climate-related Financial Disclosures (TCFD)
Task Force on Climate-related
Financial Disclosures (TCFD)
National Grid has committed to
implementing the recommendations
of the TCFD in full, and below is our third
disclosure which builds on our previous two.
Key Milestones in 2019/20
This year we have continued to make good progress on the
recommendations, aided by developments in the markets we operate
in, with aggressive ‘net zero emissions’ and renewable targets set in
the UK, New York State, Rhode Island and Massachusetts in the last
12 months, as well as increasing public scrutiny and focus across the
sector and in corporate boardrooms. This year, we have progressed our
scenario planning work, elevated climate change as a principal risk to
our Group risk register, issued our first green bond, and evolved our
greenhouse gas emission reduction targets. Our work was recognised
by CDP as we were named on its climate change A List for the fourth
year in a row.
In our 2018/19 disclosure, we outlined the areas we planned to focus our
attention on during 2019/20. The table below outlines those actions, the
progress we have made against each during this financial year, and our
areas of focus for the upcoming financial year.
June/July
2019
September
2019
November
2019
UK Net Zero
Legislation passes;
New York Net Zero by
2050 Legislation
signed by Governor
Climate change
becomes a principal
risk for National Grid
Commitment to
reduce our Scope 1
and 2 emissions to
net zero by 2050
January
2020
June
2020
Earned a CDP
A rating; issued green
bond;
Massachusetts
Governor and Rhode
Island set their 2050
commitments
Published our
2019/20 Annual
Report including our
third TCFD disclosure
Focus Area
Actions outlined in 2018/19
Progress made in 2019/20
Actions to progress in 2020/21
Governance
Ensuring senior leadership has an
appropriate understanding and responsibility
for the risks and opportunities associated
with climate change.
Continue to increase knowledge and
skills among senior leadership in this
area and include climate change expertise
as a factor to consider in our Board
succession planning.
The Board and Executive Committee have
discussed climate change throughout the
year and taken actions as follows:
• engaged with key stakeholders on aspects
of the net zero transition, for example,
bringing in the UK Committee for Climate
Change to speak to Electricity Transmission
executives;
• senior leadership devoted a day to
responsible business and our total societal
impact, including climate change; and
• committed National Grid to reduce our
Scope 1 and 2 emissions to net zero
by 2050.
Strategy
The use of climate-related scenarios to inform
our business strategy (and disclosure of the
possible outcomes under those scenarios).
We have undertaken an analysis of the impact
to our business model of transitional scenarios
where decarbonisation goals are, or are not, met.
The details of this are presented in the scenarios
section of this disclosure.
Assess the physical risk to our assets using
updated climate scenarios and quantify the
potential impacts. Incorporate this work into
the transition scenario analysis. Build on the
transitional scenarios we have developed.
Risk
Management
Embedding climate change into our risk
management process.
Metrics
and Targets
The development of metrics and targets
to assess performance, and influence
decision-making and remuneration.
After a full review of our risks, climate change
is now a principal risk for the Group, from its
previous status as an emerging risk. See
page 23. We also developed ‘business unit
specific risks’ to ensure that each part of the
business has specific climate change risks.
Deliver identified control actions to mitigate
climate change risk. Continue to review the
risk and controls as further information is
developed, including through scenario
planning work.
We announced our commitment to be net zero
for Scope 1 and 2 emissions by 2050 in
November 2019. We revised our interim Scope
1 and 2 targets to an 80% reduction by 2030
and a 90% reduction by 2040.
Personal objectives will be set throughout
the business to ensure delivery against our
commitments. Continue monitoring our
metrics and targets and develop and/or
evolve metrics, as needed.
In addition, our NGESO published an update
to their operability strategy showing the
milestones to deliver zero carbon operation
of the Great Britain Transmission network by
2025. See page 39.
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National Grid plc Annual Report and Accounts 2019/20
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Task Force on Climate-related
Financial Disclosures (TCFD) continued
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. During the year,
there has been an increased focus on climate-related matters as the
landscape evolved with regulatory developments and changes in
stakeholder expectations. The Board was involved in the following
discussions relevant to climate change:
• Approving the Group’s commitment to achieve net zero for our
Scope 1 and 2 greenhouse gas emissions by 2050 replacing
our previous target of 80% reduction by 2050. In addition, we
have set the following interim targets: 80% reductions by 2030
and 90% by 2040.
• Climate change was elevated to a principal risk during the year,
with the risk now being owned by Alison Kay, a member of the
Executive Committee who has responsibility for Group Safety,
Health and Environment. The governance process that was
undertaken to upgrade the risk from an emerging risk to a
principal risk is described in the case study on page 23.
• Strategy sessions were held, which included discussions related to
climate change and considered the scenario testing performed this
year (discussed on page 26). Topics discussed included the clean
energy transition, the future of heat, as well as our strategy for
renewables and electrification of vehicles. In addition, the Board
held four sessions to consider our role as a responsible business
and our role as a key facilitator of the energy transition featured.
• Approving the RIIO-2 submissions which reflect our investment
proposition for supporting the UK energy transition.
• Quarterly review of performance on our environmental sustainability
metrics and targets.
Responsibility for asset investment and maintenance planning is
delegated by the Board to the Executive Committee who then further
delegates the responsibility to the core operational businesses.
What is the oversight process for climate change related risks
and opportunities?
The Safety, Environment and Health Committee (SEH Committee)
is responsible for assessing the Group environmental sustainability
strategy and performance, as well as how the Company adapts its
business strategy considering potential climate change risks and
opportunities. As part of this, the SEH Committee tracks, challenges
and seeks assurance for the delivery of the plans approved by the
Executive Committee.
The Audit Committee remains responsible for reviewing and approving
the content of our TCFD disclosures and is taking an increasingly active
role in overseeing disclosures around metrics and targets. The
Committee considered papers in September 2019, November 2019,
March 2020 and May 2020 summarising the financial reporting and
disclosure considerations in respect of climate change.
The Finance Committee is responsible for overseeing our financing
strategy. This year, the Committee reviewed and approved our Green
Financing Framework. This framework, published in November 2019,
aims to facilitate the disclosure, transparency and integrity of our Green
Financing for our stakeholders.
A TCFD steering group oversees progress against the TCFD
recommendations and the publication of our annual disclosure.
The group reports to the Chief Financial Officer, Andy Agg.
Future Intent
As the climate change landscape is evolving, we will continue to build
upon the good base level of experience and knowledge within senior
management (including at Board and Executive levels), as well as
consider climate change expertise in our Board succession planning.
The SEH Committee will continue to monitor our environmental
sustainability performance quarterly and approve updates to our
environmental sustainability strategy and targets annually. The Audit
Committee will continue to oversee the programme to evolve the
assurance model for our responsible business reporting. The Finance
Committee will consider the financial impact of environmental factors on
our credit metrics and relevant considerations with regards to debt investors.
What is our strategy for responding to climate change?
Our strategy focus is three-fold: tackle the climate crisis by helping the
markets we operate in transition to a net zero economy, while reducing
our own impact on the environment and ensuring our networks operate
reliably under changing conditions. Our strategy is informed by the
evolving climate change policy and ambitions of the states and countries
in which we operate, by the risks and opportunities identified during our
continuing climate change scenario testing and by our ambition to have
a positive impact.
Our financing strategy, which includes us issuing debt from our
operating companies, is focused on aligning the debt issuances to
the business purpose of each of our regulatory deals. As part of this
strategy, we launched a Green Financing Framework to enable us to
issue green bonds, loans or other financial instruments in November
2019. Green bonds allow us to access new capital pools and engage
with investors who are keen to work with asset owners to facilitate the
clean energy transition. In January 2020, we issued our first green bond
in the UK, with the €500 million proceeds being used to finance projects
with an environmental benefit across our UK electricity business. We are
currently evaluating issuing a green bond in the US in 2020.
Regulatory Framework
The next 10 years are a crucial period with expected rapid change in
the energy system, and therefore it is vital that the funding and regulatory
framework is in place to deliver against these targets. Across our business,
we are developing proposals for our regulatory rate filings that support
our strategy to enable the transition and reduce our own impact.
UK RIIO-2 Business Plans
Our RIIO-2 Business Plans were developed through a comprehensive
stakeholder engagement programme throughout the RIIO-2 process
and have also evolved to reflect the UK government target, announced
in June 2019, to achieve net zero emissions by 2050. Our plans cover a
crucial period (2021 – 2026) for investment to help deliver the UK’s net
zero target. The route to net zero emissions is not yet clear but our plans
are flexible enough to deliver the investment needed in the 2020s. We
have built a plan to align with the pathway to net zero by 2050.
In our Electricity Transmission business, we propose £1.35 billion of
expenditure to connect new generation and transport electricity across
the country to where it is consumed, connect us to neighbouring
electricity markets and support the Electricity System Operator in being
able to operate a zero-carbon electricity system by 2025. Whilst
consistent with Ofgem’s business plan criteria, we recognise that these
investments alone are insufficient to deliver net zero targets and have
therefore proposed whole system options to accelerate progress
towards net zero, for example through ultra-rapid vehicle charging at
motorway service areas. As the optimal path to achieving net zero is
unclear, we developed a series of uncertainty mechanisms that allow
our plans to flex to deliver against the range of low-carbon system
developments our customers could bring forward.
In our Gas Transmission business, we recognise that natural gas has an
important role to play in supporting the transition to a low-carbon future.
Natural gas, hydrogen and biomethane can help to decarbonise heat,
the biggest source of UK carbon emissions. Our business plans cover
a period where developing options and understanding choices is key.
We will focus on leading the development of options associated with
gas transmission, specifically hydrogen, to facilitate the decarbonisation
of heat, industry and transport.
In our ESO business, our business plans focus on facilitating the
transition to net zero. For example, our business plans aim to deliver new
architecture and systems in our control centres to be able to operate a
zero carbon network by 2025, and new monitoring and control systems
to ensure power system stability in a low-carbon world.
Across all our businesses our plans include targets and commitments to
manage our own environmental impact, with £530 million of investment
planned across Electricity and Gas Transmission. We have committed to
reducing NOx emissions from our gas compressors, and achieving net
zero construction emissions by 2025/26. We are targeting investments
to replace leaking SF6 (an insulating gas and source of GHG emissions)
equipment to reduce emissions by 50% by 2030, phasing out the
procurement of new assets containing SF6 and introducing SF6 free
technologies.
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National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Task Force on Climate-related Financial Disclosures (TCFD)
In the UK, there is uncertainty on what further measures will be
needed to adapt to climate change and meet the UK goal of net zero
by 2050. We welcome Ofgem’s Decarbonisation Action Plan and the
shift to a more flexible, adaptive regulatory price control regime with
a system-wide net zero re-opening mechanism.
US Rate Cases
In the US, we have ongoing and upcoming regulatory rate case
proceedings. In all proceedings, gas and electric, we are focused on
including proposals to support our climate change strategy and enable
the net zero transition of the states in which we operate.
In the US gas distribution businesses, we are focused on decarbonising
our gas networks and the heating sector. We are doing this by reducing
emissions related to natural gas through energy efficiency and demand
response, continued investment in our leaking pipe replacement
programmes and advancement of the future of heat. For example, we
included a $90 million future of heat proposal in our April 2019 KEDNY/
KEDLI filing which combined expanded energy efficiency and demand
response programmes, renewable natural gas interconnection
investments, geothermal investments, and a hydrogen blending study.
We plan to include future of heat proposals and continued pipe
replacement programmes in our next Niagara Mohawk and
Massachusetts gas rate filings. This work aligns with the Rhode Island
Heating Sector Transformation, launched by the Governor in July 2019 to
identify how the heating sector needs to change to meet the state’s
climate objectives. This initiative concluded in April 2020 with
recommendations provided to the Governor. Those recommendations
included increased energy efficiency, electrification through air and
ground source heat pumps, and fuel decarbonisation through renewable
natural gas and renewable oil.
In the US electric distribution businesses, we are focused on climate
change and the new energy landscape. For our next Niagara Mohawk
rate case filing, we will submit a proposal that focuses on three key areas:
grid modernisation, customer engagement and supporting the state to
achieve its clean energy goals outlined in the Climate Leadership and
Community Protection Act (CLCPA). We will also leverage these grid
modernisation investments to enable customers to engage with their
energy consumption in an informed and seamless manner. Enabling
New York State’s clean energy transition is a common theme across all
the above-described proposals and will be further enabled by our work
in the electrification of transportation. The Massachusetts rate filing,
approved in October 2019, includes work to advance Massachusetts’s
climate objectives including a climate change mitigation and adaptation
plan, an off-peak rebate programme for electric vehicle owners,
approval to include up to $50 million in energy storage in our 2021 grid
modernisation plan filing, and a path forward for a significant investment
in electric vehicle charging infrastructure in 2021. In Rhode Island, we
launched an electric vehicle infrastructure and off-peak rebate
programme and will be filing a Grid Modernisation and Advanced
Metering Functionality proposal in the second half of 2020/21.
Future Intent
We are in the process of updating our budgets and forecasts to reflect
the detailed financial impacts of our net zero strategy.
low-carbon solutions. We have assumed that transition impacts
in this scenario would be focused around technological shifts to
support decarbonisation.
• In the 4ºC scenario, changes are less rapid and less comprehensive,
and emissions remain high, so that the physical ramifications of
climate change are more apparent by 2030. In rationalising this
slower global progress, our 4ºC scenario assumed fragmented and
ad hoc policy (within the Group’s operating territories and globally).
The main transition impacts of the 1.5ºC scenario were:
• A trend towards more large-scale renewables in the
generation mix: this would be a positive development for
the Group, but for our electric network businesses the rate
of new connections could increase beyond today’s levels:
this could increase costs or, without investment ahead of need,
lead to a backlog.
• A trend towards electrification: increases in electricity demand
would likely trigger electricity network upgrades and investment.
Although network costs are a very small proportion of the customer
bill, spikes in spending would need to be managed in conjunction
with our regulators to ensure that customers, especially lower-income
customers, are not unduly adversely affected.
• Public pressure on gas: in line with the Committee on Climate
Change and other external sources, we do not believe substitutes to
methane gas for space heating can reach scale in our territories by
2030 (or even 2040, unless extensive new policy is rapidly deployed).
However, in this scenario we anticipate that, without mitigating action
to reduce and offset emissions, there is a risk of pushback against
the use of gas by environmental groups or concerned citizens.
We are already experiencing growing resistance to building new gas
infrastructure in our US business from politicians, concerned citizens
and environmental groups.
The main impacts of the 4ºC scenario were:
• Physical ramifications of climate change: in this scenario
we expect extreme weather events of escalating severity and
frequency, which could increase disruption to our assets and our
customers. This would require investment to ‘harden’ assets and
would heighten the safety risk to our field employees. Our approach
to physical climate risk is discussed in more detail below.
• Lower system visibility: as this scenario sees less coordinated
policy and regulation in pursuit of decarbonisation, we would
anticipate a greater variety of solutions being deployed across our
networks. This could increase overall system costs and reduce
visibility over the network, potentially slowing our responsiveness
to disruptive events. We do note, however, that a greater number
of distributed assets would increase the potential for local balancing,
which could mitigate this.
• Inequality of access: without carefully designed policy, we believe
decarbonisation activities have the potential to leave some sectors of
society behind: for example, heat pumps and the energy efficiency
upgrades they typically require are currently cost-prohibitive for many.
As well as the ethical implications of this, there is a risk to the Group,
especially for our US businesses, that a proportion of our customers
would struggle to pay their bills.
How have we advanced our climate change scenario analysis?
This year, we have advanced our scenario analysis work that considered
both the transition and physical risks to our business. This work is and
will continue to inform our strategy and investment plans.
Analysis shows that, without action, both scenarios present risks to us.
However, while these would need to be managed, we would not need
to materially change our business model. We also note that for a group
in our position, some of these changes represent material opportunities.
Transition Risk Analysis
To further understand the risk that climate change could have on our
business, we have undertaken a high-level scenario analysis. We used
two scenarios: the first assumes that the global response to the threat of
climate change is enough to limit global average temperature increases
to no more than 1.5ºC above pre-industrial levels (as set out in the Paris
Agreement) by 2100 (the 1.5ºC scenario). The second scenario assumes
that the 1.5ºC target is missed by some margin, comparable to a 4ºC
global average temperature increase (the 4ºC scenario).
To facilitate business planning, we have considered scenarios out to
2030. In this analysis, we assessed the impacts of the scenarios without
factoring in activities we might take to adapt to the threats of climate
change, or the opportunities of decarbonisation.
We made the following simplifying assumptions:
• In the 1.5ºC scenario, rapid changes are made to progress
decarbonisation goals: coordinated policy, regulation and customer
behaviour favours bans on polluting technologies, and support for
Physical Risk Scenario Analysis
We recognise that, due to the amount of carbon already in the atmosphere,
some escalation of extreme weather events is likely in both the ‘1.5ºC’
and ‘4ºC’ scenarios, especially under a longer-term view. This year, we
began Group-level work to assess our physical risks to ensure that any
necessary measures to defend our assets are identified. We ran an initial
workshop with the US, UK and NGV teams and the UK Meteorological
Office (Met Office) consultancy team to define the key areas of focus
(e.g. flooding, icing and hurricane frequency for the US and UK regions)
and define how the climate science can answer the questions we have
on the weather conditions our assets will have to operate in up until
2100. Using the output of this work, we will develop and progress a
scope to analyse weather data specific to the regions we operate in and
assist in developing an understanding of the vulnerability of our assets
as well as the mitigating measures that will be needed to protect them.
We are also undertaking work with a team from the Massachusetts
Institute of Technology (MIT) to study the impacts of weather changes
related to climate change in the northeastern US.
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National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Task Force on Climate-related
Financial Disclosures (TCFD) continued
What are the risks and opportunities from climate change?
The rapid changes in the energy market and demands to meet net zero emission targets present several challenges that are both a risk and
opportunity for us. In addition, the changes in temperature and weather patterns have and continue to present challenges and risks. These risks
and opportunities, along with a summary of the work we are doing to address them, are presented in the table below.
Risk/
opportunity type
Description
Our response
Transition
Markets
Markets
The operating environment and regulatory
framework are rapidly changing in line
with the decarbonisation of the electricity
and gas networks in the UK and US.
Commercial opportunities from the
transition towards net zero (short/medium
and long-term).
Facilitating the transition to a low-carbon economy is central to our purpose as a business,
and certain key actions we are taking in relation to decarbonisation and decentralisation are
set out on pages 12 – 15.
Development of a strategy to enable the building of charging stations across our
US jurisdictions and UK highways and to meet demand for electric vehicles.
We have developed a dedicated programme to understand what is required to incorporate
hydrogen and renewable natural gas into the gas supply.
Acquisition of Geronimo, a leading developer of wind and solar generation assets based
in Minneapolis, Minnesota, to help position us to develop and grow a large-scale
renewable business in the US.
Our interconnectors form an important part of the UK decarbonisation, by allowing us
to exchange surplus renewable electricity with neighbouring countries.
We are leading the development of Carbon Capture Utilisation and Storage (CCUS)
technology in the Humber, UK, to support this area to become the first zero carbon region
in the world.
Our continuing energy-efficiency programmes across Massachusetts, Rhode Island
and New York have reduced CO2 emissions by more than 725,000 metric tonnes over the
past year which is equivalent to the GHG emissions from over 156,000 passenger vehicles
driven for one year.
Markets
Changes in supply and demand for
existing and new technologies.
Our analysis, underpinned by the ESO Future Energy Scenarios (FES) shows that, even with
increased decentralisation of electricity, there is a key role for Electricity Transmission in the
UK under a range of scenarios that meet the UK’s 2050 climate change goals.
As the transition to renewable generation continues, we will work with the Long Island
Power Authority (LIPA) to transform our generation fleet by responding to future RFPs.
Under our existing contracts which extend through 2028, LIPA determines their reliability
and sustainability needs and which units are operated, retired or transformed.
Our FES will be aligned to not meeting, meeting or exceeding the 2050 net zero target.
Security and
reliability
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.
Security and
reliability
Facilitating zero carbon operation
of the Great Britain electricity system.
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.
In April 2019, the ESO 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.
To facilitate this, the ESO has agreed contracts with five parties, worth £328 million over
a six-year period, in a world-first approach to managing the stability of the electricity system.
Physical risks
Extreme weather
Physical impacts from extreme weather
events such as storms and flooding.
We continue to address the physical risks from extreme weather-related events, with a focus
on flooding events (in both the UK and US) and storm hardening (in the US). See case study
on page 61. As this work continues, it will be informed by not only the weather patterns we
are experiencing, but also the results of the ongoing scenario testing.
Changing weather
conditions
Increased frequency of weather incidents
leading to asset damage/compromise and
operational risks.
We will undertake a review of resilience from weather impacts to date. Work is ongoing
to update standards with updated information. As an example, our US engineering team
is updating standards for new and rebuilt substations to address changes in inland and
coastal flooding projections.
The ongoing scenario testing will consider whether our design standards are still
appropriate under different scenarios, for example, a wider temperature range.
Changing weather
conditions
Changes in supply of and demand for
gas and electricity as a result of changing
weather conditions.
The ESO is undertaking a project, Mapping Impacts and Visualisation of Risks of extreme
weather on system operation (MIVOR), to evaluate the impacts of extreme weather events
on system operation up to 2050.
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National Grid plc Annual Report and Accounts 2019/20
Strategic Report | Task Force on Climate-related Financial Disclosures (TCFD)
Future intent
We will continue our physical risk analysis in 2020/21, including a review
of the effectiveness of adaptation measures to date, identification of future
areas of vulnerability, and assessment of these against future weather
conditions and the likelihood of that happening. We will complete the
scenario testing and determine any further adaptation measures that
need to be undertaken. While financial provision has been made in the
UK business plans for flood measures based on 2019 climate science
data, additional adaptation measures can only be determined after this
exercise has been completed and will be considered under the
uncertainty mechanism provisions in the RIIO-2 business plans. The US
business plans also include actions to harden our networks against
expected weather conditions in the nearer term, but this work will help
us better plan for future conditions.
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 22. During the year, a Group-level bespoke climate
change principal risk was developed and added to our Group risk
register, as described in the case study on page 23. The newly added
climate change principal risk is underpinned by a series of Group
controls and actions to mitigate the risk (this is further described on
page 24). Several of the Group-level controls have been implemented
while others are in progress. Ongoing work includes establishing
programmes to develop the skills in our current and future workforce.
Our recent report, Building the Net Zero Energy Workforce, looks at the
skills and expertise the energy sector will need to help the UK reach its
emissions target. It also identifies the need to recruit for 400,000 jobs
in the sector between 2020 and 2050 to meet the target. Supported
by the #jobthatcantwait campaign, we will be recruiting new talent
who can help deliver the transition to net zero and adapt our networks
accordingly. We have seen a marked increase in applicants in response
to this campaign.
Following the adoption of the Group-level climate change principal risk,
the US and UK businesses developed bespoke climate change risks
on their respective risk profiles. These risks are being cascaded to the
underlying operating business units to develop to ensure their risks
and control actions are specific to them.
Future intent
The Executive Committee will review the results as part of the regular
semi-annual review of Group risks in early 2020/21 and as part of that
discussion will specifically consider whether changes need to be made
to the Group climate change risk.
Case study: extreme weather-related planning
Ensuring network reliability is core to our business and we
are constantly undertaking actions, often referred to as storm
hardening, to improve our networks’ resilience to the increasing
frequency of strong weather events, given the significant impact
this can have on our customers. These activities have focused
on both our electric and gas businesses. As noted in the financial
review (see page 30), this year we incurred $98 million of major
storm costs, the majority of which are recoverable under our rate
plans. Examples of ongoing efforts in 2020/21 include hardening
efforts for our gas assets in Long Island and New York City.
We worked with a collaboration of New York State and New
York City representatives and other key stakeholders, to develop
recommendations for future storm hardening and resiliency
projects for our gas network, strategies for addressing climate
risk factors, and guidelines for incorporating climate change
projections in long-term capital planning. Another example is
our annual investment in our electric distribution infrastructure
to improve resilience and grid modernisation work to increase
speed in knowing outage locations and improving our ability to
restore supply.
In the UK, flood defence has been a keen focus for the business.
Our target is resilience to 1 in 1000-year flooding events in the
UK or a 0.1% chance in any given year. This resilience level was
developed through consultation with Ofgem and BEIS via the ENA
Flood Working Group and recognised in the National Flood
Resilience Review 2016 as being best practice for critical local
and national infrastructure. As of 31 March 2020, we had invested
£71 million in flood defences with work completed or in progress
at 37 sites and expected to be completed at a further 12 sites in
2020 and 2021. Our RIIO-2 (2021 – 2026) plans aim to protect
a further 100 sites from surface-level flooding and recommend
further investments to manage the risks posed from the secondary
impacts of flooding, such as erosion and subsidence to our tower
and cable routes.
61
National Grid plc Annual Report and Accounts 2019/20
Strategic Report
Task Force on Climate-related
Financial Disclosures (TCFD) continued
Case study: the 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 distribution in the US and gas
transmission in the UK and US remain core to our business strategy,
and we believe it will remain central to the energy mix in both
countries. There is likely to be a mosaic of solutions, including
reducing emissions from the natural gas transmission and distribution
networks, as well as conversions to both electric and lower carbon
gas heating (renewable natural gas or gas blended with hydrogen),
focusing on cost-effective solutions and meeting different
consumer needs.
In conjunction with government agencies, other utilities and key
stakeholders and other gas networks, we have developed a programme
of work to gather evidence and help us understand what is required
to incorporate hydrogen and renewable natural gas into the gas
supply. We are also working with industry to consider what
improvements and changes are needed to maintain well-functioning,
liquid gas markets throughout the transition, and ensure security of supply
and delivery of natural gas, renewable natural gas and hydrogen.
Refer to page 13 for further details on the future of heat.
Future intent
We continually review our metrics and targets, as needed, to ensure
that the data we are measuring is meaningful, aligns with our strategy,
and is providing the information the business and our stakeholders need
to effectively monitor our performance and demonstrate our progress.
In 2020/21, we will be laying out our pathway to achieve our net zero by
2050 emission reductions and setting targets to align our ambitions and
provide better visibility to our progress.
We are also evaluating development of a meaningful Scope 3 target that
enables us to align to Science Based Targets Initiative (SBTI) criteria,
specifically focusing on our customers.
Image: Newtown Creek, a renewable gas project
What metrics are used to assess these risks and opportunities?
We have continued to advance our environmental sustainability
strategy, focusing on three key areas: climate change, responsible
use of natural resources and caring for the natural environment.
We have metrics and targets that allow us to measure our impact
on the environment, demonstrate our commitment and monitor our
performance. As previously discussed, the cornerstone of our suite
of metrics is our commitment to reducing our impact by achieving
net zero for our Scope 1 and 2 emissions by 2050, with interim targets
of an 80% reduction by 2030 and a 90% reduction by 2040. Numerous
underlying metrics support this goal and our broader sustainability
ambition, including reducing the carbon footprint of our operating
facilities, enhancing the natural value of our properties, recycling and/or
reusing our recovered assets and reducing our office waste. These are
discussed in more detail on pages 50 and 51.
We have also included enhanced disclosures in the financial statements
prepared under IFRS to explain how we have considered the financial
impacts of climate change, in particular evaluating the impact of new
net zero commitments in our territories, and the effect this has had
on judgements and estimates such as the useful economic life of
our assets. See notes 1 and 13 to the financial statements for details.
This remains a recurring area of focus for the Audit Committee.
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National Grid plc Annual Report and Accounts 2019/20
2.
Corporate Governance
Letter from the Chairman
Board and Committee evaluation
Audit Committee
Finance Committee
Safety, Environment and Health Committee
Nominations Committee
Diversity
Statement of compliance with the
UK Corporate Governance Code 2018
Index to the Directors’ Report
and other disclosures
Directors’ Remuneration Report
64
74
76
82
83
84
85
86
87
88
63
National Grid plc Annual Report and Accounts 2019/20
Corporate Governance
Letter from the Chairman
During the year, our discussions around RIIO-2,
gas supply contingency planning in the US, the
brief power outage on 9 August 2019 in the UK
and payment of the final dividend are examples
of how the Board has had regard to section
172 of the Companies Act 2006. We have
considered the broader implications of our
decisions, not just for shareholders but for a
wider group of stakeholders and the likely
consequences of our decisions in the longer
term. On page 44 we set out our key
stakeholders and how we have engaged with
them to ensure that their views are being
captured in the boardroom, to assist us in
maintaining focus on creating the right culture
for the Company. We continue to provide
details throughout the Directors’ Report of the
stakeholder matters that are considered in our
decision-making. We will continue to engage
with our stakeholders in a way that is guided by
our purpose to Bring Energy to Life, our vision
and values and the Company’s culture.
This year the Board has continued with its
chosen approach to workforce engagement
under the Code: to build on and enhance
the extensive existing range of engagement
activities and employee communication
channels to properly consider workforce
views in relevant decision-making processes;
see page 73 for further information. Following
the success of our employee engagement
sessions with Non-executive Directors in
2018/19, we have continued to utilise and
evolve these sessions throughout the year to
ensure key topics, discussions and potential
areas of concern amongst the workforce are
considered. The Board has been able to
identify key trends and topical issues, such as
gender pay, culture, and safety. Where trends
have been identified and Board action taken,
employees have been kept informed through
internal communications. Our chosen approach
allows for the sharing of responsibility, and
interaction amongst all Board members, which
we believe ultimately drives a greater focus on
the ‘true employee voice’ in Board decisions.
We will continue to review and adapt our
approach to ensure that we are utilising this
vital engagement both in and out of the
boardroom including considering the facilitation
of virtual engagement sessions to enable the
Board to continue with this despite COVID-19
restrictions.
Culture and the internal Board evaluation
Promoting a culture of openness and debate in
the boardroom is one of my key responsibilities
as Chairman, and as a Board we play an
important leadership role in promoting the
desired culture throughout the organisation.
The Company has spent considerable time
over the last few years getting the culture right
for the Company and it continues on its
journey; you can read more about this on
page 72 where we explain how culture formed
part of this year’s Board evaluation.
During the year, we undertook a formal and
rigorous internal evaluation of our Board and
Committees which included some follow-up
areas from our external evaluation last year.
The evaluation focused on three areas: Board
effectiveness; Board decision-making; and
organisational culture and the individual style
of leaders. During the evaluation process the
Board gained insight into the different aspects
of culture and the alignment of cultures around
the Company. A facilitated session was
arranged to discuss the comparisons of the
Board evaluation results with the culture survey
results of the Company’s senior management.
Unfortunately, due to the COVID-19 pandemic,
this session has been postponed as it would
not have been effective to do this when Board
members were not physically in the same
location. The evaluation process and associated
outcomes can be found on page 74.
Board succession and diversity
In November 2019 Dean Seavers, US
Executive Director stepped down and in
May 2019 and January 2020 we appointed
Jonathan Silver and Liz Hewitt as Non-
executive Directors respectively. On
appointment Jonathan joined the Finance
Committee, Remuneration Committee and
Nominations Committee and his US regulatory
experience alongside his strong financial
background has provided valuable insight
into Board and Committee discussions. Liz
became a member of the Audit Committee,
Safety, Environment and Health (SEH)
Committee and Nominations Committee on
appointment. Liz’s diverse and extensive
experience has served to strengthen the
Code’s requirement in relation to the Audit
Committee’s competence, as a whole, to be
relevant to the sector in which the Company
operates. Her input to Board and Committee
discussions is already very helpful. The
Nominations Committee oversaw the rigorous
selection process for these appointments.
See page 84 for more information.
Last year Mark Williamson, the Board’s Senior
Independent Director, reported that in order
to lead the Company through the completion
of the RIIO-2 regulatory process it would be
in the Company’s best interests for me to stay
beyond the nine-year term identified in the
Code. Following on from this, in January 2020
I formally notified my intention to step down
as Chairman of the Board following the
identification of a suitable successor. Mark has
been leading this process and we plan to have
my designated successor in place in time for
me to step down at the 2021 Annual General
Meeting (AGM) at the latest. I will be standing
for re-election at the Company’s AGM in July
2020 and, in order to facilitate an effective
succession, it is intended I remain as Chairman
until my successor has been successfully
onboarded. This crucial succession process
will be set out further in next year’s
Nominations Committee Report.
Ensuring a diverse culture on the Board is
crucial to improving effectiveness, encouraging
constructive debate, delivering superior
performance and enhancing the success
of the Company. With the recent appointment
of Liz Hewitt I am pleased to report that we are
again meeting our diversity target of 33.3% of
the Board being women. We also currently
meet 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 85.
Sir Peter Gershon
Chairman
Sir Peter Gershon
Chairman
Dear shareholders,
I am pleased to present to you our Corporate
Governance Report for 2019/20. The report
provides an insight into the activities of the
Board and its Committees over the year
including how it has evaluated its effectiveness
and how it provides appropriate and effective
stewardship to the Company to ensure it
achieves its strategic priorities. It also discusses
how we create value for shareholders and
wider stakeholders during an ongoing period
of external economic, regulatory and
political uncertainty.
Towards the end of the year we have seen
the acceleration of the COVID-19 pandemic.
This is having a profound effect on how
companies around the world operate during
these unprecedented times and we recognise
the increased importance of good governance
at a time when effective engagement and
collaboration with our stakeholders has never
been more important. As a Board we are
closely monitoring the developments of
COVID-19 and the impact of this on all areas
of the Company. Please see overleaf for
information on our response to COVID-19.
Over the year there have been a number
of other key events such as the brief power
outage experienced on 9 August 2019 in the
UK and the gas connection supply challenges
in downstate New York in the US. Other
external factors which have influenced the
Board agenda include: the regulatory
environment in the UK and the RIIO-2 business
plan submissions; the increased gas regulation
in the US, in particular New England; the
increased political uncertainty leading up to the
December 2019 UK General Election; Brexit;
and the impact of the legal separation of the
ESO. All of which have had, and some will
continue to have, an impact on the way we
work and operate.
UK Corporate Governance Code 2018
and stakeholder engagement
We are pleased to report that we are fully
compliant with the requirements of the new
UK Corporate Governance Code (the Code);
see page 86 for information on how we have
adapted our practices to ensure compliance
and transparent reporting against the Code.
Our stakeholders are very important to us and
we remain committed to maintaining regular
open dialogue and effective communication
with them. With the global restrictions in place
due to COVID-19 this is requiring us to consider
alternative methods to ensure we maintain the
same level of engagement.
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National Grid plc Annual Report and Accounts 2019/20
Corporate Governance | Letter from the Chairman
Our response to COVID-19
In order for us, as a Board, to be able to effectively monitor the
Company’s crisis management we met on a weekly basis throughout
April 2020 to monitor the impact of the current COVID-19 pandemic on
the Company’s operations and how the Company was responding to
the latest developments. These meetings were moved to a fortnightly
basis from May 2020 and we will assess the need and frequency of
these regular briefings as the pandemic continues.
How we have considered our stakeholders during COVID-19
Our commitment to being a responsible business is central to the way
in which we operate. This has been the governing principle behind our
response to the COVID-19 pandemic as Directors. We have had to think
through and debate on the choices and actions we need to consider
over the coming months to position us best for success in the medium-
to long-term taking account of the impact on our key stakeholders. The
Board has continued to monitor its responsibilities to the Company’s
different stakeholder groups. Good engagement has been crucial in
understanding the views of our stakeholders in order to make informed
decisions during this period of crisis. For example, the Company has
been seeking feedback from employees that has helped to shape its
response to the COVID-19 pandemic.
Our colleagues
Our colleagues have been critical in making sure that we keep the
lights on. The Board considered both the physical and mental wellbeing
of our employees and are regularly briefed on the actions that would be
taken to keep them safe and also to equip them to work from home
efficiently. The Board has been in support of these initiatives, including:
sequestering critical operations staff on-site in the UK and US to ensure
service continuity; senior leaders communicating regularly via virtual
online group calls; webchats and video messages; rolling out mental
health training courses; and understanding colleague sentiment to the
crisis and the COVID-19 recovery strategy through a pulse survey in
the UK and US. The Company has not implemented pay reductions,
furlough or compulsory redundancy schemes. We continue to monitor
progress of how the Company can accommodate employees to return
safely in the field, and how we can build on some of the positive changes
in our culture and ways of working as the restrictions are lifted.
Communities
Our employees have also been supporting our communities by
volunteering and providing their time and expertise to support charities
and the most vulnerable. In the UK for example, as well as monetary
support to various charities, the Company is operating a food bank
and has helped the University Hospitals Birmingham (UHB) Charity to
purchase almost 400 tablet computers that will be used by patients to
help them speak to their loved ones while in isolation, see page 15 for
a case study. In the US, the Company approved cessation of service
disconnections for non-payment of outstanding bills. This reflects our
commitment to support the communities in which we operate. Looking
beyond the short-term, the Board will be kept informed of work to
support getting people back into employment and into crucial roles,
as well as helping support small- and medium-sized businesses
(SMEs) to drive the local economies we operate in.
Investors
The Board recognises it is imperative to promote the success of the
Company on behalf of its members. The Finance Committee has held
two ad hoc meetings to consider the short- and longer-term liquidity
of the Company in a range of different COVID-19 related scenarios.
The Board approved the recommendation to pay a final dividend in
August 2020 following stress testing of the financials in various
adverse scenarios.
Customers, regulators and suppliers
We are very conscious that many of our customers are currently
experiencing additional financial challenges and have therefore
willingly agreed to moratoriums on debt collection activities in our
US regulated businesses.
Furthermore, US Niagara Mohawk sought and received permissions
from regulators to defer for three months, scheduled rate changes that
would have increased customer bills as of 1 April 2020. In addition, we
decided to postpone the filing of the US Niagara Mohawk rate case
which could have resulted in bill increases in 2021.
The Board also supported the active and constructive engagement
with Ofgem to protect customers by supporting the proposal for the
relaxation of network charge payment terms for those suppliers and
shippers who are facing cash flow challenges as a result of COVID-19.
Additionally, the Board noted the request made to modify the collection
of forecast additional balancing costs by the ESO for a further year.
These costs, estimated at up to £500 million, are required to safely and
securely manage and balance the system given the unprecedented
reduction in demand levels caused by COVID-19. We recognise that
the increase is significant and is a material issue for ESO customers.
The Board notes that the ESO is working with Ofgem and the industry
with a view to ensuring that any scheme put in place is in the interests
of end consumers and our customers. We have also continued the
development and tender of future work for our suppliers, giving longer
term visibility and greater certainty of income and the Board has been
kept informed of any impacts on our suppliers and supply chain.
We will continue to work closely with our stakeholders across both sides
of the Atlantic in the current environment. The Board continues to be
kept updated regularly on our COVID-19 response and on learnings that
can be sustained to improve our ways of working and Company culture.
For information on how we have considered our stakeholders through
the year see pages 44 – 47.
65
National Grid plc Annual Report and Accounts 2019/20
Corporate Governance
Our Board
Committee
membership key
Audit
Committee
Finance
Committee
Nominations
Committee
Remuneration
Committee
Safety, Environment
and Health Committee
Executive
Committee
Chair of the
Committee
Biographies as at 17 June 2020
Other Board members
during the year were:
• Dean Seavers –
stepped down on
5 November 2019
• Nora Mead Brownell
– stepped down on
8 April 2019
Sir Peter Gershon CBE FREng (73)
Chairman
John Pettigrew FEI FIET (51)
Chief Executive
Andy Agg (50)
Chief Financial Officer (CFO)
Appointed: 1 August 2011 as Deputy
Chairman and Chairman with effect
from 1 January 2012
Tenure: 8 years
Skills and competencies: Sir Peter is
an experienced leader, having held senior
board-level positions in the computer, defence
and telecommunications industries. He has
served as a Managing Director in several
high-profile organisations and was previously
Chairman of Tate and Lyle plc. Sir Peter is
committed to engaging with employees,
for example, through site visits in the UK
and US. He annually hosts the Chairman’s
Awards, an excellent opportunity to
appreciate employees at National Grid;
and further engages through the recent
employee engagement sessions. 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:
• Chairman of the Dreadnought Alliance
Leadership Board;
• Trustee of the Sutton Trust;
• Trustee of the Education Endowment
Foundation;
• Chairman of Join Dementia Research
(JDR) Partnership Board; and
• Board member of the Investor Forum.
Appointed: 1 April 2014 and Chief
Executive with effect from 1 April 2016
Appointed: 1 January 2019
Tenure: 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 held a number of senior
finance leadership roles across the Group,
including Group Financial Controller, UK
CFO and Group Tax and Treasury Director.
Andy brings in-depth knowledge of National
Grid, both in the UK and US, and his broad
experience across operational and
corporate finance roles led to a smooth
transition into his role. He contributes
broadly on a wide range of topics at Board,
Finance and Audit Committee meetings.
External appointments: None.
Tenure: 6 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,
creating 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 UK government’s Inclusive
Economy Partnership;
• Member of the CBI’s President’s
Committee;
• Member of the Edison Electric Institute
Executive Committee; and
• Non-executive Director and Senior
Independent Director of Rentokil Initial plc.
What we bring
to the Board
This diagram sets out
the number of Board
members with
specific skills and
experience as a way
of demonstrating the
different aspects
the Directors bring
to the Board.
Energy
4
Engineering
7
11
General management
Technology/innovation
5
Digital/cyber challenge
2
Compliance/regulation
9
5
Government/political
Finance/audit/banking
7
8
International (specifically US)
5
Safety
Risk management
10
66
Nicola Shaw CBE (51)
Executive Director, UK
Appointed: 1 July 2016
Tenure: 3 years
Skills and competencies: Nicola’s career,
in the UK and overseas, has included
several senior operational and commercial
roles in regulated businesses. She has
a strong leadership track record, which has
included 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 implement
Board decisions and lead our UK business
with the requisite experience, knowledge
and leadership expertise.
Alison Kay (56)
Group General Counsel
and Company Secretary
Appointed: 24 January 2013
Skills and competencies: Alison has
responsibility for the legal, compliance and
governance framework of the Group. She
is an experienced commercial lawyer and
brings 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:
External appointments:
• Member and Vice-Chair of the GC100
• Non-executive Director of International
Consolidated Airlines Group, S.A.;
• Director of Major Projects Association;
• Director of Energy Networks
Association Limited; and
• Director of Energy UK.
Group; and
• Member of the Marie Curie West Midlands
Development Board.
National Grid plc Annual Report and Accounts 2019/20
Corporate Governance | Our Board
Jonathan Dawson (68)
Non-executive Director;
Independent
Appointed: 4 March 2013
Tenure: 7 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. Jonathan previously held
positions as Chairman of the Remuneration
Committee and Senior Independent Director
of Next plc and Senior Independent
Director and Chairman of the Audit &
Risk Committee at Jardine Lloyd
Thompson Group plc.
As a Non-executive Director, Jonathan
brings an innovative perspective, scrutiny,
constructive challenge and independent
oversight to the Board.
External appointments:
• Chairman of River and Mercantile
Group PLC; and
• Chairman and a founding partner
of Penfida Ltd.
Therese Esperdy (59)
Non-executive Director;
Independent
Appointed: 18 March 2014. Appointed
to the Board of National Grid USA from
1 May 2015
Tenure: 6 years
Skills and competencies: Therese
has significant international investment
banking experience, having held a variety
of leadership roles spanning 27 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.
Therese’s specialist knowledge combined
with her sharp and incisive thinking enables
her to contribute and constructively
challenge on a wide range of Board
debates.
External appointments:
• Chairman of Imperial Brands PLC; and
• Non-executive Director of Moody’s
Corporation.
Dr Paul Golby CBE FREng, FIET,
FIMechE, FEI, FCGI (69)
Non-executive Director;
Independent
Appointed: 1 February 2012
Tenure: 8 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 to
the Board 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 specialised
experience in safety and risk management
combined with his deep insight into
regulatory issues faced by the Group,
particularly in the UK, is crucial to his role
as Chair of the Safety, Environment
and Health Committee.
External appointments:
• Chairman of Costain Group PLC; and
• Chairman of NATS Holdings Limited.
Liz Hewitt (63)
Non-executive Director;
Independent
Appointed: 1 January 2020
Tenure: Less than 1 year
Skills and competencies: Liz qualified
as a chartered accountant with Arthur
Andersen & Co. and has held a variety
of executive positions in private equity
companies including 3i Group plc,
Gartmore Investment Management Limited
and Citicorp Venture Capital Ltd. Liz was
also Director of Corporate Affairs at Smith &
Nephew plc. Liz brings significant business,
financial and investment knowledge to the
Board, and has wide experience of being a
chair and a member of audit, remuneration,
nominations, disclosure, risk and corporate
social responsibility committees. Liz’s
diverse knowledge and broad range of
financial expertise is a great addition to
the boardroom bringing a fresh, logical
perspective to Board discussions and
decision-making.
External appointments:
• Senior Independent Director and chair of the
Audit Committee at Melrose Industries plc;
• Non-executive Director and chair of the
Audit Committee at Novo Nordisk A/S; and
• External member of the House of Lords
Commission and chair of its Audit Committee.
Amanda Mesler (56)
Non-executive Director;
Independent
Appointed: 17 May 2018
Tenure: 2 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 26 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 an
entrepreneurial perspective to the Board
and valuable insight into the Company’s
increasingly important technical evolution.
External appointments:
• Chief Executive Officer of CashFlows
Europe Limited; and
• Non-executive Director of Insect
Technology Group Holdings Limited.
Earl Shipp (62)
Non-executive Director;
Independent
Jonathan Silver (62)
Non-executive Director;
Independent
Mark Williamson (62)
Non-executive Director and
Senior Independent Director
Appointed: 1 January 2019
Appointed: 16 May 2019
Appointed: 3 September 2012
Tenure: 1 year
Tenure: 1 year
Tenure: 7 years
Skills and competencies: With an
extensive career in the chemicals industry
and having held a senior leadership role
in a safety-critical process environment,
Earl brings significant safety, project
management, environmental, sustainability
and strategic expertise to the Board and
Committees. This, along with his innovative
way of thinking, enables Earl to contribute
on a wide range of issues to Board and
Committee debates, particularly in relation
to safety management.
External appointments:
• Non-executive Director of Olin Corporation;
• Non-executive Director of CHI St. Luke’s
Health System of Texas; and
• Commissioner of Brazoria-Fort Bend
Rail District (Texas).
Skills and competencies: Jonathan has
considerable knowledge of the US-regulated
energy environment, experience and
understanding of integrating public policy
and technology into a utility as well as a
strong background in finance. Previously,
Jonathan was the head of the US
government’s $40 billion clean energy
investment fund. He is currently the
Managing Partner of Tax Equity Advisors
LLC, which manages investment in
large-scale renewable projects and was
recognised as one of the ‘Top 10 Green
Tech Influencers’ in the US. Jonathan’s
strong background in finance and
government policy along with his long career
at the intersection of policy, technology,
finance, and energy brings innovative and
positive insight to the Board’s policy discussions
and to its interaction with management.
External appointments:
• Managing Partner of Tax Equity Advisors LLC;
• Director of Plug Power, Inc; and
• Director of Intellihot Inc.
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, Non-executive
Director and Senior Independent Director of
Alent plc and Chairman of Imperial Brands
PLC cement his extensive financial
experience and give him 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. Mark acts
as an effective board evaluator, provides a
logical eye, and makes impartial judgements
weighing up options for the Board in a
dispassionate way. In his role as Senior
Independent Director, Mark brings an
excellent understanding of investor
expectations as well as providing significant
insight into managing relationships
with investor and financial communities.
External appointment:
• Chairman of Spectris plc.
67
National Grid plc Annual Report and Accounts 2019/20
Corporate Governance
Corporate Governance overview
Your Board remains committed to the highest standards
of Corporate Governance and in 2019/20 continued to
embed the new UK Corporate Governance Code into
the work that we do.
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, dividend policy, 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:
• the Company’s strategy and long-term strategic objectives;
• risk appetite and determination of 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;
• oversight of the Company’s response to major crises and other
significant challenges; and
• 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.
• Consideration of exercise
of discretion.
• Implementation of policy.
• Incentive design and
setting of targets.
Finance Committee:
• Financing policies and
decisions.
• Credit exposure.
• Hedging.
• Foreign exchange
transactions.
• Tax strategy and policy.
• Guarantees and
indemnities.
Safety, Environment and
Health (SEH) Committee:
• SEH strategy and policies.
• Performance targets.
• Sustainability.
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
Three Executive Directors are members of the Executive Committee,
as well as being on the Board. The Group General Counsel and
Company Secretary is also a member of the Executive Committee.
See their biographies on page 66.
John Pettigrew – Chief Executive and Committee Chair
Andy Agg – Chief Financial Officer
Nicola Shaw – Executive Director, UK
Alison Kay – Group General Counsel and Company Secretary
Governance structure
The schedule of matters reserved for the Board and terms of
reference for each Board Committee are available in our Board
Governance Document at: www.nationalgrid.com
Reports from each of the Board Committees, together with details
of their activities, are set out on pages 76 – 87.
Full biographies for the Executive Committee are available at:
www.nationalgrid.com
Andy Doyle
Chief Human Resources
Officer
Badar Khan
President, National Grid
US
Barney Wyld
Group Corporate
Affairs Director
Adriana Karaboutis
Chief Information
and Digital Officer
Jon Butterworth
Managing Director,
National Grid Ventures
Badar was previously President of the National Grid Ventures business before stepping into the role of Interim President of the US Business, following Dean Seavers stepping down
in November 2019, and was appointed to the role permanently on 2 April 2020. Jon Butterworth was appointed Managing Director of National Grid Ventures and a member of the
Executive Committee after fulfilling this role on an interim basis since November 2019.
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Corporate 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 2020. Attendance is shown as the number of meetings
attended out of the total number of meetings possible for the individual Director during the year.
Board
Audit
Finance
Nominations
Remuneration
Safety,
Environment
and Health
Director
Sir Peter Gershon
John Pettigrew
Andy Agg
Nicola Shaw
Jonathan Dawson
Therese Esperdy
Paul Golby
Liz Hewitt – Appointed on 1 January 2020
Amanda Mesler
Earl Shipp
Jonathan Silver – Appointed on 16 May 2019
12 of 12
12 of 12
12 of 12
12 of 12
12 of 12
–
–
–
–
–
–
4 of 4
4 of 4
–
4 of 4
11 of 121
4 of 4
4 of 4
11 of 121
4 of 4
2 of 2
1 of 1
–
–
12 of 12
4 of 4
1 of 1
12 of 12
9 of 9
–
–
–
3 of 3
Mark Williamson
11 of 121
4 of 4
Former Directors who served for part of the year
Dean Seavers – Stepped down from position of Executive
Director, US on 5 November 2019
Nora Mead Brownell – Stepped down from position of
Non-executive Director on 8 April 2019
6 of 84
–
–
–
–
–
–
1. Four ad hoc Board meetings were held during the year and all non-attendance was due to short notice.
2. Earl Shipp did not attend the April Nominations and Remuneration Committee meetings due to personal circumstances.
3. A Remuneration Committee meeting was held at short notice in November 2019 and Jonathan Silver was unable to attend.
4. Dean Seavers was unable to attend the October and November 2019 Board meetings.
All Board/Committee members who were unable to attend a meeting provided comments in advance.
Board/Committee Chair
Examples of Board focus during the year include:
7 of 7
–
–
–
7 of 7
7 of 7
7 of 7
2 of 2
7 of 7
6 of 72
6 of 6
7 of 7
–
–
–
–
–
–
5 of 5
–
–
–
–
4 of 52
2 of 33
5 of 5
–
–
–
–
–
–
–
–
6 of 6
1 of 1
5 of 5
6 of 6
–
–
–
–
Key areas
of activity
Strategy and
performance
Matters considered
Key decisions made / link to purpose
• Board approval of the Company’s Business Plan
and strategy;
• the direction of travel for our digital strategy;
• following consideration of the external energy
landscape, endorsed the strategic priority areas
for management focus for 2020/21;
• reviewed and endorsed the ambition of net zero
by 2050 and the interim targets for the Company
as a whole;
• received updates on cyber security activities and
the progress being made in this area. The Board
agreed it was acting in accordance with its risk
appetite in this area; and
• commissioned an internal investigation report,
along with an ESO technical report to establish
the factors that had led to, and the lessons that
could be learned from, the power outage which
had occurred on Friday 9 August 2019.
Strategy remained a key focus throughout the year. The Board
participated in two interactive strategy sessions in addition to
the time allocated during Board meetings this year. The offsite
sessions in September 2019 and January 2020 provided the
Board with an opportunity to scrutinise business performance
against the strategic plan and review the key strategic objectives
for the year. In the year, the Board focused on:
• developing a Business Plan that meets the Group’s
requirements, aligned to the Company’s purpose, vision and
values and underpinned by a robust financial strategy;
• reviewing and scrutinising Group trading performance, budget
and consideration of share price;
• shareholders’ interests if the Labour Party had won the 2019
UK General Election and implemented its manifesto
commitment to nationalise National Grid UK regulated business
and interconnectors;
• growth strategies for NGV, including renewable generation
strategy;
• performance updates from the UK and US businesses;
• the key milestones and progress made by the Company
on the energy transition;
• climate change and our strategy to further reduce our
emissions, to achieve net zero by 2050 and make a wider
contribution to the decarbonisation of the economies in which
we operate;
• innovation and technology – see separate section below;
• the increasingly strong performance of the UK and US
commercial property portfolio; and
• the sequence of events that took place on Friday 9 August
2019 cumulatively resulted in a widespread electricity power
outage across the country.
Views of
key stakeholder
groups considered
All:
Investors
Suppliers
Customers
Regulators
Communities and
governments
Our colleagues
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National Grid plc Annual Report and Accounts 2019/20
Corporate Governance
Corporate Governance overview continued
Matters considered by the Board continued
Matters considered
Key decisions made/ link to purpose
Key areas
of activity
Business plan
and dividend
Employee
engagement
and culture
Discussed the ongoing financial strategy and business plan for
the year. Regular updates were received on emerging themes
and key external challenges, and particular consideration was
given to these and the current political environment.
The Group’s financial capacity under the Business Plan was
stress tested using the current approach to fund the dividend
until Financial Year 2026, in the context of current market
expectations. The Board also reviewed the suitability of the
Group’s dividend policy wording considering the key regulatory
processes in the UK and US.
In light of the COVID-19 pandemic, the Board discussed the
issues that had been considered and analysis undertaken in
relation to the payment of a dividend, which had included
financial scenarios and resilience testing, and consideration
of stakeholders including investors such as pension funds.
This year the Board received biannual updates on the
implementation of employee voice on Board activity and culture.
The Board reviewed the existing employee engagement
implementation plan and commented on the overview of activity
for the next half of the year. Focus has continued on improving
communication channels between the Board and employees
to ensure feedback and updates on actions are shared.
Discussed the importance of a diverse and engaged workforce
to deliver our Group strategy and the continued need to ensure
an open culture where dialogue between the Board, senior
management and the workforce is encouraged.
Our workforce continued to be a key focus as we navigated the
impact of the COVID-19 pandemic. The health and safety of our
employees remained paramount and discussions centred on
keeping critical employees safe whilst their work continued.
The Board received weekly updates on employee wellbeing
and absenteeism.
Views of
key stakeholder
groups considered
Investors
Customers
Communities and
governments
Our colleagues
• 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 from March 2019 to March 2024;
• The Board considers a range of factors when
annually reviewing and setting the dividend,
including expected performance and regulatory
developments. No dividend policy changes were
recommended and the current policy was
reaffirmed; and
• Approved the payment of the final dividend at its
additional June 2020 Board meeting.
Our colleagues
• Board input on the approach taken to workforce
engagement activities and the topics discussed
based on employee feedback; and
• The Board believes that existing approaches and
mechanisms enable comprehensive two-way
engagement opportunities with the workforce and
is satisfied that the approach taken is an effective
alternative to the proposed methods set out in
the Code.
Please see pages 72 and 73 for more information.
Political and
regulatory
environment
The Board has continued to focus on how to promote the
success of the Company during further developments to the
external environment in the UK and US.
In the UK, regular updates were received on risks and
opportunities posed by Brexit proposals and the potential for
state ownership, and continued engagement activities with our
stakeholders on the issue.
In the US, the Board received regular updates on the gas supply
constraint in downstate New York. Once an agreement has been
reached with the Governor of New York, the focus for the US
Business will be on executing the longer-term supply strategy and
undertaking a major change in the way it engages with external
stakeholders in New York.
• Board input on, support for and monitoring of
the UK and US regulatory strategies;
• Political sub-group of the Executive Committee
continued to take a more hands-on approach to
the evolving political and regulatory landscape
and its implications for the Company; and
• The Board agreed that a lessons learned
exercise would be undertaken which would
include an assessment of the Company
stakeholder management at the US state political
level. The reviews were conducted by external
consultants. The Board received a comprehensive
assessment of the lessons learned at the March
2020 meeting and the action plan to implement
the reviews’ recommendations was approved
at the April 2020 meeting.
All:
Investors
Suppliers
Customers
Regulators
Communities and
governments
Our colleagues
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Corporate Governance | Corporate Governance overview
Key areas
of activity
RIIO-2 price
control
Matters considered
Key decisions made / link to purpose
The Board scrutinised and challenged the Company’s UK
regulatory strategy throughout the year, providing feedback,
guidance and support for its ongoing development.
The Board reviewed the financials of the business plans,
noting that the majority of spend was associated with asset
health and increased cyber security requirements.
A strong stakeholder engagement strategy was adopted
by the Transmission and System Operator Boards. This
commitment was demonstrated by signing engagement
charters to be stakeholder led and to be part of the User
Group process. Our final business plans were submitted to
Ofgem in December 2019 following extensive stakeholder
engagement panels, challenge groups, and consideration
against the 2050 net zero target.
• Draft business plans were reviewed, and the
Board approved the creation of a sub-committee
of the Board, chaired by the Chairman, to
confirm the content for the business plans and
accompanying assurance statements prior to
the final submission to Ofgem;
• the sub-committee considered how the
comments from the Finance Committee on the
Financeability Assurance Statements had been
taken into account; and
• stakeholder engagement consisting of 2,800
individuals, representing the full cross-section
of our stakeholder segments, and 13,000+
consumers, shaped the plans to deliver a safe
and reliable network while enabling the transition
to a low carbon network. The Board reiterated
that the plans had inbuilt mechanisms to cope
with potential changes to the energy landscape
without increasing consumer bills in real terms.
Views of
key stakeholder
groups considered
Investors
Customers
Regulators
Technology
and innovation
The Board reviewed the performance and success of National
Grid Partners against the Business Plan and heard about a
number of proposed investments.
• The Board reviewed the overview of investment
strategies and endorsed the growing portfolio
noting the establishment of a positive reputation
in the external market.
Our colleagues
The business continued to perform well and focus remained
on disruptive innovation capabilities.
Total societal
impact
Focus has been on navigating expectations of various
stakeholder groups as societal expectations have changed.
National Grid is at the centre of the energy system in the UK
and US, and we are uniquely positioned to drive societal impact
in the energy sector and enable a clean, green energy system.
• The Board recommended the development and
implementation of a new Responsible Business
framework for the Company.
All:
Investors
Suppliers
Customers
Regulators
Communities and
governments
Our colleagues
Looking forward, the Board’s focus for next year is expected to include:
• management of threats and opportunities posed by the next phase of the COVID-19 pandemic;
• ensuring an acceptable outcome for RIIO-2;
• strategy, including the future of gas;
• organisation, culture, bench strength and talent;
• US reputation recovery;
• New York rate case filings; and
• net zero.
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National Grid plc Annual Report and Accounts 2019/20
Corporate Governance
Corporate Governance overview continued
Our culture journey
We recognise that how we do things is as important as what we do.
The Board is responsible for influencing and monitoring culture
throughout the organisation to ensure we are emulating desired beliefs
and behaviours both in and outside the boardroom, and identifying
areas where culture is embedded strongly and areas where shifts in
culture are required. Our culture determines how we behave,
how we make decisions and our attitude towards risk aligned with the
Group’s purpose, vision and values.
The Board has spent considerable time reviewing and determining the
right culture for the organisation and recognises that there is still work
to be done; the journey so far is outlined below.
2016/17
2017/18
Culture-themed internal Board and Committee evaluation
assessed how the Board set the ‘tone from the top’ and how
effectively this was cascaded throughout the Company.
Re-established clear purpose, vision and values and
agreed a common definition of culture as ‘Our values, beliefs
and behaviours that characterise our Company and guide
our practice.’
The Board agreed culture-specific actions and a culture
scorecard to be reported to the Board at least annually.
Agreed areas for increased Board focus including visible
leadership and agreed the approach to engaging most
effectively with employees.
Approved format for culture scorecard to aid the Board
in monitoring culture at Group level.
2018/19
Annual employee survey results were considered, and areas
of improvement augmented into the Board’s behaviours
including local engagement sessions in the UK and US.
The 2018 Corporate Governance Code was considered in
depth by the Board, and key stakeholders were mapped out
and discussed. The Board discussed its chosen approach
to workforce engagement and an implementation plan
was agreed.
A revised culture scorecard was considered against an overall
status for each of the Company’s values, bringing together
data from teams including safety, ethics, compliance, supply
chain management and customers. The Company committed
to review how to evolve its approach to monitoring and
measuring culture, along with how it could align the activity
taking place to have a greater combined impact and make
change happen at a faster pace.
2019/20
Looking
ahead
Board culture evaluation
During the year the Board considered culture throughout
its decision-making and the internal Board evaluation
incorporated a review of culture. For more information
see page 74.
Board review of culture scorecard
A new set of vision and values was agreed for the Company
and the Board agreed to evolve its approach to measuring
and monitoring culture across the Company with the aim of
having a simplified approach. This would be based on the
Company’s externally benchmarked annual safety survey,
external customer feedback and the modification of the
Company’s annual engagement survey to align around a
more useful cultural diagnostic.
Culture diagnostic work throughout the year showed that the
current culture was highly consistent across the Company,
promoting a common identity across the organisation; areas
of focus and change were also identified as part of the
exercise and these have been considered.
Over the next year the Board will focus on the following
culture-related activities:
• monitor the implementation of the Company’s purpose,
vision and values and the link to the Company’s culture;
• review and monitor the culture actions of the internal
Board evaluation to ensure that the ‘tone from the top’
is correct and the Board has a clear view of culture both
at Board level and within the organisation;
• facilitate a culture session with the Chief Human
Resources Officer and the Board to consider the results
of the 2019/20 Board evaluation; and
• review and monitor the change in culture and ways of
working in the Company during the COVID-19 pandemic.
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Corporate Governance | Corporate Governance overview
Workforce engagement
Employee engagement sessions
In response to the Code we have implemented a range of Employee
Voice on Board (EVOB) activities to ensure that there is appropriate
meaningful engagement between the Board and our workforce.
Activities seek to expose Board members to a broad cross section
of employees and employee experiences across the Company and
our locations. Using the employee input through the EVOB activity
to feed Board decision-making is a core part of the Code and a
discussion topic and action log has been maintained following each
of the relevant activities.
During the year, the Non-executive Directors (NEDs) held three
employee voice engagement sessions, in Boston, New York and
London. Unfortunately the session scheduled for March 2020 in
California was cancelled due to COVID-19. The employee engagement
sessions provided an opportunity for employees and all NEDs to
discuss topical subjects, including how successful employees felt the
Company had been in embedding its values, beliefs and behaviours
throughout the organisation, and shared their views on the gender
pay gap. 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. The Board
allocates time directly after the sessions to discuss key outcomes
and takeaways. Communications this year have increased to ensure
our employees are kept informed about what was being heard in
these sessions as well as progress against the actions taken from
the meetings. The Board continues to receive updates on the actions
taken from these sessions.
Eight non-exec board members hosted:
44
face-to-face
sessions
across
meeting with over
resulting in
27
different sites
240
colleagues
27
actions captured
Colleagues’ feedback has influenced the board’s thinking in the following
areas and actions are currently in progress:
Inclusion and diversity
Safety
Company brand
Onboarding
Change management
Silos
Line management
Culture
IT
Talent attraction and retention
Decision making
Communication
Employee Voice engagement sessions with NEDs
April 2019, Boston, US
Employees took the opportunity to discuss our corporate culture.
The Board were pleased with the unanimous agreement of how
important our safety culture was across the Company and the open
discussions on wide-ranging topics which followed. Discussions
focused on the requirement to positively reinforce the desired culture
across all areas of the business and to ensure that communication
channels and transparency of actions increased. Topics of concern
were raised around the limitations of the existing processes and
systems and the Board noted these challenges as areas for
improvement.
September 2019, New York, US
These sessions focused on the ongoing communication strategy
being implemented throughout the Company. Discussions centred
on sharing information across jurisdictions and individual business
areas to help ‘find a better way’ and to promote project successes
and learn from any programme failures. The Board listened to
concerns around technology and provided an update on the plan
going forward.
December 2019, London, UK
The Board praised the active engagement at these sessions with
topics focused on corporate identity, culture, diversity and the gender
pay gap. Conversations highlighted the need to increase ethnic and
gender diversity in senior roles and the NEDs informed the attendees
of the latest initiatives (see table below). Positive conversations
around reducing the gender pay gap also took place, which started
with understanding the reasoning behind the difficulty experienced
in recruiting women for some specific roles within the business. The
Board encouraged discussions on ideas for programmes aimed at
encouraging and enabling women to return from maternity leave.
Employee Resource Group (ERG) Non-executive
Director Dinner
November 2019, London, UK
In November, a dinner was held to provide the opportunity for 16 UK
ERG Chairs and leads to hold informal discussion with NEDs on
the importance and impact of the ERG they support and lead. NEDs
were able to discuss and gain feedback on inclusion and diversity
related engagement topics. Following the positive feedback received
from this session we have planned an equivalent US dinner for 2020.
What have we heard?
What have we done?
During the employee engagement sessions, some of
the areas that we heard about were:
• more needs to be done to create ethnic and
gender diversity within the Company and to
ensure that senior roles are representative
• appreciating cultural differences is valued by our ethnically diverse colleagues, so we have refreshed
and simplified our Reverse Monitoring process to build on cultural awareness by ‘walking in our shoes’;
and
• a new category for Inclusion has been created for the Chairman’s Awards, which can be awarded to
any individual or group that has contributed positively towards inclusion at National Grid. Examples
include involvement in our employee resource groups and evidence of working towards our Group
inclusion and diversity strategy.
• more visible support of and advocacy for the
employee resource groups by the Board and
Executive Committee
• the Executive Committee has joined the Board in supporting and advocating the work of the employee
resource groups on a regular basis, including attendance at the twice-yearly Inclusion Forums. The full
calendar of events has also been circulated.
• communication and cascading issues combined
with process and system changes have caused
problems
• a communications strategy has been developed to ensure stronger alignment between the Group
narrative and local communications to create a clear line of sight from Group messages to regional
entities.
• improvements needed in two-way communications
to ensure priorities and focus areas are aligned
and that all departments are working towards the
overarching National Grid goal
• the UK business has implemented a comprehensive leadership communications programme which
includes Q&A sessions, breakfast and lunches with Executive Directors and increased frequency of
Town Halls to engage in conversations about the Company’s direction, priorities and to give the
Directors more opportunities to listen to issues and ideas from across the business.
• frustrations that there are no obvious changes
• the US business is developing a communications plan to address any employee concerns more
following the annual employee engagement survey
effectively and to ensure updates are communicated and cascaded successfully.
• conversations around gender pay and
suggestions that more needs to be done to
engage and enable women returning from
maternity leave
• in response to gender pay gap concerns and that women require encouragement from the Company
to return from maternity leave, we have compiled a list of leading senior examples who flex their work
pattern. They have been interviewed by our communications team and their ‘work story’ will feature in
our internal email bulletin every six weeks.
• concerns around technology and cyber threats
• a key focus for 2020/21 is to implement our updated information technology strategy in response to
concerns raised by employees throughout the Group.
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Corporate Governance
Corporate Governance overview continued
Performance evaluation
2019/20 Internal Board evaluation
Following the external Board evaluation which was undertaken
last year, this year, we undertook an internally facilitated Board
and Committee evaluation.
The evaluation focused on Board development and the purpose of this
review was to gain:
• insights into how Directors viewed the culture of the Company;
• an understanding of what constituted effective decisions made
during the year and why; and
• a deeper understanding about our culture and how it aligned with
the Company’s ambitions.
Our internal evaluation process
The effectiveness of each of the Board Committees was taken into
account in the evaluation. The results confirmed that there were minor
areas for improvement in relation to Board effectiveness.
The process of the evaluation and the areas identified for further
development are noted below.
January
February/
March
Board received the Board and
Committee Effectiveness
Surveys – including questions
on the effectiveness of the
Board and its decision-making
during the year.
Board completed a tailored Russell Reynolds Survey on
organisational culture diagnostic and how Board members
perceived the culture in the Company.
Completed Myers-Briggs type indicators (if not known).
Results received from surveys. These were reviewed and analysed to create an aggregated
report in relation to organisational culture.
Comments from the effectiveness survey were discussed in the individual Director performance evaluations.
Later in
2020
Effectiveness action plans
created and discussed with
the Board and its Committees.
Facilitated session with Chief Human Resources Officer analysing
results of the organisational culture survey, including a comparison
of the findings of the same survey completed by the Company’s
senior management.
Actions to enhance the Board’s effectiveness for 2020/21
The Board discussed the results of the evaluation in April 2020 and in May 2020 the following actions were agreed:
Action
Responsibility
More effective discussion and decision-making through streamlined
and targeted papers to the Board and its Committees.
Chief Executive and Group General Counsel and Company Secretary
External perspectives to be brought forward to the Board to bolster
management expertise including in the areas of cyber, climate change,
customer and developments in energy policy and energy technology.
Chief Executive and Group General Counsel and Company Secretary
Continue with and enhance the effectiveness of employee engagement
sessions to ensure a clearer alignment between these sessions and
discussions/decisions made by the Board and its Committees.
Chief Executive, Group General Counsel and Company Secretary and
Chief Human Resources Officer
Devote more time to the discussion of strategic priorities at
Board meetings.
Chairman, Group General Counsel and Company Secretary and
Chief Human Resources Officer
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Progress against actions for the Board agreed in 2018/19 external evaluation
Action
Progress made
Invite our customers into the boardroom to understand
and directly hear their perspectives.
Continue to invite external speakers to Board meetings/
dinners on topical issues.
The Chairs of both our RIIO-2 Transmission and ESO Stakeholder Panels met with the Board in
May and July 2019 respectively. This brought a valuable insight into how our RIIO teams were
focusing on the needs of our customers during the regulatory review. We will keep the current
situation under review and aim to invite additional customer groups into the boardroom later
this year.
The Governor of Massachusetts and a member of the Governor’s office met with the Board in
March 2019. The Chair, CEO and incoming CEO of Ofgem met with the Board in November 2019.
We had invited Pacific Gas and Electric to meet with the Board in March 2020; however, this has
now been postponed due to COVID-19. We continue to monitor the topical issues and will keep
under review prospective external attendees who could meet with the Board later in the year.
Use market research agencies to bring the voice of the
customer and other stakeholders into the boardroom.
This has been undertaken this year through regular reports from the businesses who use these
agencies to inform their views.
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.
An all-inclusive facilitated session was due to take place in March 2020 in California which would
have covered culture and the results of this year’s internal Board evaluation. Due to COVID-19 this
has been postponed.
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.
We have continued to develop our Board and strategic papers with the assistance of a third party
to ensure Board meeting effectiveness. The amendments to our paper templates have been
made to encourage and guide the sponsor and the paper author to consider the end aim or
action they require from the Board. A focus for this year is to ensure the strategic aim is
re-communicated at the beginning of each item before Board discussion and input commences.
Add a Corporate Social Responsibility session annually
to the Board agenda.
A deep dive into Corporate Social Responsibility took place at the January 2020 Board strategy
session and will be discussed again later in the year.
Directors’ induction and training
Directors’ induction programme
Following appointment to the National Grid Board, each new Director
receives a comprehensive induction programme tailored to their
experience, background and the requirements of the role. Consideration
is also given to Committee appointments, and the Group General
Counsel and Company Secretary assists the Chairman in designing and
facilitating the individual programmes. They are primarily designed with
the purpose of onboarding and familiarising the new Directors with our
business, vision, values, governance and people.
Both Earl Shipp and Jonathan Silver were provided with a formal, tailored
induction programme upon joining the Board last year. A detailed
summary can be found below.
The Board has also welcomed Liz Hewitt this year and we will report
on progress against her induction plan next year.
Non-executive Director induction examples
Earl and Jonathan both underwent a tailored induction programme
covering a range of areas of the business including governance,
remuneration and stakeholder matters. Throughout the year they have
both met with senior management from key business areas and functions
as well as employees across the UK, US and NGV businesses. They
also both separately received a briefing from our legal advisors which
included: company law and directors’ duties; corporate governance;
the Market Abuse Regulation; and listing and disclosure obligations.
Both directors met key employees in our Reward team to understand
our reward strategy, remuneration policy and current market practice
necessary to assist with their appointment to the Remuneration Committee.
Earl Shipp
Focus was given to matters pertinent to his role on the Safety,
Environment and Health Committee.
• Earl met with a number of employees throughout the business
and in key safety roles including Paul Golby, the Committee Chair,
to discuss National Grid’s Safety Framework, including carbon
reduction and climate change, wellbeing, sustainability and our
2050 net zero ambition.
• He undertook numerous site visits in both the UK and the US and
attended a thorough and engaging safety roadshow in May 2019.
This included a visit to our gas, electric and customer business units
in New York and New Jersey where he was provided with a detailed
end-to-end view of our smart grid approach and our Grid
Modernisation Strategy. He also visited control rooms and contact
centres in Boston and learnt more about our approach to
personalisation and tailoring our customer experience journeys
towards the electrification of vehicles and the clean energy future.
Jonathan Silver
Focus for Jonathan’s induction was given to matters pertinent to his role
on the Finance Committee.
• Jonathan met with the Group Treasurer and the Group Head of Tax
who 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. He also
met key employees throughout the business to discuss financial
accounting and control issues, the statutory audit, the annual
business planning process and other substantive topics involving
pensions and insurance.
• Jonathan undertook a number of site visits across Rhode Island and
Massachusetts. This included a tour of a liquefied natural gas facility,
as well as visits to renewable energy projects across Rhode Island.
He also received in-depth information briefings and undertook
control centre tours across the customer, gas distribution and gas
transmission functions.
Director development and training
The Chairman has overall responsibility for ensuring that our
Non-executive Directors receive suitable ongoing training to enable them
to remain an effective Board member. Individual training requirements
are reviewed and agreed annually on a one-on-one basis. As our internal
and external business environment continues to change, it is important
to ensure that Directors’ skills and knowledge are refreshed and updated
regularly. In addition to individual tailored training, updates on corporate
governance, legal and regulatory matters are also provided by way of
briefing papers and presentations at Board meetings. Non-executive
Directors receive details of training and development opportunities
offered by external advisors on various topics including cyber security,
operational resilience, climate change and technical updates on a
regular basis and we encourage and monitor attendance. In light of
COVID-19, training opportunities have continued virtually via webinars.
Additionally, the Non-executive Directors are expected to visit at least
one operational site annually, a target which is regularly exceeded.
Examples of site visits undertaken this year include a visit to the Feeder
9 Project at Goxhill in the UK and South Street Substation Project in
Providence, Rhode Island in the US.
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Corporate Governance
Audit Committee
Continued focus on internal control over
financial reporting and IT
The Committee considers these matters at
each meeting as a matter of routine. The focus
in the early part of the year was on monitoring
progress reported by management to address
IT control deficiencies highlighted in previous
years, and in May 2020 we concluded that
sufficient additional control activity had been
implemented to allow us to judge the
‘significant deficiency’ previously reported in
respect of US IT infrastructure controls to be
remediated and closed.
During the second half of the year, time was
spent understanding management’s progress
on enhancing control environments across all
locations. In particular, in March and May 2020,
the Committee considered management
updates on the lessons learnt from the initial
implementation of SAP S/4 HANA (as part of
the MyFinance programme) for the ESO prior
to the planned deployment of the technology
as the financial system of record across the UK
regulated business in mid-2021.
As we do annually, we considered the impact
of these matters on the year-end attestation
relating to the effectiveness of internal controls
over financial reporting required under SOX.
Overall framework for risk assurance
During the year, we discussed the Company’s
control framework and its maturity and it was
agreed that management would come back
to the Committee regularly with updates on a
number of improvements and enhancements
to the Company’s risk, control and assurance
framework that was consistent across the
Group. I was pleased to see the appointment
of a new Chief Risk and Compliance Officer
and the establishment of a central team to
drive a more common approach to second line
of assurance. In May 2020, we were updated
on the number of actions that had already
been executed and the plans that had been
developed, including the appointment of
respective leads in all businesses and functions
and the creation of implementation plans to
push the improvements forward.
Cyber security and cyber audit update
In September 2019, the Group Chief
Information and Digital Officer and Chief
Information and Security Officer joined for
the delivery of the cyber-risk-related audit
update to the Committee. The Committee
noted the significant work being undertaken
to remediate control weaknesses and that it
was proceeding in line with expectations.
Following this meeting, an update on digital
was presented to the Board in December 2019
to provide a consistent view of risk within the
Company’s security framework. The Board
confirmed it was comfortable with the
Company’s current cyber priorities and
stressed the importance of engagement
with regulators for future cyber upgrades.
The Committee will consider cyber assurance
again later in the year.
Review of the year
The Committee met four times during the year
to undertake its role in providing oversight and
monitoring the integrity of financial reporting,
the effectiveness of internal risk management,
control and assurance processes, the
Company’s governance framework and the
external audit. Following the decision to defer
the Group’s results announcement by a month
in light of the COVID-19 pandemic, the
Committee met in May 2020 with an additional
meeting convened in June 2020.
A substantial proportion of the Committee’s
time from late March 2020 onwards was
devoted to focusing on the year-end financial
reporting, internal controls and related impacts
arising from the COVID-19 pandemic in the UK
and US.
Assessing and responding to the impact
of COVID-19 on year-end financial
reporting and internal controls
The Committee met as scheduled on
25 March, in the week following the stay at
home notices being issued in both the UK and
US. The Committee discussed management’s
evolving risk assessment relating to the impact
of the pandemic on the year-end reporting and
close process, as well as contingency plans.
The Committee sought regular updates from
management throughout the year-end close
process as continuity plans were implemented.
As discussed on page 78, the key accounting,
financial reporting and internal control related
matters were discussed in the May 2020
and June 2020 meetings, and throughout
this period I remained in close contact with
the Chief Financial Officer, receiving regular
updates as the situation evolved. I am
pleased to report that the Group’s close
processes and Sarbanes-Oxley Act 2002
(SOX) controls operated as intended without
significant deviation.
In light of the rapidly changing regulatory
and economic circumstances throughout
late March and early April 2020, a decision
was taken to defer the Company’s results
announcement by one month to June 2020.
This decision was consistent with those taken
by many other companies, and in keeping with
advice from the Financial Reporting Council
(FRC), Financial Conduct Authority (FCA) and
SEC to afford management and the Board
more time to better understand the evolving
situation. This has also allowed us to
appropriately address the key disclosure
requirements in this Annual Report, in a
number of key areas including:
• accounting matters – and in particular the
impact of the moratoriums on collections
in the US on bad debt reserves and cash
collection forecasts;
• going concern – focused on the
appropriateness of the Group’s analysis as
regards reasonable downside scenarios;
• long-term viability statement – concerning
the key assumptions and reassessment of
viability from additional perspectives given
the uncertainty and dynamic external
factors and their cumulative effect in the
medium and long term; and
• the consideration and assessment of
a specific COVID-19 risk scenario or
cluster scenario.
Mark Williamson
Committee Chair
Key areas of focus in 2019/20:
• Assessing and responding to the impact
of COVID-19 on year-end financial
reporting and internal controls;
• Internal controls;
• Overall framework for risk assurance;
• Cyber security and cyber audit;
• New UK system of financial record
(Phase 1);
• Climate change related financial
disclosures; and
• Finance leadership changes.
Key areas of focus in 2020/21:
• Ongoing review of the impact of
COVID-19;
• Cyber security and cyber audit;
• Overall framework for risk assurance;
• New UK system of financial record
(Phase 2);
• Climate change related financial
disclosures and Responsible Business
reporting; and
• The UK regulatory developments and
impact on the Committee.
Composition of the Audit Committee
The Committee is made up of five
independent Non-executive Directors:
• Mark Williamson (Committee Chair);
• Therese Esperdy;
• Paul Golby;
• Liz Hewitt; and
• Amanda Mesler.
The Board is satisfied that all members of the
Committee have recent and relevant financial
experience and that the Chair, as a chartered
accountant, and with significant board level
financial and audit experience, is suitably
qualified. The Committee is deemed to have
competence relevant to the sector in which
the Company operates.
The Committee members’ biographies are
on pages 66 and 67 and contain details of
each member’s skills and experience.
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Further reading
You can view the Committee’s Terms of
Reference here: www.nationalgrid.com
S
Statement of compliance with the Competition and
Markets Authority (CMA) Order – the Company
confirms that it has complied with The Statutory Audit
Services for Large Companies Market Investigation
(Mandatory Use of Competitive Tender Processes
and Audit Committee Responsibilities) Order 2014
(Article 7.1), including with respect to the Audit
Committee’s responsibilities for agreeing the audit
scope and fees and authorising non-audit services.
Looking forward
Impact of COVID-19
The Committee expects a significant
proportion of its time will remain focused
on the impact of the pandemic for the
foreseeable future – across accounting,
financial reporting and internal control related
matters. The Committee will continue to
monitor developments and adapt its approach
to best support the Group’s stakeholders.
Other matters
Cyber and internal control matters will remain
high-priority areas as the Company seeks to
embed improvements and efficiencies over
the coming months.
In addition, the Committee will continue to
take a close interest in the Company’s evolving
ESG-related reporting activities. It will also
continue to monitor UK regulatory developments
carefully, as the UK government responds to
the findings of the Kingman and Brydon
reports later in 2020.
Audit Committee Chair transition
Liz Hewitt was appointed as Non-executive
Director and joined the Audit Committee as
a member in January 2020. During 2019,
Liz was identified as the right candidate to
take over from me as Audit Committee Chair.
Over the course of 2020/21 I will be working
closely with the Nominations Committee and
Board, as well as Liz, to ensure there is a
seamless transition plan in place. As part
of Liz’s tailored induction she has had meetings
with myself, Deloitte, the Global Head of Audit
and other senior members of the Company’s
finance team and she will continue to work
alongside me this year to ensure a smooth
transition.
Mark Williamson
Committee Chair
Climate change related financial
disclosures
The Company has continued to make good
progress towards providing disclosures
consistent with the recommendations set
out by the Task Force on Climate-related
Financial Disclosures (TCFD). In the year, the
Committee was presented with a roadmap
to progress towards full compliance of TCFD
and the current gap analysis. The Committee
noted progress made in the year, including
the identification of a principal risk relating
to the threats and opportunities around
climate change and the Company’s first set
of disclosures concerning longer-term
scenario analysis.
In the context of the financial statements,
the Committee also considered the impact
of climate change on management’s key
judgements and estimates, in particular
regarding gas asset lives as set out on
page 78.
New UK system of financial record
(MyFinance) – Phase 1
MyFinance became the financial system of
record for the ESO at the point of legal
separation on 1 April 2019.
The Committee received updates from
management on a regular basis throughout the
year, in anticipation of the planned technology
roll out across the UK business in early
2021/22 (Phase 2).
The Committee discussed the programme
leadership, governance and assurance model,
and lessons learnt from Phase 1 that will be
applicable to Phase 2.
Governance and regulatory changes
During the year, we received a detailed report
on the outcomes and recommendations of
the audit reforms in the UK following the
publication of Sir Donald Brydon’s review into
the quality and effectiveness of audit in the UK,
as well as those of the UK Competition and
Markets Authority and the Kingman review
concerning the UK regulatory landscape.
We also received a number of updates from
Internal Audit in relation to the new Chartered
Institute of Internal Auditors (IIA) Code of
Practice and later in the year we will review
this and make the appropriate changes to the
Internal Audit Charter and the Committee’s
Terms of Reference.
Finance leadership changes
The Committee also met privately with the
Chief Financial Officer towards the end of his
first full year in the role, to discuss succession
planning within the Finance function during
the coming year. We will continue these
conversations in 2020/21.
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Corporate Governance
Audit Committee continued
Significant issues/judgements 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 significant issues and judgements considered for the year ending
31 March 2020 are set out in the following table.
In addition, the Committee and the external auditor discussed the
significant issues addressed by the Committee during the year. You
can read more in the Independent Auditor’s Report on pages 110 – 120.
Matter considered
Factors and reasons considered, including financial outcomes
COVID-19 related
matters
• The Committee considered the accounting, reporting and internal control implications of the COVID-19 pandemic extensively
throughout the period from late March through to June 2020.
• The Committee satisfied itself that management had adequately identified and considered all potentially significant accounting
and disclosure matters in May 2020. Particular attention was devoted to understanding the implications of the moratoriums on
collections of customer receivables issued by regulators in New York, Massachusetts and Rhode Island in March 2020. These
events significantly impacted the business with immediate effect and contributed to a total bad debt charge of £234 million for
the year, of which £117 million ($150 million) was considered incremental and due to the moratoriums.
• The Committee also noted the other significant matters identified by management, being the additional uncertainty relating to
determining the fair value of unquoted assets held by the Company’s pension and other post-employment benefit schemes.
The Committee accepted management’s approach to delay finalising the financial statements until early June 2020 to allow
for additional asset valuation data to be received and appropriate adjustments reflected over residual elements of specific
asset classes.
• Concerning internal control, in March 2020, the Committee discussed management’s evolving risk assessment and contingency
planning activities. The Committee noted, amongst other things, management’s process to have a back-up individual identified
in order to plan for an unforeseen absence by someone involved in a key part of the year-end, close and reporting process.
The Committee received regular updates throughout the year-end and close process, and acknowledged that in the vast majority
of cases, control-related activities took place on time and by the individual originally assigned.
• In May and June 2020, the Committee was kept informed of the impacts of COVID-19 on the Company, including accounting
matters, going concern and viability considerations, in light of continuing business developments as well as regulatory
pronouncements, including from the UK FRC on the rapidly evolving corporate reporting landscape.
• Details of the Committee’s conclusions in relation to going concern and the long-term viability statement are set out on page 80.
Application of the
Group’s Exceptional
Items Framework
• The Committee considered papers from management over the course of the year setting out how the exceptional items
framework has been applied to certain events and transactions over the period, as set out in note 5 to the financial statements.
• For each item, the Committee has considered the judgements made by management, considering both, each item in isolation,
and the aggregate view of the impact on adjusted profit and adjusted earnings per share.
• The Committee reached the conclusion that additional US environmental provisions, the impact of a 0.5% reduction in the
discount rate applied to the Group’s environmental provisions and the reversal of the change in the UK tax rate should all be
treated as exceptional.
• The Committee concluded in line with management’s view that it was not appropriate to treat the incremental $150 million bad
debt charge as an exceptional item this year. In addition, having considered the quantum and nature of the settlement in relation
to the downstate New York gas moratorium and the additional COVID-19 related costs, it was deemed appropriate to include the
impact of these items within adjusted profit.
Gas Transmission and
Gas Distribution asset
lives in the context of
climate change
• Consideration was given to whether the developments in the UK and US towards binding carbon reduction targets should trigger
any changes to our estimates, judgements or disclosures, especially regarding our gas asset lives. The Committee received
various papers from management setting out an overview of the legislative changes in the period, analysis of the future pathways
for the energy transition in the UK and US, and evaluation of the possible future use for our networks in these circumstances.
• The Committee accepted management’s view that on balance we believe there will be a role for our gas networks post 2050
under a range of possible scenarios, and there is nothing at present to suggest that the asset lives should be shortened at this
point. The Committee also accepted management’s view that in light of the evolving legislative developments and increasing
investor attention, disclosure of a key judgement in relation to the impact of changes of legislation, disclosure of our gas asset lives
as a key estimate, and appropriate sensitivity analysis were appropriate as set out in note 13 to this year’s financial statements.
Going Concern
• The Committee evaluated papers prepared by management in May and June 2020, setting out management’s analysis under
a reasonable but severe ‘worst-case’ scenario, principally reflecting potential outcomes as regards the length and severity of
lockdown conditions, US customer moratoriums and a significant level of employee absenteeism. The Committee evaluated
management’s analysis of the mitigating actions available to it to manage through such a situation, including the degree to which
plans already existed and the likely challenges associated with implementing them.
• The Committee considered the assumptions made by management regarding availability of debt financing, noting recent debt
issuances but also contingency plans in the event that debt markets could close. Having considered the available evidence,
the Committee considered that the analysis presented, in conjunction with the disclosures included in note 1 to the financial
statements, was appropriate to the Company’s circumstances.
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Corporate Governance | Audit Committee
Key matters considered by the Committee
The key matters considered by the Committee during the course of the year ended 31 March 2020 are set out below:
Matter considered
Factors and reasons considered, including financial outcomes
Financial reporting
• On an ongoing basis the Committee considered current IFRS financial reporting issues. In addition to the matters highlighted
above assessed against the Group Exceptional Items Framework, we also considered the accounting as regards to the
acquisition of Geronimo in accordance with IFRS 3 ‘Business Combinations’, the position at Western Link as regards to liquidated
damage claims, and the impact of the 9 August 2019 UK power outage.
• 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, going concern and viability.
• Recommended to the Board the key accounting judgements and key sources of estimation uncertainty related to pensions and
environmental provisions, made by management for the 2019/20 half and full-year financial statements, going concern and other
reports filed with the SEC containing financial information.
Internal controls
• The Committee received regular updates on progress towards the Company’s annual SOX attestation.
• In March 2020, the Committee considered management’s progress against its wider financial controls action plan, and further
process improvements introduced ahead of the year-end, including relating to governance process and formalisation of
documentation around non-IFRS performance measures.
Risk and viability
statement
• In addition to its regular work monitoring internal control processes, and reviewing and challenging the draft viability statement,
the Committee specifically focused its attention this year on how the Company had factored the COVID-19 pandemic into its
annual risk assessment process and long-term viability testing.
External auditor
• Received an update report at each meeting, including updates on the status of, and results from the annual audit process.
• Considered the external auditor’s report on the 2019/20 half and full-year results.
• Received and reviewed the management recommendations letter.
• Ongoing consideration of the external audit plan, including monitoring the approach, scope and risk assessments contained therein.
• Assessment of the effectiveness and independence of Deloitte, as well as review and update to the Group’s policy on the
provision of non-audit services from Deloitte following updated FRC guidance in the year.
• Review and approval of all audit fees proposed by management and for non-audit services in the year.
• Recommended to the Board the re-appointment of Deloitte at the upcoming AGM.
• Received an update from Deloitte on workflows in relation to COVID-19 and received confirmation that the external audit team
had been working well in new circumstances.
• Discussed the results of the client survey assessment, noting results were broadly consistent with the prior year. Key themes
were highlighted and it was ensured that any actions would be incorporated into the 2020 audit.
• Continued to hold private meetings with Deloitte and maintained dialogue throughout the year.
Corporate audit
• The Committee received a review of the Corporate Audit Charter. Minor changes were made to reflect the SOX control testing
transition and the Committee approved the updated Corporate Audit Charter.
Compliance,
governance and
disclosure matters
• Received an update on the 2019/20 audit plan and the significant findings, and reviewed the plan for 2020/21.
• Received an update on cyber assurance and updates to the IT Risk Framework.
• Reviewed PwC’s key messages in the external quality assessment (EQA) of Corporate Audit, noting the improvements made
since the last EQA.
• Updated the Committee on the new IIA Code of Practice and confirmed a recommendation would be brought back to the
Committee later in the year, which would also be reflected in the Corporate Audit Charter and the Committee’s terms of reference.
• Welcomed Liz Hewitt to her first Audit Committee meeting in March 2020.
• Reviewed and approved the updated terms of reference for the Committee.
• Received a detailed report on the outcomes and recommendations of the Brydon Review and other UK regulatory changes.
• Considered the progress towards implementing the Financial Stability Board’s TCFD recommendations.
• Received updates on ethics and business conduct, including whistleblowing to help monitor the management and mitigation
of business conduct issues as part of the wider controls framework. The Committee noted that there had not been any significant
breaches of the Company’s Code of Ethical Business Conduct; however, noted that some cases had highlighted opportunities
for improved controls. The Committee was also pleased to hear that the whistleblowing procedures in place and internal
procedures remained effective and a number of employee communications would take place in 2020 to improve the
understanding of these procedures.
• Received a bi-annual update of compliance with external laws and regulations, including updates on any non-compliance issues
and steps being taken to improve compliance across the Company. The Committee discussed the controls and mitigating
actions employed to reduce such instances of fraud and compliance breaches in support of the Group’s overall strategy and
culture. The Committee noted that the review of enhancements to the Company’s risk, control and assurance framework would
incorporate the improvement of assurance activities through culture, technology, organisation and reporting.
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Corporate Governance
Audit Committee continued
Financial Reporting
Going Concern and Viability Statement
The Committee, in conjunction with the Finance Committee, reviewed
the Group’s going concern and viability statements (as set out on
pages 26 and 27) and the supporting assessment reports prepared
by management.
The Finance Committee met in May 2020 to discuss the implications
of COVID-19 to the Group’s going concern and viability statements.
The current COVID-19 situation has highlighted the interconnectivity
between risks and the speed at which risks may materialise and
during this uncertainty, significant work was undertaken to consider
the Company’s viability statement from additional perspectives. In May
and June 2020, the Committee reviewed and challenged the viability
statement and considered the period of assessment used, taking into
account the COVID-19 events and other external factors in the fast-
changing situation including benchmarking the approach adopted by
other companies. It also considered individual risk testing, cluster testing
and the impact of the Company’s response to COVID-19 on business
plans and financial models. After due consideration, these were
recommended to the Board in June 2020. The financial statements are
prepared on a going concern basis such that the Company and the
Group have adequate resources to remain in operation as per National
Grid’s Group Treasury policy.
Statutory reporting framework policy
The Board has ultimate responsibility for effective management of risk
for the Group including determining its risk appetite, identifying key
strategic and emerging risks, and reviewing the risk management and
internal control framework. The Committee, in supporting the Board
to assess the effectiveness of risk management and internal control
processes, relies on a number of Company-specific internal control
mechanisms to support the preparation of the Annual Report and
Accounts and the financial reporting process. This includes both the
Board and Committees receiving regular management reports to include
analysis of results, forecasts and comparisons against last year’s results,
and assurance from the external auditor. Members of the Executive
Committee attend quarterly performance reviews to supplement this.
The Committee is kept fully informed of all new legislation, FRC advice
and best practice and the requirements of the Code and Disclosure
and Transparency Rules. Regular reviews in the drafting process
support the development of an annual report and accounts that
meets all requirements.
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 SOX and is received
directly from the Group SOX and Controls Team and through the
Audit Committee.
In relation to the financial statements, the Company has specific internal
mechanisms that govern the financial reporting process and the
preparation of the Annual Report and Accounts. The Committee ensures
that the Company provides accurate, timely financial results and
implements accounting standards and judgements effectively, including
in relation to going concern and viability. 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 and Chief Financial Officer,
supplement these reviews. Each month, the Chief Financial Officer
presents a consolidated financial report to the Board.
Fair, balanced and understandable
The Committee undertook a full and formal review of the content in the
2019/20 Annual Report and Accounts and recommended the approval
of the half and full-year financial statements and the Annual Report and
Accounts to the Board. The review is a well-established and documented
process involving senior management and the core reporting team.
To enable the Committee to make this recommendation, the Committee
considered whether, taken as a whole, the Annual Report and Accounts
is fair, balanced and understandable. The Committee also considered
the Company’s compliance with relevant regulatory frameworks and
the validation of management’s representations to Deloitte. Further, it
provided oversight of the quality and integrity of the Group’s financial
reporting and accounting policies and practices.
As part of its review of the financial statements, the Committee
considered, and challenged as appropriate, the accounting policies
and significant judgements and estimates underpinning the
financial statements.
This work enabled the Committee to be satisfied that the Annual Report
and Accounts, taken as a whole, is fair, balanced and understandable
and provides the necessary information for shareholders to assess the
Company’s position and performance, business model and strategy.
This was reported to the Board at its meeting in June 2020.
Risk management and internal control
Risk management
The Committee has delegated responsibility from the Board for the
oversight of the Group’s system of internal control and risk management
systems. This includes policies, compliance, legislation including
compliance with SOX and the UK Bribery Act 2010, appropriateness of
financial disclosures, procedures, business conduct and internal audit.
As part of the framework across the Group, National Grid’s values –
“do the right thing”, “find a better way” and “make it happen” – continue
to communicate and promote a culture of integrity across the business.
During the year, the Board reviewed the principal risks facing the Group
(as set out on pages 22 – 25). The Committee provided assurance and
review of the risk management process to ensure that processes are in
place to manage risk appropriately.
Internal Control and Risk Management effectiveness
We continually monitor the effectiveness of our internal controls and
risk management processes to make sure they continue to be effective
and assess them to make sure they remain fit for purpose. Following
the review over the year the Committee confirmed that the processes
had the correct authority, expertise and independence and provided
sufficient assurance to the Company. As the business continues to
evolve, systems and processes continue to be implemented to support
this such as the recent deployment of new systems across finance,
supported by the cyber team. The Committee was satisfied that the
systems and processes are functioning effectively.
The effectiveness of internal controls and risk management processes is
regularly monitored and assessed by the Committee and management
to make sure they remain robust. This review includes financial,
operational and compliance controls. The Committee also monitors and
addresses any business conduct issues or compliance issues. The
Certificate of Assurance (CoA) process operates via a cascade system
and takes place annually in support of the Company’s full-year results.
Corporate Audit supports the Group’s risk management and internal
controls processes. They deliver an independent and objective approach
to evaluate and push forward processes. The Global Head of Audit has
responsibility for the internal audit function and attends all Committee
meetings, and has access to the Committee Chair when necessary.
At each of the Committee’s meetings progress is reviewed including
significant findings and how previous actions have been completed.
The Committee notes timelines and where actions are overdue, these
are challenged by the members. Corporate Audit is responsible for
developing the Audit Plan including engaging in major change
programmes across the business. The Committee approved the review
of the Corporate Audit Charter in November 2019 following agreement
from the Safety, Environment and Health Committee.
This year, the Committee continued to keep IT controls at the top of its
agenda and focus, following the appointment of a new Chief Information
Security Officer. In May 2020, the Committee was informed that the prior
year significant deficiency in respect of IT controls was closed, following
work to fully remediate the IT infrastructure environment in the US.
Audit Committee Chair Transition
As outlined in the report on page 84, the Nominations Committee
discussed in 2019 the plan to recruit a Non-executive Director with
suitable capabilities to replace Mark Williamson as Audit Committee
Chair when he retires. Following a thorough process, Liz Hewitt was
appointed to the Board and joined as a member of the Audit Committee.
Liz is a Chartered Accountant with significant experience in dealing with
complex and challenging audit issues. She has extensive experience
as chair of an audit committee previously holding the role with Synergy
Health plc and Savills plc. Liz currently chairs the Audit Committees of
Melrose Industries plc, Novo Nordisk A/S and the House of Lords. Further
details on Liz’s career experience and skills can be found on page 67.
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National Grid plc Annual Report and Accounts 2019/20
Corporate Governance | Audit Committee
External audit
The Committee is responsible for overseeing the relationship with the
external auditor. Mark Williamson meets with the external auditor prior
to each meeting and outside the meeting cycle on a regular basis.
• Deloitte is the external auditor to the Company.
• Appointed in 2017 following a formal tender process.
• Reappointed at the 2019 AGM for the year ended 31 March 2020.
• Audit Committee was authorised by shareholders to set Deloitte’s
remuneration at the 2019 AGM.
• Current lead Audit Partner is Doug King and 2019/20 was the third
year of his term.
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 2021.
A resolution to reappoint Deloitte and give authority to the Audit
Committee to determine their remuneration will be submitted to
shareholders at the 2020 AGM.
Effectiveness and performance
As part of the Committee’s responsibilities, a review during the year was
undertaken to consider the effectiveness of the external auditor and
ensure that the quality, challenge and output of the external audit
process is sufficient.
National Grid’s management take an active engagement in the external
audit process and recognise the importance of the process. The
Committee also regularly receives the views of senior management and
members of the finance team in forming conclusions on effectiveness.
During the year, the Committee:
• reviewed the quality of audit planning including approach, scope,
progress and level of fees;
• reviewed the outcome of recommendations from the Deloitte
Management Letter in 2018/19;
• received the Deloitte Management Letter for 2019/20;
• held private meetings with Deloitte where management was not
present; and
• confirmed that the external audit process by Deloitte had been
delivered effectively.
Auditor independence and objectivity
In addition to the review of effectiveness, the Committee is responsible
for considering the independence and objectivity of Deloitte. The
Committee has full oversight of the non-audit services policy and fees
paid and enforces checks to ensure that employees of Deloitte are not
appointed to roles in the financial reporting scope within the Company.
The Committee considered the safeguards in place, including the annual
review by Corporate Audit, to protect the external auditor’s
independence. The external auditor reported to the Committee in June
2020 that it had considered its independence in relation to the audit and
confirmed that it complies with UK regulatory and professional
requirements, SEC regulations and Public Company Accounting
Oversight Board (PCAOB) standards and that its objectivity is not
compromised. The Committee took this into account when considering
the external auditor’s independence and concluded that Deloitte
continued to be independent for the purposes of the external audit and
confirmed that this recommendation was free from third-party influence
and restrictive contractual clauses.
The independence of the external auditor is essential to the provision
of an objective opinion on the true and fair view presented in the
financial statements.
Audit quality
Regularly throughout the year, the Committee looks at the quality of
the auditor’s reports and considers its response to accounting, financial
control and audit issues as they arise. To maintain audit quality, the
Committee reviews and challenges the proposed external audit plan,
including its scope and materiality, before approval, to satisfy itself that
Deloitte has identified all key risks and has developed robust audit
procedures and communication plans.
The Committee also meets with Deloitte twice a year without
management present, providing the external auditor with the opportunity
to raise any matters in confidence and have an opportunity for open
dialogue. This meeting also gives the Committee a chance to monitor
the performance of the lead Audit Partner both inside and outside
Committee meetings.
Non-audit services
In line with the FRC’s Ethical Standard and to help protect the external
auditor’s objectivity and independence, we have a policy governing
Deloitte’s provision of non-audit services. In March 2020, the Committee
approved amendments to the policy in line with the mandatory FRC
changes outlined in the Revised Ethical Standards, published in
December 2019.
The cap on the total fees that may be paid to the external auditor for
non-audit services in any given year is 70% of the average audit fees
paid in the last three financial years. Following Deloitte’s appointment
in 2017 this is the first year that this is effective on the Company.
To help protect auditor objectivity and independence, the provision of
any non-audit service by the external auditor requires prior approval.
The policy allows for certain specified services to be undertaken under
‘pre-approval’ by the Audit Committee where we believe there is no
threat to the auditor’s independence and objectivity, the service has
been reviewed by the CFO, and where fees do not exceed £50,000.
These services are limited to:
• audit, review or attest services. These are services that generally
only the external auditor 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; and
• other areas, such as provision of access to technical publications.
Our policy requires management to present a list of all non-audit work
requests to the Committee at each official meeting to ensure the
Committee is monitoring all non-audit services provided. Non-audit
service approvals during 2019/20 principally related to comfort letters
associated with debt offerings. Work performed by Deloitte during the
year (which necessarily also includes engagements approved by the
Committee in 2018/19) included pre-implementation governance reviews
associated with the new UK financial record system (MyFinance) and
a final element of market-related advisory work with the UK property
division.
External auditor fees
The amounts payable to the external auditor, Deloitte, in each of the past
two years were:
Audit and non-audit services (£m)
18.0
1.1
16.9
18.6
3.3
15.3
17.8
1.9
15.9
16.9
1.1
19/20
18/19
17/18
19/20
Audit services
Non-audit services
Total billed non-audit services provided by Deloitte during the year
ended 31 March 2020 were £1.1 million, representing 7% of total
audit and audit-related fees. In 2018/19, non-audit services totalled
£3.3 million (22% of total audit and audit-related fees).
Further information on the fees paid to Deloitte for audit, audit-related
and other services is provided in Note 4 to the financial statements on
page 136.
Total audit and audit-related fees include the statutory fee and fees
paid to Deloitte for other services that the external auditor 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.
81
National Grid plc Annual Report and Accounts 2019/20
Corporate Governance
Finance Committee
The Committee will continue to receive regular
updates on implications as the pandemic
continues to progress.
Prior to the emergence of COVID-19 other
key focuses for the Committee included the
external regulatory and political environments,
and significant time was spent considering the
implications of Brexit and the resulting market
impact following the UK’s exit from the
European Union on 31 January 2020.
In January 2020, the Committee members
hosted an informal question and answer
session with employees from the Tax, Pensions
and Insurance teams in the UK, to further
increase workforce engagement and to
encourage a dialogue between the Committee
and employees whom the Committee would
not normally have the opportunity to engage
with at meetings. Following the success of the
January session, similar engagement sessions
are planned to take place in 2020 and thought
is being given as to how these can take place
around COVID-19 restrictions.
Treasury
RIIO-2 was a key focus for the Committee over
the year and regular updates on the financial
implications of RIIO-2 were received including
an additional presentation focused on the
financial aspects of the RIIO-2 business plan.
Discussions took place on the assumptions
and parameters set by Ofgem and proposed
financial frameworks, ahead of the RIIO-2
business plan submission in November 2019.
The Committee provided continued oversight
over management decision-making and
execution of financial risk. The Company
reviewed the management of the Group’s
financial risk appetite; as a result, the Committee
approved minor policy changes to funding risk,
liquidity risk, counterparty credit risk, credit
rating risk and foreign exchange translation risk.
Management provided regular updates on
strategy formulation for the future, including
investment requirements for the business,
credit ratings, dividend policy and LIBOR
transition. The Committee was pleased to
receive details on the execution of new bonds
during the year, approving the year’s financing
strategy and receiving regular updates as
financing is executed. Approval was also given
to a hybrid refinancing strategy with hybrid
bonds issued across two tranches in NGG
Finance plc.
A Green Financing Committee chaired by the
Group Treasurer was established in December
2019 to support the Company’s sustainability
strategy and Green Financing Framework
detailed on page 58 as the Group works
towards its net zero ambition. In January 2020
the Company launched its first green bond,
which was well received by the market.
In November, the Committee invited a credit
rating agency to the Committee to provide an
insight into methodologies used for ratings, the
credit landscape in the UK and US for regulated
utilities and the potential impact of Brexit.
Insurance
The Committee received regular insurance
updates which considered the current shape
of the insurance market and how the Company
was benchmarked against other organisations
in relation to the Company’s approach to
insurance renewals in April 2020.
The Committee monitored the evolution and
efficiency of cyber insurance as part of our
cyber insurance programme. This continues to
be a fast-growing area of the global insurance
market and external advisors are due to
present to the Committee in July 2020 to
provide additional external insight.
At its meeting in April, the Committee
discussed the impact of COVID-19 on the
insurance market and will be monitoring the
insurance risk appetite closely throughout
the year.
Tax
The Committee has continued to monitor the
potential tax impacts of Brexit and received a
focused update on implications from a tax
perspective throughout the year. An update
was also received concerning the UK Finance
Bill 2019/20 and the potential impact on the
Company, particularly around the impact of the
changes to the IR35 rules. The Committee will
continue to monitor developments in this area.
In January 2020, external advisors presented
to the Committee on the evolving Tax
Transparency debate.
The Company also continues to give focus to
the changing tax landscape, particularly in
relation to the effect of digitisation, in line with
the business-wide digitalisation ambition. The
Tax team continue to inform the Committee of
external developments in relation to tax authorities
to enable continued best practice and how
technology can be leveraged in this area.
Pensions
In 2018/19 the Committee commenced plans
to consider de-risking the UK pension plans,
to more closely match the assets and liabilities.
Throughout this year, the Committee
considered these plans further and approved
appropriate solutions to de-risk the Company’s
pension arrangements, enabling the National
Grid UK Pensions Scheme to enter into buy-in
arrangements with both Legal & General
and Rothesay, supporting the Company’s
long-term strategy to reduce the level of risk
within its pension arrangements.
In July 2019, external advisors presented to the
Committee on the UK pension landscape and
trends in the market, including the increased
decline in the defined benefit schemes across
the market and the increase in utilisation of
defined contribution schemes. The Committee
received a further presentation from external
advisors in April 2020 focusing on the US
pension landscape and trends in the market
alongside the impact of COVID-19 on the
pensions market.
Looking forward
The Committee will remain focused on
ensuring the Company is effectively managing
financial risk, working closely with the Audit
Committee with particular focus on impacts
due to the COVID-19 pandemic as it continues
to progress globally.
Therese Esperdy
Committee Chair
Therese Esperdy
Committee Chair
Key areas of focus in 2019/20:
• UK and US pension and investment strategy;
• Financial risk appetite;
• Treasury-related activities for the
ESO separation;
• Bond issuance and hybrid bond refinancing;
• Financial implications of RIIO-2;
• Review of external regulatory and political
environments and potential impact on
credit ratings and any associated financial
risk; and
• Green Financing Framework and first
green bond issuances.
Key areas of focus in 2020/21:
• COVID-19 potential market, financial and
balance sheet impact;
• Going Concern and Viability Statement;
• Financial implications of RIIO-2;
• Review of management of financial risk
against the Company’s financial risk appetite;
and
• Continued oversight around Brexit-related
financial risks and market reaction.
Review of the year and COVID-19
The Committee met on four scheduled
occasions 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. The Committee also convened
for an additional presentation in May 2019
which focused on the financial impacts of the
RIIO-2 business plans.
Towards the end of the year the impact to
global markets of the COVID-19 pandemic
became clearer and the Committee held
additional COVID-19 focused meetings in April
and May 2020. Significant consideration was
given to the financial implications of the global
pandemic on the Company. This included
financial scenario planning and risk mitigation.
At its May meeting the Committee considered
the Going Concern assumption of the
Company, considering the uncertainties posed
by COVID-19 and the additional focus by
regulators. This consideration included a range
of cash flow outcomes, the Company’s ability
to access existing undrawn facilities alongside
its ability to access long-term debt markets
and short-term cash positioning.
82
National Grid plc Annual Report and Accounts 2019/20
Corporate Governance
Safety, Environment and Health Committee
Paul Golby
Committee Chair
Key areas of focus in 2019/20:
• Post‑Massachusetts labour dispute
and workforce re‑integration;
• US regulatory safety changes;
• Liquefied Natural Gas (LNG) and
Compressed Natural Gas (CNG);
• Monitoring the action plan to achieve
long‑term carbon reduction targets;
• Deep dive into employee wellbeing; and
• Continued focus on process safety
improvements.
Key areas of focus in 2020/21:
• COVID‑19 impact on our customers,
employees and contractors;
• Gas safety and reliability;
• Group safety performance and safety
culture;
• Sustainability and climate change;
• Business deep dives and process
improvements;
• SEH risks and mitigation; and
• Mental health and wellbeing.
S
Further reading
For more information on the Company’s
work around Task Force on Climate‑
related Financial Disclosures (TCFD)
requirements (see pages 57 – 62).
Review of the year and COVID-19
During the year, the Committee met six times
to undertake its oversight responsibilities for
reviewing the strategies, policies, initiatives,
risk exposure, targets and performance of the
Company in relation to safety, environment,
health and wellbeing. Two of these meetings
were scheduled specifically to monitor the
potential safety issues surrounding the lifting
of the downstate New York gas moratorium.
The Committee considered the Company’s
contingency proposals to maintain security
of supply throughout the winter, including
the potential to add new CNG sites to meet
demand, and challenged the associated risks.
Towards the end of the year we have seen the
acceleration of the global COVID‑19 pandemic;
the health and wellbeing of all employees and
contractors has been of paramount importance
during these challenging and unprecedented
times. The Committee has and will continue to
focus on ensuring the strategies and policies
being implemented across the business
adequately protect the health, safety and
wellbeing of everyone.
Committee member induction
Since joining the Committee in 2019, both
Amanda Mesler and Earl Shipp have undertaken
site visits in the UK and US as part of their
induction. These site visits provided a useful
insight into the Company and the opportunity
to gain a wider perspective of National Grid
and to meet and engage with a variety of
employees to discuss their views on safety,
environment and health on site and throughout
the Company. The site visits are an important
way of demonstrating Company safety, health
and environment leadership and are a way to
build Committee knowledge, skills and
strengthen discussion around issues.
The Committee also welcomed Liz Hewitt as a
member in January 2020. Liz brings excellent
experience to the Committee and her wealth
of knowledge in wide areas of business will
add diversity and value to our discussions.
Safety
In line with the Company’s key values, safety
remains a top priority for the Company and
the Committee. We have seen improvement
in the Injury Frequency Rate in the UK, which
remains world class; however, we must never
become complacent and improvements still
need to be made. The Committee was deeply
saddened when in July 2019 a National Grid
employee in the US was involved in a fatal
traffic accident while working on behalf of the
Company. The Committee has been kept up
to date on the investigations surrounding this
tragic incident and has strongly endorsed the
Company’s commitment to ensuring that key
lessons learned have been communicated to
all our workforce. As a result, the Company
rolled out a Group‑wide safety intervention to
remind our workforce of the Company’s Safety
Ambition. The feedback from the intervention
has been positive and has encouraged our
workforce to continue the important
conversation around safety by discussing
within teams recent safety incidents and ways
to prevent future occurrences. The Committee
will continue to monitor the implementation of
these lessons learned.
Further to my update last year about the
employee safety culture survey, this year the
Committee received an update on the results
of the survey including the new plans built
from the actions identified, which will help the
Company to continue on its journey from a
calculative safety culture to a more proactive
safety culture.
Gas safety and reliability
A significant amount of the Committee’s time
this year has been spent on gas safety and
reliability in the US. The post‑work stoppage
initiatives following the Massachusetts labour
dispute were reviewed, including monitoring
the closure of open work actions and the
implementation of new processes to ensure
regulatory compliance. Regular updates were
provided which identified areas of focus and
improvement and the Committee discussed
and considered risks around these. The
Committee also reviewed and challenged the
proposed plan to improve the safety of US
LNG plants. The Committee will continue to
monitor progress of the gas safety and
reliability initiatives over the coming year.
National Grid’s net zero commitment
Sustainability is a key focus and the Committee
has been pleased to see the increasing
prominence of this issue internally and
externally. The Company recognises it has
a critical role to play in the decarbonisation
of the energy system and the importance of
setting a net zero ambition for the Company’s
own emissions, which aligns with its strategy
of a cleaner future. In November 2019, the
Committee endorsed the Company’s new
target to reduce its own direct greenhouse gas
emissions to net zero by 2050. The Committee
reviewed the Company’s high‑level plan to
achieve this and in January 2020 approved
ambitious interim targets to reduce its direct
emissions by 80% by 2030 and 90% by 2040.
The Committee will continue to closely monitor
and challenge the Company’s progress against
the action plan and the implementation of the
Company’s wider strategy around sustainability
to achieve long‑term carbon reduction targets.
Employee health and wellbeing
In January 2020, the Committee received an
update in relation to the Company’s progress
on its health and wellbeing strategy. It was
noted that a transition had been made by the
Company in its strategy from a disease‑based
campaign towards a more holistic approach,
with a wider range of health and wellbeing
factors facing the workforce being considered.
As part of the strategy, the Committee has
continued to track the impact of musculoskeletal
injuries (MSK) and its effect on employees.
The Committee was pleased to see that as a
result of physiotherapy services being available
to UK employees as well as holding 20 MSK
workshops across 11 locations, the sickness
absence risk, in relation to MSK, had dropped
from the third to fifth highest days lost over the
past calendar year. Progress continues to be
made in relation to mental health awareness
and prevention activities. With the ongoing
COVID‑19 pandemic the Committee will
monitor the implementation of wellbeing
policies and the impact on our workforce; this
will be kept under review over the coming year
to ensure that appropriate health and wellbeing
campaigns and procedures are implemented.
Paul Golby
Committee Chair
83
National Grid plc Annual Report and Accounts 2019/20
Corporate Governance
Nominations Committee
Senior leadership
Following Dean Seavers stepping down from
his role as Executive Director in November
2019, Badar Khan (previously Group Director,
Corporate Development and National Grid
Ventures) stepped in as Interim President of
the US business. Jon Butterworth (previously
COO of National Grid Ventures) stepped in as
Interim Managing Director of National Grid
Ventures. Following success in their interim
positions, the Committee approved the
permanent appointment of Badar Khan as
President of the US business and Jon
Butterworth as permanent Managing Director
of National Grid Ventures on 2 April 2020.
Non-executive Director – Jonathan Silver
The appointment of Jonathan Silver began in
2018 with the appointment of Korn Ferry, a
search consultancy firm that does not have
any other connection with the Company or
individual directors. The Committee reviewed
and agreed the Non-executive Director
candidate profile which was formulated taking
into account the current skills of the Board
members and data analysis received from the
2018 external Board evaluation process. This
highlighted the additional need to strengthen
the Board’s US regulatory, equity and financial
experience. Having conducted an initial search,
a list of potential candidates were selected for
the first interview with the Chairman. It was
agreed that a sub-group of the Committee
(Nora Mead Brownell, Therese Esperdy and
Mark Williamson), and John Pettigrew would
interview the final candidates from the short
list recommended by the Chairman. The
Committee agreed the preferred candidate and
made a recommendation to the Board in April
2019. On 16 May 2019, following a thorough
and rigorous process, the Board welcomed
Jonathan Silver as a Non-executive Director
to the Board and as a member of the Finance,
Remuneration and Nominations Committees.
Non-executive Director – Liz Hewitt
In April 2019, the Committee discussed
recruiting a further Non-executive Director with
capabilities to succeed Mark Williamson as
Audit Committee Chair once he retired. The
Inzito Partnership, who do not have any other
connection with the Company or individual
directors, was appointed to support the
recruitment of this role. The Committee agreed
the Non-executive Director candidate profile
and a short list of potential candidates was
then drawn up. First-stage interviews were
conducted by the Chairman and final interviews
were conducted by a sub-group of the
Committee (Therese Esperdy, Paul Golby and
Mark Williamson), John Pettigrew and Andy
Agg. In November 2019, the Committee agreed
that Liz Hewitt was the preferred candidate and
made a recommendation to the Board. Liz has
a strong background in dealing with complex
and challenging audit issues. The Board
welcomed Liz Hewitt as a Non-executive
Director and member of the Audit, Safety,
Environment and Health, and Nominations
Committees on 1 January 2020.
When considering the recruitment of new
Directors, the Committee adopts a formal
and transparent procedure which takes into
account the skills, knowledge and level of
experience required as well as diversity. For
both appointments the candidate pool was as
diverse as possible ensuring the Committee
had options to balance the diversity on the
Board. The effectiveness of the Board is also
reviewed through the annual Board evaluation;
see page 74 for further information.
Sir Peter Gershon
Chairman and Committee Chair
Key areas of focus in 2019/20:
• Board and Committee composition;
• Chairman succession; and
• Senior leadership succession.
Key areas of focus in 2020/21:
• Chairman succession and onboarding;
• Review of senior leadership succession
policy; and
• Board and Committee composition.
Review of the year
The Committee met seven times during the year
to undertake its responsibilities in reviewing the
leadership needs of the Company, based on
the structure, size and composition of the
Board and its Committees. In addition, the
Committee reviews and oversees succession
planning for Directors and senior management
and makes recommendations, as appropriate,
to the Board.
Succession planning and
Board composition
A key focus for the Committee this year has
been succession planning. The Committee is
responsible for ensuring that the Company is
headed by a high-quality Board and senior
management team and recognises that the
process of building a strong and effective Board
and senior management team requires a good
balance of continuity and refreshment. During
the year, Board members assessed the skills
and areas of expertise that they brought to the
boardroom to ensure effectiveness in providing
good corporate governance and strategic
oversight. This assessment will further aid in
identifying gaps and areas of strengthening
needed when appointing members in the
future. The Committee has also borne the
Code in mind in its deliberations throughout the
year to ensure that we have in place a strong
Board and senior management team with the
breadth of skills, experience and perspectives
necessary to reflect the changing demands of
the business and Company strategy. The
Committee will continue to monitor the skills
and capabilities, and length of tenure of Board
members to ensure that broad and relevant
expertise is evident and will recommend further
appointments if necessary. Further information
on our individual Directors’ skills and
capabilities can be found on pages 66 and 67.
84
Our Board diversity
Board gender
Men
Women
Executive and
Non-executive Directors
8
4
9
3
Executive
Non-executive (inc. Chairman)
Board members
by nationality
8
4
5
3
4
British
American
Tenure
< 3 years
3-6 years
> 6 years
Charts as at 17 June 2020
National Grid plc Annual Report and Accounts 2019/20
Corporate Governance | Nominations Committee
Board diversity objectives
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 in 2020.
Objective met: there are currently 33.3% women on the Board, 33.3%
women on the Executive Committee and 33.8% women direct reports to
the Executive Committee.
The Board aspires to meet the Parker Review target for FTSE 100 boards
to have at least one director from a non-white ethnic minority by 2021.
We continually aspire to exceed this target and we take gender diversity
into consideration in all our Executive and Non-executive Directors
searches. All appointments are however made on merit.
Objective met: we currently have one Director from a non-white ethnic
minority on the Board. Additionally, our mandatory requirement for a
diverse candidate pool should facilitate the opportunity to recruit further
from non-white ethnic minorities.
Terms of reference
Following the introduction of the Code,
the Committee terms of reference have been
revised to align with the new requirements.
These reflect the broadening of the
Committee’s responsibility for overseeing
the development of a diverse pipeline of
high-performing potential successors to
senior management and keeping under
review the leadership and succession
needs of the Company.
Diversity and Board diversity policy
National Grid supports the creation of an
inclusive and diverse culture which we believe
supports the attraction and retention of
talented people, improves effectiveness,
delivers superior performance and enhances
the success of the Company.
Our Board diversity policy (Policy) reflects our
continued commitment 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, ethnicity and age.
The Policy applies to the Board, Executive
Committee and direct reports to the
Executive Committee.
As set out in the 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.
Chairman’s succession
Mark Williamson
Senior Independent Director
Throughout the year I have chaired the
Nominations Committee, without Sir Peter
Gershon present, to discuss the Chairman’s
performance, tenure and succession. In last
year’s report I reported that Sir Peter’s
tenure may be extended beyond the
recommended nine-year term in order to
conclude the RIIO-2 process. This was
agreed following discussion with 18 of our
largest shareholders, who unanimously
supported the extension. In January 2020,
Sir Peter Gershon formally announced
his intention to step down as Chairman
and retire from the Board following the
appointment of a suitable successor. To
manage a smooth transition, we intend to
appoint a Chairman designate to the Board.
A search process for the next Chairman is
currently underway, supported by Russell
Reynolds, and the Committee considered a
long-list of potential candidates at the
January 2020 meeting. Over the next few
months, the Committee will agree a shortlist
of preferred candidates and a full explanation
of the search and appointment process will
be reported in next year’s report.
We will continue to review our progress
against the Policy and report on our objectives
(set out above) annually in the Annual Report
and Accounts. The Committee will be reviewing
this Policy throughout the year to ensure it
remains up to date and relevant.
Examples of the initiatives to promote and
support inclusion and diversity throughout
our Company are set out on page 53.
Sir Peter Gershon
Chairman and Committee Chair
Director tenure
The Committee believes that Non-executive
Directors should generally stay in role no longer
than nine years, in line with the Code; however,
the Committee may determine that on
occasion it is in the Company’s best interest for
a Director with particular skills, knowledge and
experience to stay beyond the nine-year term.
It is proposed that Paul Golby stay for a limited
extension beyond 1 February 2021 in order
for the Board to maintain the knowledge
and experience required to conclude the
RIIO-2 process.
Talent pipeline – Senior leadership
succession
The Board and Nominations Committee support
and encourage initiatives that strengthen the
talent pipeline within the Company. Over the
last 12 months we have seen several changes
within the Executive and senior leadership
team as we refresh the skills and capabilities
needed to achieve our long-term strategy. The
Committee has considered whether the talent
pipeline and the collective strength of the
current leadership and senior management
bench in the business is strong enough in its
key positions, specifically in relation to handling
crises and ensuring the business is fit for the
future. It is an area of focus for the Committee
to ensure that the required pace of change
facilitates strong and effective succession
across the Board and the wider business.
The Executive Committee continues to meet
regularly to discuss the succession pipeline
and health of the talent pool further down
the organisation; as a result, a number of
individuals have been identified as potential
successors to key positions. Our senior leaders
below the Board were invited to participate in the
‘Energise Our Business’ programme this year
which combines flexible online development
and peer learning with more traditional
development activity. The Committee has
developed a strong understanding of executive
talent requirements and the capabilities we
need for the future to fit with our purpose,
vision and values. This has been evidenced by
the appointment of Badar Khan as President
of the US Business and Jon Butterworth as
Managing Director of National Grid Ventures.
The Committee regularly reviews the
development plans of the high potential senior
leaders below the Board. The Board has also
met with high-potential employees both in the
UK and the US on several occasions during
the year.
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National Grid plc Annual Report and Accounts 2019/20
Corporate Governance
Statement of application of and compliance
with the UK Corporate Governance Code 2018
3. Composition, Succession and Evaluation
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 66 and 67 and fuller biographies are
available on our website. Board and Committee attendance during the
year to 31 March 2020 is set out on page 69. 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 Committee also
monitors the expertise of the Board and will recommend further
appointments if desirable. The appointment of Liz Hewitt in January
2020 ensures the Board has a Non-executive Director with the required
capabilities and expertise to succeed as Audit Committee Chair. 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.
Succession
The Nominations Committee, which comprises the Chairman and
Non-executive Directors, leads the process for Board appointments and
makes recommendations to the Board. The Nominations Committee
also has responsibility for ensuring that plans are in place for orderly
succession to both the Board and senior management positions as well
as overseeing the development of the talent pipeline to ensure that the
future leadership needs of the Company are considered and these fit
the culture and forward-looking strategy of 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.
In April 2020 the Nominations Committee confirmed to the Board that
all Directors continued to perform their duties in accordance with the
principles above. Succession planning is ongoing for those members
of the Board who are approaching the nine-year tenure recommendation.
Evaluation
The 2019/20 performance evaluations of the Board, Board Committees
and individual Directors were carried out internally with consideration
given to composition, diversity, how effectively members work together
to achieve objectives and effectiveness of decision-making. You can
read more about this on page 74.
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. They also confirmed it would be in the Company’s best
interest for Sir Peter Gershon to continue in his role as Chairman during
the conclusion of the RIIO-2 regulatory process.
At the end of the year, the Chairman held performance meetings with
each Board member to discuss their contribution and performance over
the prior year, including how effectively they worked together to achieve
objectives and any 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 contribution continued to be effective.
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 2018 (the Code). For
the year ended 31 March 2020, 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 87 sets out where to find each of the disclosures required in the
Directors’ Report in respect of Listing Rule 9.8.4 R.
1. Board Leadership and Company Purpose
Our Board is collectively responsible for the effective oversight and
long-term success of the Company and champions our purpose, vision,
values and desired culture, ensuring consistency with our workforce
policies and practices. 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.
The Board sets the risk appetite and principal risks for the Company
and takes the lead in areas such as safeguarding the reputation of the
Company and its financial policy, as well as making sure we maintain
a sound and prudent system of internal control and risk management.
Since the onset of the COVID-19 pandemic, we have received updates
on the impact on our UK networks that are managing the rapid and
unprecedented decrease in energy demand across all UK networks
and in May 2020 it was agreed to add COVID-19 as a principal risk.
The Board also agreed to add a new climate change principal risk in
March 2020.
There is a clear schedule of matters reserved for the Board and
schedule of delegation, which were both reviewed and updated in
January 2020. The schedule of matters reserved for the Board is
available on our website, together with other governance documentation.
The Board actively engages with shareholders and stakeholders,
including employees, on a regular basis. Further information on how the
Board has effectively discharged this responsibility can be found on
pages 44 – 47.
2. Division of Responsibilities
The Chairman, who was independent on appointment, is responsible
for the leadership and management of the Board and its governance.
He makes sure the Board is effective in its role by promoting a culture of
openness and debate, facilitating the effective contribution of all Directors
and helping to maintain constructive relations between Executive and
Non-executive Directors. The Chairman sets the Board’s agenda making
sure consideration is given to the main challenges and opportunities
facing the Company, and adequate time is available to discuss all
agenda items, including strategic issues. This particular area was
reviewed as part of the internal Board evaluation. For further information
on the Chairman’s independence and tenure, please see page 85.
The annual evaluation of our Board considers the composition, including
the combination of Executive and independent Non-executive Directors,
to ensure there is no dominant decision-making. 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.
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
prior to appointment and during their time on the Board. As part of the
Chairman’s succession, potential candidates are notified of the expected
time commitment at the beginning of the process. Details of external
appointments are set out in the biographies on pages 66 and 67 and on
our website. Independent of management, our Non-executive Directors
bring diverse skills and experience vital to providing strategic guidance,
constructive challenge and debate. See our website for the matters
reserved for the Board schedule.
The Group General Counsel and Company Secretary makes sure that the
Board has access to the necessary policies, processes and resources
required to operate effectively and efficiently. She is also responsible for
ensuring that timely information is provided and advises and supports
the Chairman and the Board on all governance matters.
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National Grid plc Annual Report and Accounts 2019/20
Corporate Governance | Statement of application of and compliance
with the UK Corporate Governance Code 2018
4. Audit, Risk and Internal Control
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.
The requirement for Directors to state that they consider the Annual
Report and Accounts, taken as a whole, is fair, balanced and
understandable remains a key consideration in the drafting and review
process. The coordination and review of the Annual Report and Accounts
is conducted in parallel with the formal audit process undertaken by the
external auditors and the review by the Board and its Committees. The
Board is satisfied that the current policies and procedures in place ensure
the independence and effectiveness of the internal and external audit
functions. Further details can be found on page 81.
The drafting and assurance process support the Audit Committee’s
and Board’s assessment of the overall fairness, balance and clarity of
the Company’s position and prospects as detailed in the Annual Report
and Accounts, and the statement of Directors’ responsibilities as set
out on page 109.
The Board has carried out a robust assessment of the nature and extent
of the principal and emerging risks facing the Company in achieving its
long-term strategic objectives, including those that would threaten the
business model, future performance, solvency or liquidity. Further details
can be found on pages 22 – 27.
The Board also sets the Company’s risk appetite, internal controls and
risk management processes. The Board monitors the Company’s risk
management, internal control systems and framework and undertakes
a review of their effectiveness annually. The activities of the Audit
Committee, which assists the Board with its responsibilities relating
to risk and assurance, are set out on pages 76 – 81.
5. Remuneration
The Remuneration Committee, comprised entirely of Independent
Non-executive Directors, is responsible for recommending to the Board
the remuneration policy for Executive Directors, the Chairman and senior
management, and the implementation of this policy. The aim is to align
the remuneration policy to the long-term Company strategy and key
business objectives that will promote long-term sustainable success.
Our policy is reviewed against workforce remuneration and
performance, and is designed to reflect our shareholders’, customers’
and regulators’ interests.
The Directors’ Remuneration Report on pages 88 – 107, sets out the
work of the Remuneration Committee, its activities during the year and
further details on how our Remuneration Policy is implemented including
the remuneration of Non-executive Directors. Executive Remuneration,
including alignment to broader workforce pay policies has been
discussed at employee voice engagement sessions, along with gender
pay reporting. These topics will remain key areas for discussion as we
continue our programme of engagement into 2020/21.
For more information regarding our policy on the Executive Directors
pension contribution/allowance and the alignment to the workforce,
please see page 89 of the Directors’ Remuneration Report.
232
231
110
66
2
236
236
236
237
95
103
53 and 54
9, 37 and 257
208 and 233
156
13
20
237
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
Our workforce
Political donations and expenditure
Research and development
Risk management
Share capital
10
22
227
237
233
52
237
237
22
233
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National Grid plc Annual Report and Accounts 2019/20
Corporate Governance
Directors’ Remuneration Report
Annual statement from the Remuneration Committee Chair
Introduction
Last year, our shareholders approved the new Directors’ Remuneration
Policy for the period from 2019, with 97.03% votes in favour. At the same
time, the Directors’ Remuneration Report received 96.53% votes in
favour. The Remuneration Committee and the whole Board are grateful
to shareholders for their support for our Policy and our implementation
of it. As a company, our aim is to ensure transparency with our
shareholders and all stakeholders in what we do, particularly with regard
to governance and remuneration. The Committee fully recognises the
central importance of these areas for National Grid’s reputation, and the
strong interest of shareholders in our standards and performance. Last
year’s vote followed extensive consultation with our major institutional
shareholders in light of which we put forward proposals that were
approved at the AGM. This year we are not seeking approval of a new
Policy, although through the annual advisory vote we are seeking your
support for our implementation of the Policy during 2019/20. We are
planning to seek your approval of a new Policy next year in light of
decisions to be made by Ofgem during the year regarding the next
regulatory period (RIIO-2) commencing April 2021. As we have done
previously, we will consult with major institutional shareholders before
putting forward our proposals.
Review of decisions made during the year
Annual Performance Plan (APP)
National Grid again delivered good financial performance for the year,
with Group underlying Profit before Tax of £2,493 million, Underlying
Earnings per Share of 58.2 pence and Group Return on Equity of
11.70%; and the Directors have recommended an increase in the final
dividend in line with our stated policy. Against this background, the
Group financial metrics for the APP (impacting the CEO and CFO)
represented 79.4%, a little over half way between target and stretch
performance. The financial outcome for the Executive Director, UK was
58.3%, just ahead of target performance, reflecting lower UK-specific
financials versus Group particularly on RoE. The financial performance
metrics for the APP are based on financial results, with technical
adjustments made in line with past practice in respect of currency
adjustments, unbudgeted pension costs, scrip dividend dilution and
storm damage repair costs.
The final APP outcomes (which incorporate assessments against
individual objectives and financial performance) have, however, had
one adjustment affecting all staff eligible for APP awards. With the
bulk of colleagues working remotely due to COVID-19 restrictions, and
heavily focused on maintaining continuity of service and supply to our
customers, it would have been difficult for in-depth annual personal
performance reviews to be undertaken in the normal way. The Committee
therefore agreed with senior management that, across the Group, the
individual component under the APP would be capped at the lower of
actual and target, which is equal to 50% of maximum. The Committee
has also applied this principle to the Executive Directors and other senior
executives; the unadjusted individual scores for the Executive Directors
are shown on pages 98 and 99, from which it can be seen that the
outturn for the individual objectives of all current Executive Directors
has been reduced in light of this approach.
Coupled with the financial measures for the APP, the overall outcome
for the CEO and CFO is 88.3% of salary, and for the Executive Director,
UK 69.8% of salary, in each case out of a maximum potential of 125% of
salary. In its assessment of the overall performance of John Pettigrew
and the level of APP outcome for him for the year, the Committee gave
careful consideration to the issues arising from the decision to impose
a moratorium on new gas supply connections in National Grid’s service
territory in downstate New York (KEDNY/KEDLI). Although this was an
operational decision taken by the Group’s US leadership in response to
a potential shortfall in gas supplies coming into the region, the Committee
and John agreed that, as CEO, he was ultimately accountable for the
adverse financial and reputational consequences suffered by the
Company. The Committee also recognised the subsequent outstanding
leadership that John had given in reaching a settlement with the New York
authorities and in actions taken to address the situation. Accordingly,
the Committee and John agreed that it would be appropriate for John
to donate 20% of his APP award (net of tax) when it is paid in July to
a charity involved in the emergency COVID-19 response in our US
service territories.
In reaching its overall decisions on the APP, the Committee took
account of Environmental, Social and Governance (ESG) considerations,
including those related to COVID-19, noting in particular that no employees
have been furloughed, no compulsory redundancies or pay reductions
have been made, and trade union agreements have been honoured.
Jonathan Dawson
Committee Chair
Key areas of focus in 2019/20:
• Items relating to the appointment of new
Executive Committee members and
leaving arrangements for former Executive
Director, US; and
• Reviewed impact of evolving corporate
governance standards, including pension
arrangement for UK-based new hires.
Key areas of focus in 2020/21:
• COVID-19 related remuneration decisions;
• RIIO-2 impact on future LTPP awards; and
• Directors’ Remuneration Policy review and
shareholder consultation.
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National Grid plc Annual Report and Accounts 2019/20
Corporate Governance | Directors’ Remuneration Report
Annual statement from the Remuneration Committee Chair continued
Long Term Performance Plan (LTPP)
The performance period for the 2017 LTPP ended on 31 March 2020,
with a vesting outcome of 84.9% of the maximum potential (350% for
the CEO and 300% for other Executive Directors). This outturn was
based on our performance measures of Group Return on Equity and
Group Value Growth, with adjustments in respect of inclusion of the value
created from the sale of the residual interest in the UK Gas Distribution
business and revised timing of UK tax payments. More details on the
performance measures are set out on page 100. The Committee
reviewed whether there were any factors which might cause it to
reduce the vesting levels, including compliance with the dividend policy,
but concluded after careful consideration that the vesting levels fairly
reflected performance over the performance period, and that the
additional two-year holding period and significant shareholding
requirements appropriately align interests with shareholders,
particularly through COVID-19 uncertainty.
I noted last year that our recently appointed CFO’s pension allowance
was already set at 20% of base salary at the time of his appointment.
Also, as reported last year, our previously appointed UK-based Executive
Directors agreed to reduce their pension allowance from 30% of base
salary to 20% by the end of 2022, without compensation.
We recognise recent governance and remuneration statements from
major institutions to the effect that companies are expected to develop
a credible plan to align incumbent directors’ pension contribution rates
with the majority of the wider UK workforce by the end of 2022. The
Committee has been thinking carefully about this issue, particularly in
the context of the variety of legacy pension plans in operation and the
tiered structure of pension contributions throughout the Company which
I described last year. This matter is under active review, and we shall
incorporate our longer-term pension proposals as part of our consultation
for the Directors’ Remuneration Policy binding vote in 2021.
Annual salary review
Against the background of the pandemic and its impact on wider
society and the economies of the territories where National Grid
operates, the Committee agreed that, whilst most managers and all
those covered by trade union agreements would receive increases, it
would exercise restraint and not award annual salary increases to the
Group Executive Committee members at this time. The Committee
however felt that an exception should be made in respect of Andy Agg,
the CFO. Andy was appointed to his role in January 2019 and, as we
have done for other appointments, his starting salary was set
significantly below the assessed market rate for the job with the publicly
stated intention to increase his salary, subject to his performance and
progression in the role, toward the assessed market rate. In line with this
plan Andy would have received a salary increase of 9% from 1 June 2020.
However, in the context of the other senior executives not receiving a
salary increase this year, the Committee decided to restrict Andy’s
increase to 6.5%. In approving this increase, the Committee considered
that Andy had made a very good contribution to the Group in his first full
year as CFO, with a particular focus on strengthening his senior financial
team as well as focusing on the financial preparations for RIIO-2. The
Committee will again review Andy’s salary next year and may, as
previously, award him an increase in excess of other senior executives,
subject to continuing good performance, to bring his salary in line with
the market rate.
The Remuneration Committee will continue to consider the current and
potential impact of COVID-19 on the Company and its stakeholders in
determining if and when any salary increases are awarded. Consistent
with this decision, there will be no increases in fees for the Board
Chairman or other Non-executive Directors at this time.
I would also like to note and thank John Pettigrew and Andy Agg for
their generous donations of £50,000 and £20,000, respectively, to the
Prince’s Trust to support the Trust’s work with young people giving them
a lifeline and increased social mobility despite the challenges created
by the COVID-19 pandemic. The £20,000 donation from Andy Agg
represents some 50% of the salary increase he will receive for 2020.
Leaving arrangements for Dean Seavers
Dean Seavers, Executive Director, US, stepped down for personal
reasons from the Board on 5 November 2019. His employment with
National Grid subsequently terminated on 31 December 2019, following
a handover period with his successor as President of National Grid’s US
business. The Committee concluded that ‘good leaver’ remuneration
provisions should apply under our Directors’ Remuneration Policy.
Details of his leaving arrangements are provided on page 102.
The Board decided that this position will no longer sit on the Main Board.
Badar Khan was appointed Interim President of the US Business and
then was made permanent in this role from 1 April 2020.
Pension
Under the new Policy approved last year, any new UK-based
Executive Directors will receive a pension contribution/allowance of
up to 20% of base salary (reduced from 30% previously). To further align
with the evolving shareholder expectations and market practice, the
Committee decided that, from November 2019 onwards, any new
UK-based Executive Directors will receive a pension contribution/
allowance of up to 12% of base salary, which is in line with the defined
contribution rate available to the majority of the UK-based wider
workforce. The Company has also cascaded this change so that it
applies to all new UK hires regardless of level. The current average
pension contribution across the various pension schemes for the wider
UK workforce has decreased from 18% last year to 17% this year due
to natural attrition.
What is our remuneration policy seeking to achieve?
Although we have regularly stated our remuneration policy objectives, it
is important to set out again what we are seeking to achieve in the way
we structure senior executives’ remuneration. Our policy aim is to ensure
that how we structure remuneration and how we make decisions on
annual and long-term reward plans are compatible with and fully support:
• attracting, motivating and retaining senior executives while not
over-paying;
• ensuring we pay our senior executives in a way that incentivises
stretching financial and operational performance, within the risk
appetite set by the Board;
• being fully aligned to the way National Grid earns its returns for
shareholders; and
• actively supporting our strategy, ethics, values and contribution to
society in the territories where we operate.
In addition, in order to ensure internal alignment and common purpose,
we apply the same broad architecture to the remuneration of our senior
management team below the Executive Directors.
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 continue to put a much higher weight on
this element compared with the APP because National Grid is a
long-term business with long-life assets. We want to make sure
investment decisions are made, and operating efficiencies achieved,
against this background. Moreover, for Executive Directors, some 85%
of their variable pay opportunity (both annual and long-term) is delivered
in National Grid’s shares. Consistent with our approach for aligning
executive interests to the long term, LTPP awards have a three-year
performance period and a further two-year post-vesting holding period.
Our LTPP measures for 2020 will continue to be fully aligned with
long-term value creation and shareholder interests. Figure 1 below
illustrates how performance measures are structured for 2019 and 2020
LTPP awards, taking account of the impact of the transition from RIIO-1
to RIIO-2.
Impact of RIIO-2 on our Long Term Performance Plan
Figure 1: LTPP measures
19/20
20/21
21/22
22/23
23/24
24/25
2019
Award
2020
Award
Key:
RIIO-1 RIIO-2
Group Value Growth
Group RoE
Holding period
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). This requirement ensures that
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National Grid plc Annual Report and Accounts 2019/20
Corporate Governance
Directors’ Remuneration Report continued
executives necessarily 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. Moreover, we believe our senior management, not
just Executive Directors, should view the dividends paid on shares they
earn as part of their overall remuneration arising from National Grid,
rather than focusing on the annual capital value. 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 (other than to pay income tax arising on vesting) prior to
that point. Our post-employment shareholding requirement further
enhances the alignment of interests between executives and
shareholders. Our current post-employment shareholding policy requires
Executive Directors to hold 200% of salary for two years. We have noted
recent governance developments and shareholder expectations that the
post-employment shareholding requirement should be at the same level
as the in-employment shareholding requirement, although balanced
against that our in-employment shareholding requirement is at the top
end of market practice. We will review this matter as part of our
consultation for the Directors’ Remuneration Policy vote in 2021.
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 and environmental performance)
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 below in Figure 2.
4. Discretion and independent judgement is applied.
Achievement of short-term (APP) and long-term (LTPP)
incentive opportunities is linked to National Grid’s
performance
As I stated last year, as a committee we consider whether to apply
discretion when assessing remuneration outcomes for Executive
Directors. Before approving any payments under either the APP or LTPP,
we reflect with great care first on both the underlying financial and wider
business performance of the Company; we then assess the wider
performance of the Company in terms of its societal contribution, its
relations with regulators, and its overall reputational standing with
stakeholders. We also undertake a careful appraisal of the performance
of each Executive Director and members of the Executive Committee
against their individual objectives set for them at the start of the year and
their demonstration of leadership qualities and our values. Whilst the
underlying financial performance of the Company is a material factor
in our assessments, the Committee has shown and will continue to
demonstrate a willingness to apply discretion to adjust final payments
in light of all factors considered relevant by the Committee.
In addition to applying discretion to final payment levels, the Committee
considers whether there might be any basis for applying malus and/or
clawback to awards made and/or payments already received by an
individual where subsequent events or factors justify taking such steps.
Figure 2: 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 Underlying Profit
Earnings per Share
Objectives are set on
an individual basis,
dependent on role, remit and
requirements. Includes wider
business measures as
appropriate
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
LTPP
3-year performance period
(up to 350% of salary for
CEO, 300% for other
Executive Directors)
Group Return on Equity
Group Value Growth
n/a
Fair and Appropriate
When making remuneration decisions for the Executive Directors and
other senior leaders, the Remuneration Committee takes account of
the remuneration arrangements and outcomes for the wider workforce,
statistical information, such as the CEO pay ratio and gender pay gap
data, employee views on executive pay as part of our employee voice
process, and our Company values. Last year, we voluntarily reported our
CEO pay ratio one year early, with a median ratio of 76:1 for UK-based
employees. This year, the median ratio for UK-based employees is 86:1.
Our Group-wide median ratio was 48:1 last year and 53:1 this year. The
increases in both ratios are largely due to the increase in LTPP vesting.
The lower Group-wide ratio 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. In terms of UK
gender pay gap, there has been an improvement from the median of
4.4% last year to 2.6% this year.
Changes to the Committee membership
Nora Mead Brownell resigned from the Board on 8 April 2019.
Jonathan Silver joined the Board and was appointed to the Committee
on 16 May 2019.
Developments for 2020/21
Looking ahead, and as already mentioned, the Committee’s work will
be dominated by considering the impact of RIIO-2 on our remuneration
structure. In addition, we will also be mindful of the evolving practice on
90
executive pension levels (where we have already taken steps to align
different employee levels). We will also be considering how best to build
into our remuneration arrangements consideration of key non-financial
objectives, such as environmental issues and the Company’s
performance in reducing emissions and enabling the wider societal
evolution towards new and renewable energy sources and networks.
In our review of policy for 2021, we will consult on all of these matters
during the year ahead.
Conclusion
The Committee has carefully reviewed the performance of the senior
executive team during the year and the prior three years to assess
whether the level of APP and LTPP payments/vesting were aligned with
the Company’s performance over the period and concluded that the
arrangements set out in this Remuneration Report were a fair reflection
of their individual and collective performance. Accordingly, on behalf of
the Committee, I commend this Directors’ Remuneration Report to you
and ask for your support at the Annual General Meeting.
Jonathan Dawson
Remuneration Committee Chair
National Grid plc Annual Report and Accounts 2019/20
Corporate Governance | Directors’ Remuneration Report
At a glance – 2019/20
Our ‘At a glance’ highlights the performance and remuneration outcomes for our Executive Directors for the year ended 31 March 2020.
Further detail is provided in the Statement of implementation of remuneration policy in 2019/20.
Annual Report on Remuneration
A comparison of the 2019/20 single total figure of remuneration, with the maximum remuneration if variable pay had vested in full, is set out below for
the Executive Directors. Andy Agg, John Pettigrew and Nicola Shaw were each in office for the full year. Dean Seavers was in office for part of the year.
Total remuneration
Executive Director
Andy Agg
John Pettigrew
Dean Seavers
Nicola Shaw
Maximum if variable
pay vested
in full £’000
2,015
6,227
2,905
3,074
2019/20 total single figure of remuneration
£’000
Split by component (%)
1,716
43.0%
30.6%
23.2%
3.2%
5,322
27.0%
16.9%
50.2%
2,502
24.4%
69.3%
2,520
29.3%
15.3%
49.6%
5.9%
6.3%
5.8%
Key:
Fixed
APP
2017 LTPP – face value
2017 LTPP – share appreciation/depreciation and dividend equivalent values
Notes:
1. Dean Seavers stepped down from the Board for personal reasons on 5 November 2019 and left the Company on 31 December 2019. In the above table, the maximum if variable pay vested
in full relates to the period 1 April to 31 December 2019 and includes base salary, benefits in kind, pension, 2019/20 APP and 2017 LTPP vesting.
2. For each UK-based Executive Director the share price has increased between grant date of the LTPP awards in 2017 and the estimated share price value at vesting, being the three months’
average preceding 31 March 2020. Comparing the share price at grant of 973.80p for Andy Agg, John Pettigrew and Nicola Shaw versus the estimated average share price for the period
1 January 2020 to 31 March 2020 (978.75p), there is an increase of 4.95p (0.5%) per share. Andy Agg received a second 2017 LTPP tranche and comparing the share price at grant of
941.50 versus the estimated average share price for the period 1 January 2020 to 31 March 2020 (978.75p), there is an increase of 37.25p (4.0%) per share. This results in an estimated
increase in value (net of dividend equivalents) of £10,554 in total for Andy Agg, £15,107 for John Pettigrew, and £7,063 for Nicola Shaw. For the former US-based Executive Director, Dean
Seavers, the ADS price has decreased between grant date and the estimated average ADS price for the period 1 January 2020 to 31 March 2020 ($62.48). Comparing the ADS price
at grant of $63.94 versus the estimated ADS price of $62.48 there is a reduction of $1.46 (2.0%) per ADS. This results in an estimated reduction in value (net of dividend equivalents) of
$56,810 for Dean Seavers. Overall, the percentage growth in value over the three-year period due to dividend income per share/ADS is at least 11%, and this will increase further subject to
a final dividend to be included on the vesting date.
Key features of remuneration policy
(adopted 2019)
Implementation of policy in 2019/20
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 8.0% (comprising the UK budget of 2.9% and a further 5.1%)
for each of John Pettigrew and Nicola Shaw (June 2019). These increases were
awarded in line with remuneration policy and given their strong individual
performance and to align their pay to the appropriate market levels for their roles;
Annual
Performance
Plan (APP)
Long Term
Performance
Plan (LTPP)
• Salary increase of 3.1% for Dean Seavers (June 2019). This increase was in line
with the budget for US managerial employees; and
• Andy Agg was not eligible for a June 2019 salary increase because he was
internally promoted on 1 January 2019.
• Maximum opportunity is 125% of salary;
• 50% paid in cash, 50% paid in shares which must
• 70% based on financial measures and 30% based on individual objectives;
• Financial measures for CEO and CFO comprise 35% underlying EPS and
be retained until the later of two years and
meeting the shareholding requirement; and
• Subject to both malus and clawback.
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 Underlying Operating Profit respectively; and
• Individual objectives cover driving efficiency, delivering value for investors,
stakeholder engagement including regulatory and government, our workforce/
talent and culture agenda, corporate social responsibility and customer.
• 2019/20 APP payouts as a percentage of maximum opportunity: 71% for each of
Andy Agg and John Pettigrew, 0% for Dean Seavers and 56% for Nicola Shaw.
• Maximum award level is 350% of salary for CEO
and 300% for other Executive Directors;
• Vesting is subject to long-term performance
conditions over a three-year performance period;
• 2019 LTPP award: 33.33% Group RoE and 66.67% Group Value Growth; and
• Overall the 2017 LTPP vested at 84.9% of the maximum and is based on the
performance of two equally weighted measures of Group RoE and Group Value
Growth achieving 69.8% and 100.0% respectively.
• Shares must be retained until the later of two
years from vesting and meeting the shareholding
requirement; and
• Subject to both malus and clawback.
Pension and
other benefits
• 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
• UK cash allowance for John Pettigrew and Nicola Shaw, 30% of pensionable pay
(reducing to 26.7% at 1 April 2020, 23.4% at 1 April 2021 and 20% at 1 April
2022) and for Andy Agg, 20% of pensionable pay;
• US-defined contribution for Dean Seavers, 9% of pensionable pay with additional
• Other benefits as appropriate.
match of up to 4%; and
Shareholding
requirement
• 500% of salary for CEO;
• 400% of salary for other Executive Directors; and
• Post-employment shareholding requirement,
200% of salary for two years.
• 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.
• The Committee agreed in November 2019 that newly appointed UK-based
Executive Directors will receive pension contributions of up to 12% of base
salary for the DC plan (or cash supplement in lieu); this is in line with the level
for new joiners across the rest of the UK-based workforce.
• Shareholdings for Andy Agg, John Pettigrew and Nicola Shaw are 195%, 609%
and 175% respectively and for Dean Seavers (at 5 November 2019) 423%; and
• John Pettigrew has met his shareholding requirement. Andy Agg and Nicola
Shaw have not yet met their shareholding requirements due to relatively shorter
tenure in role and in company, respectively.
• Andrew Bonfield and Dean Seavers have each met their post-employment
shareholding requirement as at 31 March 2020.
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Corporate Governance
Directors’ Remuneration Report continued
Directors’ remuneration policy – approved by shareholders in 2019
Key aspects of the current Director’s remuneration policy, along with elements particularly applicable to the 2019/20 financial year, are shown on
pages 92 – 95 for ease of reference only. The current policy was approved for three years from the date of the 2019 AGM, held on 29 July 2019.
A shareholder vote on the remuneration policy is not required in 2020. A copy of the full remuneration policy is 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.
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.
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.
Approved 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 benefit 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 their 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.
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Corporate Governance | Directors’ Remuneration Report
Directors’ remuneration policy – approved by shareholders in 2019 continued
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 DB 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 Defined Benefit (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).
Pension footnote: The Remuneration Committee agreed in November 2019 (i.e. after the July 2019 AGM Policy vote) that newly appointed Executive Directors will receive annual
contributions of up to 12% of basic salary for the DC pension scheme, or cash supplement in lieu.
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.
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National Grid plc Annual Report and Accounts 2019/20
Corporate Governance
Directors’ Remuneration Report 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
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.
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 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 two thirds and Group RoE represents one third 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 five sixths and Group RoE represents
one sixth 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 or 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.
Approved 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.
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Corporate Governance | Directors’ Remuneration Report
Directors’ remuneration policy – approved by shareholders in 2019 continued
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.
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.
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.
Please refer to the full remuneration policy within the 2018/19
Annual Report and Accounts on the Company’s investor website
(http://investors.nationalgrid.com) for our remuneration policy on
Directors’ recruitment, external appointments, total remuneration
opportunity and corporate and share capital events.
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 92.
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 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.
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Corporate Governance
Directors’ Remuneration Report continued
Statement of implementation of remuneration policy in 2019/20
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 2019/20
were Nora Mead Brownell (until 8 April 2019), Jonathan Dawson (Chair), Earl Shipp, Jonathan Silver (from 16 May 2019) and Mark Williamson.
The Committee’s activities during the year – activities of the Committee during the year can be found at page 106.
AUDITED
Single Total Figure of Remuneration – Executive Directors
The following table shows a single total figure in respect of qualifying service for 2019/20, together with comparative figures for 2018/19:
Andy Agg
19/20
18/19
John Pettigrew 19/20
18/19
Dean Seavers
19/20
Nicola Shaw
18/19
19/20
18/19
Salary
£’000
595
149
1,017
944
512
825
555
515
Benefits
in kind
£’000
Pension
Total fixed
pay
23
4
116
94
27
30
15
15
119
30
305
283
74
138
166
155
737
183
1,438
1,321
613
993
736
685
APP
525
158
897
994
0
457
387
552
LTPP
454
20
2,987
2,336
1,889
1,551
1,397
997
Total variable
pay
Total
remuneration
979
178
3,884
3,330
1,889
2,008
1,784
1,549
1,716
361
5,322
4,651
2,502
3,001
2,520
2,234
Notes:
Dean Seavers: 2019/20 fixed pay components in the table above are for the period he served as a Director during the year, from 1 April to 5 November 2019; 2019/20 variable pay
components in the table above are for the period during which he was employed, from 1 April to 31 December 2019.
Andy Agg: 2018/19 figures in the table above are for the period he served as a Director during the year, from 1 January to 31 March 2019.
Salary: Base salaries were last increased on 1 June 2019 other than for Andy Agg, who was not eligible to receive a salary increase due to being appointed CFO on 1 January 2019.
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 and which, for John Pettigrew, amounted to approximately £86,000 for 2019/20 (and approximately £75,000 for 2018/19). A Sharesave
option award was granted to John Pettigrew on 27 December 2019 and the benefit (approximately £8,000) of this award is included. There were no Sharesave options granted to any
of the other Executive Directors during 2019/20.
APP: John Pettigrew will donate 20% of his 2019/20 APP (net of tax) to a charity involved in the emergency COVID-19 response in our US service territories. Dean Seavers received a nil
payout for the individual portion of the APP. Consistent with Company policy for all colleagues not covered by a trade union agreement, this results in a nil payout overall. Information
relating to amounts paid for the loss of office can be found on page 102.
LTPP: The 2017 LTPP is due to vest in July 2020. The average share price over the three months from 1 January 2020 to 31 March 2020 of 978.75p ($62.48 per ADS) has been applied
and estimated dividend equivalents are included. The 2018/19 LTPP figures have been restated because last year they were estimated using the average share price (January–March
2019) and they now include the actual share price on vesting at 1 July 2019 and all dividend equivalent shares. Due to a higher share price at vesting of 842.10p versus the estimate of
837.34p (and the additional dividend equivalent shares added for the dividend with a record date of 31 May 2019 with a dividend rate of 31.26p per share), the actual value at vesting was
£770, £89,005 and £37,991 higher than for the estimate last year for Andy Agg, John Pettigrew, and Nicola Shaw, respectively. Despite a lower ADS price at vesting of $52.736 versus
the estimate of $54.73, the actual value at vesting was £539 higher than for the estimate last year for Dean Seavers. This is because the change in ADS price was offset by the additional
dividend equivalent ADSs for the dividend with a record date of 31 May 2019 with a dividend rate of $2.0256 per ADS.
Impact of share price change: The impact of share price appreciation/depreciation, comparing share/ADS prices at grant versus the estimated share/ADS prices upon vesting is set
out in the notes to the 2017 LTPP (vesting) table on page 101.
Exchange rate: $1.2868:£1.
AUDITED
Total pension benefits
Andy Agg, 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 until he left the business at 31 December 2019. 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 of 26 October 2031. At 31 March 2020, John Pettigrew’s accrued DB pension was
£165,031 per annum and his accrued lump sum was £495,092. 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, a 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.
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Corporate Governance | Directors’ Remuneration Report
Statement of implementation of remuneration policy in 2019/20 continued
AUDITED
Annual Performance Plan (APP)
Performance against targets for APP 2019/20
APP awards are earned by reference to the financial year and this year will be paid in July 2020. 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.
For financial measures, threshold, target and stretch performance levels 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 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 is made at the end of the performance year on each objective.
The outcomes of APP awards earned for financial performance are summarised in the table immediately below. Performance against individual
objectives is set out in the tables which follow.
Performance measure
CEO and CFO
Underlying 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%
35%
54.0
57.5
61.0
58.2
10.91
11.31
11.71
11.70
60.0%
98.8%
23.3%
1,655
1,715
1,775
1,734
65.8%
23.3%
23.3%
23.3%
23.3%
23.3%
30%
2.01
2.26
2.51
2.34
1,533
1,583
1,633
1,576
1,276
1,327
1,387
1,344
8.96
9.16
9.36
9.25
1,725
1,785
1,845
1,645
66.0%
43.0%
64.2%
72.5%
0.0%
Detail expanded in tables below
60–65%
Notes:
Underlying EPS: Technical adjustments have been made reducing the target by 2.5p to reflect the net effect of currency adjustments, the impact of deferrable storm costs, certain
actuarial assumptions on pensions and scrip dividend uptake.
Group RoE: A technical adjustment has been made reducing the target by 0.33% to reflect the true-up of opening equity.
UK financial measures: Technical adjustments have been made reducing the underlying UK Operating Profit target to reflect the net effect of certain actuarial assumptions on
pensions (£5m reduction) and normalisation to reflect the impact of RPI (£11m reduction) and reducing the UK Value Added target by £14m to ensure consistency of accounting
treatment.
US financial measures: Technical adjustments have been made reducing the underlying US Operating Profit target by £70m to reflect the net effect of currency adjustments,
deferrable storm costs and certain actuarial assumptions on pensions. Technical adjustments have been made reducing the US Value Added target by £33m to reflect the net effect
of currency adjustments and the impact of deferred tax movements.
Individual Objectives: For 2019/20 the Committee has applied discretion to cap the payout for overall individual achievement against individual objectives at the lower of target and
actual achievement to reflect restraint in the context of COVID-19 and to be consistent with decisions made for the wider managerial population. This discretion is not incorporated above.
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Corporate Governance
Directors’ Remuneration Report continued
Individual Objectives
The individual objectives of the Executive Directors when taken together were designed to deliver against each of our 2019/20 business priorities.
The Committee adopts a two-stage process to agree individual objectives. First it reviews and provides feedback on the objectives including
consideration of the weighting based on business criticality of the objective and then, at a second meeting, it completes a final review and approves
the objectives. At the end of the year an overall assessment is made which takes account of the weighting and achievement of the respective
individual objectives for each Director and the degree to which each element of the objective was met against specific target and stretch targets.
As with the financial measures, the achievement of ‘stretch’ performance and ‘target’ performance overall results in 100% and 50% respectively
of the maximum payout.
For 2019/20 the Committee has applied discretion to cap the payout for overall achievement against individual objectives at the lower of target and
actual achievement to reflect restraint in the context of COVID-19 and to be consistent with decisions made for the wider managerial population. This
discretion is not incorporated in the percentage outcomes below.
Andy Agg
Individual objective & performance commentary
Drive operating efficiency of the business and finance function
• Delivered targeted UK cost efficiencies of £50 million and on track to deliver a further £100 million in 2020/21
• Delivered US cost efficiencies, but was short of target
• Made good progress on the digital transformation of the Finance function, including the successful implementation of SAP
improvements and strong leadership of a Finance transformation programme, with more work to be done to crystallise
cost reductions
Weighting
Outcome
25%
64%
Support financial aspects of regulatory negotiations
• Provided effective support on the Hinkley-Seabank agreements and in continuing RIIO-2 discussions with Ofgem in the UK,
25%
80%
enabling financial parameters that are viewed as positive by shareholders
• Enabled positive outcome on Massachusetts Electric (MECO) rate case
• Maximum not awarded due to regulatory outcomes not fully at stretch levels
Support in updated investor proposition review and Total Societal Impact initiative
• Established and gained agreement from the Board for an appropriate investor proposition
• Completed sale of minority stake in Cadent in line with agreed timing
• More opportunities remain in identifying additional financeable growth opportunities for sustained outperformance
Drive the talent agenda
• Made positive progress on development and succession planning deeper in the Finance function
• Increased the Colleague Enablement score and workforce diversity in the Finance function, though fell short of targeted
aspirations
Summary
Andy had a good year and has firmly established himself in the CFO role. He provided good leadership on the investment
proposition, started to transform the Finance function and strengthened talent capabilities. Outside of his core objectives he
has also made strong contributions in articulating National Grid’s contributions as a corporate entity in the State Ownership
debate, introducing GAAP reporting. More work is needed in driving the talent agenda in the US and progressing additional
risk and control measures.
John Pettigrew
Individual objective & performance commentary
Optimise regulatory/government agreements and relationships
• Led a successful response to the near simultaneous tripping of two large power stations in August 2019 leading to power
outages in various parts of England and Wales, including re-establishing power within the timeframes required by Ofgem,
and engaging with Ofgem in the investigation and learnings reviews which confirmed that the outage was not caused by
National Grid infrastructure
• Continued dialogue with Ofgem and stakeholders on the proposed parameters for RIIO-2 although there remain differences
on certain issues
• Achieved a successful outcome for the Hinkley-Seabank project in the UK and the MECO rate case in Massachusetts
• Continued positive engagement with key regulatory and government stakeholders, including a new UK government, and
administrations in Massachusetts and Rhode Island, though there is more work to be done in New York to rebuild our
reputation following the issues arising from the downstate New York Gas moratorium
Develop external National Grid value proposition
• Established and gained agreement from the Board for an appropriate investor proposition
• Additionally, established and gained agreement from the Board for a new framework for defining National Grid’s Total
Societal Impact to support our aspirations as we continue to emphasise the importance of being a purpose-led organisation
Continue work to ensure National Grid is well placed for growth and innovation
• Continued to build an effective platform for growth through National Grid Ventures, particularly with the purchase of
renewables developer Geronimo Energy
• Delivered the digital strategy in both the UK and US
• Responded appropriately to innovation and disruptive technologies, particularly through National Grid Partners, though
there remains more work to be done to achieve our ambitions
25%
80%
25%
36%
100%
65%
Weighting
Outcome
40%
50%
20%
100%
20%
75%
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National Grid plc Annual Report and Accounts 2019/20
Corporate Governance | Directors’ Remuneration Report
Statement of implementation of remuneration policy in 2019/20 continued
John Pettigrew continued
Individual objective & performance commentary continued
Drive the talent and culture agenda
• Increased the colleague engagement score by 6% and articulated clear aspirations on culture, which now need to be
embedded in the organisation
• Demonstrated enhancements in the capabilities and strength of succession of the National Grid leadership team, including
the successful appointments of a President of the US business, and Managing Director, National Grid Ventures; there
remains more work to be done on succession planning and further investment in leadership capability
• Made strides in inclusion and diversity, though success of I&D initiatives still needs to be evidenced with increased
proportion of women and minorities in leadership and managerial positions
Summary
Weighting
Outcome
20%
50%
John Pettigrew’s performance in his role as CEO continues to be strong, with particular highlights in the areas of the value
proposition for our investors and communities, stakeholder engagement and outcomes in the UK and Massachusetts, and
growth and innovation. More work is to be done on completing agreements on downstate NY and in the succession planning
and diversity of our workforce.
100%
65%
Nicola Shaw
Individual objective & performance commentary
Deliver a step change improvement in the performance of customer service as measured by Net Promoter Score
and Customer Satisfaction (CSAT)
• Met Net Promoter Score stretch target
• Met Customer Satisfaction score target, and was very close to stretch target
• Demonstrated strong focus on customer service during the year, including positive personal engagement with customers
Deliver a step change in Operational Performance
• Delivered cost reductions as part of the UK transformation programme whilst successfully managing all key risks
• Successfully managed implications of Brexit, with no interruption to business
• Made progress on digital transformation, with some further implementation work to be done
• More work to be done on risk and control measures
Deliver successful regulatory outcomes
• Delivered RIIO-2 business plans with stakeholder support, with some items posed by independent challenge group to be
addressed, although there remain differences on certain issues
• Positive engagement with UK regulator, including on Hinkley-Seabank activities which led to a positive outcome
• Led a successful response to the August 2019 power outage, although external communications response times could have
been better
Drive the talent agenda
• Made positive progress on succession planning but more work to be done
• Increased the Colleague Enablement and Engagement scores in the Core UK business
• Improved workforce diversity in the Core UK business
Summary
Weighting
Outcome
25%
80%
25%
45%
25%
55%
25%
60%
Overall Nicola Shaw has had a good year with delivering on cost reduction commitments, strong progress in improving
customer service, positive engagement with our stakeholders, particularly with RIIO-2 and Hinkley-Seabank, and excellent
Colleague Enablement and Engagement scores. There remains work to be done on risk and control measures and certain
issues regarding RIIO-2.
100%
60%
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National Grid plc Annual Report and Accounts 2019/20
Corporate Governance
Directors’ Remuneration Report continued
2019/20 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 2020
Former Executive Director, US
Max
Actual
Max
Actual
Max
Actual
Max
Actual
125%
37.50%
88.23%
43.75%
18.75%
26.25%
125%
37.50%
88.23%
43.75%
18.75%
26.25%
43.75%
43.23%
43.75%
43.23%
125%
37.50%
29.17%
29.17%
29.16%
69.73%
18.75%
12.54%
19.25%
19.19%
Key:
Individual
Underlying EPS or
UK/US Underlying
Operating Profit
Group/UK/US RoE
UK/US Value Added
APP
amount
£743,750
£524,969
Andy Agg
£1,270,940
£897,080
John Pettigrew
£693,240
£386,717
Nicola Shaw
125%
37.50%
29.17%
29.17%
29.16%
0%
£807,407
£0
Dean Seavers
Notes:
1. Underlying EPS and Group RoE pertain to Andy Agg, CFO and John Pettigrew, CEO.
2. Underlying UK Operating Profit, UK RoE and UK Value Added pertain to Nicola Shaw, Executive Director, UK.
3. Underlying US Operating Profit, US RoE and US Value Added pertain to Dean Seavers, Executive Director, US. The APP maximum opportunity and actual award for Dean Seavers are for
the period during which he was employed, from 1 April to 31 December 2019.
4. For 2019/20 the Committee has applied discretion to cap the payout for overall achievement against individual objectives for Andy Agg, John Pettigrew and Nicola Shaw, at the lower of
target and actual achievement to reflect restraint in the context of COVID-19 and to be consistent with decisions made for the wider managerial population. This discretion is incorporated
in the actual payouts above.
5. John Pettigrew will donate 20% of his 2019/20 APP (net of tax) to a charity involved in the emergency COVID-19 response in our US service territories.
AUDITED
LTPP performance
The LTPP value included in the 2019/20 single total figure relates to anticipated vesting in July 2020 of the conditional LTPP awards granted
in 2017.
2017 LTPP
The 2017 award is determined by performance over the three years ended 31 March 2020 of Group RoE (50% weighting) and Group Value
Growth (50% weighting), which is expected to vest on 27 July 2020. The financial components and weightings for this year’s vesting, i.e., the
2017 LTPP awards, are the same for all Executive Directors. The Group Value Growth outturn includes an amount to reflect the value added
from the sale of the residual interest in the UK Gas Distribution business and to adjust for revised timing of UK tax payments in 2019/20.
The Committee has decided not to apply any discretion following consideration of wider financial performance during the 3-year performance period.
Performance measure
Group RoE (50% weighting)
Group Value Growth (50% weighting)
Threshold – 20%
vesting
Maximum – 100%
vesting
Actual/expected
vesting
Actual/expected
proportion of
maximum achieved
11.0%
10.0%
12.5% or more
12.0% or more
11.9%
12.8%
69.8%
100.0%
100
National Grid plc Annual Report and Accounts 2019/20
Corporate Governance | Directors’ Remuneration Report
Statement of implementation of remuneration policy in 2019/20 continued
AUDITED
2017 LTPP (vesting)
The 2017 LTPP is expected to vest on 27 July 2020. The amounts expected to vest under the 2017 LTPP for the performance period ended on
31 March 2020 and included in the 2019/20 single total figure are shown in the table below. The share price valuation is an estimate based on
the average share price over the three months from 1 January 2020 to 31 March 2020 of 978.75p ($62.48 per ADS); the final dividend to be paid
in August 2020 is excluded.
Original number
of share awards
in 2017 LTPP
Overall vesting
percentage
(as % of max.)
Number of
awards vesting
Number
of dividend
equivalent shares
Total value of
awards vesting and
dividend equivalent
shares (£’000)
Andy Agg
John Pettigrew
Dean Seavers (ADSs) (prorated)
Nicola Shaw
49,080
323,205
41,078
151,109
84.9%
84.9%
84.9%
84.9%
41,668
274,401
34,875
128,291
4,675
30,794
4,036
14,397
454
2,987
1,889
1,397
Notes:
The total value of awards vesting and dividend equivalent shares are subject to a two-year holding period.
Andy Agg: Andy Agg’s award of 49,080 shares was granted in two tranches. The first tranche of 21,996 shares was granted on 28 June 2017 followed by a second tranche of
27,084 shares granted on 24 July 2017. Both awards are subject to the same performance conditions, performance period and vesting percentage/dividend equivalents estimates.
Dean Seavers: Dean Seavers’ original award of 49,294 ADSs has been prorated to 41,078 ADSs on the basis of completed months employed between the grant date and
31 December 2019.
Impact of share price change: The impact of share price change for the 2017 LTPP, comparing share price at grant versus the average share price for the period 1 January 2020 to
31 March 2020 of 978.75p ($62.48 per ADS), for each Executive Director: for John Pettigrew and Nicola Shaw the share price at grant was 973.80p resulting in an increase per share of
4.95p (0.5%) and this results in an estimated increase in value (including dividend equivalents) of £15,107 for John Pettigrew and £7,063 for Nicola Shaw; Andy Agg received his 2017
LTPP award in two tranches and the share prices at grant for his awards were 973.80p and 941.50p resulting in increases per share of 4.95p (0.5%) and 37.25p (4%) respectively and this
results in estimated increases in value (including dividend equivalents) of £1,028 and £9,526 respectively; for Dean Seavers the ADS price at grant was $63.94 resulting in a decrease per
ADS of $1.46 (2%) and this results in an estimated reduction in value (including dividend equivalents) of $56,810. The impact of share price change is not included in the expected
amounts to vest shown in the above table.
AUDITED
Single total figure of remuneration – Non-executive Directors
The following table shows a single total figure in respect of qualifying service for 2019/20, together with comparative figures for 2018/19:
Nora Mead Brownell
Jonathan Dawson
Therese Esperdy
Sir Peter Gershon
Paul Golby
Liz Hewitt
Amanda Mesler
Earl Shipp
Jonathan Silver
Mark Williamson
Total
Fees £’000
Other emoluments £’000
Total £’000
2019/20
2018/19
2019/20
2018/19
2019/20
2018/19
2
111
141
538
104
23
91
103
91
134
100
108
138
523
101
n/a
77
25
n/a
130
–
0
19
86
5
1
2
17
11
6
1,338
1,202
147
8
2
15
83
5
n/a
–
3
n/a
6
122
2
111
160
624
109
24
93
120
102
140
108
110
153
606
106
n/a
77
28
n/a
136
1,485
1,324
Notes:
Receiving the US-based Board fee: Nora Mead Brownell, Therese Esperdy, Earl Shipp and Jonathan Silver.
Receiving the UK-based Board fee: Jonathan Dawson, Paul Golby, Liz Hewitt, Amanda Mesler and Mark Williamson.
Nora Mead Brownell: Nora Mead Brownell stepped down from the Board on 8 April 2019.
Therese Esperdy: Fees for 2019/20 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 and this amounted to approximately £85,000 for 2019/20
(and approximately £81,000 for 2018/19).
Jonathan Silver: Jonathan Silver joined the Board on 16 May 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 £13.5 million (2018/19: £11.6 million).
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Corporate Governance
Directors’ Remuneration Report continued
AUDITED
Other Remuneration Disclosures
2019 LTPP (conditional award) granted during the financial year
The face values of the awards are calculated using the volume weighted average share price at the date of grant (28 June 2019) (£8.341132 per
share and $53.0487 per ADS) and are 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
300% of salary
350% of salary
300% of salary
300% of salary
£1,785
£3,603
$3,347
£1,677
20%
20%
20%
20%
Number of shares
213,999
431,969
Performance
period end date
31 March 2022
31 March 2022
63,094 (ADSs)
31 March 2022
201,059
31 March 2022
Notes:
The 2019 LTPP grant will vest on 1 July 2022. The total value of awards vesting and dividend equivalent shares are subject to a two-year holding period.
Dean Seavers: Dean Seavers’ 2019 LTPP award of 63,094 ADSs will be prorated to 10,515 ADSs to reflect the time served between the award date and 31 December 2019 when he
left the Company.
AUDITED
Performance conditions for 2019 LTPP awards granted during the financial year
Performance measure
Group RoE
Group Value Growth
Conditional share awards granted – 2019
Weighting for all
Executive Directors
33.33%
66.67%
Threshold
20% vesting
11.0%
10.0%
Maximum
100% vesting
12.5% or more
12.0% or more
Notes:
Group RoE: Group RoE is measured during the first two years of the three-year performance period and will contribute one-third of the total vesting outcome (at the end of three years).
Group Value Growth: Group Value Growth is measured over the entire three-year performance period and will contribute two-thirds of the total vesting outcome.
AUDITED
Payments for loss of office and payments to past Directors
Leaving arrangements for Dean Seavers
Dean Seavers stepped down from the Board for personal reasons on 5 November 2019 and remained employed by the Company until
31 December 2019 to support a smooth leadership transition and handover.
Mr Seavers’ remuneration in relation to his fixed pay for the period 1 April 2019 to 5 November 2019, his 2019/20 APP and his 2017 LTPP is
disclosed in the Single Total Figure of Remuneration table on page 96. For the period from 6 November 2019 to 31 March 2020, Mr Seavers
received remuneration totalling £1.1 million which predominantly includes his fixed pay (salary, benefits and pension) until 31 December 2019, his
pay in lieu of notice of approximately £732,000 and his accrued holiday of approximately £133,000. All payments are in accordance with his
service agreement and the Directors’ Remuneration Policy and subject to applicable tax withholdings. As part of Mr Seavers’ agreed leaver
arrangements the Company will fund limited costs for security arrangements until 31 December 2020. These costs are expected to be no more
than $35,000.
The Committee agreed to grant good leaver treatment for Mr Seavers’ outstanding LTPP awards given his overall long-term strong performance
and contribution to the business. Mr Seavers’ outstanding ADS awards under the 2018 and 2019 Long Term Performance Plan (LTPP) will be
prorated for completed months held since the award date until 31 December 2019, as set out in the table below. These awards will vest at the
same time as other participants, subject to performance measured at the vesting date and any discretion the Committee may decide to
exercise at the time of vesting, in line with our Directors’ Remuneration Policy. These shares will be subject to the two-year post-vesting holding
requirement and post-employment shareholding requirement, if not already met.
LTPP Awards
Award
2018 LTPP
2019 LTPP
Total
ADSs awarded
Pro-rata ADSs
Vesting Date
58,786
63,094
121,880
29,393
10,515
39,908
July 2021
July 2022
Mr Seavers is subject to the Company’s post-employment shareholding requirement of 200% of base salary for two years after leaving
the Company.
102
National Grid plc Annual Report and Accounts 2019/20
Corporate Governance | Directors’ Remuneration Report
Statement of implementation of remuneration policy in 2019/20 continued
Payments to past Directors and post-employment shareholdings
There have been no payments to any other past Director during 2019/20. Past Directors are required to continue to hold their shares/ADSs with the
Company’s third-party share scheme administrator in order to audit compliance; at 31 March 2020 Andrew Bonfield and Dean Seavers have each
continued to meet their post-employment share-holding requirements.
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 2020, had headroom of
3.89% and 7.86% respectively.
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 2020 and the salary used to calculate the value of the shareholding is the gross annual
salary as at 31 March 2020.
John Pettigrew has met his shareholding requirement. As Andy Agg and Nicola Shaw are still relatively new in post and to the Company,
respectively, they have not yet met their requirement, but each are expected to do so in 2023 assuming on-target performance/vesting
outturns. They will not be allowed to sell shares, except for covering associated tax liabilities, until this requirement is met. Dean Seavers had
met his shareholding requirement before he stepped down from the Board. Non-executive Directors do not have a shareholding
requirement.
A further 50 shares have been purchased between April and June on behalf of each of Andy Agg, John Pettigrew and Nicola Shaw via the
Share Incentive Plan (an HMRC tax-advantaged all-employee share plan), thereby increasing their beneficial interests. There have been no other
changes in Directors’ shareholdings between 1 April 2020 and 17 June 2020.
The normal vesting dates for the conditional share awards subject to performance conditions are 1 July 2020, 1 July 2021 and 1 July 2022
for the 2017 LTPP, 2018 LTPP and 2019 LTPP respectively.
Directors
Executive Directors
Andy Agg
John Pettigrew
Dean Seavers (ADSs)
(at 5 November 2019)
Nicola Shaw
Non-executive Directors
Nora Mead Brownell
(ADSs) (at 8 April 2019)
Jonathan Dawson
Therese Esperdy
(ADSs)
Sir Peter Gershon
Paul Golby
Liz Hewitt
Amanda Mesler
Earl Shipp (ADSs)
Jonathan Silver (ADSs)
Mark Williamson
Share ownership
requirements
(multiple of salary)
Number of
shares owned outright
(including connected
persons)
Value of shares held
as multiple of current
salary
Number of options
held under the
Sharesave Plan
Conditional share awards
subject to performance
conditions (LTPP 2017,
2018 & 2019)
400%
500%
400%
400%
–
–
–
–
–
–
–
–
–
–
122,351
662,828
81,817
103,897
4,583
41,077
1,587
107,215
2,291
0
1,500
1,000
0
47,460
195%
609%
420%
175%
–
–
–
–
–
–
–
–
–
–
4,045
7,253
–
4,070
–
–
–
–
–
–
–
–
–
–
372,965
1,153,572
80,986
539,331
–
–
–
–
–
–
–
–
–
–
Notes:
Andy Agg: On 31 March 2020 Andy Agg held 4,045 options granted under the Sharesave Plan. 4,045 options were granted with an exercise price of 749 pence and these have since
been exercised at 749 pence per share in April 2020. The number of conditional share awards subject to performance conditions is as follows: 2017 LTPP: 49,080; 2018 LTPP: 109,886;
2019 LTPP: 213,999.
John Pettigrew: On 31 March 2020 John Pettigrew held 7,253 options granted under the Sharesave Plan. 3,034 options were granted with an exercise price of 749 pence per share
and these have since been exercised at 749 pence per share in April 2020. 4,219 options were granted with an exercise price of 711 pence per share and they can, subject to their terms,
be exercised at 711 pence per share between 1 April 2025 and 30 September 2025. The number of conditional share awards subject to performance conditions is as follows: 2017
LTPP: 323,205; 2018 LTPP: 398,398; 2019 LTPP: 431,969.
Dean Seavers: The number of conditional share awards (ADSs), subject to performance conditions, has been prorated (from 171,174 ADSs) for completed months served since the
grant date until his last day of employment (31 December 2019) and is made up as follows: 2017 LTPP: 41,078 (the original award of 49,294 ADSs prorated for 30/36 months); 2018
LTPP: 29,393 (the original award of 58,786 ADSs prorated for 18/36 months); 2019 LTPP: 10,515 (the original award of 63,094 ADSs prorated for 6/36 months).
Nicola Shaw: On 31 March 2020 Nicola Shaw held 4,070 options granted under the Sharesave Plan. 4,070 options were granted with an exercise price of 737 pence per share and they
can, subject to their terms, be exercised at 737 pence per share between 1 April 2022 and 30 September 2022. The number of conditional share awards subject to performance
conditions is as follows: 2017 LTPP: 151,109; 2018 LTPP: 186,263; 2019 LTPP: 201,959.
Nora Mead Brownell: stepped down from the Board on 8 April 2019.
Dean Seavers, Therese Esperdy, Earl Shipp and Jonathan Silver: Holdings and awards are shown as ADSs and each ADS represents five ordinary shares.
103
National Grid plc Annual Report and Accounts 2019/20
Corporate Governance
Directors’ Remuneration Report continued
External appointments and retention of fees
Experience as a board member of another company is considered to be valuable personal development, which in turn is of benefit to the Company.
The table below details the Executive Directors (at 31 March 2020) who served as Non-executive Directors in other companies during the year ended
31 March 2020:
John Pettigrew
Nicola Shaw
Company
Retained fees
International Consolidated Airlines Group S.A.
Rentokil Initial plc
£68,986
£107,042
(€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.
17%
5,079
4,321
Key:
2019/20 £m
2018/19 £m
-9%
5%
1,852
1,684
1,618
1,699
-11%
488
433
6%
993
1,049
Payroll costs
Dividends
Tax
Net interest
Capital expenditure
Notes:
1. The Dividends figure for 2018/19 has been restated at £1,618 million (from £1,610 million) to reflect the actual value of dividends paid.
2. Percentage increase/decrease of the costs between years is shown.
Performance graph
This chart shows National Grid plc’s 10-year annual Total Shareholder Return (TSR) performance against the FTSE 100 Index since 31 March 2010
and illustrates the growth in value of a notional £100 holding invested in National Grid on 31 March 2010, compared with the same invested in
the FTSE 100 index. 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
180.95
201.09
233.89
250.68
242.74
203.31
275.28
Key:
National Grid plc
FTSE 100 Index
100.00
106.04
100.00
107.30
125.70
111.65
154.46
127.05
135.73
145.92
135.58
168.68
168.88
179.40
149.60
300
250
200
150
100
50
0
31/03/10
31/03/11 30/03/12 29/03/13 31/03/14 31/03/15 31/03/16 31/03/17 30/03/18 29/03/19 31/03/20
Data source: DataStream
Chief Executive’s pay in the last ten financial years
Steve Holliday was CEO throughout the six-year period from 2010/11 to 2015/16. John Pettigrew became CEO on 1 April 2016.
Steve Holliday
John Pettigrew
2010/11
2011/12
2012/13
2013/14
2014/15
2015/16
2016/17
2017/18
2018/19
2019/20
Single total figure of remuneration (£’000)
3,738
3,539
3,170
4,801
4,845
5,151
4,623
3,648
4,651
5,322
Single total figure of remuneration including
only 2014 LTPP (£’000)
3,931
APP (proportion of maximum awarded)
81.33% 68.67% 55.65%
77.94% 94.80% 94.60%
73.86% 82.90% 84.20%
70.58%
PSP/LTPP (proportion of maximum vesting)
65.15% 49.50%
25.15% 76.20%
55.81% 63.45%
90.41% 85.20% 84.20% 84.90%
Notes:
Single total figure 2019/20: The figure for 2019/20 for John Pettigrew is explained in the single total figure of remuneration table for Executive Directors.
Single total figure 2018/19: The figure for 2018/19 has been restated to reflect actual share price at 1 July 2019, consistent with comparative figures shown in this year’s single total figure
of remuneration table.
2014 LTPP: The 2016/17 single total figure of remuneration 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.
104
National Grid plc Annual Report and Accounts 2019/20
Corporate Governance | Directors’ Remuneration Report
Statement of implementation of remuneration policy in 2019/20 continued
Percentage change in CEO’s remuneration
The table below shows how the percentage change in the CEO’s salary, benefits and APP between 2018/19 and 2019/20 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, each with their own pay structure.
Salary
Taxable benefits
APP
2019/20
£’000
2018/19
£’000
Change
2019/20
£’000
2018/19
£’000
Change
2019/20
£’000
2018/19
£’000
Change
John Pettigrew
1,017
944
7.7%
116
94
23.4%
897
994
-9.8%
Non-union employees
(average increase/decrease)
3.6%
-1.3%
-5.9%
Notes:
Non-union employees: The population is not a constant comparator group due to external hires, promotions and attrition between years. Calculating the APP change comparing employees
that were employed throughout the period results in a 0.35% change. The result is impacted also by the proportion of new employees that have not accrued a ‘full year’ of APP payout and
changes in business results which this year drive in particular a lower APP payout for our US business versus last year.
Pay data for US employees have been converted at $1.2868:£1.
CEO pay ratio
We have disclosed our 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) in accordance with the Companies (Miscellaneous Reporting) Regulations
2018 (as amended), which formally apply to National Grid from this reporting year, 2019/20. We disclosed these ratios on a voluntary basis last year
for 2018/19.
Year
2018/19 – voluntary
2019/20
UK
Method
Option A
Option A
25th percentile
pay ratio
Median
pay ratio
75th percentile
pay ratio
96:1
111:1
76:1
86:1
58:1
66:1
Group-wide
Median
pay ratio
48:1
53:1
The comparison with UK employees is specified by the regulations. US employees represent approximately 73% of our total employees. Our median
pay ratio on a Group-wide basis is 53:1, calculated on the same basis as the UK pay ratios and an exchange rate of $1.2868:£1.
Salaries at 31 March 2020 and estimated performance-based annual payments for 2019/20 have been annualised to reflect full-time equivalents.
Performance payments have not been further adjusted to compensate where new employees have not completed a full performance year.
The CEO pay ratio has increased from 76:1 to 86:1 at the median. The CEO single total figure of remuneration has increased by approximately 17%
versus last year and this increase is driven predominantly by an approximate 25% increase in estimated LTPP vesting value. Increases in salary,
benefits in kind and pensions as a result of the increase to base salary are broadly offset by an approximate reduction of 11% in 2019/20 APP payout
for the CEO. Excluding LTPP the total pay and benefits for the CEO has increased by 0.8% whilst the total pay and benefits for the reference
employee at the median has increased by 2.4%, compared with last year.
Excluding estimated 2017 LTPP vesting, our UK median pay ratio is the same as last year at 38:1 and on a Group basis has marginally reduced to
23:1 this year compared with 24:1 last year. 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 41:1 and excluding the estimated 2017 LTPP vesting is 18:1.
This year the 2017 LTPP vesting represents some 56% of the CEO’s single total figure of remuneration. However, only 2% of UK-based employees
will receive an estimated 2017 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 2017 LTPP vesting in our calculations results in lower
ratios, for the reference employees of 49:1, 38:1 and 29:1 at the 25th, 50th and 75th percentiles respectively and these ratios are the same as last
year. As employees advance through the Group, there will be the opportunity to receive higher rewards commensurate with increased accountability
and market practice.
The regulations require the total pay and benefits and the salary component of total pay and benefits for this year to be set out as follows:
Pay data 2019/20
CEO remuneration
UK employee 25th percentile
UK employee 50th percentile
UK employee 75th percentile
Base salary
Total pay &
benefits
£1,016,752
£5,321,735
£34,521
£51,149
£60,913
£47,849
£61,842
£80,614
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 inclusive of short-term and long-term incentives applicable for the respective financial year 1 April – 31 March. The reference employees
at the 25th, 50th and 75th percentile have been determined by reference to pay and benefits as at the last day of the respective financial year,
31 March, though estimates have been used for the respective APP payouts and performance outturns of the LTPP and dividend equivalents.
105
National Grid plc Annual Report and Accounts 2019/20
Corporate Governance
Directors’ Remuneration Report continued
Statement of implementation of remuneration policy in 2019/20 continued
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 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.
The Committee’s activities during the year
Meeting
April
May
November (two meetings)
Main areas of discussion
2018/19 individual objectives scoring for Executive Committee
Approval of 2019/20 Objectives for Executive Committee
Discussion on 2018/19 expected incentive plan outturns
2018/19 APP financial outturns and confirmation of awards for Executive Committee
Discussion on expected 2016 LTPP outturns
Annual salary review and LTPP proposals for Executive Committee
Approval of 2019/20 APP financial metrics
Review and approval of Chairman’s fees
Performance update for outstanding LTPP awards
Review of gender and ethnicity pay gaps
Items related to Executive Committee appointments
Leaving arrangements for Executive Director, US
Debrief of AGM season and remuneration trends
Review of pensions arrangements for Executive Committee
March
Market data review for Executive Committee remuneration and initial proposals for base salary increases
First review of 2019/20 individual objectives of Executive Committee
Item related to new Executive Committee appointment
Advisors to the Remuneration Committee
The Committee received advice during 2019/20 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 for governance matters. This work has incurred fees of £57,488 incurred on the basis of time
charged to perform services and deliverables. 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 HR Director – 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 Directors’ Remuneration Policy adopted at the 2019 AGM
The voting figures shown refer to votes cast at the 2019 AGM and represent 63.86% of the issued share capital. In addition, shareholders holding
28.6 million shares abstained.
Number of votes
Proportion of votes
For
2,116,131,831
97.03%
Against
64,718,198
2.97%
Voting on 2018/19 Directors’ Remuneration Report at the 2019 AGM
The voting figures shown refer to votes cast at the 2019 AGM (in respect of the prior remuneration policy adopted in 2017) and represent 63.71% of
the issued share capital. In addition, shareholders holding 33.8 million shares abstained.
Number of votes
Proportion of votes
106
For
2,100,158,370
96.53%
Against
75,482,807
3.47%
National Grid plc Annual Report and Accounts 2019/20
Corporate Governance | Directors’ Remuneration Report
How our remuneration policy will be implemented in 2020/21
The remuneration policy adopted at the 2019 AGM will be implemented during 2020/21 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).
As explained in the Remuneration Committee Chair’s Statement, for 2020/21 a salary increase for Andy Agg will be awarded and this will be effective
from July in line with the rest of the workforce. Salary increases for John Pettigrew and Nicola Shaw will not be awarded at this time.
Andy Agg
John Pettigrew
Nicola Shaw
From 1 July 2020
From 1 June 2019
Increase
£633,675
£1,029,461
£561,524
£595,000
£1,029,461
£561,524
6.5%
0%
0%
Pensions
The remuneration policy approved at the July 2019 AGM stated that new appointments would receive contributions of up to 20% of base salary. In
addition to this, John Pettigrew and Nicola Shaw agreed progressive reductions from 30% to 20% of base salary. Implementation of this agreement
is now underway and effective 1 April 2020, cash in lieu of pension contributions for each of John Pettigrew and Nicola Shaw have reduced to 26.7%
and further reductions to 23.4% and then 20.0% will take place at 1 April 2021 and 1 April 2022 respectively. Andy Agg already receives the
approved policy maximum of 20%. Further to the 2019 AGM the Committee agreed in November 2019 that newly appointed Executive Directors will
receive annual contributions of up to 12% of basic salary for the DC pension scheme, or cash supplement in lieu. Further discussions on pension
contributions will be conducted as part of the 2021 Directors’ Remuneration Policy review.
APP measures for 2020/21
Due to the uncertainty in the context of COVID-19, the Committee has opted not to finalise financial measures, associated weightings or targets at
this time but intends to do so as soon as practicable. APP targets are considered commercially sensitive and consequently will be disclosed in the
2020/21 Directors’ Remuneration Report.
Performance measures for LTPP to be awarded in 2020
Due to the uncertainty in the context of COVID-19, the Committee has opted not to finalise the targets for the 2020 LTPP financial measures.
The weightings for these measure are Group RoE (16.67%) and Group Value Growth (83.33%). Group RoE will be measured over the first year of
the three-year performance period and Group Value Growth will be measured over the entire three-year performance period, determining 1/6th and
5/6ths of the total vesting outcome for the 2020 LTPP, respectively. LTPP awards are expected to be made later in the year and will be based on
1 July 2020 salaries.
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. We will not be increasing the Chairman’s fee or other NED fees at this time. Fees effective from 1 June 2019 remain unchanged
and are set out in the table below.
From 1 June 2019
£’000
Role
From 1 June 2019
£’000
Role
Chairman
Senior Independent Director
Board fee (UK-based)
Board fee (US-based)
540.2
Committee membership fee
23.1
Chair Audit Committee
69.5
Chair Remuneration Committee
82.1
Chair (other Board Committees)
The Directors’ Remuneration Report has been approved by the Board and signed on its behalf by:
Jonathan Dawson
Committee Chairman
17 June 2020
10.8
31.2
31.2
23.9
107
National Grid plc Annual Report and Accounts 2019/20
3.
Financial Statements
Directors’ statement and independent
auditor’s reports
Statement of Directors’ responsibilities
Independent auditor’s report
109
110
Note 34 – Subsidiary undertakings,
joint ventures and associates
Note 35 – Sensitivities
Note 36 – Additional disclosures in
196
201
respect of guaranteed securities 203
Note 37 – Transition to new
accounting standards
Note 38 – Acquisition of
Geronimo Energy LLC and
Emerald Energy Venture LLC
Note 39 – Post balance sheet events
203
208
208
121
123
124
125
126
127
130
132
135
137
140
141
145
146
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
Notes to the consolidated financial
statements – analysis of items in the
primary statements
Note 1 – Basis of preparation and recent
accounting developments
Note 2 – Segmental analysis
Note 3 – Revenue
Note 4 – Operating costs
Note 5 – Exceptional items and
remeasurements
Note 6 – Finance income and costs
Note 7 – Tax
Note 8 – Earnings per share (EPS)
Note 9 – Dividends
Note 10 – Discontinued operations
and assets held for sale
147
148
Note 11 – Goodwill
Note 12 – Other intangible assets
149
Note 13 – Property, plant and equipment 150
Note 14 – Other non-current assets
152
Note 15 – Financial and other investments 153
Note 16 – Investments in joint ventures
and associates
154
Note 17 – Derivative financial instruments 156
Note 18 – Inventories and current
Company financial statements
under FRS 101
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
158
159
160
161
163
164
164
165
174
176
177
178
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
181
182
182
195
108
Basis of preparation
Company accounting policies
209
Primary statements
Company balance sheet
211
Company statement of changes in equity 212
Notes to the Company financial
statements
213
Note 1 – Fixed asset investments
213
Note 2 – Debtors
Note 3 – Creditors
214
Note 4 – Derivative financial instruments 214
214
Note 5 – Investments
215
Note 6 – Borrowings
215
Note 7 – Share capital
Note 8 – Shareholders’ equity
and reserves
Note 9 – Parent Company guarantees
Note 10 – Audit fees
215
215
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National Grid plc Annual Report and Accounts 2019/20
Financial Statements
Statement of Directors’ responsibilities
Each of the Directors, whose names and functions are listed on
pages 66 – 67, confirms that:
• to the best of their knowledge, the Group financial statements
and the Parent Company financial statements, which have been
prepared in accordance with IFRSs as issued by the IASB and
IFRS as adopted by the European Union and UK GAAP FRS 101
respectively, give a true and fair view of the assets, liabilities,
financial position and profit of the Company on a consolidated and
individual basis;
• to the best of their knowledge, the Strategic Report contained in
the Annual Report and Accounts includes a fair review of the
development and performance of the business and the position of
the Company on a consolidated and individual basis, together with a
description of the principal risks and uncertainties that it faces; and
• they consider that the Annual Report and Accounts, taken as a
whole, are fair, balanced and understandable and provides the
information necessary for shareholders to assess the Company’s
position and performance, business model and strategy.
This Responsibilities Statement was approved by the Board and signed
on its behalf.
Directors’ Report
The Directors’ Report, prepared in accordance with the requirements
of the Companies Act 2006 and the UK Listing Authority’s Listing Rules,
and Disclosure Rules and Transparency Rules, comprising pages 1 – 107
and 216 – 252, was approved by the Board and signed on its behalf.
Strategic Report
The Strategic Report, comprising pages 1 – 62, was approved by the
Board and signed on its behalf.
By order of the Board
Alison Kay
Group General Counsel
& Company Secretary
17 June 2020
Company number: 4031152
The Directors are responsible for preparing the Annual Report and
Accounts, including the Group financial statements and the Parent
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 Group
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.
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National Grid plc Annual Report and Accounts 2019/20
Financial Statements
Independent auditor’s report
to the members of National Grid plc
Report on the audit of the financial statements
1. 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 2020 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 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 39 to 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 to the parent company financial statements.
The financial reporting framework that has been applied in the
preparation of the Group financial statements is applicable law, IFRSs
as adopted by the European Union and IFRSs as issued by the IASB.
The financial reporting framework that has been applied in the
preparation of the parent company financial statements is applicable
law and United Kingdom Accounting Standards, including FRS 101
“Reduced Disclosure Framework” (United Kingdom Generally Accepted
Accounting Practice).
2. 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. The non-audit services provided
to the Group and parent company for the year are disclosed in note 4
to the financial statements. 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.
3. Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year were:
• Impact of COVID-19;
• Impact of climate change on property, plant and equipment;
• Environmental provisions;
• Classification of exceptional items;
• Net pension obligations;
• Treasury derivative transactions; and
• IT user access controls.
Changes in our key
audit matters since
the prior year
These key audit matters are consistent with those we identified in the prior year except that:
• As a consequence of the COVID-19 outbreak, which has severely affected the UK and US economies, there are financial reporting
impacts particularly with respect to key judgments, estimates and disclosures within the financial statements. In addition, there
are potential financial control impacts as a consequence of remote working. This caused us to perform an updated audit risk
assessment. Accordingly we have identified this as a key audit matter; and
• The impact of climate change on property, plant and equipment has been identified as a new key audit matter due to the increase
in shareholder focus and legislation enacted during the year in relation to “net-zero” carbon by 2050 commitments by the UK
government and certain US states (specifically New York and Massachusetts) in which the Group operates. This has a potentially
significant impact on the Group’s gas businesses and accordingly the estimated useful lives of its assets.
Materiality
Scoping
The materiality that we used for the Group financial statements was £120 million, which represents 5.1% of adjusted profit before tax
(profit before tax excluding the impact of reported exceptional items and remeasurements) and 6.8% of statutory profit before tax.
Our scope covered six components of the Group in addition to procedures performed at the Group level. Of these, three were
subjected to a full-scope audit whilst the remaining three were subject to specific procedures on certain account balances.
Our scoping covered 99% of the Group’s revenue; 97% of the Group’s gross assets; and 99% of the Group’s gross liabilities.
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4. Conclusions relating to going concern, principal risks and viability statement
4.1. Going concern
We have reviewed the directors’ statement in note 1A 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 operate as a going concern for a period of at least
twelve months from the date of approval of the financial statements.
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 the COVID-19 pandemic and 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 the directors’
statement required by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent with our knowledge
obtained in the audit.
Going concern is the basis of
preparation of the financial
statements that assumes an
entity will remain in operation
for a period of at least twelve
months from the date of
approval of the financial
statements.
We confirm that we have nothing
material to report, add or draw
attention to in respect of these
matters.
4.2. 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:
• the disclosures on pages 23 – 25 that describe the principal risks, procedures to identify emerging risks, and an
explanation of how these are being managed or mitigated;
• the directors’ confirmation on page 26 that they have carried out a robust assessment of the principal and emerging
risks facing the Group, including those that would threaten its business model, future performance, solvency or
liquidity; or
• the directors’ explanation on page 26 as to how they have assessed the prospects of the Group, over what period
they have done so and why they consider that period to be appropriate, and their statement as to whether they have
a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due
over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications
or assumptions.
We are also required to report whether the directors’ statement relating to the prospects of the Group required by Listing
Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit.
Viability means the ability of the
Group to continue over the time
horizon considered appropriate
by the directors, which for
National Grid is 5 years.
We confirm that we have nothing
material to report, add or draw
attention to in respect of these
matters.
5. 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’). We consider both the likelihood of a risk 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.
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.
5.1. Impact of COVID-19
Key audit matter
description
Account balances: Trade and other receivables. Refer to note 19 to the financial statements. Pensions and other
post-retirement benefits. Refer to note 25 to the financial statements.
The COVID-19 pandemic has had a significant impact on the UK and US economies with consequences to the
judgements and estimates made by the Group, principally in relation to the recoverability of US customer receivables
and the valuation of certain pension assets. Refer to note 1E to the financial statements and the Audit Committee’s
discussion on pages 76 – 78.
In March 2020 the COVID-19 pandemic resulted in the UK government and several US states in which the Group operates imposing
lockdowns of their populations in order to stop the spread of the disease. This had a direct and severe impact on those economies
as consumer spending decreased and unemployment rose at unprecedented rates, in turn severely impacting global demand and
world financial markets. This has impacted the results of the Group for the 2020 financial year and is expected to continue to impact
the Group for the remainder of FY21.
Management reassessed their controls framework, which encompassed a review of the ability to operate existing controls remotely
and consideration of whether existing controls were suitable for addressing areas of new or increased risk. As a result of this
assessment, a new COVID-19 entity-level control was implemented to assess the completeness of accounting considerations
across the Group. Further, whilst there could be a potential impact upon a number of financial statement line items, management’s
assessment determined that the primary risks that arose from the COVID-19 pandemic related to the valuation of:
• provisions for bad and doubtful debts in the US due to the increased uncertainty over customers’ ability to settle amounts when
they fall due; and
• unquoted pension assets, particularly certain assets in the property and alternative investment portfolios which are subject to
increased valuation uncertainties.
In calculating bad and doubtful debts, the key judgement relates to the requirement to incorporate ‘expected credit losses’ into the
provision. This requires management to make forward-looking estimates of the expected level of losses which will be incurred on
any outstanding trade receivables. In the US, unlike in the UK, the Group has retail customers. The regulatory moratorium in the
US requiring the suspension of certain debt collection and customer termination activities has increased the level of estimation
uncertainty related to the bad debt calculation in respect of US trade receivables. Management has considered relevant forward-
looking macroeconomic data in the US, as well as the effect on incurred losses experienced in the aftermath of the financial crisis of
2008 and Superstorm Sandy in 2012 to inform their estimation. Accordingly, we have identified this as an area of ‘higher’ audit risk.
The key judgements related to the valuation of certain unquoted pension assets are discussed in the ‘net pension obligations’ key
audit matter.
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Financial Statements
Independent auditor’s report
to the members of National Grid plc continued
5. Key audit matters continued
5.1. Impact of COVID-19 continued
Key audit matter
description continued
A risk was also identified in relation to the impact of the pandemic on the Group’s cash flows and liquidity and accordingly its going
concern analysis. Management performed a detailed analysis of the potential impact of the COVID-19 pandemic on revenue, profit
and cash flows, in particular the impact on US customer collections. Possible cost mitigations were also considered. This detailed
analysis also included consideration of a number of downside scenarios as to the duration of the lockdown measures, and concluded
that no reasonably possible downside scenario existed wherein the Group would be unable to continue as a going concern.
How the scope of our
audit responded to the
key audit matter
Related disclosure of management’s and the Board’s assessment of the ability to continue as a going concern, inclusive of the
impact of the pandemic as a principal risk has been made in the Annual Report on page 25, and has been included as a
consideration in the viability statement on page 26.
We performed controls testing at year end on areas of heightened risk, including the incremental COVID-19 specific control, and
assessed whether management appropriately considered the related impact on existing controls.
Further, we held discussions within the Group and component engagement teams, with management, with our internal treasury,
pensions and tax specialists and within the wider Deloitte network to identify the areas of risk to the financial statements as a
result of the wider impacts of the pandemic. We used the outcome of these discussions to update our audit risk assessment and
challenge management’s impact assessment. Our responses in respect of specific areas identified as risks related to COVID-19
are outlined below. For these areas we also reviewed management’s disclosures in relation to the key judgements and estimates
made in assessing the impact of COVID-19, inclusive of sensitivity disclosures related to the areas of estimation uncertainty.
Provisions for bad and doubtful debts in the US: In challenging management’s assumptions related to the impact of the
COVID-19 pandemic on the provision for bad and doubtful debts on US retail customers, we considered the extent to which
the 2008 financial crisis and impact of Superstorm Sandy were reasonable data points to use in informing those estimates. We
challenged management’s judgement in respect of the point in the range of calculated possible outcomes which management
determined to be their best estimate.
Valuation of unquoted pension assets: We have described the procedures performed on the valuation of these pension assets
in our ‘net pension obligation’ key audit matter.
Liquidity and ability to continue as a going concern: We have assessed the going concern model prepared by management,
which considered the impact of COVID-19. We assessed the underlying assumptions, inclusive of mitigating cost actions being
taken based on our understanding of the business and knowledge of the industry in which the Group operates. Where impacts
were significant, our component audit teams were also involved in a more granular challenge of local management’s forecasts.
Further, we assessed management’s evaluation of liquidity and loan covenant compliance over the period of assessment to confirm
no breaches are anticipated over this timeframe.
Key observations
Our testing confirmed the incremental COVID-19 specific control operated effectively.
We concluded that management’s judgements and estimates made in determining the incremental level of expected credit losses
as a consequence of the COVID-19 pandemic are reasonable.
Our conclusion on the valuation of certain pension assets is set out in our ‘net pension obligation’ key audit matter.
Our conclusion on going concern is set out in the ‘Conclusions relating to going concern, principal risks and viability statement’
section of this report.
We concluded that management’s disclosures included in note 1E to the financial statements in respect of the key judgements and
areas of estimation uncertainty are appropriate.
5.2. The impact of climate change on property, plant and equipment
Key audit matter
description
Account balance: Property, plant and equipment. Refer to notes 1E and 13 to the financial statements and the Audit
Committee’s discussion on pages 76 – 78.
The UK government and certain of the US states in which the Group operates have enacted legislation and established targets in
respect of net zero carbon emissions by 2050. Accordingly climate change represents a strategic challenge for the Group, which
has also set targets for reducing direct greenhouse gas emissions by the same date.
Natural gas, when burned, emits carbon dioxide and is considered a greenhouse gas. Therefore, the strategic challenge relates to
the potential future use of the Group’s assets used to facilitate gas transmission services in the UK and gas distribution services in
the US in the period approaching 2050 and beyond. The remaining useful economic life of the Group’s gas assets is up to 50 years
in the UK and 80 in the US, extending well beyond the 2050 “net zero” commitment date. As described in note 13 to the financial
statements, the impact of changing the useful economic lives of all of the Group’s gas assets, such that they would be fully
depreciated by 2050, would be an increase in the annual depreciation expense of £188 million, and such that they would be fully
depreciated by 2060, would be an increase in the annual depreciation expense of £79 million.
As the continued use of natural gas as a primary energy source beyond 2050 appears to be in conflict with net zero targets and the
impact of shortening the useful lives of the gas assets to 2050 has a material impact on annual depreciation, we identified a ‘higher’
risk related to the financial statement impact of those commitments, specifically pinpointed to management’s judgement in
determining the useful lives of gas assets in the context of the net zero commitments.
As described in note 13 to the financial statements and in the Audit Committee Report (page 78), management performed a
detailed assessment of the potential uses for the Group’s gas assets as part of their consideration around whether developments in
the UK and US towards binding carbon reduction targets should trigger any changes to National Grid’s estimates, judgements or
disclosures, especially regarding gas asset lives. Management’s assessment included an overview of the legislative changes in the
UK and US, and an evaluation of the possible future use of National Grid’s networks in a net zero energy system.
Management’s best estimate of the useful economic lives of US gas assets, across all states in which it operates, is based on
the depreciable life identified through depreciation studies for each asset and are approved by the respective state regulator.
Accordingly, in the US, the IFRS asset depreciable lives are identical to those agreed by the Group’s regulators for regulatory
purposes. Management concluded it is probable that there will be a role for its US gas networks post 2050 under a range of
possible scenarios, and there is nothing at present to suggest that asset lives should be shortened at this point.
In the UK, National Grid Gas Transmission (NGGT) owns and operates the UK gas transmission network (NTS). Pipelines represent
the vast majority of the value that will be undepreciated by 2050. Having analysed the potential decarbonisation pathways,
management has identified numerous potential uses for the Group’s UK gas pipeline assets in a net zero energy system including
for the continued transmission of natural gas as a back-up fuel or in order for blue hydrogen to be produced alongside carbon
capture and storage; and the transmission of hydrogen or other low or zero carbon gases.
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Financial Statements | Independent auditor’s report
5.2. The impact of climate change on property, plant and equipment continued
Key audit matter
description continued
Management concluded that their best estimate for the useful economic life of the National Transmission System (NTS) pipeline assets
in the UK is 50 years (or until 2070) as this best represents when the assets will continue to support business operations in the UK.
How the scope of our
audit responded to the
key audit matter
Management and the Audit Committee determined that in light of the evolving legislative developments and increasing investor
attention, disclosure of a key judgement in relation to the potential future use of the Group’s gas assets post-2050 and disclosure
of the gas asset lives as a key estimate (note 1E to the financial statements), with appropriate sensitivity analysis (note 13 to the
financial statements) were appropriate.
We tested management’s internal control over the accounting for and disclosure of the potential impacts associated with the energy
transition and climate change.
We challenged management’s judgement that the useful lives of the Group’s gas assets extend beyond 2050 in light of the different
goals, commitments and legislation relating to net zero in the UK and the US states in which the Group operates by:
• reviewing potential strategic pathways to achieve net zero targets;
• obtaining and reviewing government plans in the US and UK for achieving net zero which we compared to the potential strategic
pathways;
• reviewing information from the Group’s regulators, including price controls in the UK and rate cases in the US, to consider
whether they presented any contradictory evidence;
• performing an assessment of the likelihood of occurrence of alternative scenarios for achieving net zero targets;
• considering the potential for re-purposing the Group’s gas networks for alternative uses, and in particular for transporting
hydrogen; and
• reviewing a number of external reports including: Hydrogen in a low-carbon economy and Net Zero – Technical report, produced
by the Committee on Climate Change; the UK’s draft integrated National Energy and Climate Plan (NECP) produced by the
Department for Business, Energy & Industrial Strategy; and searching for contradictory evidence in respect of management’s
judgements.
We utilised our sustainability specialists to review management’s key assumptions and to challenge the viability of some of the
technological advances presented within the strategic pathways. We also consulted with Deloitte specialists in other countries
regarding the suitability of existing gas infrastructure for transporting hydrogen.
We also reviewed the disclosures set out in note 1 to the financial statements and the sensitivity analysis set out in note 13 to the
financial statements regarding the carrying value of the useful economic lives of the Group’s gas assets.
Key observations
Our testing confirmed that the relevant controls over management’s assessment of the impact of the energy transition and climate
change operated effectively.
We observe that whilst some indicators do exist suggesting that the useful economic lives of the Group’s gas assets may be limited
to 2050, these are mitigated by other statements by governments and advisory bodies which suggest gas, and therefore gas
transmission and distribution assets, will continue to have a role beyond 2050. Furthermore, the emergence of a substantial
hydrogen infrastructure could introduce a longer term role for National Grid gas assets past 2050, if technological developments
allow the utilisation of existing assets in this infrastructure.
Whilst the targets, goals and ambitions in respect of net zero have now been formalised in legislation in the jurisdictions in which
the Group operates, there is widespread recognition that work needs to be done to define the possible future decarbonisation
pathways. We note that whilst state energy policy in the US states in which the Group operates is codified by the legislature, it is the
regulators who are charged with implementing state energy policies. We concluded it was reasonable to assume that there will be
a valuable use for the Group’s US gas assets beyond 2050 and that in the absence of any determination by the Group’s regulators,
it continues to be reasonable to use the regulatory asset lives for the calculation of depreciation in accordance with IFRS.
In the UK, we note that there is no alignment between the useful lives of the Group’s gas assets for IFRS depreciation purposes,
and the period of recovery of the regulatory asset value under regulation. Nevertheless, we conclude that it is reasonable to assume
that there will be a valuable use for these assets until 2070.
We consider the disclosures in note 1 to the financial statements and the sensitivity analysis in note 13 to the financial statements to
be appropriate.
We are satisfied that management’s other disclosures in the Annual Report relating to the uncertainty surrounding the future use of
the Group’s gas assets are consistent with the financial statements and our understanding of the business.
5.3. Environmental provisions
Key audit matter
description
Account balance: Provisions. Refer to notes 1E, 26 and 35 to the financial statements and the Audit Committee’s
discussion on pages 76 – 78.
At 31 March 2020 the Group has £2,071 million (2019: £1,639 million) of environmental provisions, of which £175 million (2019: £189
million) are in the UK and £1,896 million (2019: £1,450 million) in the US.
The Group’s environmental provisions relate to a number of sites owned and managed by the Group together with certain US sites
which are no longer owned. In the US the provision is in respect of 257 sites which vary in the level of clean-up required. Of the total
US environmental provisions of £1,896 million, more than half relates to three former sites which were identified by the Environmental
Protection Agency (EPA) as sites of significant contamination (Superfund sites). The EPA has the authority to force the parties
responsible for the contamination of these sites either to perform clean-ups or reimburse the government for work led by the EPA.
There are a number of estimation uncertainties across all of the sites. We identified a ‘higher’ risk in relation to certain sites which
are complicated because of their size, the number of parties involved and/or the stage of remediation the project is at. The
uncertainties that exist in relation to these sites include: the impact of regulation; the form, timing, extent and associated cost of
remediation needed; the methods and technologies used in remediation; the allocation of responsibility; and the discount rates
applied to the forecast cash flows.
There were significant increases in the provisions recorded for two US Superfund sites in the year and a small reduction at the third.
We determined that the estimation of the undiscounted cash outflows specific to these sites was the most significant and sensitive
to a change in reasonably possible outcomes.
In respect of the US Superfund site with the most significant increase in provision, there were two reasons for management’s
reassessment of the estimated cash outflows. An updated design report was received in the year which indicated that the work
required to remediate the site was more extensive than had previously been expected, resulting in a higher estimated total cost. In
addition, following an EPA order management increased its estimate of the share of the costs the Group would bear amongst the
Potentially Responsible Parties (PRPs).
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Financial Statements
Independent auditor’s report
to the members of National Grid plc continued
5. Key audit matters continued
5.3. Environmental provisions continued
Key audit matter
description continued
Regarding the other Superfund site with a significantly increased provision, an updated survey clarified the extent of remediation
work which needs to be performed, leading to an increase in the Group’s share of the expected costs.
How the scope of our
audit responded to the
key audit matter
Management are required to make judgements in selecting an appropriate discount rate which reflects changes in UK gilt and US
treasury rates as current market assessments of the time value of money. The Group decreased the real discount rates applied to
the undiscounted cash flows from 1% in the prior year to 0.5% for both the UK and the US provisions.
We tested the controls over the compilation of forecast cash flows and the determination of the discount rate.
We performed detailed risk assessments to categorise US sites based on size and the level of estimation uncertainty, determined
by the stage of the remediation and the extent of work required. In respect of US sites other than the Superfund sites, we worked
with our internal environmental specialists to assess cash flow estimates across a sample of sites. In order to assess the
completeness of the year end liabilities we also completed public domain searches on Federal databases across all Group
subsidiaries to determine whether any relevant costs or applicable sites were omitted.
With respect to the US Superfund sites, we agreed underlying cost assumptions to third-party build information, approved
engineering design reports and other benchmarks and utilised our internal environmental provision specialists to assist us in
evaluating managements’ key assumptions. We also considered information obtained from the Group’s legal advisors and
relevant EPA correspondence in our evaluation of the recorded provisions.
We performed additional procedures on the site with the most significant increase in provision. Specifically relating to the
judgement over the estimated allocation of total remediation costs, we made enquiries of the Group’s internal legal counsel and
obtained analysis directly from external legal counsel. With the assistance of our internal environmental specialists, we used this
additional information to determine independently a range of potential outcomes and allocations of remediation costs at the site,
and used this to assess management’s estimate.
We challenged the methodology that management has adopted for calculating the discount rate with the support of our internal
valuation specialists. In addition, we independently calculated an appropriate discount rate range and used this to assess
management’s rate.
Key observations
Our testing confirmed that the relevant controls over the compilation of forecast cash flows and the determination of the discount
rate were operating effectively.
We found the total cost assumptions associated with all of the tested sites to be reasonable, including the US Superfund sites. In
respect of the US Superfund sites we are satisfied that management’s estimate of the proportion of costs expected to be allocated
to the Group are within our independently calculated range.
We consider the decrease in real discount rates from 1% to 0.5% applied in the UK and US to be reasonable based on the
movement in gilts and treasury yields.
We noted that the assumptions and judgments that are required to formulate the provisions mean that the range of possible
outcomes is broad. In respect of the Superfund site with the most significant increase in provision, as a consequence of the
developments in the year, the level of uncertainty regarding the Group’s share of final costs has reduced. However, there continues
to be a risk of further increases and we note that the remediation at the other two Superfund sites is less advanced and accordingly
at risk of future increases.
We are satisfied with the Group’s disclosures of environmental provisions in light of the underlying assumptions and accounting
judgments made.
5.4. Classification of exceptional items
Key audit matter
description
Account balance: Operating costs (included in the exceptional items and remeasurements column). Refer to notes 1E
and 5 to the financial statements and the Audit Committee’s discussion on pages 76 – 78.
The Consolidated Income Statement separately identifies 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 is one of the principal measures which the Board uses to review the
performance of the Group’s segments. In addition, underlying profit, which is derived from adjusted profit, is another widely used
measure and is used in determining aspects of executive remuneration. Accordingly, the classification of items in the middle column
is important for users of the financial statements. Consistency in the identification and presentation of these items is also important
to ensure comparability of year-on-year reporting in the Annual Report and Accounts.
There is judgement in the classification and accuracy of the amounts determined to be exceptional in accordance the Group’s
exceptional items framework and any amounts so classified impact the adjusted profit of the Group.
In the current year management classified the following items as exceptional charges in the middle column:
• Environmental charges of £402 million – Relating to the re-evaluation of estimates of total remediation costs and cost sharing
allocations borne by the Group for the three US Superfund sites, as well as the impact of the change in the real discount rate
applied to the estimated undiscounted cash flows for all environmental provisions; and
• Deferred tax arising on the reversal of the previously enacted reduction in the UK corporation tax rate of £192 million.
The key judgements related to the calculation of the environmental charges have been discussed in the ‘environmental provisions’
key audit matter.
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5.4. Classification of exceptional items continued
How the scope of our
audit responded to the
key audit matter
We have tested the controls over the classification and accuracy of the amounts presented as exceptional items in the middle column.
We have obtained the Group’s exceptional items framework and assessed the reasonableness of the framework for identifying items
to be classified as exceptional. We assessed whether the classification of each of the items classified as exceptional complies with
the approved framework and ESMA guidance and is reasonable. In making this assessment we also considered the consistency of
application of the framework year on year. We substantiated the nature and quantum of significant individual items by examining
appropriate evidence.
We also considered other items which were not identified as exceptional in the context of management’s exceptional items
framework as part of our challenge of management’s conclusions thereon, such as the provision for bad and doubtful debts in the
US which was increased in the current year on account of the impact of COVID-19 and the related cessation of certain collection
activities and disconnection of customers for non-payments.
Key observations
Our testing confirmed that the relevant controls over the classification and accuracy of the amounts presented as exceptional items
in the middle column were found to be operating effectively.
We determined that the amounts disclosed as exceptional were so classified in accordance with the Audit Committee approved
exceptional items framework and that the framework has been applied consistently with prior years.
Specifically, the classification of material increases in environmental provisions at the three Superfund sites and the impact on
deferred tax balances of a change in tax rates have been classified as exceptional in prior years. We concur that the additional US
bad debt charge should not be exceptional as it would represent just part of an amount calculated in accordance with IFRS.
5.5. Net pension obligations
Key audit matter
description
Account balance: Pensions and other post-retirement benefit obligations. Refer to notes 1E, 25 and 35 to the financial
statements and the Audit Committee’s discussion on pages 76 – 78.
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.
There are significant assumptions used in the valuations of the defined benefit obligations, which as at 31 March 2020 represent a
liability of £24.6 billion (2019: £24.9 billion), and valuations of unquoted pension assets (‘unquoted assets’), which as at 31 March
2020 make up £11.4 billion (2019: £8.4 billion) out of scheme assets of £23.7 billion (2019: £24.8 billion).
The critical 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 obligations. Management uses external actuaries to assist in determining these
assumptions. Accordingly, we have identified certain of these assumptions to be ‘higher’ audit risks.
Unlike the fair value of other assets that are readily observable and therefore more easily independently corroborated, the valuation
of unquoted pension assets classified is inherently subjective. As such there is significant judgement in determining the fair value
of these assets including the selection of the valuation methodology and other critical assumptions. The COVID-19 pandemic has
resulted in the valuation of certain property assets being subject to increased uncertainty. In addition the valuation of certain
unquoted investments including those held in private equity portfolios are subject to an unusually high level of uncertainty due to the
most recent valuations on them being performed prior to the significant economic impacts of the COVID-19 pandemic. For these
investments, management engaged external experts to assess the economic impact of COVID-19 on the asset valuations as at year
end, including property specialists who assessed the value of the property portfolio held within pension assets. Accordingly, we
have identified this as an area of ‘higher’ audit risk.
In the UK, the Group entered into two buy-in policies in the year. The Section A policy was entered into in August 2019, with the
Section B policy completing in November 2019. The transactions involve the transfer of certain pension assets in the form of gilts
and cash, valued at £2.8 billion and £1.6 billion respectively, in return for bulk annuity policies, with the intention of mitigating
longevity risk. The transactions represent part of the Group’s long term de-risking strategy, of a similar nature to the longevity swap
entered into in 2018. Under a buy-in transaction the ultimate obligation to pay the members remains with the scheme and is hence
retained within the Group’s pension obligations; the bulk annuity is considered a qualifying insurance policy and is recognised at the
valuation of the obligation it covers as an asset to the scheme. At the time of the transactions, the member obligations to which the
policies relate were valued at £2.4 billion for Section A and £1.3 billion for Section B resulting in the recognition of actuarial losses of
£700 million being recognised in Other Comprehensive Income, as disclosed in note 25 to the financial statements.
How the scope of our
audit responded to the
key audit matter
We tested the controls over the valuation of unquoted pension assets and over the critical assumptions used in determining the
valuation of the pension obligations.
We engaged internal actuarial experts to assist in testing the discount rates used in calculating the pension obligations. We
independently calculated appropriate discount rates and compared these to management’s rates.
Our actuarial experts also assisted us in benchmarking and challenging the other assumptions used by management in determining
the value of pension obligations particularly focusing on inflation, salary growth and mortality rates; this 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 considered the competence, capability and objectivity of the independent actuaries engaged by the Group to
perform valuations of the relevant schemes and where applicable, of unquoted assets.
We engaged internal specialists to challenge management’s valuation of certain unquoted scheme assets. Our work included
assessing the reasonableness of the valuation methodologies applied, reviewing publically available information on these assets,
comparing the valuations to internal benchmarks and confirmation of inputs used by management to determine the asset values.
Further, our actuarial experts assisted us with the assessment of management’s assumptions and valuation methodology related to
the buy-ins and we consulted with technical experts as to the correct accounting treatment.
Key observations
Our testing confirmed that the relevant controls over the valuation of unquoted pension assets and over the critical assumptions
used in determining the valuation of the pension obligations operated effectively.
We judge the discount rates and other key actuarial assumptions used by management to be within our internally developed
reasonable range or consistent with our internally developed assumptions.
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to the members of National Grid plc continued
5. Key audit matters continued
5.5. Net pension obligations continued
Key observations
continued
We note that the recognition of the actuarial loss on the buy-in transactions, representing the difference between the price paid and
the value of the obligations covered by the buy-in policies is appropriately recognised in OCI as it is treated as a change in the fair
value of plan assets. We assessed the appropriateness of the related disclosures in note 25 to the financial statements and
consider them to be reasonable.
We consider management’s valuations of the unquoted investments to be reasonable and the disclosures in note 1E to the financial
statements regarding the estimation uncertainty and in note 35 to the financial statements regarding the sensitivity of the pension
assets balance to the valuation of unquoted assets to be appropriate.
5.6. 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.
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 interest rate swaps. The Group designates derivatives in hedge relationships where they
judge this to meet the requirements of IFRS 9. Due to the technical nature of this assessment, we have identified it as a ‘higher’
audit risk. At 31 March 2020 the Group had derivative financial assets of £1,342 million (31 March 2019: £1,153 million) and
derivative financial liabilities of £1,334 million (31 March 2019: £1,183 million).
The valuation of the derivative portfolio requires management to make certain assumptions and judgements in particular around the
valuation methodologies adopted and the discount rate to be applied to forecast cash flows.
The portfolio also includes ‘level 3’ derivative financial liabilities of £245 million (31 March 2019: £216 million) for which unobservable
inputs that are significant to the fair value measurement must be used in the valuation models. This results in management having
to make estimates in relation to unobservable inputs, which increase the complexity and level of estimation uncertainty, and there is
judgement involved in determining the methodology used to fair value these derivatives. Accordingly, we have identified this as an
area of ‘higher’ audit risk.
How the scope of our
audit responded to the
key audit matter
We have tested the controls over the recording and valuation of derivative financial instruments. This has included testing of the
review controls performed by management over the valuations and its 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. 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 disclosures within the financial statements.
We assessed whether the representation of items in the cash flow statement to reflect the change in accounting policy have been
appropriately disclosed.
Key observations
Our testing confirmed that the relevant controls over the recording and valuation of derivative financial instruments were effective.
We conclude that the valuation of derivatives and the Group’s use of hedge accounting is appropriate.
We are satisfied that the disclosures in respect of the cash flow statement accounting policy change, and the amounts represented
in the prior year to reflect the updated policy, are appropriate.
5.7. IT user access controls
Key audit matter
description
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 76 – 78.
In the past two financial years (ended on 31 March 2019 and 31 March 2018), we identified 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 continued executing on their remediation programme commenced during the year ended 31 March 2018 in order to
strengthen the IT control framework, and substantially completed the programme.
The existence of deficiencies during the year results in an increased risk that data and reports from the affected systems are not reliable.
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.
How the scope of our
audit responded to the
key audit matter
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 throughout the year could feasibly have had on the affected systems and account
balances including assessing the likelihood of inappropriate user access impacting the financial statements. Further, we tested
controls implemented by management to identify instances of the use of inappropriate access, as well as mitigating controls
included within management’s remediation programme. Where no such controls existed, we extended the scope of our audit
such that we have not placed reliance on controls for information produced or held in the impacted systems.
Key observations
A number of the deficiencies identified as unremediated in the prior year were remediated by year-end. We do not consider the
remaining deficiencies to be significant and we found the mitigating controls implemented by management operated effectively.
Due to the fact that the newly remediated controls did not operate for the entire year, we conducted a largely substantive audit in
the areas impacted by the access deficiencies. We continued to rely on controls in certain areas where the IT systems were not
impacted by the access deficiencies.
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6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a
reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in
evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements
Parent company financial statements
Materiality
£120 million (2019: £124 million).
£100 million (2019: £100 million).
Basis for
determining
materiality
Our determined materiality represents 5.1% of adjusted profit
before tax and 6.8% of statutory profit before tax.
1.2% of net assets.
Adjusted profit before tax is profit before tax, exceptional items and
remeasurements as disclosed in the consolidated income
statement. Prior year materiality was determined on a similar basis.
Rationale for
the benchmark
applied
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.
As the Company is non-trading, 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.
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, or where the impact of volatility may
result in the recognition of material income or charges in a
particular 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 the key measure applied in the
prior year.
Group materiality
£120m
Component
materiality range
£18m to £69m
Audit Committee
reporting threshold
£6m
Key:
Adjusted PBT £2,346m
Group materiality
6.2. Performance materiality
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. Group performance materiality was set at £92.0 million for the 2020 audit (2019: £86.8 million), or 77% of Group
materiality (2019: 70%). In determining to increase performance materiality, we considered the following factors:
• our cumulative experience from prior year audits;
• the level of corrected and uncorrected misstatements identified;
• our risk assessment, including our understanding of the entity and its environment; and
• our assessment of the Group’s overall control environment.
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to the members of National Grid plc continued
6. Our application of materiality continued
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £6.0 million (2019: £6.2 million), as well as differences
below that threshold which, 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.
7. An overview of the scope of our audit
The following significant components of the Group were identified in our audit planning: UK Electricity Transmission, UK Gas Transmission 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.
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 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 auditors during the planning and performance stages of our audit alongside frequent remote communication and review of their work.
In response to the COVID-19 pandemic which limited our ability to make component visits after the year end, frequent calls were held between the Group and
component teams and remote access to relevant documents was provided.
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, 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 UK Electricity
Transmission and UK Gas Transmission components.
In addition to the work performed at a component level the Group audit team also performed 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 led the work in connection with the impact of climate change on the useful lives of the Group’s gas assets and co-ordinated
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.
Revenue (%)
Gross assets (%)
Gross liabilities (%)
Full audit scope 95%
Specified audit
procedures 4%
Review at group level 1%
Full audit scope 96%
Specified audit
procedures 1%
Review at group level 3%
Full audit scope 98%
Specified audit
procedures 1%
Review at group level 1%
8. 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 9.8.10R(2) do not properly disclose a departure
from a relevant provision of the UK Corporate Governance Code.
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9. 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.
10. 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 and non-compliance with laws and regulations 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.
11. 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.
11.1. 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, we considered
the following:
• the nature of the industry and sector, control environment and business performance including the design of the Group’s remuneration policies, key drivers for
directors’ remuneration, bonus levels and performance targets;
• results of our enquiries of management, internal audit and the Audit Committee about their own identification and assessment of the risks of irregularities;
• any matters we identified having obtained and reviewed the Group’s documentation of their 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;
• the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations;
• the matters discussed among the audit engagement team including significant component audit teams and involving relevant internal specialists, including
tax, pensions, IT, and treasury specialists regarding how and where fraud might occur in the financial statements and any potential indicators of fraud. The
engagement team includes audit partners and staff who have extensive experience of working with companies in the same sectors as National Grid operates,
and this experience was relevant to the discussion about where fraud risks may arise. The discussion was also carried out across the engagement team
specific to the potential fraud implications of COVID-19 in relation to added financial pressures as well as in relation to increases in remote working.
In common with all audits under ISAs (UK), we are also required to identify management override as a significant risk and to perform specific procedures to
respond to that risk.
We also obtained an understanding of the legal and regulatory frameworks that the Group operates in, focusing on provisions of those laws and regulations that
had a direct effect on the determination of material amounts and disclosures in the financial statements. 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.
In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial statements but compliance with which may be
fundamental to the Group’s ability to operate or to avoid a material penalty. These included the Group’s operating licences and environmental regulations.
11.2. 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 provisions of relevant laws and regulations
described as having a direct effect on the financial statements;
• enquiring of management, the Audit Committee and in-house 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 relevant regulatory authorities;
• 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.
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to the members of National Grid plc continued
14. Other matters
14.1. Auditor tenure
We became independent and commenced our audit transition on
1 January 2017. Following the recommendation of the audit committee,
we were appointed by the Shareholders at the Annual General Meeting
on 31 July 2017 to audit the financial statements for the year ending
31 March 2018 and subsequent financial periods.
The period of total uninterrupted engagement including previous
renewals and reappointments of the firm is three years, covering the
years ending 31 March 2018 to 31 March 2020.
14.2. 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).
15. 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
17 June 2020
Report on other legal and regulatory requirements
12. 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
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.
13. Matters on which we are required to report by exception
13.1. 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.
13.2. 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.
120
Consolidated income statement
for the years ended 31 March
Financial Statements
2020
Continuing operations
Revenue
Provision for bad and doubtful debts
Other operating costs
Operating profit/(loss)
Finance income
Finance costs
Share of post-tax results of joint ventures and associates
Profit/(loss) before tax
Tax
Profit/(loss) after tax from continuing operations
Profit/(loss) after tax from discontinued operations
Total profit/(loss) for the year (continuing and discontinued)
Attributable to:
Equity shareholders of the parent
Non-controlling interests from continuing operations
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)
2019
Continuing operations
Revenue
Provision for bad and doubtful debts
Other operating costs
Operating profit/(loss)
Finance income
Finance costs
Share of post-tax results of joint ventures and associates
Profit/(loss) before tax
Tax
Profit/(loss) after tax from continuing operations
Profit/(loss) after tax from discontinued operations
Total profit/(loss) for the year (continuing and discontinued)
Attributable to:
Equity shareholders of the parent
Non-controlling interests from continuing operations
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
14,540
(234)
(10,999)
3,307
70
(1,119)
88
2,346
(433)
1,913
5
1,918
1,917
1
–
–
(527)
(527)
(16)
(48)
(1)
(592)
(47)
(639)
(14)
(653)
(653)
–
Before exceptional
items and
remeasurements
£m
Exceptional items
and remeasurements
(see note 5)
£m
14,933
(181)
(11,310)
3,442
73
(1,066)
40
2,489
(488)
2,001
57
2,058
2,055
3
–
–
(572)
(572)
15
(91)
–
(648)
149
(499)
(45)
(544)
(544)
–
Notes
2(a),3
4
4,5
2(b)
5,6
5,6
5,16
2(b),5
5,7
5
10
8
8
8
8
Notes
2(a),3
4
4,5
2(b)
5,6
5,6
10,16
2(b),5
5,7
5
10
8
8
8
8
Total
£m
14,540
(234)
(11,526)
2,780
54
(1,167)
87
1,754
(480)
1,274
(9)
1,265
1,264
1
36.8
36.6
36.5
36.3
Total
£m
14,933
(181)
(11,882)
2,870
88
(1,157)
40
1,841
(339)
1,502
12
1,514
1,511
3
44.3
44.1
44.6
44.4
121
National Grid plc Annual Report and Accounts 2019/20 Consolidated income statement
for the years ended 31 March continued
2018
Continuing operations
Revenue
Provision for bad and doubtful debts
Other 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/(loss) after tax from discontinued operations
Total profit for the year (continuing and discontinued)
Attributable to:
Equity shareholders of the parent
Non-controlling interests from continuing operations
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
(36)
(11,757)
3,457
127
(1,128)
44
2,500
(584)
1,916
145
2,061
2,060
1
–
–
36
36
–
119
5
160
1,473
1,633
(143)
1,490
1,490
–
Notes
2(a)
4
4,5
2(b)
6
5,6
10
2(b),5
5,7
5
10
8
8
8
8
Total
£m
15,250
(36)
(11,721)
3,493
127
(1,009)
49
2,660
889
3,549
2
3,551
3,550
1
102.5
102.1
102.6
102.1
122
National Grid plc Annual Report and Accounts 2019/20Financial Statements Consolidated statement of comprehensive income
for the years ended 31 March
Financial Statements
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 (losses)/gains on pension assets and post-retirement benefit obligations
Net losses on equity instruments designated at fair value through other comprehensive income
Net (losses)/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
Net losses in respect of cost of hedging
Net losses on available-for-sale investments
Transferred to profit or loss on sale of available-for-sale investments
Net (losses)/gains on investment in debt instruments measured at fair value
through other comprehensive income
Share of other comprehensive (losses)/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 (loss)/income for the year, net of tax from continuing operations
Other comprehensive income for the year, net of tax from discontinued operations¹
Other comprehensive (loss)/income for the year, net of tax
Total comprehensive income for the year from continuing operations
Total comprehensive (loss)/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
2020
£m
1,274
2019
£m
1,502
25
7
7
10
10
(724)
(9)
(3)
(17)
212
(541)
551
(128)
(78)
–
–
(15)
(5)
35
360
(181)
6
(175)
1,093
(3)
1,090
1,091
(3)
1,088
68
–
7
(13)
(15)
47
347
(40)
(66)
–
–
2
1
12
256
303
36
339
1,805
48
1,853
1,801
48
1,849
2018
£m
3,549
1,313
–
–
–
(530)
783
(505)
16
–
(30)
(73)
–
–
33
(559)
224
147
371
3,773
149
3,922
3,773
149
3,922
2
4
–
1. The other comprehensive income from discontinued operations relates to the items of other comprehensive income of Cadent (investment through Quadgas HoldCo Limited). Refer to note
10 for details.
123
National Grid plc Annual Report and Accounts 2019/20 Consolidated statement of changes in equity
for the years ended 31 March
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 15
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
At 1 April 2019
Profit for the year
Other comprehensive (loss)/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
Tax on share-based payments
Cash flow hedges transferred to the statement of
financial position, net of tax
Share
capital
£m
Share
premium
account
£m
Retained
earnings
£m
Other
equity
reserves1
£m
Total
shareholders’
equity
£m
Non-
controlling
interests
£m
449
1,324
22,582
(3,987)
20,368
–
–
–
–
3
–
–
–
–
–
–
–
–
–
(3)
–
–
–
–
–
3,550
925
4,475
(4,487)
–
(1,017)
33
(5)
16
2
–
(553)
(553)
–
–
–
–
–
–
–
452
–
452
1,321
21,599
(4,540)
–
(268)
72
1,321
21,331
(4,468)
–
–
–
–
6
–
–
–
–
–
–
–
–
(7)
–
–
–
–
458
1,314
–
–
–
–
12
–
–
–
–
–
–
–
–
–
(13)
–
–
–
–
–
1,511
89
1,600
(1,160)
–
18
(2)
27
–
21,814
1,264
(509)
755
(892)
–
17
(6)
19
3
–
–
249
249
–
–
–
–
–
(18)
(4,237)
–
333
333
–
–
–
–
–
–
(15)
3,550
372
3,922
(4,487)
–
(1,017)
33
(5)
16
2
18,832
(196)
18,636
1,511
338
1,849
(1,160)
(1)
18
(2)
27
(18)
19,349
1,264
(176)
1,088
(892)
(1)
17
(6)
19
3
(15)
16
1
(1)
–
–
–
–
–
–
–
–
16
–
16
3
1
4
–
–
–
–
–
–
20
1
1
2
–
–
–
–
–
–
–
Total
equity
£m
20,384
3,551
371
3,922
(4,487)
–
(1,017)
33
(5)
16
2
18,848
(196)
18,652
1,514
339
1,853
(1,160)
(1)
18
(2)
27
(18)
19,369
1,265
(175)
1,090
(892)
(1)
17
(6)
19
3
(15)
At 31 March 2020
470
1,301
21,710
(3,919)
19,562
22
19,584
1. For further details of other equity reserves, see note 28.
2. Included within the share premium account are costs associated with scrip dividends.
124
National Grid plc Annual Report and Accounts 2019/20Financial Statements Consolidated statement of financial position
as at 31 March
Financial Statements
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
11
12
13
14
25
15
16
17
18
19
15
17
20
10
21
17
22
23
26
21
17
24
23
7
25
26
27
28
2020
£m
6,233
1,295
2019
£m
5,869
1,084
48,770
43,913
354
1,849
543
995
1,249
61,288
549
2,986
102
1,998
93
73
–
5,801
67,089
(4,072)
(380)
(3,602)
(76)
(86)
(348)
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)
(8,564)
(9,129)
(26,722)
(24,258)
(954)
(891)
(1,082)
(4,184)
(2,802)
(2,306)
(833)
(808)
(933)
(3,965)
(1,785)
(1,883)
(38,941)
(34,465)
(47,505)
(43,594)
19,584
19,369
470
1,301
21,710
(3,919)
19,562
22
458
1,314
21,814
(4,237)
19,349
20
19,584
19,369
The consolidated financial statements set out on pages 121 to 208 were approved by the Board of Directors on 17 June 2020 and were signed on its
behalf by:
Sir Peter Gershon Chairman
Andy Agg Chief Financial Officer
National Grid plc
Registered number: 4031152
125
National Grid plc Annual Report and Accounts 2019/20 Consolidated 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 operating activities – discontinued operations
Cash flows from investing activities
Acquisition of financial investments
Acquisition of Geronimo and Emerald
Investments in joint ventures and associates
Loans to joint ventures and associates
Disposal of financial investments
Disposal of 61% interest in UK Gas Distribution
Disposal of interests in Quadgas HoldCo Limited
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 movements in derivatives¹
Net cash flow (used in)/from investing activities – continuing operations
Net cash flow used in investing activities – discontinued operations
Cash flows from financing activities
Purchase of treasury shares
Proceeds from issue of treasury shares
Purchase of own shares
Proceeds received from loans
Repayment of loans
Payments of lease liabilities
Net movements in short-term borrowings
Net movements in derivatives¹
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 in cash and cash equivalents
Exchange movements
Cash and cash equivalents at start of year
Cash and cash equivalents at end of year
Notes
2020
£m
2019
£m
2018
£m
2(b)
2,780
2,870
3,493
5
10
38
10
10
29(c)
29(c)
29(c)
29(c)
29(c)
29(c)
10
29(a)
20
527
1,640
19
269
(169)
(92)
(60)
4,914
(199)
4,715
(97)
(108)
(139)
(82)
–
63
–
1,965
(317)
(4,583)
68
75
73
7
(223)
572
1,588
27
40
(110)
(123)
(400)
4,464
(75)
4,389
(71)
(89)
–
(143)
(31)
18
–
–
(306)
(3,635)
38
68
68
822
(412)
(3,201)
(3,602)
6
–
16
(6)
4,218
(3,253)
(121)
(424)
(187)
(957)
(892)
(1,606)
–
(183)
4
252
73
156
–
17
(2)
2,932
(1,969)
(70)
179
35
(914)
(1,160)
(952)
–
(80)
3
329
252
(36)
1,530
16
118
(206)
(239)
26
4,702
8
4,710
(207)
(2)
–
(129)
(68)
134
(20)
–
(173)
(3,738)
10
69
30
5,953
330
2,396
171
(1,017)
33
(5)
1,941
(2,156)
(71)
(764)
(267)
(853)
(4,487)
(7,646)
(231)
(807)
(3)
1,139
329
1. Certain derivative balances have been represented for all periods presented to reflect a reclassification from financing activities to investing activities to reflect a change in accounting policy
(see note 1 for details).
126
National Grid plc Annual Report and Accounts 2019/20Financial 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.
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 17 June 2020.
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 2020 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 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
As at the date of approving these financial statements, the impact of
COVID-19 on the Group’s operations is continually being assessed and
subject to rapid change. The Directors have assessed the principal risks
discussed on pages 24 – 25, including by modelling both a base case
and a reasonable worst case scenario. The reasonable worst-case
scenario covers the cash flow impact associated with an extended
lockdown for a period of 12 months across both the UK and US.
The main cash flow impacts identified in the reasonable worst-case
scenario are:
• a significant reduction in cash collections over an extended
12-month period driven by lower customer demand and increased
bad debt in our US businesses;
• additional working capital required to fund payment term extensions
and charge deferrals in the UK electricity market, intended to help
customers and end-user consumers;
• one-off increases in other costs such as cleaning, safety equipment
and IT; offset by
• a reduction in non-essential capital expenditure across the
Group driven by increased absenteeism, supply chain issues
and difficulty in accessing sites; and
• a reduction in discretionary spend across all areas (e.g.
recruitment, travel and consultancy spend).
As part of their analysis, the Board also considered the following
potential levers at their discretion to improve the position identified by
the reasonable worst-case scenario in the event that the debt capital
markets are not accessible:
• further significant changes in the phasing of the Group’s capital
programme with elements of non-essential works and programmes
delayed beyond June 2021;
• a number of further reductions in operating expenditure across
the Group primarily related to workforce cost reductions in both
the UK and the US; and
• the payment of dividends to shareholders.
Having considered the reasonable worst-scenario and further levers at
the Board’s discretion, the Group continues to have headroom against
the Group’s committed facilities identified in note 33 to the financial
statements.
In addition to the above, the ability to raise new financing was separately
included in the analysis and the Directors noted the £0.9 billion debt
issuances completed in April 2020 (disclosed in note 21 to the financial
statements) as evidence of the Group’s ability to continue to have access
to the debt capital markets if needed. Other factors considered by the
Board as part of their Going Concern assessment included the potential
impact of Brexit trade talks, the Group’s various ongoing rate case
determinations in the UK and US alongside inherent uncertainties in
cash flow forecasts (such as the impact of storms in our US business).
Based on the above, the Directors have concluded the Group is well
placed to manage its financing and other business risks satisfactorily,
and have a reasonable expectation that the Group will have adequate
resources to continue in operation for at least 12 months from the
signing date of these consolidated financial statements. They therefore
consider it appropriate to adopt the going concern basis of accounting
in preparing the financial statements.
127
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
1. Basis of preparation and recent accounting developments continued
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.
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.
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.
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
At the end of June 2019, we completed the disposal of our retained
39% interest in the UK Gas Distribution business (held through
Quadgas) that was classified as held for sale. We have treated the
results and cash flows of Quadgas as a discontinued operation in
the consolidated income statement and consolidated cash flow
statement. Refer to note 10 for further details.
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).
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;
• the judgement that notwithstanding legislation enacted and targets
established during the year ended 31 March 2020 committing
the UK, New York State and Massachusetts to achieving net
zero greenhouse gas emissions by 2050, these do not trigger
a reassessment of the remaining useful economic lives of our
gas network assets (see estimate below and note 13); and
• following the legal separation of the Electricity System Operator
on 1 April 2019, we concluded that the Electricity System Operator
acts as an agent in respect of certain Transmission Network Use
of Service revenues, principally those collected on behalf of the
Scottish and Offshore transmission operators, as detailed in note 3.
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:
• the valuation of liabilities for pensions and other post-retirement
benefits (see note 25); and
• the cash flows applied in determining the environmental provisions,
in particular relating to three US Superfund sites (see note 26).
In light of the current ongoing impact of the COVID-19 pandemic,
valuations of certain assets and liabilities are necessarily more
subjective. In particular, two further areas of estimation uncertainty
impacting the Group’s position as at 31 March 2020 have been
identified:
• the valuation of certain pension assets, in particular unquoted
equities, properties and diversified alternatives, in light of the
volatile economic markets (see note 25); and
• the recoverability of customer receivables, particularly in relation
to US retail customers, in light of the suspension of debt collection
activities and customer termination activities (see note 19).
In addition, we also highlight the estimates made regarding the useful
economic lives of our gas network assets due to the length over which
they are being depreciated, the potential for new and evolving
technologies over that period, and the range of potential pathways for
meeting net zero targets (see note 13 for details and sensitivity analysis).
In order to illustrate the impact that changes in assumptions for
the valuation of pension assets and liabilities and cash flows for
environmental provisions could have on our results and financial
position, we have included sensitivity analyses in note 35. Information
on what we believe a reasonably possible range of outcomes to be
on recoverability of customer receivables are included in note 19.
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National Grid plc Annual Report and Accounts 2019/20Financial Statements 1. Basis of preparation and recent accounting developments continued
H. New IFRS accounting standards and interpretations not
yet adopted
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:
• IFRS 17 ‘Insurance Contracts’;
• Amendments to IFRS 3 ‘Business Combinations’;
• Amendments to the References to the Conceptual Framework;
• Amendments to IAS 1 and IAS 8: Definition of material; and
• Amendments to IAS 1 ‘Presentation of Financial Statements’.
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.
F. Accounting policy choices
IFRS provides certain options available within accounting standards.
Choices we have made, and continue to make, include the following:
• Presentational formats: we use the nature of expense method for our
income statement and aggregate our statement of financial position
to net assets and total equity. In the income statement, we present
subtotals of total operating profit, profit before tax and profit after
tax from continuing operations, together with additional subtotals
excluding exceptional items and remeasurements as a result of the
three columnar 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)).
• Cash flow statement: Following a review in the year, we have
changed our accounting policy in relation to the presentation
of derivatives in the cash flow statement, which has resulted in
£412 million of cash outflows for 2019 and £330 million of cash
inflows from 2018 to be presented as investing activities rather
than financing activities. The reclassified cash flows are in relation
to derivatives associated with our net investment hedges, and given
they are designated in a hedge relationship, the Group has decided
to present them together with the underlying hedged item rather
than as part of our overall financing activities.
G. New IFRS accounting standards and interpretations
effective for the year ended 31 March 2020
The Group adopted IFRS 16 ‘Leases’ with effect from 1 April 2019.
We have applied the modified retrospective approach permitted in
the standard whereby prior year comparatives have not been restated
on adoption. Instead, any cumulative transition adjustments are reflected
through reserves. Refer to note 37 for full details of the impact and
transition adjustments arising on adoption.
The UK’s Financial Conduct Authority announced that LIBOR will cease
to exist by the end of 2021, and will be replaced by alternative reference
rates. In September 2019, the IASB amended IFRS 9 and IFRS 7 by
issuing Interest Rate Benchmark Reform, which provides exceptions
to specific hedge accounting requirements to ensure that hedging
relationships are not considered to be modified as a result of the change
in the reference rate. The amendments were endorsed in January 2020
for adoption in the EU. The Group early-adopted these changes to IFRS
9 and IFRS 7 with effect from 1 April 2019. There were no transition
adjustments on adoption. Refer to note 32(e) for further details of the
impact in the current period.
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:
• 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; and
• Amendments to IAS 19 ‘Employee Benefits’.
129
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
2. 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 treated as reportable operating segments. 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 independent 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 UK Electricity Transmission segment also includes the independent Electricity System Operator (ESO). Although there is a separate governance
structure (including a separate Executive Committee), the Board receives financial information on an aggregated UK Electricity Transmission basis,
which includes the results of the ESO, and accordingly the ESO is included within the reportable segment.
National Grid Ventures (NGV) is our only other operating segment. It 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. Instead, NGV’s results are reported alongside
the results of all other operating businesses on an aggregated basis as “NGV and Other”, with certain additional disclosure included in footnotes.
NGV 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, electricity interconnectors and our new investments in Geronimo
Energy LLC (Geronimo) and Emerald Energy Venture LLC (Emerald). Geronimo is a developer of wind and solar generation based in Minneapolis in
the US. The acquisition is National Grid’s first ownership stake in wind generation and an expansion of our activities in solar generation.
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 any period presented (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
2020
Sales
between
segments
£m
Sales
to third
parties
£m
(8)
(16)
–
(6)
3,694
911
9,205
730
Total
sales
£m
3,702
927
9,205
736
2019
Sales
between
segments
£m
Sales
to third
parties
£m
(20)
(12)
–
(4)
3,331
884
9,846
872
Total
sales
£m
3,351
896
9,846
876
2018
Sales
between
segments
£m
Sales
to third
parties
£m
(28)
(9)
–
(6)
4,126
1,082
9,272
770
Total
sales
£m
4,154
1,091
9,272
776
Total revenue from continuing operations
14,570
(30)
14,540
14,969
(36)
14,933
15,293
(43)
15,250
Split by geographical areas – continuing
operations:
UK
US
5,282
9,258
14,540
5,045
9,888
14,933
5,938
9,312
15,250
1. Included within NGV and Other is £608 million (2019: £597 million; 2018: £593 million) of revenue relating to NGV.
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National Grid plc Annual Report and Accounts 2019/20Financial Statements 2. 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 Other1,2
Total operating profit from continuing operations
Split by geographical area – continuing operations:
UK
US
Before exceptional items
and remeasurements
After exceptional items
and remeasurements
2020
£m
1,320
348
1,397
242
3,307
1,925
1,382
3,307
2019
£m
1,015
303
1,724
400
3,442
1,695
1,747
3,442
2018
£m
1,041
487
1,698
231
3,457
1,840
1,617
3,457
2020
£m
1,316
347
880
237
2,780
1,915
865
2,780
2019
£m
778
267
1,425
400
2,870
1,422
1,448
2,870
2018
£m
1,041
487
1,734
231
3,493
1,840
1,653
3,493
Below we reconcile total operating profit from continuing operations to profit before tax from continuing operations. Total operating exceptional items and
remeasurements of £527 million charge (2019: £572 million charge; 2018: £36 million gain) are detailed in note 5. This is comprised of a £4 million charge (2019:
£237 million charge; 2018: £nil) attributable to UK Electricity Transmission; £1 million charge (2019: £36 million charge; 2018: £nil) to UK Gas Transmission;
£517 million charge (2019: £299 million charge; 2018: £36 million gain) to US Regulated; and £5 million charge (2019: £nil; 2018: £nil) to NGV and Other.
Reconciliation to profit before tax:
Operating profit from continuing operations
Finance income
Finance costs
Share of post-tax results of joint ventures and associates
Profit before tax from continuing operations
3,307
3,442
70
73
(1,119)
(1,066)
88
40
3,457
127
(1,128)
44
2,346
2,489
2,500
2,780
54
2,870
88
3,493
127
(1,167)
(1,157)
(1,009)
87
1,754
40
1,841
49
2,660
1. Included within NGV and Other is £269 million (2019: £263 million; 2018: £234 million) of operating profit before exceptional items and remeasurements and £268 million of operating profit
after exceptional items and remeasurements (2019: £263 million; 2018: £234 million), relating to NGV.
2. In 2019, NGV and Other included gains of £95 million in relation to cash received in respect of two legal settlements.
(c) Capital expenditure
Capital expenditure represents additions to property, plant and equipment and non-current intangibles but excludes additional investments in and loans to
joint ventures and associates. In 2020, we transferred certain software assets and properties which are held outside the US rate base and operate for the
benefit of our US Regulated businesses, that were previously included within the NGV and Other segment, to the US Regulated segment. See footnote 2.
Net book value of property, plant and
equipment and other intangible assets
2020
£m
2019
£m
2018
£m
13,788
4,513
29,623
2,141
50,065
20,427
29,638
50,065
48,770
1,295
50,065
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
18,772
21,980
40,752
39,853
899
40,752
Capital expenditure
Depreciation, amortisation
and impairment
2020
£m
1,043
249
3,228
559
5,079
1,847
3,232
5,079
4,727
352
5,079
2019
£m
925
308
2,650
438
4,321
1,584
2,737
4,321
4,015
306
4,321
2018
£m
999
310
2,424
341
4,074
1,527
2,547
4,074
3,901
173
4,074
2020
£m
(469)
(171)
(855)
(145)
2019
£m
(628)
(181)
(700)
(226)
2018
£m
(475)
(194)
(635)
(226)
(1,640)
(1,735)
(1,530)
(784)
(856)
(931)
(804)
(804)
(726)
(1,640)
(1,735)
(1,530)
(1,464)
(176)
(1,640)
(1,560)
(175)
(1,735)
(1,392)
(138)
(1,530)
Operating segments:
UK Electricity Transmission
UK Gas Transmission
US Regulated²
NGV and Other1,2
Total from continuing operations
Split by geographical area –
continuing operations:
UK
US
Asset type:
Property, plant and equipment
Non-current intangible assets
Total from continuing operations
1. Included within NGV and Other are assets with a net book value of £2,080 million (2019: £1,635 million; 2018: £1,454 million), capital expenditure of £550 million (2019: £317 million;
2018: £186 million) and depreciation, amortisation and impairment of £124 million (2019: £114 million; 2018: £143 million) relating to NGV.
2. In 2020, US Regulated includes certain software assets and properties in the US which are outside the US rate base and operate for the benefit of our US regulated businesses. These
assets were included within NGV and Other in 2019 and 2018. The assets had a net book value of £1,062 million in 2019 and £998 million in 2018, capital expenditure of £87 million in 2019
and £161 million in 2018 and depreciation, amortisation and impairment of £102 million in 2019 and £80 million in 2018.
Total non-current assets other than financial instruments and pension assets located in the UK and US were £31,780 million and £25,867 million
respectively as at 31 March 2020 (31 March 2019: UK £30,072 million, US £21,787 million; 31 March 2018: UK £20,816 million, US £27,663 million).
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National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
3. Revenue
Revenue arises in the course of 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 (which solely relate to the contract with the Long Island Power Authority
(LIPA) in the US) are accounted for under the leasing standard as rental income, also 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 adopted in the prior year and applied prospectively from 1 April 2018. Therefore, the analysis below is only provided for the current
period and the immediate comparative period. Below, we include 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 (along with the Scottish and Offshore transmission
operators amongst others). 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 System Operator earns revenue for balancing supply and demand of electricity on the transmission system, where it acts as principal. Revenue
is recognised as the service is provided. The System Operator also collects revenues on behalf of transmission operators, principally NGET and the
Scottish and Offshore transmission operators, from users who connect to or use the transmission system. However, these amounts are paid to the
transmission operators before the System Operator has collected payment from the users (electricity suppliers) and therefore the System Operator
does hold some exposure to credit losses with electricity suppliers. The System Operator must set the charges paid by electricity suppliers by
reference to the price control mechanism described above. That mechanism does not grant the System Operator with discretion to deviate from
that mechanism. The transmission operators own and maintain the electricity network and receive direct feedback from electricity suppliers on
the quality of the network they provide. There is a judgement about whether the System Operator acts as a principal or agent in respect of the
transmission network revenues collected on behalf of the Scottish and Offshore transmission operators (as set out in note 1). We have concluded
that it acts as an agent in respect of these transmission revenues and therefore records the attributable revenue net of operating costs.
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.
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National Grid plc Annual Report and Accounts 2019/20Financial Statements 3. Revenue continued
(c) US Regulated
The US Regulated segment of the Group principally generates 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 electricity distribution services in New York and New England. This comprises the following principal services:
• Gas and electricity distribution: 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.
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 the Isle of Grain, Geronimo, metering, sales from our UK property business, rental
income and insurance.
The Group recognises revenue from transmission services through interconnectors and LNG at the Isle of Grain by means of customers’ use of
capacity and volumes. Revenue is recognised over time and is billed monthly. Payment terms are up to 30 days.
Other revenue in the scope of IFRS 15 principally includes revenues from our UK metering business and sales of renewables projects from Geronimo
to Emerald (see note 38). Revenue is recognised as it is earned. In the case of the UK metering business, revenue is billed monthly and payment
terms are up to 30 days.
Other revenue, recognised in accordance with standards other than IFRS 15, includes property sales by our UK commercial property business
(including sales to our St William joint venture) 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.
(e) Disaggregation of revenue
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).
Revenue for the year ended 31 March 2020
UK Electricity
Transmission
£m
UK Gas
Transmission
£m
US Regulated
£m
NGV and Other
£m
Total
£m
Revenue under IFRS 15
Transmission
Distribution
System Operator
Other
Total IFRS 15 revenue
Other revenue
Generation
Other
Total other revenue
Total revenue from continuing operations
1,992
–
1,610
69
3,671
–
23
23
3,694
649
–
214
15
878
–
33
33
911
425
8,319
–
12
8,756
369
80
449
9,205
309
–
–
296
605
–
125
125
730
Geographical split for the year ended 31 March 2020
UK Electricity
Transmission
£m
UK Gas
Transmission
£m
US Regulated
£m
NGV and Other
£m
Revenue under IFRS 15
UK
US
Total IFRS 15 revenue
Other revenue
UK
US
Total other revenue
Total revenue from continuing operations
3,671
–
3,671
23
–
23
3,694
878
–
878
33
–
33
911
–
8,756
8,756
–
449
449
9,205
567
38
605
110
15
125
730
3,375
8,319
1,824
392
13,910
369
261
630
14,540
Total
£m
5,116
8,794
13,910
166
464
630
14,540
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National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
3. Revenue continued
(e) Disaggregation of revenue continued
Revenue for the year ended 31 March 2019
UK Electricity
Transmission
£m
UK Gas
Transmission
£m
US Regulated
£m
NGV and Other
£m
Total
£m
Revenue under IFRS 15
Transmission
Distribution
System Operator
Other
Total IFRS 15 revenue
Other revenue
Generation
Other
Total other revenue
Total revenue from continuing operations
1,909
–
1,416
–
3,325
–
6
6
3,331
661
–
172
–
833
–
51
51
884
370
8,941
–
–
9,311
367
168
535
9,846
313
–
–
284
597
–
275
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
UK
US
Total IFRS 15 revenue
Other revenue
UK
US
Total other revenue
Total revenue from continuing operations
3,325
–
3,325
6
–
6
3,331
833
–
833
51
–
51
884
–
9,311
9,311
–
535
535
9,846
585
12
597
245
30
275
872
3,253
8,941
1,588
284
14,066
367
500
867
14,933
Total
£m
4,743
9,323
14,066
302
565
867
14,933
Revenue to be recognised in future periods, presented as contract liabilities of £1,158 million (2019: £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, NGV and US Regulated are 40 years, 36 years (to 2055), 15 years and up to 51 years respectively. The weighted average
amortisation period is 18 years.
Future revenues in relation to unfulfilled performance obligations not yet received in cash amount to £3.1 billion (2019: £3.5 billion). £1.5 billion
(2019: £1.6 billion) relates to connection contracts in UK Electricity Transmission which will be recognised as revenue over 29 years and £1.5 billion
(2019: £1.8 billion) relates to revenues to be earned under Grain LNG contracts until 2029. The remaining amount will be recognised as revenue
over 5 years.
The amount of revenue recognised for the year ended 31 March 2020 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 (2019: £nil).
134
National Grid plc Annual Report and Accounts 2019/20Financial Statements 4. 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.
Depreciation, amortisation
and impairment
Payroll costs
Provision for bad
and doubtful debts
Purchases of electricity
Purchases of gas
Property and other taxes
Balancing Services Incentive
Scheme
Payments to other UK
network owners¹
Other
Before exceptional items
and remeasurements
Exceptional items
and remeasurements
2020
£m
1,640
1,684
234
1,318
1,276
1,191
2019
£m
1,588
1,703
181
1,504
1,644
1,108
2018
£m
1,530
1,648
36
1,299
1,539
1,057
1,317
1,196
1,012
–
2,573
11,233
–
2,567
11,491
1,043
2,629
11,793
2020
£m
2019
£m
2018
£m
–
–
–
85
40
–
–
–
402
527
147
149
–
(50)
(2)
–
–
–
328
572
–
–
–
(14)
4
–
–
–
(26)
(36)
Operating costs include:
Inventory consumed
Research and development expenditure
1. Under IFRS 15, with effect from 1 April 2018, revenue and associated payments to other UK network owners are presented on a net basis.
(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
2019
£m
1,735
1,852
181
1,454
1,642
1,108
2020
£m
1,640
1,684
234
1,403
1,316
1,191
2018
£m
1,530
1,648
36
1,285
1,543
1,057
1,317
1,196
1,012
–
2,975
11,760
328
14
2020
£m
2,188
168
75
135
19
1
2,586
(902)
1,684
–
2,895
12,063
415
19
2019
£m
2,084
156
72
232
27
76
2,647
(795)
1,852
1,043
2,603
11,757
367
13
2018
£m
1,998
157
65
156
16
7
2,399
(751)
1,648
1. Included within wages and salaries are US other post-retirement benefit costs of £45 million (2019: £48 million; 2018: £46 million). For further information refer to note 25.
(b) Number of employees
UK
US
Total number of employees
31 March
2020
6,321
16,748
23,069
Monthly
average
2020
6,151
16,679
22,830
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
135
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
4. Operating costs continued
(c) Key management compensation
Short-term employee benefits
Compensation for loss of office
Post-employment benefits
Share-based payments
Total key management compensation
2020
£m
2019
£m
2018
£m
7
1
1
3
12
7
–
1
3
11
8
–
1
3
12
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 96 and those of Non-executive Directors on
page 101.
(e) Auditors’ remuneration
Auditors’ remuneration is presented below in accordance with the requirements of the Companies Act 2006 and the principal accountant fees
and services disclosure requirements of Item 16C of Form 20-F:
Audit fees payable to the parent Company’s auditors and their associates in respect of:
Audit of the parent Company’s individual and consolidated financial statements¹
The auditing of accounts of any associate of the Company²
Other services supplied³
Total other services4
Tax fees:
Tax compliance services
Tax advisory services
All other fees:
Other assurance services5
Services relating to corporate finance transactions not covered above
Other non-audit services not covered above6
2020
£m
1.9
8.7
6.3
16.9
–
–
0.6
–
0.5
1.1
2019
£m
1.6
8.5
5.2
15.3
–
–
1.1
–
2.2
3.3
2018
£m
2.7
9.3
3.9
15.9
0.3
–
0.7
–
0.9
1.9
Total auditors’ remuneration
18.0
18.6
17.8
1. Audit fees in each year represent fees for the audit of the Company’s financial statements and regulatory reporting for the years ended 31 March 2020, 2019 and 2018.
2. The 2019 comparative has been updated following finalisation of the 2019 audit fee with the Audit Committee.
3. Other services supplied represent fees payable for services in relation to other statutory filings or engagements that are required to be carried out by the auditors. In particular, this includes
fees for reports under section 404 of the US Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley), audit reports on regulatory returns and the review of
interim financial statements for the six-month periods ended 30 September 2019, 2018 and 2017 respectively.
4. There were no audit related fees as described in Item 16C(b) of Form 20-F.
5. Principally amounts relating to assurance services provided in relation to comfort letters for debt issuances.
6. In 2020, non-audit services include auction monitor work on Contracts for Difference, IT project assurance and a review of controls over our data on New York customers. In 2019 and 2018,
non-audit services primarily related to the UK Property business in respect of the evaluation of possible options for the use of property assets.
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 81 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.
136
National Grid plc Annual Report and Accounts 2019/20Financial Statements 5. 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
2020
£m
2019
£m
2018
£m
Included within operating profit
Exceptional items:
Environmental charges
Cost efficiency and restructuring programmes
Massachusetts Gas labour dispute
Impairment of nuclear connection development costs
Final settlement of LIPA MSA Transition
Remeasurements – commodity contract derivatives
Included within finance income and costs
Remeasurements:
Net gains/(losses) on financing derivatives
Net (losses)/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
Exceptional items:
Deferred tax arising on the reduction in US corporation tax rate
Remeasurements:
Net losses on financial instruments
Total included within profit before tax
Included within tax
Exceptional items – credits/(debits) arising on items not included in profit before tax:
Deferred tax arising on the reduction in the US corporation tax rate
Deferred tax arising on the reversal of the reduction in UK corporation tax rate
Tax on exceptional items
Tax on remeasurements
Total exceptional items and remeasurements after tax
Analysis of total exceptional items and remeasurements after tax
Exceptional items after tax
Remeasurements after tax
Total exceptional items and remeasurements after tax
(402)
–
–
–
–
(402)
(125)
(527)
1
(16)
(49)
(64)
–
(1)
(592)
–
(192)
103
42
(47)
(639)
(491)
(148)
(639)
–
(204)
(283)
(137)
–
(624)
52
(572)
(40)
15
(51)
(76)
–
–
–
–
–
–
26
26
10
36
119
–
–
119
5
–
(648)
160
–
–
144
5
149
(499)
(480)
(19)
(499)
1,510
–
(9)
(28)
1,473
1,633
1,532
101
1,633
137
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
5. 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.
Set out below are details of the transactions against which we have considered the application of our exceptional items framework in each of the
years for which results are presented.
2020
We concluded that the increase in costs associated with the changes in our environmental provisions (£402 million) and the additional deferred tax
charge reflecting the impact of the remeasurement of the Group’s deferred tax liabilities as a result of a change in the substantively enacted UK
corporation tax rate (£192 million) meet the criteria to be classified as exceptional.
A further £10 million of COVID-19 related costs incurred in the year have similarly not been classified as exceptional in view of the quantum involved
and all costs associated with the settlement reached with the State of New York in respect of the Downstate New York Gas Moratorium have also
been treated as part of adjusted profit.
Environmental charges: In the US, the most significant component of our £1.9 billion environmental provision relates to several Superfund sites,
and arose from former manufacturing gas plant facilities, formerly owned or operated by the Group or its predecessor companies.
The sites are subject to both State and Federal law in the US. Under Federal and State Superfund laws, potential liability for the historical
contamination may be imposed on responsible parties jointly and severally, without regard to fault, even if the activities were lawful when they
occurred. The provisions and the Group’s share of estimated costs are re-evaluated at each reporting period. As a result of notices issued by
governmental authorities and newly developed cost estimates prepared by third-party engineers, we have re-evaluated our estimates of total
costs and cost sharing allocations borne by the Company, and accordingly have increased our provision by £326 million. Under the terms of our rate
plans, we are entitled to recovery of environmental clean-up costs from rate payers, but under IFRS no asset can be recognised for this recovery.
Also included in the total environmental charge is the £76 million impact of the change in the real discount rate applied to the environmental
provisions across the Group, of which £66 million relates to the US and £10 million to the UK. Given the substantial and sustained change in
gilts and corporate bond yields, we concluded it was appropriate to reduce the real discount rate from 1% to 0.5%. The weighted average
remaining duration of our cash flows is now around 10 years.
2019
In assessing certain items of income and expenditure against our exceptional items framework, we 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. The cash outflow for the year was £93 million.
Massachusetts Gas labour dispute: Between June 2018 and January 2019, 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. The net incremental cost of
the experienced contractors working alongside supervisors and workers from other areas of the business was £283 million, reflecting 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 2018, Toshiba announced the cancellation of its NuGen project to build a new
nuclear power station at Moorside in Cumbria, and NuGen terminated its connection agreement with UK Electricity Transmission. In February 2019,
Hitachi terminated its connection agreements in respect of its Horizon projects at Wylfa and Oldbury. As there was no realistic prospect of these
schemes continuing in their present form, we concluded that it was 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
Final settlement of LIPA MSA transition: 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 was recorded as exceptional, consistent with the treatment of gains and losses on the original transaction.
138
National Grid plc Annual Report and Accounts 2019/20Financial Statements 5. 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). These assets and liabilities include
commodity contract derivatives and financing derivatives to the extent that hedge accounting is not achieved or is not effective.
The unrealised gains or losses reported in profit and loss on certain additional assets and liabilities now treated at FVTPL are also classified within
remeasurements. These relate to 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. 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, our investment in Sunrun Neptune 2016 LLC and the contingent
consideration arising on the acquisition of Geronimo (all 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 financing derivative financial instruments comprise gains and losses arising on derivative financial instruments reported
in the consolidated income statement in relation to risk management of interest rate and foreign exchange exposures. 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 and 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 was designated at FVTPL on transition to IFRS 9 to reduce a measurement mismatch (see note 21); and
v. Unrealised net gains/(losses) on derivatives and other financial instruments within our joint ventures and associates.
Items included within tax
2020
The Finance Act 2016, which was enacted on 15 September 2016, reduced the main UK corporation tax rate to 17% with effect from 1 April 2020.
Deferred tax balances were calculated at this rate for the years ended 31 March 2017 to 2019. On 17 March 2020, the UK Government utilised the
Provisional Collection of Taxes Act 1968 to substantively enact a reversal of the reduction in the main UK corporation tax rate to 17% with effect from
1 April 2020, resulting in the rate remaining at 19%. Deferred taxes at the reporting date have been measured using enacted tax rates and reflected
in these financial statements, resulting in a £192 million deferred tax charge, principally due to the remeasurement of deferred tax liabilities. The
treatment of this charge as exceptional is consistent with the treatment for the year ended 31 March 2017 when the original reduction in the tax rate
was substantively enacted, resulting in the recognition of an exceptional tax credit of £94 million.
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.
139
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
6. 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 for 2018 were not required to be restated and were 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
2020
£m
2019
£m
2018
£m
48
2
–
20
70
54
2
–
17
73
54
–
73
–
127
Net interest on pensions and other post-retirement benefit obligations
25
(23)
(22)
(65)
Interest expense on financial liabilities held at amortised cost:
Bank loans and overdrafts
Other borrowings¹
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 (losses)/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 financing derivatives³:
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
(73)
(997)
(22)
(39)
(77)
(10)
122
(72)
(970)
(20)
(43)
(74)
–
135
(87)
(1,030)
–
12
(75)
(11)
128
(1,119)
(1,066)
(1,128)
26
(16)
(16)
(49)
(13)
14
(48)
(64)
15
15
(51)
(37)
(3)
(91)
(76)
–
–
–
49
70
119
119
54
88
127
(1,167)
(1,157)
(1,009)
Net finance costs from continuing operations
(1,113)
(1,069)
(882)
1. Includes interest expense on lease liabilities (see note 13 for details).
2. Interest on funding attributable to assets in the course of construction in the current year was capitalised at a rate of 3.6% (2019: 3.9%; 2018: 4.1%). In the UK, capitalised interest qualifies
for a current year tax deduction with tax relief claimed of £15 million (2019: £19 million; 2018: £20 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 £66 million (2019: £264 million gain; 2018: £314 million loss) offset by foreign exchange losses and gains on financing
derivatives measured at fair value.
140
National Grid plc Annual Report and Accounts 2019/20Financial Statements 7. 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
Total tax reported within 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
2020
£m
433
192
(145)
47
480
2020
%
18.5
27.4
2019
£m
488
–
(149)
(149)
339
2019
%
19.6
18.4
2018
£m
584
(1,510)
37
(1,473)
(889)
2018
%
23.4
(33.4)
141
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements
Notes to the consolidated financial statements
– analysis of items in the primary statements continued
7. Tax continued
The tax charge/(credit) for the year can be analysed as follows:
Current tax:
UK corporation tax at 19% (2019: 19%; 2018: 19%)
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
Tax charged/(credited) to the consolidated statement of comprehensive income and equity
Current tax:
Available-for-sale investments
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 pension assets and post-retirement benefit obligations¹
Share-based payments
Total tax recognised in the statements of comprehensive income from continuing operations
Total tax relating to share-based payments recognised directly in equity from continuing operations
2020
£m
2019
£m
2018
£m
179
(4)
175
(2)
(41)
(43)
132
269
6
275
64
9
73
348
480
132
(12)
120
8
(40)
(32)
88
27
2
29
208
14
222
251
200
(18)
182
15
(4)
11
193
65
(2)
63
(1,155)
10
(1,145)
(1,082)
339
(889)
2020
£m
2019
£m
2018
£m
–
–
–
–
(1)
(40)
(206)
(3)
(250)
(247)
(3)
(250)
–
3
–
–
–
(12)
12
–
3
3
–
3
(11)
–
(3)
(18)
–
(4)
530
1
495
497
(2)
495
1. 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.
142
National Grid plc Annual Report and Accounts 2019/20Financial Statements 7. Tax continued
The tax charge/(credit) for the year after exceptional items and remeasurements, for the continuing business, is higher (2019: lower tax charge; 2018:
lower tax charge) than the standard rate of corporation tax in the UK of 19% (2019: 19%; 2018: 19%):
Before
exceptional
items and
remeasurements
After
exceptional
items and
remeasurements
Before
exceptional
items and
remeasurements
After
exceptional
items and
remeasurements
Before
exceptional
items and
remeasurements
After
exceptional
items and
remeasurements
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% (2019: 19%; 2018: 19%)
Effect of:
Adjustments in respect of prior years¹
Expenses not deductible for
tax purposes
Non-taxable income²
Adjustment in respect of foreign
tax rates
Deferred tax impact of change in
UK tax rate
Deferred tax impact of change in
US tax rate due to Tax Reform
Adjustment in respect of post-tax profits
of joint ventures and associates
included within profit before tax
Other³
Total tax charge/(credit) from
continuing operations
Effective tax rate – continuing
operations
2020
£m
2,346
–
2,346
446
(30)
26
(18)
53
–
–
(17)
(27)
433
%
18.5
2020
£m
2,346
(592)
1,754
334
(30)
29
(18)
18
192
–
(17)
(28)
480
%
27.4
2019
£m
2,489
–
2,489
2019
£m
2,489
(648)
1,841
473
350
(36)
22
(36)
78
(3)
–
(8)
(2)
488
%
19.6
(36)
28
(36)
56
(3)
–
(8)
(12)
339
%
18.4
2018
£m
2,500
–
2,500
475
(22)
20
(16)
153
(7)
–
(8)
(11)
584
%
23.4
2018
£m
2,500
160
2,660
506
(14)
21
(26)
157
(7)
(1,510)
(9)
(7)
(889)
%
(33.4)
1. Prior year adjustment is primarily due to agreement of prior period tax returns.
2. Includes gains on chargeable disposals which are offset by previously unrecognised capital losses.
3. Other primarily comprises a recognition of deferred tax on previously unrecognised capital losses and claims for land remediation relief.
Factors that may affect future tax charges
On 17 March 2020, the UK government utilised the Provisional Collection of Taxes Act 1968 to substantively enact a reversal of the reduction in the
main UK corporation tax rate to 17% with effect from 1 April 2020. The main UK corporation tax rate therefore remains at 19%. 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.
Governments across the world including the UK and the US have introduced various stimulus/reliefs for businesses to cope with the impact of the
COVID-19 pandemic. We will monitor as the details become available for any that may materially impact our future tax charges.
143
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
7. Tax continued
Tax included within the statement of financial position
The following are the major deferred tax assets and liabilities recognised, and the movements thereon, during the current and prior reporting periods:
Deferred tax liabilities/(assets)
At 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 1 April 2019
Exchange adjustments and other²
(Credited)/charged to income statement
Charged/(credited) to other comprehensive income and equity
At 31 March 2020
Accelerated
tax
depreciation
£m
Share-
based
payments
£m
Pensions
and other
post-
retirement
benefits
£m
Financial
instruments
£m
Other net
temporary
differences1
£m
Total
£m
4,874
19
4,893
275
309
–
5,477
210
613
–
6,300
(9)
–
(9)
–
–
–
(9)
(30)
(7)
(2)
(48)
(203)
–
(203)
(31)
52
12
(170)
(28)
44
(206)
(360)
21
(5)
16
(3)
6
(12)
7
(3)
(13)
(46)
(55)
(1,047)
3,636
(93)
(79)
(1,140)
3,557
(76)
(124)
–
165
243
–
(1,340)
3,965
(27)
(287)
122
350
1
(253)
(1,653)
4,184
1. The deferred tax asset of £1,653 million as at 31 March 2020 (2019: £1,340 million) in respect of other net temporary differences primarily relates to net operating losses of £547 million
(2019: £423 million) and US environmental provisions of £529 million (2019: £409 million).
2. Exchange adjustments and other comprises foreign exchange arising on translation of the US dollar deferred tax balances. It also includes reclassification of £29 million from other
temporary differences to share-based payments.
Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances
net. The deferred tax balances (after offset) for statement of financial position purposes consist solely of deferred tax liabilities of £4,184 million
(2019: £3,965 million). This balance is after offset of a deferred tax asset of £547 million (2019: £423 million) which has been recognised in respect of
net operating losses (£535 million) and capital losses (£12 million).
Deferred tax assets in respect of some capital losses as well as trading losses and non-trade deficits have not been recognised as their future
recovery is uncertain or not currently anticipated. The deferred tax asset not recognised relating to capital losses has increased due to
remeasurement of opening deferred tax asset as a result of change in substantively enacted UK corporation tax rate from 17% to 19%. Hence the
total deferred tax assets not recognised are as follows:
Capital losses
Non-trade deficits
Trading losses
2020
£m
1,626
1
6
2019
£m
1,470
4
5
The capital losses arose in the UK on disposal of certain businesses or assets. 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 2020 and 31 March 2019, 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.
144
National Grid plc Annual Report and Accounts 2019/20Financial Statements 8. 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
EPS
Earnings
EPS
Earnings
2020
£m
1,912
(639)
1,273
5
(14)
(9)
1,917
(653)
1,264
2020
pence
55.2
(18.4)
36.8
0.2
(0.5)
(0.3)
55.4
(18.9)
36.5
2020
millions
3,461
2019
£m
1,998
(499)
1,499
57
(45)
12
2,055
(544)
1,511
2019
pence
59.0
(14.7)
44.3
1.7
(1.4)
0.3
60.7
(16.1)
44.6
2019
millions
3,386
2018
£m
1,915
1,633
3,548
145
(143)
2
2,060
1,490
3,550
Earnings
EPS
Earnings
EPS
Earnings
2020
£m
1,912
(639)
1,273
5
(14)
(9)
1,917
(653)
1,264
2020
pence
55.0
(18.4)
36.6
0.1
(0.4)
(0.3)
55.1
(18.8)
36.3
2020
millions
3,478
2019
£m
1,998
(499)
1,499
57
(45)
12
2,055
(544)
1,511
2019
pence
58.8
(14.7)
44.1
1.7
(1.4)
0.3
60.5
(16.1)
44.4
2019
millions
3,401
2018
£m
1,915
1,633
3,548
145
(143)
2
2,060
1,490
3,550
EPS
2018
pence
55.3
47.2
102.5
4.2
(4.1)
0.1
59.5
43.1
102.6
2018
millions
3,461
EPS
2018
pence
55.1
47.0
102.1
4.2
(4.2)
–
59.3
42.8
102.1
2018
millions
3,476
145
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
8. 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
2020
millions
3,461
17
3,478
2019
millions
3,386
15
3,401
2018
millions
3,461
15
3,476
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.
Interim dividend in respect of the current year
Special dividend
Final dividend in respect of the prior year
2020
Cash
dividend
paid
£m
Scrip
dividend
£m
335
–
557
892
241
–
517
758
Pence
per
share
16.57
–
31.26
47.83
2019
Cash
dividend
paid
£m
450
–
710
1,160
Pence
per
share
16.08
–
30.44
46.52
Scrip
dividend
£m
94
–
319
413
2018
Cash
dividend
paid
£m
346
3,171
970
Pence
per
share
15.49
84.375
29.10
128.965
4,487
Scrip
dividend
£m
176
–
33
209
The Directors are proposing a final dividend for the year ended 31 March 2020 of 32.0p per share that will absorb approximately £1,123 million
of shareholders’ equity (assuming all amounts are settled in cash). It will be paid on 19 August 2020 to shareholders who are on the register
of members at 3 July 2020 (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.
10. 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, and
presented within discontinued operations in the income statement and cash flow statement. 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.
In June 2019, the Group sold its remaining 39% interest in Cadent (held through its holding in Quadgas HoldCo Limited (Quadgas)). This interest
had been classified as held for sale from 30 June 2018 until the date of disposal, as detailed in the Annual Report and Accounts for the year ended
31 March 2019.
The aggregate carrying value of our investment in Quadgas at the disposal date was £1,956 million. This was comprised of the carrying value of the
Group’s equity interest in Quadgas of £1,494 million, a shareholder loan to Quadgas of £352 million and a derivative financial asset with a fair value of
£110 million. The total sales proceeds were £1,965 million. The gain on disposal was £9 million.
146
National Grid plc Annual Report and Accounts 2019/20Financial Statements 10. Discontinued operations and assets held for sale continued
We considered the disposal of our 39% investment in Quadgas as the final stage of the plan to dispose of our interest in the UK Gas Distribution
business first announced in 2015, and accordingly treated the results and cash flows arising from Quadgas as a discontinued operation on the basis
that the sale formed the final 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. 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 from 30 June 2018.
The summary income statement for discontinued operations is as follows:
Revenue
Operating costs¹
Operating loss
Net finance income
Share of post-tax results of joint ventures and associates²
(Loss)/profit before tax from discontinued operations
Tax from discontinued operations
(Loss)/profit after tax from discontinued operations
Gain on disposal
Total (loss)/profit after tax from discontinued operations³
2020
£m
2019
£m
–
(23)
(23)
6
–
(17)
(1)
(18)
9
(9)
–
(1)
(1)
23
(5)
17
(5)
12
–
12
2018
£m
–
(41)
(41)
137
(89)
7
(5)
2
–
2
1. Operating costs for the year ended 31 March 2020 relate to final transaction costs and other expenses in relation to Quadgas. 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.
2. For the year ended 31 March 2019, the amount presented is the net of £43 million impairment charge against the investment in Quadgas (see note 16) and £38 million share of Quadgas
post-tax profits recognised prior to classification as held for sale.
3. Of the total profit after tax from discontinued operations, the £23 million of operating expenses and the £9 million gain on disposal are treated as exceptional. For the year ended 31 March
2019, 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.
The summary statement of comprehensive income for discontinued operations is as follows:
(Loss)/profit after tax from discontinued operations
Other comprehensive income
Items that will never be reclassified to profit or loss:
Share of other comprehensive income of associate, net of tax
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 gains in respect of cash flow hedges
Share of other comprehensive income of associate, net of tax
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 (loss)/income for the year from discontinued operations
2020
£m
(9)
2019
£m
12
2018
£m
2
–
–
6
–
6
6
(3)
36
36
–
–
–
36
48
142
142
–
5
5
147
149
The summary cash flows for discontinued operations are as follows:
Cash flows used in operating activities of £97 million (2019: £71 million; 2018: £207 million) primarily related to cash outflows in respect of voluntary
contributions totalling £66 million paid to the Warm Homes Fund, the utilisation of provisions and the payment of the final transaction fees incurred in the
period. The utilisation of provisions in 2018 mainly related to payments of professional fees in respect of the disposal of the UK Gas Distribution business.
Cash inflows from investing activities of £6 million (2019: £156 million; 2018: £171 million) were comprised of dividends received and interest received
on the shareholder loan.
There were no cash flows for financing activities in 2020 or 2019. 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 of the UK
Gas Distribution business.
147
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
11. 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 2018
Exchange adjustments
Net book value at 31 March 2019
Additions
Exchange adjustments
Net book value at 31 March 2020
Total
£m
5,444
425
5,869
81
283
6,233
Additions in the period relate to the goodwill recognised on the acquisition of Geronimo. Refer to note 38 for details.
There is no significant accumulated impairment charge as at 31 March 2020 or 31 March 2019.
The amounts disclosed above as at 31 March 2020 relate to the following cash-generating units: New York £3,544 million (2019: £3,382 million);
Massachusetts £1,325 million (2019: £1,264 million); Rhode Island £493 million (2019: £470 million); Federal £790 million (2019: £753 million); and
Geronimo £81 million (2019: £nil).
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 2.1% (2019: 2.2%). The growth rate has been determined
having regard to data on projected growth in US real gross domestic product (GDP). Based on the position of our business 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
4.5% (2019: 5.3%). The equivalent pre-tax discount rate is 4.5% (2019: 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 considered the manner in which Tax Reform has impacted 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 in 2018 from 35% to 21% is being 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% for the year ended 31 March 2018. 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. Offsetting this change is the additional income we earn, since
the rate base grows faster. (Our rate base is net of deferred tax liabilities, which, as a result of Tax Reform, is now smaller.) In overall terms, the
outcome is 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. This remains the case
even after taking into account the short-term effects of COVID-19, the most significant of which is an increase in bad debt charges in the short-term.
148
National Grid plc Annual Report and Accounts 2019/20Financial Statements 12. Other intangible assets
Other intangible assets include software which is written down (amortised) over the 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 consolidated 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 intangible
assets are:
Software
Cost at 1 April 2018
Exchange adjustments
Additions
Disposals
Reclassifications¹
Cost at 31 March 2019
Exchange adjustments
Additions
Disposals
Reclassifications¹
Cost at 31 March 2020
Accumulated amortisation at 1 April 2018
Exchange adjustments
Amortisation charge for the year
Accumulated amortisation of disposals
Accumulated amortisation at 31 March 2019
Exchange adjustments
Amortisation charge for the year
Accumulated amortisation of disposals
Accumulated amortisation at 31 March 2020
Net book value at 31 March 2020²
Net book value at 31 March 2019
1. Reclassifications includes amounts transferred from property, plant and equipment (see note 13).
2. Included in software is £69 million (2019: £116 million) relating to the US Enterprise Resource Planning system, which still has a remaining amortisation period of three years.
Years
1 to 10
Software
£m
1,797
70
306
(15)
10
2,168
63
352
–
–
2,583
(898)
(26)
(175)
15
(1,084)
(28)
(176)
–
(1,288)
1,295
1,084
149
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
13. 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 or UEL) 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 split between the UK and US, along with the weighted average remaining UEL for each class of property,
plant and equipment (which is calculated by applying the annual depreciation charge per class of asset by the net book value of that class of asset).
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
UK
US
up to 60
up to 100
10 to 100
n/a
15 to 40
5 to 60
10 to 65
5 to 40
7 to 30
up to 10
45 to 80
35 to 85
20 to 93
8 to 50
47 to 95
12 to 65
14 to 65
up to 26
Weighted
average
remaining
UEL
26
40
37
21
23
49
13
18
5
Gas asset lives
The role that gas networks play in the pathway to achieving the greenhouse gas emissions reductions targets set in the jurisdictions in which we
operate is currently uncertain. However, we believe the gas assets which we own and operate today will continue to have a crucial role in maintaining
security, reliability and affordability of energy beyond 2050, although the scale and purpose for which the networks will be used is dependent on
technological developments and policy choices of governments and regulators.
• In the UK, the gas mains, services and regulating assets relating to the National Transmission System (NTS) were subject to a detailed review in
January 2019. The most material components of these are our pipeline assets, which are due to be fully depreciated by 2070, with other assets
being depreciated over various periods between now and then. That review was undertaken prior to the UK enacting legislation committing to
net zero by 2050, but considered scenarios which included an extension of the emissions reduction targets (80% emissions reduction target at
the time of the report). The review concluded that the most likely outcome was for the NTS network assets to remain in use beyond 2050,
including in those scenarios where the greenhouse gas emissions of gas networks were largely eliminated.
We do not believe developments since January 2019 would change the conclusions of this review.
• With respect to our US gas distribution assets, asset lives are assessed as part of detailed depreciation studies completed as part of each
separate rate proceeding. Depreciation studies consider the physical condition of assets and the expected operational life of an asset. We
believe these assessments are our best estimate of the UEL of our gas network assets in the US.
• The weighted average remaining UEL for our US gas distribution fixed asset base is circa 50 years, however a sizeable proportion of our assets
are assumed to have UELs which extend beyond 2080. We continue to believe the lives identified by rate proceedings are the best estimate of
the assets’ UELs, although we continue to keep this assumption under review as we learn more about possible future pathways towards net
zero. Whilst the targets, goals and ambitions have now been formalised in legislation in the states in which we operate, there is widespread
recognition that work needs to be done to define the possible future decarbonisation pathways.
• Asset depreciation lives feed directly into our regulatory recovery mechanisms, such that any shortening of asset recovery periods as agreed
with regulators should be recoverable through future rates, subject to agreement, over future periods, as part of wider considerations around
ensuring the continuing affordability of gas in our service territories.
150
National Grid plc Annual Report and Accounts 2019/20Financial Statements
13. Property, plant and equipment continued
Given the uncertainty described relating to the UELs of our gas assets, below we provide a sensitivity on the depreciation charge for our UK and
US regulated segments were a shorter UEL presumed:
UELs limited to 2050
UELs limited to 2060
UELs limited to 2070
Increase in depreciation
expense
UK regulated
£m
US regulated
£m
37
13
–
151
66
26
Note that this sensitivity calculation excludes any assumptions regarding residual value for our asset base and the effect shortening asset
depreciation lives would expect to have on our regulatory recovery mechanisms.
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.
Plant and
machinery
£m
Assets
in the
course of
construction1
£m
Motor
vehicles
and office
equipment
£m
Cost at 1 April 2018
Exchange adjustments
Additions
Disposals
Reclassifications²
Cost at 1 April 2019 (as previously reported)
Right-of-use assets recognised on transition to IFRS 16³
Cost at 1 April 2019 (as restated)
Exchange adjustments
Additions
Disposals
Reclassifications2,4
Cost at 31 March 2020
Accumulated depreciation at 1 April 2018
Exchange adjustments
Depreciation charge for the year
Disposals
Reclassifications²
Land and
buildings
£m
2,930
114
34
(35)
295
3,338
381
3,719
98
130
(79)
29
3,897
(674)
(19)
(93)
7
1
49,374
2,001
391
(357)
2,974
54,383
67
54,450
1,511
464
(486)
4,303
60,242
(16,398)
(501)
(1,229)
335
(1)
Accumulated depreciation at 1 April 2019
(778)
(17,794)
Exchange adjustments
Depreciation charge for the year
Disposals
Reclassifications²
Accumulated depreciation at 31 March 2020
Net book value at 31 March 2020
Net book value at 31 March 2019
(16)
(92)
36
3
(372)
(1,252)
464
(7)
(847)
(18,961)
3,050
2,560
41,281
36,589
4,273
70
3,533
(159)
(3,292)
4,425
–
4,425
53
4,029
(9)
(4,433)
4,065
–
–
(150)
150
–
–
–
–
–
–
–
4,065
4,425
857
47
57
(44)
13
930
20
950
33
104
(65)
14
1,036
(509)
(25)
(101)
44
–
(591)
(20)
(120)
58
11
(662)
374
339
Total
£m
57,434
2,232
4,015
(595)
(10)
63,076
468
63,544
1,695
4,727
(639)
(87)
69,240
(17,581)
(545)
(1,573)
536
–
(19,163)
(408)
(1,464)
558
7
(20,470)
48,770
43,913
1. In 2019, included within disposals are UK nuclear connections development costs of £150 million (before £13 million of termination income) which were written off. See note 5 for
further details.
2. Represents amounts transferred between categories, (to)/from other intangible assets (see note 12), reclassifications from inventories and reclassifications between cost and accumulated
depreciation.
3. £468 million of additional right-of-use assets were recognised on transition to IFRS 16 on 1 April 2019. See note 37 for details.
4. Comprises an £87 million reduction in gross cost of assets in the course of construction in our UK Electricity Transmission business for costs previously capitalised and accrued as due to a
supplier that are no longer payable.
151
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
13. Property, plant and equipment continued
Right-of-use assets
The Group leases various properties, land, equipment and cars. With effect from 1 April 2019, new lease arrangements entered into are recognised
as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group (see note 37). The
right-of-use asset and associated lease liability arising from a lease are initially measured at the present value of the lease payments expected over
the lease term, plus any other costs. The discount rate applied is the rate implicit in the lease or, if that is not available, then the incremental rate of
borrowing for a similar term and similar security. The lease term takes account of exercising any extension options that are at our option if we are
reasonably certain to exercise the option and any lease termination options unless we are reasonably certain not to exercise the option. Each lease
payment is allocated between the liability and finance cost. The finance cost is charged to the income statement over the lease period using the
effective interest rate method. The right-of-use asset is depreciated over the shorter of the asset’s useful life and the lease term on a straight-line
basis. For short-term leases (lease term of 12 months or less) and leases of low-value assets (such as computers), the Group continues to recognise
a lease expense on a straight-line basis.
Included within the net book value of property, plant and equipment at 31 March 2020 are right-of-use assets, split as follows:
Net book value at 31 March 2020
Additions
Depreciation charge for the year ended 31 March 2020
Land and
buildings
£m
Plant and
machinery
£m
364
10
(29)
95
1
(16)
Assets
in the
course of
construction
£m
Motor
vehicles
and office
equipment
£m
–
–
–
225
73
(72)
The following balances have been included in the income statement for the year ended 31 March 2020 in respect of right-of-use assets:
Included within net finance income and costs:
Interest expense on lease liabilities
Included within revenue:
Lease income
Included within operating expenses:
Expenses relating to low-value leases
The associated lease liabilities are disclosed in note 21.
The total of future minimum sub lease payments expected to be received under non-cancellable sub leases is £94 million (2019: £86 million).
Total
£m
684
84
(117)
Total
£m
(26)
35
(12)
Information in relation to property, plant and equipment
Capitalised interest included within cost
Contributions to cost of property, plant and equipment included within:
Trade and other payables
Non-current liabilities
Contract liabilities – current
Contract liabilities – non-current
14. 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 2021.
Other receivables
Non-current tax assets
Prepayments
Accrued income¹
1. Includes accrued income in relation to property sales to the St William joint venture.
152
2020
£m
35
65
19
235
354
2020
£m
2019
£m
2,118
1,995
84
428
76
1,082
87
372
61
933
2019
£m
28
56
7
173
264
National Grid plc Annual Report and Accounts 2019/20Financial Statements 15. Financial and other investments
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 joint ventures, investments in our venture capital portfolio (National Grid Partners), 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 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 as well
as receivables in relation to deposits and collateral.
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). Other
investments include insurance contracts, measured at fair value, and held to back the present value of unfunded obligations in note 25.
The Group has elected to measure equity instruments at fair value through other comprehensive income that 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 that are
quoted in active markets are based on bid prices. When independent prices are not available, fair values are determined using valuation techniques
used by the relevant markets. The techniques use observable market data to the extent available.
Non-current
Debt and other 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
Loans to joint ventures¹
Current
Investments at fair value through profit and loss
Financial assets at amortised cost
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
National Grid Partners and other investments5
Restricted balances:
Collateral6
Other
2020
£m
352
83
108
–
543
1,278
720
1,998
2,541
978
300
83
132
220
–
108
685
35
2,541
2019
£m
343
93
62
169
667
1,311
670
1,981
2,648
969
342
93
122
221
169
62
637
33
2,648
1. As at 31 March 2019, this related to a loan to a joint venture, which was measured at amortised cost.
2. Includes £1 million (2019: £6 million) held as insurance company fund investments and £26 million (2019: £22 million) US non-qualified plan investments, and therefore restricted.
3. Includes restricted amounts of £300 million (2019: £342 million) held as insurance company fund investments.
4. Includes restricted amounts of £435 million (2019: £436 million) relating to US non-qualified plan investments.
5. This includes a series of small unquoted equity investments held by National Grid Partners of £97 million (2019: £51 million).
6. 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.
153
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
15. Financial and other investments continued
Fair value through profit and loss and fair value through other comprehensive income investments are recorded at fair value. The carrying value of
current financial assets at amortised cost approximates their fair values, primarily due to short-dated maturities. The carrying value of the non-current
loans to joint ventures approximates their fair values as at 31 March 2019. 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 hold investment grade securities; life insurance policies are held with regulated insurance companies; and deposits, collateral receivable and other
financial assets at amortised cost are investment grade. 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 are more than 30 days past due, and no
balances were written off during the year.
16. 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. They are accounted for using the equity method. 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 Nemo Link Limited
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
2020
Joint
ventures
£m
Associates
£m
Total
£m
Associates
£m
2019
Joint
ventures
£m
291
20
16
–
–
–
40
1
(41)
14
341
317
12
156
176
–
–
47
–
(34)
(20)
654
608
32
172
176
–
–
87
1
(75)
(6)
995
1,807
17
58
–
(43)
(1,625)
67
37
(38)
11
291
361
(6)
85
–
–
–
11
–
(30)
(104)
317
Total
£m
2,168
11
143
–
(43)
(1,625)
78
37
(68)
(93)
608
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. 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 £240 million (2019: £18 million) in relation to joint ventures.
154
National Grid plc Annual Report and Accounts 2019/20Financial Statements 16. Investments in joint ventures and associates continued
At 31 March 2020, the Group had three material joint ventures, being its 50% equity stakes in BritNed and Nemo Link Limited (Nemo) and its 51%
stake in Emerald Energy Venture LLC (Emerald). The Group has one material associate, being its 26.25% investment in Millennium Pipeline Company
LLC. BritNed is a joint venture with the Dutch transmission system operator, TenneT, and operates the subsea electricity link between Great Britain
and the Netherlands, commissioned in 2011. Nemo is a joint venture with the Belgian transmission operator, Elia, and is a subsea electricity
interconnector between the UK and Belgium, which became operational on 31 January 2019. BritNed and Nemo have reporting periods ending on
31 December with monthly management reporting information provided to National Grid. Emerald is a joint venture with Washington State
Investment Board and builds and operates wind and solar assets. Emerald was acquired on 11 July 2019. 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
Net assets
Group’s ownership interest in joint venture/associate
Group adjustment: elimination of profits on sales
to joint venture
Carrying amount of the Group’s investment
BritNed Development
Limited
Millennium Pipeline
Company LLC
Nemo Link
Limited
2020
£m
2019
£m
2020
£m
2019
£m
2020
£m
2019
£m
399
54
4
(45)
(16)
396
198
–
198
370
59
2
(11)
(28)
392
196
–
196
971
33
26
(315)
(43)
672
176
–
176
937
35
22
(326)
(84)
584
153
–
153
582
26
5
(29)
(10)
574
287
–
287
537
47
3
2
(375)
214
107
–
107
BritNed Development
Limited
Millennium Pipeline
Company LLC
Nemo Link
Limited
2020
£m
2019
£m
2020
£m
2019
£m
2020
£m
2019
£m
Emerald
Energy
Venture
LLC
2020
£m
435
66
6
(232)
(2)
273
139
(10)
129
Emerald
Energy
Venture
LLC
2020
£m
Income statement
Revenue
Depreciation and amortisation
Other costs
Operating profit
Net interest expense
Profit before tax
Income tax expense
Profit for the year
Group’s share of profit/(loss)
Group adjustment: Tax charge
Group’s share of post-tax results for the year
80
(14)
(10)
56
–
56
(10)
46
23
–
23
87
(13)
(10)
64
–
64
(10)
54
27
–
27
206
(46)
(20)
140
(22)
118
–
118
31
(9)
22
166
(34)
(24)
108
(11)
97
–
97
25
–
25
45
(23)
(8)
14
–
14
(2)
12
6
–
6
12
(4)
(4)
4
–
4
–
4
2
–
2
19
(7)
(10)
2
(3)
(1)
–
(1)
(1)
–
(1)
155
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
17. Derivative financial instruments
Derivatives are financial instruments that derive their value from the price of an underlying item such as interest rates, foreign exchange rates,
credit spreads, commodities, equities or other indices. In accordance with policies approved by the Board, 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.
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 consolidated 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
(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
2020
Assets
£m
Liabilities
£m
1,267
75
1,342
(1,134)
(200)
(1,334)
2020
Assets
£m
Liabilities
£m
556
643
58
–
10
(337)
(514)
(39)
(234)
(10)
1,267
(1,134)
Total
£m
133
(125)
8
Total
£m
219
129
19
(234)
–
133
2019
Assets
£m
Liabilities
£m
1,052
101
1,153
(1,084)
(99)
(1,183)
2019
Assets
£m
Liabilities
£m
539
470
41
–
2
(384)
(443)
(41)
(214)
(2)
1,052
(1,084)
Total
£m
(32)
2
(30)
Total
£m
155
27
–
(214)
–
(32)
1. Included within the foreign exchange forward contracts balance is £(3) million (2019: £32 million) of derivatives in relation to hedging of capital expenditure.
156
National Grid plc Annual Report and Accounts 2019/20Financial Statements 17. 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
2020
2019
Assets
£m
Liabilities
£m
Total
£m
Assets
£m
Liabilities
£m
62
62
480
13
20
31
661
1,205
1,267
(254)
(254)
(51)
(5)
(28)
(109)
(687)
(880)
(1,134)
(192)
(192)
429
8
(8)
(78)
(26)
325
133
56
56
19
416
11
20
530
996
(282)
(282)
(193)
(1)
–
(14)
(594)
(802)
1,052
(1,084)
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
2020
£m
(3,101)
(8,097)
(3,284)
(500)
(800)
Total
£m
(226)
(226)
(174)
415
11
6
(64)
194
(32)
2019
£m
(6,299)
(6,700)
(2,937)
(500)
(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:
(15,782)
(17,236)
Commodity purchase contracts accounted for as derivative contracts
Forward purchases of gas
Derivative financial instruments linked to commodity prices
Electricity swaps
Gas swaps
Gas options
2020
2019
Assets
£m
Liabilities
£m
Total
£m
Assets
£m
Liabilities
£m
Total
£m
64
4
7
–
75
(108)
(44)
(83)
(8)
(1)
(79)
(1)
(1)
66
29
5
1
(200)
(125)
101
(78)
(12)
(19)
(1)
(1)
(99)
10
4
–
2
157
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
17. 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
2020
2019
Assets
£m
Liabilities
£m
Total
£m
Assets
£m
Liabilities
£m
Total
£m
31
31
8
9
8
7
12
44
75
(126)
(126)
(35)
(24)
(12)
(1)
(2)
(74)
(200)
(95)
(95)
(27)
(15)
(4)
6
10
(30)
(125)
52
52
14
9
6
6
14
49
101
(68)
(68)
(9)
(8)
(4)
(4)
(6)
(31)
(99)
(16)
(16)
5
1
2
2
8
18
2
The notional quantities of commodity contract derivatives by type are as follows:
Forward purchases of gas1
Electricity swaps
Electricity options
Gas swaps
Gas options
2020
102m Dth
2019
52m Dth
12,836 GWh
12,848 GWh
0 GWh
10,444 GWh
89m Dth
26m Dth
87m Dth
34m Dth
1. Forward gas purchases have terms up to four years (2019: two years). The contractual obligations under these contracts are £128 million (2019: £108 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 £21 million against inventories as at 31 March 2020 (2019: £20 million).
2020
£m
151
265
133
549
2019
£m
99
184
87
370
158
National Grid plc Annual Report and Accounts 2019/20Financial Statements 19. 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
2020
£m
1,551
869
408
158
2019
£m
1,899
883
237
134
2,986
3,153
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 carrying value. The maximum exposure of trade receivables to credit risk is the gross carrying amount of
£2,063 million (2019: £2,293 million).
Provision for impairment of receivables
A provision for credit losses is recognised at an amount equal to the expected credit losses that will arise over the lifetime of the trade receivables
and accrued income.
At 1 April
Exchange adjustments
Charge for the year, net of recoveries
Uncollectible amounts written off
At 31 March
2020
£m
394
20
234
(136)
512
2019
£m
309
24
181
(120)
394
The trade receivables balance, accrued income balance and provisions balance split by geography is as follows:
Trade receivables
Accrued income
Provision for impairment of trade receivables
As at 31 March 2020
As at 31 March 2019
UK
£m
227
461
(40)
US
£m
Total
£m
1,836
2,063
408
(472)
869
(512)
UK
£m
313
445
(40)
US
£m
Total
£m
1,980
2,293
438
(354)
883
(394)
There are no retail customers in the UK businesses. A provision matrix is not used in the UK as an assessment of expected losses on individual
debtors is performed, and the provision is not material.
In the US, £1,806 million (2019: £1,885 million) of the trade receivables and unbilled revenue balance is attributable to retail customers. For non-retail
US customer receivables, a provision matrix is not used and expected losses are determined on individual debtors.
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.
In March 2020, the Group’s US distribution businesses ceased certain customer cash collection activities in response to regulatory instructions
and to changes in State, Federal and City level regulations and guidance, and actions to minimise risk to the Group’s employees. The Group has
also ceased customer termination activities as requested by relevant local authorities. In addition, we have considered the macroeconomic data
including unemployment levels and our previous experience regarding debtor recoverability during and in the aftermath of the 2008/09 financial
crisis (which impacted all of our service territories) and that following Superstorm Sandy in 2012 which impacted our downstate New York gas
business specifically.
Based on our review of these factors, we concluded that a reasonable range for the additional provision recognised in light of the cessation
of customer terminations and collections following the moratoriums introduced would lie between £81 million and £161 million ($100 million
and $200 million). We concluded an additional charge of £117 million represented our best estimate based on the information available, primarily
as this represented an impact twice as severe as Superstorm Sandy, adjusted to incorporate all service territories impacted.
159
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
19. Trade and other receivables continued
The average expected loss rates and gross balances for the retail customer receivables in our US operations are set out below:
Unbilled revenue
0 – 30 days
30 – 60 days
60 – 90 days
3 – 6 months
6 – 12 months
Over 12 months
2020
%
2020
£m
2019
%
2019
£m
5
5
14
29
47
63
79
395
623
184
105
119
104
276
–
3
12
20
30
39
68
420
736
194
89
109
99
238
1,806
1,885
The year-on-year movements in average expected loss rates are driven primarily as a result of the moratoriums on cash collection and termination
activities outlined above.
US retail customer receivables are not collateralised. Trade receivables are written off when regulatory requirements are met. Write-off policies vary
between jurisdictions as they are aligned with the local regulatory requirements, which differ between regulators. There were no significant amounts
written off during the period that were still subject to enforcement action. Our internal definition of default is aligned with that of the individual
regulators in each jurisdiction.
For further information on our wholesale and retail credit risk, refer to note 32(a).
20. Cash and cash equivalents
Cash and cash equivalents include cash balances, together with short-term investments with an original maturity of less than three months that are
readily convertible to cash.
Net cash and cash equivalents reflected in the cash flow statement are net of bank overdrafts, which are reported in borrowings. The carrying
amounts of cash and cash equivalents and bank overdrafts approximate their fair values.
Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for periods varying between one
day and three months, depending on the immediate cash requirements, and earn interest at the respective short-term deposit rates.
Net cash and cash equivalents held in currencies other than sterling have been converted into sterling at year-end exchange rates. For further
information on currency exposures, refer to note 32(c).
Cash at bank
Short-term deposits
Cash and cash equivalents
2020
£m
73
–
73
2019
£m
177
75
252
160
National Grid plc Annual Report and Accounts 2019/20Financial Statements 21. Borrowings
We borrow money primarily in the form of bonds and bank loans. These are for a fixed term and may have fixed or floating interest rates or are
linked to RPI. 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.
All borrowings are accounted for at amortised cost, with the exception of one liability measured at fair value through profit and loss, in order to
eliminate a measurement mismatch.
Borrowings, which include interest-bearing, zero-coupon and inflation-linked debt, overdrafts and collateral payable, are initially recorded at fair value.
This normally reflects the proceeds received (net of direct issue costs for liabilities measured at amortised cost). Subsequently, borrowings 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, interest is calculated 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).
Current
Bank loans
Bonds
Commercial paper
Lease liabilities
Other loans
Non-current
Bank loans
Bonds¹
Lease liabilities
Other loans
Total borrowings
1. Includes a liability held at fair value through profit and loss of £741 million (2019: £667 million).
2020
£m
1,244
1,446
1,269
112
1
2019
£m
641
1,973
1,792
65
1
4,072
4,472
2,819
2,599
23,094
21,278
623
186
26,722
30,794
205
176
24,258
28,730
161
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
21. 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
2020
£m
4,072
2,212
1,664
757
2,122
2019
£m
4,472
2,393
1,990
1,553
714
870
19,097
30,794
959
16,649
28,730
The fair value of borrowings at 31 March 2020 was £34,174 million (2019: £32,252 million). Where market values were available, fair value of
borrowings (Level 1) was £14,059 million (2019: £14,356 million). Where market values were not available, fair value of borrowings (Level 2) was
£20,115 million (2019: £17,896 million), calculated by discounting cash flows at prevailing interest rates. The notional amount outstanding of the debt
portfolio at 31 March 2020 was £30,422 million (2019: £28,417 million).
In April 2020, National Grid Electricity Transmission plc issued a £0.4 billion fixed interest rate bond from the NGET EMTN programme with a 20-year
tenor and The Narragansett Electric Company issued a $0.6 billion (£0.5 billion) fixed interest rate bond with a 10-year tenor. Both issuances are part
of the continued Group funding arrangements.
During the year, the assets of the Colonial Gas Company were merged with the Boston Gas Company, and have been ringfenced post-merger, 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 £84 million at 31 March 2020 (2019: £81 million).
Collateral is placed with or received from any derivative 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 £785 million (2019: £558 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 £741 million (2019: £667 million), which includes cumulative change in fair value attributable to changes in credit
risk recognised in other comprehensive income, post tax of £10 million (2019: £13 million);
ii. the amount repayable at maturity in November 2021 is £759 million (2019: £724 million); and
iii. the difference between carrying amount and contractual amount at maturity is £18 million (2019: £57 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.
162
National Grid plc Annual Report and Accounts 2019/20Financial Statements 21. Borrowings continued
Lease liabilities
The Group adopted IFRS 16 on 1 April 2019, which resulted in the recognition of £474 million of additional lease liabilities. As we applied the modified
retrospective approach to transition, comparatives were not restated. Refer to note 37 for details.
Lease liabilities are initially measured at the present value of the lease payments expected over the lease term. The discount rate applied is the rate
implicit in the lease or if that is not available, then the incremental rate of borrowing for a similar term and similar security. The lease term takes
account of exercising any extension options that are at our option if we are reasonably certain to exercise the option and any lease termination
options unless we are reasonably certain not to exercise the option. Each lease payment is allocated between the liability and finance cost. The
finance cost is charged to the income statement over the lease period using the effective interest rate method.
Gross 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 lease liabilities are as follows:
Less than 1 year
1 to 5 years
More than 5 years
22. Trade and other payables
2020
£m
2019
£m
132
361
481
974
(239)
735
112
297
326
735
65
183
62
310
(40)
270
65
156
49
270
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. Contingent consideration is measured
at fair value.
Trade payables
Deferred payables
Customer contributions¹
Social security and other taxes
Contingent consideration²
Other payables
1. From government-related entities.
2. Contingent consideration relates to the acquisition of Geronimo (see note 38).
Due to their short maturities, the fair value of trade payables approximates their carrying value.
2020
£m
2,205
137
84
202
30
944
2019
£m
2,404
217
87
159
–
902
3,602
3,769
163
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
23. 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.
Current
Non-current
Significant changes in the contract liabilities balances during the period are as follows:
As at 1 April
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
24. Other non-current liabilities
2020
£m
76
1,082
1,158
2020
£m
994
39
(60)
185
–
1,158
2019
£m
61
933
994
2019
£m
866
29
(51)
155
(5)
994
Other non-current liabilities include deferred income which will not be recognised as income until after 31 March 2021. It also includes payables
that are not due until after that date.
Contingent consideration is measured at fair value. All other non-current liabilities are initially recognised at fair value and subsequently measured at
amortised cost.
Deferred income¹
Customer contributions²
Contingent consideration³
Other payables
1. Principally the deferral of profits relating to the sale of property, which we expect to recognise in future years.
2. From government-related entities.
3. Contingent consideration relates to the acquisition of Geronimo (see note 38).
There is no material difference between the fair value and the carrying value of other payables.
2020
£m
2019
£m
101
428
44
318
891
96
372
–
340
808
164
National Grid plc Annual Report and Accounts 2019/20Financial Statements 25. Pensions and other post-retirement benefits
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
UK and the US. In the US we also provide healthcare and life insurance benefits to eligible employees, post-retirement. The fair value of associated
plan assets and present value of DB obligations are updated annually in accordance with IAS 19 (revised). We separately present our UK and US
pension plans to show geographical split. Below we provide a more detailed analysis of the amounts recorded in the primary financial statements
and the actuarial assumptions used to value the DB obligations.
National Grid’s UK 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. In the US, the assets of the plans are held in trusts and administered by the
Retirement Plans Committee comprised of appointed employees of the Company.
Defined contribution plans
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.
The National Grid YouPlan
YouPlan is the qualifying UK pension plan that is used for automatic enrolment of new hires.
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 Company contribution of 12% of salary as well as the cost of administration and insured benefits.
Defined benefit plans
On retirement, members of DB plans 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 plans is calculated separately for each DB plan by projecting the estimated amount of future
benefit payments that employees have earned for their pensionable service in the current and prior periods. These future benefit payments
are discounted to determine the present value of the liabilities. Current service cost and any unrecognised past service cost are recognised
immediately. The discount rate used is the yield curve 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.
The principal UK DB pensions plans 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 principal plans and various healthcare and life insurance plans.
The COVID-19 pandemic
The COVID-19 pandemic has had a global impact on economies, equity and bond markets. Market volatility during March has had an impact on the
value of assets held by our DB and DC pension plans. Our UK DB plans have low-risk investment strategies with limited exposure to equities and
other return seeking assets, whilst the US plans have a greater exposure to these asset classes.
UK Pensions plans
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 167 for the assumptions used for IAS 19 (revised) purposes. The
actuarial valuations for NGUKPS as at 31 March 2019 have recently been completed, while we expect the valuation for NGEG of ESPS to be finalised
by 30 June 2020.
Latest full actuarial valuation
31 March 2019
31 March 2019
31 March 2016
Actuary
Willis Towers Watson
Willis Towers Watson
Aon Hewitt
Section A of NGUKPS
Section B of NGUKPS
NGEG of ESPS
Market value of plan 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
£6,551 million
£6,502 million
101%
£49 million
£41 million
£5,765 million
£5,831 million
99%
(£66 million)
(£55 million)
£2,553 million
£3,053 million
84%
(£500 million)
(£415 million)
165
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
25. Pensions and other post-retirement benefits continued
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, now an unrelated third party. The plan closed to new hires on 1 April 2002.
Section A
Following the latest actuarial valuation at 31 March 2019, Section A remains in surplus, and so no deficit funding contributions are required. National
Grid and the Trustees have agreed a schedule of contributions whereby the employers will continue to contribute 51.8% of pensionable salary, less
member contributions, in respect of future benefit accrual.
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 latest full actuarial valuation at 31 March 2019 determined that Section B was in deficit. In addition to a £34 million payment already made in
September 2019, National Grid and the Trustees agreed that an additional payment of approximately £32 million will be made by September 2020
to eliminate the funding deficit. In addition, the employers contribute 51.4% of pensionable salary, less member contributions, in respect of future
benefit accrual.
Pensions buy-ins
During the year, the Trustees of the NGUKPS entered into two buy-in arrangements in order to manage various risks. The policies provide bulk
annuities in respect of some pensioner and dependant members of Sections A and B of NGUKPS and were funded by existing assets. In Section A,
£2.8 billion of gilts were exchanged for a buy-in policy with Rothesay Life. In Section B, £1.6 billion of gilts were exchanged for a buy-in policy with
Legal & General. Both policies are held by the Trustee. For both transactions, the pricing of the policies was highly competitive; however, under IAS
19 the methodology for calculating the value of the buy-ins (as an asset held by the pension plan) differs from the price paid. This resulted in the
recognition of an actuarial loss of £0.7 billion on purchase, recorded within the consolidated statement of other comprehensive income.
National Grid Electricity Group of the Electricity Supply Pension Scheme
The last full actuarial valuation for the NGEG of the ESPS determined that the plan 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 plan closed to new hires from 1 April 2006.
The plan holds a longevity insurance contract which covers improvements in longevity, providing long-term protection to the scheme, should some
pensioner and dependant members live longer than currently expected.
Administration costs
Up to 31 March 2020, National Grid was responsible for the costs of plan administration and the Pension Protection Fund (PPF) levies for both
Sections A and B of NGUKPS, and NGEG of ESPS. However, from 1 April 2020 onwards this will only apply to Section B of NGUKPS and NGEG of
ESPS, whilst Section A of NGUKPS will fund these costs from the Section’s assets.
Security arrangements
National Grid has also established security arrangements with charges in favour of the Trustees.
Value of security arrangements at 31 March 20201
£315 million
£180 million
£239 million
Principal supporting employers
National Grid plc and
National Grid UK Limited
National Grid Gas plc (NGG)
National Grid Electricity
Transmission plc (NGET)
Additional amounts payable2 at 31 March 2020
£72 million
A maximum of £280 million
A maximum of £500 million
Section A of NGUKPS
Section B of NGUKPS
NGEG of ESPS
1. Following the completion of the March 2019 valuations for Sections A and B of NGUKPS, these amounts have changed to £186 million for Section A and to £nil for Section B.
2. These amounts are payable if certain trigger events occur which have been individually agreed between the plans and their relevant supporting employers.
The majority of the security is provided in the form of surety bonds with the remainder in letters of credit. The assets held in security will be paid to
the respective section or plan in the event that the relevant supporting employer is subject to an insolvency event or fails to make the required
contributions; and applicable to NGEG of ESPS only, if NGET loses its licence to operate under relevant legislation. Counter indemnities have also
been taken out to ensure the obligations will be fulfilled.
166
National Grid plc Annual Report and Accounts 2019/20Financial Statements 25. Pensions and other post-retirement benefits continued
US pension plans
National Grid has multiple DC pension plans which allow employee as well as Company contributions. Non-union employees hired after 1 January
2011, as well as new hire represented union employees, receive a core contribution into the DC plan, irrespective of the employee’s contribution into
the plan.
National Grid sponsors four non-contributory qualified DB pension plans, which provide vested union employees, and vested non-union employees
hired before 1 January 2011 with retirement benefits within prescribed limits as defined by the US Internal Revenue Service. National Grid also
provides non-qualified DB pension arrangements for a section of current and former employees, which are closed to new entrants. Benefits under
the DB 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 £153 million (2019: £231 million).
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 £18 million (2019: £14 million).
For the last few years it has been the Company’s policy to primarily direct contributions to the DB pension plans due to concerns over tax deductible
limitations relating to the retiree and healthcare and life insurance plans.
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
2020
%
2.35
2.35
2.90
2.65
2.45
2019
%
2.40
2.45
3.50
3.25
3.20
2018
%
2.60
2.65
3.40
3.15
3.10
At 31 March 2020, single equivalent financial assumptions are shown above for presentational purposes, although full yield curves have been used in
our calculations. In 2018 and 2019, single equivalent financial assumptions were set which reflected the average duration for the aggregate past and
future service obligations.
The discount rate is determined by reference to high-quality UK corporate bonds at the reporting date. 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.
Discount rate
Salary increases
Initial healthcare cost trend rate
Ultimate healthcare cost trend rate
US pensions
US other post-retirement benefits
2020
%
3.30
3.50
n/a
n/a
2019
%
3.95
3.50
n/a
n/a
2018
%
4.00
3.50
n/a
n/a
2020
%
3.30
3.50
7.00
4.50
2019
%
3.95
3.50
7.25
4.50
2018
%
4.00
3.50
7.50
4.50
Discount rates for US pension liabilities have been determined by reference to appropriate yields on high-quality US corporate bonds 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 2030 (2019: 2028).
Assumed life expectations for a retiree age 65
Males
Females
In 20 years:
Males
Females
2020
2019
2018
UK
years
US
years
UK
years
US
years
UK
years
US
years
22.1
23.8
23.3
25.3
20.9
23.4
22.5
25.1
22.0
23.6
23.3
25.2
22.1
24.2
23.7
25.9
22.3
23.9
23.7
25.5
22.0
24.2
23.6
25.8
167
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
25. Pensions and other post-retirement benefits continued
Maturity profile of DB obligations
The weighted average duration of the DB obligation for each category of plan is 14 years for UK pension plans; 14 years for US pension plans and
16 years for US other post-retirement benefit plans.
As at the reporting date, the present value of the funded obligations split according to member status was approximately:
• UK pensions: 8% active members (2019: 10%; 2018: 10%); 14% deferred members (2019: 16%; 2018: 18%); 78% pensioner members (2019:
74%; 2018: 72%);
• US pensions: 36% active members (2019: 37%; 2018: 38%); 9% deferred members (2019: 9%; 2018: 8%); 55% pensioner members (2019:
54%; 2018: 54%); and
• US other post-retirement benefits: 35% active members (2019: 39%; 2018: 38%); 0% deferred members (2019: 0%; 2018: 0%); 65% pensioner
members (2019: 61%; 2018: 62%).
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
Net defined benefit liability
Represented by:
Liabilities
Assets
2020
£m
2019
£m
2018
£m
(24,281)
(24,609)
(23,747)
23,748
24,793
23,858
(533)
(345)
(75)
(953)
184
(330)
(72)
(218)
(2,802)
(1,785)
1,849
(953)
1,567
(218)
111
(307)
(67)
(263)
(1,672)
1,409
(263)
The geographical split of pensions and other post-retirement benefits is as shown below:
UK Pensions
US Pensions
US other post-retirement
benefits
2020
£m
2019
£m
2018
£m
2020
£m
2019
£m
2018
£m
2020
£m
2019
£m
2018
£m
Present value of funded obligations
(12,775)
(14,200)
(14,152)
(7,809)
(6,901)
(6,349)
(3,697)
(3,508)
(3,246)
Fair value of plan assets
14,364
15,507
15,330
6,972
6,646
6,030
2,412
2,640
2,498
Present value of unfunded obligations
Other post-employment liabilities
1,589
1,307
1,178
(69)
–
(76)
–
(74)
–
(837)
(276)
–
(255)
(254)
–
(319)
(233)
–
(1,285)
(868)
(748)
–
(75)
–
(72)
–
(67)
(815)
Net defined benefit asset/(liability)
1,520
1,231
1,104
(1,113)
(509)
(552)
(1,360)
(940)
Represented by:
Liabilities
Assets
(69)
(76)
(74)
(1,373)
1,589
1,520
1,307
1,231
1,178
1,104
260
(1,113)
(769)
260
(509)
(783)
231
(552)
(1,360)
(940)
(815)
–
–
–
(1,360)
(940)
(815)
The recognition of the pension assets in both the UK in relation to the NGUKPS, the NGEG of ESPS and the US in relation to Niagara Mohawk Plan
reflects legal and actuarial advice that we have taken regarding recognition of surpluses under IFRIC 14. 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, surplus assets may be used to pay benefits under other Plans, thereby allowing the Company to settle other liabilities
under other Plans.
168
National Grid plc Annual Report and Accounts 2019/20Financial Statements 25. Pensions and other post-retirement benefits continued
Amounts recognised in the income statement and statement of other comprehensive income
Included within operating costs
Administration costs
Included within payroll costs
Defined benefit plan costs:
Current service cost
Past service cost – augmentations
Past service credit – redundancies
Special termination benefit cost – redundancies
Past service cost – plan amendments¹
Included within finance income and costs
Net interest cost
Total included in income statement
Remeasurement (losses)/gains of pension assets and post-retirement benefit obligations²
Exchange adjustments
Total included in the statement of other comprehensive income
2020
£m
2019
£m
2018
£m
16
14
16
178
193
193
–
–
2
–
5
(7)
55
34
1
(1)
9
–
180
280
202
23
219
(724)
(97)
(821)
22
316
68
(101)
(33)
65
283
1,313
175
1,488
1. For the year ended 31 March 2019, the estimated cost of equalising for the impact of GMP under the most cost-effective permissible methodology (Section A of NGUKPS – £17 million;
Section B of NGUKPS – £12 million; NGEG of ESPS – £5 million).
2. For the year ended 31 March 2020, this includes an actuarial loss from the purchase of buy-in policies of £0.7 billion.
The geographical split of pensions and other post-retirement benefits is as shown below:
Included within operating costs
Administration costs
Included within payroll costs
Defined benefit plan 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 (income)/cost
Total included in income statement
Remeasurement gains/(losses) of pension assets and
post-retirement benefit obligations¹
Exchange adjustments
Total included in the statement of other
comprehensive income
UK Pensions
US Pensions
US other post-retirement
benefits
2020
£m
2019
£m
2018
£m
2020
£m
2019
£m
2018
£m
2020
£m
2019
£m
2018
£m
9
6
6
6
7
9
1
1
1
33
–
–
2
–
41
5
(7)
55
34
35
128
(31)
13
143
–
143
(31)
103
57
–
57
49
100
104
98
45
48
46
1
(1)
9
–
58
3
67
1,177
–
–
–
–
–
–
–
–
–
–
–
–
–
100
104
98
21
127
(588)
(42)
21
132
(14)
(42)
27
134
27
75
–
–
–
–
45
33
79
–
–
–
–
48
32
81
–
–
–
–
46
35
82
(279)
(55)
25
(59)
109
100
1,177
(630)
(56)
102
(334)
(34)
209
1. For the year ended 31 March 2020, UK pensions is stated after an actuarial loss from the purchase of buy-in policies of £0.7 billion.
169
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
25. Pensions and other post-retirement benefits continued
Reconciliation of the net defined benefit liability
Opening net defined benefit liability
Cost recognised in the income statement
Remeasurement and foreign exchange effects recognised in the statement of other comprehensive income
Employer contributions
Other movements
Closing net defined benefit liability
2020
£m
(218)
(219)
(821)
327
(22)
(953)
2019
£m
(263)
(316)
(33)
419
(25)
(218)
2018
£m
(1,933)
(283)
1,488
475
(10)
(263)
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
2020
£m
1,231
(13)
143
156
3
2019
£m
1,104
(103)
57
174
(1)
2018
£m
(156)
(67)
1,177
150
–
2020
£m
(509)
(127)
(630)
153
–
Closing net defined benefit asset/(liability)
1,520
1,231
1,104
(1,113)
2019
£m
(552)
(132)
(56)
231
–
(509)
2018
£m
(728)
(134)
102
208
–
2020
£m
(940)
(79)
(334)
18
(25)
2019
£m
(815)
(81)
(34)
14
(24)
(552)
(1,360)
(940)
2018
£m
(1,049)
(82)
209
117
(10)
(815)
Changes in the present value of defined benefit obligations (including unfunded obligations)
Opening defined benefit obligations
Current service cost
Interest cost
Actuarial gains/(losses) – 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
Employee contributions
Benefits paid
Exchange adjustments
Closing defined benefit obligations
2020
£m
2019
£m
2018
£m
(24,939)
(24,054)
(26,230)
(178)
(751)
148
452
(84)
–
(2)
–
–
(22)
(1)
(193)
(771)
(69)
266
(619)
7
(55)
(5)
(34)
(19)
(1)
(193)
(775)
(100)
671
174
1
(9)
(1)
–
(21)
(1)
1,282
(531)
1,376
(768)
1,285
1,145
(24,626)
(24,939)
(24,054)
The geographical split of pensions and other post-retirement benefits is as shown below:
UK pensions
US pensions
US other post-retirement benefits
2020
£m
2019
£m
2018
£m
2020
£m
2019
£m
2018
£m
2020
£m
2019
£m
2018
£m
Opening defined benefit obligations
(14,276)
(14,226)
(15,645)
(7,155)
(6,582)
(7,050)
(3,508)
(3,246)
(3,535)
Current service cost
Interest cost
Actuarial gains/(losses) – experience
Actuarial gains – demographic assumptions
Actuarial gains/(losses) – financial assumptions
Past service credit – redundancies
Special termination benefit cost – redundancies
Past service cost – augmentations
Past service cost – plan amendments
Medicare subsidy received
Employee contributions
Benefits paid
Exchange adjustments
(33)
(335)
113
140
798
–
(2)
–
–
–
(1)
752
–
(41)
(358)
(56)
224
(568)
7
(55)
(5)
(34)
–
(1)
837
–
(49)
(366)
(95)
565
604
1
(9)
(1)
–
–
(1)
770
–
(100)
(280)
(45)
78
(595)
–
–
–
–
–
–
(104)
(277)
(52)
–
(24)
–
–
–
–
–
–
(98)
(273)
(38)
30
(279)
–
–
–
–
–
–
374
(362)
398
(514)
362
764
(45)
(136)
80
234
(287)
–
–
–
–
(22)
–
156
(169)
(48)
(136)
39
42
(27)
–
–
–
–
(19)
–
141
(254)
(46)
(136)
33
76
(151)
–
–
–
–
(21)
–
153
381
Closing defined benefit obligations
(12,844)
(14,276)
(14,226)
(8,085)
(7,155)
(6,582)
(3,697)
(3,508)
(3,246)
170
National Grid plc Annual Report and Accounts 2019/20Financial Statements 25. Pensions and other post-retirement benefits continued
Changes in the value of plan assets
Opening fair value of plan assets
Interest income
Return on plan assets (less than)/in excess of interest¹
Administration costs
Employer contributions
Employee contributions
Benefits paid
Exchange adjustments
Closing fair value of plan assets
Actual return on plan assets
Expected contributions to plans in the following year
2020
£m
2019
£m
2018
£m
24,793
23,858
24,375
728
(1,240)
(16)
327
1
749
490
(14)
419
1
710
568
(16)
475
1
(1,279)
(1,377)
(1,285)
434
667
(970)
23,748
24,793
23,858
(512)
269
1,239
307
1,278
363
1. For the year ended 31 March 2020, this includes an actuarial loss from the purchase of buy-in policies of £0.7 billion.
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
15,507
15,330
15,489
Interest income
366
389
363
2020
£m
2019
£m
2018
£m
Return on plan assets (less than)/
in excess of interest¹
Administration costs
Employer contributions
Employee contributions
Benefits paid
Exchange adjustments
(908)
(9)
156
1
457
(6)
174
1
(749)
(838)
–
–
103
(6)
150
1
(770)
–
Closing fair value of plan assets
14,364
15,507
15,330
Actual return on plan assets
Expected contributions to plans
in the following year
(542)
137
846
148
466
140
2020
£m
6,646
259
(26)
(6)
153
–
(374)
320
6,972
233
2019
£m
6,030
256
62
(7)
231
–
(398)
472
2018
£m
6,322
246
314
(9)
208
–
(362)
(689)
6,646
318
6,030
560
2020
£m
2,640
103
(306)
(1)
18
–
(156)
114
2,412
(203)
125
150
221
7
2019
£m
2,498
104
(29)
(1)
14
–
(141)
195
2,640
75
9
2018
£m
2,564
101
151
(1)
117
–
(153)
(281)
2,498
252
2
1. For the year ended 31 March 2020, UK pensions includes an actuarial loss from the purchase of buy-in policies of £0.7 billion.
The markets for unquoted investments are illiquid and the valuations that have been provided by fund managers as at 31 March 2020 may be based
on valuation models that have unobservable inputs. Given the current market volatility that has arisen as a result of COVID-19, this means that the
prices provided are subject to additional estimation uncertainty. Sensitivity analyses for changes in private equity, property and diversified alternative
valuations have been provided in note 35.
Asset allocation strategy
Each plan’s investment strategy is formulated in order to target specific asset allocations and returns, and to manage risk. The asset allocation of the
plans is as follows:
Equities
Corporate bonds
Government securities
Property
Diversified alternatives
Liability matching assets
Infrastructure
Cash and cash equivalents
Other
2020
2019
UK
pensions
%
US
pensions
%
US other
post-retirement
benefits
%
UK
pensions
%
US
pensions
%
US other
post-retirement
benefits
%
10.2
26.7
14.3
4.8
6.2
34.3
–
1.8
1.7
100.0
36.0
31.0
18.2
4.4
9.0
–
1.7
0.3
(0.6)
100.0
57.6
0.6
22.9
–
13.4
–
–
–
5.5
100.0
12.7
23.4
39.4
5.5
5.0
11.1
–
1.9
1.0
40.8
26.4
16.0
4.7
10.1
–
1.5
0.3
0.2
100.0
100.0
60.2
0.7
20.6
–
12.9
–
–
–
5.6
100.0
171
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
25. Pensions and other post-retirement benefits continued
Defined benefit investment strategies and risks
DB pension plans 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 plan, to assist them in mitigating the risks associated with their plans and to ensure that the plans
are funded to meet their obligations.
In the UK, each plan 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 plan, 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 plans’ 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, buy-ins, government securities, corporate bonds 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 pension plan’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 pension plans hold sufficient cash to meet benefit requirements, with other investments being held in liquid or realisable assets to meet
unexpected cash flow requirements. The plans do not borrow money, or act as guarantor, to provide liquidity to other parties (unless it is temporary).
In the UK, both NGUKPS and NGEG of ESPS have Responsible Investment (RI) Policies, which take into account Environmental, Social and
Governance (ESG) areas. The NGUKPS RI also incorporates the six UN-backed Principles for Responsible Investment (UNPRI). The Trustees believe
that ESG factors can be material to financial outcomes and therefore these should and will be considered alongside other factors. The Trustees
recognise that their primary responsibility remains a fiduciary one, i.e. their first duty is to ensure the best possible return on investments with the
appropriate level of risk. However, the Trustees also recognise the increasing materiality of ESG factors and that they have a fiduciary and regulatory
duty to consider RI, including ESG factors and the potential impact on the quality and sustainability of long-term investment returns and therefore on
the Trustees’ primary fiduciary duty.
Whilst in the US there is no regulatory requirement to have ESG-specific principles embedded in investment policies, investment managers often
utilise ESG principles to inform their decision-making process.
The most significant risks associated with the DB plans are:
• Asset volatility – the plans invest in a variety of asset classes, but principally in government securities, bulk annuities, corporate bonds,
equities and property. Consequently, actual returns will differ from the underlying discount rate adopted, impacting on the funding position
of the plan through the net balance sheet asset or liability. Each plan 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 including bulk annuities, as well as interest rate hedging and management of foreign exchange exposure, and 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 life expectancy have a direct impact on liabilities. The NGEG of ESPS
holds a longevity insurance contract (“longevity swap”) and NGUKPS holds buy-in policies for both Sections A and B, which covers exposure
to improvement in longevity, providing long-term protection in the event that members live longer than expected;
• Counterparty risk – is managed by having a diverse range of counterparties and through having a strong collateralisation process (including for
the longevity swap held by NGEG of ESPS). Measurement and management of counterparty risk is delegated to the relevant investment
managers. For our bulk annuity policies, various termination provisions were introduced in the contracts, managing our exposure to
counterparty risk. The insurers’ operational performance and financial strength are monitored on a regular basis;
• 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;
172
National Grid plc Annual Report and Accounts 2019/20Financial Statements 25. 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 as well as bulk annuity buy-in policies;
• 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; 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
Equities
Corporate bonds
Government securities
Property
Diversified alternatives
2020
Quoted
£m
Unquoted
£m
732
3,837
2,051
103
–
732
–
–
585
893
Total
£m
1,464
3,837
2,051
688
893
Liability-matching assets
1,704¹
3,278²
4,982
Longevity swap
Cash and cash equivalents
Other (including net current assets
and liabilities)
–
29
–
(51)
222
(51)
251
249
249
2019
Quoted
£m
Unquoted
£m
1,181
3,625
6,114
108
–
1,751
–
40
–
784
–
–
749
771
–
(35)
259
160
Total
£m
1,965
3,625
6,114
857
771
1,751
(35)
299
160
2018
Quoted
£m
Unquoted
£m
1,420
3,949
5,629
129
99
1,174
–
211
–
813
–
–
834
690
–
–
215
167
Total
£m
2,233
3,949
5,629
963
789
1,174
–
426
167
8,456
5,908
14,364
12,819
2,688
15,507
12,611
2,719
15,330
1. Consists of pooled funds which invests mainly in fixed interest securities.
2. Comprises the buy-in policies held by NGUKPS.
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.
2020
Quoted
£m
Unquoted
£m
2019
Quoted
£m
Unquoted
£m
Total
£m
2,510
2,158
1,267
307
626
121
24
533
1,329
422
–
183
–
21
2,178
425
640
316
487
99
–
21
(41)
(8)
Total
£m
2,711
1,754
1,062
316
670
99
21
13
2018
Quoted
£m
Unquoted
£m
577
1,085
414
–
198
–
14
6
1,954
413
565
279
421
77
–
27
Total
£m
2,531
1,498
979
279
619
77
14
33
4,188
6,972
2,480
4,166
6,646
2,294
3,736
6,030
467
1,640
535
–
162
–
24
(44)
2,784
2,043
518
732
307
464
121
–
3
2020
Quoted
£m
Unquoted
£m
353
15
551
162
–
1,037
–
1
161
132
Total
£m
1,390
15
552
323
132
2019
Quoted
£m
Unquoted
£m
404
19
540
175
–
1,184
–
3
166
149
Total
£m
1,588
19
543
341
149
2018
Quoted
£m
Unquoted
£m
412
24
508
161
–
1,110
–
2
144
137
Total
£m
1,522
24
510
305
137
1,081
1,331
2,412
1,138
1,502
2,640
1,105
1,393
2,498
173
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
26. 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.
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, discount rates or changes in the expected timing of expenditure that relates 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 within finance costs.
At 1 April 2018
Exchange adjustments
Additions¹
Unused amounts reversed
Unwinding of discount
Utilised²
Transfers³
At 31 March 2019
Exchange adjustments
Additions¹
Unused amounts reversed
Unwinding of discount
Utilised²
At 31 March 2020
Current
Non-current
Environmental
£m
Decommissioning
£m
Restructuring
£m
Emissions
£m
Other
£m
1,531
103
32
(36)
62
(53)
–
1,639
82
437
(29)
65
(123)
2,071
194
7
18
(10)
5
(26)
–
188
5
93
(16)
5
(21)
254
3
–
125
(3)
–
(42)
–
83
–
7
(16)
–
(39)
35
8
–
16
(6)
–
(9)
–
9
1
12
–
–
(5)
17
316
14
35
(10)
7
(79)
(3)
280
9
40
(9)
7
(50)
277
2020
£m
348
2,306
2,654
Total
provisions
£m
2,052
124
226
(65)
74
(209)
(3)
2,199
97
589
(70)
77
(238)
2,654
2019
£m
316
1,883
2,199
1. For the year ended 31 March 2020, £402 million (2019: £nil) of additions relate to exceptional environmental provisions, of which £76 million relates to the impact of the change in the real
discount rate from 1% to 0.5% during the year (see note 5 for details). Additions to other provisions include £15 million (2019: £nil) in relation to discontinued operations.
2. Utilised amounts for other provisions include £8 million (2019: £20 million) in relation to discontinued operations.
3. Represents net amounts transferred to trade and other payables (see note 22) of £nil (2019: £3 million).
174
National Grid plc Annual Report and Accounts 2019/20Financial Statements 26. 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
2020
2019
Discounted
£m
Undiscounted
£m
175
1,896
2,071
184
1,955
2,139
Real
discount
rate
0.5%
0.5%
Discounted
£m
Undiscounted
£m
189
1,450
1,639
210
1,555
1,765
Real
discount
rate
1%
1%
The remediation expenditure in the UK relates to old gas manufacturing sites and also to electricity transmission sites. Cash flows are expected to be
incurred until 2075 although the weighted average duration of the cash flows is 11 years. A number of estimation uncertainties affect the calculation
of the provision, including the impact of regulation, 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, of which the majority relates to three Superfund sites (being sites where
hazardous substances are present as a result of the historic operations of manufactured gas plants in Brooklyn, New York). 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. Under the terms of our rate plans, we are entitled to recovery of environmental clean-up costs from rate payers.
Decommissioning provisions
The decommissioning provisions represent £174 million (2019: £80 million) of expenditure relating to asset retirement obligations estimated to be
incurred until 2115, with additional amounts being recognised in the year relating to both interconnectors and other assets commissioned in the year.
In addition, £74 million (2019: £90 million) of expenditure relating to the demolition of gas holders is estimated to be incurred until 2026.
Restructuring provisions
In 2019, a cost-efficiency and restructuring programme was undertaken in both our UK and US businesses, as detailed in note 5, which resulted in
the recognition of a £125 million charge in that year. £39 million (2019: £42 million) was utilised during the current year, resulting in a closing provision
of £35 million (2019: £83 million).
Other provisions
Included within other provisions at 31 March 2020 are the following amounts:
• £37 million (2019: £30 million) in respect of legacy provisions recognised following the sale of UK Gas Distribution;
• £31 million (2019: £29 million) in respect of onerous lease commitments and rates payable on surplus properties with expenditure expected to
be incurred until 2039;
• £164 million (2019: £164 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, but we
currently expect that cash flows will be incurred until 2049; and
• £nil (2019: £13 million) in respect of obligations associated with investments in joint ventures and associates.
175
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
27. Share capital
Ordinary share capital represents the total number of shares issued which are publicly traded. We also disclose the number of treasury shares the
Company holds, which are shares that the Company has bought itself, predominantly to actively manage 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 2018
Issued during the year in lieu of dividends¹
At 31 March 2019
Issued during the year in lieu of dividends¹
At 31 March 2020
Allotted, called-up and fully
paid
million
3,638
49
3,687
93
3,780
£m
452
6
458
12
470
1. The issue of shares under the scrip dividend programme is considered to be a bonus issue under the terms of the Companies Act 2006, and the nominal value of the shares is charged to
the share premium account.
The share capital of the Company consists of ordinary shares of 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 2020, the Company held 272 million (2019: 277 million) of its own shares. The market value of these shares as at 31 March 2020 was
£2,574 million (2019: £2,359 million).
For the benefit of employees and in connection with the operation of the Company’s various share plans, the Company made the following
transactions in respect of its own shares during the year ended 31 March 2020:
i. During the year, 3 million (2019: 3 million) treasury shares were gifted to National Grid Employee Share Trusts and 2 million (2019: 3 million)
treasury shares were re-issued in relation to employee share schemes, in total representing approximately 0.1% (2019: 0.2%) of the ordinary
shares in issue as at 31 March 2020. The nominal value of these shares was £1 million (2019: £1 million) and the total proceeds received were
£17 million (2019: £18 million). National Grid settles share awards under its Long Term Incentive Plan and the Save As You Earn scheme, by the
transfer of treasury shares to its employee share trusts.
ii. During the year, the Company made payments totalling £6 million (2019: £2 million) to National Grid Employee Share Trusts to enable the
trustees to make purchases of National Grid plc shares to settle share awards in relation to all employee share plans and discretionary reward
plans. The cost of such purchases is deducted from retained earnings in the period that the transaction occurs.
The maximum number of ordinary shares held in treasury during the year was 277 million (2019: 283 million) representing approximately 7.3%
(2019: 7.7%) of the ordinary shares in issue as at 31 March 2020 and having a nominal value of £34 million (2019: £35 million).
176
National Grid plc Annual Report and Accounts 2019/20Financial Statements 28. 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 merger reserve represents the difference between the carrying value of subsidiary undertaking investments and their respective capital
structures following the Lattice demerger from BG Group plc and the 1999 Lattice refinancing.
The cash flow hedge reserve will amortise as the committed future cash flows from borrowings are paid or capitalised in fixed assets (as described in
note 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 available-for-sale, 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 2017
Exchange adjustments¹
Net gains/(losses) taken to equity²
Share of net gains of associates taken to
equity
Transferred from profit or loss²
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 equity²
Share of net gains of associates taken
to equity
Transferred to profit or loss²
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
At 1 April 2019
Exchange adjustments¹
Net losses taken to equity
Share of net losses 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
894
(504)
–
–
–
–
390
–
390
346
–
–
–
–
–
–
736
550
–
–
–
–
–
–
At 31 March 2020
1,286
103
–
296
5
(280)
4
128
(3)
125
–
–
–
–
–
–
–
–
76
76
–
(206)
(107)
1
166
(13)
6
(18)
61
–
(142)
(5)
14
(17)
29
(15)
(75)
–
41
–
7
–
17
–
(33)
–
(45)
–
11
–
(50)
162
–
(30)
–
(73)
29
88
(88)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
34
34
–
–
–
–
–
–
–
34
–
(13)
–
–
–
4
–
25
–
–
–
–
–
–
–
46
46
–
2
–
–
–
–
–
48
–
(15)
–
–
–
(2)
–
31
–
–
–
–
–
–
–
7
7
–
7
–
–
–
(1)
–
13
–
(3)
–
–
–
–
–
19
(5,165)
(3,987)
–
–
–
–
–
19
–
19
–
–
–
–
–
–
–
–
–
–
–
–
(504)
266
5
(353)
33
(5,165)
(4,540)
–
72
(5,165)
(4,468)
–
–
–
–
–
–
–
346
(304)
1
207
(13)
12
(18)
19
(5,165)
(4,237)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
550
(206)
(5)
(31)
(17)
42
(15)
10
19
(5,165)
(3,919)
1. The exchange adjustments recorded in the translation reserve comprise a gain of £545 million (2019: gain of £896 million; 2018: loss of £1,304 million) relating to the translation of foreign
operations offset by a gain of £5 million (2019: loss of £550 million; 2018: gain of £800 million) relating to borrowings, cross-currency swaps and foreign exchange forward contracts used
to hedge the net investment in non-sterling denominated subsidiaries.
2. Following a review in the year, we have changed our presentation of spot foreign exchange movements on derivatives designated in cash flow hedges of foreign currency risk and interest
rates. This has no net impact on the consolidated statement of comprehensive income. It has resulted in a prior year gross up to £166 million (2018: £277 million) to ‘Net losses taken to
equity’ with an equal and offsetting gross up to ‘Transferred to profit or loss’.
177
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
29. 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 are included in note 32.
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 in cash and cash equivalents
Decrease 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
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 16 (2019: IFRS 9)
Net debt (net of related derivative financial instruments) at end of year
Composition of net debt
Net debt is comprised as follows:
Cash, cash equivalents and financial investments
Borrowings
Financing derivatives¹
2020
£m
(183)
(7)
(23)
888
675
(1,081)
(1,097)
(84)
2019
£m
(80)
(822)
(708)
866
(744)
(1,648)
(1,076)
(27)
2018
£m
(807)
(5,953)
1,209
808
(4,743)
2,098
(1,017)
(66)
(1,587)
(3,495)
(3,728)
(26,529)
(23,002)
(19,274)
(474)
(32)
–
(28,590)
(26,529)
(23,002)
2020
£m
2,071
2019
£m
2,233
2018
£m
3,023
(30,794)
(28,730)
(26,625)
133
(32)
600
(28,590)
(26,529)
(23,002)
1. The financing derivatives balance included in net debt excludes the commodity derivatives (see note 17).
2. Excludes £6 million (2019: £23 million; 2018: £27 million) cash interest from the Quadgas shareholder loan included within discontinued operations in the cash flow statement.
178
National Grid plc Annual Report and Accounts 2019/20Financial Statements 29. Net debt continued
(b) Analysis of changes in net debt
At 1 April 2017
Cash flow
Fair value gains and losses and exchange movements
Interest income/(charges)
Other non-cash movements
At 31 March 2018
Impact of transition to IFRS 9
At 1 April 2018 (as restated)
Cash flow
Fair value gains and losses and exchange movements
Interest income/(charges)
Other non-cash movements
At 1 April 2019
Impact of transition to IFRS 16
Cash flow
Fair value gains and losses and exchange movements
Interest income/(charges)
Other non-cash movements
At 31 March 2020
Balances at 31 March 2020 comprise:
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Cash
and cash
equivalents
£m
1,139
(807)
(3)
–
–
329
–
329
(80)
3
–
–
252
–
(183)
4
–
–
73
–
73
–
–
73
Financial
investments
£m
Borrowings
£m
Financing
derivatives
£m
8,741
(28,638)
(5,983)
(149)
85
–
2,108
1,088
(1,117)
(66)
2,694
(26,625)
–
(32)
2,694
(26,657)
(846)
93
29
11
(240)
(733)
(1,062)
(38)
1,981
(28,730)
–
(42)
25
34
–
(474)
450
(864)
(1,092)
(84)
1,998
(30,794)
–
1,998
–
–
–
–
(4,072)
(26,722)
1,998
(30,794)
(516)
(61)
1,162
15
–
600
–
600
422
(1,011)
(43)
–
(32)
–
450
(246)
(39)
–
133
1,205
62
(254)
(880)
133
Total1
£m
(19,274)
(4,743)
2,098
(1,017)
(66)
(23,002)
(32)
(23,034)
(744)
(1,648)
(1,076)
(27)
(26,529)
(474)
675
(1,081)
(1,097)
(84)
(28,590)
1,205
2,133
(4,326)
(27,602)
(28,590)
1. Includes accrued interest at 31 March 2020 of £246 million (2019: £223 million; 2018: £197 million).
(c) Reconciliation of cash flow from financing liabilities to cash flow statement
Cash flows per financing activities section of cash flow statement:
Proceeds received from loans
Repayment of loans
Payments of lease liabilities
Net movements in short-term borrowings
Net movements in derivatives
Interest paid
Cash flows per financing activities section of cash flow statement
Adjustments:
Non-net debt-related items
Derivative cash inflow in relation to capital expenditure
Derivative cash flows per investing section of cash flow statement
Discontinued operations
Cash flows relating to financing liabilities within net debt
Analysis of changes in net debt:
Borrowings
Financing derivatives
Cash flow movements relating to financing liabilities within net debt
2020
£m
2019
£m
2018
£m
4,218
(3,253)
2,932
(1,969)
(121)
(424)
(187)
(957)
(724)
34
13
(223)
–
(900)
(450)
(450)
(900)
(70)
179
35
(914)
193
24
13
(412)
–
(182)
240
(422)
(182)
1,941
(2,156)
(71)
(764)
(267)
(853)
(2,170)
12
12
330
(231)
(2,047)
(2,108)
61
(2,047)
179
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– analysis of items in the primary statements continued
29. Net debt continued
(d) Reconciliation of changes in liabilities arising from financing activities
The table below reconciles changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash
changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the statement of
cash flows within financing activities.
Following a review in the year, we have changed our accounting policy in relation to the presentation of certain derivatives in the cash flow statement
to be presented as investing activities rather than financing activities (further detail is disclosed in note 1). The reclassified cash flows are in relation to
derivatives associated with our net investment hedges, and given they are designated in a hedge relationship, the Group has decided to present
them together with the underlying hedged item rather than as part of our overall financing activities.
As a result we have separately disclosed the reconciliation below, excluding derivatives associated with our net investment hedges, given that they
are classified in the statement of cash flows within investing activities.
Borrowings
£m
(28,638)
2,108
1,088
(1,117)
(66)
(26,625)
(32)
(26,657)
(240)
(733)
(1,062)
(38)
(28,730)
(474)
450
(864)
(1,092)
(84)
Financing
derivatives
£m
16
281
222
34
–
553
–
553
23
(334)
(14)
–
228
–
240
(231)
(9)
–
Total
£m
(28,622)
2,389
1,310
(1,083)
(66)
(26,072)
(32)
(26,104)
(217)
(1,067)
(1,076)
(38)
(28,502)
(474)
690
(1,095)
(1,101)
(84)
(30,794)
228
(30,566)
At 1 April 2017
Cash flow
Fair value gains and losses and exchange movements
Interest income/(charges)
Other non-cash movements
At 31 March 2018
Impact of transition to IFRS 9
At 1 April 2018 (as restated)
Cash flow
Fair value gains and losses and exchange movements
Interest charges
Other non-cash movements
At 1 April 2019
Impact of transition to IFRS 16
Cash flow
Fair value gains and losses and exchange movements
Interest charges
Other non-cash movements
At 31 March 2020
180
National Grid plc Annual Report and Accounts 2019/20Financial 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 energy purchase agreements and contracts for the purchase of assets which, in many cases, extend over a long
period of time. Commitments previously included operating lease commitments but on transition to IFRS 16, which was effective from 1 April 2019,
substantially all lease commitments are included on the balance sheet as right-of-use assets (see note 13) and lease liabilities (see note 21).
Therefore, only low-value leases and short-term leases are off-balance sheet commitments, both of which are immaterial. 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
Energy purchase commitments¹
Less than 1 year
In 1 to 2 years
In 2 to 3 years
In 3 to 4 years
In 4 to 5 years
More than 5 years
Guarantees²
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 (expected expiry 2020)
Guarantees of certain obligations of Nemo Link Limited (expired 2019)
Guarantees of certain obligations of National Grid North Sea Link Limited (various expiry dates)²
Guarantees of certain obligations of St William Homes LLP (various expiry dates)³
Guarantees of certain obligations for construction of IFA 2 (expected expiry 2022)²
Guarantees of certain obligations of National Grid Viking Link Limited (expected expiry 2024)
Other guarantees and letters of credit (various expiry dates)
Operating lease commitments
Less than 1 year
In 1 to 2 years
In 2 to 3 years
In 3 to 4 years
In 4 to 5 years
More than 5 years
2020
£m
2019
£m
2,629
1,973
1,365
1,353
890
973
955
861
779
651
827
862
11,314
16,358
11,237
15,709
173
34
92
–
683
30
564
1,096
150
2,822
173
39
139
19
865
22
505
872
341
2,975
2019
£m
43
39
34
35
27
123
301
1. Energy purchase commitments relate to contractual commitments to purchase electricity or gas that are used to satisfy physical delivery requirements to our customers or for energy that
we use ourselves (i.e. normal purchase, sale or usage) and hence are accounted for as ordinary purchase contracts (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).
2. Included within total guarantees are guarantees to both joint ventures and Engineering, Procurement and Construction contractors regarding the construction of interconnectors of £358
million (2019: £470 million).
3. Includes guarantees to related parties.
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.
181
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– supplementary information continued
31. 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 ventures
Payable to associates
Interest income from joint ventures
Interest income from associates
Dividends received from joint ventures5
Dividends received from associates6
2020
£m
2019
£m
2018
£m
5
101
33
61
56
255
1
72
4
2
8
34
41
5
151
192
26
141
584
368
8
12
5
23
30
171
3
14
220
135
160
160
376
–
17
4
27
43
170
1. During the year, £38 million (2019: £139 million) of property sites were sold to a joint venture, St William Homes LLP. A further £32 million of sales were made to NGET/SPT Upgrades Limited
in 2020.
2. Sales relate to transactions with Quadgas, until the date it ceased to be a related party following the disposal of our 39% stake in June 2019 (see note 10). Included within this is other
income of £31 million (2019: £52 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, most notably, £31 million
(2019: £30 million) of purchases from Millennium Pipeline Company LLC. The Group also purchased capitalised assets of £58 million (2019: £26 million) from NGET/SPT Upgrades Limited
(a joint venture).
4. Amounts receivable from associates includes a loan receivable balance of £242 million (2019: £325 million) in relation to St William Homes LLP (a joint venture). There is no longer a loan
receivable from Quadgas (2019: £352 million) and Nemo Link (a joint venture) (2019: £258 million). The loan receivable balance from Nemo Link was transferred to equity during 2020
(see note 16 for details).
5. Dividends of £25 million (2019: £30 million) were received from BritNed Development Limited.
6. Includes £32 million (2019: £24 million) of dividend income from Millennium Pipeline Company LLC. No dividends were received from Quadgas this year (2019: £133 million).
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 88 – 108 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, and written policies covering the
following specific areas: 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 82.
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.
182
National Grid plc Annual Report and Accounts 2019/20Financial Statements 32. 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 finance income and
costs (see note 6). Hedge accounting is discontinued when a hedging relationship no longer qualifies for hedge accounting.
Certain hedging instrument components are treated separately as costs of hedging with the gains and losses deferred in a component of other
equity reserves and released systematically into profit or loss to correspond with the timing and impact of hedged exposures, or released in full to
finance costs upon an early discontinuation of a hedging relationship.
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. Exposure arises from derivative financial instruments, deposits with banks and
financial institutions, trade receivables and committed transactions with wholesale and retail customers.
Treasury credit risk
Counterparty risk arises from the investment of surplus funds and from the use of derivative financial instruments. As at 31 March 2020, 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
2,049
500
1,118
1,863
1,024
–
559
931
745 to 931
372 to 465
261 to 373
130 to 186
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 2020 and 2019, 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. Further information on financial investments subject to impairment
provisioning is included in note 15.
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 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. In March 2020, the Group’s US distribution business
ceased certain cash collection and termination activities in response to regulatory instructions following the COVID-19 pandemic. This has resulted
in the recognition of expected credit losses as at 31 March 2020 (see note 19 for further details).
183
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– supplementary information continued
32. 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 £23 million as at 31 March 2020
(2019: £19 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.
Related amounts
available to be offset but
not offset in statement
of financial position
Gross
carrying
amounts
£m
Gross
amounts
offset
£m
Net amount
presented in
statement of
financial
position
£m
Financial
instruments
£m
Cash
collateral
received/
pledged
£m
Net amount
£m
1,267
75
1,342
(1,134)
(200)
(1,334)
8
–
–
–
–
–
–
–
1,267
75
1,342
(1,134)
(200)
(1,334)
(351)
(5)
(356)
351
5
356
(694)
(3)
(697)
646
8
654
222
67
289
(137)
(187)
(324)
8
–
(43)
(35)
Related amounts
available to be offset but
not offset in statement
of financial position
Gross
carrying
amounts
£m
Gross
amounts
offset
£m
Net amount
presented in
statement of
financial
position
£m
Financial
instruments
£m
Cash
collateral
received/
pledged
£m
Net amount
£m
1,052
101
1,153
(1,084)
(99)
(1,183)
(30)
–
–
–
–
–
–
–
1,052
101
1,153
(1,084)
(99)
(1,183)
(299)
29
(270)
299
(29)
270
(30)
–
(551)
–
(551)
615
–
615
64
202
130
332
(170)
(128)
(298)
34
At 31 March 2020
Assets
Financing derivatives
Commodity contract derivatives
Liabilities
Financing derivatives
Commodity contract derivatives
At 31 March 2019
Assets
Financing derivatives
Commodity contract derivatives
Liabilities
Financing derivatives
Commodity contract derivatives
184
National Grid plc Annual Report and Accounts 2019/20Financial Statements 32. 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 financing 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:
At 31 March 2020
Non-derivative financial liabilities
Borrowings, excluding lease liabilities
Interest payments on borrowings¹
Lease liabilities
Other non-interest-bearing liabilities
Contingent consideration
Derivative financial liabilities
Financing derivatives – receipts²
Financing derivatives – payments²
Commodity contract derivatives – receipts²
Commodity contract derivatives – payments²
Derivative financial assets
Financing derivatives – receipts²
Financing derivatives – payments²
Commodity contract derivatives – receipts²
Commodity contract derivatives – payments²
At 31 March 2019
Non-derivative financial liabilities
Borrowings, excluding lease liabilities
Interest payments on borrowings¹
Lease liabilities
Other non-interest-bearing liabilities
Derivative financial liabilities
Financing derivatives – receipts²
Financing derivatives – payments²
Commodity contract derivatives – receipts²
Commodity contract derivatives – payments²
Derivative financial assets
Financing derivatives – receipts²
Financing derivatives – payments²
Commodity contract derivatives – receipts²
Commodity contract derivatives – payments²
Less than
1 year
£m
1 to 2
years
£m
2 to 3
years
£m
More than
3 years
£m
Total
£m
(3,672)
(2,150)
(1,611)
(22,214)
(29,647)
(765)
(132)
(3,149)
(32)
(750)
(114)
(318)
(16)
(714)
(99)
–
(32)
(12,002)
(14,231)
(629)
–
(16)
(974)
(3,467)
(96)
2,249
986
1,208
3,510
7,953
(2,582)
(1,136)
(1,463)
(4,067)
(9,248)
4
(116)
2,469
(2,271)
20
(21)
2
(50)
1,063
(527)
1
–
–
(24)
570
(375)
1
–
–
(12)
1,775
(1,478)
–
–
6
(202)
5,877
(4,651)
22
(21)
(7,998)
(3,009)
(2,539)
(35,133)
(48,679)
Less than
1 year
£m
1 to 2
years
£m
2 to 3
years
£m
More than
3 years
£m
(4,129)
(2,348)
(1,998)
(19,673)
(800)
(72)
(3,306)
3,045
(3,421)
2
(98)
1,928
(1,251)
23
–
(733)
(63)
(340)
1,703
(2,029)
3
(26)
561
(459)
9
(5)
(721)
(52)
–
163
(223)
1
(4)
863
(783)
2
(1)
(13,465)
(123)
–
2,560
(3,276)
–
(1)
1,112
(875)
–
–
Total
£m
(28,148)
(15,719)
(310)
(3,646)
7,471
(8,949)
6
(129)
4,464
(3,368)
34
(6)
(8,079)
(3,727)
(2,753)
(33,741)
(48,300)
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 receipts and payments line items for derivatives comprise gross undiscounted future cash flows, after considering any contractual netting that applies within individual contracts. Where
cash receipts and payments within a derivative contract are settled net, and the amount to be received/(paid) exceeds the amount to be paid/(received), the net amount is presented within
derivative receipts/(payments).
185
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– supplementary information continued
32. 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 for 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.
Derivative financial instruments were used to manage foreign currency risk as follows:
Cash and cash equivalents
Financial investments
Sterling
£m
Euro
£m
18
813
–
–
2020
Dollar
£m
55
1,185
Other
£m
–
–
Total
£m
73
1,998
Sterling
£m
97
965
Euro
£m
2
–
2019
Dollar
£m
153
1,016
Other
£m
–
–
Total
£m
252
1,981
Borrowings
(12,407)
(4,150)
(13,217)
(1,020)
(30,794)
(10,591)
(4,787)
(12,126)
(1,226)
(28,730)
Pre-derivative position
(11,576)
(4,150)
(11,977)
(1,020)
(28,723)
Derivative effect
(1,169)
4,341
(4,214)
1,175
133
(9,529)
(1,055)
(4,785)
(10,957)
(1,226)
(26,497)
4,803
(5,245)
1,465
(32)
Net debt position
(12,745)
191
(16,191)
155
(28,590)
(10,584)
18
(16,202)
239
(26,529)
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:
Sterling
£m
Euro
£m
Trade and other receivables
Trade and other payables
Other non-current liabilities
306
(1,177)
(85)
–
–
–
2020
Dollar
£m
1,403
(2,002)
(277)
Other
£m
–
–
–
Total
£m
1,709
(3,179)
(362)
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)
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.
186
National Grid plc Annual Report and Accounts 2019/20Financial Statements 32. 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.
LIBOR is being replaced as an interest rate benchmark by alternative reference rates in certain currencies including our functional currencies, USD
and GBP, and foreign currencies in which we operate. This impacts contracts including financial liabilities that pay LIBOR-based cash flows, and
derivatives that receive or pay LIBOR-based cash flows. The change in benchmark also affects discount rates which can impact valuations. We are
managing the risk by planning to replace LIBOR cash flows with alternative reference rates on our affected contracts.
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.
Net debt was managed using derivative financial instruments to hedge interest rate risk as follows:
2020
Fixed
rate
£m
Floating
rate
£m
Inflation
linked
£m
Other1
£m
Cash and cash equivalents
Financial investments
71
–
10
1,966
–
–
Borrowings
(20,969)
(3,085)
(6,740)
Pre-derivative position
(20,898)
(1,109)
(6,740)
Derivative effect
2,259
(1,892)
(234)
Net debt position
(18,639)
(3,001)
(6,974)
(8)
32
–
24
–
24
Total
£m
73
1,998
Fixed rate
£m
59
6
Floating
rate
£m
104
1,944
(30,794)
(19,043)
(3,045)
(28,723)
(18,978)
133
1,740
(28,590)
(17,238)
(997)
(1,559)
(2,556)
2019
Inflation
linked
£m
–
–
(6,642)
(6,642)
(213)
(6,855)
Other1
£m
89
31
–
Total
£m
252
1,981
(28,730)
120
(26,497)
–
(32)
120
(26,529)
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 as finance costs.
The Group early-adopted IFRS Interest Rate Benchmark Reform amendments related to hedge accounting, with effect from 1 April 2019. The
amendments allow existing hedge designations to continue unchanged during the period of uncertainty relating to the timing and method of
benchmark migrations.
The amendments will be applied until the earlier point in time where affected cash flows are amended, the relationship is formally discontinued,
and any cash flow hedge reserve balance has been released, or formal market conventions ending uncertainty are published and widely adopted.
If amended cash flows do not cause a hedging relationship to be discontinued, then the amendments will cease to be applied only when that
relationship is discontinued under IFRS 9.
The IFRS amendments impact fair value and cash flow hedges of interest rate risk and related hedging instruments, and certain net investment
hedges that use cross-currency interest rate swaps to pay a foreign currency floating rate and receive a functional currency floating rate. The
notional values of hedging instruments, for each type of hedging relationship impacted, are shown in the hedge accounting tables in note 32(e).
These amounts also correspond to the exposures designated as hedged.
187
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– supplementary information continued
32. 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
Cash flow hedges of
foreign currency
and interest rate
risk
Cash flow hedges of
foreign currency
risk
Net investment
hedges
Year ended 31 March 2020
£m
£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
5
–
1
2
1
247
(1)
(39)
(143)
(7)
14
(1)
(8)
–
106
(105)
(264)
£m
(17)
–
–
–
–
4
8
(8)
(12)
£m
–
(30)
–
(45)
(43)
9
–
(82)
(19)
May 2020 – Feb 2040
Jul 2020 – Dec 2039
Apr 2020 – Dec 2024
Jun 2020 – Sep 2027
1.64
1.19 – 1.24
1.13 – 1.17
1.30 – 1.66
1.10 – 1.24
1.13 – 1.14
LIBOR
+30bps/+408bps
LIBOR -44bps/+
115bps
1.331% – 5.850%
1.103% – 3.864%
1.24 – 1.41
1.04 – 1.30
n/a
n/a
n/a
1.21 – 1.49
1.14
n/a
n/a
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.
188
National Grid plc Annual Report and Accounts 2019/20Financial Statements 32. Financial risk management continued
(e) Hedge accounting continued
Fair value hedges of
foreign currency and
interest rate risk
Cash flow hedges of
foreign currency and
interest rate risk
Cash flow hedges of
foreign currency risk
Net investment hedges
Year ended 31 March 2019
£m
£m
Consolidated statement of comprehensive income
–
(6)
–
3
(4)
17
168
(9)
(25)
(206)
(12)
166
–
–
–
78
(28)
(134)
£m
(12)
–
–
–
–
9
23
(3)
(4)
£m
–
(90)
–
39
32
–
–
(43)
(249)
Net losses in respect of:
Cash flow hedges¹
Cost of hedging
Transferred to profit or loss in respect of:
Cash flow hedges¹
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 instruments²
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
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
n/a
n/a
1.49
1.15
n/a
n/a
n/a
1. Following a review in the year, we have changed our presentation of spot foreign exchange movements on derivatives designated in cash flow hedges of foreign currency risk and interest
rates. This has no net impact on the consolidated statement of comprehensive income. It has resulted in a prior year gross up of £166 million to net losses in respect of cash flow hedges
with an equal and offsetting gross up to transferred to profit and loss in respect of cash flow hedges.
2. 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.
189
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– supplementary information continued
32. 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. These tables also
present notional values of hedging instruments (and equal hedged exposures) impacted by IFRS 9 Interest Rate Benchmark Reform amendments.
(i) Fair value hedges of foreign currency and interest rate risk on recognised borrowings:
As at 31 March 2020
Hedge type
Balance of fair value hedge
adjustments in borrowings
Change in value used for
calculating ineffectiveness
Hedging
instrument
notional
£m
Continuing
hedges
£m
Discontinued
hedges
£m
Hedged
item
£m
Hedging
instrument
£m
Hedge
ineffectiveness
£m
Foreign currency and interest rate risk on borrowings1,2
(1,751)
(31)
(95)
(42)
48
6
1. The carrying value of the hedged borrowings is £1,883 million, of which £72 million is current and £1,811 million is non-current.
2. Included within the hedging instrument notional balance is £1,675 million impacted by Interest Rate Benchmark Reform amendments.
As at 31 March 2019
Hedge type
Balance of fair value hedge
adjustments in borrowings
Change in value used for
calculating ineffectiveness
Hedging
instrument
notional
£m
Continuing
hedges
£m
Discontinued
hedges
£m
Hedged
item
£m
Hedging
instrument
£m
Hedge
ineffectiveness
£m
Foreign currency and interest rate risk on borrowings¹
(1,707)
11
(117)
15
(10)
5
1. The carrying value of the hedged borrowings was £1,810 million, of which £202 million was current and £1,608 million was non-current. Following a review in the year, we have changed our
presentation of spot foreign exchange movements on derivatives designated in fair value hedges of foreign currency risk and interest rates. It has resulted in a prior year equal and offsetting
impact of £4 million to the balances used for the ‘Change in value used for calculating ineffectiveness’.
(ii) Cash flow hedges of foreign currency and interest rate risk:
As at 31 March 2020
Balance in cash flow hedge
reserve
Change in value used for
calculating ineffectiveness
Hedge type
Foreign currency and interest rate risk on borrowings¹
Foreign currency risk on forecasted cash flows
Hedging
instrument
notional
£m
(4,127)
(794)
Continuing
hedges
£m
Discontinued
hedges
£m
Hedged
item
£m
Hedging
instrument
£m
Hedge
ineffectiveness
£m
(69)
8
(22)
–
142
17
(143)
(17)
(1)
–
1. Included within the hedging instrument notional balance is £176 million impacted by Interest Rate Benchmark Reform amendments.
As at 31 March 2019
Balance in cash flow hedge
reserve
Change in value used for
calculating ineffectiveness
Hedge type
Foreign currency and interest rate risk on borrowings¹
Foreign currency risk on forecasted cash flows
Hedging
instrument
notional
£m
(3,804)
(697)
Continuing
hedges
£m
Discontinued
hedges
£m
Hedged
item
£m
Hedging
instrument
£m
Hedge
ineffectiveness
£m
(17)
45
51
–
206
12
(206)
(12)
–
–
1. Following a review in the year, we have changed our presentation of spot foreign exchange movements on derivatives designated in cash flow hedges of foreign currency risk and interest
rates. This has no net impact on the consolidated statement of comprehensive income. It has resulted in a prior year equal and offsetting impact of £167 million to the balances used for the
‘Change in value used for calculating ineffectiveness’.
(iii) Net investment hedges of foreign currency risk:
As at 31 March 2020
Hedge type
Balance in translation reserve
Change in value used for
calculating ineffectiveness
Hedging
instrument
notional
£m
Continuing
hedges
£m
Discontinued
hedges
£m
Hedged
item
£m
Hedging
instrument
£m
Hedge
ineffectiveness
£m
Currency risk on foreign operations¹
(3,064)
45
(2,871)
(6)
6
–
1. Included within the hedging instrument notional balance is £nil impacted by Interest Rate Benchmark Reform amendments.
As at 31 March 2019
Hedge type
Balance in translation reserve
Change in value used for
calculating ineffectiveness
Hedging
instrument
notional
£m
Continuing
hedges
£m
Discontinued
hedges
£m
Hedged
item
£m
Hedging
instrument
£m
Hedge
ineffectiveness
£m
Currency risk on foreign operations
(2,974)
(329)
(2,502)
550
(550)
–
190
National Grid plc Annual Report and Accounts 2019/20Financial Statements 32. Financial risk management continued
(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 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. 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.
191
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– supplementary information continued
32. 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
Investments held at FVTPL
Investments held at FVOCI
Investments in associates¹
Financing derivatives
Commodity contract derivatives
Liabilities
Financing derivatives
Commodity contract derivatives
Liabilities held at fair value
Contingent consideration²
2020
2019
Level 1
£m
Level 2
£m
Level 3
£m
1,278
83
–
–
–
–
352
–
1,257
9
1,361
1,618
–
–
(741)
–
(741)
620
(889)
(136)
–
–
(1,025)
593
108
–
103
10
66
287
(245)
(64)
–
(74)
(383)
(96)
Total
£m
1,386
435
103
1,267
75
3,266
(1,134)
(200)
(741)
(74)
(2,149)
1,117
Level 1
£m
Level 2
£m
Level 3
£m
1,311
93
–
–
–
1,404
–
–
(667)
–
(667)
737
–
343
–
1,050
33
1,426
(868)
(32)
–
–
(900)
526
62
–
90
2
68
222
(216)
(67)
–
–
(283)
(61)
Total
£m
1,373
436
90
1,052
101
3,052
(1,084)
(99)
(667)
–
(1,850)
1,202
1. Our Level 3 investments include investments relating to Sunrun Neptune 2016 LLC accounted for at FVTPL.
2. Contingent consideration relates to the acquisition of Geronimo (see note 38).
Level 1:
Level 2:
Financial instruments with quoted prices for identical instruments in active markets.
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 financing derivatives include cross-currency, interest rate and foreign exchange derivatives. We value these 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, and therefore we classify our vanilla trades as Level 2 under
the IFRS 13 framework.
Our Level 2 commodity contract 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 financing derivatives 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 that we value using proprietary models.
Derivatives are classified as Level 3 where significant inputs into the valuation technique are neither directly nor indirectly observable (including our
own data, which are adjusted, if necessary, to reflect the assumptions market participants would use in the circumstances).
Our Level 3 investments include equity instruments 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 unquoted investments where prices or valuation inputs are
unobservable. These investments are either recently acquired or there have been recent funding rounds with third parties and therefore the valuation
is based on the latest transaction price and any subsequent investment-specific adjustments.
Our Level 3 investments in associates include our investment in Sunrun Neptune 2016 LLC, which is accounted for at fair value. The investment is fair
valued by discounting expected cash flows using a weighted average cost of capital specific to Sunrun Neptune 2016 LLC.
In light of the current ongoing impact of the COVID-19 pandemic, the valuations of certain assets and liabilities can be more subjective. While there
have been significant movements in market indices, we are satisfied that there has been no significant impact on the fair values of our financial
instruments measured at fair value, and that any impact is reflected in the fair values in the table above.
192
National Grid plc Annual Report and Accounts 2019/20Financial Statements 32. Financial risk management continued
(g) Fair value analysis continued
The changes in value of our Level 3 financial instruments are as follows:
At 1 April
Net (losses)/gains for the year1,2
Purchases
Acquisition of Geronimo
Settlements
Reclassification to held for sale³
Financing derivatives
2020
£m
(214)
(20)
–
–
(1)
–
2019
£m
(219)
4
–
–
1
–
At 31 March
(235)
(214)
Commodity contract
derivatives
2020
£m
2019
£m
1
6
26
–
(31)
–
2
(1)
(16)
44
–
(26)
–
1
Other3,4
2020
£m
152
26
51
(74)
(18)
–
137
2019
£m
194
15
57
–
(4)
(110)
152
Total
2020
£m
(61)
12
77
(74)
(50)
–
(96)
2019
£m
(26)
3
101
–
(29)
(110)
(61)
1. Loss of £20 million (2019: £4 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 £17 million (2019: £21 million loss) is attributable to commodity contract derivative financial instruments held at the end of the reporting period.
3. Relates to our put and call options over our interests in Quadgas, that were classified as held for sale at 31 March 2019.
4. Other comprises our investments in Sunrun Neptune 2016 LLC, Enbala and the investments made by National Grid Partners, which are accounted for at fair value through profit and loss as
well as the contingent consideration arising from the acquisition of Geronimo (see note 38).
The impacts on a post-tax basis of reasonably possible changes in significant Level 3 assumptions are as follows:
Financing derivatives
Commodity contract
derivatives
Other3
2020
£m
2019
£m
2020
£m
2019
£m
2020
£m
2019
£m
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
–
–
–
–
(95)
90
–
–
–
–
–
–
(88)
83
–
–
2
–
(4)
4
–
–
–
–
(1)
2
(10)
10
–
–
–
–
–
–
–
–
–
–
(3)
4
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 2020.
The impacts disclosed above were considered on a contract-by-contract basis with the most significant unobservable inputs identified.
–
–
–
–
–
–
(3)
3
193
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– supplementary information continued
32. 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 2020, these metrics for the Group were 9.2% (2019: 9.4%), 63% (2019: 66%) and 4.1x (2019:
4.4x), respectively – see pages 28 and 244 – 245. 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;
• 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 2020 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.
194
National Grid plc Annual Report and Accounts 2019/20Financial Statements 33. 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 2020, we had bilateral committed credit facilities of £5,495 million (2019: £5,463 million). In addition, we had committed credit facilities
from syndicates of banks of £277 million at 31 March 2020 (2019: £264 million). All committed credit facilities were undrawn in 2020 and 2019. 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
2020
£m
–
1,940
1,668
277
1,887
–
5,772
2019
£m
–
–
2,190
1,668
1,869
–
5,727
Of the unused facilities at 31 March 2020, £5,495 million (2019: £5,463 million) is available for liquidity purposes, while £277 million (2019: £264
million) is available as backup to specific US borrowings. £1,923 million of the undrawn bilateral facilities due to mature in one to two years, were
renegotiated between 1 April and 17 June 2020 with new expiry dates to June 2024. Of the £1,887 million of undrawn committed borrowings facilities
due to expire within four to five years, £110 million was renegotiated before 31 March 2020, with the expiry extended by a further year, with effect
from 1 June 2020.
For the separately regulated business of National Grid Electricity System Operator Limited, the Group has a facility of £550 million (2019: £550
million). This facility is not available as Group general liquidity support and is not represented in the table above.
In addition to the above, the Group has Export Credit Agreements (ECAs) totalling £901 million (2019: £859 million), of which £233 million (2019: £510
million) is undrawn. Subsequent to the year end, two new ECAs totalling £598 million have been made available and have not been drawn.
195
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– supplementary information continued
34. 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 2020 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 Limited1*
National Grid Blue Power Limited1*
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 Limited1*
National Grid Fourteen Limited1*
National Grid Gas Holdings Limited
National Grid Gas plc
National Grid Grain LNG Limited
National Grid Holdings Limited
National Grid Holdings One plc
National Grid IFA 2 Limited
National Grid Interconnector Holdings Limited
National Grid Interconnectors Limited
National Grid International Limited
National Grid Metering Limited
National Grid North Sea Link Limited
National Grid Offshore Limited (previously NG Shetland Link Limited)
National Grid Partners Limited
1. Registered office: c/o KPMG, 15 Canada Square, London E14 5GL, UK
2. Registered office: Shire Hall, PO Box 9, Warwick CV34 4RL, UK
*
In liquidation.
National Grid Plus Limited (previously National Grid Offshore Limited)
National Grid Property Holdings Limited
National Grid Seventeen Limited1*
National Grid Smart Limited
National Grid Ten
National Grid Thirty Five Limited1*
National Grid Thirty Six Limited
National Grid Twelve Limited
National Grid Twenty Eight Limited
National Grid Twenty-Five Limited1*
National Grid Twenty Seven Limited
National Grid Twenty Three Limited
National Grid UK Limited
National Grid UK Pension Services Limited
National Grid (US) Holdings Limited
National Grid (US) Investments 2 Limited
National Grid (US) Investments 4 Limited
National Grid (US) Partner 1 Limited
National Grid Ventures Limited
National Grid Viking Link Limited
National Grid William Limited
NG Nominees Limited
NGC Employee Shares Trustee Limited
NGG Finance plc
Ngrid Intellectual Property Limited
NGT Telecom No. 1 Limited1*
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%)2
196
National Grid plc Annual Report and Accounts 2019/20Financial Statements 34. Subsidiary undertakings, joint ventures and associates continued
Subsidiary undertakings continued
Incorporated in the US
Registered office: National Registered Agents, Inc., 1209 Orange Street, Wilmington, DE 19801, USA (unless stated otherwise in footnotes).
Alden Solar, LLC
Altona Solar, LLC
Apple River Solar, LLC
Apple Solar, LLC
Arapahoe Solar, LLC
Argenta Solar, LLC
Armenia Solar, LLC
Artemisia Solar, LLC1
Ashland Solar, LLC
Athens Solar, LLC
Audubon Wind Farm, LLC
Banner Solar, LLC
Bee Hollow Solar, LLC
Benevolent Solar, LLC
Blaze Solar, LLC
Blue Ridge Wind, LLC
Blues Solar, LLC
Blue Stone Solar Energy, LLC
Bluewater Solar, LLC
Boone Solar, LLC
Boston Gas Company2
Brewster Solar, LLC
Brilliance Solar, LLC
British Transco Capital Inc.3
British Transco Finance, Inc.3
Brock Solar, LLC
Broken Bridge Corp.4
Brook Trout Solar, LLC
Brookside Solar, LLC
Burlington Solar, LLC
Burr Ridge Wind, LLC
Cage Ranch Solar, LLC
Cage Ranch Solar II, LLC
Cage Ranch Solar III, LLC
Caldwell Solar, LLC
Caldwell Solar II, LLC
Canby Solar, LLC
Cattle Ridge Wind Farm 2, LLC
Cepheus Community Solar Gardens LLC1
Claddagh Solar, LLC1
Clear Creek Solar, LLC
Clermont Solar, LLC
Clinton County Solar, LLC
Commonwealth Solar, LLC
Conestoga Wind, LLC
Copperhead Solar, LLC
Crocker Wind Farm 2, LLC
Cygnus Community Solar Garden, LLC1
Daybreak Solar, LLC
Deer Trail Solar, LLC
Dekalb Solar, LLC
Desoto Solar, LLC
Dodson Creek Solar, LLC
Dorado Community Solar Gardens, LLC1
Dorsey Road Solar, LLC
East Galesburg Solar, LLC
East Macomb Solar, LLC
Eastern Hemlock Solar, LLC
Elba Solar, LLC
Elburn Solar, LLC
Eldena Solar, LLC
Elk Creek Solar, LLC
Elk Creek Solar 2, LLC
Empire Solar, LLC
EUA Energy Investment Corporation2
Falls City Solar, LLC
Firstview Wind Farm, LLC
Franklin Solar, LLC
Front Range Wind Farm, LLC
Fulton Solar, LLC
Galesburg Solar, LLC
Genesee Solar Energy, LLC
Geronimo Energy LLC
Geronimo E Wind LLC5
Geronimo Solar Energy, LLC1
Geronimo Stutsman Wind Farm, LLC
Geronimo White Pine Solar, LLC
Gladiolus Solar, LLC1
Glenwood Solar, LLC
Glen Rock Solar, LLC
Golden Solar, LLC
Goldendale Solar, LLC
Goldfinch Solar, LLC
Granite State Power Link LLC3
Grant Solar, LLC
Grant Solar 2, LLC
Grayson Solar, LLC
Greenbrier Creek Solar, LLC
Greentown Solar, LLC
Greenwood Solar, LLC
Grid NY, LLC6
Grindstone Wind Farm, LLC7
Hale Solar, LLC
Hampton Solar, LLC
Handley Road Solar, LLC
Hardeman County Solar, LLC
Harmony Solar ND, LLC
Harmony Solar ND 2, LLC
Harrington Solar, LLC
Hartley Solar, LLC
Hearth Solar, LLC
Henderson Solar, LLC
Heyworth Solar, LLC
Honeybee Solar, LLC
Hoosier Solar, LLC1
Hyacinth Solar, LLC1
Illumination Solar, LLC
Innovation Solar, LLC
Irwin Solar, LLC
Itasca Energy Development, LLC8
Itasca Energy Services, LLC
Jack Rabbit Wind, LLC
Jackson County Solar, LLC
Jantz Solar, LLC
Junction Solar, LLC
Kankakee Solar, LLC
Keslinger Solar, LLC
KeySpan CI Midstream Limited3
KeySpan Energy Corporation6
KeySpan Energy Services Inc.3
KeySpan Gas East Corporation6
KeySpan International Corporation3
KeySpan MHK, Inc.3
KeySpan Midstream Inc.3
KeySpan Plumbing Solutions, Inc.6
Kindle Solar, LLC
KSI Contracting, LLC3
KSI Electrical, LLC3
KSI Mechanical, LLC3
Lake Iris Solar, LLC
Lakeside Solar, LLC
Lamdin Solar, LLC
Lamplight Solar, LLC
Land Management & Development, Inc.6
Landwest, Inc.6
Lansing Solar, LLC
Lawrence Solar, LLC
Leola Wind Farm, LLC
Lilac Solar, LLC1
Lindy Solar, LLC
Lockport Solar, LLC
Lordsburg Solar, LLC
Lydia Solar, LLC
Madden Creek Solar, LLC
Marigold Community Solar Garden, LLC1
Massachusetts Electric Company2
Maverick Wind Farm, LLC
Mazon Solar, LLC
McFadden Solar, LLC
Merton Solar, LLC
Metro Energy, LLC6
Metrowest Realty LLC3
Miller Creek Solar, LLC
Morning Glory Solar, LLC1
Mottville Solar, LLC
Mountain Laurel Solar, LLC
Mustang Ridge Wind Farm, LLC
Mystic Steamship Corporation3
Nantucket Electric Company2
National Grid Algonquin LLC3
National Grid Connect Inc.3
National Grid Development Holdings Corp.3
National Grid Electric Services, LLC6
National Grid Energy Management, LLC3
National Grid Energy Services LLC3
National Grid Energy Trading Services LLC6
National Grid Engineering & Survey Inc.6
National Grid Generation LLC6
National Grid Generation Ventures LLC6
National Grid Glenwood Energy Center, LLC3
National Grid IGTS Corp.6
National Grid Insurance USA Ltd6
National Grid Islander East Pipeline LLC3
National Grid LNG GP LLC3
197
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– supplementary information continued
34. Subsidiary undertakings, joint ventures and associates continued
Subsidiary undertakings continued
Incorporated in the US continued
National Grid LNG LLC3
National Grid LNG LP LLC3
National Grid Millennium LLC3
National Grid NE Holdings 2 LLC2
National Grid North America Inc.3
National Grid North East Ventures Inc.3
National Grid Partners Inc.6
National Grid Partners LLC3
National Grid Port Jefferson Energy Center LLC3
National Grid Services Inc.3
National Grid Transmission Services Corporation2
National Grid US 6 LLC3
National Grid US LLC3
National Grid USA3
National Grid USA Service Company, Inc.2
Nees Energy, Inc.2
New Bremen Solar, LLC
New England Electric Transmission Corporation4
New England Energy Incorporated2
New England Hydro Finance Company, Inc. (53.704%)2
New England Hydro-Transmission Corporation (53.704%)4
New England Hydro-Transmission Electric Company Inc. (53.704%)2
New England Power Company2
Newport America Corporation9
NGNE LLC3
NGV Emerald Acquisition Co. LLC3
NGV Emerald Energy Venture Holdings LLC3
NGV Emerald Holdings LLC3
NGV US Distributed Energy Inc.3 (previously National Grid Green Homes Inc.)
NGV US Transmission Inc.3 (previously Grid America Holdings Inc.)
Niagara Falls Solar, LLC
Niagara Mohawk Energy, Inc.3
Niagara Mohawk Holdings, Inc.6
Niagara Mohawk Power Corporation6
Niobrara Wind, LLC
NM Properties, Inc.6
Nordic Vos, LLC
North Adair Solar, LLC
Northeast Renewable Link LLC3
North East Transmission Co., Inc.3
North Fork Wind, LLC
North Rock Solar, LLC
North Wonder Lake Solar, LLC
Onton Solar, LLC
Opinac North America, Inc.3
Oreana Solar, LLC
Patriotic Solar, LLC
Pennington Solar, LLC
Peony Solar, LLC
Perseus Community Solar Garden, LLC1
Philadelphia Coke Co., Inc.3
Piper Solar, LLC
Pipestone Solar, LLC
Pleasant Plains Solar, LLC
Plum Creek Wind Farm, LLC
Plum Creek Wind Farm 2, LLC
Polaris Community Solar Garden, LLC1
Port of the Islands North, LLC6
Prairie Oasis Solar, LLC
Prairie Rose Wind 2, LLC1
Prairie Wolf Solar, LLC
Prosperity Wind Farm, LLC
Prosperity Wind Farm 2, LLC
Radiance Solar, LLC1
Red Rock Solar SD, LLC
Regal Solar, LLC
Regulus Community Solar Gardens, LLC1
Rising Solar, LLC
River North Solar, LLC
River Run Solar, LLC
Riverside Solar, LLC
Rochester Solar, LLC1
Rock Falls Solar, LLC
Rock Ridge Wind Farm, LLC
Ross County Solar, LLC
Royal Solar, LLC
Royal Solar 2, LLC
Royerton Solar, LLC
Saginaw Bay Solar, LLC
Sandstone Creek Solar, LLC
Sandstone Creek Solar 2, LLC
Sawmill Wind Farm, LLC
Silver City Solar, LLC
Scorpius Community Solar Garden, LLC1
Serenity Solar, LLC1
Sheas Lake Solar, LLC
Sherco Solar, LLC1
Silver Lake Solar, LLC
Sirius Community Solar Gardens, LLC1
Snowdrop Solar, LLC1
Somerset Solar, LLC
South Belleville Solar, LLC
South Macomb Solar, LLC
Spotlight Solar, LLC
Spring Brook Solar, LLC
Springfield Solar Farm, LLC
Springfield Wind Farm, LLC1
Springville Solar, LLC
St. Thomas Solar, LLC
Stockton Solar, LLC
Stony Brook Wind, LLC
Stove Creek Solar, LLC
Sturgis Solar, LLC
Sugar Maple Solar, LLC
Summit Lake Solar, LLC
Sunbeam Solar, LLC
Sunray Solar, LLC
Sunrise Solar, LLC
Sycamore Creek Solar, LLC
The Brooklyn Union Gas Company6
The Narragansett Electric Company9
Tilton Solar, LLC
Torchlight Solar, LLC1
Transgas, Inc.2
Uintah Solar, LLC
Upper Hudson Development Inc.6
Valley Appliance and Merchandising Company9
Vermont Green Line Devco, LLC3 (90%)
Vibrant Solar, LLC
Virgo Community Solar Gardens, LLC1
Virtue Solar, LLC
Vivid Solar, LLC
Vulpecula Community Solar Garden, LLC1
Wayfinder Group, Inc.2
Wheatfield Solar, LLC
Wild Springs Solar, LLC1
Wildcat Ridge Wind Farm, LLC
Wilder Junction Wind Farm, LLC
Wildhorse Creek Solar, LLC
Willard Solar, LLC
Wiregrass Solar, LLC
Wonder Lake Solar, LLC
Woodlands Solar, LLC
Yellowbud Solar, LLC
198
National Grid plc Annual Report and Accounts 2019/20Financial Statements 34. Subsidiary undertakings, joint ventures and associates continued
Subsidiary undertakings continued
Incorporated in Australia
Registered office: Level 7, 330 Collins Street, Melbourne, VIC 3000, Australia
Incorporated in Luxembourg
Registered office: 412F, Route d’Esch, L-2086, Luxembourg, Grand Duchy of
Luxembourg
National Grid Australia Pty Limited
National Grid Luxembourg Sarl (previously 21 June Sarl)
Incorporated in Canada
Registered office: Stewart McKelvey Stirling Scales, c/o Charles Reagh,
1959 Upper Water Street, Suite 900, Halifax Nova Scotia, B3J 2N2, Canada
Incorporated in the Netherlands
Registered office: Westblaak 89, 3012 KG Rotterdam, PO Box 21153,
3001 AD, Rotterdam, Netherlands
British Transco International Finance B.V.
KeySpan Energy Development Co.
Incorporated in Hong Kong
Registered office: Level 54, Hopewell Centre, 183 Queen’s Road East,
Hong Kong
National Grid Hong Kong Limited (previously HK NewCo 2019 Limited)
Incorporated in the Isle of Man
Registered office: Third Floor, St George’s Court, Upper Church Street, Douglas,
IM1 1EE, Isle of Man, UK
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**
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: c/o Geronimo Energy LLC, 8400 Normandale Lake Bvld. Suite 1200, Bloomington, MN 55437, USA.
2. Registered office: Corporation Service Company, 84 State Street, Boston MA 02109, USA.
3. Registered office: Corporation Service Company, 251 Little Falls Drive, Wilmington DE 19808, USA.
4. Registered office: Lawyers Incorporating Service, 10 Ferry Street, Suite 313, Concord NH 03301, USA.
5. Registered office: National Registered Agents, Inc., 301 S. Bedford St. Suite 1 Madison, WI 53703, USA.
6. Registered office: Corporation Service Company, 80 State Street, Albany NY 12207-2543, USA.
7. Registered office: National Registered Agents, Inc., 30600 Telegraph Road, Suite2345, Bingham Farms, MI 48025-5720, USA.
8. Registered office: 10710 Town Square Drive NE, Suite 201 Minneapolis, MN 55449, USA.
9. Registered office: Corporation Service Company, 222 Jefferson Boulevard, Suite 200, Warwick RI 02888, USA.
In liquidation.
*
** Entered liquidation 29 April 2020.
199
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– supplementary information continued
34. Subsidiary undertakings, joint ventures and associates continued
Joint ventures
A list of the Group’s joint ventures as at 31 March 2020 is given below.
All joint ventures are included in the Group’s financial statements using
the equity method of accounting. Principal joint ventures are identified
in bold.
Incorporated in England and Wales
Registered office: 1–3 Strand, London WC2N 5EH, UK (unless stated otherwise
in footnotes).
BritNed Development Limited (50%)*
Joint Radio Company Limited (50%)1**
Nemo Link Limited (50%)
NGET/SPT Upgrades Limited (50%)†
St William Homes LLP (50%)2
Incorporated in the US
Registered office: Corporation Service Company, 251 Little Falls Drive,
Wilmington, DE 19808, USA (unless stated otherwise in footnotes).
Clean Energy Generation, LLC (50%)
Emerald Energy Venture LLC (51%)
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
IFA2 SAS (50%)
Associates
A list of the Group’s associates as at 31 March 2020 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 the US
Registered office: Corporation Service Company, 251 Little Falls Drive,
Wilmington, DE 19808, USA (unless stated otherwise in footnotes).
Clean Line Energy Partners LLC (32%)3
Connecticut Yankee Atomic Power Company (19.5%)4
Direct Global Power, Inc. (26%)3
Energy Impact Fund LP (9.42%)5
Greeneru, Inc. (21.6%)³
KHB Venture LLC (33%)6
Maine Yankee Atomic Power Company (24%)7
Millennium Pipeline Company, LLC (26.25%)3
New York Transco LLC (28.3%)8
Nysearch RMLD, LLC (22.63%)
Sunrun Neptune Investor 2016 LLC3***
Yankee Atomic Electric Company (34.5%)9
Incorporated in Belgium
Registered office: Avenue de Cortenbergh 71, 1000 Brussels, Belgium
Coreso SA (15.84%)
Other investments
A list of the Group’s other investments as at 31 March 2020
is given below.
Incorporated in England and Wales
Registered office: 1 More London Place, London SE1 2AF, UK
Energis plc (33.06%)‡
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: Harvard Business Services, Inc., 16192 Coastal Highway, Lewes DE 19958, Sussex County, USA.
6. Registered office: De Maximus Inc., 135 Beaver Street, 4th Floor, Waltham MA 02452, USA.
7. Registered office: Joseph D Fay, 321 Old Ferry Road, Wiscasset ME 04578, USA.
8. Registered office: Corporation Service Company, 80 State Street, Albany NY 12207, USA.
9. Registered office: Karen Sucharzewski, 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.
*** NGV US Distributed Energy Inc. owns 1,000 Class A Membership Interests.
† National Grid Electricity Transmission plc owns 50 £1.00 A Ordinary shares.
‡
In administration.
Our interests and activities are held or operated through the subsidiaries, joint arrangements or associates as disclosed above. These interests
and activities (and their branches) are established in – and subject to the laws and regulations of – these jurisdictions.
200
National Grid plc Annual Report and Accounts 2019/20Financial Statements 35. 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 certain 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. Note that the sensitivity analysis for
the useful economic lives of our gas network assets is included in note 13.
Pensions and other post-retirement benefit liabilities (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%
US long-term rate of increase in salaries change of 0.5%
UK change of one year to life expectancy at age 654
US change of one year to life expectancy at age 65
Assumed US healthcare cost trend rates change of 1%
Pension assets:
Change in value of unquoted equities by 10%
Change in value of unquoted properties by 10%
Change in value of unquoted diversified alternatives by 10%
Environmental provision:
10% change in estimated future cash flows
2020
2019
Income
statement
£m
Net
assets
£m
Income
statement
£m
6
10
4
1
2
1
4
31
–
–
–
877
514
670
39
47
545
456
507
381
89
152
6
16
4
1
2
1
4
32
–
–
–
Net
assets
£m
1,064
688
908
56
46
610
406
503
415
107
142
210
210
165
165
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. In the UK, there would also be a £205 million net assets offset from the buy-in policies purchased in the year, where the accounting value of the buy-in asset is set
equal to the associated liabilities.
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. The buy-in
policies purchased during the year would have a £152 million net assets offset to the above.
4. In the UK, the buy-in policies purchased during the year, and the longevity swap entered into previously, would have a £223 million net assets offset to the above.
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 2020. 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
are recognised.
201
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– supplementary information continued
35. Sensitivities continued
(b) Sensitivities on financial instruments
We are further required to show additional sensitivity analysis under IFRS 7 and these are shown separately in the subsequent table due to the
additional assumptions that are made in order to produce meaningful sensitivity disclosures.
Our 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 2020 and 2019 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
2020
2019
Income
statement
£m
Other
equity
reserves
£m
Income
statement
£m
Other
equity
reserves
£m
27
14
5
49
–
47
27
216
27
16
11
53
–
13
44
246
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 £1,319 million (2019: £1,119 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 (post-tax):
10% fair value change in derivative financial instruments¹
10% fair value change in commodity contract derivative liabilities
1. The effect of a 10% change in fair value assumes no hedge accounting.
2020
2019
Income
statement
£m
Net
assets
£m
Income
statement
£m
Net
assets
£m
26
(27)
12
9
26
(27)
12
9
26
(27)
(3)
–
26
(27)
(3)
–
202
National Grid plc Annual Report and Accounts 2019/20Financial Statements 36. Additional disclosures in respect of guaranteed securities
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.
Niagara Mohawk Power Corporation, a wholly owned subsidiary of the Group, has issued preferred shares that are listed on a US national securities
exchange and are guaranteed by National Grid plc. In order to provide preferred shareholders with information on the financial stability of the
company providing the guarantee, 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 summarised financial information 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 Power Corporation’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. There are no restrictions on the payment of
dividends by Niagara Mohawk Power Corporation or limitations on National Grid plc’s guarantee of the preferred shares, and there are no factors that
may affect payments to holders of the guaranteed securities.
The following summarised financial information for National Grid plc and Niagara Mohawk Power Corporation is presented on a combined basis and
is intended to provide investors with meaningful and comparable financial information, and is provided pursuant to the early adoption of Rule 13-01 of
Regulation S-X in lieu of the separate financial statements of Niagara Mohawk Power Corporation.
Summarised financial information is presented, on a combined basis, as at 31 March 2020. The combined amounts are presented under IFRS
measurement principles. Inter-company transactions have been eliminated. Investments in other non-issuer and non-guarantor subsidiaries are
included at cost, subject to impairment.
Summarised financial information for the year ended 31 March 2020 – IFRS
Combined statement of financial position
Non-current loans to other subsidiaries
Non-current assets
Current loans to other subsidiaries
Current assets
Current loans from other subsidiaries
Current liabilities
Non-current loans from other subsidiaries
Non-current liabilities
Net liabilities¹
Equity
Combined income statement – continuing operations
Revenue
Operating costs
Operating profit
Other income from other subsidiaries
Other income and costs, including taxation
Profit after tax
National Grid plc and
Niagara Mohawk Power
Corporation combined
£m
363
8,939
12,435
1,378
(16,226)
(1,648)
(2,105)
(5,460)
(2,324)
(2,324)
2,365
(2,131)
234
3,888
(428)
3,694
1. Excluded from net liabilities above are investments in other consolidated subsidiaries with a carrying value of £14,362 million.
37. Transition to new accounting standards
(a) Transition to IFRS 16
The Group has adopted IFRS 16 ‘Leases’, with effect from 1 April 2019. 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 results 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 therefore increases
both our assets and liabilities (including net debt). It also changes the timing and presentation in the consolidated income statement as it results in an
increase in finance costs and depreciation largely offset by a reduction in the previously straight-line operating costs.
Transition options
We have applied IFRS 16 using the modified retrospective approach. Comparatives have not been restated on adoption. Instead, on the opening
balance sheet date, right-of-use assets (net of accrued rent or rent-free periods, and reported within property, plant and equipment), additional lease
liabilities (reported within borrowings) and any associated deferred tax have been recognised, with no cumulative transition adjustment to reflect
through retained earnings. For short-term leases (lease term of 12 months or less) and leases of low-value assets (such as computers), the Group
continues to recognise a lease expense on a straight-line basis as permitted by IFRS 16.
203
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– supplementary information continued
37. Transition to new accounting standards continued
(a) Transition to IFRS 16 continued
We 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 any 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
At 31 March 2019, the Group disclosed non-cancellable operating lease commitments of £0.3 billion, of which the majority were in the US. A further
£0.4 billion of lease liabilities were 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 was used in
determining our lease liability commitments. This was partially offset by the £0.2 billion impact of discounting our lease liabilities at the incremental
borrowing rate for each lease. The weighted average discount rate applied to lease liabilities recognised on the transition date was 2.8%.There were
some immaterial short-term and low-value leases, which will be recognised on a straight-line basis as an expense in the consolidated income
statement over the remaining lease term.
As a result, the Group has recognised additional right-of-use assets of £0.5 billion and lease liabilities (which are included within net debt) of £0.5
billion at 1 April 2019. No additional net deferred tax has arisen. The transition adjustment is in addition to the £270 million of finance leases already
recognised on the consolidated statement of financial position under IAS 17. There has been no impact on net assets as shown in the table below,
which shows the impacted balances from the Group consolidated statement of financial position.
Impact of transition
Property, plant and equipment – Right-of-use assets
Land and buildings
Plant and machinery
Assets in the course of construction
Motor vehicles and office equipment
Total property, plant and equipment
Borrowings – Lease liabilities
Current
Non-current
Total lease liabilities
Other liabilities
Trade and other payables
Other non-current liabilities
Net assets
Equity
Total equity
31 March 2019
As previously
reported
£m
IFRS 16
transition
adjustments
£m
1 April 2019
As restated
£m
2,560
36,589
4,425
339
43,913
(65)
(205)
(270)
(3,769)
(808)
19,369
19,369
381
67
–
20
468
(48)
(426)
(474)
3
3
–
–
2,941
36,656
4,425
359
44,381
(113)
(631)
(744)
(3,766)
(805)
19,369
19,369
The impact of IFRS 16 on profit after tax as a result of adopting the new standard is not material. However, it has resulted in an increase in operating
profit due to the operating costs now being replaced with depreciation and interest charges.
The impact on the cash flow statement has also not been material, although there has been an increase in operating cash flows and decrease in
financing cash flows, because repayment of the principal portion of the lease liabilities is now classified as cash flows from financing activities rather
than operating cash flows.
Ongoing accounting policy
With effect from 1 April 2019, new lease arrangements entered into are recognised as a right-of-use asset and a corresponding liability at the date at
which the leased asset is available for use by the Group. The right-of-use asset and associated lease liability arising from a lease are initially
measured at the present value of the lease payments expected over the lease term, plus any other costs. The discount rate applied is the rate implicit
in the lease or if that is not available, then the incremental rate of borrowing for a similar term and similar security.
The lease term takes account of exercising any extension options that are at our option if we are reasonably certain to exercise the option and any
lease termination options unless we are reasonably certain not to exercise the option.
Each lease payment is allocated between the liability and finance cost. The finance cost is charged to the income statement over the lease period
using the effective interest rate method. The right-of-use asset is depreciated over the shorter of the asset’s useful life and the lease term on a
straight-line basis. For short-term leases (lease term of 12 months or less) and leases of low-value assets (such as computers), the Group continues
to recognise a lease expense on a straight-line basis.
204
National Grid plc Annual Report and Accounts 2019/20Financial Statements 37. Transition to new accounting standards continued
(b) Transition to IFRS 9 and IFRS 15
On 1 April 2018, the Group adopted IFRS 9 and IFRS 15. Both standards were applied using the modified retrospective approach whereby comparative
amounts were not restated on transition, but a cumulative adjustment was made to retained earnings in the opening consolidated statement of financial
position as at 1 April 2018. The impact of the transition on the opening consolidated statement of financial position is set out in the following table:
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
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
16
18,848
–
–
–
–
–
–1
–
–
–
–
–2
–
–1
–
–
–
–
–
–
–
–
–
–
–
(32)3
–
–
–
54
–
–
(27)
(27)
(27)
–
–
(99)5
726
(27)
–
(27)
–
–
–
–
–
–
–
–
–
–
(3)
–
–
–
–
(3)
(3)
–
–
597
(53)7
–
–
6
–
–
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
16
18,652
205
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements Notes to the consolidated financial statements
– supplementary information continued
37. Transition to new accounting standards continued
(b) Transition to IFRS 9 and IFRS 15 continued
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 in the year ended 31 March 2019 as a result of the transition to IFRS 9:
1.
The available-for-sale category for financial assets was 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
did not alter 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 were 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, were 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 were reclassified at 1 April 2018:
Financial asset/liability
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
Note
Original measurement
category under IAS 39
New measurement
category under IFRS 9
15
15
15
15
21
Available-for-sale investments
Financial assets at FVTPL
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
Original
carrying
amount
under IAS 39
Change to
measurement
basis under
IFRS 9
New carrying
amount
under IFRS 9
£m
2,294
343
84
872
£m
–
–
–
–
£m
2,294
343
84
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.
2.
The change from the incurred loss impairment model of IAS 39 to the expected loss model in IFRS 9 did not have 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 did not have 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.
3.
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 included 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 was recognised on the adjustments recorded on the transition to IFRS 9. Reserve impacts are stated net of related deferred tax.
5. Retained earnings included the impact from adjustments 1, 3 and 6.
6.
The Group 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.
206
National Grid plc Annual Report and Accounts 2019/20Financial Statements
37. Transition to new accounting standards continued
(b) Transition to IFRS 9 and IFRS 15 continued
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 did 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) were 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 were deferred as contract liabilities on our consolidated statement of
financial position on transition, and released over the life of the connection assets. This was 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 were recognised as the works are completed. This was 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 in the year ended 31 March 2019 as a result of the transition to IFRS 15:
7.
Deferred income from contributions for capital works were reclassified to contract liabilities. In addition, these liabilities for capital works relating
to connections have increased as these capital contributions for connections were cumulatively adjusted for on 1 April 2018 and are now
deferred and released over the life of the connection assets. This was 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 was 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 was 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 reflected the net of adjustments 7 and 8 above.
207
National Grid plc Annual Report and Accounts 2019/20Financial Statements | Notes to the consolidated financial statements
Notes to the consolidated financial statements
– supplementary information continued
38. Acquisition of Geronimo Energy LLC and Emerald Energy Venture LLC
On 11 July 2019, National Grid Ventures acquired 100% of the share capital of Geronimo Energy LLC (Geronimo) and 51% of Emerald Energy Venture
LLC (Emerald), which is jointly controlled by National Grid and Washington State Investment Board (WSIB). Geronimo is a leading developer of wind
and solar generation based in Minneapolis in the US, and the acquisition is a significant step in National Grid’s commitment to the decarbonisation
agenda, towards developing and growing a large-scale renewable generation business in the US, and delivering sustainable, reliable and efficient
energy. This is National Grid’s first ownership stake in wind generation and an expansion of our activities in solar generation. Whilst Geronimo
develops the assets, Emerald has a right of first refusal to buy, build and operate those assets.
The total consideration was £209 million, satisfied by a combination of cash and contingent consideration. The contingent consideration has been
recorded within trade and other payables for the amount payable within one year, with the remainder recorded within other non-current liabilities. The
fair value of contingent consideration recognised is determined as the present value of our best estimate of the value that we will be required to pay,
taking into consideration management’s estimates of the volume of successful development activity by Geronimo over the relevant period.
The fair values of the assets and liabilities recognised from both the acquisition of the subsidiary, Geronimo, and the joint venture, Emerald, are set
out below.
Intangible assets
Property, plant and equipment
Investment in joint venture – Emerald
Cash
Other identifiable assets and liabilities
Total identifiable assets
Goodwill
Total consideration transferred
Satisfied by:
Contingent consideration – Geronimo
Cash consideration – Geronimo
Cash consideration – Emerald
£m
5
1
90
2
30
128
81
209
70
49
90
209
The goodwill arising from the acquisition comprises the value associated with the potential future projects that will be developed by Geronimo as well
as the expertise of the management team that have been acquired, neither of which qualify for recognition as tangible or intangible assets. At the
acquisition date, there were no material contingent liabilities.
Subsequent to the acquisition date, we made an additional capital contribution of £50 million into Emerald.
Total acquisition-related costs of £3 million have been recognised within operating costs within the consolidated income statement, of which
£1 million was recognised in the year ended 31 March 2020.
Geronimo earns revenue from selling its development stage assets to Emerald and other third parties. Emerald generates revenue from the assets it
purchases from Geronimo once they are operational and has no other business (see note 16). Neither entity has generated significant revenues or
profits for the period between the acquisition date and the reporting date. Even if the acquisition had completed on 1 April 2019, there would have
been no significant revenues or profits.
39. Post balance sheet events
In the period between 31 March 2020 and 17 June 2020, there have continued to be substantial environmental, economic and social changes in
both the UK and US. As described elsewhere in these Annual Report and Accounts, these have had, and will continue to have, significant
ramifications for the Group. Other than as disclosed in respect of those areas where forward-looking forecasts are relevant (notably goodwill
impairment reviews (note 11), expected credit losses on financial instruments including trade receivables (notes 19 and 32) and the presumption of
the going concern basis generally (note 1)), none of these developments have impacted or caused adjustment to the financial statements.
208
National Grid plc Annual Report and Accounts 2019/20Financial 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 2020 were approved by the Board of Directors on 17 June 2020.
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
2019 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.
As described further in note 1 to the consolidated financial statements,
the Directors have considered the impact of COVID-19 on the Group and
on the Company, and have concluded that the Company will have
adequate resources to continue in operation for at least 12 months from
the signing date of these financial statements. Therefore, they continue
to adopt the going concern basis of accounting in preparing the 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 16 with effect from 1 April 2019. The
adoption of IFRS 16 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. The Company accounts for common control transactions
at cost.
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.
209
National Grid plc Annual Report and Accounts 2019/20 Company 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’ 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 88 to 108.
210
National Grid plc Annual Report and Accounts 2019/20Financial Statements Company balance sheet
as at 31 March
Financial Statements
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
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
Cost of hedging reserve
Other equity reserves
Profit and loss account
Total shareholders’ equity
Notes
2020
£m
2019
£m
1
2
2
5
3
3
7
8
14,362
9,923
12,427
12,625
398
752
2
358
895
75
13,579
13,953
(16,836)
(15,529)
(3,257)
11,105
(2,620)
8,485
470
1,301
(28)
(6)
399
6,349
8,485
(1,576)
8,347
(2,648)
5,699
458
1,314
1
–
380
3,546
5,699
The Company’s profit after tax for the year was £3,684 million (2019: £202 million loss). Profits available for distribution by the Company to
shareholders were in excess of £5 billion at 31 March 2020. The financial statements of the Company on pages 209 to 215 were approved by the
Board of Directors on 17 June 2020 and were signed on its behalf by:
Sir Peter Gershon Chairman
Andy Agg Chief Financial Officer
National Grid plc
Registered number: 4031152
211
National Grid plc Annual Report and Accounts 2019/20 Company statement of changes in equity
for the years ended 31 March
At 1 April 2018
Loss for the year
Other comprehensive loss for the year
Transferred from equity (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
Profit for the year²
Other comprehensive (loss)/profit for the year
Transferred from equity (net of tax)
Total comprehensive (loss)/profit 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 2020
Share
capital
£m
Share
premium
account
£m
Cash flow
hedge
reserve
£m
Cost of
hedging
reserve
£m
452
1,321
–
–
–
6
–
–
–
–
–
–
–
(7)
–
–
–
–
458
1,314
–
–
–
12
–
–
–
–
–
–
–
(13)
–
–
–
–
2
–
(1)
(1)
–
–
–
–
–
1
–
(29)
(29)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(6)
(6)
–
–
–
–
–
470
1,301
(28)
(6)
Other
equity
reserves
£m
353
–
–
–
–
–
–
27
–
380
–
–
–
–
–
–
19
–
399
Profit
and loss
account
£m
Total
shareholders’
equity
£m
4,892
(202)
–
(202)
–
18
(2)
–
(1,160)
3,546
3,684
–
3,684
–
17
(6)
–
(892)
6,349
7,020
(202)
(1)
(203)
(1)
18
(2)
27
(1,160)
5,699
3,684
(35)
3,649
(1)
17
(6)
19
(892)
8,485
1. Included within the share premium account are costs associated with scrip dividends.
2. Included within profit for the year is dividend income from subsidiaries of £3,887 million (2019: £nil).
212
National Grid plc Annual Report and Accounts 2019/20Financial Statements Notes to the Company financial statements
Financial Statements
1. Fixed asset investments
At 1 April 2018
Additions
At 31 March 2019
Additions
Disposals
At 31 March 2020
Shares in
subsidiary
undertakings
£m
9,896
27
9,923
7,011
(2,572)
14,362
During the year there was a capital contribution of £19 million (2019: £27 million) which represents the fair value of equity instruments granted to
subsidiaries’ employees arising from equity-settled employee share schemes.
Furthermore, the Company made a further investment of £2,000 million in National Grid (US) Holdings Limited, following a rights issue by that
company; acquired National Grid (US) Investments 2 Limited from an indirect subsidiary undertaking for £2,420 million; and disposed of its
investments in National Grid Holdings One plc and National Grid (US) Investments 2 Limited in exchange for an investment in National Grid
Luxembourg Sarl at a cost of £2,572 million.
The Company’s direct subsidiary undertakings as at 31 March 2020 were as follows: National Grid (US) Holdings Limited; NGG Finance plc; and
National Grid Luxembourg Sarl. 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
Deferred tax
2020
£m
2019
£m
37
110
12,390
12,514
–
1
12,427
12,625
27
363
8
398
–
358
–
358
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.
A reconciliation of the movement in deferred tax in the year is shown below:
At 1 April 2018
Credited to equity
At 31 March 2019
Charged to equity
At 31 March 2020
Deferred
tax
£m
(1)
1
–
8
8
213
National Grid plc Annual Report and Accounts 2019/20 Notes to the Company financial statements
continued
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
Amounts owed to subsidiary undertakings falling due after more than one year are repayable as follows:
In 1 to 2 years
In 4 to 5 years
More than 5 years
The carrying values stated above are considered to represent the fair values of the liabilities.
4. Derivative financial instruments
The fair values of derivative financial instruments are:
2020
£m
666
278
2019
£m
1,275
92
15,834
14,104
58
58
16,836
15,529
355
160
2,105
2,620
–
443
1,662
2,105
346
228
2,074
2,648
1,077
–
997
2,074
Amounts falling due within one year
Amounts falling due after more than one year
2020
Assets
£m
Liabilities
£m
37
27
64
(278)
(160)
(438)
Total
£m
(241)
(133)
(374)
2019
Assets
£m
Liabilities
£m
110
–
110
(92)
(228)
(320)
Total
£m
18
(228)
(210)
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
Restricted balances – collateral
214
2020
£m
–
(3,804)
(7,886)
2019
£m
(1,208)
(2,900)
(7,920)
(11,690)
(12,028)
2020
£m
572
180
752
2019
£m
672
223
895
National Grid plc Annual Report and Accounts 2019/20Financial Statements Financial Statements | Notes to the Company financial statements
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
The maturity of total borrowings is as follows:
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
2020
£m
46
2
618
666
355
1,021
2020
£m
666
355
–
–
–
–
2019
£m
–
435
840
1,275
346
1,621
2019
£m
1,275
–
346
–
–
–
1,021
1,621
The notional amount of borrowings outstanding as at 31 March 2020 was £1,018 million (2019: £1,618 million).
7. Share capital
The called-up share capital amounting to £470 million (2019: £458 million) consists of 3,780,237,016 ordinary shares of 12204/473 pence each
(2019: 3,687,483,073 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 2020, the profit and loss account reserve stood at £6,349 million (2019: £3,546 million) of which profits available for distribution by the
Company to shareholders were in excess of £5 billion at 31 March 2020. 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.
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 2020, the sterling equivalent amounted to £2,169 million (2019: £2,152 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 £27,000 (2019: £26,000). Fees payable to Deloitte for non-audit services to the Company are
not required to be disclosed as they are included within note 4 to the consolidated financial statements.
215
National Grid plc Annual Report and Accounts 2019/20 National Grid plc Annual Report and Accounts 2019/20
4.
Additional Information
The business in detail
Key milestones
Where we operate
UK regulation
US regulation
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
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
Directors’ indemnity
Employees
Human Rights
Listing Rule 9.8.4 R cross-reference table
Material contracts
Political donations and expenditure
Property, plant and equipment
Research, development
and innovation activity
Unresolved SEC staff comments
Other unaudited financial
information
Commentary on consolidated
financial information
Definitions and glossary of terms
Want more information or help?
Cautionary statement
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National Grid plc Annual Report and Accounts 2019/20
Additional Information | [XXXXXX]
The business in detail
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 merge 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 the UK Gas Distribution business
2019
National Grid separates the UK Electricity System Operator business
National Grid sells its remaining 39% equity interest in UK Gas
Distribution business
Acquisition of Geronimo
217
National Grid plc Annual Report and Accounts 2019/20
Additional Information
The 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
Easington
Theddlethorpe
from the
Netherlands
Bacton
to/from
Belgium
Grain LNG
BritNed to/from
the Netherlands
to/from
Belgium
to/from
France
Our US network
Canada
Vermont
Maine
New Hampshire
New York
Massachusetts
Connecticut
Rhode Island
Pennsylvania
New Jersey
At present, environmental issues are not preventing our UK and US businesses from utilising any material operating assets in the course
of their operations.
1. Access to electricity and gas transmission assets on property owned by others is controlled through various agreements.
2. The Warwick (Telent) building lease was terminated on a break clause and was vacated on 24 December 2019.
218
UK Transmission1
Scottish electricity transmission system
English and Welsh electricity
transmission system
Approximately 4,481 miles (7,212 kilometres)
of overhead line, 1,391 miles (2,239 kilometres)
of the underground cable and 347 substations.
Gas transmission system
Approximately 4,740 miles (7,630 kilometres) of
high-pressure pipe and 24 compressor stations
connecting to eight distribution networks and
third-party independent systems.
Terminal
LNG terminal owned by National Grid
LNG terminal
Electricity interconnector
Gas interconnector
Principal offices
Owned office space:
Warwick and Wokingham
Leased office space2:
Solihull and London
Leased office space totalling 134,704 square feet
(12,515 square metres) with remaining terms
three to six years.
US regulated1
Electricity transmission network
Gas distribution operating area
Electricity distribution area
Gas and electricity distribution area overlap
An electricity transmission network of approximately
9,109 miles (14,659 kilometres) of overhead line,
105 miles (169 kilometres) of underground cable
and 396 transmission substations.
An electricity distribution network of approximately
73,004 circuit miles (117,488 kilometres) and 730
distribution substations in New England and upstate
New York.
A network of approximately 35,682 miles
(57,425 kilometres) of gas pipeline. Our network also
consists of approximately 498 miles (801 kilometres)
of gas transmission pipe, as defined by the US
Department of Transportation.
Generation
Principal offices
Owned office space: Syracuse, New York
Leased office space: Brooklyn, New York
and Waltham, Massachusetts
Leased office space totalling approximately
635,000 square feet (58,993 square metres)
with remaining terms of five to nine years.
In January 2020, we announced we had executed
a lease for 86,000 square feet (7,990 square metres)
of office space at 2 Hanson Place, Downtown
Brooklyn, New York. The lease is anticipated to
commence in January 2021. We will begin to exit our
current One MetroTech Brooklyn location in phases at
the end of the calendar year 2020. Space anticipated
to be vacated is being marketed for sub-lease. The
MetroTech lease terminates in February 2025 and will
not be renewed.
National Grid plc Annual Report and Accounts 2019/20
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 the 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.
will undertake over the year to add value for consumers. Ofgem’s ESO
Performance Panel will challenge the ESO on its plans, evaluate its
performance and make recommendations to Ofgem. At the end of the
year, Ofgem will decide whether to financially reward or penalise the
ESO up to a maximum 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) of ±£30 million, informed by the Performance Panel’s
recommendations, as well as other evidence collected throughout the year.
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 their objectives. These include financial incentives that
encourage us to:
• efficiently deliver, through 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 balance 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 Cadent and this completed in June 2019.
Our UK gas and electricity transmission and system operator businesses
operate under four separate price controls. These comprise two for our
electricity operations, one covering our role as Transmission Owner (TO)
and the other for our role as System Operator (SO), and two for our gas
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 2017 Ofgem, the Department for Business, Energy and Industrial Strategy
(BEIS) and National Grid plc agreed to create a legally separate business,
the Electricity System Operator (ESO), within the National Grid Group. The
ESO became a separate entity within the Group on 1 April 2019.
A primary goal of ESO legal separation in April 2019 was to increase
transparency of our activities and help minimise any perceived conflicts
of interest as we take on the challenge of driving forward the energy
transformation. There are clear signals from Ofgem and the broader
regulatory context that the ESO will play a crucial role in the changing
energy environment. As an asset-light and service-based entity the ESO
is also fundamentally different from other regulated network companies.
The new price control arrangements for RIIO-2 are therefore an opportunity
to implement a new regulatory framework that enables us to meet our
stakeholders’ expectations.
In April 2018, Ofgem introduced a new regulatory and incentives
framework for the ESO. This moved away from the use of targeted,
mechanistic incentives towards a ‘principles-based’ evaluative incentives
approach. The new approach includes a set of ‘Roles and Principles’
designed to set clear expectations about the baseline behaviours we
expect from the ESO and a requirement for the ESO to produce a Forward
Plan, following stakeholder engagement, demonstrating the activities it
In 2019, the ESO published a mission and set of ambitious goals
accompanied by its Forward Plan and its RIIO-2 business plan to set out
what, when and how it delivers. This RIIO-2 business plan reflects the
ambition shared by us and Ofgem for the ESO to be innovative,
ambitious and agile, responding to stakeholder needs and the changing
energy landscape.
Ofgem published terms of reference for a review of system operators
on 13 February 2020. The aim of the review is to consider the current
and future challenges facing GB System Operation and assess whether
the right governance framework is in place to deliver the UK’s net zero
emissions target at lowest cost to consumers. A report on the outcome
of the review will be produced which is expected to be received in June
2020 or later.
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 which
limits full price convergence. European legislation governs how congestion
revenues may be used and how interconnection capacity is allocated.
It requires all interconnection capacity to be allocated to the market through
auctions. Under UK legislation, interconnection businesses must be
separate from transmission businesses.
There is a range of different regulatory models available for
interconnector projects. These involve various levels of regulatory
intervention, ranging from fully merchant (where the project is fully reliant
on sales of interconnector capacity) to cap and floor.
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 for, 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.
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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 vary
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.
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 overleaf).
In addition to fast money, each year we are allowed to recover regulatory
depreciation, i.e. a portion of the RAV and a return on the outstanding
RAV balance. Regulatory depreciation 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 RIIO-T1 price control, our regulator
included a provision for a mid-period review, which 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.
Competition in onshore transmission
Ofgem stated in its final decision on the RIIO-T1 price 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 (HSB) electricity transmission project by National Grid
through a regulatory model called the ‘Competition Proxy Model’ (CPM).
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. Ofgem subsequently
updated the analysis which supported this decision, and in October 2019
consulted on a new minded-to position to fund delivery of the HSB project
through the Strategic Wider Works (SWW) mechanism under the RIIO
price control framework, rather than through the CPM as previously intended.
The CPM is intended to be a ‘late competition’ model.
The ESO, at Ofgem’s request, is developing an Early Competition Plan.
This plan will set out how a model for Early Competition could be
implemented, identifying the process, roles and responsibilities, code
and licence changes required along with cost and timescales to
implement. Plans are being co-created with stakeholders to ensure
developed model(s) are attractive to potential bidders in addition to being
achievable and aligned with network planning processes. As part of this
work, the ESO is also considering what, if any, role the ESO could have
in distribution level competition. The Early Competition Plan is due to be
completed by the end of February 2021.
Simplified illustration of RIIO regulatory building blocks
Totex
(capital invested
+ controllable
operating costs,
after sharing
factor adjustment)
RAV
(slow money)
X
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:
Transmission
Gas
6.8%
Electricity
7.0%
iBoxx 10-year simple trailing
average index (1.58% for 2019/20)
62.5%
3.54%
60.0%
3.75%
In addition, the RIIO-T1 price controls for transmission included a
‘re-opener mechanism’, in relation to certain specific cost categories
where there was uncertainty about expenditure requirements at the
time of setting allowances. Both our gas and electricity transmission
businesses requested additional funding under this mechanism in
May 2018, leading to some changes to the allowed revenues.
Cost of equity (post-tax real)
Cost of debt (pre-tax real)
Notional gearing
Vanilla WACC1
1. Vanilla WACC = cost of debt × gearing + cost of equity × (1-gearing).
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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 our
electricity and gas transmission businesses, for both TO and SO.
Sharing factors and fast:slow money ratios under our current RIIO price
controls are as follows:
Fast1
Slow2
Gas Transmission
Electricity Transmission
Transmission
owner
System
operator
Transmission
owner
System
operator
Baseline3
35.6%
Uncertainty
10%
Baseline3
64.4%
Uncertainty
90%
62.60%
15.00%
72.10%
37.40%
85.00%
27.90%
Sharing
44.36%
46.89%
1. Fast money allows network companies to recover a percentage of totex within a
one-year period.
2. Slow money is where costs are added to RAV and, therefore, revenues are recovered
slowly (e.g. over 45 years) from both current and future customers.
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-2
Ofgem has started work on the next round of RIIO price controls (RIIO-2)
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 default 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 for the baseline-allowed
cost of equity which, based on the evidence available, it used in May
2019 to calculate its working assumption for RIIO-2 that is lower than
the value under the current RIIO price controls. The RIIO-2 proposals
will also apply, in part, to the ESO, but due to the nature of its activities
some elements are less applicable to the ESO, and Ofgem has proposed
that the duration will remain as a five-year price control, but with business
plans (and totex allowances) it will be on a two-year cycle and overall the
financial framework for the ESO is likely to be very different.
We and other stakeholders will continue to work with Ofgem to develop
the framework and parameters for RIIO-2. We submitted business plans
in December 2019 and Ofgem is expected to publish and consult on its
draft determination in summer 2020, followed by the final price control
determination for transmission companies before 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.
The Federal Energy Regulatory Commission (FERC) regulates wholesale
transactions for utilities, such as interstate transmission and wholesale
electricity sales, including rates for these services, at the federal level.
FERC also regulates public utility holding companies and centralised
service companies, including those of our US businesses.
Regulatory process
The US regulatory regime is premised on allowing the utility the
opportunity to recover its cost of service and earn a reasonable return on
its investments as determined by the commission. Utilities submit formal
rate filings (rate cases) to the relevant state regulator when additional
revenues are necessary to provide safe, reliable service to customers.
Utilities can be compelled to file a rate case, 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 9 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
B
C
D
E
F
G
H
I
J
A Rate base
B Debt
C Equity
D Return
E Controllable costs
F Non-controllable costs
G Depreciation
H Taxes
I Lagged recoveries
J Allowed revenue
Our rate plans
Each operating company has a set of rates for service. We have three
electric distribution operations (upstate New York, Massachusetts and
Rhode Island) and six gas distribution networks (upstate New York,
New York City, Long Island, Massachusetts (two) and Rhode Island).
Our distribution operating companies have revenue decoupling
mechanisms that delink 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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The business in detail continued
We bill our customers for their use of electricity and gas services.
Customer bills typically cover the cost of 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.
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.
Our FERC-regulated transmission companies use formula rates (instead
of periodic stated 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.
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 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.
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.
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;
• pension and other post-employment benefit true-ups, separately from
base rates; and
• performance-based frameworks such as incentives and multi-year plans.
We explain these terms below in the table on page 226.
Below, we summarise significant, recent developments in rate filings
and the regulatory environment. In 2017/18, we made 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 (RIPUC) in August 2018. An order,
establishing new base rates for Boston Gas and Colonial Gas, was
approved by the Massachusetts Department of Public Utilities (MADPU)
in September 2018. In 2018/19, we made a full rate case filing for
Massachusetts Electric in November 2018. In 2019/20, we made a full
rate case filing for KEDNY and KEDLI in April 2019. More recently, an
order, setting forth a five-year performance-based ratemaking plan, was
approved by MADPU in September 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.
Massachusetts
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 effective on
1 October 2019. The Massachusetts Electric rate case is the first for
Massachusetts Electric and Nantucket Electric since the case filed in
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. New rates were approved with an allowed RoE of 9.6%
on an equity ratio of 53.5%. MADPU approved a five-year performance-
based ratemaking plan, which adjusts distribution rates annually based
on a predetermined formula. As part of its decision, MADPU is requiring
a management audit addressing the Company’s strategic planning
processes, staffing decisions and its relationship to National Grid USA
Service Company. The audit will take place in two phases beginning in
mid-2020 and ending with a final report in 2021. The Company cannot
predict the outcome of this proceeding.
Merger of Boston Gas Company and Colonial Gas Company
On 16 December 2019, MADPU approved the Company’s proposal to
legally merge Colonial Gas Company into Boston Gas Company. The
two companies had already effectively consolidated their operations, but
the legal merger of these two entities allows for certain small efficiencies
and cost savings. The legal merger was effective as of 15 March 2020.
However, for ratemaking purposes, the Company must still maintain
separate rates for customers of legacy Boston Gas Company and legacy
Colonial Gas Company, until otherwise approved by MADPU.
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Electric vehicle programmes
In September 2018, MADPU approved with modifications a petition filed
by Massachusetts Electric Company and Nantucket Electric Company
for approval of a three-year pilot Electric Vehicle Market Development
Programme (EV Programme). The total allowed cost, including a
performance incentive, is approximately $20 million. The companies
submitted their first cost recovery filing in May 2020 with effect from
1 July 2020.
In September 2019 MADPU issued its final order in the Petition of
Massachusetts Electric Company and Nantucket Electric Company for
Approval of General Increases in Base Distribution Rates for Electric
Service, which included approval of limited components of the
companies’ proposed five-year Phase II Electric Vehicle Programme
(Phase II). The total allowed cost for Phase II is approximately $9 million.
MADPU allowed the companies to file future EV proposals under the
umbrella of the grid modification proceedings, which the companies
plan to do. Cost recovery for both the EV Programme and Phase II is
governed by the Electric Vehicle Programme Provision.
Solar Massachusetts Renewable Target Program
In September 2018, MADPU 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 the Department of Energy
Resources (DOER). The programme’s objective is to develop a further
1,600 MW of customer-based solar power, at a lower cost than the prior
two solar programmes. 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. Massachusetts Electric
Company’s SMART allocation for large solar projects was filled up
shortly after SMART opened. In November 2019, the Company has
completed its first full year of enrolling projects in SMART and has
submitted its proposed 2020 SMART Factor to recover its costs,
which MADPU has approved subject to further review and investigation.
In April 2020, DOER issued emergency regulations for additional SMART
capacity, for review and comment. The SMART regulations require an
additional 1,600 MW of customer-based solar power, and DOER has
proposed certain changes to the programme incentive structure. About
half of the total capacity will be located within the service territories of
Massachusetts Electric Company and Nantucket Electric Company,
as with the initial SMART programme. The regulations are effective
immediately. In May 2020, DOER conducted a virtual public hearing
and accepted written comments. Once DOER adopts final regulations,
the electric distribution companies must file amended tariffs to allow
for the expansion of SMART in summer/autumn 2020.
Statewide assessment of gas pipeline safety
In November 2018, MADPU initiated an independent statewide pipeline
safety audit of the natural gas distribution systems in Massachusetts and
hired an independent auditor. The auditor assessed the safety of the gas
systems in the entire state and made recommendations for improvements
that may impact operations of Boston and Colonial Gas and pipeline
safety compliance requirements in the future. The auditor’s final report
was issued 29 January 2020, and included 37 recommendations for all
the gas companies in Massachusetts as well as state agencies and
other stakeholders. The final report also included a number of opportunities
specific to Boston Gas and Colonial Gas. MADPU directed the gas
companies to file plans in response to the final report. Boston Gas
and Colonial Gas filed their plan on 28 February 2020, in which they
accepted the final report’s recommendations and opportunities, and
detailed their actions to assess and address the recommendations and
observations. MADPU may take further action on the auditor’s final
report, but the Company cannot predict what that action may be.
Gas System Enhancement Plan (GSEP)
On 30 April 2019, MADPU approved our recovery of approximately
$49.5 million in revenue requirements, related to $269.2 million of
anticipated investments in 2019 under an accelerated pipe replacement
programme, through rates effective from May 2019 to April 2020.
MADPU also raised the cap on GSEP recoveries from 1.5% of revenue
to 3% of revenue.
Grid modernisation
In response to a 2014 regulatory requirement, we filed a Massachusetts
electricity grid modernisation plan on 19 August 2015 that proposed
multiple investment options. An order from MADPU approving some
of the proposed investment was received on 10 May 2018. In its order,
MADPU refined their objectives for grid modernisation to be: optimise
system performance; optimise system demand and interconnect; and
integrate distributed energy resources. We continue to implement our
grid modernisation plan, and will be making annual cost recovery and
annual update filings in conjunction with the plan in March and April of
each year, respectively. We will also file our next proposed three-year
grid modernisation plan (for 2021–23) on 1 July 2020.
Massachusetts large-scale renewable contracts/clean
energy contracts
During 2018, pursuant to state legislation enacted in 2016, our
Massachusetts electric distribution companies, Massachusetts Electric
Company and Nantucket Electric Company, filed with MADPU requests
for approval of long-term contracts for their pro rata share of output and
associated transmission from hydroelectric generation from Canada
(approximately 1,200 MW), and from an offshore wind energy generation
project (approximately 800 MW) to be located on the outer continental shelf.
Between April and June 2019, MADPU approved all of these
contracts, along with the companies’ request to recover the costs
and remuneration equal to 2.75% of the annual payments under the
contracts. The MADPU approval of the contracts for hydroelectric
generation from Canada was appealed to the Massachusetts Supreme
Judicial Court in July 2019. Despite COVID-19, the parties have been
heard, but the court has no specific deadline to issue a decision, and
the contracts will not become effective without a decision from the
court affirming final regulatory approval.
Also, the 2016 legislation requires the companies to solicit a total of
1,600 MW of offshore wind energy generation, and a second competitive
solicitation was issued in March 2019. In February 2020, Massachusetts
Electric Company and Nantucket Electric Company submitted long-term
contracts for their pro rata share of offshore wind energy generation
(approximately 804 MW) to MADPU, seeking regulatory approval of the
contracts, along with a request to recover the costs and remuneration
equal to 2.75% of the annual payments under the contracts. While
MADPU has no specific deadline to approve the contracts, despite
COVID-19, hearings have been scheduled for July 2020.
The contracts will not become effective without regulatory approval.
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The business in detail continued
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 $195 million and $61 million,
respectively, for the year ending 31 March 2021. The filings propose
more than $1.5 billion in capital investments to modernise KEDNY and
KEDLI’s gas infrastructure by replacing ageing pipelines, implementing
safety improvements, enhancing storm hardening and resiliency, and
reducing methane emissions. The filings also include proposals to
enhance gas safety and promote a sustainable and affordable path
towards a low-carbon energy future. We are resuming settlement
negotiations in the interest of agreeing on a multi-year rate plan that
mitigates bill impacts for our customers while allowing us to maintain
safe and reliable service, advance our clean energy goals, and earn a
reasonable return. If we are unable to reach a negotiated settlement, the
rate cases will continue to a litigated outcome at which time we would
then plan to file a new multi-year rate case proposal.
We also agreed to develop a range of options to address the natural gas
constraints facing the region, which were initially presented in a report
on 24 February 2020 outlining the gas capacity constraints affecting
the downstate New York service territory and the reasonably available
options for meeting long-term customer demand. These options were
further presented at a series of six public meetings during March 2020
in the downstate New York service territory. These meetings were
designed to facilitate a dialogue with customers, residents, advocates,
business leaders and local elected officials on potential solutions. On
8 May 2020, we published a supplemental report with refined forecasts
and additional analyses to evaluate the options for addressing the
downstate New York supply constraints, including a preliminary
assessment of the impacts of COVID-19 on customer demand, as well
as a summary of the public’s comments and feedback on the potential
solutions. In mid-May certain permits were denied in New York and New
Jersey for a pipeline solution and therefore we are advancing a portfolio
of solutions that were identified in the supplementary report.
In light of the financial hardships our customers have experienced from
COVID-19, we delayed implementation of certain previously approved
rate increases. We also delayed filing a rate case this Spring and are
exploring options including an extension of the current rate plan or a rate
case filing later this Summer.
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, when the NYPSC audited our New York
gas business.
In September 2018, the NYPSC selected Saleeby Consulting Group as
the independent auditor to perform the audit. The Company was fully
committed to the audit with the goal of demonstrating its full capabilities
and receiving meaningful feedback that would drive useful recommendations
to improve the Company’s electric and gas operations for the benefit of
its customers. The audit began in November 2018 and ran until August
2019, with a final report due in September 2019. Unexpectedly, in
October 2019, the NYPSC employees advised us that they were
terminating the contract with the auditors, effective immediately, because
of the poor quality of the draft audit report by the auditor, with no fault
whatsoever on the part of the Company. NYPSC employees advised
their intention to complete the management audit themselves. The audit
is expected to be completed sometime in the second half of 2020.
Downstate gas settlement
In May 2019, KEDNY and KEDLI stopped fulfilling applications for new
and expanded firm service in most of their downstate New York service
territories because the available firm gas supplies were insufficient to keep
pace with demand. On 11 October 2019, the NYPSC issued an ‘Order
Instituting Proceeding and to Show Cause’ that directed the Companies
to provide gas service to a subset of previously denied applicants and
show cause why the Companies should not be subject to financial
penalties. On 24 November 2019, the Companies reached a settlement
that was approved on 26 November 2019 by the NYPSC. The
agreement resolves the proceeding opened by the NYPSC relating to
the moratorium and provides the necessary framework for resolving the
longer-term energy supply issues. Specifically, the settlement provides
that KEDNY and KEDLI will lift the moratorium for approximately two
years. National Grid will offer $7 million in customer assistance to
address hardships resulting from the moratorium. National Grid also
agreed to fund $8 million for new energy-efficiency and gas-conservation
measures designed to relieve stress on the system and reduce peak-day
gas usage, as well as $20 million of clean technology investments and
programmes in New York. The settlement provides for the appointment
of a monitor to oversee our downstate New York gas supply operations
and compliance with the settlement.
Advanced Metering Infrastructure
On 15 November 2018, Niagara Mohawk Power Corporation (NMPC)
filed a report with the NYPSC detailing the initial outcome of NMPC’s
Advanced Metering Infrastructure (AMI) research and collaborative
sessions. The report, which included an AMI Business Plan, a detailed
benefit-cost analysis, and a Customer Engagement Plan, proposed a
six-year deployment of electric AMI meters and AMI-compatible gas
modules in NMPC’s service territory beginning in 2019/20. This
investment would modernise both customer and grid-facing components
of the Company’s distribution system and is considered a key enabler
of NMPC’s strategy to address the comprehensive state energy goals
expressed in New York’s Reforming the Energy Vision proceedings.
The near-term benefits include greater customer choice and control over
energy use; improved system modelling, load forecasting, and capital
investment planning; increased system efficiency; and operational
efficiencies for outage response. On 4 September 2019, we filed a
supplemental report detailing the AMI collaborative’s continued work.
The filing provided an updated benefit-cost analysis and proposed a
six-year, $640 million (20-year NPV) deployment of electric AMI meters
and AMI-compatible gas modules in NMPC’s service territory beginning
in 2019/20. Our proposal to deploy AMI is currently pending before the
NYPSC. If approved by the NYPSC, the Company would replace
approximately 1.7 million electric and 640,000 gas metering points.
Rhode Island
Rhode Island combined gas and electric rate case
On 24 August 2018, the Rhode Island Public Utilities Commission
(RIPUC) approved the terms of an Amended Settlement Agreement
(ASA). We are currently in year two of the Company’s multi-year rate
plan. The rate plan includes a 9.275% RoE on an equity ratio of 51%.
The ASA also requires the Company to file the next rate case so that
new rates take effect no later than 1 September 2022, unless the RIPUC
consents to an extension of the term and specifies another date upon
which rates are to take effect. The Company will file its Rate Year 3
compliance filing on 1 June 2020 for distribution rates for year three
of the multi-year rate plan, effective 1 September 2020.
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. On 30 October 2019, RIPUC issued an Investigation
Report regarding the gas service interruption which identified the causes
of the outages, which included multiple factors, some of which were
outside the control of the Narragansett Electric Company. RIPUC’s
Report also recommended several gas system improvements, many of
which we have addressed already. On 13 December 2019, we filed our
response to the RIPUC’s Report and continue to meet with RIPUC on
a quarterly basis regarding winter reliability issues for Aquidneck Island
and Rhode Island.
224
National Grid plc Annual Report and Accounts 2019/20
Additional Information | The business in detail
Power Sector Transformation/Advanced Metering Functionality
On 27 November 2017, we filed a Power Sector Transformation (PST)
Vision and Implementation Plan in conjunction with our combined gas
and electric rate case (the PST Plan). The PST Plan proposed a suite
of investments, including the full deployment of Advanced Metering
Functionality (AMF), which were designed to modernise the state’s
energy infrastructure. We intend to file our Updated AMF Business Case
and Grid Modernisation Plan (GMP) with the RIPUC in the second half of
2020/21. The Updated AMF Business Case will present a detailed plan
for full-scale AMF deployment in Rhode Island, using a Rhode Island-
only scenario and a combination Rhode Island and New York
deployment scenario to demonstrate the cost synergies that can be
achieved through a multi-jurisdictional deployment. The estimated cost
of the Rhode Island programme is approximately $414 million over 20
years in nominal terms (assuming a Rhode Island-only deployment),
which reflects the estimated useful life of the meters. The GMP will
present a ten-year road map to guide the future development of projects
and programmes to enhance distribution system planning and
operations, which will be separately recovered as part of the
Infrastructure, Safety and Reliability Plan or a future rate case.
Heating Sector Transformation
On 8 July 2019, the Governor signed Executive Order 19-06 launching
the Heating Sector Transformation (HST) Initiative to advance the state’s
development of clean, affordable, and reliable heating technologies. Two
state agencies, the Office of Energy Resources (OER) and the Division of
Public Utilities and Carriers (Division), were tasked to lead the initiative
and instructed to work with government and non-government partners
in the development of a report. We engaged with OER, the Division,
and external stakeholders through a series of facilitated workshops.
On 22 April 2020, the recommendations were provided to the Governor
concluding that no one solution was more economically attractive than
any other, and the state’s decarbonisation solutions should include
increased energy efficiency, decarbonised electrification through air and
ground source heat pumps, and fuel decarbonisation through renewable
natural gas and renewable oil. The document presented guiding
principles, rather than technology mandates, for additional policy
development proffering that the heating sector policy should remain
technology-agnostic while promoting early demonstration and
development of promising, carbon-reducing technologies. The report
does not specify next steps; however, OER acknowledged it will be
conducting an energy and economic analysis to inform actional
pathways to meet the Governor’s January 2020 Executive Order goal of
meeting the state’s electricity demand with 100% renewable resources
by 2030, which will be linked to decarbonising the heating sector.
Infrastructure, Safety and Reliability Plans
We filed our 2021 Gas and Electric Infrastructure, Safety and Reliability
(ISR) Plans on 20 December 2019 for effect 1 April 2020. The Electric
ISR Plan proposes capital spending of $103.8 million, plus $10.4 million
for vegetation management and total operation and maintenance expense
of $1.8 million. The Gas ISR Plan proposes total capital spending of
$198.6 million. On 17 March 2020, RIPUC approved the Company’s Gas
and Electric ISR Plans, which include $200 million and $104 million of
investments, respectively, for 2020/21. The Electric ISR Plan investment
also includes $3.7 million to readily respond to distributed energy
resource (DER) interconnections and $12 million of operation and
maintenance expense for vegetation management and inspection and
maintenance programmes. RIPUC slightly modified the Electric ISR Plan
to move $2 million for certain strategic DER investments such as
advance capacitors and feeder monitor systems from the discretionary
category (system capacity and performance) to the non-discretionary
category. This means that the Company is allowed to invest in those
assets if required by the system needs or customer connections, but we
may defer the proactive investment in those technologies until after the
Grid Modernisation plan is approved. The RIPUC approved both plans
with only a $1 million reduction to the gas capital spending proposal.
Rhode Island large-scale renewable contracts
In February 2019, the Company’s Rhode Island electric distribution
company, the Narragansett Electric Company, filed with the RIPUC for
approval of a long-term contract for output from offshore wind energy
generation from an approximately 400 MW project to 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, and such bids were
shared with Rhode Island. RIPUC approved the contract in May 2019.
In February 2020, the Narragansett Electric Company filed with the
RIPUC for approval of a long-term contract for output from an
approximately 50 MW solar facility to be located in Connecticut.
The contract resulted from a competitive solicitation issued in 2018 to
satisfy the Company’s obligations under the Rhode Island Long-term
Contracting Standard. RIPUC approved the contract at a virtual open
meeting on 27 March 2020 and the Company received its written
decision on 11 May 2020.
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 were filed with 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 the 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 on 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 proposed 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 proposed 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.
On 21 November 2019, FERC issued an order addressing customer
complaints involving the transmission RoE for the transmission owners
in the Midcontinent Independent System Operator (MISO TOs). FERC
issued an order on rehearing addressing the initial order on 21 May 2020.
In those orders, FERC adopted a revised methodology for determining
base RoEs for the MISO TOs. This differed significantly from the
methodology and framework set forth in its 16 October 2018 preliminary
order, which proposed a new RoE methodology in the dockets covering
the four RoE complaints against the NETOs. On 23 December 2019, the
NETOs filed a Supplemental Paper Hearing Brief and a Motion to
Supplement the Record in the NETOs’ RoE dockets to respond to the
new methodology adopted in the November 2019 MISO TOs’ order, as
there is uncertainty as to whether the outcome in that proceeding may
be applied to the NETOs’ cases. Further changes to the FERC RoE
methodology applicable to the Company are possible as a result of the
orders in the MISO TOs’ proceeding and the issues raised in pending
pleadings in the NETOs’ proceedings. Given the significant uncertainty
relating to FERC’s methodology, the Company is unable to predict the
potential effect of the November 2019 and 21 May 2020 MISO TO orders
on the NETOs’ RoE dockets or the outcome of the four complaints.
Further, the Company cannot reasonably estimate a range of gain or
loss for any of the four complaint proceedings.
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-New England’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 employees, various interested consumer
parties, the 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 22 May 2019, FERC rejected the Formula
Rate 206 settlement in its entirety and remanded the matter to the Chief
Administrative Law Judge for hearing procedures. The parties have
continued settlement negotiations and have been granted a suspension
of the procedural schedule to attempt to finalise a settlement.
225
National Grid plc Annual Report and Accounts 2019/20
Additional Information
The business in detail continued
Summary of US price controls and rate plans
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1. Both transmission and distribution, excluding stranded costs.
2. KeySpan Energy Delivery New York (the Brooklyn Union Gas Company).
3. KeySpan Energy Delivery Long Island (KeySpan Gas East Corporation).
Rate filing made
Feature in place
New rates effective
P Feature partially in place
Rate plan ends
Rates continue indefinitely
Multi-year rate plan
†Revenue decoupling
A mechanism that removes the link between a utility’s revenue and
sales volume so that the utility is indifferent to changes in usage.
Revenues are reconciled to a revenue target, with differences billed or
credited to customers. Allows the utility to support energy efficiency.
§Commodity-related bad debt true-up
A mechanism that allows a utility to reconcile commodity-related bad
debt to either actual commodity-related bad debt or to a specified
commodity-related bad debt write-off percentage. For electricity utilities,
this mechanism also includes working capital.
‡Capital tracker
A mechanism that allows 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.
226
National Grid plc Annual Report and Accounts 2019/20
Additional Information
Internal control and risk factors
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
2020. 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-5(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 2020.
Deloitte LLP, which has audited our consolidated financial statements for
the year ended 31 March 2020, 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 it, 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 22 – 25. 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 page 258.
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 ensuring process safety; to monitoring personal safety,
occupational health and environmental performance; and to meeting our
obligations under negotiated settlements.
Pandemics
We face risks related to health epidemics and other outbreaks.
As seen in the context of COVID-19, pandemics and their associated counter-
measures may affect countries, communities, supply chains and markets,
including the UK and our service territory in the US. The spread of such
pandemics could have adverse effects on our workforce, which could affect
our ability to maintain our networks and provide service. In addition, disruption
of supply chains could adversely affect our systems or networks.
Pandemics such as COVID-19 can also result in extraordinary economic
circumstances in our markets which could negatively affect our customers’
ability to pay our invoices in the US or the charges payable to the system
operators for transmission services in the UK. The suspension of debt collection
and customer termination activities across our service area in response to such
pandemics is likely to result in near-term lower customer collections, and could
result in increasing levels of bad debt and associated provisions.
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.
The extent to which pandemics such as COVID-19 may affect our liquidity,
business, financial condition, results of operations and reputation will depend on
future developments, which are highly uncertain and cannot be predicted, and
will depend on the severity of the relevant pandemic, the scope, duration, cost to
National Grid and overall economic impact of actions taken to contain it or treat
its effects.
227
National Grid plc Annual Report and Accounts 2019/20
Additional Information
Internal control and risk factors continued
Infrastructure and IT systems
We may suffer a major network failure or interruption, or may not be
able to carry out critical operations due to the failure of infrastructure,
data or technology or a lack of supply.
Operational performance could be materially adversely affected by: a failure
to maintain the health of our assets or networks; inadequate forecasting of
demand; inadequate record keeping or control of data or failure of information
systems and supporting technology. This, in turn, could cause us to fail to meet
agreed standards of service, incentive and reliability targets, or be in breach of a
licence, approval, regulatory requirement or contractual obligation. Even incidents
that do not amount to a breach could result in adverse regulatory and financial
consequences, as well as harming our reputation.
Where demand for electricity or gas exceeds supply, including where we do not
adequately forecast and respond to disruptions in energy supplies, and our
balancing mechanisms are not able to mitigate this fully, a lack of supply to
consumers may damage our reputation.
In addition to these risks, we may be affected by other potential events that are
largely outside our control, such as the impact of the COVID-19 pandemic
(including on our operations and as a result of large-scale working from home
by our employees), 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 emergency
legislation to address the COVID-19 pandemic and 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 the following (as examples) could have a material
adverse impact on our results of operations, cash flows, the financial condition
of our businesses and the ability to develop those businesses in the future:
• the RIIO-2 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; implications of climate change and of advancing
energy technologies; whether aspects of our activities are contestable; and
the level of permitted revenues and dividend distributions for our businesses
and in relation to proposed business development activities.
For further information, see pages 219 – 226, 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.
228
National Grid plc Annual Report and Accounts 2019/20
Additional Information | Internal control and risk factors
Growth and business development activity
Failure to respond to external market developments and execute our
growth strategy may negatively affect our performance. Conversely,
new businesses or activities that we undertake alone or with partners
may not deliver target outcomes and may expose us to additional
operational and financial risk.
Failure to grow our core business sufficiently and have viable options for new
future business over the longer term, or failure to respond to the threats and
opportunities presented by emerging technology 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).
We may also be liable for the past acts, omissions or liabilities of companies or
businesses we have acquired, which may be unforeseen or greater than anticipated.
In the case of joint ventures, we may have limited control over operations and our
joint venture partners may have interests that diverge from our own.
The occurrence of any of these events could have a material adverse impact on
our results of operations or financial condition, and could also impact our ability
to enter into other transactions.
In addition, our results of operations and net debt position may be affected
because a significant proportion of our borrowings, derivative financial instruments
and commodity contracts are affected by changes in interest rates, commodity
price indices and exchange rates, in particular the dollar-to-sterling exchange rate.
Furthermore, our cash flow may be materially affected as a result of settling
hedging arrangements entered into to manage our exchange rate, interest rate
and commodity price exposure, or by cash collateral movements relating to
derivative market values, which also depend on the sterling exchange rate into
the 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 (including as a result of the COVID-19 pandemic).
We participate in a number of pension schemes that together cover substantially
all our employees. In both the UK and US, the principal schemes are DB schemes
where the scheme assets are held independently of our own financial resources.
In the US, we also have other post-retirement benefit schemes. Estimates of the
amount and timing of future funding for the UK and US schemes are based on
actuarial assumptions and other factors, including: the actual and projected
market performance of the scheme assets; future long-term bond yields;
average life expectancies; and relevant legal requirements.
Changes in these assumptions or other factors may require us to make additional
contributions to these pension schemes which, to the extent they are not
recoverable under our price controls or state rate plans, could materially
adversely affect the results of our operations and financial condition.
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Additional Information
Financing and liquidity
An inability to access capital markets at commercially acceptable
interest rates could affect how we maintain and grow our businesses.
Our businesses are financed through cash generated from our ongoing
operations, bank lending facilities and the capital markets, particularly the
long-term debt capital markets.
Some of the debt we issue is rated by credit rating agencies, and changes
to these ratings may affect both our borrowing capacity and borrowing costs.
In addition, restrictions imposed by regulators may also limit how we service
the financial requirements of our current businesses or the financing of newly
acquired or developing businesses.
Financial markets can be subject to periods of volatility and shortages of liquidity
– for example, as a result of unexpected political or economic events or the
COVID-19 pandemic. 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
(including as a result of the COVID-19 pandemic).
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 (including personnel on sick leave or otherwise unable to
work on an extended basis because of the COVID-19 pandemic) 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 228.
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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Additional Information
Shareholder information
Articles of Association
The following description is a summary of the material terms of our
Articles of Association (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 68.
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 88 – 107).
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. At the Company’s AGM for 2020, shareholders
will be asked to approve, by ordinary resolution, an increase in this
amount (which has remained unchanged since the 2009 AGM) to
£45 billion to enable the funding of growth over the medium-term in
an efficient manner.
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 ordinary shares while the ordinary shares are subject to the plan.
Where, under an employee share plan operated by the Company,
participants are the beneficial owners of the ordinary 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.
(v) 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.
231
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Additional Information
Shareholder information continued
General meetings
AGMs must be convened each year within six months of the Company’s
accounting reference date upon 21 clear days’ advance written notice.
Under the Articles, any other general meeting may be convened
provided at least 14 clear days’ written notice is given, subject to annual
approval of shareholders. In certain limited circumstances, the Company
can convene a general meeting by shorter notice. The notice must
specify, among other things, the nature of the business to be transacted,
the place, the date and the time of the meeting. Consistent with the UK
government restrictions in relation to the COVID-19 pandemic, the
Company’s AGM for 2020 will take place as a closed 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 (The Bank of New York Mellon) 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, facsimiles 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 16 May 2019 to 17 June 2020, the Company received a
total of $1,835,589.41 in reimbursements from the Depositary consisting
of $1,225,480.47 and $610,108.94 received in October 2019 and
February 2020 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 257.
Description of securities other than equity securities:
Depositary fees and charges
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 2019/20 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 US Securities and Exchange Commission
(SEC) reporting requirements for foreign companies. The Company’s
Form 20-F and other filings can be viewed on the National Grid website
as well as the SEC website at www.sec.gov.
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Additional Information | Shareholder information
Events after the reporting period
In the period between 31 March 2020 and 17 June 2020, there have
continued to be substantial environmental, economic and social
changes in both the UK and US. As described further in the Strategic
Report, these have had, and will continue to have, significant
ramifications for the Group. Other than in respect of those areas where
forward-looking forecasts are relevant (notably goodwill impairment
reviews (note 11), expected credit losses on financial instruments
including trade receivables (notes 19 and 32) and the presumption of the
going concern basis generally (note 1)), none of these developments
have caused adjustment to the financial statements.
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 234 and 235 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 2020, National Grid had been notified of the following
holdings in voting rights of 3% or more in the issued share capital of
the Company:
Number of
ordinary
shares
% of
voting
rights1
Date of last
notification
of interest
BlackRock, Inc.
238,695,907
6.85
3 December 2019
The Capital Group
Companies, Inc.
145,094,617
3.88
16 April 2015
1. This number is calculated in relation to the issued share capital at the time the holding was
disclosed.
As at 17 June 2020, no further notifications have been received.
The rights attached to ordinary shares are detailed on page 231. All ordinary
shares and all major shareholders have the same voting rights. The
Company is not, to the best of its knowledge, directly or indirectly controlled.
Share capital
As at 17 June 2020, 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 2019 AGM to purchase up to
10% of the Company’s share capital (being 341,188,512 ordinary shares).
The Directors intend to seek shareholder approval to renew this authority
at the 2020 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.
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 2019 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
277,263,224
£34,467,394.44
7.521
–
–
–
5,331,440
£662,766.75²
0.143
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 277,263,224
£34,467,394.44²
7.333
1. Called-up share capital: 3,687,483,073 as at 31 March 2019.
2. Nominal value: 12204/473p.
3. Called-up share capital of 3,780,237,016 ordinary shares as at the date of this report.
As at the date of this report, the Company held 270,105,462 ordinary
shares as treasury shares. This represented 7.15% of the Company’s
called-up share capital.
Authority to allot shares
Shareholder approval was given at the 2019 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.
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Additional Information
Shareholder information continued
Dividend waivers
The trustee of the National Grid Employee Share Trust, which is
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,
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 2020.
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
170,394
202,748
331,032
46,110
43,274
1,727
235
441
144
300
21.39
5,185,345
25.46
14,246,560
41.57
68,966,441
5.79
5.43
0.22
0.03
32,119,610
106,072,161
31,718,701
17,096,831
0.05
106,039,599
0.02
102,719,196
0.14
0.38
1.82
0.85
2.81
0.84
0.45
2.81
2.72
0.04 3,296,072,572
87.19
796,405
100 3,780,237,016
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.
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Additional Information | Shareholder information
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
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 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.
Taxation of capital gains
Subject to specific rules relating to assets that derive at least 75% of
their value from UK land, 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 a 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 information reporting and backup withholding tax
Dividend payments made to US Holders and proceeds paid from the
sale, exchange, redemption or disposal of ADSs or ordinary shares to
US Holders may be subject to information reporting to the US Internal
Revenue Service (IRS). Such payments may be subject to backup
withholding taxes if the US Holder fails to provide an accurate taxpayer
identification number or certification of exempt status or fails to comply
with applicable certification requirements.
US Holders should consult their tax advisors about these rules and any
other reporting obligations that may apply to the ownership or disposition
of ADSs or ordinary shares. Such obligations include reporting
requirements related to the holding of certain foreign financial assets.
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).
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.
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 an 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.
UK inheritance tax
An individual who is domiciled in the US for the purposes of the Estate
Tax Convention and who is not a UK national for the purposes of the
Estate Tax Convention will generally not be subject to UK inheritance tax
in respect of (i) the ADSs or ordinary shares on the individual’s death or
(ii) a gift of the ADSs or ordinary shares during the individual’s lifetime.
This is not the case where the ADSs or ordinary shares are part of the
business property of the individual’s permanent establishment in the UK
or relate to a fixed base in the UK of an individual who performs
independent personal services.
Special rules apply to ADSs or ordinary shares held in trust.
In the exceptional case where the ADSs or shares are subject both to
UK inheritance tax and to US federal gift or estate tax, the Estate Tax
Convention generally provides for the tax paid in the UK to be credited
against tax paid in the US or vice versa.
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.
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Additional Information
Other disclosures
All-employee share plans
The Company has a number of all-employee share plans as described
below, which operated during the year. These allow UK or US-based
employees to participate in tax-advantaged plans and to become
shareholders in National Grid.
Sharesave
UK employees 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. At the end of the three or five years,
participants may use their savings to purchase ordinary shares in
National Grid at a 20% discounted option price, which is set at the time
of each annual Sharesave launch.
Share Incentive Plan (SIP)
UK employees 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 a UK resident trust.
US Incentive Thrift Plans
Thrift Plans are open to all US employees of participating National Grid
companies; these 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 2019 were: for pre-tax
contributions, 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, 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 $56,000. For the calendar year 2020, participants
may invest up to the applicable federal salary limits: for pre-tax
contributions, this is a maximum of 50% of salary limited to $19,500 for
those under the age of 50 and $26,000 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 $57,000.
Employee Stock Purchase Plan (ESPP)
Employees of National Grid’s participating US companies are eligible to
participate in the ESPP (commonly referred to as a 423b plan). Eligible
employees have the opportunity to purchase ADSs in National Grid 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.
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 2020, 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 of the Company’s
share plans contain provisions relating to a change of control.
Outstanding awards and options would normally vest and become
exercisable on a change of control, subject to the satisfaction of any
performance conditions at that time. In the event of a change of control
of the Company, a number of governmental and regulatory consents
or approvals are likely to be required, arising from laws or regulations
of the UK, 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 2020, no new 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. Due to
current ongoing contractual negotiations that the Company has with
Costain plc, the situational conflict that Paul Golby has by virtue of being
a Non-executive Director of the Company and Chairman of Costain plc
has been kept under constant review during the year and Paul Golby
has been recused of all discussions in relation to contractual issues
with Costain plc. He has also confirmed to us in writing that the same
arrangements are in place in Costain plc.
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 Corporate Governance Code 2018 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.
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Additional Information | Other disclosures
Directors’ indemnity
The Company has arranged, in accordance with the Companies Act
2006 and the Articles of Association, 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.
Material contracts
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.
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 there have been no material disruptions to our operations
from labour disputes during the past five years. The agreement under
dispute between the Company and the Massachusetts Gas unions was
satisfactorily renegotiated in January 2019. National Grid believes that
it can conduct its relationships with trade unions and employees in a
satisfactory manner. Further details on the Company’s colleagues can
be found on pages 52 – 54.
Human rights
Respect for human rights is incorporated into our employment practices
and our core 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. As a global utility company, we earn
this trust by doing things in the right way, complying with the laws of the
countries in which we do business while building our reputation as a
responsible 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 commitment is
guided by our Global Supplier Code of Conduct (GSCoC) that integrates
human rights into the way we do business throughout our supply chain
alongside other areas of sustainability. This Code outlines our values and
expectations to ensure we treat people with respect and protect their
human rights, protect the environment and preserve natural resources
and positively impact the interests of the communities we serve and from
which we procure goods and services. Through our GSCoC, we expect
our suppliers to act in accordance with the highest ethical standards and
comply with all the relevant laws, regulations and licences 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, Trafficking and Violence Protection Act 2000 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 140
Publication of unaudited financial information
Not applicable
Details of long-term incentive schemes
Waiver of emoluments by a director
Waiver of future emoluments by a director
Not applicable
Not applicable
Not applicable
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 234
Page 234
Agreements with controlling shareholders
Not applicable
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 as such terms
are defined in the Companies Act 2006. 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 political 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 (PAC) made
political donations in the US totalling $46,050 (£36,978) 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 150 – 152, note 21 borrowing on pages 161 – 163 and where
we operate on page 218.
Research, development and innovation activity
Investment in research and development during the year for the Group
was £14 million (2018/19: £19 million; 2017/18: £13 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 2019/20.
Continued collaboration and stakeholder engagement have driven
the research programmes for ET innovation. Our engagement with
stakeholders as part of webinars, podcasts, formal meetings,
conferences and dissemination events has been instrumental to
developing our strategies including our overall innovation strategy
as well as technology and asset-related innovation strategies.
As a result, our project portfolio has been developed around the
themes of delivering cleaner and cheaper energy. Our commitment to
the ‘Net Zero’ target for 2050 has provided the focus for our research
programme on carbon emission reduction. We have started
cross-sector collaboration in order to drive a whole-system approach
to decarbonising key sectors such as heat, transport and industry.
Our Zero2050 project in South Wales has brought diverse stakeholders
from utilities, industry, academia, SMEs, consultants and government
together to design a pathway to decarbonisation for South Wales that
delivers best value to consumers.
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Additional Information
Other 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 achieve these goals, we work
in collaboration with technical organisations, academia and vendors in
the energy sector that align with our goals and objectives to provide a
safe, reliable, efficient and clean service. This collaboration has also
helped inform our strategic direction in response to jurisdictional
requests for electric modernisation (Grid Modernisation in
Massachusetts, Rhode Island and Reforming the Energy Vision (REV)
in New York). We continue to focus our R&D on increasing public safety,
protecting our workforce and reducing the cost of the work we perform.
In 2019/20, 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:
US Electricity:
• In Massachusetts under our ‘Solar Phase II’ programme, we
contracted and built 15.27 MW of company-owned photovoltaics
facilities. The objective is to better understand the real-world impact
advanced technologies can bring to the grid; such as reduced
customer interconnection costs and time; increasing hosting capacity;
and improving the distribution system’s overall power quality and
reliability. We partnered with the Electric Power Research Institute
(EPRI), Sandia National Laboratories (Sandia) and Fraunhofer
Gesellschaft (Fraunhofer);
• With the EPRI, we explored the value of customised smart inverter
settings and advanced metering at the Point of Common Coupling
(PCC) and published our findings in a white paper titled
‘Recommended Smart Inverter Settings for Grid Support and Test
Plan: Interim Report’. We also worked with them to calculate the
severity of PV Arc Flashes, of which the team shared their findings
in a paper titled ‘DC Arc Flash on Photovoltaic Equipment’;
• With National Grid’s support, Sandia initiated an Advanced
Distribution Management Systems (ADMS) to optimise commands
to allow PV penetration of 50% or greater. Our work was published
in a paper titled ‘Optimal Distribution System Voltage Regulation using
State Estimation and DER Grid-Support Functions’;
• Under the support of the US Department of Energy, the Fraunhofer
CSE-led project, called ‘SunDial’, we created a system that optimally
manages facility loads and energy storage charging and discharging
with PV to mitigate potential problems due to intermittency and large
ramps in generation;
• In the ‘Solar Phase III’ programme, we developed seven additional
sites each equipped with a unique combination of smart inverters,
energy storage, advanced metering, plant level control, and other
equipment with features beyond today’s industry standards. We will be
testing these new technologies on a variety of distribution circuits; and
• Last year, we completed two New York REV pilot projects:
• Fruit Belt Neighbourhood Solar and Community Resilience.
This year we have completed an additional New York REV
demonstration project; and
• The Distributed System Platform (DSP) REV demonstration project
tested a small-scale distribution system energy market involving
customer-owned DERs to support the Distribution System Operator
(DSO) concept.
We are also increasing research into decarbonising our own operations
and preparing our network for the changes we need to make to
accommodate a fully decarbonised energy sector. We have worked
with our partners on several projects, investigating ways to eliminate
greenhouse gases from our gas-insulated equipment as well as the
reduction of our carbon footprint relating to our construction work.
Our future network will need to accommodate more renewable energy
sources and other converter-based connections and equipment.
Providing the infrastructure for a secure, efficient and reliable network
requires an increased understanding of network stability with reduced
inertia in the system. We have started four projects investigating the
impacts of reduced inertia, potential controller interactions and reduced
fault levels. As part of these projects we are developing our capabilities
to accurately model the electricity transmission network and are
developing schemes to mitigate the impacts on system stability and
protection performance.
The second key aspect that our stakeholder engagement has
highlighted is the delivery of cheaper energy. This has been implemented
in our research programme on optimised asset management and
monitoring as well as the digitisation of operational technology, considering
in particular, cyber security in a context of increasing cyber threats.
As a key enabler for future innovation we have continued the delivery
of our Deeside Centre for Innovation. Significant progress has been
made with the completion of the control building, good progress on
the construction of the overhead line test area and detailed design
for the substation area, which notably includes a trial for construction
with cement-free concrete.
The ESO has been innovating to make sure the electricity network
operates safely and efficiently around the clock. Innovation is key to
creating a sustainable, low-carbon electricity system for the future that
will help the UK meet its net zero commitments. We refresh our strategy
and innovation priorities annually, based on consultation with our
stakeholders and this ensures we continue to focus innovation funding
only on the most effective projects which can deliver consumer benefits.
Next year will see us continue delivering large-scale ESO-led innovation
projects, including Distributed ReStart, a £10 million Network Innovation
Competition (NIC) project with SP Energy Networks and specialist
energy consultancy TNEI. In a world first, this project will develop and
demonstrate coordination of DERs to provide a safe and effective Black
Start service at lower cost to consumers.
Gas Transmission innovation has continued to focus on developing
innovation programmes across core areas such as net zero, safety,
reliability and asset health, and embedding these in the business, while
also preparing to deliver the energy network of the future and facilitate
UK decarbonisation. Highlights from the year include:
• expanding our focus on hydrogen with a number of new projects,
including Hydrogen Injection into the NTS, looking at the requirements
to carry out a physical trial of hydrogen in the NTS;
• the Monitoring of Real-Time Fugitive Emissions project, looking at
developing a robust measurement protocol and a new, low-cost,
distributed sensor scheme to monitor fugitive emissions;
• the Spatial GB Clean Heat model, a National Grid-led collaborative
project with the gas distribution networks to develop an integrated,
cross-vector heat decarbonisation model of the whole heating system
within GB to optimise future investment plans;
• launching a number of innovation calls with the Energy Innovation
Centre (EIC), reaching out to innovators and small and medium-sized
enterprises (SMEs) to find new technologies and solutions to some of
our biggest challenges on the NTS;
• the GRAID ART project, which will investigate the addition of Acoustic
Resonance Technology (ART) onto the GRAID robotic platform to
enhance our underground pipeline inspections, provide robust data
about their condition and reduce maintenance and repair costs;
• the installation of the Composite Transition Pieces at Peterborough
and Huntingdon; these innovative seal units make it quicker, cheaper
and safer to assess pipelines for corrosion.
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Additional Information | Other disclosures
The Company is utilising all the R&D efforts described above, to create
the Grid modernisation plans for all jurisdictions.
Unresolved SEC staff comments
There are no unresolved SEC staff comments required to be reported.
• We continued to progress our Smart City REV demonstration project
in partnership with the city of Schenectady. Phase 1, which involves
procurement, deployment and initial operation of all selected
technologies, has progressed beyond 90% completion. Now we are
collaborating on the establishment and assessment of functional
performance characteristics, including feedback from city stakeholders
to evaluate the public acceptance and the overall value proposition.
Phase 2 of the project is currently in the technology procurement
phase, which will then be deployed in the remaining areas of the city.
• National Grid is heavily engaged on several programmes, including
bulk system renewables, DERs integration, planning and asset
management, energy storage, asset management for transmission
and distribution, system automation and integrating emerging
technologies.
• To proactively monitor environmental conditions within underground
structures (manholes) we have piloted the installation of manhole
monitoring technology produced by CNIguard. Underground
infrastructure can be susceptible to the accumulation of water, debris
and salt that can result in the degradation of assets. This can result in
failure of the assets thereby increasing the operation and loading on
parallel equipment. National Grid has installed nine units in Providence,
Rhode Island and 11 in Brockton, Massachusetts and will be installing
12 in Albany, NY, 12 in Brockton, Massachusetts and 12
in Providence, Rhode Island in the second quarter of 2020.
• National Grid is preparing to demonstrate online monitoring technology
at transmission substations and lines in our New England service area.
These technologies will allow the Company to utilise the capacity of
lines and transformers more efficiently and focus maintenance efforts
on the assets which are at the greatest risk.
• Over the next 10 years we will be deploying up to 170 digital
substations in New England and New York as we transition to fully
digital substations on our transmission network, which will utilise the
IEC 61850 communications standard. The digital substation reduces
construction and operation costs, engineering and construction
time, increases system flexibility, and helps facilitate the large-scale
incorporation of renewable power.
US gas:
• While partnering with a robotics company and another utility, we have
been 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 constructed a functional sewer system
covering five hectares at one of our facilities to test the accuracy of
the technology. We purposefully created cross bores in the system
at several points to determine if the technology could locate them.
The technology found all the cross bores with no false negatives. We
are currently transitioning the technology to the field for live testing.
• We have been working with a Canadian valve manufacturer to develop
a service isolation valve to locally and remotely isolate a gas service.
The application has become necessary due to recent industry
incidents in the US. The valve has passed all industry and National
Grid required testing and can be installed on service lines up to 11 bar
of pressure. The valve can take a switched signal from any source
and locally isolate the gas service. Signals include flood, fire, seismic,
under-pressurisation, over-pressurisation and methane. The valve
can also be closed via a wireless signal from National Grid. We are
currently building 75 units to be deployed in the New York State
service territory. We are in conversations with our regulators to
expand the testing to 1,000 units as a solution to hurricane Sandy
flooding issues.
• To enhance the functionality of the service isolation valve, we have
been working to develop and deploy enhanced residential methane
detectors (RMDs). With the deployment of the 75 service isolation
valves, we are installing European manufactured RMDs that are
powered by 120 V and hard wired to the valve control. We are
working with several manufacturers on enhancements: first to
power the unit with long-term batteries (current technology limits
battery life to three years); and second, to introduce wireless
communication to the valve controller (as current technology
requires wiring from the RMD to the isolation valve). We are
developing an RMD with communications technology that would
allow installation of the RMD in remote locations in residential flats,
and installation of the RMD in locations where gas is being used
to signal if gas escapes.
239
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 (RPMs). They comprise: Group Return on Equity (RoE), UK and US regulatory RoE, regulated asset base, regulated financial performance,
regulatory gearing, asset growth, Value Added, including Value Added per share and Value Growth. These measures include the inputs used by
utility regulators to set the allowed revenues for many of our businesses.
We use RPMs 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 RPMs 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.
UK Electricity Transmission
UK Gas Transmission
US Regulated
NGV and Other
Sales between segments
Total
2020
Pass-
through
costs
£m
Gross
revenue
£m
3,702
(1,528)
927
(242)
9,205
(3,460)
736
(30)
–
–
Net
revenue
£m
Gross
revenue
£m
2,174
685
5,745
736
(30)
3,351
896
9,846
876
(36)
2019
Pass-
through
costs
£m
(1,397)
(227)
Net
revenue
£m
1,954
669
(3,978)
5,868
–
–
876
(36)
2018
Pass-
through
costs
£m
(2,243)
(257)
(3,804)
–
–
Net
revenue
£m
1,911
834
5,468
776
(43)
Gross
revenue
£m
4,154
1,091
9,272
776
(43)
14,540
(5,230)
9,310
14,933
(5,602)
9,331
15,250
(6,304)
8,946
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 28 – 37 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 2019/20, as highlighted on page 241, our underlying results exclude
£147 million (2018/19: £108 million) of timing differences. We have not excluded major storm costs this year as costs were below our $100 million
storm cost timing threshold (2018/19: £93 million). We expect to recover major storm 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.
240
National Grid plc Annual Report and Accounts 2019/20Additional Information Additional Information | Other unaudited financial information
Reconciliation of statutory, adjusted and underlying profits and earnings – at actual exchange rates – continuing operations
Year ended 31 March 2020
UK Electricity Transmission
UK Gas Transmission
US Regulated
NGV and Other
Total operating profit
Net finance costs
Share of post-tax results of joint ventures and associates
Profit before tax
Tax
Profit after tax
Statutory
£m
Exceptionals and
remeasurements
£m
Adjusted
£m
1,316
347
880
237
2,780
(1,113)
87
1,754
(480)
1,274
4
1
517
5
527
64
1
592
47
639
1,320
348
1,397
242
3,307
(1,049)
88
2,346
(433)
1,913
Timing
£m
(146)
54
239
–
147
–
–
147
(45)
102
Major
storm costs
£m
Underlying
£m
–
–
–
–
–
–
–
–
–
–
1,174
402
1,636
242
3,454
(1,049)
88
2,493
(478)
2,015
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 joint ventures 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)
40
1,841
(339)
1,502
237
36
299
–
572
76
–
648
(149)
499
1,015
303
1,724
400
3,442
(993)
40
2,489
(488)
2,001
77
38
(223)
–
(108)
–
–
(108)
36
(72)
–
–
93
–
93
–
–
93
(24)
69
1,092
341
1,594
400
3,427
(993)
40
2,474
(476)
1,998
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 joint ventures 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
1,041
487
1,734
231
3,493
(882)
49
2,660
889
3,549
–
–
(36)
–
(36)
(119)
(5)
(160)
(1,473)
(1,633)
1,041
487
1,698
231
3,457
(1,001)
44
2,500
(584)
1,916
14
18
(136)
–
(104)
–
–
(104)
42
(62)
–
–
142
–
142
–
–
142
(51)
91
1,055
505
1,704
231
3,495
(1,001)
44
2,538
(593)
1,945
241
National Grid plc Annual Report and Accounts 2019/20 Other unaudited financial information continued
Additional Information
Reconciliation of adjusted and underlying profits – at constant currency
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 joint ventures and associates
Profit before 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 joint ventures and associates
Profit before tax
At constant currency
Adjusted
at actual
exchange rate
£m
Constant
currency
adjustment
£m
Adjusted
£m
Timing
£m
Major storm
costs
£m
Underlying
£m
1,015
303
1,724
400
3,442
(993)
40
2,489
–
–
25
1
26
(11)
–
15
1,015
303
1,749
401
3,468
(1,004)
40
2,504
77
38
(226)
–
(111)
–
–
(111)
–
–
94
–
94
–
–
94
1,092
341
1,617
401
3,451
(1,004)
40
2,487
At constant currency
Adjusted
at actual
exchange rate
£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)
44
2,500
–
–
94
(4)
90
(38)
1
53
1,041
487
1,792
227
3,547
(1,039)
45
2,553
14
18
(144)
–
(112)
–
–
(112)
–
–
150
–
150
–
–
150
1,055
505
1,798
227
3,585
(1,039)
45
2,591
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.
Profit
after tax
£m
1,274
1,913
2,015
Profit
after tax
£m
1,502
2,001
1,998
Profit
after tax
£m
3,549
1,916
1,945
Non-
controlling
interest
£m
Profit after tax
attributable to
shareholders
£m
(1)
(1)
(1)
1,273
1,912
2,014
Non-
controlling
interest
£m
Profit after tax
attributable to
shareholders
£m
(3)
(3)
(3)
1,499
1,998
1,995
Non-
controlling
interest
£m
Profit after tax
attributable to
shareholders
£m
(1)
(1)
(1)
3,548
1,915
1,944
Weighted
average
number of
shares
millions
3,461
3,461
3,461
Weighted
average
number of
shares
millions
3,386
3,386
3,386
Weighted
average
number of
shares
millions
3,461
3,461
3,461
Earnings
per share
pence
36.8
55.2
58.2
Earnings
per share
pence
44.3
59.0
58.9
Earnings
per share
pence
102.5
55.3
56.2
Year ended 31 March 2020
Statutory
Adjusted (also referred to as Headline)
Underlying
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
242
National Grid plc Annual Report and Accounts 2019/20Additional Information Additional Information | Other unaudited financial information
Timing and regulated revenue adjustments
As described on pages 219 – 226, 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 under-collection of £147 million (2018/19: £108 million over-collection).
Our closing balance at 31 March 2020 was £256 million over-recovered. In the UK, there was a cumulative over-recovery of £24 million at 31 March
2020 (2019: under-recovery of £59 million). In the US, cumulative timing over-recoveries at 31 March 2020 were £240 million (2019: £466 million
over-recovery).
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, timing and regulated revenue adjustments totalled a recovery of £92 million in the year (2018/19:
£115 million return). 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.
1 April 2019 opening balance¹
Over/(under) recovery
31 March 2020 closing balance to (recover)/return³
1 April 2018 opening balance¹
Over/(under) recovery
31 March 2019 closing balance to (recover)/return2,3
1 April 2017 opening balance¹
Over/(under) recovery
31 March 2018 closing balance to (recover)/return2,3
UK Electricity
Transmission
£m
UK Gas
Transmission
£m
US Regulated
£m
(127)
146
19
59
(54)
5
471
(239)
232
UK Electricity
Transmission
£m
UK Gas
Transmission
£m
US Regulated
£m
(41)
(77)
(118)
97
(38)
59
245
226
471
UK Electricity
Transmission
£m
UK Gas
Transmission
£m
US Regulated
£m
(30)
(14)
(44)
111
(18)
93
108
143
251
Total
£m
403
(147)
256
Total
£m
301
111
412
Total
£m
189
111
300
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 2020.
3. The over-recovered closing balance at 31 March 2020 was £264 million (translated at the closing rate of $1.24:£1). 31 March 2019 was £407 million (translated at the closing rate of $1.30:£1).
31 March 2018 was £279 million (translated at the closing rate of $1.40:£1).
243
National Grid plc Annual Report and Accounts 2019/20 Other unaudited financial information continued
Capital 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
At actual exchange rates
At constant currency
UK Electricity Transmission
UK Gas Transmission
US Regulated
NGV and Other
Group capital expenditure
Equity investment, funding contributions and loans to joint ventures and associates¹
Acquisition of Geronimo and Emerald
Increase in financial assets (National Grid Partners)
Group capital investment
1. Excludes £15 million (2019: £47 million) equity contribution to the St William Homes LLP joint venture.
Net debt
See note 29 on page 178 for the definition and reconciliation of net debt.
2020
£m
1,043
249
2019
£m
925
308
3,228
2,650
559
438
5,079
4,321
56
209
61
127
–
58
5,405
4,506
%
change
13
(19)
22
28
18
(56)
n/a
5
20
2020
£m
1,043
249
2019
£m
925
308
3,228
2,688
559
439
5,079
4,360
56
209
61
128
–
59
5,405
4,547
%
change
13
(19)
20
27
16
(56)
n/a
3
19
Funds from operations 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
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
Funds from operations (FFO)
FFO interest cover ((FFO + adjusted interest expense)/adjusted interest expense)
1. Numbers for 2019 and 2018 reflect the calculations for the total Group as based on the published accounts for the respective years.
244
2020
£m
1,119
(39)
122
16
–
(77)
–
1,141
4,715
73
(957)
75
(269)
176
39
–
(187)
67
(45)
(97)
3,590
4.1x
2019¹
£m
1,066
(51)
135
(4)
11
(74)
1
1,084
4,389
68
(914)
201
(40)
260
51
34
(186)
(13)
(52)
(71)
3,727
4.4x
2018¹
£m
1,128
(51)
128
(49)
16
(75)
12
1,109
4,710
57
(853)
213
(118)
211
51
86
(178)
(206)
(22)
(207)
3,744
4.4x
National Grid plc Annual Report and Accounts 2019/20Additional Information Additional Information | Other unaudited financial information
Retained cash flow/adjusted net debt
RCF/adjusted 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/adjusted 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 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
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
2020
£m
3,590
(39)
(892)
2,659
–
2,659
30,794
(1,054)
(73)
(1,278)
1,442
–
(116)
203
6
(785)
(246)
2019
£m
3,727
(51)
(1,160)
2,516
–
2,516
28,730
(1,039)
(252)
(1,311)
845
248
141
38
18
(558)
(223)
2018
£m
3,744
(51)
(1,316)
2,377
(178)
2,199
26,625
(1,050)
(329)
(2,304)
857
408
(479)
117
5
(878)
(195)
28,893
26,637
9.2%
9.2%
9.4%
9.4%
22,777
10.4%
9.7%
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 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
2020
£m
1,320
(99)
63
406
(459)
26
(52)
119
2019
£m
1,015
174
64
391
(394)
72
(51)
90
2018
£m
1,041
51
70
374
(377)
69
(49)
83
1,324
1,361
1,262
245
National Grid plc Annual Report and Accounts 2019/20 Other unaudited financial information continued
UK 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
US Regulated
Year ended 31 March
Adjusted operating profit
Bad debt provision (COVID-19)1
Major storm costs
Timing
US GAAP pension adjustment
Regulated financial performance
2020
£m
348
67
25
185
(77)
(17)
(34)
(24)
473
2020
£m
1,397
117
–
239
(4)
1,749
1. US Regulated financial performance includes an adjustment reflecting our expectation for future recovery of COVID-19 related bad and doubtful debt costs.
Total regulated financial performance
Year ended 31 March
UK Electricity Transmission
UK Gas Transmission
US Regulated
Total regulated financial performance
2020
£m
1,324
473
1,749
3,546
2019
£m
303
68
8
179
(42)
(10)
(33)
(30)
443
2019
£m
1,724
–
93
(223)
(80)
1,514
2019
£m
1,361
443
1,514
3,318
2018
£m
487
(91)
18
173
(29)
(11)
(32)
(16)
499
2018
£m
1,698
–
142
(136)
(73)
1,631
2018
£m
1,262
499
1,631
3,392
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 are 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.
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National Grid plc Annual Report and Accounts 2019/20Additional Information Additional Information | Other unaudited financial information
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, 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.
Year ended 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
2020
£m
14,133
6,298
20,644
41,075
4,105
45,180
2019¹
£m
13,537
6,155
18,407
38,099
3,351
41,450
2020
£m
13,769
6,305
22,435
42,509
3,591
46,100
2019¹
£m
13,291
6,099
20,394
39,784
2,672
42,456
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 2019, and finalisation of US balances.
US rate base and Total Regulated and other balances for 31 March 2019 have been restated in the table above at constant currency. At actual
currency the values were £17.6 billion and £19.5 billion respectively.
Other business assets and other balances for NGV and Other businesses for 31 March 2019 have been restated in the table above for the impact
of IFRS 16 leases, constant currency and to exclude out 39% share of our investment in Quadgas. At actual currency excluding IFRS 16 leases
the values were £2.8 billion and £2.7 billion respectively.
Group 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.
247
National Grid plc Annual Report and Accounts 2019/20 Other unaudited financial information continued
Year 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 balances
Opening goodwill
Opening capital employed
Opening net debt
Opening equity
Return on Equity
UK and US regulated RoE
Year ended 31 March
UK Electricity Transmission
UK Gas Transmission
US Regulated
2020
£m
3,546
269
3,815
88
(1)
2019
£m
3,318
424
3,742
40
(3)
(1,069)
(1,037)
(433)
(117)
2,283
37,459
–
3,304
5,938
(488)
(34)
2,220
35,045
–
2,298
5,852
2018
£m
3,392
255
3,647
238
(1)
(980)
(639)
27
2,292
32,446
512
1,787
5,626
46,701
43,195
40,371
(27,194)
(24,345)
(21,770)
19,507
11.7%
18,850
11.8%
18,601
12.3%
Regulatory
Debt: Equity
assumption
60/40
62.5/37.5
Avg. 50/50
Achieved
Return on Equity
Base or Allowed
Return on Equity
2020
%
13.5
9.8
9.3
2019
%
13.7
9.5
8.8
2020
%
10.2
10.0
9.4
2019
%
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 2018/19 and 2017/18, this measure is the aggregate operating profit of our US OpCo entities’ publicly available financial statements
prepared under US GAAP. For 2019/20, this measure represents our current estimate, since local financial statements have yet to be prepared.
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National Grid plc Annual Report and Accounts 2019/20Additional Information Additional Information | Other unaudited financial information
Underlying IFRS operating 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
2020
£m
1,636
2019
£m
1,594
2018
£m
1,704
$1.2868
$1.305
$1.358
2020
$m
2,105
(50)
(13)
(94)
(9)
3
2019
$m
2,081
(50)
(10)
(117)
(112)
121
2018
$m
2,313
(151)
(101)
(106)
(113)
(146)
Results for US regulated OpCo entities, aggregated under US GAAP²
1,942
1,913
1,696
Adjustments to determine regulatory operating profit used in US RoE
Levelisation revenue adjustment
Adjustment for COVID-19 related provision for bad and doubtful debts³
Net other
Regulatory operating profit
Pensions¹
Regulatory interest charge
Regulatory tax charge
Regulatory earnings used to determine US RoE
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.
3. US RoE includes an adjustment reflecting our expectation for future recovery of COVID-19 related bad and doubtful deb costs.
US equity base (average for the year)
US RoE
(122)
150
51
2,021
19
(491)
(408)
1,141
(48)
–
(1)
82
–
40
1,864
1,818
(95)
(457)
(345)
967
–
(395)
(520)
903
2020
$m
12,331
9.3%
2019
$m
11,045
8.8%
2018
$m
10,092
8.9%
Value Added and Value Added per share and Value Growth
Value Added is a measure that reflects the value to shareholders of our cash dividend and the growth in National Grid’s regulated and non-regulated
assets (as measured in our regulated asset base, for regulated entities), and corresponding 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
32. Value Added per share is calculated by dividing Value Added by the weighted average number of shares (3,461 million) set out in note 8 on page 145.
Value Growth of 10.4% (2018/19: 11.5%) is derived from Value Added by adjusting Value Added to normalise for a 3% long-run RPI inflation rate.
In 2019/20, the numerator for Value Growth was £2,068 million (2018/19: £2,166 million). The denominator is Group equity as used in the Group
RoE calculation, adjusted for foreign exchange movements.
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 2019 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)
2020
£m
20,431
20,644
4,105
45,180
2019
£m
19,692
17,565
2,815
40,072
(28,590)
(26,529)
change
63%
61%
66%
64%
3% pts
3% pts
249
National Grid plc Annual Report and Accounts 2019/20 Commentary on consolidated financial statements
for the year ended 31 March 2019
Additional Information
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 2020 financial review
included on pages 28 – 37.
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.
See page 242 for a reconciliation of adjusted basic EPS to EPS.
The above earnings performance translated into an increase in adjusted
EPS in 2018/19 of 3.7p (7%).
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)
2018/19
2017/18
% change
1.31
1.30
1.36
1.40
4%
7%
The movement in foreign exchange during 2018/19 has resulted in
a £355 million increase in revenue, a £62 million increase in adjusted
operating profit and a £63 million increase in operating profit.
The movement in foreign exchange during 2018/19 has resulted in
a £355 million increase in revenue, a £62 million increase in adjusted
operating profit and a £63 million increase in operating profit.
Analysis of the adjusted operating profit by segment for the
year ended 31 March 2019
UK Electricity Transmission
For the year ended 31 March 2019, revenue in the UK Electricity
Transmission segment decreased by £803 million to £3,351 million,
and adjusted operating profit decreased by £26 million to £1,015
million. Revenue was significantly impacted by the adoption of IFRS 15,
with revenues collected from customers but passed on to the Scottish
and Offshore transmission operators are now excluded from both
revenue and operating costs, compared to £1,027 million in 2017/18.
Excluding pass-through costs, net revenue was £43 million higher,
reflecting higher baser allowances including the impact of inflation and
increased incentives income, partially offset by the return 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 £11 million higher, reflecting inflation,
increased headcount and workload, and initiative spend. Depreciation
and amortisation was £18 million higher, reflecting the continued capital
investment programme. Other costs were £41 million higher, principally
relating to provision against income recognised on early termination of
connections.
Capital expenditure decreased by £74 million compared with 2016/17 to
£925 million reflecting reduced activity on Western Link and completion
of the London Power Tunnels project.
Analysis of the income statement for the year ended
31 March 2019
Revenue
Revenue for the year ended 31 March 2019 decreased by £317 million
to £14,933 million. This decrease was driven by lower revenues in our
UK Electricity Transmission business and in our UK Gas Transmission
business, partially offset by higher revenues in our US Regulated and
NGV and Other businesses. US Regulated revenues were £574 million
higher year-on-year, principally due to the impact of new rate plans, the
benefit of foreign exchange and recovery of prior year timing under-
collections, partially offset by the collection of lower tax allowances and
the impact of IFRS 15. UK Electricity Transmission revenues decreased
by £803 million, (related to IFRS 15, which reduced both revenues and
costs by £1.0 billion), partly offset by higher BSIS pass-through costs
and return of prior year timing over-collections. UK Gas Transmission
revenues were £195 million lower, driven by the return of allowances
related to Avonmouth. Revenue from NGV and Other businesses
increased by £100 million, primarily driven by sales in our Commercial
Property business.
Operating costs
Operating costs for the year ended 31 March 2019 of £12,063 million
were £306 million higher than the prior year. This increase in
costs included a £608 million increase in exceptional items and
remeasurements, which is discussed below. Excluding exceptional
items and remeasurements, operating costs were £302 million lower,
driven by the impact of IFRS 15, which reduced costs (and related
revenues) for payments to other network owners by £1,043 million,
partially offset by higher pass-through costs, increased rates and
property taxes, higher depreciation as a result of continued asset
investment and the impact of movement in exchange rates.
Net finance costs
For the year ended 31 March 2019, net finance costs before exceptional
items and remeasurements were £8 million lower than 2017/18 at £993
million, mainly as a result of the impact of the stronger US dollar and
lower pension net interest expense due to lower pension net liabilities
and other interest gains, partially offset lower gains on the sale of
financial assets and the impact of higher UK RPI inflation. Net finance
costs in 2018/19 included remeasurement losses of £76 million on
derivative financial instruments used to hedge our borrowings,
compared to £119 million of remeasurement gains in 2017/18.
Tax
The tax charge on profits before exceptional items and remeasurements
of £488 million was £96 million lower than 2017/18. This reduction was
primarily due to a full year’s benefit in 2018/19 from the Tax Cut & Jobs
Act which reduced the US corporate tax rate from 35% to 21% with
effect from 1 January 2018.
Exceptional items and remeasurements
Operating costs for the year ended 31 March 2019 included £283 million
of costs arising from the workforce contingency plan related to the
Massachusetts Gas labour dispute, £204 million of restructuring charges
in our UK and US businesses and £137 million related to the impairment
of nuclear connection development costs following the cancellation of
the NuGen and Horizon projects. These were partially offset by a net
£52 million gain on remeasurement of commodity contracts. In the
previous year, operating costs 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.
Finance costs for the year ended 31 March 2019 included a net loss
of £76 million on financial remeasurements of derivative financial
instruments used to hedge our borrowings, compared to a gain of
£119 million on financial remeasurements in 2017/18.
Share of post-tax results of joint ventures and associates before
exceptional items for the year ended 31 March 2019 of £40 million
was £4 million lower, principally due to higher costs in St William.
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National Grid plc Annual Report and Accounts 2019/20Additional Information Additional Information | Other unaudited financial information
UK Gas Transmission
Revenue in the UK Gas Transmission segment decreased by
£195 million to £896 million, and adjusted operating profit decreased
by £184 million to £303 million.
After deducting pass-through costs, net revenue was £165 million lower
than 2017/18, reflecting the refund of revenues previously received in
respect of the proposed Avonmouth pipeline project that is no longer
required. Regulated controllable costs were £2 million lower than
2017/18, with efficiency savings offsetting the higher IT run-the-business
costs and the impact of inflation. Pension costs were £9 million higher
mainly related to the Guaranteed Minimum Pension equalisation ruling.
Depreciation and amortisation costs were £13 million lower following a
detailed review of asset lives in the year. Other operating costs were
£25 million higher than 2017/18, as a result of the release of unused
provisions in the prior year.
Capital expenditure marginally decreased to £308 million, £2 million
lower than last year.
US Regulated
Revenue in our US Regulated business increased by £574 million to
£9,846 million, and adjusted operating profit increased by £26 million
to £1,724 million.
The stronger US dollar decreased revenue and operating profit in
2018/19. Excluding the impact of foreign exchange rate movements,
revenue increased by £202 million. Of this increase, £21 million was due
to increases in pass-through costs charged on to customers. Excluding
pass-through costs, net revenue increased by £181 million at constant
currency, principally reflecting increased revenue allowances under rate
plans in upstate and downstate New York and in Massachusetts,
partially offset by the impact of US tax reform (as the billing tariffs now
reflect lower tax requirements) and the impact of IFRS 15, under which
customer connection revenues are now recognised over the life of the
asset rather than on completion of the works.
We incurred £93 million of major storm costs in 2018/19 through
a number of heavy winter storms that caused substantial damage to
our electricity networks, compared to £142 million in 2017/18. Excluding
these costs and the impact of foreign exchange movements, regulated
controllable costs increased by £106 million, reflecting workload
increases agreed with regulators and the impact of inflation. Bad debt
expense increased by £42 million at constant currency, reflecting higher
levels of receivables and cash collection studies. Depreciation and
amortisation was £40 million higher in 2018/19 at constant currency as
a result of ongoing investment in our networks. Other operating costs
were £41 million higher at constant currency, due to more expenditure
on ‘minor’ storms (non-deferrable) and increased cost of removal.
Capital expenditure in the US Regulated business increased to
£2,650 million in 2018/19, £226 million more than in 2017/18. At
constant currency, this represented a £129 million increase in
investment driven by higher investment in new and replacement
gas mains and gas business enablement investment, partially
offset by the impact of the Massachusetts Gas labour dispute.
NGV and Other
Revenue in NGV and Other increased by £100 million to £876 million,
and adjusted operating profit increased by £169 million to £400 million.
This reflects higher revenues and profit on disposal of property sites
in the UK and lower costs to setting up our new business and the
absence of the impairment of land value in 2017/18.
Capital expenditure in NGV and Other was £107 million higher
than 2017/18 at £438 million, including the increased investment
in a second French Interconnector and in the North Sea Link
interconnector to Norway.
251
National Grid plc Annual Report and Accounts 2019/20 Summary 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 2020. 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 the footnotes below for the years ended
31 March 2020, 2019, 2018, 2017 and 2016 where relevant and has been prepared under IFRS as issued by the IASB and as adopted by the EU.
Summary income statement (£m)
2020
2019
2018¹
2017
2016²
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
(Loss)/profit after tax from discontinued operations
Before exceptional items, remeasurements
Exceptional items, remeasurements
Gain on disposal of UK Gas Distribution after tax
Total profit for the year
Profit for the year attributable to equity shareholders
Before exceptional items, remeasurements
Exceptional items, remeasurements
Gain on disposal of UK Gas Distribution after tax
Total
Earnings per share
Basic – continuing operations (pence)
Diluted – continuing operations (pence)
Basic – total (pence)
Diluted – total (pence)
Weighted average number of shares – basic (millions)
Weighted average number of shares – diluted (millions)
Dividends per ordinary share
Paid during the year (pence)
Approved or proposed during the year (pence)³
Paid during the year ($)
Approved or proposed during the year ($)
14,540
14,933
15,250
15,035
13,212
3,307
(527)
2,346
(592)
1,913
(639)
5
(14)
–
3,442
(572)
2,489
(648)
2,001
(499)
57
(45)
–
3,457
36
2,500
160
1,916
1,633
145
(143)
–
1,265
1,514
3,551
1,917
(653)
–
1,264
36.8
36.6
36.5
36.3
3,461
3,478
47.83
48.57
0.615
0.625
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
128.97
45.93
1.751
0.624
3,773
(565)
2,807
(623)
2,141
(331)
606
57
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
3,214
11
2,417
(88)
1,813
89
576
116
–
2,594
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
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 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
252
2020
61,288
5,801
67,089
2019
55,017
7,946
62,963
2018
52,106
6,681
58,787
2017
52,266
13,574
65,840
2016
52,622
6,312
58,934
(8,564)
(9,129)
(8,697)
(10,511)
(7,721)
(38,941)
(34,465)
(31,242)
(34,945)
(37,648)
(47,505)
(43,594)
(39,939)
(45,456)
(45,369)
19,584
19,562
19,369
19,349
18,848
18,832
20,384
20,368
13,565
13,555
National Grid plc Annual Report and Accounts 2019/20Additional Information National Grid plc Annual Report and Accounts 2019/20
Additional Information
Definitions and glossary of terms
Our aim is to use plain English in this Annual Report and Accounts. However, where necessary, we do use a number of technical
terms and 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 240 – 249.
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.
Adjusted results (also referred to as headline results)
Financial results excluding 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
National Grid 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.
American Depositary Shares (ADSs)
Securities of National Grid listed on the New York Stock Exchange, each
of which represents five ordinary shares. They are evidenced by
American Depositary Receipts or ADRs.
Annual General Meeting (AGM)
Meeting of shareholders of the Company held each year to consider
ordinary and special business as provided in the Notice of AGM.
B
BAME
Black, Asian and Minority Ethnic (being the UK term used to refer to
members of non-white communities).
BEIS
The Department for Business, Energy and Industrial Strategy, the UK
government department responsible for business, industrial strategy,
and science and innovation with energy and climate change policy.
Board
The Board of Directors of the Company (for more information see
pages 66 and 67).
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.
BritNed
BritNed Development Limited.
C
Cadent
Cadent Gas Limited, the Company’s 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% to the Consortium
completed on 28 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.
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.
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 Cadent. 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.
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 2020, which
was $1.29 to £1. The average rate for the year ended 31 March 2019
was $1.31 to £1, and for the year ended 31 March 2018 was $1.36 to £1.
Assets and liabilities as at 31 March 2019 have been retranslated at the
closing rate at 31 March 2020 of $1.24 to £1. The closing rate for the
balance sheet date 31 March 2019 was $1.30 to £1.
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.
COVID-19
COVID-19 or coronavirus disease is an infectious disease caused by a
newly discovered coronavirus which spreads through droplets of saliva
or discharge from the nose when an infected person coughs or sneezes.
CPIH
The UK Consumer Prices Index including Owner Occupiers’ Housing
Costs as published by the Office for National Statistics.
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.
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.
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.
Directors/Executive Directors/Non-executive Directors
The Directors/Executive Directors and Non-executive Directors of the
Company, whose names are set out on pages 66 and 67 of this document.
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Additional Information
Definitions and glossary of terms continued
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.
G
Gas Transmission (GT)
National Grid’s UK gas transmission business.
Dollars or $
Except as otherwise noted, all references to dollars or $ in this Annual
Report and Accounts relate to the US currency.
Geronimo
Geronimo, a leading developer of wind and solar generation based in
Minneapolis in the US, which National Grid acquired in July 2019.
E
Earnings per share (EPS)
Profit for the year attributable to equity shareholders of the Company
allocated to each ordinary share.
Grain LNG
National Grid Grain LNG Limited.
Great Britain
England, Wales and Scotland.
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.
Group Value Growth
Group Value Growth is Group-wide value added expressed as a
proportion of Group equity. See page 32 for an explanation of
Value Added.
Electricity Transmission (ET)
National Grid’s UK electricity transmission business.
GW
Gigawatt, an amount of power equal to 1 billion watts (109 watts).
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.
GWh
Gigawatt hours, an amount of energy equivalent to delivering 1 billion
watts (109 watts) of power for a period of one hour.
H
Hinkley-Seabank (HSB)
A project to connect the new Hinkley Point C nuclear power station to
the electricity transmission network.
Employee resource group (ERG)
A group of employees who join together in their workplace based on
shared characteristics or life experiences.
HMRC
HM Revenue & Customs. The UK tax authority.
Estate Tax Convention
The convention between the US and the UK for the avoidance of double
taxation with respect to estate and gift taxes.
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.
EU
The European Union (EU) is the economic and political union of 27
member states located in Europe. The UK left the European Union
on 31 January 2020.
Exchange Act
The US Securities Exchange Act 1934, as amended.
F
FERC
The US Federal Energy Regulatory Commission.
Finance lease
A lease where the asset is treated as if it was owned for the period of
the lease, and the obligation to pay future rentals is treated as if they
were borrowings. Also known as a capital lease.
Financial year
For National Grid this is an accounting year ending on 31 March.
Also known as a fiscal year.
FRS
A UK Financial Reporting Standard as issued by the UK Financial
Reporting Council (FRC). It applies to the Company’s individual
financial statements on pages 209 – 215, which are prepared in
accordance with FRS 101.
Funds from Operations (FFO)
A measure used by the credit rating agencies of the operating cash
flows of the Group after interest and tax but before capital investment.
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.
kW
Kilowatt, an amount of power equal to 1,000 watts.
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Additional Information | Definitions and glossary of terms
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.
MW
Megawatt, an amount of power equal to 1 million watts.
MWh
Megawatt hours, an amount of energy equivalent to delivering 1 million
watts (106) of power for a period of one hour.
N
National Grid Metering Limited (NGM)
The Company’s UK regulated metering business.
National Grid Partners (NGP)
The Company’s venture investment and innovation business established
in November 2018.
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 Geronimo, 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.
National Transmission System (NTS)
The gas National Transmission System in Great Britain.
Net Promoter Score (NPS)
A commonly used tool to measure customer experience to gauge the
loyalty of a company’s customer relationships. It is an index ranging from
-100 to +100.
Net Zero
Net zero means that a person, legal entity (such as a company), country
or other body’s own emissions of greenhouse gases are either zero or
that its remaining greenhouse gas emissions are balanced by schemes
to offset, through the removal of an equivalent amount of greenhouse
gases from the atmosphere, such as planting trees or using technology
like carbon capture and storage.
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.
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), which regulates the energy
markets in the UK.
OPEB
Other post-employment benefits.
Ordinary shares
Voting shares entitling the holder to part ownership of a company.
Also known as common stock. National Grid’s ordinary shares have a
nominal value of 12204∕473 pence following the share consolidation
approved at the General Meeting of the Company held on 19 May 2017.
P
Paris Agreement
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 encourage energy-
efficiency programmes by eliminating the disincentive a utility otherwise
has to such programmes.
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Additional Information
Definitions and glossary of terms continued
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-2
The regulatory framework for energy networks expected to be issued by
Ofgem to start on 1 April 2021.
RIPUC
The Rhode Island Public Utilities Commission.
T
Tax Convention
Tax Convention means the income tax convention between the US and
the UK.
Taxes borne
Those taxes that represent a cost to the Company and are reflected in
our results.
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.
RPI
The UK retail price index as published by the Office for National
Statistics.
Tonne
A unit of mass equal to 1,000 kilogrammes, equivalent to approximately
2,205 pounds.
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.
STEM
Science, technology, engineering and mathematics.
Tonnes carbon dioxide equivalent (CO2e)
A measure of greenhouse gas emissions in terms of the equivalent
amount of carbon dioxide.
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.
U
UK
The United Kingdom, comprising England, Wales, Scotland and
Northern Ireland.
UK Corporate Governance Code (the Code)
Guidance, issued by the Financial Reporting Council in 2018, on how
companies should be governed, applicable to UK listed companies,
including National Grid, in respect of reporting periods starting on or
after 1 January 2019.
UK GAAP
Generally accepted accounting principles in the UK. These differ from
IFRS and from US GAAP.
Underlying EPS
Underlying results for the year attributable to equity shareholders of the
Company allocated to each ordinary share.
Underlying results
The financial results of the Company, adjusted to exclude the impact of
exceptional items and remeasurements that are treated as discrete
transactions under IFRS and can accordingly be classified as such, and
to take account of volumetric and other revenue timing differences arising
due to the in-year difference between allowed and collected revenues.
US
The United States of America, its territories and possessions, any state
of the United States and the District of Columbia.
Stranded cost recoveries
The recovery of historical generation-related costs in the US, related to
generation assets that are no longer owned by us.
US GAAP
Generally accepted accounting principles in the US. These differ from
IFRS and from UK GAAP.
Subsidiary
A company or other entity that is controlled by National Grid.
Swaption
A swaption gives the buyer, in exchange for an option premium, the right,
but not the obligation, to enter into an interest-rate swap at some
specified date in the future. The terms of the swap are specified on the
trade date of the swaption.
US 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, adjusted to normalise for a 3%
long-run RPI inflation rate, expressed as a proportion of Group
equity. See page 249.
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Additional Information
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Financial calendar
The following dates have been announced or are indicative:
Electronic communications
Please register at www.shareview.co.uk.
18 June 2020
2019/20 full-year results
1 July 2020
2 July 2020
3 July 2020
9 July 2020
ADRs go ex-dividend for 2019/20 final dividend
Ordinary shares go ex-dividend for 2019/20 final dividend
Record date for 2019/20 final dividend
Scrip reference price announced
22 July 2020
(5pm London time)
Scrip election date
27 July 2020
2020 AGM
19 August 2020
2019/20 final dividend paid to qualifying shareholders
12 November 2020
2020/21 half-year results
25 November 2020
ADRs go ex-dividend for 2020/21 interim dividend
26 November 2020
Ordinary shares go ex-dividend for 2020/21
interim dividend
27 November 2020
Record date for 2020/21 interim dividend
3 December 2020
Scrip reference price announced
14 December 2020
(5pm London time)
Scrip election date for 2020/21 interim dividend
13 January 2021
2020/21 interim dividend paid to qualifying shareholders
Dividends
The Directors are recommending a final dividend of 32.00 pence per
ordinary share ($2.0126 per ADS) to be paid on 19 August 2020 to
shareholders on the register as at 3 July 2020. Further details on
dividend payments can be found on page 37. 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 2019/20 final
dividend will be charged a fee of $0.02 per ADS by the Depositary prior
to the distribution of the cash dividend.
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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.
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Postal share dealing: Equiniti offer our European Economic Area
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257
National Grid plc Annual Report and Accounts 2019/20
Additional Information
Cautionary statement
This document comprises the Annual Report and Accounts for the year
ended 31 March 2020 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 1 – 107
and 216 – 252 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 the impact of COVID-19 on our operations,
our employees, our counterparties, our funding and our regulatory and
legal obligations, but also more widely in terms of 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-2 price as well as increased economic uncertainty resulting from
COVID-19; 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; the failure by the Company to respond to, or
meet its own commitments as a leader in relation to, climate change
development activities relating to energy transition, including 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
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