SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
| ¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| OR | ||
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended 31 March | ||
| OR | ||
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| OR | ||
| ¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| Date of event requiring this shell company report | ||
| For the transition period from to | ||
Commission file number: 001-14958
NATIONAL GRID PLC
(Exact name of Registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organization)
1-3 Strand, London WC2N 5EH, England
(Address of principal executive offices)
Alison Kay
011 44 20 7004 3000
Facsimile No. 011 44 20 7004 3004
Group General Counsel and Company Secretary
National Grid plc
1-3 Strand London WC2N 5EH, England
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class | Name of each exchange on which registered | |
| Ordinary Shares of 11 17/43 pence each | The New York Stock Exchange* | |
| American Depositary Shares, each representing five | The New York Stock Exchange | |
| Ordinary Shares of 11 17/43 pence each | ||
| 6.625% Guaranteed Notes due 2018 | The New York Stock Exchange | |
| 6.30% Guaranteed Notes due 2016 | The New York Stock Exchange | |
| Preferred Stock ($100 par value-cumulative): | ||
| 3.90% Series | The New York Stock Exchange | |
| 3.60% Series | The New York Stock Exchange |
| * | Not for trading, but only in connection with the registration of American Depositary Shares representing Ordinary Shares pursuant to the requirements of the Securities and Exchange Commission. |
Securities registered or to be registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: None.
Securities for which there is a reporting obligation pursuant to Section15(d) of the Securities Exchange Act of 1934: None.
The number of outstanding shares of each of the issuer’s classes of capital or common stock as of 31 March 20142016 was
| Ordinary Shares of 11 17/43 pence each |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes þ No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No þ
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer þ | Accelerated filer ¨ | Non-accelerated filer ¨ |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ¨ International Financial Reporting Standards as issued by the International Accounting Standards Board þ Other ¨
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
This constitutes the annual report on Form 20-F of National Grid plc (the “Company”) in accordance with the requirements of the US Securities and Exchange Commission (the “SEC”) for the year ended 31 March 20142016 and is dated 57 June 2014.2016. Details of events occurring subsequent to the approval of the annual report on 18 May 20142016 are summarised in section “Further Information” which forms a part of this Form 20-F .20-F. The content of the Group’s website (www.nationalgrid.com/uk) should not be considered to form part of this annual report on Form 20-F.
Form 20-F Cross Reference Table
Item | Form 20-F caption | Location in the document | Page(s) | Form 20-F caption | Location in the document | Page(s) | ||||||||||
1 |
Identity of directors, senior management and advisors |
Not applicable | – |
Identity of directors, senior management and advisors |
Not applicable | – | ||||||||||
2 |
Offer statistics and expected timetable |
Not applicable | – |
Offer statistics and expected timetable |
Not applicable | – | ||||||||||
3 |
Key Information |
Key Information | ||||||||||||||
3A Selected financial data | “Additional Information—Summary consolidated financial information” | 200-201 | ||||||||||||||
“Strategic Report—Financial review” | 22-25 | |||||||||||||||
3A Selected financial data | “Additional Information—Summary consolidated financial information” | 186-187 | “Financial Statements—Consolidated statement of financial position” | 98 | ||||||||||||
“Strategic Report—Financial review” | 6-9 | “Financial Statements—Unaudited commentary on consolidated statement of financial position—Net debt” | 99 | |||||||||||||
“Financial Statements—Unaudited commentary on consolidated cash flow statement—Net debt” | 91 | “Financial Statements—Unaudited commentary on the consolidated cash flow statement—Net debt” | 101 | |||||||||||||
“Additional Information—Other unaudited financial information—Reconciliations of adjusted profit measures” | 182 | “Additional Information—Other unaudited financial information—Reconciliations of adjusted profit measures” | 196 | |||||||||||||
“Additional Information—Other disclosures—Exchange rates” | 178 | “Additional Information—Shareholder information—Exchange rates” | 189 | |||||||||||||
“Exchange Rates” | | “Further Information” | | “Exchange Rates” | | “Further Information” | | |||||||||
3B Capitalization and indebtedness | Not applicable | – | 3B Capitalization and indebtedness | Not applicable | – | |||||||||||
3C Reasons for the offer and use of proceeds | Not applicable | – | 3C Reasons for the offer and use of proceeds | Not applicable | – | |||||||||||
3D Risk Factors | “Additional Information—Business information in detail—Risk factors” | 167-169 | 3D Risk Factors | “Additional Information—The business in detail—Risk factors” | 183-186 | |||||||||||
4 |
Information on the company | Information on the company | ||||||||||||||
4A History and development of the company | “Want more information or help?” |
| 192- Back cover |
| 4A History and development of the company | “Want more information or help?” |
| 207 Back cover |
| |||||||
“Additional Information—Other disclosures—Key milestones” | 179 | “Additional Information—The business in detail—Key milestones” | 174 | |||||||||||||
“Strategic Report—Chief Executive’s review” | 4-5 | “Strategic Report—Chief Executive’s review” | 6-7 | |||||||||||||
| �� | “Strategic Report—Our vision and strategy” | 14-15 | “Strategic Report—Operating environment” | 8-9 | ||||||||||||
“Strategic Report—Operating environment” | 12-13 | “Additional Information—Shareholder information—Articles of Association” | 187-188 | |||||||||||||
“Additional Information—Other disclosures—Articles of Association” | 176-177 | “Financial Statements—Consolidated statement of financial position—Unaudited commentary on consolidated statement of financial position—Property, plant and equipment” | 99 | |||||||||||||
“Financial Statements—Consolidated statement of financial position—Unaudited commentary on consolidated statement of financial position—Property, plant and equipment” | 89 | “Financial Statements—Consolidated cash flow statement—Unaudited commentary on the consolidated cash flow statement—Net capital expenditure” | 101 | |||||||||||||
“Financial Statements—Consolidated cash flow statement—Unaudited commentary on consolidated cash flow statement—Net capital expenditure” | 91 | “Additional Information—Other unaudited financial information—Commentary on consolidated financial statements for the year ended 31 March 2015” | 197-199 | |||||||||||||
“Additional Information—Other unaudited financial information—Commentary on consolidated financial statements for the year ended 31 March 2013” | 183-185 | “Financial Statements—Notes to the consolidated financial statements—2. Segmental analysis—(c) Capital expenditure | 106 | |||||||||||||
“Financial Statements—Notes to the consolidated financial statements—2. Segmental analysis—(c) Capital expenditure, depreciation and amortisation” | 95 | “Additional Information—The business in detail—UK Regulation”; “US Regulation” and “—Summary of US price controls and rate plans” | 176-182 | |||||||||||||
“Strategic Report—How our strategy creates value” | 21 | 4B Business overview | “Additional Information—The business in detail—Where we operate” | 175 | ||||||||||||
4B Business overview | “Additional Information—Business information in detail—Where we operate” | 166 | “Strategic Report—Operating environment” | 8-9 | ||||||||||||
“Strategic Report—Operating environment” | 12-13 | “Strategic Report“—What we do – Electricity”; “—What we do – Gas”; “—Our Business model”; |
| 10-11 12-13 14-15 |
| |||||||||||
“Strategic Report—Our vision and strategy”; “—What we do—Electricity”; “—What we do—Gas”; “—How we make money from our regulated assets”; and “—How our strategy creates value” | 14-21 | |||||||||||||||
i
Item | Form 20-F caption | Location in the document | Page(s) | |||||||||
“ “—Our | | 18-21 | | |||||||||
“Strategic Report—Principal operations” | ||||||||||||
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“Financial Statements—Notes to the consolidated financial statements—2. Segmental analysis” and “—unaudited commentary on the results of our principal operations by segment” | ||||||||||||
“Additional Information— |
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“Strategic Report— | ||||||||||||
4C Organizational structure | “Financial Statements—Notes to the consolidated financial statements—32. Subsidiary undertakings, joint ventures and associates—Principal subsidiary undertakings” | |||||||||||
4D Property, plants and equipment | “Additional Information— — “Property, plant and equipment | | 194 | | ||||||||
“Strategic Report—What we “—Our Business model”; | | |||||||||||
| 10-13
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“Strategic Report—Our vision and strategy—Embed sustainability” and “—Drive growth” | ||||||||||||
“Strategic Report—Operating environment— | ||||||||||||
“Financial Statements—Consolidated statement of financial position—Unaudited commentary on consolidated statement of financial position—Property, plant and equipment” | ||||||||||||
“Additional Information—Other disclosures—Property, plant and equipment” | ||||||||||||
“Financial Statements—Notes to the consolidated financial statements—11. Property, plant and equipment” | ||||||||||||
“Financial Statements—Notes to the consolidated financial statements—19. Borrowings” | ||||||||||||
“Additional Information—The business in detail—Where we operate” | 175 | |||||||||||
4A | Unresolved staff comments | “Additional Information—Other disclosures—Unresolved SEC staff comments” | ||||||||||
ii
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5 | Operating and financial review and prospects | |||||||
5A Operating results | “Strategic Report—Financial review” | |||||||
“Strategic Report—Operating environment” | ||||||||
“Additional Information— | ||||||||
“Strategic Report—Principal operations” | ||||||||
“Financial Statements—Consolidated income statement—Unaudited commentary on the consolidated income statement” | ||||||||
| “Financial Statements—Notes to the | 107 |
ii
| Item | Form 20-F caption | Location in the document | Page(s) | |||||
consolidated financial statements—2. Segmental analysis—Unaudited commentary on the results of our principal operations by segment” | ||||||||
“Additional Information—Other unaudited financial information” | 196-198 | |||||||
“Strategic Report—Our KPIs” | 18 | |||||||
“Strategic Report—Strategic Objective: Drive Growth—Sustained inflation/deflation in the UK/US” | 27 | |||||||
“Financial Statements—Notes to the consolidated financial statements—30. Financial risk management—(d) Currency risk” | 152 | |||||||
“Additional Information—Internal control and risk factors—Law and regulation” | 184 | |||||||
5B Liquidity and capital resources | “Strategic Report—Financial review” | 22-25 | ||||||
“Financial Statements—Notes to the consolidated financial statements—1 A Going concern” | 102 | |||||||
“Financial Statements—Consolidated cash flow statement” | 100-101 | |||||||
“Additional Information—Internal control and risk factors—Risk factors—Financing and liquidity—An inability to access capital markets at commercially acceptable interest rates could affect how we maintain and grow our businesses” | 186 | |||||||
“Financial Statements—Notes to the consolidated financial statements—2. Segmental analysis—Unaudited commentary on the results of our principal operations by segment” | ||||||||
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“Financial Statements—Notes to the consolidated financial statements—26. Net debt” | ||||||||
“Financial Statements—Notes to the consolidated financial statements—27. Commitments and contingencies” | 144 | |||||||
“Financial Statements—Notes to the consolidated financial statements—19. Borrowings” | ||||||||
“Financial Statements—Notes to the consolidated financial statements—15. Derivative financial instruments” | ||||||||
“ | ||||||||
“ | ||||||||
“Material Interests in Shares” and “Material interest in American Depositary Shares” | | “Further Information” | ||||||
5C Research and development, patents and licenses, etc. | “Additional Information— | |||||||
5D Trend information | “Strategic Report—Financial review” | |||||||
“Strategic Report—Principal operations” | ||||||||
“Strategic Report—Operating environment” | ||||||||
5E Off-balance sheet arrangements | “Financial Statements—Unaudited commentary on consolidated statement of financial condition—Off balance sheet items” | |||||||
5F Tabular disclosure of contractual obligations | “Financial Statements—Notes to the consolidated financial statements—27. | 144 |
iii
Item | Form 20-F caption | Location in the document | Page(s) | |||||
|
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5G Safe Harbor | “Important notice” | 1 | ||||||
“Want more information or help?—Cautionary statement” | | 208/Back cover | ||||||
6 | Directors, senior management and employees | |||||||
6A Directors and senior management | “Corporate Governance—Our Board” | |||||||
| ||||||||
6B Compensation | “Corporate Governance—Directors’ Remuneration Report” | |||||||
“Financial Statements—Notes to the consolidated financial statements—3. Operating costs—(c) Key management compensation” | ||||||||
“Financial Statements—Notes to the consolidated financial statements—22. Pensions and other post-retirement benefits” | ||||||||
“Financial Statements—Notes to the consolidated financial statements—29. Actuarial information on pensions and other post-retirement benefits” | ||||||||
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6C Board practices | “Corporate Governance—Our Board” | |||||||
“Additional Information— | ||||||||
“Corporate Governance—“Board Composition, Our Board and its committees and Board and committee interactions”; “—Audit Committee”; “—Finance Committee”; “—Safety, Environment and Health Committee”; “—Nominations Committee”; “—Executive Committee”; | ||||||||
“Corporate Governance—Directors’ Remuneration Report—Annual statement from the Remuneration Committee chairman” | ||||||||
“Corporate Governance— Directors’ Remuneration Report— | ||||||||
“Corporate Governance— Directors’ Remuneration Report— | ||||||||
“Corporate Governance— Directors’ Remuneration Report— | ||||||||
6D Employees | “Financial Statements—Notes to the consolidated financial statements—3. Operating costs—(b) Number of employees” | |||||||
“Additional Information—Other disclosures—Employees” | ||||||||
6E Share ownership | “Corporate Governance— | |||||||
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“Corporate Governance— Directors’ Remuneration Report—Annual report on remuneration” | 75-81 | |||||||
”Additional Information—Other disclosures—All-employee share plans” | 193 |
iv
Item | Form 20-F caption | Location in the document | Page(s) | |||||
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“Share ownership” | | “Further Information” | ||||||
7 | Major shareholders and related party transactions | |||||||
7A Major shareholders | “Additional Information— | |||||||
“Material interests in shares” and “Material interest in American Depositary Shares” | | “Further Information” | ||||||
7B Related party transactions | “Financial Statements—Notes to the consolidated financial statements—28. Related party transactions” | | Further Information | |||||
“Financial Statements—Notes to the consolidated financial statements—27 Commitment and Contingencies. | 144 | |||||||
7C Interests of experts and counsel | Not applicable | – | ||||||
8 |
Financial information | |||||||
8A Consolidated statements and other financial information | ||||||||
“Financial Statements—Report of Independent Registered Public Accounting Firm—Audit opinion for Form 20-F” | ||||||||
“Financial Statements—Notes to the consolidated financial statements—1. Basis of | ||||||||
| ||||||||
“Financial Statements—Consolidated income statement”; “—Consolidated statement of comprehensive income”; “—Consolidated statement of changes in equity”; “—Consolidated statement of financial position”; and “—Consolidated cash flow statement” | ||||||||
“Financial Statements—Notes to the consolidated financial statements – analysis of items in the primary statements” | ||||||||
“Financial Statements—Notes to the consolidated financial statements – supplementary information” | ||||||||
“Strategic Report—Chairman’s statement” | ||||||||
8B Significant changes | “Subsequent Events” | | “Further Information” | |||||
9 |
The offer and listing | |||||||
9A Offer and listing details | “Additional Information— | |||||||
Shareholder information—“Exchange Rates”, “—Share price”, “— Price History” | | 189-190 “Further | | |||||
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9B Plan of distribution | Not applicable | |||||||
9C Markets | “Additional Information— | |||||||
9D Selling shareholders | Not applicable | – | ||||||
9E Dilution | Not applicable | – | ||||||
9F Expenses of the issue | Not applicable | – | ||||||
10 | Additional information | |||||||
10A Share capital | Not applicable | – | ||||||
10B Memorandum and articles of association | “Additional Information— | 187-188 | ||||||
“Additional Information— Other disclosures—Corporate governance practices: differences from New York Stock Exchange (NYSE) listing standards” | ||||||||
“Additional Information—Shareholder information—Share capital” | 189-190 |
v
Item | Form 20-F caption | Location in the document | Page(s) | Form 20-F caption | Location in the document | Page(s) | ||||||||||
“Additional Information—Directors’ Report disclosures—Share capital” | 174-175 | 10C Material contracts | “Additional Information—Other disclosures—Material contracts” | 194 | ||||||||||||
10C Material contracts | “Additional Information—Other disclosures—Material contracts” | 179 | 10D Exchange controls | “Additional Information—Shareholder information—Exchange controls” | 188 | |||||||||||
10D Exchange controls | “Additional Information—Other disclosures—Exchange controls” | 178 | 10E Taxation | “Additional Information——Shareholder information—Taxation” | 190-192 | |||||||||||
10E Taxation | “Additional Information——Other disclosures—Taxation” | 179-181 | 10F Dividends and paying agents | Not applicable | – | |||||||||||
10F Dividends and paying agents | Not applicable | – | 10G Statement by experts | Not applicable | – | |||||||||||
10G Statement by experts | Not applicable | – | 10H Documents on display | “Additional Information—Shareholder information—Documents on display” | 188 | |||||||||||
10H Documents on display | “Additional Information—Other disclosures—Documents on display” | 178 | 10I Subsidiary information | Not applicable | – | |||||||||||
11 |
Quantitative and qualitative disclosures about market risk | |||||||||||||||
10I Subsidiary information | Not applicable | – | 11A Quantitative information about market risk | “Financial Statements—Notes to the consolidated financial statements—15. Derivative financial instruments” | 126-128 | |||||||||||
11 |
Quantitative and qualitative disclosures about market risk | |||||||||||||||
11A Quantitative information about market risk | “Financial Statements—Notes to the consolidated financial statements—15. Derivative financial instruments” | 114-116 | “Financial Statements—Notes to the consolidated financial statements—3. Sensitivities on areas of estimation and uncertainty” | 160-161 | ||||||||||||
“Financial Statements—Notes to the consolidated financial statements—30. Financial risk management—(a) Credit risk”; “—(b) Liquidity risk”; “—(c) Interest rate risk”; “—(d) Currency risk”; “—(e) Commodity risk”; “—(f) Capital risk management”; and “—(g) Fair value analysis” | 137-144 | “Financial Statements—Notes to the consolidated financial statements—30. Financial risk management—(a) Credit risk”; “—(b) Liquidity risk”; “—(c) Interest rate risk”; “—(d) Currency risk”; “—(e) Commodity risk”; “—(f) Capital risk management”; and “—(g) Fair value analysis” | 149-155 | |||||||||||||
“Strategic Report—Financial review” | 6-9 | “Strategic Report—Financial review” | 22-25 | |||||||||||||
11B Qualitative information about market risk | “Financial Statements—Notes to the consolidated financial statements—15. Derivative financial instruments” | 114-116 | 11B Qualitative information about market risk | “Financial Statements—Notes to the consolidated financial statements—15. Derivative financial instruments” | 126-128 | |||||||||||
“Financial Statements—Notes to the consolidated financial statements—30. Financial risk management—(a) Credit risk”; “—(b) Liquidity risk”; “—(c) Interest rate risk”; “—(d) Currency risk”; “—(e) Commodity risk”; “—(f) Capital risk management”; and “—(g) Fair value analysis” | 137-144 | “Financial Statements—Notes to the consolidated financial statements—30. Financial risk management—(a) Credit risk”; “—(b) Liquidity risk”; “—(c) Interest rate risk”; “—(d) Currency risk”; “—(e) Commodity risk”; “—(f) Capital risk management”; and “—(g) Fair value analysis” | 149-155 | |||||||||||||
“Strategic Report—Financial review” | 6-9 | “Strategic Report—Financial review” | 22-25 | |||||||||||||
“Additional Information—Risk factors” | 167-169 | “Additional Information—Internal Control and Risk factors“—Risk Factors ” | 183-186 | |||||||||||||
12 | Description of securities other than equity securities |
Description of securities other than equity securities | ||||||||||||||
12A Debt securities | Not applicable | – | 12A Debt securities | Not applicable | – | |||||||||||
12B Warrants and rights | Not applicable | – | 12B Warrants and rights | Not applicable | – | |||||||||||
12C Other securities | Not applicable | – | 12C Other securities | Not applicable | – | |||||||||||
12D American depositary shares | “Additional Information—Other disclosures—Description of securities other than equity securities: depositary fees and charges” | 178 | 12D American depositary shares | “Additional Information—Shareholder information—Description of securities other than equity securities: depositary fees and charges” | 188 | |||||||||||
“Additional Information—Other disclosures—Depositary payments to the Company” | 177 | “Additional Information—Shareholder information—Depositary payments to the Company” | 188 | |||||||||||||
“Additional Information—Definitions and glossary of terms” | 188-191 | “Additional Information—Definitions and glossary of terms” | 203-206 | |||||||||||||
13 |
Defaults, dividend arrearages and delinquencies | Not applicable | – |
Defaults, dividend arrearages and delinquencies | Not applicable | – | ||||||||||
14 |
Material modifications to the rights of security holders and use of proceeds | Not applicable | – |
Material modifications to the rights of security holders and use of proceeds | Not applicable | – | ||||||||||
15 |
Controls and procedures | “Additional Information—Internal control— Disclosure controls” and “—Internal control over financial reporting” | 170 |
Controls and procedures | “Additional Information—Internal control and risk factors—Disclosure controls” and “—Internal control over financial reporting” | 183 | ||||||||||
vi
Item | Form 20-F caption | Location in the document | Page(s) | Form 20-F caption | Location in the document | Page(s) | ||||||||||
“Financial Statements—Report of Independent Registered Public Accounting Firm—Audit opinion for Form 20-F” | 93 | |||||||||||||||
16 | 16A Audit committee financial expert | “Corporate Governance—Audit Committee—Experience” | 49 |
16A Audit committee financial expert | “Corporate Governance—Board and Committee Membership and Attendance” | 52 | ||||||||||
16B Code of ethics | “Additional Information—Other disclosures—Code of Ethics” | 177 | 16B Code of ethics | “Additional Information—Other disclosures—Code of Ethics” | 193 | |||||||||||
16C Principal accountant fees and services | “Corporate Governance—Audit Committee—External audit” | 51 | 16C Principal accountant fees and services | “Corporate Governance—Audit Committee—External audit” | 57-58 | |||||||||||
“Financial Statements—Notes to the consolidated financial statements—3. Operating costs—(e) Auditors’ remuneration” | 98 | “Financial Statements—Notes to the consolidated financial statements—3. Operating costs—(e) Auditors’ remuneration” | 110 | |||||||||||||
16D Exemptions from the listing standards for audit committees | Not applicable | – | 16D Exemptions from the listing standards for audit committees | Not applicable | – | |||||||||||
16E Purchases of equity securities by the issuer and affiliated purchasers | Not applicable | – | 16E Purchases of equity securities by the issuer and affiliated purchasers | Not applicable | – | |||||||||||
16F Change in registrant’s certifying accountant | Not applicable | – | 16F Change in registrant’s certifying accountant | – | ||||||||||||
16G Corporate governance | “Additional Information—Other disclosures—Corporate governance practices: differences from New York Stock Exchange (NYSE) listing standards” | 177 | 16G Corporate governance | “Additional Information—Other disclosures—Corporate governance practices: differences from New York Stock Exchange (NYSE) listing standards” | 193 | |||||||||||
16H Mine safety disclosure | Not applicable | – | 16H Mine safety disclosure | Not applicable | – | |||||||||||
17 | Financial statements | Not applicable | – |
Financial statements | Not applicable | – | ||||||||||
18 | Financial statements | “Financial Statements—Company accounting policies” | 155 |
Financial statements | “Financial Statements—Company accounting policies” | 168-169 | ||||||||||
“Financial Statements—Basis of preparation” | 82-83 | “Financial Statements—Notes to the consolidated financial statements—1. Basis of preparation and recent accounting developments” | 102-104 | |||||||||||||
“Financial Statements—Recent accounting developments” | 83 | “Financial Statements—Consolidated income statement”; “—Consolidated statement of comprehensive income”; “—Consolidated statement of changes in equity”; “—Consolidated statement of financial position”; and “—Consolidated cash flow statement” | 94-100 | |||||||||||||
“Financial Statements—Consolidated income statement”; “—Consolidated statement of comprehensive income”; “—Consolidated statement of changes in equity”; “—Consolidated statement of financial position”; and “—Consolidated cash flow statement” | 84-91 | “Financial Statements—Notes to the consolidated financial statements – analysis of items in the primary statements” | 102-143 | |||||||||||||
“Financial Statements—Notes to the consolidated financial statements—analysis of items in the primary statements” | 92-131 | “Financial Statements—Notes to the consolidated financial statements – supplementary information” | 144-167 | |||||||||||||
“Financial Statements—Notes to the consolidated financial statements—supplementary information” | 132-154 | “Financial Statements—Report of Independent Registered Public Accounting Firm—Audit opinion for Form 20-F” | 93 | |||||||||||||
“Financial Statements—Report of Independent Registered Public Accounting Firm—Audit opinion for Form 20-F” | 81 | |||||||||||||||
19 | Exhibits | Filed with the SEC | – |
Exhibits | Filed with the SEC | – | ||||||||||
vii
Key highlights | ||||||||||||
2015/16 | ||||||||||||
| Financial highlights | ||||||||||||
Information about our reporting Our financial results are reported in sterling. We convert our US business results at the average exchange rate during the year, which for 2015/16 was $1.47 to £1 (2014/15 $1.58 to £1). We use adjusted profit measures which exclude the impact of exceptional items and remeasurements. These are used by management to assess the underlying performance of the business. Reconciliations to statutory financial information are shown on page 196. Online report The PDF of our Annual Report and Accounts 2015/16 includes a full search facility. You can find the document by visiting the investor relations section at www.nationalgrid.com and using a word search. Further information Throughout this report you can find links to further detail within this document or online. Please look out for the following icon:
| Adjusted operating profit £4,096m +6% 2014/15: £3,863m Operating profit £4,085m +8% 2014/15: £3,780m Operational highlights Capital expenditure £3,893m +12% 2014/15: £3,470m Greenhouse gas emissions (million tonnes carbon dioxide equivalent) 7.3 +0% 2014/15: 7.3 | Adjusted earnings per share 63.5p +10% 2014/15: 57.6p* Earnings per share 69.0p +30% 2014/15: 53.2p* Group safety performance 0.10 IFR 0.03 improvement 2014/15: 0.13 IFR Employee engagement score 76% +1% 2014/15: 75% | ||||||||||
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Our strategy is to be a recognised leader in the development and operation of safe, reliable and sustainable energy infrastructure, to meet the needs of our customers and communities and to generate value for our investors. | ||||
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Deliver operational excellence Achieve world-class levels of safety, reliability, security and customer service. | ||||
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Engage our people Create an inclusive, high-performance culture by developing all our employees. | ||||
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Stimulate innovation Promote new ideas to work more efficiently and effectively. | ||||
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Engage externally Work with external stakeholders to shape UK, EU and US energy policy. | ||||
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Embed sustainability Integrate sustainability into our decision-making to create value, help preserve natural resources and respect the interests of our communities. | ||||
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Drive growth Grow our core businesses and develop future new business opportunities. | ||||
National Grid Annual Report and Accounts 2015/16
| Strategic Report | ||||||||
The Strategic Report includes an overview of our strategy and business model, the principal risks we face and information about our performance. In addition to the financial review included within this section, we provide additional analysis and commentary, including the performance of our operating segments, within the unaudited commentary sections of the Financial Statements. This additional analysis forms part of our Strategic Report. | At a glance | 02 | ||||||
| Chairman’s statement | 04 | |||||||
| Chief Executive’s review | 06 | |||||||
| Our operating environment | 08 | |||||||
| What we do | 10 | |||||||
| Our business model | 14 | |||||||
| Our vision and strategy | 16 | |||||||
| Our KPIs | 18 | |||||||
| Financial review | 22 | |||||||
| Internal control and risk management | 26 | |||||||
| Viability statement | 30 | |||||||
| Principal operations | 31 | |||||||
| Our people | 44 | |||||||
| Corporate Governance | ||||||||
The Corporate Governance Report, introduced by | ||||||||
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| Directors’ Report and other disclosures | 67 | |||||||
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| Financial Statements | ||||||||
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| Introduction to the | 83 | |||||||
| Statement of Directors’ responsibilities | 84 | |||||||
| Report of Independent Registered Public Accounting Firm | 93 | ||||||
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| Additional Information | ||||||||
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| Definitions and glossary of terms | 203 | ||||||
| Want more information or help? | 207 | |||||||
| 208 | |||||||
| We use a number of technical terms and abbreviations within this document. For brevity, we do not define terms or provide explanations every time they are used; please refer to the glossary | ||||||||
| information as well as an important notice in relation to forward-looking statements with our cautionary statement. | ||||||||
| Contents | 01 | ||||||||||||
Adjusted operating profit | Adjusted operating profit | Adjusted operating profit | ||||||
| £4,096m | £1,173m | £486m | ||||||
2014/15: £3,863m | 2014/15: £1,237m | 2014/15: £437m | ||||||
Capital expenditure | Capital expenditure | Capital expenditure | ||||||
| £3,893m | £1,084m | £186m | ||||||
2014/15: £3,470m | 2014/15: £1,074m | 2014/15: £184m | ||||||
UK regulated return on equity (RoE)%
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| National Grid Annual Report and Accounts 2015/16 | At a glance | 03 |
Balancing the three elements of the energy trilemma – security of supply, the cost of energy and environmental sustainability – continues to contribute towards a dynamic environment in the energy industry.
“Being responsible and sustainable is central to both and
| As we continue to invest in the As part of our response, we need a strong leadership team that combines a deep knowledge of the
In November, we announced that Steve Holliday had informed the
John’s appointment followed a very thorough and rigorous selection process, carried out by the | |||||
Responsible business | ||||||
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| Our KPIs | ||||||
| pages 18–21 | ||||||
| 04 | National Grid Annual Report and
| Strategic Report |
Strategic Report |
| In focus | ||
The Board is proposing a recommended full-year dividend of 43.34p Corporate Governance pages 46–81 |
We will also be welcoming Nicola Shaw onto the Board as Executive Director, UK from 1 July 2016. Apart from the appointment of Dean Seavers on 1 April 2015, as we described in last year’s Annual Report and Accounts, there have been no other changes to the Board composition over the past year.
John and Nicola’s appointments highlight the importance of succession planning and this will remain an important area of focus for the Nominations Committee and the Board. Effective succession planning for both Executive and Non-executive Director positions helps make sure we have the right mix of skills and experience to manage change as the Company evolves.
Viability statement
During 2015/16 the Board reviewed and approved the Company’s principal risks. This played an important part in the Board’s approval of the new viability statement required by the 2014 UK Corporate Governance Code. You can read more about our viability statement on page 30.
Our UK Gas Distribution business
The Board regularly reviews the composition and balance of the Company’s portfolio. As part of this, we have begun a process for the potential sale of a majority stake in our UK Gas Distribution business.
We believe that the Company can deliver best value to shareholders through maintaining a portfolio of businesses with strong operational performance, alongside annual asset growth of around 5–7%, based on a long-term assumption of 3% in respect of UK RPI. The sale of a majority stake in our UK Gas Distribution business is expected to increase this growth rate towards the upper end of the range.
Following completion of a sale, the Board expects to return substantially all of the net proceeds to shareholders. We also expect to maintain the strong balance sheet that allows the Group to continue to fund its investment programme. The process is likely to be completed in early 2017.
Dividend
Our dividend policy aims to grow the ordinary dividend at least in line with the rate of RPI inflation each year. Accordingly, the Board has recommended an increase in the final dividend to 28.34 pence per ordinary share ($2.0445 per American Depositary
Share). If approved, this will bring the full-year dividend to 43.34 pence per ordinary share ($3.1768 per American Depositary Share), an increase of 1.1% over the 42.87 pence per ordinary share in respect of the financial year ended 31 March 2015.
Responsible business
At the start of 2016, the United Nation’s 17 goals to ‘transform our world’ officially came into force. The Sustainable Development Goals call on all countries to promote prosperity while protecting the planet. Business has an important role to play in helping achieve these goals. By being responsible and sustainable we can all make a positive difference to people’s lives and to our planet.
At National Grid, being responsible and sustainable is central to both what we do and how we do it. In the UK we are now an accredited Living Wage employer. We have come to the end of our two-year employee chosen charity partnership with Macmillan Cancer Support. I am very pleased to say that our UK employees have raised more than £600,000 and this money has been used by Macmillan to provide fuel grants for more than 3,000 people living with or recovering from cancer. I am looking forward to seeing which charity our employees choose next for us to support.
In the US, our energy efficiency programmes are making a real difference in helping our customers reduce their energy use. The American Council for an Energy-Efficient Economy (ACEEE) scored all three states in which we operate among the top 10 for energy efficiency.
As you can read on page 18, we have added new KPIs to our reporting, so we can more fully reflect the issues that really matter to the Company and our stakeholders. For our 2015/16 Annual Report, we have included KPIs for our community engagement and for the work we do in support of education and skills. Both of these issues are important to us. We want to see the communities in which we operate thrive, and we want to see more young people studying STEM subjects because there are not enough young people coming through into engineering.
You can find more information about our approach to being a responsible business on our website.
We know there are areas where we can improve. As John describes in his CEO review, we did not meet some of our customer satisfaction targets, and we must continue to build on our safety performance.
Looking ahead
We support the work that Ofgem is undertaking to explore the introduction of onshore competition. However, we believe that competition should only be taken forward where it is in the best interests of consumers.
As the energy market continues to evolve, the role of the GB System Operator (SO) has also been a matter of debate with both Ofgem and DECC and we are currently in detailed discussion on what greater independence for the SO means in practice. We recognise the need to continue strengthening the management of potential conflicts of interest between our Transmission Operator (TO) and SO roles, but do not believe that creating an independent SO is in the interests of consumers, given the need to focus on security of supply.
Due to the nature of our business, we recognise that our critical national infrastructure systems are a potential target for cyber threats. We will continue to invest in strategies that aim to protect our business in the UK and US, and which keep pace with the increasing scale and sophistication of threats.
We also need to continue raising awareness of cyber security across the Company, addressing our attitudes and behaviour towards it as an issue, making security breaches less likely to happen.
I would like to extend my deepest appreciation to the management team and all our employees for their hard work, dedication and commitment to the Company’s success.
Sir Peter Gershon
Chairman
| National Grid Annual Report and Accounts 2015/16 | Chairman’s statement | 05 |
It’s an exciting time to be part of the energy industry, and I’m looking forward
to working with my leadership team on the opportunities that lie ahead.
| I firmly believe that through a high performance culture we will continue to find better ways of serving our customers – setting expectations, being honest about what we can deliver, then consistently delivering on our promises. However, customer needs are evolving with much greater engagement, awareness, and a desire to manage their energy use. That’s why we are developing the way we think and work at National Grid – improving our end-to-end processes, removing waste and focusing on the things that create value for our customers. We have done more work during the year to develop this high performance culture and it will remain an important part of how we develop as a Company. Our employees continue to show their commitment to the communities we serve. Our UK and US businesses have delivered over 18,000 interactions with young people, encouraging the development of the skills and capabilities needed to gain meaningful employment. Overall, we invest time and resources equivalent to a value over £14 million each year in the communities where we work.
As Sir Peter describes, we have begun a process for the potential sale of a majority stake in our UK Gas Distribution business. We have been working on how we separate Gas Distribution from National Grid, so we can create a stand-alone business that is ready for sale. We want to make sure it has the people, assets, systems and technology it needs to be successful in the future. In the UK, where there are continuing concerns about electricity capacity margins, we contracted additional balancing services of 2.4 GW for the winter period to be available to help manage periods of peak demand. This includes 133 MW from demand side balancing reserve arrangements, including businesses that signed up for reducing demand at peak periods if called on – for example, by turning off air conditioning for a period – in return for payment. We have also launched the Power Responsive programme, which is designed to help growth in DSR. You can read more about this on pages 34 and 35. | |||||||||||||
I’m delighted to have been asked by the Board to take over as CEO of National Grid and lead the Company into its next chapter. Having joined the Company 25 years ago, as a graduate, I’ve been fortunate that the opportunities and challenges I’ve had from moving around all parts of the organisation, in both the UK and US, have never failed to motivate and inspire me – both personally and professionally. I’ve also been fortunate to have worked closely with Steve Holliday over the past ten years. Under Steve’s leadership, the Company has transformed its performance and culture, helping place National Grid at the heart of the energy industry. He leaves a great legacy for us to build on. I now look forward to continuing the great work we are doing with our customers, shareholders, partners and employees to meet the challenges and opportunities of the changing UK and US energy landscapes. On 1 July, Nicola Shaw joins National Grid as Executive Director for our UK business. Nicola joins us from High Speed 1, where she was CEO for the last five years, managing and maintaining the UK’s high-speed railway infrastructure. I very much look forward to working with her when she joins our business. | I would like to thank Ian Galloway for his tremendous support as UK Chief Operating Officer while we were seeking to make an appointment to the UK Executive Director role.
Our business has delivered a strong performance during 2015/16. In the UK, we have had our safest year ever, while in the US our performance continues to improve – we have seen fewer injuries and had fewer people taking time off due to an injury than ever before. However, we want to build on this performance and further reduce risks. We will focus on the causes of incidents and find more opportunities to learn from them and share best practice. Reliability across our networks has remained very strong throughout the year. In the US, our electricity distribution system delivered solid performance with continued recognition of our storm response processes. In the UK, despite the ongoing concerns over tightening electricity margins, our SO business has managed the challenges extremely well. Our commitment to our customers is critical to our future success. In the UK, we have exceeded our two electricity and gas transmission customer satisfaction targets. In the US, we did not meet our targets due to customer concerns about higher than normal winter bills. |
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| National Grid Annual Report and Accounts 2015/16 |
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Strategic Report |
“I look forward to continuing the great work we are doing with our customers, shareholders, partners and employees” | ||||
In focus |
Employee engagement score 76% (2014/15: 75%) |
Our KPIs pages 18–21 |
Principal operations pages 31–43 |
On 12 May 2016, Ofgem announced a mid-term review. As expected, the scope of this review is narrow with no changes to key financial parameters. We welcome Ofgem’s continued commitment to the clarity and certainty offered by the eight-year RIIO framework. Ofgem will run a consultation process this summer, with any changes to be implemented in April next year.
In addition, the Company has been working with DECC and Ofgem to consider how to evolve the current SO model, to make it more independent, while remaining cost effective. In doing so, it is vital that there is no disruption to the pivotal role we play as SO in balancing the network.
Our US business
America’s gas and electricity networks, most of which were originally constructed during the nation’s ambitious post-World War II building boom, have served us well over the last half-century.
But times have changed. We need to advance the country’s natural gas and electricity infrastructure beyond its 20th century limitations, by creating a more customer-centric, resilient, agile, efficient and environmentally sound energy network.
We call our approach to this Connect21, and you can read more about our work to support it on pages 38–41. For example, we’ve created our New Energy Solutions team, which is looking at how we promote cleaner energy, improving efficiency, affordability, and choice for customers by delivering state-mandated initiatives.
In order to continue investing in our networks and improving our service to customers, we filed three rate cases in 2015 – one in Massachusetts and two in downstate New York. These three proposals are undergoing a thorough review process by the regulators in each state.
Also during 2015/16, we backed the Environmental Protection Agency’s (EPA) proposed Carbon Pollution Standards for New and Existing Power Plants (known as the Clean Power Plan). As we and other organisations have requested, the EPA’s final Plan provides states with compliance flexibility and makes sure that early emissions reductions via investments in renewable resources and energy efficiency strategies are counted.
Our people
The initiatives and achievements I’ve described are testament to the hard work of our people. I believe that developing the skills and capabilities of our employees is crucial to our success, so I’m really pleased that we delivered more than 154,000 days of technical, safety, leadership and personal effectiveness training across our global workforce during 2015/16.
I was also delighted to see that in our most recent employee engagement survey we achieved an engagement score of 76% – our highest since we started conducting Group-wide surveys of our people.
I would like to thank all my colleagues at National Grid for their contribution and ongoing commitment to our business.
Priorities for the year ahead
Maximising value from our core businesses and delivering safe, reliable networks will continue to be our top priorities. In addition, in 2016/17 we are focused on completing the sale of a majority stake in our UK Gas Distribution business and will continue to file for new rates to support our US business.
Longer-term priorities
Customer first
We must be close to our customers, so we can respond to their changing needs and deliver an outstanding service. As customer requirements evolve, so must National Grid. This will bring further opportunities to grow and drive value.
Performance optimisation
Everyone in our Company should see performance optimisation as part of the day job – constantly working efficiently and doing things better. If we are to succeed, we must maintain and further strengthen the Group’s high performance culture.
Growth
We have strong growth potential and see opportunities in all our regions and businesses. We expect to sustain a high level of investment in our regulated business in the UK and US as well as exploring new business opportunities over the medium term. We will, however, only invest in projects that meet our strict investment criteria and represent the best value for shareholders.
Evolve for the future
With the growing rate of renewables, distributed generation and, over time, energy storage, our industry is changing. We need to make sure we are at the forefront of this, continuing our involvement in industry discussions so we can keep abreast of the changes, and make sure we evolve for the future.
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| John Pettigrew |
| Chief Executive |
| National Grid Annual Report and Accounts 2015/16 | Chief Executive’s review | 07 |
| 08 | National Grid Annual Report and Accounts 2015/16 | Strategic Report |
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Measurement of financial performance We describe our results principally on an adjusted basis and explain the rationale for this on page 182. We present results on an adjusted basis before exceptional items, remeasurements and stranded cost recoveries. See page 182 for further details and reconciliations from the adjusted profit measures to IFRS, under which we report our financial results and position. The comparative numbers have been restated for the adoption of IAS 19 (revised) ‘Employee benefits’. See further detail in note 1 on page 92.
A reconciliation between reported operating profit and adjusted operating profit is provided below. Further commentary on movements in the income statement is provided on page 85.
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Total operating profit | 3,735 | 3,749 | 3,535 | |||||||||||
Exceptional items | (55) | 84 | 122 | |||||||||||
Remeasurements – commodity contracts | (16) | (180) | 94 | |||||||||||
Stranded cost recoveries
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Adjusted operating profit | 3,664 | 3,639 | 3,491 | |||||||||||
Adjusted net finance costs | (1,108) | (1,124) | (1,090) | |||||||||||
Share of post-tax results of joint ventures | 28 | 18 | 7 | |||||||||||
Adjusted taxation | (581) | (619) | (697) | |||||||||||
Attributable to non-controlling interests
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Group return on equity (RoE) We measure our performance in generating value for our shareholders by dividing our annual return by our equity base.
Group RoE has increased during the year to 11.4%, due to the impact of major storms in the prior year. Excluding major storms, Group RoE has decreased by 30bps reflecting the end of Niagara Mohawk deferral recoveries, together with higher controllable costs and system costs in the US. These negative impacts were partially offset by French interconnector performance and the lower UK tax rate.
Group return on equity %
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The cost of energy | Security of supply | Sustainability | ||||||||
Commentary | The cost of the energy we use is an issue for consumers, industry, energy providers, regulators and governments. Consumers expect a reliable energy system that delivers gas and electricity when and where it is needed. They pay for the cost of this infrastructure and improvements to it through the network costs part of their energy bills. The costs are subject to regulatory approval. | The energy system is in a phase of transition from high to low carbon. Coal plants are closing down and being replaced with nuclear, renewables and gas. During the transition, electricity margins need to be monitored and actively managed as we move to a generation mix with greater volumes of intermittent generation. | Evidence shows our climate is changing because of the emission of greenhouse gases resulting from human activity. The bulk of emissions derive from the demand for energy for power, heating and transport. | |||||||
Developments | The UK Competition and Markets Authority has concluded its investigation into the energy market and set out numerous remedies, including proposals to address locational pricing on the electricity transmission network. In May 2016, Ofgem stated that it will undertake a mid-period review of the RIIO outputs for our transmission businesses. In the US, consumers have experienced rising costs for energy over the past three winters. Regulators are seeking to encourage investment in infrastructure and new technology to bring down costs and help consumers manage their energy use. | Energy security is the UK Government’s number one priority on energy. It is reviewing the capacity market and incentives so that market arrangements bring forward new generation of all technologies at the right time – so that new generation capacity is built. The Government also signed an agreement for a new nuclear power station at Hinkley Point. In the US, regulators are seeking investment in infrastructure to improve the security and resilience of energy networks while also decarbonising those networks. | Negotiations for a new international agreement on climate change concluded in Paris at the 21st session of the Conference of Parties (COP21) in December 2015. A commitment to have clear goals and a system of governance and review were put in place. The published advice of the Climate Change Committee is that the UK’s fifth carbon budget should be a target of 57% reduction on 1990 levels between 2028 and 2032. Legislation is expected to be proposed in summer 2016. The US EPA’s Clean Power Plan sets standards for power plants and agrees state level targets for reductions in carbon emissions. | |||||||
Our response | UK response | UK response | Group response | |||||||
We are investing up to £16 billion over the eight years to 2021 to make sure Britain’s energy system is fit and ready to support a low-carbon economy. Despite this significant increase in investment, our network costs will remain flat in real terms over the coming years. All network costs are heavily scrutinised through the UK energy regulator Ofgem and are the only part of consumers’ bills that are regulated. Ofgem’s incentives encourage innovation, so if we are more efficient, consumers share the benefits. US response Improving the customer experience and helping ratepayers manage their energy costs is a critical component of our business operations. To help reduce New England’s energy costs, we are partnering with the developer of one major proposed regional pipeline expansion project to improve transport capacity, upgrade existing facilities, and enhance market area storage assets. | We are supporting the UK Government by providing analysis through our role as delivery body for Electricity Market Reform (EMR). We have put in place new products to ensure that the SO has the right tools to maintain supplies over winter. We are developing DSR products that reduce reliance on traditional generation sources. We have also started construction on two new interconnectors (see page 43). US response In addition to supporting new investments in gas and electricity infrastructure projects, we have submitted grid modernisation proposals that aim to improve the region’s reliability, sustainability and affordability of its energy supply and services. We have filed rate cases in Massachusetts and New York proposing to update our distribution rates. | Reducing greenhouse gas emissions forms part of the Company’s KPIs (see page 21). UK response We have facilitated the connection of 4.5 GW of solar PV generation at the distribution network level, working with industry to remove barriers to entry and find solutions to network operability issues. We have set out our vision for the Future of Gas, exploring opportunities to bring forward bio-substitute natural gas and compressed natural gas vehicle fuels. US response We continue to support the EPA’s Clean Power Plan, the Northeast’s cap-and-trade scheme of the Regional Greenhouse Gas Initiative, and other state-level initiatives. We also support technological partners and innovative tools, such as energy storage, electric transportation and distributed generation, which can help meet sustainability and energy diversity objectives. | ||||||||
| National Grid Annual Report and Accounts 2015/16 | Our operating environment | 09 | ||||||||||
Strategic Report
Corporate Governance
Financial Statements
Additional Information
07
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Regulated asset growth Our regulated assets have increased by 3% (£1 billion) to £34.7 billion, reflecting the continued high levels of investment in our networks in both the UK and US. Maintaining efficient growth in our regulated assets ensures we are well positioned to continue providing consistently high levels of service to our customers and increases our revenue allowances in future years.
The UK regulatory asset value (RAV) increased by £1.1 billion, reflecting inflation and significant capital expenditure in our UK Electricity Transmission business in particular. The US rate base decreased by £0.1 billion. Foreign exchange movements decreased the rate base reported in sterling by £0.9 billion. Offsetting this, investment in the networks and working capital movements increased rate base by £0.8 billion.
Total regulated assets and regulated asset growth £bn
| The Board is confident that growth in assets, earnings and cash flows, supported by improving cash efficiency and an exposure to attractive regulatory markets, should help the Group to maintain strong, stable credit ratings and a consistent prudent level of gearing, while delivering attractive returns for shareholders.
Other performance measures Dividend growth During the year we generated £1.3 billion of sustainable business net cash flow after our capital expenditure programmes. This has enabled the growth of the dividend in line with RPI, being 2.9%(2012/13: dividend growth of 4%), taking into account the recommended final dividend of 27.54p.
The high level of take-up of this scrip option in the last couple of years has led to concerns about the potential dilutive effect on value of this option. This meant that we decided not to offer the scrip element for the 2013/14 interim dividend paid in January this year, as our forecast capital programme was already fully funded. We continue to offer the scrip option for the year-end dividend.
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How we make money from our regulated assets page 20
UK regulation pages 160 – 162
US regulation pages 162 – 165
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Year ended 31 March
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| Dividend growth | 3 | 4 | 8 | |||||||||||||||||||
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1. US rate base calculated as at 31 December for these years.
2. Estimated figure until the conclusion of the regulatory reporting cycle.
Value added Our dividend is an important part of our returns to shareholders along with growth in the value of the asset base attributable to equity investors. These are reflected in the value added metric that will underpin our approach to sustainable decision making and long-term incentive arrangements.
Overall value added in the year was £2.1 billion or 57.2p per share as set out below: |
Cash generated from operations Cash generated from operations was £4,419 million (2012/13: £4,037 million). Adjusted operating profit before depreciation, amortisation and impairment was £81 million higher year on year. Changes in working capital improved by £351 million over the prior year, principally in the US due to the timing of receivables from LIPA relating to Superstorm Sandy, higher commodity costs and weather differences year on year. Partially offsetting these improvements, cash outflows relating to exceptional items were £38 million higher due to reorganisation in the UK and LIPA MSA transition costs in the US.
UK regulated return on equity The UK RoE has decreased 90bps to 12.7%, reflecting the new regulatory arrangements under the RIIO framework in place from this year. This performance represents 260bps outperformance over allowed returns.
UK return on equity %
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UK regulated assets1 | 25.2 | 24.3 | +0.9 | |||||||||||||||||||
US regulated assets2 | 11.2 | 10.3 | +0.9 | |||||||||||||||||||
Other invested capital | 1.7 | 1.5 | +0.2 | |||||||||||||||||||
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| Total assets | 38.1 | 36.1 | +2.0 | |||||||||||||||||||
| Dividend paid | +1.1 | |||||||||||||||||||||
| Movement in goodwill | – | |||||||||||||||||||||
| Net debt | (21.2) | (20.2) | -1.0 | |||||||||||||||||||
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| Value added | +2.1 | |||||||||||||||||||||
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| Value added per share | 57.2p | |||||||||||||||||||||
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1. Consists of regulated asset values and other regulatory assets and liabilities of the UK businesses regulated under RIIO price controls.
2. US regulated assets increased from $17.2 billion to $18.7 billion in the year. These represent rate base plus assets outside of rate base, including working capital. | ||||||||||||||||||||||
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US regulated return on equity The US RoE has decreased 20bps to 9.0%, mainly driven by lower allowed rates in our KEDNY and Long Island Generation businesses following the introduction of new rate plans during the year.
| Interest cover The principal measure we use to monitor financial discipline is interest cover, which is a measure of the cash flows we generate compared with the net interest cost of servicing our borrowings. The table below shows our interest cover for the last three years.
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| Our operations – performance at a glance
Business analysis 2013/14 %
Adjusted operating profit
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US return on equity %
Return on capital employed RoCE provides a performance comparison between our regulated UK and US businesses and is one of the measures that we use to make strategic and investment decisions about our portfolio of businesses. The table below shows the RoCE for our businesses over the last five years:
Return on capital employed %
The UK RoCE has decreased from 8.6% to 8.0% in 2013/14, reflecting the new RIIO regulatory allowances, including lower cost of debt allowance, higher gearing assumption in the gas businesses, and the inclusion of our share of exceptional costs. The decrease in the US RoCE from 7.1% to 6.4% is primarily due to the end of Niagara Mohawk deferral recoveries and controllable cost increases. Excluding the impact of major storm costs, the US RoCE would have been 7.7% in 2012/13.
Net debt We expect our net debt to continue to grow for the next few years as we fund our capital investment programmes and enhance our networks. We continue to borrow at attractive rates when needed and believe that the level of net debt remains appropriate for our business. Our five year net debt trend is shown on page 91. | Year ended 31 March | |||||||||||||||||||||
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| Interest cover | 4.1 | 3.9 | 3.9 | |||||||||||||||||||
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The increase in interest cover in 2013/14 reflects flat finance costs year on year. Our target long-term range for interest cover is in excess of 3 times. Further details on our capital management and credit ratings can be found in note 30 (f) and on the debt investors’ section of our website.
Timing and regulated revenue adjustments As described on page 20, 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 this 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 level of revenue, the balance must be returned to customers in subsequent periods, and if we collect less than the allowed level of revenue we may recover the balance from customers in subsequent periods. In the US, a substantial portion of our costs are pass-through costs (including commodity and energy efficiency costs) and are fully recoverable from our customers. Timing differences between costs of this type being incurred and their recovery through revenue are also included in timing.
The amounts calculated as timing differences are estimates and subject to change until the variables that determine allowed revenue are final.
Our operating profit for the year includes a total estimated in-year under-collection of £42 million (2012/13: £16 million over-collection). Our closing balance at 31 March 2014 was £60 million over-recovered.
In the UK, there was a cumulative under-recovery of £57 million at 31 March 2014 (2013: under-recovery of £5 million). All other things being equal, the majority of that balance will normally be recoverable from customers starting in the year ending 31 March 2016. |
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In the US, cumulative timing over-recoveries at 31 March 2014 were £117 million (2013: £110 million). The majority of that balance will be returned to customers next year.
In addition to the timing adjustments described above, following the start of the RIIO price controls in the UK, outperformance against allowances as a result of the totex incentive mechanism, together with changes in output-related allowances included in the original price control, will almost always be adjusted in future revenue recoveries, typically starting in two years’ time.
Our current IFRS revenues and earnings include the amounts that will need to be repaid but exclude amounts that will be recovered in future periods. Such adjustments will form an important part of the continuing difference between reported IFRS results and underlying economic performance based on our regulatory obligations.
For our UK regulated businesses as a whole, regulated revenue adjustments totalled £106 million in the year. This is based on our estimates of: work carried out in line with allowances; in expectation of future allowances; or work avoided altogether – either as a result of us finding innovative solutions or of the need being permanently removed. | In the US, accumulated regulatory entitlements to future revenue net of over- or under-recoveries amounted to £1,027 million at 31 March 2014 (2013: £1,311 million). These entitlements cover a range of different areas, with the most significant being environmental remediation and pension assets, as well as deferred storm costs.
All regulatory entitlements are recoverable (or repayable) over different periods, which are agreed with the regulators to match the expected payment profile for the liabilities. As at 31 March 2014, these extend until 2059.
Major storms Despite the very cold winter across much of the US, there were no major storms in 2013/14. In 2012/13, two major storms in the US, Superstorm Sandy and Storm Nemo, as well as a number of smaller storms, had a material effect on the results of National Grid, reducing operating profit by £136 million.
The table below shows adjusted operating profit and operating profit for the past three years, excluding the impact of timing differences and major storms.
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Non-financial KPIs pages 10 – 11
Our vision and strategy pages 14 – 15
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Year ended 31 March
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Adjusted operating profit
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Operating profit | 3,777
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Performance
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UK Principal operations pages 29 – 33
US Principal operations pages 35 – 37
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2012/13 |
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UK Electricity Transmission |
99.9999 |
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UK Gas Transmission
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UK Gas Distribution | 99.999 | 99.999 | 99.999 | 99.999 | 99.999 | % | 99.999 | |||||||||||||||
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Electricity transmission – US | 147 | 414 | 5181 | 346 | 118 | MWh losses | 308 | |||||||||||||||
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Electricity – US: Commercial | 114 | 123 | 121 | 1052 | 107 | Minutes of outage | * | |||||||||||||||
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* Targets are set jurisdictionally by operating company. |
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1. 2011/12 result restated to reflect final data. |
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2. 2012/13 result excludes New Hampshire, which was sold during the year.
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Customer satisfaction
Definition We measure customer satisfaction through our position in customer satisfaction surveys. |
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Strategic element Deliver operational excellence
UK Principal operations
pages 29 – 33
US Principal operations pages 35 – 37
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n/a | n/a | n/a | n/a | 7.4 | Score out of 10 | 6.91 | |||||||||||||||
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UK Gas Transmission | n/a | n/a | n/a | n/a | 7.2 | Score out of 10 | 6.91 | |||||||||||||||
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UK Gas Distribution
| 4th | 4th | 3rd | 3rd | * | Quartile ranking | Improve | |||||||||||||||
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Gas distribution – US: Residential
| 3rd | 2nd | 3rd | 3rd | 2nd | Quartile ranking | Improve | |||||||||||||||
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Gas distribution – US: Commercial
| 2nd | 4th | 3rd | 4th | 4th | Quartile ranking | Improve | |||||||||||||||
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Electricity – US: Residential
| 4th | 3rd | 3rd | 3rd | 2nd | Quartile ranking | Improve | |||||||||||||||
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Electricity – US: Commercial
| 3rd | 2nd | 2nd | 3rd | 2nd | Quartile ranking | Improve | |||||||||||||||
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* Under RIIO-GD1, our customer satisfaction results are now reported on an annual basis, rather than quarterly, which was how we reported them under our previous price control. We will publish the results on our website in the summer as part of our commitment to our stakeholders, and in our Annual Report and Accounts for 2014/15. |
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1. 6.9 represents our baseline target, set by Ofgem, for reward or penalty under RIIO.
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Electricity | The electricity industry connects generation sources to homes and businesses through transmission and distribution networks. |
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| In focus | ||||||||||||
Our business model pages 14–15 | ||||||||||||
Real-time balancing Through our Electricity Network Control Centre we balance the UK’s energy needs in real time. Read more about this on pages 34–35. | ||||||||||||
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Generation Generation is the production of electricity from fossil fuel and nuclear power stations, as well as renewable sources such as wind and solar. In the US, we own and operate 50 fossil fuel-powered stations on Long Island and 7.9 MW of solar generation in Massachusetts. We do not own or operate any electricity generation in the UK.
For solar generation, we recover our costs and a reasonable return from customers in Massachusetts through a solar cost-adjustment factor. This is added to the electricity rate, net of revenues earned from the solar assets.
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Transmission systems generally include overhead lines, underground cables and substations. They connect generation and interconnectors to the distribution system.
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Distribution systems carry lower voltages than transmission systems over networks of overhead lines, underground cables and substations. They take over the role of transporting electricity from the transmission network, and deliver it to consumers at a voltage they can use.
We do not own or operate electricity distribution networks in the UK. In the US, our distribution networks serve around 3.5 million customers in upstate New York, Massachusetts and Rhode Island.
Supply The supply of electricity involves buying electricity and selling it on to customers. It also involves customer services, billing and the collection of customer accounts. We do not sell electricity to consumers in the UK. All our customers in the US can select a competitive supplier for the supply component of electricity utility services. Where customers choose National Grid, they pay us for distribution and electricity costs. Where they choose to buy electricity from third parties, they pay us for distribution only and pay the third-party supplier for the electricity. Our base charges for electricity supply are calculated to recover the purchased power costs. | ||||||||
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| Interconnectors | |||||||||||||
System operator As system operator (SO) for England and Wales, we coordinate and direct electricity flows onto and over the transmission system, balancing generation supply and user demand. Where necessary, we pay sources of supply and demand to increase or decrease their generation or usage. |
We have the same role for the two high voltage electricity transmission networks in Scotland and we
Our charges for SO services in the UK are subject to a price control approved by Ofgem. System users pay us for connection, for using the system and balancing services.
| As electricity transmission
In the US, similar services are provided by independent system operators. | Transmission grids are often interconnected so that energy can flow from one country or region to another. This helps provide a safe, secure, reliable and affordable energy supply for citizens and society across the region. Interconnectors also allow power suppliers to sell their energy to customers in other countries. Great Britain is linked via interconnectors with France, Ireland, Northern Ireland and the Netherlands. We own part of the interconnectors with France and the Netherlands. We are also now entering the construction phase for two new interconnectors, between the UK and Belgium and the UK and Norway. We are continuing to work on developing additional interconnector projects, which we believe will deliver significant benefits to consumers. These include opportunities for interconnection with Iceland, Denmark and a further link with France. We also jointly own and operate a 224 kilometre interconnector between New England in the US and Canada. We sell capacity on our UK interconnectors through auctions and on our US interconnector through wholesale markets and bilateral contracts. |
 |
| 10 | National Grid Annual Report and Accounts 2015/16 | Strategic Report |
Strategic Report |
| National Grid Annual Report and Accounts 2015/16 | What we do – Electricity | 11 |
| 12 | National Grid Annual Report and Accounts 2015/16 | Strategic Report |
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In focus | What we do | |||||
Our business model
| GasThe gas industry connects producers, processors, storage, transmission and distribution network operators, as well as suppliers to industrial, commercial and domestic users. | |||||
Biomethane milestone We connected the UK’s first 100% renewable biomethane HGV filling station in Leyland, Lancashire (see page 37).
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| Production and importation | Distribution | |||||||||||
We do not produce gas in either the UK or the US. Gas used in the UK is mainly sourced from gas fields in the North and Irish seas, piped from Europe and imported as LNG.
Gas used in the US is produced mainly in North America. We import LNG from a number of countries. In the UK, we own and operate Grain LNG, an importation terminal and storage facility at the Isle of Grain in Kent, which charges customers under long-term contracts for various services. These include access to our importation terminal, storage facilities and capacity rights. In the US, we own and operate LNG storage and vaporisation facilities, as well as an LNG storage facility in Providence, Rhode Island, where we store gas for third parties for a fee. We also buy gas directly from producers and LNG importers for resale to our customers.
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Pipeline shippers bring gas from producers to suppliers, who in turn sell it to customers.
We do not supply gas in the UK. However, we own National Grid Metering, which provides meters and metering services to supply companies, under contract. In the UK, customers pay the supplier for the cost of gas and for its transportation. We transport the gas through our network on behalf of shippers, who pay us transportation charges. In the US, gas distribution companies, including National Grid, sell gas to consumers connected to their distribution systems. In most cases in the US, where customers choose National Grid, they pay us for distribution and gas costs. Where they choose to buy gas from third parties, they pay us for distribution only and pay the third-party supplier for the gas and upstream transportation capacity. Also in the US, except for residential consumers in Rhode Island, customers may purchase their supply from independent providers with the option of billing for those purchases to be provided by us. | ||||||||
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System operator As |
Our price control, set by Ofgem, includes incentives that aim to maintain and improve our daily operational efficiency and are subject to renegotiation at set intervals. | The transmission systems generally include pipes, compressor stations and storage facilities, including LNG storage. They connect production through terminals to the distribution systems. In the UK, gas enters the transmission system through importation and reception terminals and interconnectors and may include gas previously held in storage. Compressor stations located along the network play a vital role in keeping large quantities of gas flowing through the system, particularly at times of high demand. The gas transmission system has to be kept constantly in balance, which is achieved by buying, selling and using stored gas. This means that, under normal circumstances, demand can be met. We are the sole owner and operator of gas transmission infrastructure in Great Britain. In the US, we hold a minority interest in two interstate pipelines: Millennium Pipeline Company and Iroquois Gas Transmission System. Interstate pipelines are regulated by the Federal Energy Regulatory Commission (FERC). |
 |
National Grid Annual Report and Accounts 2015/16 | What we do – Gas | 13 |
| 14 | National Grid Annual Report and Accounts 2015/16 | Strategic Report |
Strategic Report |
| National Grid Annual Report and Accounts 2015/16 | Our business model | 15 |
Our vision is to connect you to your energy today, trusted to meet your energy needs tomorrow. Our strategy is to be a recognised leader in the development and operation of safe, reliable and sustainable energy infrastructure, to meet the needs of our customers and communities and to generate value for our investors. Our strategic objectives set out what we believe we need to do to achieve our vision and strategy. Further information on all our KPIs is provided on pages 18–21. |
| Strategic objective | Deliver operational excellence | Engage our people | Stimulate innovation | |||||||
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Description | Achieve world-class levels of safety, reliability, security and customer service. | Create an inclusive, high-performance culture by developing all our employees. | Promote new ideas to work more efficiently and effectively. | |||||||
How we deliver | Our customers, communities and other stakeholders demand safe, reliable and secure supply of their energy. This is reflected in our regulatory contracts where we are measured and rewarded on the basis of meeting our commitments to customers and other stakeholders. Pursuing excellence in all our operational processes will allow us to manage our assets efficiently, deliver network improvements quickly and provide services that meet the changing demands of our customers. | It is through the hard work of our employees that we will achieve our vision, respond to the needs of our stakeholders and create a competitive advantage. Encouraging engaged and talented teams that are in step with our strategic objectives is vital to our success. Our presence within the communities we serve, the people we work with and our opportunities to grow both individually and as a business are all important to making National Grid a great place to work. | Our commitment to innovation allows us to run our networks more efficiently and effectively and achieve our regulatory incentives. Across our business, we explore new ways of thinking and working to benefit every aspect of what we do. Embedding innovation and new technology into our operations helps us deliver continuous improvements in the quality and cost of our services. | |||||||
Relevant KPIs | Employee injury frequency rate | Employee engagement index | Network reliability | |||||||
Number of employee lost time injuries per 100,000 hours worked in a 12 month period. Our ambition is to achieve a world-class safety performance of below 0.1. Network reliability The reliability of our electricity and gas networks. Customer satisfaction A measure of customer satisfaction across our segments and differing customer groups. Group return on equity Measure of value generation for our shareholders. | A measure of how engaged our employees feel, based on the percentage of favourable responses to certain indicator questions repeated annually in our employee engagement survey. Workforce diversity Percentage of women and ethnic minorities in our workforce. | The reliability of our electricity and gas networks. |
| 16 | National Grid Annual Report and Accounts 2015/16 | Strategic Report |
Strategic Report |
| Strategic objective | Engage externally | Embed sustainability | Drive growth | |||||||
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Description | Work with external stakeholders to shape UK, EU and US energy policy. | Integrate sustainability into our decision-making to create value, help preserve natural resources and respect the interests of our communities. | Grow our core businesses and develop future new business options. | |||||||
How we deliver | Policy decisions by regulators, governments and others directly affect our business. We engage widely in the energy policy debate, so our position and perspective can influence future policy direction. We also engage with our regulators to help them provide the right mechanisms so we can deliver infrastructure that meets the changing needs of our customers and stakeholders. | Our long-term sustainability strategy sets our ambition to deliver these aims and to embed a culture of sustainability within our organisation. This culture allows us to make decisions that balance affordability with helping to protect and preserve natural resources and benefit the communities in which we operate. We remain committed to our targets of a 45% reduction in Scope 1 and Scope 2 greenhouse gas emissions by 2020 and 80% by 2050. | We continue to maximise value from our existing portfolio, while exploring and evaluating opportunities for growth. Making sure our portfolio of businesses maintains the appropriate mix of growth and cash generation is necessary to meet the expectations of our shareholders. We review investment opportunities carefully and will only invest where we can reasonably expect to earn acceptable returns. Combining this disciplined approach with operational and procurement efficiencies gives us the best possible opportunity to drive strong returns and meet our commitments to investors. | |||||||
Relevant KPIs | Climate change A measure of our reduction of Scope 1 and Scope 2 greenhouse gas emissions of the six primary Kyoto greenhouse gases (excluding electricity transmission and distribution line losses). | Regulated asset base growth Maintaining efficient growth in our regulated assets ensures we are well positioned to provide consistently high levels of service to our customers and increases our revenue allowances in future years. | ||||||||
Adjusted EPS Adjusted earnings represent profit for the year attributable to equity shareholders. This excludes exceptional items and remeasurements (see page 111). | ||||||||||
Adjusted earnings per share provides a measure of shareholder return that is comparable over time. | ||||||||||
| National Grid Annual Report and Accounts 2015/16 | Our vision and strategy | 17 |
| Delivering our strategy The Board uses a range of financial and non-financial metrics, reported periodically, against which we measure Group performance. |
KPI and definition | Adjusted EPS Adjusted earnings represent profit for the year attributable to equity shareholders. This excludes exceptional items and remeasurements (see page 111). Adjusted earnings per share provides a measure of shareholder return that is comparable over time. | Group return on equity (RoE) We measure our performance in generating value for our shareholders by dividing our annual return by our equity base. This calculation provides a measure of the performance of the whole Group compared with the amounts invested by the Group in assets attributable to equity shareholders. | Regulated asset base growth Maintaining efficient growth in our regulated assets ensures we are well positioned to provide consistently high levels of service to our customers and increases our revenue allowances in future years. | |||||||
Our performance | Adjusted EPSpence1 | Group return on equity % | Total regulated asset base and regulated asset base growth£bn | |||||||
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Commentary | For the year ended 31 March 2016, adjusted earnings attributable to equity shareholders increased by £197 million to £2,386 million. This increase in earnings resulted in an adjusted earnings per share of 63.5p, an increase of 10.2% on 2014/15. The earnings increase was driven by a £233 million increase in adjusted operating profit. With the exception of our UK Electricity Transmission business, operating profit increased in all of our business segments. Overall adjusted net finance costs were £20 million lower than 2014/15 at £1,013 million. The effective tax rate for the year was 24.0%. | Group RoE has increased during the year to 12.3%, from 11.8% in 2014/15. During the year, the UK regulated businesses delivered a solid return of 13.3% in aggregate (2014/15: 13.7%), including an assumption of 3% long run average RPI inflation. US returns (calculated on a calendar year) of 8.0% were slightly down on last year, reflecting high winter gas leak and snow removal costs at the start of 2015, together with rate base growth. Further details of how this is calculated are on page 202. | Our UK regulated asset value (RAV) and US rate base increased by £1.8 billion (5%) to £38.8 billion. This reflects the continued high levels of investment in our networks in both the UK and US, together with the impact of the stronger US dollar. | |||||||
Target | The adjusted EPS target set as part of executive remuneration for Annual Performance Plan (‘APP’) was more than met with 100% of maximum achieved (see page 76). | The Group RoE target set as part of executive remuneration for APP was more than met with 100% of maximum achieved (see page 76). The Group RoE is one of the performance measures for the Long Term Performance Plan, outturns for which are calculated on a three year basis. | No specific target. Our overall aim is to achieve between 5% and 7% of regulated asset base growth each year. |
| 18 | National Grid Annual Report and Accounts 2015/16 | Strategic Report |
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Value added
Reflects value to shareholders of dividend and growth in National Grid’s assets, net of the growth in overall debt. | Employee lost time injury frequency rate
Number of employee lost time injuries per 100,000 hours worked in a 12-month period. Our ambition is to achieve a world-class safety performance of below 0.1. | Network reliability
The reliability of our electricity and gas networks.
Network reliability is measured separately for each of our business areas. The table below is meant to provide a simple visual representation of our performance across all of our networks.
Detailed data for each of the prior four years is provided on page 18 of our 2014/15 Annual Report and Accounts, which you can find in the investors section of our Company website.
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Value added£bn |
Employee lost time injury frequency rate per 100,000 hours worked | Prior four | ||||||||||||||
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| Target/ | (11/12– | |||||||||||||||
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| base% | 15/16 | 14/15) | ||||||||||||
| UK Electricity Transmission | T | 99.9999 | 99.999998 | exceeded | ||||||||||||
| UK Gas Transmission | T | 100 | 100 | achieved | ||||||||||||
| UK Gas Distribution | T | 99.999 | 99.999 | achieved | ||||||||||||
| US Electricity Transmission | B | 99.9 | 99.972 | no target | ||||||||||||
| US Electricity Distribution | B | 99.9 | 99.995 | no target | ||||||||||||
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T – Target | ||||||||||||||||
B – No target set or set individually by each jurisdiction. Accordingly, we set a base and report performance above the base. | ||||||||||||||||
Value added in the year increased by £0.1 billion to £1.8 billion.
Of the £1.8 billion value added in 2015/16, £1,337 million was paid to shareholders as cash dividends and £267 million as share repurchases (offsetting the scrip issuance during the year), with £183 million retained in the business.
See page 23 for further details. |
In the UK we improved our employee safety performance during 2015/16, with an employee injury frequency rate of 0.07. Our US business improved its safety performance, with an employee injury frequency rate of 0.11.
Overall, our Company-wide employee injury frequency rate has fallen to 0.10 and has been consistently around this level throughout the year. In real terms, this means 17 fewer employees had a lost time injury this year than last. |
We aim to deliver reliability by: planning our capital investments to meet challenging demand and supply patterns; designing and building robust networks; risk-based maintenance and replacement programmes; and detailed and tested incident response plans. In the UK, our networks performed well. Ahead of winter 2015/16, we assessed the margin and procured additional electricity system balancing tools on both supply and demand-side. We successfully used our new demand side tool for the first time and saw the market respond to market notifications. In the US, despite numerous winter snow storms and summer wind storms in parts of New England and New York, our network resilience held up well. We invested millions of dollars in our electricity infrastructure to improve resilience and help reduce the impact of service interruptions.
See UK Principal operations: pages 31–37 and US Principal operations: pages 38–41
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No specific target. Our overall aim is to sustainably grow value added over the long term while maintaining performance of our other financial KPIs.
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We have met our ambition of achieving below 0.1 in the UK but not in the US. |
We achieved our targets, which are set out in the table for our UK networks, and are set individually for each of our US jurisdictions. | ||||||||||||||
| National Grid Annual Report and Accounts | Our KPIs | 19 |
Our KPIscontinued
| Delivering our strategy The Board uses a range of financial and non-financial metrics, reported periodically, against which we measure Group performance. |
| 20 | National Grid Annual Report and Accounts 2015/16 | Strategic Report | ||||||||||
Strategic Report |
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Employee engagement index
| Climate change | Customer satisfaction | ||||||||||||||||||
| A measure of how engaged our employees feel, based on the percentage of favourable responses to certain indicator questions repeated annually in our employee engagement survey. | Scope 1 and Scope 2 greenhouse gas emissions of the six primary Kyoto greenhouse gases (excluding electricity transmission and distribution line losses). Our target is to reduce our greenhouse gas emissions by 45% by 2020 and 80% by 2050, compared with our 1990 emissions of 19.6 million tonnes. | The table summarises how we measure customer satisfaction:
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| Methodology | Measure | |||||||||||||||||||
| UK | UseRIIO-related metrics agreed with Ofgem | Score out of 10 | ||||||||||||||||||
| US | J.D. Power and Associates customer satisfaction surveys | Quartile ranking | ||||||||||||||||||
The table below focuses on the past two years.
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| Employee engagement index% | Greenhouse gas emissions Million tonnes carbon dioxide equivalent | Performance | ||||||||||||||||||
| 14/15 | 15/16 | Target | ||||||||||||||||||
| UK Electricity Transmission | 7.4 | 7.5 | 6.91 | |||||||||||||||||
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| UK Gas Transmission | 7.6 | 7.6 | 6.91 | |||||||||||||||
| UK Gas Distribution | 8.3 | –2 | 8.31 | |||||||||||||||||
| US Gas Distribution – Residential | 4th | 4th | To improve | |||||||||||||||||
| US Gas Distribution – Commercial | 4th | 3rd | To improve | |||||||||||||||||
| US Electricity – Residential | 3rd | 3rd | To improve | |||||||||||||||||
| US Electricity – Commercial | 2nd | 4th | To improve | |||||||||||||||||
1. Figures represent our baseline targets set by Ofgem for reward or penalty under RIIO. 2. Our customer satisfaction results are now reported on an annual basis with the results being published later this year.
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| We measure employee engagement through our employee engagement survey. The results of our 2016 survey, which was completed by 87% of our employees, have helped us identify specific areas where we are performing well and those areas we need to improve. Our engagement index has risen one point to 76% favourable. Managers receive a scorecard that aims to create greater leadership accountability and we produce survey reports and action plans at company, regional, business unit, function and team levels. | Our Scope 1 greenhouse gas emissions for 2015/16 equate to 7.0 million tonnes carbon dioxide equivalent (2015: 7 million tonnes) and our Scope 2 emissions (excluding electricity transmission and distribution line losses) equate to 0.3 million tonnes (2015: 0.3 million tonnes); combined this is a 62% reduction against our 1990 baseline. These are equivalent to an intensity of around 496 tonnes per £million of revenue (2015: 478). Our Scope 3 emissions for 2015/16 were 35.6 million tonnes. We measure and report in accordance with the World Resources Institute and World Business Council on Sustainable Development Greenhouse Gas Protocol: Corporate Accounting and Reporting Standard (Revised Edition) for all six Kyoto gases, using the operational approach for emissions accounting. 100% of our Scope 1 and 2 emissions and 95% of our Scope 3 emissions are independently assured against ISO 14064-3 Greenhouse Gas assurance protocol. This statement is available on our Company website.
| Our customer satisfaction KPI comprises seven components; Ofgem’s UK electricity and gas transmission and distribution customer satisfaction scores and four J.D. Power and Associates customer satisfaction surveys in the US. We have exceeded the two UK Electricity and Gas Transmission targets; the outcome for the third UK Gas Distribution survey will be published later this year.
In the US, we did not achieve our targets. Customers were again concerned about higher-than-normal winter bills as a result of electricity commodity price increases and higher gas usage due to cold weather. In an effort to rebuild trust and customer satisfaction, we put in place a customer outreach and education programme similar to last year that focused on energy-saving solutions and bill management. | ||||||||||||||||||
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| We achieved our target of increasing engagement compared with the previous year. | We forecast that we will continue to significantly exceed (better) the 45% by 2020 reduction target. We expect the 2050 target to be extremely challenging.
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| National Grid Annual Report and Accounts 2015/16 | Our KPIs | 21 |
Additional commentary on financial KPIs Adjusted operating profit Adjusted operating profit for the year ended 31 March 2016 was £4,096 million, up £233 million (6%) compared to last year. With the exception of our UK Electricity Transmission business, operating profit increased in all of our business segments. Adjusted operating profit by segment£m
For the year ended 31 March 2016, adjusted operating profit in the UK Electricity Transmission segment decreased by £64 million to £1,173 million. Revenue was £223 million higher, mainly reflecting the recovery of higher pass-through costs such as payments to other UK network owners and system balancing costs. In addition, £43 million of legal settlement revenue in 2014/15 was not repeated this year. As mentioned above, pass-through costs were £209 million higher. Regulated controllable costs were £28 million higher due to inflation and salary growth, together with legal cost recoveries in the prior year, higher tower maintenance costs and transformation costs associated with our System Operator business. Depreciation and amortisation costs were £14 million higher, reflecting the continued capital investment programme, and other costs were £36 million higher than prior year including additional asset impairments this year and lower scrap and disposal proceeds. UK Gas Transmission adjusted operating profit increased by £49 million to £486 million. Revenue was £25 million higher, including over-recovery of allowed revenues in the year, partly offset by lower pass-through cost recoveries. After deducting pass-through costs, net revenue was £46 million higher than prior year. Regulated controllable costs were £10 million higher than last year, mainly as a result of inflation, higher gas system service charges and organisational change costs. Depreciation and amortisation costs were £6 million higher, reflecting ongoing investment. Other operating costs were £19 million lower than last year, mostly reflecting additional costs in 2014/15 relating to the closure of LNG facilities. | UK Gas Distribution adjusted operating profit increased by £52 million to £878 million. Revenue was £51 million higher, principally reflecting increased regulatory revenue allowances. In part, these allowances were increased to compensate for expected increases in taxation costs reflecting a change to the tax treatment of replacement expenditure. Regulated controllable costs were £21 million higher due to inflation, recruitment, property costs and higher charges from strategic partners to cover connections and flexible winter resourcing. Depreciation and amortisation costs were £12 million higher reflecting the continued capital investment programme. Pass-through costs charged to customers were £11 million lower this year, and other costs were £23 million lower than prioryear, which included provisions for additional asset protection costs. Within our US Regulated business, adjusted operating profit increased by £21 million to £1,185 million. The effect of the stronger dollar was to increase operating profit in the year by £81 million. Excluding this impact from exchange rate movements, revenue decreased by £1,051 million, principally as a result of lower commodity costs passed on to customers and unfavourable timing of recoveries year on year, partly offset by higher increased revenue allowances under the Niagara Mohawk three-year rate plan and the benefit of capex trackers. The reduction in revenue was mostly offset by a £1,027 million reduction in pass-through costs (excluding the impact of foreign exchange). Regulated controllable costs reduced by £71 million at constant currency, partly as a result of lower gas leak and compliance work this year and additional costs incurred last year to improve data quality and bring regulatory filings up to date. Depreciation and amortisation costs were £51 million higher this year at constant currency as a result of ongoing investment in our networks. Pension costs were £15 million higher at constant currency, while other operating costs were £41 million higher at constant currency, including higher asset removal costs. Adjusted operating profit in Other activities was £175 million higher at £374 million. In the US, adjusted operating profit was £143 million higher, reflecting lower spend on upgrades to our finance systems which were completed last year. In addition, we benefited from a £49 million gain on disposal of our investment in the Iroquois pipeline, and a reduction in the costs associated with our investment in Clean Line. In the UK, adjusted operating profit was £32 million higher mainly as a result of strong auction revenues in our French interconnector (IFA) business and higher property sales proceeds. Adjusted earnings For the year ended 31 March 2016, adjusted net finance costs were £20 million lower than they were in 2014/15 at £1,013 million, with lower UK RPI inflation, continued focus on management of cash balances, and the benefit of last year’s debt buybacks offsetting the impact of the stronger US dollar and increasing net debt. Our adjusted tax charge was £58 million higher than it was in 2014/15. This was mainly due to higher profits before tax. The effective tax rate for 2015/16 was 24.0% (2014/15: 24.2%). | This section provides additional commentary on our KPIs and other performance metrics we use to monitor our business performance. Analysis of our financial performance and position as at 31 March 2016, including detailed commentary on the performance of our operating segments, is located in the financial statements. However, this analysis still forms part of our Strategic Report financial review. See pages 197 to 199 for commentary on our financial performance and position for the year ended 31 March 2015 compared with 31 March 2014. We have also included analysis of our UK regulated financial performance by segment on page 108. In focus Use of adjusted profit measures page 196 Commentary on the consolidated income statement page 95 Commentary on results of our principal operations by segment pages 107–108 Further details of how our performance metrics are calculated page 202 |
| 22 | National Grid Annual Report and Accounts 2015/16 | Strategic Report |
Strategic Report
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In focus
Reconciliations of adjusted profit measures
page 196
Commentary on statement of financial position
page 99
The earnings performance described on the previous page has translated into adjusted earnings of £2,386 million, up £197 million on last year. This equates to adjusted earnings per share (EPS) of 63.5 pence, up 5.9 pence (10%) on 2014/15.
Scrip restatement
In accordance with IAS 33, all EPS and adjusted EPS amounts for comparative periods have been restated as a result of shares issued via scrip dividends.
Measurement of financial performance
We describe and explain our results principally on an adjusted basis and explain the rationale for this on page 196. We present results on an adjusted basis before exceptional items and remeasurements. See page 196 for further details and reconciliations from the adjusted profit measures to IFRS, under which we report our financial results and position. A reconciliation between reported operating profit and adjusted operating profit is provided below. Further commentary on movements in the income statement is provided on page 95.
Year ended 31 March
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| £m | 2016 | 2015 | 2014 | |||
Total operating profit | 4,085 | 3,780 | 3,735 | |||
Exceptional items | 22 | – | (55) | |||
Remeasurements – commodity contracts | (11) | 83 | (16) | |||
Adjusted operating profit | 4,096 | 3,863 | 3,664 | |||
Adjusted net finance costs | (1,013) | (1,033) | (1,108) | |||
Share of post-tax results of joint ventures | 59 | 46 | 28 | |||
Adjusted taxation | (753) | (695) | (581) | |||
Attributable to non-controlling interests | (3) | 8 | 12 | |||
Adjusted earnings | 2,386 | 2,189 | 2,015 | |||
Adjusted EPS (pence) | 63.5 | 57.6 | 53.1 | |||
Group return on equity (RoE)
We measure our performance in generating value for our shareholders by dividing our annual return by our equity base.
Group RoE has increased during the year to 12.3%, from 11.8% in 2014/15. During the year, the UK regulated businesses delivered a solid operational return of 13.3% in aggregate (2014/15: 13.7%), including an assumption of 3% long run average RPI inflation. US operational returns (calculated on a calendar year) of 8.0% were slightly down on last year, reflecting high winter gas leak and snow removal costs at the start of 2015, together with rate base growth.
Overall, other activities in the Group delivered a good performance, including an improved result from the French and BritNed interconnectors, higher property sales, the gain on sale of our interest in the Iroquois pipeline and lower US other costs following the completion of our financial system upgrade last year. Treasury performance also helped the result, through lower RPI accretions on the Group’s index linked debt, ongoing focus on effective cash management and the benefit of last year’s debt repurchases. Together, these helped to offset the headwind from a lower cost of debt allowance under the tracker within the UK price controls.
Regulated asset base growth
In total, our UK regulated asset value (RAV) and US rate base increased by £1.8 billion (5%) to £38.8 billion. This reflects the continued high levels of investment in our networks in both the UK and US, together with the impact of the stronger US dollar.
The UK RAV increased by £0.7 billion, reflecting significant capital expenditure, together with inflation, although RPI inflation at 1.6% (March to March), was below our 3% long term expectation. UK RAV growth also included capitalised efficiencies or ‘performance RAV’ of £115 million this year.
US rate base has increased by £1.1 billion this year. Of this, £0.4 billion was due to foreign exchange movements increasing the rate base reported in sterling. Excluding foreign exchange, rate base increased by £0.7 billion, reflecting a significant year of US investment.
Value added
Our dividend is an important part of returns to shareholders along with growth in the value of the asset base attributable to equity investors. These are reflected in the value added metric that underpins our approach to sustainable decision-making and long-term incentive arrangements.
Overall value added in the year was £1.8 billion or 47.6 pence per share as set out below:
Year ended 31 March
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| £bn at constant currency | 2016 | 2015 | Change | |||
UK regulated assets1 | 26.0 | 25.5 | +0.5 | |||
US regulated assets1 | 14.1 | 13.9 | +0.2 | |||
Other invested capital | 1.9 | 1.5 | +0.4 | |||
Total assets | 42.0 | 40.9 | +1.1 | |||
Dividend paid | +1.3 | |||||
Share buyback | +0.3 | |||||
Movement in goodwill | – | |||||
Net debt | (25.3) | (24.4) | -0.9 | |||
Value added | +1.8 | |||||
Value added per share | 47.6p | |||||
1. Includes assets held outside RAV and rate base.
Value added in the year was higher than 2014/15 (£1.7 billion or 44.7p per share), primarily as a result of higher inflation on UK regulated assets (March 2016 RPI of 1.6%, prior year 0.9%), together with the gain on disposal of our share of the Iroquois pipeline. Of the £1.8 billion value added in 2015/16, £1,337 million was paid to shareholders as cash dividends and £267 million as share repurchases (offsetting the scrip issuance during the year), with £183 million retained in the business.
The Board is confident that growth in assets, earnings and cash flows, supported by improving cash efficiency and an exposure to attractive regulatory markets, should help the Group to maintain strong, stable credit ratings and a consistent prudent level of gearing, while delivering attractive returns for shareholders.
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In focus UK regulation pages 176–177 US regulation pages 178–182 | Net debt and credit metrics We expect capital investment programmes and network enhancement will continue to be funded by market borrowings. We continue to borrow at attractive rates when needed and the level of net debt remains appropriate for the size of our business. During 2015/16, net debt has increased by £1.4 billion. This is driven by net business cash inflows (after capex) of £1.9 billion, more than offset by outflows from interest, dividends, tax and other financing flows of £2.6 billion, with other non cash movements such as foreign exchange and accretion increasing net debt by a further £0.7 billion. A key measure we use to monitor financial discipline is retained cash flow divided by adjusted net debt (RCF/net debt). This is a measure of the operating cash flows we generate, before capital investment but after dividends paid to shareholders, compared with the level of debt we hold. The principal adjustments made to net debt are in respect of pension deficits and hybrid debt instruments. RCF/net debt was 11.5% for the year (2014/15: 11.2%; 2013/14: 10.5%). For the current year, we have used this measure to actively manage scrip uptake through buying back shares when supported by sufficient headroom. Deducting the costs of buying back these shares reduces RCF/net debt to 10.5% for the year. Our long-term target range for RCF/net debt is to exceed 9.0%, which is consistent with the A3 rating threshold used by Moody’s, the rating agency. We additionally monitor interest cover, which is a measure of the cash flows we generate compared with the net interest cost of servicing our borrowings. Interest cover for the year was 5.5 times (2014/15: 5.1 times; 2013/14: 4.1 times). Our target long-term rate for interest cover is in excess of 3.0 times. | Regulatory financial performance Timing and regulated revenue adjustments As described on pages 176 to 182, our allowed revenues are set in accordance with our regulatory price controls or rate plans. We calculate the tariffs we charge our customers based on the estimated volume of energy we expect will be delivered during the coming period. The actual volumes delivered will differ from the estimate. Therefore, our total actual revenue will be different from our total allowed revenue. These differences are commonly referred to as timing differences. If we collect more than the allowed revenue, the balance must be returned to customers in subsequent periods, and if we collect less than the allowed level of revenue we may recover the balance from customers in subsequent periods. In the US, a substantial portion of our costs are pass-through costs (including commodity and energy efficiency costs) and are fully recoverable from our customers. Timing differences between costs of this type being incurred and their recovery through revenue are also included in timing. The amounts calculated as timing differences are estimates and subject to change until the variables that determine allowed revenue are final. Our operating profit for the year includes a total estimated in-year over-collection of £25 million (2014/15: £64 million under-collection). Our closing balance at 31 March 2016 was £48 million over-recovered. In the UK, there was cumulative under-recovery of £87 million at 31 March 2016 (2015:under-recovery of £177 million). In the US, cumulative timing over-recoveries at 31 March 2016 were £135 million (2015: £150 million over-recovery). The majority of that balance will be returned to customers next year. In addition to the timing adjustments described above, as part of the RIIO price controls in the UK, outperformance against allowances as a result of the totex incentive mechanism, together with changes in output-related allowances included in the original price control, will almost always be adjusted in future revenue recoveries, typically starting in two years’ time. Our current IFRS revenues and earnings include these amounts that will need to be repaid or recovered in future periods. Such adjustments will form an important part of the continuing difference between reported IFRS results and underlying economic performance based on our regulatory obligations. For our UK regulated businesses as a whole, regulated revenue adjustments totalled £262 million in the year (2014/15: £174 million). This is based on our estimates of: work carried out in line with allowances; in expectation of future allowances; or work avoided altogether – either as a result of us finding innovative solutions or of the need being permanently removed. In the US, accumulated regulatory entitlements to future revenue net of over- or under-recoveries amounted to £1,335 million at 31 March 2016 (2015: £1,528 million). These entitlements cover a range of different areas, with the most significant being environmental remediation and pension assets, as well as deferred storm costs. All regulatory entitlements are recoverable (or repayable) over different periods, which are agreed with the regulators to match the expected payment profile for the liabilities. As at 31 March 2016, these extend until 2071. |
| Financial review | 25 | ||||||||||||
Internal control and risk management
The Board is committed to protecting and enhancing our reputation and assets, while safeguarding the interests of our shareholders. It has overall responsibility for the |
National Grid is exposed to a variety of uncertainties that could have a material adverse effect on the Group’s financial condition, our operational results, our reputation, and the value and liquidity of our shares.
This year we refined our risk management processes as a result of changes implemented by the UK Corporate Governance Code 2014 (the Code). Most notably, we now specifically test the impact of our principal risks on a reasonable worst case basis, alone and in clusters, over a five-year assessment period. The aim of this is to establish their impact on the Group’s ability to continue operating and meet its liabilities over the assessment period. The reason for selecting a five-year assessment period and the results of this exercise are described in the viability statement on page 30.
Risk management approach Our
Our process involves a continuous cycle of bottom-up review and reporting and top-down review and feedback. All our business functions participate in the bottom-up risk management process. They identify the main risks to our business model and to achieving their business objectives | and the actions being taken to manage and monitor them. They assess each risk by considering the financial and reputational impacts, and how likely the risk is to materialise. The identified risks
An important feature of our risk management process is our three lines of defence model. Each business function owns and is responsible for managing its own particular risks (the first line of defence). A central risk management team (the second line of defence) acts as an advisory function and also provides independent challenge and review. This team partners with the business functions through nominated risk liaisons and collaborates with assurance teams and specialists, such as safety and compliance management. Our internal audit function then audits selected controls and mitigation activities (the third line of defence). Regional senior management regularly reviews and debates the outputs of the bottom-up risk management process and agrees the prioritisation of the risks. The main risks for
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| 26 | National Grid Annual Report and Accounts 2015/16 | Strategic Report |
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viability over the next five years. Through the testing and The outcomes from each level of the risk
Our principal risks Accepting that it is not possible to identify, anticipate or eliminate every risk that may arise and that risk is an inherent part of doing business, our risk management process aims to provide reasonable assurance that we understand, monitor and manage the main uncertainties that we face in delivering our objectives.
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Drive growth
| Failure to identify and execute the right opportunities to
Failure to
Our ability to achieve our ambition for growth is subject to a wide range of external uncertainties, including the availability of potential investment targets and attractive
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Sustained deflation/inflation in the UK/US. Sustained deflation in the UK would result in a loss of inflationary indexation of UK RIIO networks’ RAV. In the US our asset base is not indexed by inflation, therefore higher inflation erodes value even if our cost of service is periodically updated through rate case filings. | ●The primary measures we have to manage this risk include our business planning process (five-year plan approved each year by the Board), annual portfolio review by the Board, financing strategies (including hedging policies approved by the Finance Committee) and regulatory strategies (e.g. US rate case filing schedule). | |||||
Engage externally
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Policy decisions by regulators, governments and others directly affect our business. We must engage widely in the energy policy debate, making sure our position and perspective help to shape future policy direction. |
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Engage our people
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It is through the high-quality work of our employees that we will achieve our vision, respond to the changing needs of our stakeholders and create a competitive advantage. Obtaining and fostering an engaged and talented team that has the knowledge, training, skills and experience to deliver on our strategic objectives is vital to our success. We must attract, integrate and retain the talent we need at all levels of the business. | ●Strategic workforce planning allows us to effectively inform our strategic resourcing plans.
●The rigour of our succession planning and development planning process has been improved, particularly at senior levels and is now being applied deeper into the organisation. ●We are involved in a number of initiatives to help secure the future engineering talent required (see page
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| Internal control and risk management | 27 | ||||||||||||
Internal control and risk managementcontinued
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Deliver operational excellence
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Failure to deliver appropriate information systems and data integrity.
The Company is increasingly reliant on technology to support and maintain our business-critical processes. We must be able to rely on the performance of these systems and the underlying data to demonstrate the value of our business to our shareholders, |
● We have rebuilt the US Program Delivery organisation, to build back programme ● Globally, our Information Management Framework is being rolled out to improve data management. ● Data and its effective management is also central to our
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We experience a catastrophic/major cyber security breach.
Due to the nature of our business we recognise that our critical national infrastructure (CNI) systems may be a potential target for cyber threats. We must protect our business assets and infrastructure and be prepared for any malicious attack. |
● Our cyber security programme is a global programme of work which started in 2010 and continues to be modified and updated to this day. This programme is intended to reduce the risk that a cyber threat could adversely affect the Company’s business resilience.
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Catastrophic asset failure. Safety is paramount. Some of the assets that we own and operate are inherently hazardous and process safety incidents, while extremely unlikely, may occur. | ● We continue to commit significant resources and financial investment to maintain the integrity of our assets and we strive to continuously improve our key process safety controls. ● We continue to implement our Group-wide process safety management system to ensure a robust and consistent framework of risk management exists across our higher hazard asset portfolio. ● We have a mature insurance strategy that uses a mix of self-insurance, captives and direct (re)insurance placements. This provides some financial protection in respect of property damage, business interruption and liability risks. Periodically, independent surveys of key assets are undertaken, which provide risk engineering knowledge and best practices to the Group with the aim to further reduce our exposure to hazard risks. | |||||
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| We fail to | ● We have relaunched our dedicated Group Technology Team within the Strategy Function.
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| 28 | National Grid Annual Report and Accounts 2015/16 | Strategic Report |
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Our internal control process We have a number of processes to support our internal control environment. These processes are managed by dedicated specialist teams,
Reviewing the effectiveness of our internal control and risk management Each year the Board reviews the effectiveness of our internal control
The Board evaluated the effectiveness of management’s processes for monitoring and reviewing internal control and risk management. It noted that no significant failings or weaknesses had been identified by the review and confirmed that it was satisfied the systems and processes were functioning effectively. | Our internal control and risk management
Internal control over financial reporting We have specific internal mechanisms to govern the financial reporting process and the preparation of the Annual Report and Accounts. Our financial controls guidance sets out the fundamentals of internal control over financial reporting, which are applied across the Company.
Our financial processes include a range of system, transactional and management oversight controls. In addition, our businesses prepare detailed monthly management reports that include analysis of their results, along with comparisons to relevant budgets, forecasts and prior year results. These are presented to, and reviewed by, senior management within our Finance function. | These reviews are supplemented by quarterly performance reviews, attended by the Each month, the Finance Director presents a consolidated financial report to the Board.
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How executiveViability statement
remuneration aligns
to Company strategy
The Remuneration Committee determines remuneration policy and practices through which we aim to promote the success of the Company by attracting, motivating and retaining high-calibre Executive Directors and other senior employees to deliver value for our shareholders, customers and the communities in which we operate.
Our strategy To be a recognised leader in the development and operation of safe, reliable and sustainable energy infrastructure, to meet the needs of our customers and communities and to generate value for our investors.
Our strategic objectives | The Committee believes that the changes will further enhance the long-term alignment between executive remuneration and the delivery of the corporate strategy.
The information set out below describes current rather than future policy.
Alignment to strategy Annual Performance Plan (APP) Our APP aims to incentivise and reward the achievement of annual financial and strategic business measures, and the delivery of annual individual objectives. Performance metrics, including corporate financial measures and individual objectives, are agreed at the start of each performance year and are aligned with the strategic business priorities for that year.
The table below shows the financial measures and their relative weightings that were included within the APP for the Executive Directors for 2013/14:
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Our vision and strategy pages 14 – 15
Remuneration Report
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Deliver operational excellence
Engage our people
Stimulate innovation
Engage externally
Embed sustainability
Drive growth | |||||||||||||||
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| Cash flow (Group or regional) | 38% | 28% | 43% | |||||||||||||
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Financial measures together represent 70% of the APP.
Individual performance objectives in the APP reflect 30% of the plan and are defined in terms of target and stretch performance requirements. The performance objectives change each year, depending upon business priorities. Examples of individual objectives include those relating to safety, stakeholder relations, employee engagement and capability, and the development of Group and financial strategy.
In order to provide balance for all our stakeholders, at the end of the year the Remuneration Committee has discretion to reduce APP awards to take account of any safety, customer, service-related, environmental or governance issues that may have occurred.
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The Remuneration Committee aligns the remuneration policy to our Company strategy and main business objectives. Performance-based incentives are earned through achieving demanding targets for short-term business and individual performance, as well as creating long-term value for our shareholders, customers and the communities in which we operate.
Remuneration Committee review of remuneration During the year, the Remuneration Committee undertook a detailed review of the remuneration arrangements for Executive Directors, with the aim of achieving further alignment between executive reward and long-term shareholder value.
As a result of this review, the Committee is proposing some significant changes to the arrangements for the 2014/15 financial year, and these are set out in detail on pages 58 to 73. Shareholders are being asked to approve these changes at the AGM on 28 July 2014. | ||||||||||||||||
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The Board’s consideration of the longer-term viability of the Company is an extension of our business planning process, which includes financial forecasting, a robust risk management assessment, regular budget reviews and scenario planning. This activity is strengthened by a culture throughout the Company of review and challenge. Our As part of National Grid’s risk appetite framework, each year the Board reviews our target risk appetite levels and reflects on whether our decision-making behaviours over the past year have aligned with these targets. The Board confirmed that the Company’s behaviours over the past year had been in line with our target risk appetite. We believe that five years is the most appropriate timeframe over which the Board should assess the long-term 1. We have reasonable clarity over a five-year period, allowing an appropriate assessment of our principal risks to 2. The Board considered whether there are specific, foreseeable risk events relating to the principal risks that are likely to materialise within a five to ten year period, and which might be substantial enough to affect the Company’s viability and therefore should be taken into account when setting the assessment period. No risks of this sort were identified; and 3. It matches our business planning cycle. We have set out the details of the principal risks facing our Company on pages 26 to 29, described in relation to our ability to deliver our strategic Over the course of the year the Board has also considered | ||||||||||||
| following specific areas of our principal risks in detail: | The Board has considered the proposed sale of a majority share in our UK Gas Distribution business and has concluded that it will not have an adverse impact on the viability of the Company. It will continue to assess the strategic risks that the proposed sale presents when considering the approval of the transaction.
The The Board has also reviewed the stress testing of the principal risks. The Board started by considering our reputational and financial risk capacity. It then considered how that capacity might be tested by the principal risks. Each of the principal risks was tested for its individual impact based on assessing reasonable worst case scenarios over a five-year period, and considering reputational impacts and financial impacts (to the nearest £500m). The figure of £500m was selected because our financial risk capacity is very substantial and the In addition to testing individual principal risks, the Board also considered the impact of a cluster of the principal risks materialising over the assessment period. They focused on the effect these could have on our reputation and stakeholder trust and how that In assessing the Each Director was satisfied that they had sufficient information to judge the viability of the Company. Based on the assessment described above and on page 27, the Directors
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● our regulatory position in the UK, including our RIIO mid-period review strategy;
● the future of our System Operator and Transmission Owner roles;
● the potential impact of Brexit on our business.
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Failure to respond effectively to the threats and opportunities presented by emerging technology, particularly the challenge of adapting our networks to meet the challenges of increasing distributed energy resources. Failure to identify and execute the right opportunities to deliver our growth strategy. |
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Safety performance 7,700+ employees and contractors completed a driver safety programme on the risk of distractions while driving Our networks We continue to invest in new infrastructure and update our existing networks to deliver energy safely and reliably to our customers. KPIspages 18–21 Electricity Transmission page 32 Gas Transmission page 33 Gas Distribution page 37 Innovation We secured over £22m of funding for three major innovative projects. Read more about how this will be invested on pages 32–37 | When I look at the different aspects of the UK’s energy landscape, it seems that one factor is a constant. Whether it’s the sources of energy, or regulatory and government policy developments, or the expectations of customers and industry stakeholders, the common factor that emerges is change. For us at National Grid, a large part of our success depends on our ability to keep pace with it and adapt to it. This year we’ve seen significant regulatory developments. Ofgem launched a consultation on extending competition in electricity transmission. We support this work and recognise that introducing competition is a good way to deliver value for consumers, if the right conditions are met. We outlined this in our response and will continue to use our experience to make sure a thorough assessment is undertaken before any change is finalised. We have also been working alongside DECC and Ofgem to consider how to evolve the current SO model, to make it more flexible and more independent while remaining cost effective. In doing so, it is vital that there is no disruption to the pivotal role National Grid plays as SO in keeping the energy market working. In May 2016, Ofgem announced a mid-period review of the RIIO-T1 price control looking at three specific output measures in gas and electricity transmission. The scope of this review is narrow with no changes to key financial parameters. Ofgem will now run a consultation process this summer, with any changes to be implemented in April 2017. We’ve seen significant change inside the Company too. In November 2015 we announced our plans to commence a process to sell a majority stake in our Gas Distribution business. Since then we have been working on how we separate Gas Distribution from National Grid and create a stand-alone business ready for sale; making sure it has the right people, assets, systems and technology it needs to be successful in the future.
| Set against all these developments, I’m delighted that our UK businesses have continued to perform well during the last year with continued world class safety levels and network reliability, as well as further developing our interconnector businesses with two new projects. You can read more about our UK operating highlights over the next six pages. We can’t be complacent though. If we are to be trusted to provide a safe and reliable service today, to deliver a clean and sustainable future for energy, and to deliver on our promises to customers, we need to improve our performance. This is why performance has been such an important area of focus for our UK businesses during 2015/16 – and it remains a priority for the year ahead, as you can read below. Looking ahead to 2016/17 The coming year promises to be a challenge as we continue to respond and adapt to change across our businesses. Our priorities are very clear. We will create and subsequently sell a majority stake in a stand-alone Gas Distribution business and continue to work externally to influence future regulatory changes, while meeting the ever-changing needs of our stakeholders. It’s important for us to be prepared for the possible introduction of competition in electricity transmission, that our people understand its implications, and that we are ready to review and respond to the mid-period review consultation. I am confident that as a business we will be ready for these changes. At the same time we will continue our drive to improve performance, and make sure we develop a high performance culture to serve our customers as best we can. |
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Principal operations
| Electricity TransmissionWe own and manage the electricity transmission system in England and Wales. Our networks comprise approximately 7,200 kilometres (4,470 miles) of overhead line, |
We are also the national electricity transmission system operator, responsible for both the England and Wales transmission system, and the two high voltage transmission networks in Scotland, which we do not own.
Day-to-day operation of the system involves the continuous real-time matching of demand and generation output. We are also designated as system operator for the new offshore electricity transmission regime.
Although demand for electricity is generally increasing around the world, in the UK it is expected to remain broadly flat over the next five to 10 years.
Changes in the sources and characteristics of generation connecting to our network, such as wind and nuclear generation, mean we need to
Over the last
What we’ve achieved
We Following a seven year period of consultation, community engagement and planning applications we received a development consent order (DCO) for the construction of a new transmission circuit to connect the nuclear power station at Hinkley Point. To connect the power station to the network | Working with the stakeholder advisory group we have identified and recommended four projects to receive funding from the Visual Impact Provision project. These projects are
The North West Coast Connection Project continues to progress and maintain engagement with a broad range of stakeholders. This includes holding community information events along the preferred route corridor and meeting government officials, local authorities and focus |
Priorities for the year ahead
Programme delivery: increase the amount of work we can deliver, and reduce our costs through improving processes. Operational efficiency: continue Safety: maintain our world class safety performance. |
Electricity transmitted across our network 253,981 (GWh)
Circuit breaker replacement programme We have piloted a new approach to circuit breakers aiming to halve the time and
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We were granted a £12 million award from this year’s Network Innovation Competition (NIC) which will be used to convert a substation at Deeside into an off-grid research facility. This will replicate a live substation and allow us to test the effects of future low-carbon generation on the network
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| Gas Transmission We own and manage the gas national transmission system in Great Britain, with day-to-day responsibility to maintain a safe, reliable, and available operation. Our network comprises approximately 7,660 kilometres (4,760 miles) of high pressure pipe and 24 compressor stations. In 2015/16 the gas throughput across the system was more than 80 billion cubic metres. |
| What we’ve achieved in 2015/16 We have increased our annual network investment by a further £18 million and maintained excellent levels of network availability throughout the year. We are committed to safety and are working to improve the fall protection equipment on all our trailers following our first lost time injury in more than two and a half years, when a contractor sustained a minor injury unloading a lorry in December 2015. We have undertaken a detailed review of our end-to-end processes, focusing on removing waste and increasing value for our customers. One result from this efficiency work has been our ability to increase the volume of in-house maintenance work we deliver. We have also reduced the time we expect to take in connecting customers to the NTS as a result of these process improvements. We received a further £4.8 million from Ofgem’s NIC to support our customer low-cost connections project. This project will introduce new technology that changes the connections process for customers, making it easier and reducing the cost for new customers to connect to the NTS. We are investing in our Aylesbury, Huntingdon and Peterborough compressor stations to make sure they comply with the stricter environmental limits set out in the Industrial Emissions Directive (IED). We plan to complete the necessary upgrade works to all our sites affected by this legislation by 2023. Priorities for the year ahead Safety: build on, and further improve our safety culture and statistics through a review of our risk management approach. Reliability: increase the amount of maintenance and replacement work on our assets, in line with our RIIO commitments and develop an improved asset health risk methodology. Efficiency: improve the quality of data on our assets to enable better decisions on investments and to drive efficiencies in our project work. In response to customer feedback, work to reduce the time taken to connect customers to our network. Innovation: continue to create value for customers and the wider industry through innovation, development and implementation. Emissions compliance projects: meet the IED requirements by delivering our agreed asset enhancement and replacement programme. | |||||
In focus X20,000 The gas throughput across the system in 2015/16 was more than 80 billion cubic metres, enough to fill Wembley Stadium more than 20,000 times.
Efficient robotics Our pioneering robotics will negotiate complex pipework, withstanding extreme pressures. By avoiding unnecessary excavations, this technology has the potential to save almost £60 million in 20 years and generate carbon savings of over 2,000 tonnes. | Market context The UK’s gas market and sources of gas are changing. Domestic demand has fallen over the last five years and a significant increase is not expected in future years. The UK continental shelf (UKCS) now makes up less than half our total gas supply, with the remainder coming from Norway, continental Europe, or further afield via shipped imports of LNG. Overall, supply capacity now exceeds peak demand by more than 30%, giving our customers significant flexibility over which sources of gas they choose to meet demand. Flexible sources of supply, such as LNG importation terminals, interconnectors and storage sites, can respond to demand more quickly than traditional UKCS supplies. Therefore, our network needs to be able to respond to changing day-to-day and within-day supply and demand patterns. We also need to prepare for an uncertain energy landscape in the long term. UK reliance on imported gas supplies will vary depending on the level of gas supply from the UKCS and the development of indigenous gas sources. We are working closely with our customers and stakeholders to meet these operational challenges. We are focused on continuing to develop our network and services to meet their needs safely, reliably and efficiently. | |||||
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Power Responsive In June 2015, we launched the Power Responsive programme, designed to help drive demand side response (DSR) growth through greater customer awareness and clear participation policies. We believe DSR will play an increasingly vital role in building a secure, affordable, sustainable electricity system by providing greater flexibility. Power Responsive offers a means for suppliers, businesses and policy makers to collaborate, build awareness and deliver improved DSR solutions, helping to reduce total energy costs. The goal is to achieve 30–50% of balancing capability from the demand side by 2020. You can find out more about the programme and case studies from customers signed up to DSR at www.powerresponsive.com | ||||||||||||
System Operator As System Operator (SO) we are responsible for making sure Britain’s gas and electricity is transported safely and efficiently from where it is produced to where it is consumed, when it is needed. We make sure that supply and demand are balanced in real time and we facilitate the connection of assets to the transmission system.
Sources of energy are changing. In electricity, an increase in renewable generation such as wind, solar and tidal power, together with a decrease in more conventional generation such as coal and gas, is leading to greater variability and uncertainty. In gas, the changing location of gas being input into the transmission system will drive greater need for flexibility as the traditional north-south flow diminishes. This makes our role in matching supply and demand more challenging, so we work with the market to make sure we have appropriate tools in place to balance the transmission system. We work with our customers and stakeholders to shape the future of the energy market, providing analysis and insight into the changing nature of energy. We also facilitate changes to the market frameworks to accommodate new technologies and ways of working, while considering how the role of the SO should evolve over time. The SO is at the forefront of this debate helping to find solutions with industry. What we have delivered in 2015/16 We continue to play a leading role in helping develop the UK’s future energy strategy, and that of Europe. Our approach includes working with customers and stakeholders on initiatives such as the translation of new EU code requirements for gas, the development of new demand side services in the form of the Power Responsive programme, the harmonisation of gas trading arrangements across Europe, our Future Energy Scenarios reports, and System Operability Framework workshops and webinars. |
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We will continue to find better ways to provide timely, cost effective and innovative solutions to balance supply and demand for gas and electricity.
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Market developments
We will continue to work with Ofgem and DECC as they develop proposals to help meet the energy challenges of the future, including options for greater SO independence and ensuring there is no disruption to the vital role of the SO. We will work closely with our stakeholders as proposals for roles and responsibilities of the SO become clearer.
Customers and stakeholders We will continue to develop our longer-term strategy to understand the issues that will affect our customers and stakeholders in the future, and plan how we will best support them. Delivering energy We will continue to support the evolution of market frameworks in the UK and Europe to enable new types of generation and demand to come forward in response as the energy landscape changes. |
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| Gas DistributionWe own and operate four of the eight regional gas distribution networks in Great Britain. Our networks comprise approximately 131,000 kilometres
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In focus 263TWh Gas consumption in our networks We manage the National Gas Emergency number (0800 111 999) on behalf of all gas distribution networks. We handled nearly 2.3 million calls during 2015/16, across the emergency number, enquiry lines, appliance repair helpline and meter enquiry service.
Improving customer communications To provide our customers with a safe and secure supply of gas we continue to invest in the network by replacing the existing metal gas mains pipes, which supply around 150,000 homes every year, with new hard-wearing plastic pipes. A trial of a new suite of customer communication materials resulted in a 51% reduction in the number of complaints and enquiries in the trial areas. We will introduce these communication materials across all our networks in 2016/17 with the aim of improving our overall customer satisfaction performance, which is not yet at the level we would like. | Market context We manage our networks to keep our customers safe and warm. We are incentivised through RIIO to operate efficiently and deliver services that our customers and stakeholders value. Ofgem is able to make comparisons across all eight networks. It establishes outputs they are expected to deliver so we all maintain a safe and reliable network; make a positive contribution to sustainability and protect the environment; provide connections to supply new consumers and support new gas entry points into the network; meet their social obligations; and provide an agreed standard of service to consumers and other stakeholders. We collaborate with the industry on issues, such as innovation, safety and the future of networks to deliver outcomes that customers value. Gas remains an important part of the current and future energy mix and we are working with our customers and stakeholders to develop our networks to accommodate gas from new sources, such as biomethane. What we’ve achieved in 2015/16 We remain committed to our ambition to be the best gas distribution business in Britain and continue to focus on delivering a safe and reliable service for our customers. This year we were prosecuted for incidents at Scunthorpe and Dugdale and, after pleading guilty, accepted fines of £3m. We acknowledged that we did not do our job properly on these occasions and have since changed the way certain activities are carried out. We have worked on improving the services we provide for our customers that make us a more efficient business. Responding to feedback from our employees and stakeholders, we have been improving the mobile technology used by our workforce and reducing the number and size of the holeswe dig in the roads. These initiatives improve customer satisfaction and will also help us to continue delivering our RIIO outputs. We have continued to connect different sources of gas to our network, particularly biomethane. Since the first connection in October 2013, we have now completed 22 biomethane connections in our networks. | The most innovative during 2015/16 was Raynham Farms, Norfolk, which saw the first plastic pipe local transmission system connection in the UK. We also connected the UK’s first HGV filling station to the high pressure local transmission system. This new facility in Leyland, Lancashire, supplies 100% renewable biomethane and will therefore play an important part in the UK’s rapidly growing renewable refuelling infrastructure. Our industry-leading work on the future of the gas network will ensure the gas distribution business features heavily in the nation’s energy infrastructure for many years to come. We have been preparing our business for the introduction of domestic smart meters, which, following a UK Government coordinated rollout, we expect will be standard across the country by the end of 2020. We have invested further in technology for our strategic partners. The Tier One Replacement System (TORS) enables us to replace the pipes beneath our feet without the need for excavations. TORS promises a revolution in working practices and less disruption for our customers. Following trials, we are looking to use this technology in 2016/17 and further improve safety, network efficiency and customer satisfaction. Priorities for the year ahead Maintain a stable and strong business throughout the process for the potential sale, to maximise shareholder value and continue to deliver a safe and reliable network. Create a truly customer-focused business by removing inconsistencies in service delivery, reducing the number and size of excavations, and introducing the new customer communication materials. Optimise our processes and work more collaboratively to continue to operate an efficient network for employees and customers. Create further value in the business to improve financial stability and customer satisfaction, and increase operational efficiency. We will also strive to have our safest year yet, and continue to work with the UK Government on the future role of gas and increase the use of new technologies. |
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electricity consumers in New England and upstate New York.
Our Power Supply Agreement (PSA) with LIPA
of electricity we forecast, plan for and procure
3.6m consumers received services from our gas distribution networks including 24,341 new gas heating customers in 2015/16. | I believe there’s something special about living, working, and playing in the communities we serve. We have approximately 15,000 employees serving the energy needs of more than seven million customers in our service territories in Massachusetts, New York and Rhode Island. Our shared sense of community has taught us that today’s customer is savvy, forward-thinking, and deeply mindful of the environment. We all want the same thing – to keep our communities healthy and prosperous. Together we can do it by working to solve what I believe is the greatest challenge of our time – climate change – while delivering innovation and economic development. This makes our next steps as an energy provider straightforward: we need to make sure our energy becomes cleaner, more efficient, resilient and reliable, and with more customer choices. We’ve promised to meet the energy needs of our customers in New England and New York. Let me tell you how we’ve done that over the past year, and what we have planned for the future.
Our energy is becoming cleaner. All three of the states we serve have established goals of 80% reductions in emissions economy-wide versus 1990 levels by 2050. These states have already made progress toward their targets, but almost all emission reductions have come from cleaning up power generation. We are also committed to working towards a decarbonised energy network by 2050. It’s why we advocate for a balanced solution that includes renewables, energy efficiency, and increasing gas transmission. | We are taking the lead on innovating ways to make solar connections easier and more affordable. We support the Deepwater Wind project off the coast of Block Island, the first offshore wind project in the US. We are also proponents of the Maine Green Line, which would use a submarine cable to transmit wind power from northern Maine to Massachusetts, supplemented by imports of hydropower from Canada. In both New England and New York, we are In 2015, we received a number of accolades: ACEEE scored all three states in which we operate in the top 10 in energy efficiency; we are number five in the nation for solar megawatts installed per customer (according to the Solar Electric Power Association); and we were named the number one green utility in the US according to Newsweek’s ‘Top Green Companies in the World 2015’. Looking forward Connect21 remains our strategy to build and operate a better energy distribution network for the 21st century digital economy. Also gas forms a bridge that will help take us to a decarbonised future. It supports our intent to bring on more intermittent renewable energy generation until reliable large-scale energy storage technologies become available. While aggressive, our strategy establishes a platform for a decarbonised energy supply chain without economic disruption in local communities. | |||||||||
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“We filed three rate | |||
What we do and where we do it
Electricity
We jointly own and operate transmission facilities across upstate New York, Massachusetts, New Hampshire, Rhode Island and Vermont. We own and operate electricity distribution networks in upstate New York, Massachusetts and Rhode Island.
Gas
We own and operate gas distribution networks across the northeastern US, located in upstate New York, New York City, Long Island, Massachusetts and Rhode Island.
What we’ve achieved during 2015/16
Safety
Our safety performance continues to improve. Through to March 2016 we’ve seen a 9% reduction in the number of injuries requiring medical attention and a 26% reduction in the number of injuries requiring employees to be out of work. We believe these improvements are the result of our safety plans, aimed at reducing key risks and preventing incidents, along with enhanced and targeted communications on lessons learned and intended to prevent reoccurrence.
During 2016/17, we will continue to build on safety plans with a significant focus on the prevention of soft tissue injuries, slips/trips/ falls, and road traffic collisions.
Rate cases
We filed three rate cases in 2015 – one in Massachusetts and two in downstate New York.
In Massachusetts, we proposed to set new electricity distribution rates that will allow us to continue investing in our electricity infrastructure and improving service to our 1.3 million electricity customers. This submission covers only the distribution rates, found in the delivery portion of National Grid’s electricity bills. This is the cost of delivering electricity to our customers and includes costs such as poles, wires, utility trucks, customer computer systems and taxes – all the costs to operate our business.
In New York, we proposed to update and reset our gas delivery rates that will allow us to continue investing in our natural gas networks and improving service to our 1.8 million gas customers in Brooklyn, Queens and Staten Island and Long Island/Rockaway Peninsula.
These proposals will let us:
| ● | modernise and enhance the safety, reliability and resilience of our gas infrastructure; |
| ● | upgrade our gas network to deliver economic and environmental benefits; |
| ● | extend our gas expansion programme and add more gas heating customers each year; |
| ● | improve customer service capabilities; and |
| ● | deliver economic development funding and promote STEM education programmes. |
These three proposals are undergoing a thorough review process by our regulators in each state. If approved, new charges will take effect from 1 October 2016 in Massachusetts and 1 January 2017 in New York.
Additionally, the New York Public Service Commission (PSC) will soon decide on two important items related to Niagara Mohawk. In December 2015, we filed a capex petition for Niagara Mohawk, which builds upon similar successful interim capex filings done for KEDNY and KEDLI in the past, and seeks to provide funding for $1.4bn of capex across FY17 and FY18. This ‘extension filing’ should allow us to use deferral account money, so that customer rates do not increase until we make our next full rate filing. Secondly, we are also waiting for approval for our Niagara Mohawk’s financing plans, which will enable us to fund future construction and meet the mandatory redemptions. The petitions also afforded us with an opportunity to replace higher cost debt when economic to do so.
New Energy Solutions
In July, we announced the creation of our New Energy Solutions (NES) team. This team is focusing on driving cleaner energy, improving efficiency, affordability, and choice for customers. The goal of NES is to deliver state-mandated initiatives such as New York State’s Reforming the Energy Vision (REV) and Grid Modernization (GridMod) in Massachusetts. It is also driving other innovative energy initiatives, like large-scale solar, electric vehicles, and battery storage.
Our jurisdictions
Each of our jurisdictions has projects under way to develop economic and environmental health in three ways: by driving economic growth; providing cleaner energy; and advancing innovative technologies. The following highlights some of our 2015/16 achievments.
Massachusetts
Year one of a two-year smart energy solutions smart grid pilot achieved a 98% retention rate from the original 15,000 customers who started in the pilot, a 72% customer satisfaction rate, and for active participants, an average energy saving of $100 or more.
Earlier this year, we submitted a proposal for a two-pipeline solution to address natural gas constraints in New England that included contracts with Access Northeast and the Northeast Energy Direct gas pipeline project. MADPU began a review of those proposals.
In April, Kinder Morgan decided not to move forward with Northeast Energy Direct. We have begun work to identify alternative solutions that can help meet the needs of our current and future gas customers.
The project was part of a two-pipeline solution intended to provide additional gas delivery capacity into the region for electricity generators. So, to stabilise electricity supply prices for our customers, Spectra’s proposed Access Northeast project now becomes increasingly critical for the region.
Customers have been subjected to billions of dollars in electricity price increases over the last three winters. Supply prices are market-driven and are largely due to the increased demand for natural gas. An increase in supply capacity will help meet demand and lower prices for our customers.
We installed 28 miles of new gas mains, replaced 150 miles of gas mains, and added more than 6,900 new natural gas customers.
New York
In December 2015, we energised the Five Mile Road substation in rural Cattaraugus County, south of Buffalo. The $51.7 million project was several years in the making, and brings increased reliability and capability to the Company’s bulk power transmission network across the southwest portion of New York state. It also involved upgrades to existing transmission circuits in the region.
We opened a new gas control centre on Long Island. This monitors and controls the gas system in our downstate and upstate regions. It also houses the Academy, a centre for technical and management training. High school students are welcome here through
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our Engineering Pipeline Program, to explore engineering safety, natural gas operations, electric power systems and smart grid technologies. We awarded our two largest energy efficiency grants since our energy efficiency incentive programme began in 2009. With a $1.8 million incentive, Finch Paper in Glens Falls, New York purchased new equipment to remove bark and chip wood, reduce its energy use, yield more fibre, and secure a long-term supply of eight-foot logs, the company’s primary raw material. Quad Graphics in Saratoga Springs, New York used a $1.1 million grant to install a more efficient printing press that has increased production by more than 60%. We continue to invest more in replacing gas mains. The NYPSC approved $414 million gas infrastructure investment in Long Island to speed up the replacement of ageing pipe and extend the use of natural gas to more customers. We added more than 15,600 new gas customers. Rhode Island As part of our sea2shore project, we’ve begun installing an underwater 34.5 kV cable in preparation for Deepwater Wind, the nation’s first offshore wind farm. The approximate 20-mile underwater cable will link Deepwater’s five turbine project off Block Island to the mainland power grid. The 30 MW wind farm has the capacity to generate enough power for 17,000 homes and will also include a fibreoptic line, bringing high-speed internet service to Block Island for the first time. The wind farm is expected to start operating this autumn. We added seven miles of new gas mains, replaced 50 miles of gas mains, and added more than 1,800 new natural gas customers. FERC Partnering with Eversource, we completed the interstate reliability project, completing the New England East West Solution – a suite of projects designed to strengthen the reliability of the regional power grid. Our costs for the project, $267.6 million, include station upgrades and the installation of a 75-mile, 345 kV transmission line along rights-of-way in Connecticut, Massachusetts and Rhode Island. |  | ||||||
Along with three other leading energy companies, we announced in January 2016, a proposal – The Wind and Hydro Response – to deliver 400 MW of reliable, cost-effective clean energy to New England. The Wind and Hydro Response is our answer to a request for clean energy solutions that was issued jointly by state agencies and electricity distribution companies (including National Grid) in Massachusetts, Rhode Island and Connecticut. Priorities for the year ahead Our Connect21 journey continues to evolve with these three priorities for 2016/17: Performance excellence, customer value, and future customer expectations. Performance excellence: Continue our safety compliance and performance excellence journey. Drive new ways of working, including performance excellence, compliance improvement programmes, and safety plans. Customer value: Maximise and communicate customer value. Deliver tangible value to customers as identified and measured by our service-level agreements. Future customer expectations: Anticipate future customer needs and transform our customer experience. Leverage jurisdictional model, digital customer experience, Connect21 platform, New Energy Solutions, and REV/Grid Mod filings. | Solar initiative in Massachusetts Our Solar Phase II initiative installs large solar systems on sites we believe will bring the most benefit to the electric distribution system, regardless of the construction challenges it may pose. Approved by MADPU in 2014, the initiative allows us to install up to 20 MW of utility-owned solar capacity. During 2015/16 we partnered with local solar developers and municipalities to secure 18 sites in 12 municipalities across Massachusetts for projects ranging from 650 kW to 1 MW. So far, we have In focus Connect21 Connect21 is our
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In focus 31% Approximate percentage of UK gas from LNG imports, up from 27% in 2014.
LNG ship reloading During 2015/16, we completed our first LNG ship reload where more than 157,000m3 of LNG, at around -158°C, was transferred onto another ship for onward transport. The reload process, coupled with the storage capability available at Grain, provides greater flexibility for customers.
Creating potential for new homes In April 2015 we sold our site at Leeside Road, Tottenham to the London Borough of Enfield. The 17 acre site has potential for 840 homes. We dismantled two gas holders before the sale, using clay from the London Power Tunnels project to fill in the holder bases. In the same month we sold our 90 acre site at Ebbsfleet Green to Redrow homes. The site has potential for 950 homes and forms part of the wider garden city proposal championed by Chancellor of the Exchequer George Osborne. | ||||||||||
Interconnectors The England-France interconnector (IFA) is a 2,000 MW HVDC link between the French and British transmission systems with ownership shared between National Grid and Réseau de Transport d’Electricité
In July 2015, we launched a new process that gives customers vital information before an outage, meaning they are more able to accurately react and adjust their market position – improving the service they receive from IFA. BritNed is a joint venture between National Grid and TenneT, the Dutch transmission system operator. It Following Board approval for the Belgium (Nemo Link) and Norway (North Sea Link) interconnectors in 2015, construction is now under way for both projects. Nemo Link, developed between National Grid Interconnector Holdings Ltd and Elia, the Belgium transmission system operator, will connect Richborough in the UK and Herdersbrug in Belgium. The subsea cable will be 130 kilometres in length and have the
North Sea Link (NSL) will connect Blyth in the UK and Kvilldal in Norway. Developed between National Grid and Statnett, the Norwegian transmission system operator, at 720 kilometres, NSL will be the world’s longest subsea cable and will have a capacity of 1.4 GW. NSL is expected to be operational in 2021. Grain LNG Grain LNG is one of three LNG importation facilities in the UK. It operates under long-term contracts with customers and provides importation services of ship berthing, temporary storage and re-gasification into the national transmission system. Our road tanker loading facility was commissioned in November 2015. The new loading hub offers a more environmentally-friendly alternative fuel and allows road tanker operators to load and transport LNG in bulk. | Metering National Grid Metering (NGM) provides installation and maintenance services to energy suppliers in the regulated market in Great Britain. It maintains an asset base of around
| UK Property National Grid Property is responsible During
Xoserve Xoserve delivers transactional services on behalf of all the major gas network transportation companies in Great Britain, including National Grid. Xoserve is jointly owned by National Grid, as majority shareholder, and the other gas distribution network companies. Xoserve celebrated its 10 year anniversary as a company on 1 May 2015.
US non-regulated businesses Some of our US businesses are not subject to state or federal rate-making authority. These include interests in some of our LNG road transportation, some gas transmission pipelines (our minority equity interests in these are not regulated) and certain commercial services relating to solar installations, fuel cells and other new
Corporate activities Corporate activities comprise central overheads, Group insurance and expenditure incurred on business development. |
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If we are to achieve our strategic objectives, we need to make sure
our employees have the right skills and capabilities.
Safeguarding the future
We remain committed to helping address the significant skills challenge facing the engineering profession in both the UK and US.
In the UK, engineering companies are projected to need 182,000 people with engineering skills each year until 2022, according to the 2016 Engineering UK Report – yet the estimated shortfall is 69,000 annually.
A particular concern has been the low number of young women interested in engineering. Our initiatives include our residential work experience week, which in 2015 extended to around 100 young people, balanced 50/50 between girls and boys. 99% of the students said that the experience increased their interest in engineering, while 69% of the female students said that it persuaded them to follow a career in the energy industry.
We are helping schools, parents and children see engineering as a modern, dynamic, desirable career with a great future. Our employees act as education ambassadors who volunteer their time for a range of activities in the classroom and at science and engineering fairs, most notably on STEM enrichment, careers education and our work experience programmes.
In the US, we completed the sixth year of our National Grid Engineering Pipeline Program, designed to inspire high school students to pursue an engineering education and career. To date, 258 promising students have participated in the programme.
We promoted STEM education and careers to more than 300 middle and high school students during our Engineering our Future initiative. We also partner with seven local community colleges to deliver programmes designed to produce future electric line workers.
We have begun a partnership with the State University of New York to develop a Natural Gas Technician Certificate Program, designed to address future hiring needs for our gas operations.
We are continuing our partnership with the Center for Energy Workforce Development on its ‘energy industry fundamentals’.
Our US work experience opportunities include summer internships. Some interns start their journey into the energy industry through our Engineering Our Future programme and go on to join our Company through our graduate development programme.
We also offer summer internships in the UK, as well as 12 month industrial placements to undergraduates in their penultimate year. These programmes offer students the opportunity to experience our Company before deciding to join the organisation as graduates.
Building skills and expertise
Providing high-quality development opportunities for our employees is essential for us to construct, maintain and operate our electricity and gas networks safely and reliably. This year, our Academy has delivered 154,025 days of technical, safety, leadership and personal effectiveness training across our global workforce.
In January 2016, we inducted 75 high-potential employees onto our accelerated development programme; designed to enhance our leadership succession planning.
We have also developed our performance leadership programme, designed to help strengthen our performance leadership capability for leaders who manage functions or organisations.
Promoting an inclusive and diverse workforce
Our inclusion and diversity activities include attraction and recruitment, development, leadership, role modelling and cultural change.
A number of UK leaders were paired with mentors representing a range of diverse characteristics, allowing them to increase their knowledge of a particular area of diversity. Feedback was very positive and a further wave of the programme is planned.
In the US, we have continued to promote inclusiveness through programmes designed to raise awareness of unconscious bias and disability employment. Senior leaders have also shared personal experiences about inclusion through a series of videos.
We support 10 employee resource groups in the US, and six in the UK, that encompass inclusion and diversity. These groups are chaired by senior business leaders, so they can shape change within the business and the communities we serve, while providing professional development to the members.
In addition to our well-established Springboard and Spring Forward programmes for women, we are introducing a programme targeted at other under-represented groups – mainly ethnic minorities. We are also piloting a new online professional development platform for women and an initiative in the US is introducing more women into our field force.
Externally, we continue to be recognised as an employer of choice and work in partnership with a number of organisations that promote inclusion and diversity.
National Grid employees were named as the EY Young Energy Professional of the year 2015; a finalist in the Black British business awards; and one of six women profiled in the EY Women in Power and Energy Index 2015.
At the end of 2015, we were one of the first FTSE organisations to publish UK gender pay data.
In the UK, we have signed up to the Living Wage Foundation. We have committed to making sure our employees and those of our new suppliers are paid at least the Living Wage and have also pledged to take this further than the accreditation requires, including a commitment that our apprentices, interns and graduates at National Grid are also paid at least the Living Wage.
| 44 | National Grid Annual Report and Accounts 2015/16 | Strategic Report |
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In focus 1.8m Number of engineers, technicians and crafts people needed in the UK over the period 2012–2022. 7 Number of US local community colleges with whom we partner to deliver utility technology training programmes. KPIs pages 18–21 Board diversity page 62
EmployAbility In the UK, the EmployAbility programme targeted at young people with special needs is a notable example of the work done by our employee resource groups. The programme has now expanded to offer work experience internships at a number of our sites, and has garnered public recognition for its innovation and impact. Our US business has now launched its own pilot of the EmployAbility programme.
Troops to energy jobs We work with veterans through the US troops to energy jobs programme, designed to help veterans make the transition from military service to the energy industry. Through our role with the US Joining Forces initiative, launched by the White House, we are aiming for 10% of our new hires to come from veterans over the next 10 years. |
“Our UK employees raised
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The table below shows the breakdown by gender at different levels of the organisation. We have included information relating to subsidiary directors, as this is required by the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013. We define ‘senior management’ as those managers who are at the same level, or one level below, our Executive Committee. It also includes those who are directors of subsidiaries, or who have responsibility for planning, directing or controlling the activities of the Company, or a strategically significant part of the Company, and are employees of the Company.
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Our Board | 8 | 3 | 11 | 72.7 | 27.3 | |||||||||||||||
Senior management | 189 | 63 | 252 | 75 | 25 | |||||||||||||||
Whole Company* | 19,177 | 5,891 | 25,068 | 76.5 | 23.5 | |||||||||||||||
| * | This measure is also one of our Company KPIs. See page 20 for more information. |
Health and wellbeing
During 2015/16 we have continued to raise awareness of mental wellbeing across our UK business.
We have a leading role in the Business in the Community Workwell campaign that is focusing on mental wellbeing in the workplace, and also an alumni network supporting the Time to Change campaign.
More than 670 of our employees have pledged to support this campaign, and others have shared their personal stories, encouraging colleagues to talk about mental health. During 2015/16, we have trained more than 250 employees on mental health first aid.
Initiatives designed to improve employees’ understanding of good nutrition have included a nutritional challenge. Our wellbeing kiosks were used more than 16,000 times by our employees during 2015/16, recording data such as blood pressure and weight.
In the US, our focus on soft tissue injury prevention included a sports therapy initiative. Our educational programmes focused on diseases such as diabetes and cancer.
Our employee engagement survey results continue to show that employees have a good awareness of our wellbeing programmes.
Volunteering
Our employees continue to share their skills, time and expertise through skills-based volunteering and fundraising activities.
In the UK, employees provided more than 14,000 hours of support to community projects. They participated in a number of fundraising activities to help our employee chosen charity partnership with Macmillan Cancer Support reach its fundraising target. Their efforts helped us exceed our target, raising more than £600,000, which provided 3,121 emergency fuel grants to people affected by cancer. We also raised more than £17,000 for Special Olympics Great Britain by organising a summer games event and supported the organisation’s Athletes Leadership Programme.
In the US, our Power to Serve employee volunteering programme supports our stewardship and safety principles. It seeks to acknowledge existing community service, as well as to create new volunteer opportunities for employees.
Human rights
National Grid does not have a specific policy relating to human rights, but respect for human rights is incorporated into our employment practices and our values, which include respecting others and valuing diversity. See page 194 for more information.
| National Grid Annual Report and Accounts | Our people | 45 |
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In the US, we have focused on boosting membership and awareness of our Employee Resource Groups, which have measurable goals that are in line with our vision and Elevate 2015 ambitions.
These groups aim to build awareness and understanding of inclusion and diversity throughout the organisation. Their activities include programmes designed to build skills that help manage differences.
The table below shows the breakdown by gender at different levels of the organisation. We have included information relating to subsidiary directors, as this is required by the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013. We define ‘senior management’ as those managers who are at levels Executive –1 and Executive –2, as well as those who are directors of subsidiaries or who have responsibility for planning, directing or controlling the activities of the Company, or a strategically significant part of the Company, and are employees of the Company.
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Human rights National Grid does not have a specific policy relating to human rights, but respect for human rights is incorporated into our employment practices and our values, which include respecting others and valuing diversity.
‘Doing the Right Thing’ is our guide to ethical business conduct. The way in which we conduct ourselves allows us to build trust with the people we work with. We earn this trust by doing things in the right way, building our reputation as an ethical company that our stakeholders want to do business with, and that our employees want to work for.
Our procurement policies integrate sustainability into the way we do business throughout our supply chain, so that we create value, preserve natural resources and respect the interests of the communities we serve and from which we procure goods and services. Additionally, through our supplier code of conduct, we expect our suppliers to keep to all laws relating to their business, as well as the principles of the United Nations Global Compact, the United Nations Declaration of Human Rights and the International Labour Organization (ILO). |
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| This has been an interesting and exciting year for the Company and the Board, with the Board agenda focusing on some significant topics. External influences on the Board agenda included cyber security, the future of the System Operator, political developments and how the referendum on continued UK membership of the EU will affect the Company. The Board has also been spending time on the Company’s strategy for the short and long term, the Group’s principal risks and risk appetite, US rate case filings and the proposed sale of our UK Gas Distribution business, all of which are referenced in more detail later in this report. | ||||||||
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This year we appointed Independent Audit to undertake a formal and rigorous externally facilitated Board and committee evaluation. With the recent changes to the Code we thought it would be appropriate for the evaluation to focus on risk. Independent Audit concluded that the Board was working well and that it benefits from a good mix of experience from both the UK and US. They noted there was a good balance between strategic, operational and regulatory matters, with good engagement supported by thorough work by management. They made a number of recommendations in relation to risk, principally focused on cascading risk management further down the business. The results of the evaluation were presented to the Board in April, and a number of recommendations to take forward were considered by the Board in May. We will be monitoring the outcome during the year and will report on progress in next year’s Annual Report and Accounts. You can find more information about the evaluation on pages 52 and 53.
Cyber security
During the year, the Board considered the threats we face and the effectiveness of our cyber security strategy to mitigate the inherent risks. In June 2015, the Board received an in-depth presentation so it could gain a comprehensive overview of the Company’s long-term strategy on this issue. The focus was on establishing guiding principles for cyber security, deciding what questions the Board should be asking of the cyber security team and the development of a new cyber programme. This will improve the existing programme and help enhance the level of security to protect the business and to keep pace with the increasing scale and sophistication of threats. The Board will be receiving cyber security training and additional updates later in the year.
Board changes
As previously announced, Steve Holliday retired as Chief Executive on 31 March 2016, and will step down from the Board on 22 July 2016. He was succeeded as Chief Executive by John Pettigrew. Steve will leave National Grid after nearly a decade as Chief Executive and 15 years on the Board. Following John’s appointment, we will also welcome Nicola Shaw on to the Board as Executive Director, UK from 1 July 2016.
In my role as Chairman, I am responsible for making sure the Board operates effectively, by promoting effective relationships and open communication between Directors. This is particularly important as the membership of the Board changes and new relationships are formed. Maintaining and promoting a culture of openness and debate and making sure the Board work together as a team are also important aspects considered during an appointment process.
The Nominations Committee oversaw the rigorous selection process in the search for Steve’s successor and for our new Executive Director, UK. You can read more about this on page 61. These appointments were key to the Board and the fit with the current membership and how the individuals combine to add value was an important consideration in the decision-making process.
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Key A Audit Committee F Finance Committee N Nominations Committee R Remuneration Committee S Safety, Environment and Health Committee (ch) Chairman of committee ^ Including National Grid Group plc Tenure as at 31 March 2016 Charts and committee membership are as at 18 May 2016 |
Sir Peter Gershon CBE FREng (69) ChairmanN (ch) Appointed: 1 August 2011 as Deputy Chairman and became Chairman with effect from 1 January 2012 Tenure: 4 years Career:Sir Peter is a Fellow of the Royal Academy of Engineering and has held a number of senior positions across multiple industries. His previous appointments include Chief Executive of the Office of Government Commerce, Managing Director of Marconi Electronic Systems and a member of the UK Defence Academy Advisory Board. Sir Peter is currently Chairman of Tate & Lyle plc and a Non-executive Chairman of the Aircraft Carrier Alliance Management Board and most recently a Trustee of The Sutton Trust Board. Skills and experience: Sir Peter has significant board level experience gained across multiple industries, with considerable experience in Government through previous roles. He also has significant experience of general management both in the city and internationally and brings to the Board an in-depth understanding of the high-tech industry. |
John Pettigrew FEI, FIET (47) Chief ExecutiveF Appointed: 1 April 2014 and became Chief Executive with effect from 1 April 2016 Tenure: 2 years Career: A Fellow of the Energy Institute and of the Institution of Energy and Technology, John joined the Company in 1991 and has over 25 years of experience at National Grid in a variety of senior management roles. John’s previous appointments include Director of Engineering from 2003, Chief Operating Officer and Executive Vice President for the US Electricity Distribution & Generation business between 2007 and 2010, Chief Operating Officer for UK Gas Distribution between 2010 and 2012, and UK Chief Operating Officer from 2012 to 2014. John was appointed to the role of Chief Executive on 1 April 2016. Skills and experience: Through his wide variety of roles in the UK and US businesses John has extensive knowledge of the Company as well as the engineering and utilities industries as a whole. He has anin-depth understanding of the Government and regulatory landscape. |
Steve Holliday FREng (59) Executive Director Appointed:National Grid Group plc on 30 March 2001, to the Board in October 2002 and as Chief Executive from January 2007 through to 31 March 2016 Tenure:15 years^ Career: A Fellow of the Royal Academy of Engineering, Steve was an Executive Director at British Borneo Oil and Gas before joining National Grid in 2001. Most recently Steve was Chairman of the UK Business Council for Sustainable Energy, a Prince’s National Ambassador and Non-executive Director of Marks and Spencer Group plc. Steve is currently Chairman of Crisis UK and of the Energy, and Efficiency Industrial Partnership, Vice Chairman for Business in the Community and of The Careers and Enterprise Company and Lead Non-executive Director and Board member for the Department for Energy, Food and Rural Affairs (DEFRA). Skills and experience: Steve has significant knowledge and experience of the energy and utilities industries in the UK and internationally. He has considerable board level, Government and regulatory experience. | |||||||
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Group General Counsel & Company Secretary Appointed:24 January 2013 Career: Alison has undertaken several roles since joining National Grid in 1996 including UK General Counsel and Company Secretary from 2000 to 2008 and Commercial Director, UK Transmission from 2008 to 2012. Before joining National Grid she was a Skills and | |||||||||
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Key A Audit Committee F Finance Committee N Nominations Committee R Remuneration Committee S Safety, Environment and Health Committee (ch) Chairman of committee ^ Including National Grid Group plc Tenure as at 31 March 2016 Charts and Committee membership are as at 18 May 2016 Board gender
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Nora Mead Brownell (69) Non-executive DirectorN, R, S Independent Appointed: 1 June 2012 Tenure: 3 years Career:A key individual in the US energy industry, Nora has significant experience gained in a variety of roles including Commissioner of the Pennsylvania Public Utility Commission and the Federal Energy Regulatory Commission (FERC) and former President of the National Association of Regulatory Utility Commissioners. Most recently, Nora sat on the Boards of ONCOR Electric Delivery Holding Company LLC and Comverge, Inc. Nora is currently a member of the Board of Spectra Energy Partners LP, Direct Energy Advisory Board and the Advisory Board of Morgan Stanley Infrastructure Partners as well as a partner in ESPY Energy Solutions, LLC. Skills and experience: Through herNon-executive directorships, Nora brings extensive experience in US Government and regulation and has significant expertise in the US utilities industry in particular through her role as a Commissioner with FERC. |
Jonathan Dawson (64) Non-executive DirectorF, N, R, (ch) Independent Appointed: 4 March 2013 Tenure:3 years Career: Jonathan started his career in the Ministry of Defence before moving to Lazard where he spent more than 20 years. He was a Non-executive Director of Galliford Try plc, National Australia Group Europe Limited and Standard Life Investments (Holdings) Limited. Most recently he was Chairman of the Remuneration Committee, Non-executive and Senior Independent Director of Next plc until May 2015. Jonathan is currently aNon-executive Director of Jardine Lloyd Thompson Group plc and Chairman and a founding partner of Penfida Limited. Skills and experience:Jonathan has a wide range of city experience with a significant and in-depth understanding of the corporate finance, pensions and banking industries. |
Therese Esperdy (55) Non-executive DirectorA, F, (ch), N Independent Appointed: 18 March 2014, and appointed to the Board of National Grid USA from 1 May 2015 Tenure: 2 years Career: Having started her banking career at Lehman Brothers, Therese joined Chase Securities in 1997 and then held a variety of senior roles at JP Morgan Chase & Co. These included appointments as Head of US Debt Capital Markets and Global Head of Debt Capital Markets, co-head of Banking, Asia Pacific and Global Chairman of the Financial Institutions Group. Skills and experience: Therese has significant experience in city, corporate finance and banking through her previous appointments. She also has a wide range of international experience having worked in a number of international markets. | |||
Paul Golby CBE FREng (65) Non-executive DirectorA, N, R, S, (ch) Independent Appointed: 1 February 2012 Tenure: 4 years Career:A fellow of the Royal Academy of Engineering, Paul has held a variety of roles within the energy and utilities industries. Paul was an Executive Director of Clayhithe plc, before later joining E.ON UK plc where he was Chief Executive and later Chairman. He was also a Non-executive Chairman of AEA Technology Group plc. Paul is currently the Chairman of EngineeringUK, the UK National Air Traffic System, the Engineering and Physical Sciences Research Council and a member of the Council for Science and Technology. Most recently, Paul was appointed as Chairman of Costain Group plc on 5 May 2016. Skills and experience:Paul has experience in energy utilities, Government and regulatory industries. Paul also has a wide range of board level experience gained through his Chief Executive and Chairman appointments. |
Ruth Kelly (48) Non-executive DirectorA, F, N Independent Appointed: 1 October 2011 Tenure:4 years Career: Ruth began her career in Government where she held various senior roles, including Secretary of State for Transport, for Communities and Local Government, for Education and Skills as well as Financial Secretary to the Treasury. She was also a senior executive at HSBC until August 2015. Ruth is currently appointed as Governor for the National Institute of Economic and Social Research and Pro Vice Chancellor at St Mary’s University; she has also been a Non-executive Director on the Financial Conduct Authority Board since April 2016. Skills and experience: Ruth brings in-depth knowledge of Government and regulatory practice; she also has experience in banking and corporate finance. |
Mark Williamson (58) Non-executive Director and Senior Independent DirectorA, (ch), N, R Independent Appointed: 3 September 2012 Tenure: 3 years Career: A qualified accountant with significant financial experience, Mark was Chief Accountant and then Group Financial Controller of Simon Group plc before joining International Power plc as Group Financial Controller and later as Chief Financial Officer. Mark was a Non-executive Director at Alent plc where he was Chairman of the Audit Committee and Senior Independent Director. Mark is currently the Chairman of Imperial Brands PLC. Skills and experience: Mark has extensive city, international accounting and finance experience in addition to senior and board level experience across multiple industries. Mark’s experience in energy utilities amongst other industries has provided a good understanding of Government and regulatory matters. |
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The successful delivery of our strategy depends upon attracting and retaining the right talent. This starts with having a high-quality Board. Balance is an important requirement for the composition of the Board, not only in terms of the number of Executive and Non-executive Directors, but also in terms of expertise, diversity and backgrounds.
While traditional diversity criteria such as gender and ethnicity are important, we also value diversity of skills, experience, knowledge and thinking styles. You can read about our Board diversity policy in the Nominations Committee report on page 61.
This year we said goodbye to Steve Holliday as Chief Executive and welcomed John Pettigrew as his successor. We will also be welcoming Nicola Shaw onto the Board as Executive Director, UK, from 1 July 2016. Apart from the appointment of Dean Seavers on 1 April 2015, as noted in last year’s Annual Report and Accounts, there have been no other changes to the Board composition that have come into effect during the financial year. We continue to look forward, with succession planning being an important focus for the Nominations Committee and the Board.
The Board delegates authority to its Board committees to carry out certain tasks on its behalf, so that it can operate efficiently and give the right level of attention and consideration to relevant matters.
The committee structure, reporting and communication lines are set out in the diagram below and the role and responsibilities of the committees are set out in their respective terms of reference, available on our website. Committee agendas and schedules of items to be discussed at future meetings are prepared in accordance with the terms of reference of each committee and take account of other topical and ad-hoc matters.
In addition to the vertical lines of reporting, the committees communicate and work together where required. For example, during the appointment process for John Pettigrew the Remuneration Committee worked closely with the Nominations Committee.
At Board committee meetings, items are discussed and, as appropriate, endorsed, approved or recommended to the Board, by the committee. Following Board committee meetings, the chairman of each committee provides the Board with a summary of the main decisions and discussion points so the non-committee members are kept up to date with the work undertaken by each Board committee.
Below the Board committees are a number of management committees, including the Executive Committee. You can read more about some of the management committees, including the membership and operation of the Executive Committee, on page 63.
Reports from each of the Board committees together with details of their activities during the year are set out on the following pages.
Board and committee interactions
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National Grid Annual Report and Accounts 2015/16 | Corporate Governance | 49 |
Corporate Governancecontinued
Looking back. Examples of Board focus during the year included:
Areas of focus | Commentary | |||
| Cyber security | The Board is responsible for overseeing cyber security, and this year the Board has seen an increase in their focus on this issue. As mentioned in the Chairman’s letter, the cyber security team provided the Board with a detailed overview in relation to cyber security, so that the Board had increased visibility and understanding of the Company’s long-term strategy on cyber security. | The focus was on the guiding principles and on determining what questions the Board should be asking of the cyber security team. The Board’s discussions concluded that they needed to have greater visibility of cyber security and there should be training for the Board members in dealing with cyber security risks. | ||
| Proposed majority sale of the UK Gas Distribution business | The Board regularly reviews the composition of the Company’s portfolio. As part of this review the Board received a strategy briefing in September, outlining the proposed commencement of a process for the potential sale of a majority stake in the UK Gas Distribution business. | The discussion included: various transaction options; detailed financial impacts; significant challenges to be addressed; the communication strategy; return of proceeds to shareholders and the future dividend policy; and the transaction timeline. Following discussion and challenge on a number of issues, the Board unanimously agreed to the commencement of the sale process. The Board has been kept up to date on progress. | ||
| Principal risks and viability | The risk team provided updates on the UK Corporate Governance Code 2014 requirement for the Company to produce a viability statement. Discussions at Board meetings included: a review of the Company’s principal risks; the viability statement period; the management and | mitigation of the principal risks; and how we would test the impact of the risks on the Company, including through the use of scenario planning. In May 2016, the Audit Committee recommended the viability statement to the Board which was approved. | ||
| US regulatory rate case filings | In April 2015, the Board received an update on work being undertaken by the US finance and regulatory groups for the preparation of the Company’s first rate case filings since 2012. During the year the Board received regular progress reports on the rate case filings for our downstate New York gas companies, KEDNY and KEDLI, and also Massachusetts Electric. An overview of each filing was received by the Board before they were submitted, | including a term sheet outlining the key metrics of each submission. An extension request for the rate case filing in Niagara Mohawk was also seen by the Board before filing. This extension proposed electricity and natural gas delivery prices for customers being frozen at current levels through to March 2018 while allowing the Company to increase investments to enhance its gas and electricity systems. | ||
| European energy and the politics of energy | The Board received an update on important UK and EU political developments prior to the UK General Election in May 2015. Following the General Election, the Board received a paper on the potential implications for the Company and an engagement plan. The Board was also | kept up to date on the referendum on the continued UK membership of the EU and the potential effects of exiting Europe, including on the development of interconnector projects and on our continuing involvement and benefits of being in the Integrated Energy Market. | ||
| The future of the System Operator | The future of the SO has been considered previously by the Board and was reviewed again in detail in September 2015. In particular, Ofgem’s Integrated Transmission Planning and Regulation (ITPR) project and emerging DECC thinking on the possible creation | of a ‘super System Operator’ were developments the Board considered. Additional updates on progress were provided in January, March and April 2016 when the Board received updates on future option modelling following discussions with Government. | ||
| UK onshore competition | In addition to defining our role on the future of the SO, the Board has recently discussed the Company’s position on where consenting activity to support competitively tendered onshore transmission should be undertaken. In conclusion, the Company’s view was that competition should only be taken forward where it was in the interests of consumers. | In March 2016, the Board discussed specific questions posed by Ofgem in relation to the Company’s position on onshore competition and discussed working with Ofgem to explore an enduring consenting solution, taking into account shareholder and consumer benefits. | ||
| Strategy sessions | In addition to time allocated during the year at Board meetings, the Board participated in two interactive strategy sessions involving a combination of a full Board discussion and breakout groups. The Board’s focus was on the | state of the market in the UK and US, future opportunities for the Company including business development, merger and acquisition opportunities, and how the Company’s core capabilities could be used to best effect. | ||
| Site visits | In January 2016, the Non-executive Directors visited the Company’s UK cyber security operations centre, which provided an insight into its day-to-day operations and highlighted awareness of the direct security threats to the Company as they occur and are analysed 24 hours a day. Other visits by the Directors included safety site visits, including a visit to Power Plant Operations to celebrate over 10 years of no accidents, a field visit in Brooklyn to one of our LNG trucking provider locations to see facilities | and meet management, and a site tour in Eakring. Another visit was to the Western Link project to review the Scotland/England interconnector and new sub-station. In September 2016, the Board members will be visiting our Buffalo, New York office which will include a site tour. These visits provide the opportunity for Directors to meet local management teams, discuss aspects of the business with employees, and gain insight into our day-to-day business. | ||
| 50 | National Grid Annual Report and Accounts 2015/16 | Corporate Governance |
Corporate Governance |
In focus
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meetings held with institutional and private investors during the year in 11 countries
Further detail on
www.investors.nationalgrid.com
Looking forward. The Board’s focus for next year is expected to include:
| ● | regular reviews of safety activities; |
| ● | updates on the UK Gas Distribution sale process; |
| ● | European energy update following the outcome of the UK’s EU referendum; |
| ● | UK and US operational business overviews; |
| ● | continued detailed review of strategy and financing; |
| ● | the outcome of US rate case filings; |
| ● | implications of the ITPR project on our activities; |
| ● | future options for the SO; |
| ● | cyber security updates and training; |
| ● | innovation; |
| ● | results and follow up on the action planning from the external Board and committee evaluation; |
| ● | the 2016 UK Winter Outlook; and |
| ● | results of the 2016 employee engagement survey. |
Directors’ induction programme
Following new appointments to the Board, the Chairman, Chief Executive and Group General Counsel & Company Secretary arrange a comprehensive induction programme. The programme is tailored based on experience and background and the requirements of the role.
John Pettigrew has been a Board member since April 2014. Following his succession to the role of Chief Executive he has been meeting external and internal stakeholders and external advisors and brokers as necessary. From 1 April 2016 John became a member of the Finance Committee and he will receive training and development as appropriate. He will also attend other committee meetings where appropriate. A tailored induction programme will be created for Nicola Shaw and monitored accordingly.
Director development and training
As our internal and external business environment changes, it is important to make sure that Directors’ skills and knowledge are refreshed and updated regularly. Our Chairman is responsible for the ongoing development of all Directors.
To strengthen the Directors’ knowledge and understanding of the Company, Board meetings regularly include updates and briefings on specific aspects of the Company’s activities, such as the development of our new cyber security programme and updates on the UK’s EU referendum. Updates on corporate governance and regulatory matters are also provided at Board meetings and there are training and development opportunities available for our Directors. Additionally, the Non-executive Directors are expected to visit at least one operational site annually.
We believe it is important to maintain effective channels of communication with our debt and equity institutional investors and individual shareholders. This helps us to understand their views about the Company and allows us to make sure they are provided with timely and appropriate information on our strategy, performance, objectives, financing and other developments.
Institutional investors
We carry out a comprehensive engagement programme for institutional investors and research analysts, providing the opportunity for our current and potential investors to meet with executive and operational management.
This includes:
| ● | meetings, presentations and webinars; |
| ● | attendance at investor conferences across the world; |
| ● | holding road shows in major investor centres, mainly in the UK, Europe and the US; and |
| ● | offering the opportunity for individual stewardship meetings. |
In the last year, our engagement programme has focused on clarifying our Group growth expectations. This included communicating the rationale behind our decision to commence the proposed sale of the majority stake in our UK Gas Distribution business, and explaining to investors how we expect the Company to continue to perform against its regulatory contracts in both the UK and US businesses.
In November, we arranged a meeting in London to provide institutional investors and research analysts with an opportunity to meet our US leadership team, led by Dean Seavers, and to understand more about the current performance of our US business and its outlook. A copy of the presentation and associated materials are available in the Investors section of our website.
The Board receives regular feedback on investor perceptions and opinions about the Company. Specialist advisors and the Director of Investor Relations provide updates on market sentiment.
Additionally, each year, the Board receives the results of an independent audit of investor perceptions. Interviews are carried out with investors to establish their views on the performance of the business and management. The findings and recommendations of the audit are then discussed by the Board.
Debt investors
Over the last year senior group treasury representatives have met debt investors in Europe, Canada and the US to discuss various topics such as our full-year results and upcoming US rate case filings.
We also communicated with our debt investors through regular announcements and the debt investor section of our website. This contains bond information, credit ratings and materials relating to the subsidiary year-end reports. The website also contains information about our long-term debt maturity profile, so investors can see our future refinancing needs.
Individual shareholders
Engagement with individual shareholders, who represent more than 95% of the total number of shareholders on our share register, is led by the Group General Counsel & Company Secretary.
Shareholders are invited to learn more about the Company through our shareholder networking programme. The programme includes visits to UK operational sites and presentations by senior managers and employees over two days. UK resident shareholders can apply to take part in this programme via the Investors section of our website.
For information on the 2016 Annual General Meeting, please see page 66.
| National Grid Annual Report and Accounts 2015/16 | Corporate Governance | 51 |
Corporate Governancecontinued
Board and committee membership and attendance
The table below sets out the Board and committee attendance during the year to 31 March 2016. Attendance is shown as the number of meetings attended out of the total number of meetings for the individual Director during the year.
If any Directors are unable to attend a meeting, they are encouraged to communicate their opinions and commentson the matters to be considered via the Chairman of the Board or the relevant committee chairman. Instances of non-attendance during the year were considered and determined as being reasonable in each case due to the individual circumstances. In relation to the Board meeting non-attendances, John Pettigrew and Steve Holliday were
precluded from attending the ad hoc Board meeting in November as it related to CEO succession and they were therefore both conflicted from attending. Dean Seavers was unable to attend a Board meeting due to personal reasons. Non-attendance at the Committee meeting was due to the short notice of the Nominations and Remuneration Committees ad hoc meetings and members having prior commitments, and also for personal reasons.
The Board has determined that Mark Williamson, Chairman of the Audit Committee, has recent and relevant financial experience; is a suitably qualified audit committee financial expert within the meaning of the SEC requirements; and is independent within the meaning of the New York Stock Exchange listing rules.
| Director | Board Meetings | Audit | Finance | Nominations | Remuneration | Safety, Environment & Health | ||||||||||||||||||
Sir Peter Gershon | 10 of 10 | – | – | 7 of 7 | – | – | ||||||||||||||||||
Steve Holliday1 | 9 of 10 | – | 3 of 4 | – | – | – | ||||||||||||||||||
John Pettigrew2 | 9 of 10 | – | – | – | – | – | ||||||||||||||||||
Andrew Bonfield | 10 of 10 | – | 4 of 4 | – | – | 4 of 4 | ||||||||||||||||||
Dean Seavers | 9 of 10 | – | – | – | – | – | ||||||||||||||||||
Nora Mead Brownell | 10 of 10 | – | – | 7 of 7 | 6 of 6 | 4 of 4 | ||||||||||||||||||
Jonathan Dawson | 10 of 10 | – | 4 of 4 | 7 of 7 | 6 of 6 | – | ||||||||||||||||||
Therese Esperdy | 10 of 10 | 5 of 5 | 4 of 4 | 7 of 7 | – | – | ||||||||||||||||||
Paul Golby | 10 of 10 | 5 of 5 | – | 7 of 7 | 5 of 6 | 4 of 4 | ||||||||||||||||||
Ruth Kelly | 10 of 10 | 5 of 5 | 4 of 4 | 6 of 7 | – | – | ||||||||||||||||||
Mark Williamson | 10 of 10 | 5 of 5 | – | 7 of 7 | 6 of 6 | – | ||||||||||||||||||
Attendance notes 1. Steve Holliday stepped down as Chief Executive with effect from 31 March 2016. 2. John Pettigrew became Chief Executive with effect from 1 April 2016.
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Board and committee evaluation
We are back to the first year of the Company’s three-year performance evaluation cycle. The last externally facilitated evaluation took place in 2012/13. In line with the Code, for the year 2015/16 we have undertaken a formal and rigorous externally facilitated Board effectiveness review. We appointed Independent Audit to undertake the evaluation. Independent Audit, which has no other connection to the Company, considered the Board and committees’ performance with a particular focus on risk.
The evaluation was conducted between November 2015 and April 2016 and included:
| ● | an initial planning meeting with the Chairman, Group General Counsel & Company Secretary and Independent Audit to agree the approach and expectations of the evaluation; |
| ● | one-to-one interviews based on the same set of questions conducted by Independent Audit with the Board members, Group General Counsel & Company Secretary, Head of Secretariat and other members of senior management who regularly interact with the Board and its committees; |
| ● | Independent Audit attending the Board meeting in January to observe behaviours and interactions; |
| ● | a review of the 2015 Board and committee papers and minutes, and a selection of other relevant governance documents to form a view of the effectiveness of the Board and its committees; |
| ● | the preparation of a report by Independent Audit which was initially shared with the Chairman and Group General Counsel & Company Secretary; and |
| ● | the presentation of results presented for discussion at the Board in April with the proposed recommendations presented in May. |
The effectiveness of each of the Board committees was taken into account in the evaluation. All committees received an update on the external evaluation and discussed any recommended actions. The evaluation identified a number of specific recommendations to take forward for the Audit and Nominations Committees. Independent Audit concluded that the Board was working well even though it had seen changes in membership over the past few years and thought the Board now benefitted from a good mix of experience in both the UK and US. The Board agenda demonstrated there was balance between strategic, operational and regulatory matters, with good engagement of the Board members supported by thorough work by management. They also made a number of recommendations in relation to risk, principally focused on cascading risk management further down the business.
Actions for 2016/17
Independent Audit concluded there were six main recommendations for further development. In May the Board discussed and agreed the following actions:
| ● | to give a renewed push to improve Board and committee papers, including the enforcement of standards of papers and timely submissions; |
| ● | to bring out strategic themes more clearly in the Board papers, pre-read papers and the Chief Executive’s report; |
| ● | the Chairman will discuss with the Non-executive Directors the strategy items on the draft agenda for the next following meeting and articulate the views from the Non-executive Directors as to what is required at the Board meeting including any questions that need answering; |
| ● | integrate risk more effectively into strategy development and planning; |
| ● | continue to consider the skills and capabilities needed on the Board for executing the Company’s future strategy; and |
| ● | to review whether there is enough focus on people on the Board agenda. |
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Board and committee evaluation cycle |
Individual performance As part of our annual evaluation process, Mark Williamson, as Senior Independent Director, led a review of the Chairman’s performance. The Non-executive Directors, with input from the Executive Directors, assessed his ability to fulfill his role as Chairman. It was concluded that the Chairman continued to show effective leadership of | the Board and his actions continued to influence the Board and the wider organisation. Mark Williamson discussed the feedback and development opportunities with the Chairman. Progress against actions from 2014/15 Progress against the actions from last year’s internally facilitated evaluation have been monitored by the Group General Counsel & Company Secretary and the Chairman throughout the year and an update on progress was provided at the April Board meeting. A commentary against each action from last year’s review is set out below. Last year an evaluation of committee performance was also conducted by the Chairman of each of the Board committees, following a similar process to that conducted by the Board. Where relevant, action plans were prepared for the committees and progress against the actions was monitored throughout the year. |
Update on actions from last year
| Area | Actions | Commentary | ||
Environment | Optimise the boardroom layout to create a more inclusive environment for members and presenters. Responsibility: Board members/ Group General Counsel & Company Secretary | For all meetings the Group General Counsel & Company Secretary makes sure the boardroom layout is appropriate to enable open discussion and promote an effective meeting. The Group General Counsel & Company Secretary also highlights any new presenters to the Board in the Chairman’s briefing material and the relevant Executive Director introduces the presenter to the meeting. | ||
Environment | Continue to create a more open boardroom atmosphere and culture. Responsibility: Chairman/ Board members | The Chairman manages the boardroom environment throughout meetings, encouraging open discussion on all matters and making sure all Board members are involved. A definite upward trend of contribution by all Board members has been seen. The Group General Counsel & Company Secretary makes sure there is appropriate time allocated to all agenda items and makes arrangements to foster an open atmosphere and culture. | ||
Board discussions | Maximise the effectiveness of Board discussions. Responsibility: Chairman/ Executive Directors/Group General Counsel & Company Secretary | The information going to the Board is reviewed every six months through meetings between the Chairman, the Chief Executive and the Group General Counsel & Company Secretary. The new reporting framework delivered by external specialists last year has continued to provide the Board and committees with clearer, more concise papers. This has helped improve Board discussions and decision making. At the December 2015 Executive Committee meeting the Group General Counsel & Company Secretary updated the Executive members on the role they play in drafting the papers. We will continue to review and make sure only relevant information is provided to the Board. A further refresh of the Board paper process will commence this year. After large discussion items, the Chairman summarises the key points from the discussion. He also confirms what is expected next, if anything, and if there are any actions for relevant Board members. | ||
Board discussions | Use a diversity of thinking styles. Responsibility: Chairman/ Board members | The Board members have become more flexible with their questioning taking into account their thinking styles, which varies according to the topic. At the post meetings with the Non-executive Directors, the Chairman makes sure they provide feedback on behaviours displayed during the meeting. | ||
Board focus | Continue to manage the strategy agenda. Responsibility: Chairman/ Chief Executive/Group General Counsel & Company Secretary | Significant time has been scheduled for strategy on the Board meeting agendas. In addition, we usually hold two half-day strategy sessions during the year which take place on a separate day to the Board meeting, to make sure the strategy discussions are productive and stimulating. In July 2016 there will be a full strategy away day. Additionally, the Chief Executive has developed a detailed schedule of Board strategy updates for the forthcoming year and has recently circulated to the Board the material to be covered at the July strategy day. |
| National Grid Annual Report and Accounts 2015/16 | Board evaluation | 53 |
Corporate Governancecontinued
Mark Williamson Committee chairman |  | |
| Review of the year | ||
This report aims to provide an insight into the work of the Audit Committee over the year in relation to the UK and US businesses, the external auditors, and our role within the Company’s internal assurance functions, as well as the significant issues debated by the Committee during the year. | ||
| US business review | ||
Last year, I reported on the work undertaken and progress made in relation to the US financial controls environment. This has remained a focus for the Committee this year and we expect the strengthened US leadership team to substantially complete the US finance transformation plan by 31 March 2017. | ||
In September, the US finance senior leadership team joined the Committee meeting to give an in-depth update on the initiatives underpinning the US finance team transformation plan with each senior leader presenting on their area of responsibility. This provided us with an opportunity to hear directly from members of the team, raise questions and challenge as necessary. | ||
I also took the opportunity in September to visit the Service Delivery Centre in Syracuse, New York to meet the US Shared Services and Finance teams. The visit highlighted the credit and collections process, a critical component of the larger revenue recognition process employed by the Company. I received presentations highlighting the work performed by each team, accomplishments, and areas of focus, together with an in-depth review of the credit and collections activities. | ||
| Additionally, in February I joined a video conference with the Finance Director and US finance leadership team for a progress update and to discuss the sustainable improvements being made to the overall US financial controls environment. The Finance Director and the US Chief Financial Officer have continued to keep the Committee up to date on progress with regular reports throughout the year on priorities and proposed improvements to support the transformation plan. |
UK business review
While the US financial controls environment has remained an area of focus for the Committee, during the year we have also received regular updates of the overall Group control environment, including a presentation from the UK finance team on the status of the UK finance change programme.
Following the introduction of RIIO, the UK business has undergone significant change, which in turn demanded a different level of support from the UK finance team. The change programme is intended to improve the capability and capacity of the function to better support the business in a RIIO environment. The Committee challenged management on the status of the change programme and the revised processes and controls.
Audit tender
Overseeing the competitive tender process for the external audit was a significant undertaking for the Committee and management. You can read more about the process on page 56. I kept the Board up to date on our progress and in November recommended to the Board, for its consideration, that Deloitte LLP be appointed as our new external auditors. Our current auditors, PricewaterhouseCoopers LLP, will continue in their role and undertake the audit for the year ending 31 March 2017, subject to reappointment by shareholders at the 2016 AGM. The appointment of Deloitte will be recommended to our shareholders for consideration at the 2017 AGM. We look forward to working with Deloitte in the future.
Looking forward, we will continue to receive updates on the UK Gas Distribution sale and will support the Board as appropriate in relation to this potential transaction.
Mark Williamson
Committee chairman
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Corporate Governance |
Examples of Committee focus during the year included: | ||||
| Areas of focus | Commentary | |||
Risk management | The Committee has been delegated responsibility by the Board for monitoring and assessing the effectiveness of our risk management processes. During the year, the risk team undertook a review of our risk processes to make sure we have effective systems and processes in place to meet the requirements of the 2014 UK Corporate Governance Code and the FRC guidance on Risk Management, Internal Control and Related Financial and Business Reporting. Going forwards, the Committee will also receive reports to be considered by the Board on risk process developments to enable the Committee to keep fully appraised of changes in the risk profile of the Company and to allow it to monitor the management of risk throughout the year. | The Committee continues to monitor the effectiveness of the risk management and internal control processes during the year and reports to the Board on the outcome of its annual review which covers all material controls, including financial, operational and compliance controls. You can read more about our risk management process and the review of effectiveness on pages 26 to 29. Details of our internal control systems, including those relating to the financial reporting process, can be found on pages 29 and 183. | ||
Viability statement | Following the new requirement in the Code, the Annual Report and Accounts must now include a viability statement, which you can find on page 30. The viability statement requires the Board to confirm that it has assessed the Company’s principal risks and viability. At its meeting in September, the Committee considered the outcome of a review of the Company’s | risk processes and proposed improvements to make sure there were effective systems and processes in place to support the Board in making this statement. At the Committee meeting in May, it considered the viability statement and recommended the statement to the Board for approval at its May meeting. | ||
Going concern statement | In addition, the Committee considered the Group’s short-term liquidity and capital and considered it appropriate to adopt the going concern basis in the financial statements. The Board considered and | approved the Committee’s recommendation at its May meeting. The Company’s going concern statement is set out on page 102, note 1A. | ||
Fair, balanced and understandable | The Committee considered the requirement of the Code to ensure that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable in the | context of the applicable accounting standards and confirmed this view to the Board. | ||
Financial reporting | The Committee monitors the integrity of the Company’s financial information and other formal documents relating to its financial
An important factor in the integrity of financial statements is making sure that suitable and compliant accounting policies are adopted and applied consistently on a | year-on-year basis and across the Company. In this respect, the Committee also | ||
| When reviewing the | disclosure controls to the Audit Committee. See page | ||
Sarbanes-Oxley Act 2002 testing and attestations |
The Committee
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Cyber security risk management | Responsibility for reviewing the governance processes in
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cyber security risk management process and | ||
Compliance management | Compliance management is part of the Global Assurance function, which incorporates ethics, risk management, licence management and records management. Biannual reports to the
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The Committee
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LIPA MSA transition contract accounting: on 31 December 2013, our US business moved the MSA with LIPA to a third party. This transition was particularly complex. It involved many areas of our US business and required us to manage the transition of more than 2,000 employees, including more than 40 finance
| Audit Committee | 55 |
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Corporate Governancecontinued
| Commentary | |||
Confidential reporting procedures and whistleblowing |
The Committee reviews these procedures
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The Committee also receives annual reports on the Company’s anti-bribery procedures and reviewed their adequacy. It noted that no material instances of non-compliance had been identified. | ||||||||||||
| In accordance with best practice, the Corporate Audit Charter was reviewed against the Institute of Internal Auditors (IIA) international standards and the IIA model charter. | This review assessed the purpose, authority and responsibility, as defined in the charter, to make sure they are sufficient to enable the Corporate Audit function to complete its objectives. Minor changes to the charter were approved by the Committee in November. | ||||||||||
Performance review | The 2015/16 Board and committee evaluation was conducted externally by Independent Audit and included a high level review of the Board committees.
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The recommended actions for the Audit Committee were considered by the Committee in May and an action plan agreed.
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The Committee PwC have been the Company’s external auditors As described in last year’s Annual Report and The following tender process was undertaken:
● the submissions were scored by the finance and procurement teams against a detailed scoring mechanism focusing on areas such as audit quality, relevant industry experience and understanding of our business; ● the scores were presented to the Committee in July together with a proposed short list of firms; and ● at its July meeting, the Committee discussed and agreed the short list of firms and approved the issue of a formal Request for Proposal (RFP) to the short-listed firms. The key stages of the RFP were as follows: ● meetings were held between the potential firms and members of the Board and senior finance team to set out the requirements for the audit and provide a better understanding of the expectations of key stakeholders and our business; ● references for the proposed key team members of each firm were sought; ● technologyworkshops were held with finance team members to give the potential firms the opportunity to demonstrate their audit technology tools and their relevance to the Company; and ● written tender documents were submitted by each firm covering specific areas including audit approach, risk identification, audit scope, independence and |
In early November, each potential firm presented to a panel (comprising the Committee, other members of the Board and senior finance team members and chaired by the Chairman of the Committee) setting out why they should be selected to be our external auditors. These sessions provided the panel with the opportunity to question each firm and follow up on queries from their written submissions. The Committee discussed the outcome of the presentations and views of other members of the panel at its November meeting and recommended that Deloitte LLP was the most suitable firm to be our next auditors Deloitte’s appointment, subject to approval at the 2017 AGM, will be effective for the year ending 31 March 2018. The timing of the change in auditors will help ensure both an orderly transition and compliance with external regulations on the provision of PwC, National Grid’s current external auditor, will continue in their role until Deloitte’s appointment. They have expressed their willingness to continue as auditors of the Company for the year ending 31 March 2017 and the Committee has therefore recommended to the Board that a resolution proposing the re-appointment of PwC as external auditors be put to shareholders at the 2016 AGM. There are no contractual obligations restricting our choice of external auditors and we have not entered into any auditor liability agreement. The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 – statement of compliance. The Company confirms that it complied with the provisions of the Competition and Markets Authority’s Order for the financial year under review. |
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Significant issues
The most significant issue the Committee considered in relation to the financial statements during the year was the US financial control environment and in particular these related to property, plant and equipment. The Committee also considered a paper presented by management highlighting the Company’s policy for presenting items as exceptional and the immediate accounting implications of the proposed sale of a majority stake in our UK Gas Distribution business.
The independent auditors’ report (pages 85 to 92) also includes some other areas of focus, including the accuracy and valuation of treasury derivative transactions, accounting for net pension obligations, revenue recognition, and valuation of environmental provisions which were not considered in detail by the Committee during the year, as nothing significant arose that warranted extensive Committee attention.
US financial control environment
The Committee has continued to devote a significant amount of time to reviewing the actions management are taking to improve the US financial controls environment. The two main areas of focus and challenge by the Committee on this issue were:
| ● | progress made by management against the measures taken to remediate the US financial control deficiencies. In particular the Committee asked management to produce a clear timetable for clearing the control deficiencies; and |
| ● | the status of the US finance organisational design programme, in particular, understanding the structure of the new US finance senior leadership team and management’s plans to fill key vacancies. |
Presentation of exceptional items
There were two specific items that the Committee considered this year in respect of exceptional items:
| ● | as part of the half-year results announcement, the Committee considered the treatment of the £49m gain recognised when National Grid exchanged its share of the Iroquois pipeline joint venture for shares in Dominion Midstream Partners, LP. The Committee was satisfied that this item should not be recognised as exceptional based on the size of the transaction; and |
| ● | at year end, the Committee considered the treatment of the costs incurred in preparation for the UK Gas Distribution sale. The Committee agreed with management’s proposal that these be treated as exceptional to reflect the nature of the costs. This presentation would be consistent with the treatment of the overall profit on the sale when the transaction completes. |
Potential sale of majority stake in the UK Gas Distribution business
The Committee considered the immediate accounting implications following the announcement of the sale plans in November. In particular, the Committee was satisfied with the conclusion reached that, based on the separation work remaining and the overall status of the transaction, the assets and liabilities did not need to be classified as held for sale at 31 March 2016. The Committee will continue to monitor this during 2016/17 as the potential transaction progresses.
External audit
The Committee is responsible for overseeing relations with the external auditors, including the proposed external audit plan, the approval of fees, and makes recommendations to the Board on their appointment or reappointment. Details of total remuneration paid to auditors for the year, including audit services, audit-related services and other non-audit services, can be found in note 3(e) of the consolidated financial statements on page 110.
Auditor independence and objectivity
The independence of the external auditors is essential to the provision of an objective opinion on the true and fair view presented in the financial statements. Auditor independence and objectivity is safeguarded by a number of control measures, including:
Auditor independence and objectivity is safeguarded by a number of control measures, including
| ● | limiting the nature and value of non-audit services performed by the external |
| ● | ensuring that employees of the external auditors who have worked on the audit in the past two years are not appointed to senior financial positions within the Company in line with our internal code; |
| ● | monitoring the changes in legislation related to auditor objectivity and independence to help ensure we remain compliant; |
| ● | providing a business conduct helpline that employees can use to report any concerns, including those relating to the relationships between Company personnel and the external auditor; |
| ● | the rotation of the lead engagement partner at least every five |
| ● | PwC’s internal independence rules and processes, which have been designed to exceed professional standards and focus on both personal independence and scope of services; |
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| ● | an annual review |
Audit quality
To maintain audit quality and provide comfort on the integrity of financial reporting, the Committee reviews and challenges the proposed external audit plan, including its scope and materiality prior to approval, to make sure that PwC has identified all key risks and developed robust audit procedures and communication plans.
The Committee also considers PwC’s response to accounting, financial control and audit issues as they arise, and meets with them at least annually without management present, providing the external auditors with the opportunity to raise any matters in confidence.
| National Grid Annual Report and Accounts 2015/16 | Audit Committee | 57 |
Corporate Governancecontinued
Auditor appointment
An annual review is conducted by the Committee of the level and makeup of the external audit and non-audit fees and the effectiveness, independence and objectivity of the external auditors.
The annual review includes consideration of:
Following this year’s annual review, the Committee was satisfied with the effectiveness, independence and objectivity of the external auditors, and recommended to the Board their reappointment for a further year. A resolution to reappoint PwC and giving authority to the Directors to determine their remuneration will be submitted to shareholders at the 2016 AGM. Internal (corporate) audit The corporate audit function provides independent, objective assurance to the Audit, Safety, Environment and Health and Executive Committees on whether our existing control and governance frameworks are operating effectively in order to meet our strategic objectives. Assurance work is conducted and managed in accordance with the IIA international standards for the Professional Practice of Internal Auditing and Code of Ethics. To keep the Committee informed of trends identified from the assurance work and to update on progress against the corporate audit plan, the Head of Corporate Audit reports to the Committee at least twice each year. These reports present information on specific audits, as appropriate, summarise common control themes arising from the work of the team and update on progress with implementing management actions. Where control issues are identified, senior leaders may be invited to attend Committee meetings to provide commentary on the actions they are taking to improve the control environment within their area of responsibility. In order to meet the objectives set out in the Corporate Audit Charter, audits of varying types and scopes are conducted as part of the annual corporate audit plan. The audit plan is based on a combination of risk-based and cyclical reviews, together with a small amount of work that is mandated, typically by US regulators. Inputs to the audit plan include risk registers, corporate priorities, external research of emerging risks and trends, and discussions with senior management to make sure the plan aligns with the Committee and Company’s view of risk. The audit plan is considered and approved by the Committee annually and progress against the plan is monitored throughout the year. The Committee is responsible for the appointment and removal of the Head of Corporate Audit. The Committee met privately with the Head of Corporate Audit during the year.—● audit quality and the external audit process globally; —● the auditors’ performance;—performance and delivery against the audit plan;● the expertise of the firm and our relationship with them;them including the level of challenge; and—● the initial results of online questionnaires completed by National Grid employees engaged with the auditChairman, Committee members, Executive Directors and memberssenior representatives from the finance team. The questions focused on: the quality of service; sufficiency of resources; planning and execution of the Audit Committee.Following this year’s annual review, the Committee is satisfied with the effectiveness, independence audit; communication and objectivity of the external auditors,interaction; and recommends to the Board their reappointment for a further year. A resolution to reappoint PwC and giving authority to the Directors to determine their remuneration will be submitted to shareholders at the 2014overall satisfaction.Audit tenderPwC have been the Company’s external auditors since the merger with Lattice Group plc in 2002, having been the incumbent external auditors of both the merging parties and the audit contract has not been put out to tender since then. Their performance has been reviewed annually by the Committee since that time.During the year the Committee spent time discussing a potential tender for the external audit, following the new requirement on audit tendering and rotation of auditors.The Committee has also discussed the implications of the proposals by both the UK Competition Commission (implementing its decision to mandate tendering every 10 years) and the EU (requiring audit firm rotation at least every 20 years), and will implement them when they become final. These proposals have effectively superceded the comply-or-explain provision that underpins the Code. The Financial Reporting Council has decided to defer consideration of whether to make any changes to these sections of the Code until its next review, currently scheduled for 2016.The Committee considered the additional disruption that both an audit tender and any change in audit firm would involve in light of the ongoing US financial controls program, and the services we currently receive from other firms that may be considered in a tender process.The Committee concluded that a tender is not in the Company’s interests at this time but agreed that this issue would be reviewed annually as part of the auditor appointment process. No representatives from PwC were present during the Committee’s discussion of the options for a tender of the external audit.There are no contractual obligations restricting our choice of external auditors and we have not entered into any auditor liability agreement.
Non-audit services provided by the external auditors
Below this threshold, all requests must be approved in advance by the Finance Director but do not require Committee pre-approval. This reduces the administrative burden on the Committee. A full list of all Committee and Finance Director approved non-audit work requests is presented to the Committee annually to ensure the Committee is aware of all non-audit services provided. Additionally, the Committee receives quarterly reports from management on non-audit services and other consultants’ fees to monitor the types of services being provided and fees incurred. Approval for the provision of non-audit services is given on the basis the service will not compromise independence and is a natural extension of the audit, or if there are overriding business or efficiency reasons making the external auditors most suited to provide the service. Certain services are prohibited from being performed by the external auditors, as required under the
Total non-audit services provided by PwC during the year ended 31 March
Total audit and audit-related fees include the statutory fee and fees paid to PwC for other services that the external auditors are required to perform,
The Committee
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| 58 | National Grid Annual Report and Accounts 2015/16 | Corporate Governance |
Corporate Governance |
Therese Esperdy Committee chairman |  | |
| Review of the year | ||
This was my first full year as Committee chairman, during which we have focused on our funding programme taking into account international market conditions, as well as overseeing the early stages of the treasury and other finance related aspects of the proposed sale of a majority stake in our UK Gas Distribution business. | ||
At the end of the year, we said farewell to Steve Holliday as a member of the Committee as he stepped down from his Chief Executive role, and from the start of April we welcomed John Pettigrew to the Committee as he transitioned into that role. I would like to thank Steve for his contribution to this Committee as part of his wider leadership of National Grid over many years. | ||
2015/16 has also seen changes within the treasury team, with a new Group Tax and Treasury Director taking on the role in early 2016. With accompanying changes in the UK and US treasury teams I look forward to working with the new management team to build on the strong base they have inherited. | ||
The Committee has met with management and employees across the treasury, tax, pensions and insurance functions in both the UK and US through the course of our routine meetings. In addition, all members of the Committee met separately with the new Group Tax and Treasury Director as part of his induction into the role. | ||
As part of our continuous review of counterparty risk, in June we received a presentation from external advisors on the banking market initiatives designed to improve the capital position of banks. Following the Committee’s approval to simplify our liquidity policies last year, the revised policy was successfully implemented and we reviewed performance during the year. | ||
The Committee approved the issuance of a non-dilutive convertible bond in September. This innovative funding transaction demonstrates our focus on funding diversification and cost effectiveness, and was recognised with the Deal of the Year Award for 2015 by the Association of Corporate Treasurers. | ||
| During the year, the Committee received an update on the activities and performance of our captive insurance companies, which highlighted the cost savings generated by these arrangements. We also reviewed the future strategy for the insurance function, our outsource arrangements, and the ongoing plans for the captive insurance companies. | ||
In the second half of the year, the Committee spent time on the financing related aspects of the proposed sale of a majority stake in our UK Gas Distribution business. This included reviewing the pension and tax aspects of the proposed transaction, together with planning our approach to the associated liability management exercise. This will continue to be a major focus for the Committee in the year ahead.
In April 2016, the Committee received an external update on the potential impact of the forthcoming referendum on the UK’s membership of the European Union. We assessed the treasury and other issues that might arise, together with their potential impact on the Company.
We will also continue to review our ongoing funding needs, liquidity management, pension funding and our future insurance strategy.
Examples of key matters the Committee considered during the year included:
| ● | funding requirements and financing for the business plan; |
| ● | setting and reviewing treasury policies; |
| ● | treasury performance updates; |
| ● | UK and US tax updates; |
| ● | update on US energy procurement activities and electricity and gas trading activities in the UK; |
| ● | foreign exchange policy and interest rate risk management; |
| ● | the draft going concern statement for the half- andfull-year results prior to consideration by the Board; |
| ● | update on pension and post-retirement healthcare arrangements; and |
| ● | insurance renewal programme and overall insurance strategy. |
The Committee in action – rebalancing our debt portfolio The Committee has had oversight of management’s plans to rebalance our debt portfolio relating to the potential sale of a majority stake in our UK Gas Distribution business. We initially reviewed and challenged management’s overall strategy for the restructuring programme, and subsequently received presentations over multiple meetings on the proposed methodology and risks associated with delivering it. Various options were considered and we concurred with management’s proposed approach on this important issue. We will continue to oversee progress in the coming year. |
Therese Esperdy
Committee chairman
| National Grid Annual Report and Accounts 2015/16 | Finance Committee | 59 |
Corporate Governancecontinued
Paul Golby Committee chairman |  | |||||||||||
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Road traffic collisions remain higher than we would like in both the UK and the US. Starting in the UK, the Company has therefore required many of its employees to attend safe driver training with the | ||||||||||||
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the necessary reductions in GHG emissions to meet our 2050 target will be a greater challenge. Following the UN Climate Change Conference in Paris in December 2015 (COP21), the Committee met to consider the outcomes of the conference and how these affect the Company.
Further work is planned for 2016/17, as the impact on national legislation is expected to become clearer and we review our emissions reduction strategy and our ability to meet our 2050 GHG reduction targets.
We also considered the Company’s health and wellbeing strategy and the work being undertaken to improve data management, implement better line management awareness training and provide support and guidance to employees.
Examples of other matters the Committee reviewed during the year included:
| ongoing monitoring of safety performance and significant incidents in | US; |
| ● | update on lessons learnt and steps taken following a | 2014, for which the Company was fined £2m in December 2015; | ||||||||
| ● | health; | |||||||||
| ● | the introduction and application by the Company of the accounting for sustainability (A4S) methodology for new projects; |
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The Committee in action – US gas pipeline safety management Following several years of very significant pipeline incidents, the US Congress and regulators have changed their approach to enforcing gas pipeline safety legislation, becoming impatient with companies that are not showing continuous improvement in compliance-related matters. This is demonstrated by a recent series of compliance orders in New York State, record-setting penalties nationwide and further demands for compliance improvement plans. The Company’s response has been to heighten its focus on compliance and investment in people, training and systems to meet these requirements through new gas enablement initiatives and the setting up of a gas pipeline safety monitoring system. This will involve using the Company’s process safety | ||||||||||||
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Paul Golby
Committee chairman
| 60 | National Grid Annual Report and Accounts 2015/16 | Corporate Governance |
Corporate Governance |
Sir Peter Gershon Committee chairman |
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The Committee also spent time considering succession planning over the long term, for | |||||||||
| Diversity | |||||||||
Balance and fit with current Board members are important considerations in recruitment to the Board. Therefore part of the selection process for Board appointments is for the Committee to review the existing skills and experience of the Board and
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Following the changes in Board membership, the composition of the committees was
effect from 1 April 2016.
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The Committee in action – Chief Executive succession search and appointment process
A formal process was undertaken by the Committee over a three year period in order to find an appropriate successor to Steve Holliday as Chief Executive. Luke Meynell, an external advisor, initially of Russell Reynolds Associates and subsequently of The Zygos Partnership, supported the Committee to make sure there was rigour and challenge to our process which was as follows:
| ● | a Chief Executive role profile was prepared and agreed by the Committee; |
| ● | the external advisor conducted initial searches and assessed a long list of internal and external candidates against the agreed profile to produce a shortlist of potential candidates; |
| ● | shortlisted internal candidates were considered and interviews and assessments were undertaken; |
| ● | the Chairman and some of the Non-executive Directors met the potential external candidates; |
| ● | following a review of the ratings from all the |
| ● | the preferred candidate was benchmarked against external candidates; |
| ● | following discussion of the |
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Executive Director, UK
A formal recruitment process was also undertaken for the replacement of John Pettigrew as Executive Director, UK, as follows.
The Nominations Committee appointed Korn Ferry as the search consultancy. With input from the Committee members a role and person specification was agreed.
Korn Ferry conducted initial searches for potential external candidates, with eight candidates being put forward for the role. Following this, a series of interviews were undertaken by the Chairman and members of the Board and Executive Committee. The Committee considered the outcomes from the interviews and selected two candidates for further consideration.
Final interviews with the two candidates were carried out by Steve Holliday, John Pettigrew, Ruth Kelly, Mark Williamson and members of the Executive Committee. Additionally, the two shortlisted candidates were externally assessed by YSC, a business management consultancy that undertakes executive director profiling assessments.
Following discussion, the Nominations Committee recommended Nicola Shaw as its preferred candidate for appointment to the Board. The Board approved the appointment as recommended and Nicola will join the Board on 1 July 2016.
In addition to providing external search consultancy services to the Company, Korn Ferry also provide HR consultancy services.
Sir Peter Gershon
Chairman
| Nominations Committee | 61 | ||||||||||||
Corporate Governancecontinued
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| Objectives | Progress | |||||
| The Board | Objective met. We currently have 27% women on our Board, which will increase to 33% when Nicola Shaw joins in July 2016. Lord Davies recommended in his final report that the target be increased to a voluntary 33% target by 2020. The Board has noted this new target. | |||||
All Board appointments will be made on merit, in the context of the skills and experience that are needed for the Board to be | Objective met. The appointment of John Pettigrew as Chief Executive and Nicola Shaw as Executive Director, UK were made on merit. | |||||
| We will only engage executive search firms who have signed up to the | Objective met. Korn Ferry, Russell Reynolds Associates and The Zygos Partnership are signed up to the Voluntary Code of Conduct on Gender Diversity. | |||||
Where appropriate, we will assist with the development and support of initiatives that promote gender and other forms of diversity among our Board, | Objective met. See page 44 for further details. | |||||
| Where appropriate, we will continue to adopt best practice in response to the Davies | Ongoing – as appropriate. The Nominations Committee reviewed and noted the recommendations of the Lord Davies report published in October 2015 and best practice will be adopted as appropriate and reported on next year. | |||||
We will review our progress against the Board diversity policy | Objective met. Ongoing. | |||||
We will report on our progress against the policy and our objectives in the Annual Report and Accounts along with details of initiatives to promote gender and other forms of diversity among our Board, Executive Committee and other senior | Objective met. Ongoing. | |||||
We will continue to make key diversity data, both about the Board and our wider employee population, available in the Annual Report and Accounts. | Objective met. Ongoing. | |||||
Progress against the objectives, the policy and the | ||||||
| 62 | National Grid Annual Report and Accounts 2015/16 | Corporate Governance |
Corporate Governance |
Executive Committee membership key 1 John Pettigrew Chief Executive and Committee chairman 2 Andrew BonfieldFinance Director 3 Stephanie HazellGroup Strategy & CorporateDevelopment Director 4 Alison KayGroup General Counsel & Company Secretary 5 Richard Adduci Chief Information Officer 6 George Mayhew Group Corporate Affairs Director 7 Dean SeaversExecutive Director, US 8 Mike Westcott Group Human Resources Director 9 Steve Holliday Executive Director |
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To help make sure we allocate time and expertise appropriately, the Company has a number of
Led by the Chief Executive, the Executive Committee oversees the safety, operational and financial performance of the Company. It is responsible for making day-to-day management and operational decisions it considers necessary to safeguard the interests of the Company and to further the strategy, business objectives and targets established by the Board. It approves expenditure and other financial commitments within its authority levels and discusses, formulates and approves proposals to be considered by the Board.
| There are currently
The Committee officially met 12 times this year, but the members interact much more regularly. Those members of the Committee who are not Directors | |||
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Articles of Association page 176
Audit information page 52
Board of Directors page 43
Business model page 14
Change of control provisions page 173
Code of Ethics page 177
Conflicts of interest page 173
Contractual and other arrangements page 160
Directors’ indemnity page 173
Directors’ share interests page 70
Diversity page 41
Dividend page 02
Events after the reporting period page 173
Financial instruments page 83
Future developments page 12
Greenhouse gas emissions page 11
Human rights page 41
Important events affecting the Company during the year page 06
Internal control page 22
Material interests in shares page 174
People page 40
Political donations and expenditure page 174
Principal activities page 12
Research and development page 174
Risk management page 22
Share capital page 174
The Directors’ Report, prepared in accordance with the requirements of the Companies Act 2006 and the UK Listing Authority’s Listing, and Disclosure and Transparency rules, comprising pages 06 to 73 and 160 to 187, was approved by the Board and signed on its behalf by:
Alison Kay
Group General Counsel & Company Secretary
Company number 4031152
18 May 2014
| Management committees | 63 | ||||||||||||
Corporate Governancecontinued
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Statement of compliance with the UK
Corporate Governance Code
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The UK Listing Rules require that listed companies must include in their annual report a statement of whether the Company has complied with all the relevant provisions of the UK Corporate Governance Code. The UK Corporate Governance Code was published in September 2014 (the Code), available in full atwww.frc.org.uk.
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A.1 The role of the Board Our Board is collectively responsible for the effective oversight of the Company and its businesses. It also determines the strategic direction, business
A.2 A clear division of responsibilities The Board supports the separation of the roles of the Chairman and Chief Executive. The key responsibilities are clearly documented and reviewed when appropriate. The Chairman manages and leads the Board. The Chief Executive is responsible for the executive leadership and day-to-day management of the Company
A.3 Role of the Chairman The | A.4 Role of the Our Senior Independent Director acts as a sounding board for the
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| 64 | National Grid Annual Report and Accounts 2015/16 | Corporate Governance |
| Corporate Governance
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B. Effectiveness | ||||||
B.1 The composition of the Board The Board believes it operates effectively with an appropriate balance of independent Non-executive and Executive Directors who have the right balance of skills, experience, independence and knowledge of the Company. Details of our Board, their individual biographies and Committee membership are set out on pages 47 and 48. Board and Committee attendance during the year to 31 March 2016 is set out on page 52. The independence of the Non-executive Directors is considered at least annually along with their character, judgement, commitment and performance on the Board and relevant committees. The Board took into consideration the Code and indicators of potential non-independence, including length of service. The Board considered Paul Golby’s independence separately following the announcement of his appointment as Chairman of Costain Group plc (a major supplier to the Company). The situational conflict was authorised (including putting in place protective measures to ensure the conflict is appropriately managed) and his independence was confirmed. At year end, all of the Non-executive Directors, with the exception of the Chairman, who’s independence is only determined on appointment, have been determined by the Board to be independent. B.2 Appointments to the Board The Nominations Committee, which comprises the Chairman and Non-executive Directors leads the process for Board appointments and makes recommendations to the Board. The process for the appointment of John Pettigrew as Chief Executive and Nicola Shaw as Executive Director, UK were formal, rigorous and transparent. Further details of each appointment process, succession planning and the role of the Nominations Committee can be found on page 61. B.3 Time commitment Non-executive Directors are advised of the time commitment expected from them on appointment. External commitments, which may impact existing time commitments, must be agreed with the Chairman. Details of external appointments are set out in the biographies on pages 47 and 48. As part of the evaluation of the Chairman, the Non-executive Directors, with input from the Executive Directors, assessed his ability to fulfill his role as Chairman, taking into account other significant appointments. | With the agreement of the Board, Executive Directors gain experience of other companies’ operations, governance frameworks and boardroom dynamics through non-executive appointments. The fees for these positions are retained by the individual. For further details about the Directors’ service contracts and letters of appointment, see page 74 of the Directors’ Remuneration Report. B.4 Development All new Directors are provided with a full induction programme when they are appointed to the Board. Details of Director induction and development can be found on page 51. B.5 Information and support The Group General Counsel & Company Secretary makes sure that appropriate and timely information is provided to the Board and its Committees and is responsible for advising and supporting the Chairman and the Board on all governance matters. All Directors have access to the Group General Counsel & Company Secretary and may take independent professional advice at the Company’s expense in conducting their duties. To support discussion and decision making, Board and committee members receive papers sufficiently in advance of meetings so that they can prepare for and consider agenda items. Additionally, the Chairman holds a short meeting with the Non-executive Directors before each Board meeting to discuss the focus of the upcoming meeting as well as afterwards to share feedback from the meeting. Similarly, the Chief Executive holds a short meeting with the Executive Directors and the Group General Counsel & Company Secretary after each meeting and shares the feedback from these meetings with the Chairman. Last year we engaged external specialists to review our current papers and develop a new reporting framework for the Board and its Committees. This has continued to result in clearer more concise reporting, allowing more time for quality discussions and questions. A clear set of guidelines are in place to assist the Executive Directors and management on the content and presentation of papers to the Board and committees. A further refresh of the Board paper process will commence this year. | B.6 Evaluation See pages 52 and 53 for more information on our externally facilitated Board evaluation, undertaken by Independent Audit Limited. During the year, the Chairman met each Director individually to discuss their contribution, performance over the year and training and development needs. Following these meetings, Sir Peter confirmed to the Nominations Committee that he considered that each Director demonstrated commitment to the role and their performance continued to be effective. At a private meeting of the Non-executive Directors, Mark Williamson, as Senior Independent Director, led a review of the Chairman’s performance. The Non-executive Directors, with input from the Executive Directors, assessed his ability to fulfil his role as Chairman and considered the arrangements he has in place, given he is also chairman of a FTSE 250 company and the Aircraft Carrier Alliance Management Board and a Trustee of The Sutton Trust Board. They concluded that Sir Peter’s performance continued to be effective. B.7 Election/re-election Each Director is subject to election at the first AGM following their appointment, and re-election at each subsequent AGM. Following recommendations from the Nominations Committee the Board considers all Directors continue to be effective, committed to their roles and have sufficient time available to perform their duties. Therefore, in accordance with the Code, Nicola Shaw will seek election and all other Directors will seek re-election at the 2016 AGM as set out in the Notice of Meeting, with the exception of Steve Holliday who is retiring from the Company with effect from 22 July 2016. | ||||
| National Grid Annual Report and Accounts 2015/16 | Statement of compliance with the UK Corporate Governance Code | 65 |
Corporate Governancecontinued
Statement of compliance with the UK
Corporate Governance Codecontinued
C. Accountability |
D. Remuneration | E. Relations with shareholders | ||
C.1 Financial and business reporting The requirement for Directors to state that they consider the The drafting and assurance process supports the Audit Committee’s and Board’s assessment of the overall fairness, balance and clarity of the Annual Report and the statement of Directors’ C.2 Risk management and internal control The Board has carried out a robust assessment of the principal risks facing the Company including those that would threaten the business model, future performance, solvency or liquidity. Further details can be found on pages 27 and 28. The Board also sets the Company’s risk appetite, internal controls and risk management processes. The Board undertakes a review of their effectiveness annually. Further details are set out on pages 26–29. The activities of the Audit Committee, which assists the Board with its responsibilities in relation to risk and assurance, are set out on pages 54 to 58. C.3 Audit Committee and auditors The Audit Committee report on pages 54 to 58 sets out details of how the Committee has | D.1 The level and components of remuneration The Remuneration Committee is responsible for recommending to the
The Remuneration Report on pages 68 to 81 outlines the activities of the Committee during the year and sets out excerpts of the Directors’ remuneration policy table as approved by shareholders at the 2014 AGM. D.2 Procedure For further information on the work of the Remuneration Committee and Directors’ remuneration packages see the Directors’ Remuneration Report on pages 68 to 81. The Committee’s terms of reference are available on our website. | E.1 Dialogue with shareholders The Board as a whole is responsible for making sure that satisfactory dialogue with shareholders takes place. We believe that effective channels of communication with the Company’s debt and equity institutional investors and individual shareholders are very important. More information about our approach to relations with shareholders can be found on page 51. E.2 Constructive use of General Meetings The AGM provides a key opportunity for the Board to communicate with and meet shareholders. Shareholders are able to learn more about the Company through exhibits and can ask questions directly of the Board. Company representatives and our Registrar are also on hand to answer any questions shareholders might have. Our AGM will be held on Monday 25 July 2016 at The International Convention Centre in Birmingham and broadcast via our website. The Notice of Meeting for the 2016 AGM, available on our website, sets out in full the resolutions for consideration by shareholders, together with explanatory notes and further information on the Directors standing for election and re-election. | ||
| 66 | National Grid Annual Report and Accounts 2015/16 | Corporate Governance |
Corporate Governance
Index to Directors’ Report and other disclosures
(starting on page indicated)
AGM 66
Articles of Association 187
Audit information 84
Board of Directors 47
Business model 14
Change of control provisions 193
Code of Ethics 193
Conflicts of interest 193
Contractual and other arrangements 176
Directors’ indemnity 194
Directors’ share interests 79
Directors’ service contracts and letters of appointment 74
Diversity 44
Dividends 05
Events after the reporting period 188
Financial instruments 126
Future developments 08
Greenhouse gas emissions 21
Human Rights 194
Important events affecting the Company during the year 06
Internal control 26
Internal control over financial reporting 29
Listing Rule 9.8.4 R cross reference table 194
Material interests in shares 189
People 44
Political donations and expenditure 194
Research and development 194
Risk management 26
Share capital 189
National Grid Annual Report and Accounts 2015/16
Index to Directors’ Report and other disclosures
67
Directors’ Remuneration Report
Jonathan Dawson Committee chairman |  | |||
Annual statement from the Remuneration Committee chairman | ||||
Overview At the Company’s AGM in 2015 more than 97% of votes cast were to approve the Remuneration Report for that year. As with last year we are not proposing any changes to the formal remuneration policy for National Grid and so this | ||||
The key elements of our policy are: | ||||
| ● | significant weighting towards long-term incentives versus short-term incentives; | |||
| ● | the bulk of senior executive remuneration to be paid in National Grid shares, with all of the Long Term Performance Plan (LTPP) paid only in shares, and half of the Annual Performance Plan (APP) paid in shares; | |||
| ● | very high levels of personal shareholding required to be held by senior executives – 500% of pre-tax salary for the CEO and 400% for other Executive Directors; | |||
| ● | three-year performance period for measuring potential awards under the LTPP coupled with a holding period of a further two years irrespective of whether the mandatory personal shareholding target has been attained; and | |||
| ● | performance metrics for the LTPP are RoE (measuring management’s performance in generating profit from the business) and Value Growth (measuring management’s longer term performance in creating shareholder value). | |||
We believe that our policy ensures that the rewards paid to senior executives are closely matched with shareholders’ experience. In particular, | ||||
Performance for the year | ||||
APP | ||||
| National Grid has had another successful year overall. Record capital investment of £3.9 billion has been undertaken, split equally between the UK and US, and a programme of critical rate case filings has been successfully initiated in the US. As in prior years, the EPS figure used for | ||||
in the Group budget. The overall impact of these adjustments was a decrease of 1.2 pence. Similarly, the Group RoE figure used for the APP calculation, 12.0%, has been reduced by 0.3 percentage points to take account of the absence of the increase in the UK corporate tax rate referred to above. Notwithstanding this, the EPS of 62.3 pence and Group RoE of 12.0% both met or exceededthe stretch performance levels set by the Committee at the start of the year, benefitting from realised gains achieved from the exchange of National Grid USA’s share in the Iroquois pipeline joint venture and strong results from our Other businesses led by the performance of the French interconnector. In the UK, the regulated businesses delivered good returns of 13.3%. Regulated US RoE was 8.0%, which reflected steady performance though was down on last year due to continued cost pressures as the business awaits outcomes of rate case filings. This figure, however, does not capture the gains achieved from the exchange of National Grid USA’s share in the Iroquois pipeline joint venture referred to above, and therefore has been adjusted by the Committee to reflect half of this gain for US participants in the APP, which the Committee believes properly reflects performance.
As a result, in respect of the financial measures for the APP (representing 70% of the value of the APP) the Committee made awards to Executive Directors ranging from 75% to 100% of the maximum potential for financial performance. The balance of the award (30% by value) is represented by individual executives’ assessed performance against specific objectives set by the Committee at the start of the year, resulting in awards ranging from 80% to 86% of the maximum potential for individual performance. In aggregate, therefore, Executive Directors’ APP awards fall in the range of 95% to 119% of salary. This compares with last year’s APP awards where the range was 65% to 119% of salary.
Because of commercial sensitivity we retrospectively disclose annual targets for the APP, which are set out on page 76. This year, we have sought to enhance our disclosure, including the retrospective disclosure of threshold and stretch performance levels for EPS and Group RoE, which now sits alongside the disclosure of our LTPP threshold and stretch performance levels. Target performance levels for both EPS and Group RoE were higher than for 2014/15; however, the target performance levels for UK RoE and US RoE were reduced, due to the expected returns under the RIIO framework in the UK and the impact of the timing of rate plan filings in the US. We have decided to maintain the same performance metrics for the 2016/17 APP awards and we will repeat our retrospective disclosure of performance levels in next year’s remuneration report.
LTPP
The LTPP that vested in 2015/16 was that awarded in 2012. Vesting outcomes ranged from 63% to 76% of maximum. Before making its final determination of executives’ annual and long-term awards, the Committee gives careful consideration to a number of important non-financial measures including our safety performance, reliability and levels of customer satisfaction in both the UK and the US, and considers whether a downward adjustment should be made to any executive’s award. This year the Committee concluded that there was no reason to make any adjustment. As our Executive Director, US, Dean Seavers, only joined the Board at the beginning of 2015/16, he has not received any vested LTPP for this year, and will not do so until 2017.
The award made in 2015 is the second award in respect of the LTPP granted under the new remuneration policy in 2014. This is a three-year plan with a maximum award of 350% of salary for the CEO and 300% for the other Executive Directors. Its outcome will only be known
| 68 | National Grid Annual Report and Accounts 2015/16 | Corporate Governance |
Corporate Governance |
following the results for the year ending March 2017. I reported last year that, at the end of the first performance year, Group RoE and Value Growth were on target in relation to the parameters set by the Committee, with UK RoE around stretch and US RoE below threshold. For this year the position is broadly comparable in respect of both the 2014 and 2015 LTPP grants. Taking account of performance to date of the 2014 and 2015 LTPP awards, the Committee has decided to make no changes to the performance metrics and targets for the 2016 LTPP award. Executive Director shareholdings Two years ago, we introduced high levels of shareholding requirements for our Executive Directors, in order to further align them to our shareholders. At 31 March 2016, both Andrew Bonfield and Steve Holliday have exceeded these shareholding requirements. As John Pettigrew and Dean Seavers were appointed to the Board relatively recently, neither of them has yet met their shareholding requirements and will therefore not be given permission to sell shares until they have done so, other than to pay tax on receipt of the vested shares or in exceptional circumstances. Changes to the Board Following the announcement of Steve Holliday’s retirement as CEO, John Pettigrew was promoted to CEO with effect from 1 April 2016. John’s salary has been set at £825,000. His APP opportunity remains at 125% of salary, and his LTPP opportunity has increased to 350% of salary from 2016 onwards. Steve stepped down as CEO on 31 March 2016 but will remain on the Board until 22 July to facilitate a successful transition. In March, we announced that Nicola Shaw will join the Board as our new UK Executive Director on 1 July 2016, succeeding John. Nicola’s salary has been set at £450,000. Her APP opportunity is 125% of salary and her LTPP opportunity is 300% of salary. Nicola will be eligible to receive a 2016 LTPP award. In addition, she will receive a cash payment of up to £485,000 to compensate her for incentive cash awards that were due to vest in June 2016 that she has foregone on leaving her former employer. Subject to
Steve Holliday’s and Andrew Bonfield’s annual salaries were increased by approximately 1% in 2015. In line with the US managerial pay budget, Dean Seavers’ annual | salary was not increased in 2015. John Pettigrew’s salary was increased by 7% to move his salary closer towards market as Executive Director, UK in 2015. In line with regional managerial pay budgets in 2016, salary increases in 2016 are 2% for Andrew Bonfield and 2.5% for Dean Seavers. Impact of the expected sale of a majority interest in the UK Gas Distribution business Ahead of the expected sale of a majority interest in the Gas Distribution business in 2016/17, the Committee is Conclusion As I reported last year, remuneration continues to be in a transitional phase since the APP As
Jonathan Dawson Committee chairman |
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At a glance
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Performance A comparison of the total 2015/16 single total figure of remuneration to the maximum remuneration if variable pay had vested in full is set out below.
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Total remuneration |
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| Executive Director | Maximum remuneration £’000 | 2015/16 single figure £’000 | ||||||
Andrew Bonfield | 4,077 | 3,228 | ||||||
Steve Holliday | 6,478 | 5,151 | ||||||
John Pettigrew | 1,815 | 1,569 | ||||||
Dean Seavers | 1,883 | 1,684 | ||||||
| National Grid Annual Report and Accounts 2015/16 | At a glance | 69 |
Corporate Governancecontinued
At a glancecontinued
| Key features of policy |
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| ● | Salary increases of 0–7% for | |||||||
● | Salary increases of 2–2.5% for 2016 | ||||||||||
● | Hired Nicola Shaw as new Executive Director, UK on an annual base salary of £450,000 | ||||||||||
| ● | Appointed John Pettigrew as CEO on an annual base salary of £825,000 | ||||||||||
| ● | Maximum opportunity is 125% of salary | ● | 70% based on financial metrics (35% EPS, 35% RoE), 30% based on individual objectives | |||||||
| ● | 50% paid in cash, 50% paid in shares, which must be retained until later of two years and meeting shareholding requirement | ||||||||||
| ● | Group RoE for CEO and Finance Director; UK RoE for Executive Director, UK; US RoE for Executive Director, US | ||||||||||
| ● | Subject to both clawback and malus | ||||||||||
| ● | Individual objectives cover: safety and compliance; Group and financial strategy; business growth; operational excellence; customer experience; employee engagement; capability development; and stakeholder relations | ||||||||||
| ● | Maximum award level is 350% of salary for CEO and 300% for other Executive Directors | ● | 50% value growth, 50% RoE | |||||||
| ● | Group RoE for CEO and Finance Director; even split of Group and UK RoE for Executive Director, UK; even split of Group and US RoE for Executive Director, US | ||||||||||
| ● | Vesting subject to long-term performance conditions. Shares must be retained until later of two years from vesting and meeting shareholding requirement | ||||||||||
| ● | Three-year performance period | ||||||||||
| ● | Subject to both clawback and malus | ||||||||||
| ● | External appointees participate in Defined Contribution (DC) plan or cash in lieu of pension; internal appointees retain current benefits, subject to capping of pensionable pay increases for Defined Benefit (DB) plans | ● | UK DB (Steve Holliday, John Pettigrew): maximum of two-thirds final capped pensionable pay or (Steve Holliday) one thirtieth accrual | |||||||
| ● | UK cash allowance (Andrew Bonfield): 30% of salary | ||||||||||
| ● | Pensionable pay is salary only in UK and salary and APP in US in alignment with the market | ||||||||||
| ● | US DC (Dean Seavers): 9% of pensionable pay with additional match of up to 4% | ||||||||||
| ● | Other benefits as appropriate | ● | Other benefits include private medical insurance, life assurance, and, for UK Executive Directors, either a fully expensed car or a cash alternative to a car and the use of a driver when required | ||||||||
| ● | 500% of salary for CEO | ● | Steve Holliday and Andrew Bonfield have both met their shareholding requirements | |||||||
| ● | 400% of salary for other Executive Directors | ||||||||||
| ● |
| ||||||||||
| ||||||||||||
| ||||||||
| 70 | National Grid Annual Report and Accounts 2015/16 | Corporate Governance |
Corporate Governance |
Directors’ remuneration policy – approved by shareholders in 2014
Key aspects of the Directors’ remuneration policy, along with elements particularly applicable to the 2015/16 financial year are shown on pages 71–74 for ease of reference only. This policy was approved for three years from the date of the 2014 AGM held on 28 July 2014. A shareholder vote on the remuneration policy is not required in 2016. Please note that the information shown has been updated to take account of the fact that the policy is now approved and current rather than proposed. A copy of the full remuneration policy is available on the Company website atwww.investors.nationalgrid.com/reports/2013-14.
There may be circumstances from time to time when the Committee will consider it appropriate to apply some judgement and exercise discretion in respect of the approved policy. This ability to apply discretion is highlighted where relevant in the policy, and the use of discretion will always be in the spirit of the approved policy.
Our peer group
The Committee benchmarks its remuneration policy against appropriate peer groups annually to make sure we remain competitive in the relevant markets. The primary focus for reward benchmarking is the FTSE 11-40 for UK-based Executive Directors and general industry and energy services companies with similar levels of revenue for US-based Executive Directors. These peer groups are considered appropriate for a large, complex, international and predominantly regulated business.
Approved policy table – Executive Directors
Salary |
while not overpaying. |
| ||||||||||||
Operation
| Maximum levels
|
Performance metrics, weighting
| ||||||||||
| ||||||||||||
Salaries are targeted broadly at mid-market level.
| No prescribed maximum annual increase. | Not applicable. | ||||||||||
They are generally reviewed annually. Salary reviews take into account: ● business and individual contribution; ● the individual’s skills and experience; ● scope of the role, including any changes in responsibility; and ● market data in the relevant comparator group. |
Any increases are generally aligned to salary increases received by other Company employees and to market movement. Increases in excess of this may be made at the Committee’s discretion in circumstances such as a significant change in responsibility; progression in the role; and alignment to market level. |
| ||||||||||
| ||||||||||||
| ||||||||||
and retain high-calibre individuals. | ||||||||||
| ||||||||||||||
Operation
| Maximum levels
|
Performance metrics, weighting
| ||||||||||||
| ||||||||||||||
Benefits provided include:
| Benefits have no
Participation in | Not applicable. | ||||||||||||
● | company car or a cash alternative (UK only); | |||||||||||||
● | use of a driver when required; | |||||||||||||
● | private medical insurance; | |||||||||||||
● | life assurance; | |||||||||||||
● | personal accident insurance; | |||||||||||||
● | opportunity to purchase additional benefits under flexible benefits schemes available to all employees; and | |||||||||||||
● | opportunity to participate in the following HM Revenue & Customs (UK) or Internal Revenue Service (US)
| |||||||||||||
Sharesave: UK employees may make monthly contributions from net salary for a period of
| ||||||||||||||
Share Incentive Plan (SIP): UK employees may use gross salary to purchase shares. These shares are placed in trust.
| ||||||||||||||
Incentive Thrift Plans (401(k) plans): US employees may participate in these tax-advantaged savings plans. They are DC pension plans in which employees can invest their own and Company contributions.
| ||||||||||||||
Employee Stock Purchase Plan (ESPP) (423(b) plan): eligible US employees may purchase ADSs on a monthly basis at a discounted price.
| ||||||||||||||
Other benefits may be offered at the discretion of the Committee. | ||||||||||||||
| National Grid Annual Report and Accounts 2015/16 | Directors’ remuneration policy – approved by shareholders in 2014 | |||||||||||
|
|
|
|
| 71 |
Corporate Governancecontinued
Directors’ remuneration policy – approved by shareholders in 2014continued
Pension | Purpose and link to strategy: to reward sustained contribution and assist attraction and retention. |
| ||||||||||
|
|
Performance metrics, weighting | ||||||||
| Operation | Maximum levels | and time period applicable | ||||||||
| ||||||||||
Pension for a new Executive Director will reflect whether they are internally promoted or externally appointed. |
UK
UK
US
US |
Not applicable. | ||||||||
If internally promoted:
| ||||||||||
| retention of existing DB benefits without enhancement, except for capping of pensionable pay increases following promotion to Board; or | ||||||||||
| retention of existing UK DC benefits or equivalent cash in lieu; | ||||||||||
| or | ||||||||||
| retention of existing US DC benefits plus 401(k) plan match, provided through 401(k) plan and non-qualified plans. | ||||||||||
If externally appointed:
| ||||||||||
| UK DC benefits or equivalent cash in lieu; or | ||||||||||
| US DC benefits plus 401(k) plan match. | ||||||||||
Andrew Bonfield, | ||||||||||
Steve Holliday | ||||||||||
| ||||||||||
In line with market practice, pensionable pay for UK-based Executive Directors includes salary only and for US-based Executive Directors it includes salary and APP award.
| ||||||||||
| ||||||||||||
| ||||||||
| Annual Performance Plan |
|
|
|
Performance metrics, weighting | ||||
| Operation | Maximum levels | and time period applicable | ||||
| ||||||
Performance metrics and targets are agreed at the start of each financial year. Performance metrics are aligned with strategic business priorities. Targets are set with reference to the budget. Awards are paid in June.
For APP awards made in 2013/14, 50% of any award was deferred into shares in the Deferred Share Plan (DSP). The DSP has no performance conditions and vests after three years, subject to continued employment. These shares are subject to forfeiture for leavers in certain circumstances.
Awards are subject to clawback and malus provisions. |
|
A significant majority of the APP is based on performance against corporate financial measures, with the remainder based on performance against individual objectives. Individual objectives are
The Committee may use its discretion to set measures that it considers appropriate in each financial year and reduce the amount payable, taking account of significant safety or customer service standard incidents, environmental and governance issues.
| ||||
| 72 | National Grid Annual Report and Accounts 2015/16 | Corporate Governance |
Corporate Governance |
| Long Term Performance Plan | Purpose and link to strategy: to drive long-term performance, aligning Executive
| |
| Operation |
| Maximum levels |
Performance metrics, weighting and time period applicable | |||||
| ||||||||
Awards of shares may be granted each year, with vesting subject to long-term performance conditions.
The performance metrics have been chosen as the Committee believes they reflect the creation of long-term value within the business. Targets are set each year with reference to the business plan.
Awards are subject to clawback and malus provisions. Notwithstanding the level of award achieved against the performance conditions, the Committee may use its discretion to reduce the amount vesting, and in particular will take account of compliance with the dividend policy. |
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| ||||||||||
For awards granted from 2014, | The maximum award for the CEO is 350% of salary and it is 300% of salary for the other Executive Directors. For awards made between 2011 and 2013, the maximum award for the CEO was 225% of salary and 200% for the other Executive Directors. | For awards between 2011 and 2013 the performance measures and weightings were: | ||||||||||
| ● | adjusted EPS (50%) measured over three years; | |||||||||||
| ● | TSR relative to the FTSE 100 (25%) measured over three years; and | |||||||||||
| ● | UK or US RoE relative to allowed regulatory returns (25%) measured over four years. | |||||||||||
From 2014, the performance measures are: | ||||||||||||
| ● | value growth and Group RoE (for the CEO and Finance Director); and | |||||||||||
| ● | value growth, Group RoE and UK or US RoE (for the UK and US Executive Directors respectively). | |||||||||||
All
The weightings of these measures may vary year to year, but would always remain such that the value growth metric would never fall below a 25% weighting and never rise above a 75% weighting.
Between 2011 and 2013, 25% of the award vested at threshold and 100% at stretch, with straight-line vesting in between. From 2014, | ||||||||||||
Approved policy table – Non-executive Directors (NEDs)
| ||||||||||||
Fees for NEDs | Purpose and link to strategy: to attract NEDs who have a broad range of experience and skills to oversee the implementation of our strategy.
| |||||||||||
Operation | Maximum levels |
Performance metrics, weighting and | ||||||||||||||
| ||||||||||||||||
NED fees (excluding those of the Chairman) are set by the Executive Committee in conjunction with the Chairman; the Chairman’s fees are set by the Committee. Fee structure: ● Chairman fee; ● basic fee, which differs for UK- and US-based NEDs; ● committee membership fee; ● committee chair fee; and ● Senior Independent Director fee. | There are no maximum fee levels.
The benefits provided to the Chairman are not subject to a predetermined maximum cost, as the cost of providing these varies from year to year. | Not applicable. | ||||||||||||||
| ||||||||||||||||
| ||||||||||||||||
| ||||||||||||||||
Fees are reviewed every year and are benchmarked against those in companies of similar scale and complexity.
| ||||||||||||||||
NEDs do not participate in incentive or pension plans and, with the exception of the Chairman, are not eligible to receive benefits. The Chairman is covered by the Company’s private medical and personal accident insurance plans and receives a fully expensed car or cash alternative to a car, with the use of a driver, when required.
| ||||||||||||||||
There is no provision for termination payments.
| ||||||||||||||||
| Directors’ remuneration policy – approved by shareholders in 2014 | 73 | ||||||||||||
Corporate Governancecontinued
Directors’ remuneration policy – approved by shareholders in 2014continued
|
Shareholding requirement The requirement of Executive Directors to build up and hold a relatively high value of National Grid shares ensures they share a significant level of risk with shareholders and their interests are aligned.
From 2014/15,
Unless the shareholding requirement is met, Executive Directors will not be permitted to sell shares, other than to pay tax or in exceptional circumstances. |
| |||||
| ||||||
|
|
|
|
|
Salaries for new Executive Directors appointed to the Board will be set in accordance with the terms of the approved remuneration policy in force at the time of appointment, and in particular will take account of the appointee’s skills and experience as well as the scope and market rate for the role.
Where appropriate, salaries may be set below market level initially, with the Committee retaining discretion to award increases in salary in excess of those of the wider workforce and inflation to bring salary to a market level over time, where this is justified by individual and Company performance.
Benefits consistent with those offered to other Executive Directors under the approved remuneration policy in force at the time of appointment will be offered, taking account of local market practice. The Committee may also agree that the Company will meet certain costs associated with the recruitment, for example legal fees, and the Committee may agree to meet certain relocation expenses or provide tax equalisation as appropriate.
Pensions for new Executive Directors appointed to the Board will be set in accordance with the terms of the approved remuneration policy in force at the time of appointment.
Ongoing incentive pay (APP and LTPP) for new Executive Directors will be in accordance with the approved remuneration policy in force at the time of appointment. This means the maximum APP award in any year would be 125% of salary and the maximum LTPP award would be 300% of salary (350% of salary for a new CEO).
For an externally appointed Executive Director, the Company may offer additional cash or share-based payments that it considers necessary to buy out current entitlements from the former employer that will be lost on recruitment to National Grid. Any such arrangements would reflect the delivery mechanisms, time horizons and levels of conditionality of the remuneration lost.
In order to facilitate buy-out arrangements as described above, existing incentive arrangements will be used to the extent possible, although awards may also be granted outside of these shareholder-approved schemes if necessary and as permitted under the Listing Rules.
For an internally appointed Executive Director, any outstanding variable pay element awarded in respect of the prior role will continue on its original terms.
Fees for a new Chairman or Non-executive Director will be set in line with the approved policy in force at the time of appointment.
Policy on payment for loss of office
In line with our policy, all Executive Directors have service contracts which are terminable by either party with 12 months’ notice.
The contracts contain provisions for payment in lieu of notice, at the sole and absolute discretion of the Company. Such payments are limited to payment of salary only for the remainder of the notice period. In the UK such payments would be phased on a monthly basis, over a period no greater than 12 months, and the Executive Director would be expected to mitigate any losses where employment is taken up during the notice period. In the US, for tax purposes the policy is to make any payment in lieu of notice as soon as reasonably practicable, and in any event within two and a half months of the later of 31 December and 31 March immediately following the notice date.
In the event of a UK Director being made redundant, statutory compensation would apply and the relevant pension plan rules may result in the early payment of an unreduced pension.
On termination of employment, no APP award would generally be payable and any DSP awards would generally lapse. However, the Committee has the discretion to deem an individual to be a ‘good leaver’, in which case an APP award would be payable on the termination date, based on performance during the financial year up to termination, and DSP awards would vest on the termination date. Examples of circumstances in which a Director would be treated as a ‘good leaver’ include redundancy, retirement, illness, injury, disability and death. Any APP award would be prorated and would be subject to performance achieved against the objectives for that year.
On termination of employment, outstanding awards under the share plans will be treated in accordance with the relevant plan rules approved by shareholders. Share awards would normally lapse. ‘Good leaver’ provisions apply at the Committee’s discretion and in specified circumstances, including redundancy, retirement, illness, injury, disability and death, where awards will be released to the departing Executive Director or, in the case of death, to their estate. Long-term share plan awards held by ‘good leavers’ may vest subject to performance measured at the normal vesting date and are prorated. Such awards would vest at the same time as for other participants.
The Chairman’s appointment is subject to six months’ notice by either party; for the other Non-executive Directors, notice is one month. No compensation is payable to Non-executive Directors if required to stand down.
| 74 |
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| ||||||
| ||||||||
| Corporate Governance | ||||||||
|
|
Annual report on remuneration
Statement of implementation of remuneration policy in 2015/16
Role of Remuneration Committee
The Committee is responsible for recommending to the Board the remuneration policy for Executive Directors and the other members of the Executive Committee and for the Chairman, and for implementing this policy. The aim is to align remuneration policy to Company strategy and key business objectives and ensure it reflects our shareholders’, customers’ and regulators’ interests. The members of the Remuneration Committee in 2015/16 were Nora Mead Brownell, Jonathan Dawson (chair), Paul Golby and Mark Williamson.
The Committee activities during the year
| Meeting | Main areas of discussion | |
April | 2014/15 individual objectives scoring for Executive Committee | |
| Discussion of 2015/16 objectives for Executive Committee | ||
| Review of Executive Committee shareholdings | ||
Review of Committee terms of reference | ||
May | Annual salary review and LTPP proposals for Executive Committee | |
| 2014/15 APP financial outturns and individual performance and confirmation of awards | ||
| Final approval of 2015/16 objectives for Executive Committee | ||
| Final approval of APP targets for 2015/16 financial year | ||
| Review of gender and ethnicity pay statistics | ||
October | Approval of remuneration package for incoming CEO and of payments | |
on retirement for outgoing CEO | ||
November | Update on corporate governance and disclosure issues and review of AGM outcomes | |
| Directors’ Remuneration Report planning for 2016 | ||
| Review of competitive benchmarking for secondary comparator groups | ||
| Review of gender and ethnicity pay statistics disclosure for external website | ||
Update on 2015/16 APP and outstanding LTPPs | ||
March | Approval of remuneration package for incoming Executive Director, UK | |
| Benchmarking data review for Executive Committee remuneration | ||
| 2016 Directors’ Remuneration Report – review of first draft | ||
| Discussion of metrics and targets for APP and LTPP for 2016/17 | ||
Review of objectives for Executive Committee for APP 2016/17 | ||
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| Annual report on remuneration Statement of implementation of remuneration policy in 2013/14
Role of Remuneration Committee The Committee is responsible for recommending to the Board the remuneration policy for Executive Directors and the other members of the Executive Committee and for setting the remuneration policy for the Chairman. The aim is to align remuneration policy to Company strategy and key business objectives and ensure it reflects our shareholders’, customers’ and regulators’ interests.
Members of the Committee All members of the Committee are independent. Committee membership during the year and attendance at meetings is set out below:
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Member
| Number of possible the year
| Number of
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Jonathan Dawson – chairman from 29 July 2013 |
| 6 | 6 | |||||||||||||||||||||||||||||||||||||||||||||||
Nora Mead Brownell |
| 6 | 5 | |||||||||||||||||||||||||||||||||||||||||||||||
Paul Golby |
| 6 | 6 | |||||||||||||||||||||||||||||||||||||||||||||||
Ken Harvey – chairman until 29 July 2013 |
| 2 | 2 | |||||||||||||||||||||||||||||||||||||||||||||||
George Rose |
| 2 | 2 | |||||||||||||||||||||||||||||||||||||||||||||||
Mark Williamson – appointed on 29 July 2013
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| 4
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| 4
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1. Ken Harvey and George Rose stepped down from the Board with effect from 29 July 2013. |
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The Committee’s activities during the year
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| Meeting
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| Main areas of discussion
|
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April |
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Individual performance for the 2012/13 APP |
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| Framework for the 2013/14 APP | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2013 Directors’ Remuneration Report | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Terms of reference and code of conduct for advisors to the Committee | ||||||||||||||||||||||||||||||||||||||||||||||||||
May |
|
Annual salary review for Executive Directors and Executive Committee |
| |||||||||||||||||||||||||||||||||||||||||||||||
| 2012/13 APP outturns and confirmation of awards | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2013 LTPP awards | ||||||||||||||||||||||||||||||||||||||||||||||||||
July |
|
2010 Performance Share Plan (PSP, the predecessor to the LTPP) final performance |
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| Appointment of new advisors to the Committee | ||||||||||||||||||||||||||||||||||||||||||||||||||
November |
|
New incentive plans (APP and LTPP) design |
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| Review of outcome from AGM | ||||||||||||||||||||||||||||||||||||||||||||||||||
January |
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Shareholder consultation on new incentive plans |
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February |
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Targets for LTPP and APP proposals |
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| Remuneration policy changes | ||||||||||||||||||||||||||||||||||||||||||||||||||
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| New format remuneration report
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Single total figure of remuneration – Executive Directors (audited information) |
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| The following table shows a single total figure in respect of qualifying service for 2013/14, together with comparative figures for 2012/13:
|
| |||||||||||||||||||||||||||||||||||||||||||||||||
| Salary £’000 | Benefits in kind £’000 | APP £’000 | PSP £’000 | Pension £’000 | Total £’000 | |||||||||||||||||||||||||||||||||||||||||||||
| 2013/14 | 2012/13 | 2013/14 | 2012/13 | 2013/14 | 2012/13 | 2013/14 | 2012/13 | 2013/14 | 2012/13 | 2013/14 | 2012/13 | |||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||
| Andrew Bonfield | 712 | 709 | 55 | 54 | 790 | 677 | 1,418 | – | 214 | 213 | 3,189 | 1,653 | ||||||||||||||||||||||||||||||||||||||
| Steve Holliday | 1,000 | 996 | 35 | 31 | 1,169 | 846 | 2,179 | 670 | 418 | 627 | 4,801 | 3,170 | ||||||||||||||||||||||||||||||||||||||
| Tom King | 715 | 734 | 23 | 24 | 595 | 526 | 1,732 | 466 | 1,111 | 980 | 4,176 | 2,730 | ||||||||||||||||||||||||||||||||||||||
| Nick Winser | 546 | 543 | 12 | 11 | 704 | 500 | 1,177 | 335 | 212 | 148 | 2,651 | 1,537 | ||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2,973 | 2,982 | 125 | 120 | 3,258 | 2,549 | 6,506 | 1,471 | 1,955 | 1,968 | 14,817 | 9,090 | ||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||
1. Base salaries were last increased on 1 June 2012. Tom King’s annual salary was $1,158,000 and was converted at $1.62:£1 in 2013/14 and $1.57:£1 in 2012/13. 2. Benefits in kind include private medical insurance, life assurance, either a fully expensed car or a cash alternative to a car and the use of a driver when required. For Andrew Bonfield, a cash allowance in lieu of additional pension contributions is included within pension rather than benefits in kind. 3. The APP value is the full award before the 50% mandatory deferral into the DSP. 4. During the year, the 2010 PSP award vested and entered a retention period, to be released in June 2014. The above value is based on the share price (744 pence) on the vesting date (1 July 2013). In the prior year the 2009 PSP award vested and entered a retention period, to be released in June 2013. The above valuation is based on the share price (681 pence) on the vesting date (2 July 2012). 5. The pension values for Steve Holliday and Nick Winser represent the additional benefit earned in the year (excluding inflation as measured by the consumer price index (CPI)), multiplied by a factor of 20, less the contributions they made. 6. The pension value for Tom King represents the additional benefit earned in the year multiplied by a factor of 20, plus the Company’s contributions (£7,854) to the 401(k) plan. 7. Andrew Bonfield was a member of the DC pension plan during the year. The pension value represents 30% of salary via a combination of cash allowance in lieu of pension £185,120 (2012/13: £184,385) and Company pension contributions £28,480 (2012/13: £28,367). He opted out of the pension plan from 1 April 2014 and now receives the full cash allowance in lieu of pension of 30% of salary. 8. Pension figures in last year’s report were based on the draft disclosure regulations. The 2012/13 figures in the above table are therefore amended from last year’s report to reflect the final regulations.
|
| |||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||
|
Performance against targets for APP 2013/14 (audited information) APP awards are earned by reference to the financial year and paid in June. The APP awards earned in 2013/14 were:
| ||||||||||||||||||||||||||||||||||||||||||||
| Proportion of salary | ||||||||||||||||||||||||||||||||||||||||||||
| Proportion of max achieved | Andrew Bonfield | Steve Holliday | Tom King | Nick Winser | ||||||||||||||||||||||||||||||||||||||||
| Financial measures | Target | Actual | Max | Actual | Max | Actual | Max | Actual | Max | Actual | ||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||
Adjusted EPS (p/share) | 51.0 | 54.3 | 100% | 25% | 25.00% | 25% | 25.00% | 25% | 25.00% | 25% | 25.00% | |||||||||||||||||||||||||||||||||
Group cash flow (£m) | (188 | ) | 195 | 100% | 40% | 40.00% | 40% | 40.00% | – | – | – | – | ||||||||||||||||||||||||||||||||
UK cash flow (£m) | 1,077 | 1,543 | 100% | – | – | – | – | – | – | 45% | 45.00% | |||||||||||||||||||||||||||||||||
US cash flow ($m) | (62 | ) | (85 | ) | 29.5% | – | – | – | – | 30% | 8.85% | – | – | |||||||||||||||||||||||||||||||
UK RoE (%) | 12.4 | 12.7 | 62.46% | 15% | 9.38% | 15% | 9.38% | – | – | 35% | 21.88% | |||||||||||||||||||||||||||||||||
US RoE (%) | 9.2 | 9.0 | 23.33% | 15% | 3.50% | 15% | 3.50% | 25% | 5.83% | – | – | |||||||||||||||||||||||||||||||||
US capital plan delivery (£m) | 1,192 | 1,219 | 90.3% | 10% | 9.03% | 10% | 9.03% | 25% | 22.58% | – | – | |||||||||||||||||||||||||||||||||
Individual objectives
|
| See below
|
| 45%
|
|
| 24.00%
|
|
| 45%
|
| 30.00%
|
| 45%
|
|
| 21.00%
|
|
| 45%
|
| 37.00%
| ||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||
Totals | 150% | 110.91% | 150% | 116.91% | 150% | 83.26% | 150% | 128.88% | ||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||
APP awarded | £789,679 | £1,169,100 | £595,155 | £703,685 | ||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||
1. |
In relation to the financial measures, threshold, target and stretch performance pays out at 6.67%, 40% and 100% respectively and on a straight-line basis in between threshold and target performance and target and stretch performance. | |||||||||||||||||||||||||||||||||||||||||||
2. | Adjusted EPS is amended for the impact of timing and actuarial assumptions on pensions and OPEBs. | |||||||||||||||||||||||||||||||||||||||||||
3. | Group cash flow excludes working capital movements and dividends, and is also amended for the impact of timing and certain LIPA transition costs. | |||||||||||||||||||||||||||||||||||||||||||
Individual objectives The following table indicates the primary areas of focus of the individual performance objectives that the Executive Directors had for 2013/14. Threshold, target and stretch performance pays out at 0%, 50% and 100% respectively overall. Overall performance against these objectives is shown in the table:
| ||||||||||||||||||||||||||||||||||||||||||||
Andrew
| Steve Holliday
| Tom King
| Nick
| |||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||
Safety
| —
|
| —
|
| —
| |||||||||||||||||||||||||||||||||||||||
Stakeholder relations
| —
|
—
| ||||||||||||||||||||||||||||||||||||||||||
Employee engagement
|
|
| —
|
| —
|
| —
|
| —
| |||||||||||||||||||||||||||||||||||
Capability development
|
| —
|
| |||||||||||||||||||||||||||||||||||||||||
Financial strategy
|
| —
|
| |||||||||||||||||||||||||||||||||||||||||
Operational excellence
|
| —
|
| |||||||||||||||||||||||||||||||||||||||||
UK Electricity Market Reform (EMR)
| —
| |||||||||||||||||||||||||||||||||||||||||||
US foundation (system implementation)
|
| —
|
|
| —
|
| ||||||||||||||||||||||||||||||||||||||
Group strategy
| —
| |||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||
Proportion of maximum achieved
|
| 53.33%
|
| 66.67%
|
| 46.67%
|
| 82.22%
| ||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||
2013/14 PSP performance (audited information) The PSP value included in the 2013/14 single total figure relates to vesting of the conditional PSP award granted in 2010. Vesting was determined as at 30 June 2013 and was dependent on performance over the three years ending 31 March 2013 for the EPS measure and over the three years ending 30 June 2013 for the TSR measure. Transfer remains conditional upon continued service until 30 June 2014. The performance achieved against the performance targets was:
| ||||||||||||||||||||||||||||||||||||||||||||
Performance measure
| Threshold – 25% vesting
| Maximum – 100% vesting
| Actual
| Proportion of
| ||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||
| TSR ranking | Ranked at median of the comparator group (FTSE 100) | 7.5 percentage points or more above median | 5.7 percentage points above median | 83.3% | ||||||||||||||||||||||||||||||||||||||||
| Adjusted EPS | EPS growth exceeds RPI increase by 3 percentage points | EPS growth exceeds RPI increase by 8 percentage points or more | Exceeded RPI by 6.5 percentage points | 77.9% | ||||||||||||||||||||||||||||||||||||||||
| Total | 80.6% | |||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||
1. |
The total proportion of maximum achieved is the weighted average of the proportion of maximum achieved for each performance measure. Each of the two measures had a 50% weighting. | |||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
Total pension entitlements (audited information) The table below provides details of the Executive Directors’ pension benefits:
| ||||||||||||||||||||||||||||||||||||||||||
Total contributions to DC-type pension plan £’000
| Cash in lieu of contributions to DC-type pension plan £’000
| Accrued pension at 31 March 2014 £’000 pa
| Increase in accrued pension over year, net of inflation £’000 pa
| Transfer value of accrued benefits as at 31 March 2014 £’000
| Transfer value of increase in accrued pension over year, net of inflation £’000
| Normal retirement date
| ||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||
Andrew Bonfield | 28 | 185 | – | – | – | – | 17/08/2027 | |||||||||||||||||||||||||||||||||||
Steve Holliday | – | – | 506 | 17 | 13,013 | 379 | 26/10/2016 | |||||||||||||||||||||||||||||||||||
Tom King | 8 | – | 491 | 55 | 4,112 | 462 | 01/01/2027 | |||||||||||||||||||||||||||||||||||
Nick Winser | – | – | 284 | 10 | 6,341 | 173 | 06/09/2020 | |||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||
1. |
The UK-based Executive Directors participate in FPS, a salary sacrifice arrangement for pension contributions. Contributions paid via salary sacrifice have been deducted from the figures in the table above. | |||||||||||||||||||||||||||||||||||||||||
2. |
For Steve Holliday, in addition to the pension above, there is an accrued lump sum entitlement of £125,000 as at 31 March 2014. There was no increase to the accumulated lump sum including and excluding inflation in the year to 31 March 2014. The transfer value information above includes the value of the lump sum. Steve paid contributions of £44,000 via FPS. | |||||||||||||||||||||||||||||||||||||||||
3. |
For Nick Winser, in addition to the pension above, there is an accrued lump sum entitlement of £313,000 as at 31 March 2014. The increase to the accumulated lump sum including inflation was £7,000 and excluding inflation was £nil in the year to 31 March 2014. The transfer value information above includes the value of the lump sum. Nick paid contributions of £33,000 via FPS. | |||||||||||||||||||||||||||||||||||||||||
4. |
For Tom King, the exchange rate as at 31 March 2014 was $1.67:£1 and as at 31 March 2013 was $1.52:£1. In addition to the transfer value quoted above, through participation in a 401(k) plan in the US, the Company made contributions worth £7,854 to a DC arrangement. | |||||||||||||||||||||||||||||||||||||||||
5. |
The increase in accrued pension figures for Steve Holliday and Nick Winser are net of inflation based on RPI for September 2013. The figures in the single figure table on page 67 are based on inflation using CPI for September 2012. If the same inflation measure was used for this table the relevant figures would be an increase in pension of £23,100 for Steve and £12,250 for Nick. Multiplying these figures by a factor of 20 and deducting member contributions correlates to the values in the single figure table. Tom King’s pension figures do not allow for inflation as US pensions in payment or deferment do not increase in line with inflation. For Tom, multiplying the increase in accrued pension over the year, shown above (£55,150), by a factor of 20 and adding Company contributions to a DC-type pension plan, shown above, correlates to the value in the single figure table. | |||||||||||||||||||||||||||||||||||||||||
6. |
There are no additional benefits in the event of early retirement. | |||||||||||||||||||||||||||||||||||||||||
Single total figure of remuneration – Non-executive Directors (audited information) The following table shows a single total figure in respect of qualifying service for 2013/14, together with comparative figures for 2012/13:
| ||||||||||||||||||||||||||||||||||||||||||
Fees £’000
| Other emoluments £’000
| Total £’000
| ||||||||||||||||||||||||||||||||||||||||
| 2013/14 | 2012/13 | 2013/14 | 2012/13 | 2013/14 | 2012/13 | |||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||
Philip Aiken | 88 | 84 | – | – | 88 | 84 | ||||||||||||||||||||||||||||||||||||
Nora Mead Brownell | 88 | 73 | – | – | 88 | 73 | ||||||||||||||||||||||||||||||||||||
Jonathan Dawson | 84 | 6 | – | – | 84 | 6 | ||||||||||||||||||||||||||||||||||||
Therese Esperdy | 3 | – | – | – | 3 | – | ||||||||||||||||||||||||||||||||||||
Sir Peter Gershon | 475 | 475 | 17 | 17 | 492 | 492 | ||||||||||||||||||||||||||||||||||||
Paul Golby | 76 | 76 | – | – | 76 | 76 | ||||||||||||||||||||||||||||||||||||
Ken Harvey | 36 | 108 | – | – | 36 | 108 | ||||||||||||||||||||||||||||||||||||
Ruth Kelly | 76 | 76 | – | – | 76 | 76 | ||||||||||||||||||||||||||||||||||||
Maria Richter | 101 | 101 | – | – | 101 | 101 | ||||||||||||||||||||||||||||||||||||
George Rose | 30 | 91 | – | – | 30 | 91 | ||||||||||||||||||||||||||||||||||||
Mark Williamson | 99 | 44 | – | – | 99 | 44 | ||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||
Total | 1,156 | 1,134 | 17 | 17 | 1,173 | 1,151 | ||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||
1. |
Sir Peter Gershon’s other emoluments comprise private medical insurance, cash in lieu of a car and the use of a driver when required. | |||||||||||||||||||||||||||||||||||||||||
Payments for loss of office or to past Directors (audited information) No payments were made in 2013/14 for these circumstances.
| ||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||
|
LTPP and DSP (conditional awards) granted during the financial year (audited information)
| ||||||||||||
| LTPP | Basis of award | Face value ’000 | Proportion vesting at threshold performance | Number of shares | Performance period end date | |||||||
| ||||||||||||
Andrew Bonfield
| 200% of salary
| £1,424
| 25%
| 194,798
| June 2016 and June 2017 | |||||||
Steve Holliday
| 225% of salary
| £2,250
| 25%
| 307,793
|
June 2016 and June 2017 | |||||||
Tom King
| 200% of salary
| $2,316
| 25%
| 41,225 (ADSs)
|
June 2016 and June 2017 | |||||||
Nick Winser | 200% of salary | £1,092 | 25% | 149,382 |
June 2016 and June 2017 | |||||||
| ||||||||||||
1. The face value of the awards is calculated using the share price at the date of grant (27 June 2013) (£7.3101 per share and $56.1784 per ADS).
| ||||||||||||
| DSP | Basis of award | Face value ’000 | Number of shares | Release date | ||||||||
| ||||||||||||
Andrew Bonfield | 50% of APP value | £339 | 45,706 | 13 June 2016 | ||||||||
Steve Holliday | 50% of APP value | £423 | 57,118 | 13 June 2016 | ||||||||
Tom King | 50% of APP value | $413 | 7,119 (ADSs) | 13 June 2016 | ||||||||
Nick Winser | 50% of APP value | £250 | 33,741 | 13 June 2016 | ||||||||
| ||||||||||||
1. The face value of the awards is calculated using the share price at the date of grant (13 June 2013) (£7.4092 per share and $57.9720 per ADS). 2. The award made in 2013/14 is 50% of the 2012/13 APP value. | ||||||||||||||
Performance conditions for LTPP awards granted during the financial year
| ||||||||||||||
Weighting | Conditional share awards granted – 2013 | |||||||||||||
| Performance measure | Andrew Bonfield | Steve Holliday | Tom King | Nick Winser | Threshold – 25% vesting | Maximum –100% vesting | ||||||||
| ||||||||||||||
| TSR ranking | 25% | 25% | 25% | 25% | At median of comparator group (FTSE 100) | 7.5 percentage points or more above median | ||||||||
Adjusted EPS |
50% |
50% |
50% |
50% |
EPS growth exceeds RPI increase by 3 percentage points |
EPS growth exceeds RPI increase by 8 percentage points or more | ||||||||
UK RoE |
12.5% |
12.5% |
– |
25% |
Equal to the average allowed regulatory return |
2 percentage points or more above the allowed regulatory return | ||||||||
US RoE |
12.5% |
12.5% |
25% |
– |
1 percentage point below the allowed regulatory return
|
1 percentage point or more above the allowed regulatory return
| ||||||||
| ||||||||||||||
Conditions for DSP awards granted during the financial year DSP awards are subject only to continuous employment.
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 2014, had headroom of 4.01% and 7.99% respectively.
Statement of Directors’ shareholdings and share interests (audited information) The Executive Directors are required to build up and hold a shareholding from vested share plan awards. Deferred share awards are not taken into account for these purposes until the end of the deferral period. Shares are valued for these purposes at the 31 March 2014 price, which was 822 pence per share ($68.74 per ADS).
The following table shows how each Executive Director complies with the shareholding requirement and also the number of shares owned by the Non-executive Directors, including connected persons. For Ken Harvey and George Rose, the shareholding is as at the date they stepped down from the Board. For all others it is 31 March 2014.
| ||||||||||||||
|
|
|
|
|
Directors
| Share ownership requirements (multiple of salary)
| Number of shares required to hold
| Number of shares owned outright (including connected persons)
| Number of shares held as a multiple of current salary
| Share ownership requirements met
| Vested but unreleased share award subject to continuous employment (PSP 2010)
| Conditional share awards subject to performance conditions (LTPP 2011, 2012 and 2013)
| Conditional share awards subject to continuous employment (DSP 2011, 2012 and 2013)
| ||||||||||||
| ||||||||||||||||||||
Executive Directors | ||||||||||||||||||||
Andrew Bonfield | 125% | 108,273 | 699 | <1% | No | 190,589 | 637,356 | 130,040 | ||||||||||||
Steve Holliday | 200% | 243,309 | 752,031 | 618% | Yes | 292,880 | 1,006,643 | 230,410 | ||||||||||||
Tom King | 125% | 21,058 | 71,336 | 423% | Yes | 46,556 | 131,378 | 32,388 | ||||||||||||
Nick Winser
| 125%
| 83,029
| 355,413
| 535%
| Yes
| 158,262
| 487,780
| 121,777
| ||||||||||||
| ||||||||||||||||||||
Non-executive Directors | ||||||||||||||||||||
Philip Aiken | – | – | 4,900 | n/a | n/a | – | – | – | ||||||||||||
Nora Mead Brownell | – | – | 5,000 | n/a | n/a | – | – | – | ||||||||||||
Jonathan Dawson | – | – | 24,000 | n/a | n/a | – | – | – | ||||||||||||
Therese Esperdy | – | – | – | n/a | n/a | – | – | – | ||||||||||||
Sir Peter Gershon | – | – | 75,771 | n/a | n/a | – | – | – | ||||||||||||
Paul Golby | – | – | 2,500 | n/a | n/a | – | – | – | ||||||||||||
Ken Harvey | – | – | 5,236 | n/a | n/a | – | – | – | ||||||||||||
Ruth Kelly | – | – | 800 | n/a | n/a | – | – | – | ||||||||||||
Maria Richter | – | – | 14,357 | n/a | n/a | – | – | – | ||||||||||||
George Rose | – | – | 6,792 | n/a | n/a | – | – | – | ||||||||||||
Mark Williamson
| –
| –
| 4,726
| n/a
| n/a
| –
| –
| –
| ||||||||||||
| ||||||||||||||||||||
1. |
The salary used to calculate the value of shareholding is the salary earned in the year. | |||||||||||||||||||
2. |
Andrew Bonfield has not met the shareholding requirement as none of the share awards in the plans in which he has participated have been released yet. | |||||||||||||||||||
3. |
Tom King’s holdings and awards are shown as ADSs and each ADS represents five ordinary shares. | |||||||||||||||||||
4. |
The release date for the PSP 2010 is 29 June 2014. | |||||||||||||||||||
5. |
On 31 March 2014 Andrew Bonfield held 3,421 options granted under the Sharesave plan. These options were granted at a value of 445 pence per share, and they can be exercised at 445 pence per share between April 2016 and September 2016. | |||||||||||||||||||
6. |
On 12 June 2013 Steve Holliday exercised two Share Match awards, totalling 37,475 shares. This comprised (i) an award of 16,092 options, expiring in June 2013, exercised for 100 pence in total, and (ii) an award of 21,383 options, expiring in May 2014, exercised for nil value. These shares are included in the table above (‘Number of shares owned outright’). In addition, on 7 April 2014, he exercised a Sharesave option over 3,921 shares at the option price of 427.05 pence per share before expiration in September 2014. | |||||||||||||||||||
7. |
For Andrew Bonfield, the number of conditional share awards subject to performance conditions is as follows: LTPP 2011: 229,463; LTPP 2012: 213,095; LTPP 2013: 194,798. The number of conditional share awards subject to continuous employment is as follows: DSP 2011: 29,184; DSP 2012: 55,150; DSP 2013: 45,706. | |||||||||||||||||||
8. |
For Steve Holliday, the number of conditional share awards subject to performance conditions is as follows: LTPP 2011: 362,148; LTPP 2012: 336,702; LTPP 2013: 307,793. The number of conditional share awards subject to continuous employment is as follows: DSP 2011: 97,359; DSP 2012: 75,933; DSP 2013: 57,118. | |||||||||||||||||||
9. |
For Tom King, the number of conditional awards over ADSs subject to performance conditions is as follows: LTPP 2011: 45,537; LTPP 2012: 44,616; LTPP 2013: 41,225. The number of conditional awards over ADSs subject to continuous employment is as follows: DSP 2011: 13,937; DSP 2012: 11,332; DSP 2013: 7,119. | |||||||||||||||||||
10. |
For Nick Winser, the number of conditional share awards subject to performance conditions is as follows: LTPP 2011: 174,986; LTPP 2012: 163,412; LTPP 2013: 149,382. The number of conditional share awards subject to continuous employment is as follows: DSP 2011: 48,354; DSP 2012: 39,682; DSP 2013: 33,741. | |||||||||||||||||||
11. |
The normal vesting dates for the conditional share awards subject to performance conditions are 1 July 2014 and 1 July 2015; 1 July 2015 and 1 July 2016; and 1 July 2016 and 1 July 2017 for the LTPP 2011, LTPP 2012 and LTPP 2013 respectively. The normal vesting dates for the conditional share awards subject to continuous employment are 15 June 2014; 14 June 2015; and 13 June 2016 for the DSP 2011, DSP 2012 and DSP 2013 respectively. | |||||||||||||||||||
12. |
Non-executive Directors do not have a shareholding requirement. | |||||||||||||||||||
13. |
In April and May 2014 a further 30 shares were purchased on behalf of both Steve Holliday and Andrew Bonfield via the Share Incentive Plan (an HMRC approved all-employee share plan), thereby increasing their beneficial interests. There have been no other changes in Directors’ shareholdings between 1 April 2014 and 18 May 2014. | |||||||||||||||||||
External appointments and retention of fees The table below details the Executive Directors who served as non-executive directors in other companies during the year ended 31 March 2014:
| ||||||||||||||||||||
| Company | Retained fees (£) | |||||||||||||||||||
| ||||||||||||||||||||
Andrew Bonfield | Kingfisher plc | 81,200 | ||||||||||||||||||
Steve Holliday | Marks and Spencer Group plc | 85,000 | ||||||||||||||||||
Nick Winser
| Kier Group plc
| 53,700
| ||||||||||||||||||
| ||||||||||||||||||||
Relative importance of spend on pay | ||||||||||||||||||||
This chart shows the relative importance of spend on pay compared with other costs and disbursements (dividends, tax, net interest and capital expenditure). Given the capital-intensive nature of our business and the scale of our operations, these costs were chosen as the most relevant for comparison purposes. All amounts exclude exceptional items, remeasurements and stranded cost recoveries.
|  | |||||||||||||||||||
| ||||||||||||
|
Performance graph and table This chart shows National Grid plc’s five year annual total shareholder return (TSR) performance against the FTSE 100 index, of which National Grid is a constituent. It assumes dividends are reinvested. 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. |
| |||||||||||||||||||
CEO’s pay in the last five financial years Steve Holliday was the CEO throughout this five year period.
| ||||||||||||||||||||
| 2009/10 | 2010/11 | 2011/12 | 2012/13 | 2013/14 | ||||||||||||||||
| ||||||||||||||||||||
| Total single figure £’000 | 3,931 | 3,738 | 3,539 | 3,170 | 4,801 | |||||||||||||||
APP (proportion of maximum awarded) | 95.33% | 81.33% | 68.67% | 56.65% | 77.94% | |||||||||||||||
PSP (proportion of maximum vesting) | 100.00% | 65.15% | 49.50% | 25.15% | 76.20% | |||||||||||||||
| ||||||||||||||||||||
Percentage change in CEO’s remuneration The table below shows how the percentage change in the CEO’s salary, benefits and APP between 2013/14 and 2012/13 compares with the percentage change in the average of each of those components of remuneration for non-union employees in the UK. The Committee views this group as the most appropriate comparator group, as the CEO is UK-based and this group excludes employees represented by trade unions, whose pay and benefits are negotiated with each individual union.
| ||||||||||||||||||||
Salary | Taxable benefits | APP | ||||||||||||||||||
| £’000 | £’000 | Increase | £’000 | £’000 | Increase | £’000 | £’000 | Increase | ||||||||||||
|
|
| ||||||||||||||||||
| 2013/14 | 2012/13 | 2013/14 | 2012/13 | 2013/14 | 2012/13 | |||||||||||||||
| ||||||||||||||||||||
| Steve Holliday | 1,000 | 996 | 0.4% | 35 | 31 | 12.9% | 1,169 | 846 | 38.2% | |||||||||||
UK non-union employees (increase per employee) | 2.9% | 0.7% | 10.6% | |||||||||||||||||
| ||||||||||||||||||||
Statement of implementation of remuneration policy in 2014/15 The remuneration policy will be implemented with effect from the 2014 AGM as follows:
| ||||||||||||||||||||
| Salary | ||||||||||||||||||||
’000 | ||||||||||||||||||||
From 1 June 2014 | From 1 June 2013 | Increase | ||||||||||||||||||
| ||||||||||||||||||||
| Andrew Bonfield |
£729.8 |
£712 | 2.5% | |||||||||||||||||
Steve Holliday | £1,025 | £1,000 | 2.5% | |||||||||||||||||
Tom King | $1,186.95 | $1,158 | 2.5% | |||||||||||||||||
John Pettigrew |
£475 |
£475 | 0% | |||||||||||||||||
| ||||||||||||||||||||
APP measures for 2014/15 | ||||||||||||||||||||
| Weighting | ||||||||||||||||||||
| ||||||||||||||||||||
| Adjusted EPS | 35% | |||||||||||||||||||
Group or UK or US RoE | 35% | |||||||||||||||||||
Individual objectives | 30% | |||||||||||||||||||
| ||||||||||||||||||||
The APP targets are considered commercially sensitive and consequently will be disclosed after the end of the financial year in the 2014/15 annual report on remuneration.
| ||||||||||||||||||||
|
|
|
|
|
Performance measures for LTPP to be awarded in 2014
| ||||||||||||||||
Andrew Bonfield | Steve Holliday | Tom King | John Pettigrew | Threshold – 20% vesting | Maximum – 100% vesting | |||||||||||
| ||||||||||||||||
| Group RoE | 50% | 50% | 25% | 25% | 11.0% | 12.5% | ||||||||||
| UK RoE | – | – | – | 25% | Allowed return plus 1 percentage point | Allowed return plus 3.5 percentage points | ||||||||||
| US RoE | – | – | 25% | – | 90% of allowed return | 105% of allowed return | ||||||||||
| Value growth | 50% | 50% | 50% | 50% | 10.0% | 12.0% | ||||||||||
| ||||||||||||||||
NEDs’ fees from 2014 | ||||||||||||||||
£’000 | ||||||||||||||||
From 1 June 2014 | From 1 June 2013 | Increase | ||||||||||||||
| ||||||||||||||||
| Chairman | 490 | 475 | 3.2% | |||||||||||||
Senior Independent Director | 22 | 20 | 10.0% | |||||||||||||
| Board fee (UK-based) | 62 | 60 | 3.3% | |||||||||||||
| Board fee (US-based) | 74 | 72 | 2.8% | |||||||||||||
| Committee membership fee | 9 | 8 | 12.5% | |||||||||||||
| Chair Audit Committee | 17 | 15 | 13.3% | |||||||||||||
| Chair Remuneration Committee | 17 | 12.5 | 36.0% | |||||||||||||
| Chair (other Board committees) | 12.5 | 12.5 | 0% | |||||||||||||
| ||||||||||||||||
1. Committee chair fees are in addition to the committee membership fee.
Advisors to the Remuneration Committee The Committee received advice until 31 July 2013 from independent remuneration consultants Towers Watson. From 1 August 2013 the Committee received advice from independent remuneration consultants New Bridge Street (NBS), a trading name of Aon Hewitt Ltd (part of Aon plc). NBS were selected as advisors by the Committee following a competitive tendering process.
Work undertaken by these advisors included updating the Committee on trends in compensation and governance matters and advising the Committee in connection with benchmarking of the total reward packages for the Executive Directors and other senior employees. NBS and Towers Watson are members of the Remuneration Consultants Group and have signed up to that group’s Code of Conduct. Towers Watson also provides general remuneration, pension and benefits advice and services to the Company. The Committee is satisfied that any potential conflicts were appropriately managed. NBS does not provide any other advice or services to the Company. In the year to 31 March 2014 the Committee paid a total of £262,000 to NBS and Towers Watson, with fees being charged on a time incurred basis.
The Committee also received specialist advice from the following organisations:
| ||||||||||||||||
Ÿ Alithos Limited: provision of TSR calculations for the PSP and LTPP (£25,000 paid in 2013/14); | ||||||||||||||||
• Linklaters LLP: advice relating to share schemes and to Directors’ service contracts as well as providing other legal advice to the Company (£26,000 paid in 2013/14); and | ||||||||||||||||
Ÿ KPMG LLP: advice relating to pension matters (£72,000 paid in 2013/14). | ||||||||||||||||
The Committee reviews the objectivity and independence of the advice it receives from its advisors each year. It is satisfied that they all provided credible and professional advice.
The Committee considers the views of the Chairman on the performance and remuneration of the CEO; and of the CEO on the performance and remuneration of the other members of the Executive Committee. The Committee is also supported by the Group General Counsel & Company Secretary who acts as Secretary to the Committee, the Group HR Director, the Global Head of Reward and the Global Head of Pensions. No other advisors have provided significant services to the Committee in the year.
Voting on 2012/13 Remuneration Report at 2013 AGM
| ||||||||||||||||
| For | Against | |||||||||||||||
| ||||||||||||||||
Number of votes
| 2,201m
| 20m
| ||||||||||||||
| Proportion of votes | 99.1% | 0.9% | ||||||||||||||
| ||||||||||||||||
1. The voting figures shown above refer to votes cast at the 2013 AGM. In addition, shareholders holding 147m shares abstained.
| ||||||||||||||||
The Remuneration Report has been approved by the Board and signed on its behalf by:
Jonathan Dawson Chairman of the Remuneration Committee 18 May 2014
| ||||||||||||||||
Single total figure of remuneration – Executive Directors (audited information) | ||||||||||||||||||||||||||||
| The following table shows a single total figure in respect of qualifying service for 2015/16, together with comparative figures for 2014/15: | ||||||||||||||||||||||||||||
Salary £’000 | Benefits in kind £’000 | APP £’000 | LTPP £’000 | Pension £’000 | Other £’000 |
Total £’000 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015/16 | 2014/15 | 2015/16 | 2014/15 | 2015/16 | 2014/15 | 2015/16 | 2014/15 | 2015/16 | 2014/15 | 2015/16 | 2014/15 | 2015/16 | 2014/15 | |||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Andrew Bonfield | 736 | 727 | 61 | 58 | 865 | 854 | 1,345 | 1,271 | 221 | 218 | – | – | 3,228 | 3,128 | ||||||||||||||||||||||||||||||||||||||||
Steve Holliday | 1,033 | 1,021 | 41 | 40 | 1,222 | 1,210 | 2,125 | 2,004 | 730 | 523 | – | – | 5,151 | 4,798 | ||||||||||||||||||||||||||||||||||||||||
John Pettigrew | 503 | 475 | 14 | 18 | 503 | 527 | 406 | 396 | 143 | 451 | – | – | 1,569 | 1,867 | ||||||||||||||||||||||||||||||||||||||||
Dean Seavers | 678 | – | 39 | – | 649 | – | – | – | 148 | – | 170 | – | 1,684 | – | ||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 2,950 | 2,223 | 155 | 116 | 3,239 | 2,591 | 3,876 | 3,671 | 1,242 | 1,192 | 170 | – | 11,632 | 9,793 | ||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Notes:
Salary: Base salaries were last increased on 1 June 2015. At this time Andrew Bonfield and Steve Holliday received salary increases of approximately 1%, in line with the salary increases given to other managerial employees of the Company in the UK. John Pettigrew was given an increase of 7% to move closer towards market as Executive Director, UK in 2015/16. Dean Seavers joined the Board on 1 April 2015 and was not given a salary increase at 1 June 2015, in line with other managerial employees of the Company in the US. Dean Seavers’ base salary has been converted at $1.4744:£1 for 2015/16.
Benefits in kind: Benefits in kind include private medical insurance, life assurance, and for UK Executive Directors, either a fully expensed car or a cash alternative to a car and the use of a driver when required. For Andrew Bonfield, it also includes the benefits of Sharesave options granted during the year. For Dean Seavers, this amount includes relocation payments.
Other:For Dean Seavers, Other includes the second $250,000 cash payment for forfeited bonuses from his former employer.
LTPP: A portion of the 2012 LTPP award vested in July 2015, and the remainder is due to vest in July 2016. The above value for 2015/16 is based on the share price (818 pence) on the vesting date (1 July 2015) for that portion that vested on 1 July 2015, and the average share price over the three months from 1 January 2016 to 31 March 2016 (958 pence) for that portion due to vest on 1 July 2016. The 2014/15 LTPP amount has been restated to reflect the actual amounts vested on 1 July 2015 for RoE, rather than the estimate shown in last year’s Annual Report. Due to a lower share price at vesting of 818 pence ($64.17 per ADS) versus the estimate of 899 pence ($70.33 per ADS), the actual value at vesting was £29,358, £46,335, and £12,441 lower than the estimate for Andrew Bonfield, Steve Holliday and John Pettigrew respectively.
| National Grid Annual Report and Accounts 2015/16 | Annual report on remuneration | 75 |
Corporate Governancecontinued
Annual report on remunerationcontinued
Performance against targets for APP 2015/16 (audited information)
APP awards are earned by reference to the financial year and paid in June. Fifty percent of awards are paid in shares which (after any sales to pay tax) must be retained until the shareholding requirement is met, and in any event for two years after receipt. In relation to both the financial measures and individual objectives, threshold, target and stretch performance levels are pre-determined and pay out at 0%, 50% and 100% respectively and on a straight-line basis in between threshold and target performance and target and stretch performance. Individual objectives of the Executive Directors reflect the primary focus areas within the Company’s overall strategic priorities:
| ● | building on our strong safety performance; |
| ● | the drive for business growth in the UK and US; |
| ● | delivery of operational excellence and improvement in overall Company performance and service to customers; |
| ● | promotion of innovative ideas to work more efficiently and effectively; |
| ● | strengthening the talent pipeline and keeping all our employees fully engaged; and |
| ● | working with external stakeholders to shape energy policy and embed sustainability into our decision-making to preserve natural resources and focus on environmental issues. |
The outcomes of APP awards earned in 2015/16, along with detail of individual objectives, are shown in the figures below:
| Proportion of max opportunity | Threshold | Target | Stretch | Actual | Proportion achieved | |||||||||||||||||||
Adjusted EPS (p/share) | 35% | 56.2 | 59.2 | 62.2 | 62.3 | 100% | ||||||||||||||||||
Group RoE (%) | 11.2 | 11.6 | 12.0 | 12.0 | 100% | |||||||||||||||||||
�� UK RoE (%) | 35% | 13.25 | 13.3 | 55% | ||||||||||||||||||||
US RoE (%) | 8.25 | 8.25 | 50% | |||||||||||||||||||||
Individual objectives | 30% | See adjacent table | 80–86% | |||||||||||||||||||||
Notes:
Overall: Group RoE pertains to the CEO and Finance Director, whilst UK RoE and US RoE pertain to the Executive Director, UK and Executive Director, US, respectively. RoE in some form comprises 35% of the total maximum APP opportunity.
Adjusted EPS: Adjusted EPS actual is reduced by 1.2 pence to account for the impact of timing, absence of a budgeted rise in the UK corporate tax rate, and the impact of scrip dividend uptake and currency adjustments.
Group RoE: Group RoE actual is reduced by 30 basis points to account for the absence of a budgeted rise in the UK corporate tax rate.
US RoE: US RoE actual is adjusted to capture half of the realised gains achieved from the exchange of National Grid USA’s share in the Iroquois pipeline joint venture.
| Andrew | Steve | John | Dean | |||||
| Bonfield | Holliday | Pettigrew | Seavers | |||||
Safety | ● | ● | ● | ● | ||||
Group strategy | ● | |||||||
Financial strategy | ● | |||||||
Business growth | ● | ● | ● | ● | ||||
Operational excellence | ● | ● | ● | |||||
Customer experience | ● | ● | ||||||
Employee engagement | ● | ● | ● | ● | ||||
Capability development | ● | ● | ● | ● | ||||
Stakeholder relations | ● | ● | ● | |||||
| Proportion of maximum achieved | 80% | 82% | 86% | 80% |
2015/16 APP as proportion of base salary
2015/16 LTPP performance (audited information)
The LTPP value included in the 2015/16 single total figure relates to vesting of the conditional LTPP award granted in 2012. The 2012 award is determined based on differing performance periods and vesting dates:
| ● | performance over the three years ending 31 March 2015 for the EPS measure (50% weighting), which vested on 1 July 2015; |
| ● | performance over the three years ending 30 June 2015 for the TSR measure (25% weighting), which vested on 1 July 2015; and |
| ● | performance over the four years ending 31 March 2016 for the UK RoE measure and 31 December 2015 for the US RoE measure (25% weighting overall, split by Executive Director as shown overleaf), which will vest on 1 July 2016. |
| 76 | National Grid Annual Report and Accounts 2015/16 | Corporate Governance |
Corporate Governance |
The performance achieved against the targets, including the expected vesting percentage for the RoE measures, was:
| Performance measure | Threshold – 25% vesting | Maximum – 100% vesting | Actual/expected vesting | Actual/expected proportion of maximum achieved | ||||
TSR ranking (25% weighting) | Ranked at median of the comparator group (FTSE 100) | 7.5 percentage points or more above median | 2.99 percentage points above median | 55.0% | ||||
Adjusted EPS (50% weighting) | EPS growth exceeds RPI increase by 3 percentage points | EPS growth exceeds RPI increase by 8 percentage points or more | Exceeded RPI increase by 6.3 percentage points | 74.4% | ||||
UK RoE (12.5% weighting for the CEO and Finance Director; 25% weighting for the Executive Director, UK) | RoE is equal to the average allowed regulatory return | RoE is 2 percentage points or more above the average allowed regulatory return | Exceeded average allowed regulatory return by 3.2 percentage points | 100.0% | ||||
US RoE (12.5% weighting for the CEO and Finance Director; 25% weighting for the former Executive Director, US) | RoE is 1 percentage point below the average allowed regulatory return | RoE is 1 percentage point or more above the average allowed regulatory return | 1.1 percentage points below the average allowed regulatory return | 0% |
The amounts vesting under the 2012 LTPP during the year and included in the 2015/16 single total figure are shown in the table below.
The valuation is based on the following share prices:
| ● | 818 pence ($64.17 per ADS) on the vesting date of 1 July 2015 for the EPS and TSR elements of the award; and |
| ● | average share price over the three months from 1 January 2016 to 31 March 2016 of 958 pence ($69.23 per ADS) for the RoE element of the award. |
| Original number of share awards in 2012 LTPP | Overall vesting percentage (including expected vesting percentage for RoE measure) | Number of awards vesting for RoE | Dividend equivalent shares | Total value of awards (£’000) | ||||||||||||||||
Andrew Bonfield | 213,095 | 63.45% | 135,203 | 23,787 | 1,345 | |||||||||||||||
Steve Holliday | 336,702 | 63.45% | 213,628 | 37,586 | 2,125 | |||||||||||||||
John Pettigrew | 52,395 | 75.95% | 39,793 | 7,136 | 406 | |||||||||||||||
Dean Seavers | – | – | – | – | – | |||||||||||||||
Last year’s Directors’ Remuneration Report covering remuneration for 2014/15 included an estimated vesting of the US and UK RoE portions of the 2011 LTPP award. These awards vested on 1 July 2015 and the performance achieved against the performance targets was the same as the expected vesting disclosed in the 2014/15 report. As a result of the actual achievement against the performance targets being the same as estimated, the vesting percentage and number of awards vesting are the same as disclosed in the 2014/15 report. However, the actual number of dividend equivalent shares varied as did the total value of awards vesting due to share price changes between the estimate and the actual date of vesting of the RoE portion. Specifically, the actual price on 1 July 2015 was 818 pence ($64.17 per ADS) rather than the estimate of 899 pence ($70.33 per ADS) disclosed in the 2014/15 report based on the average price from 1 January 2015 to 31 March 2015. As a result, the actual numbers of dividend equivalent shares granted for the 2011 LTPP were 22,454, 35,440 and 7,261 and the actual values of the awards at vesting were £29,358, £46,335 and £12,441 lower than originally estimated for Andrew Bonfield, Steve Holliday and John Pettigrew respectively.
Total pension benefits (audited information)
The table below provides details of the Executive Directors’ pension benefits. Steve Holliday and John Pettigrew participate in a Defined Benefit pension plan, whilst Andrew Bonfield receives cash in lieu of participation in a pension plan, and Dean Seavers participates in a Defined Contribution arrangement. The UK-based Executive Directors in a Defined Benefit pension participate in a salary sacrifice arrangement (FPS), under which the individual’s salary is reduced by an amount equal to the employee pension contribution that would have been paid into the scheme. An equivalent contribution is paid into the scheme by the employer. There are no additional benefits in the event of early retirement.
| Total contributions to DC arrangement £’000 | Cash in lieu of pension contributions £’000 | Accrued DB pension at 31 March 2016 £’000 pa | Increase in accrued DB pension over year £’000 pa | Reduction £’000 | Increase/ £’000 | Value of pension benefit £’000 | Normal date | |||||||||||||||||||||||||
Andrew Bonfield | – | 221 | – | – | – | – | 221 | 17/08/2027 | ||||||||||||||||||||||||
Steve Holliday | – | – | 591 | 39 | 62 | 2 | 730 | 26/10/2016 | ||||||||||||||||||||||||
John Pettigrew | – | – | 151 | 7 | 29 | 23 | 143 | 26/10/2031 | ||||||||||||||||||||||||
Dean Seavers | 148 | – | – | – | – | – | 148 | 30/08/2025 | ||||||||||||||||||||||||
Notes:
Steve Holliday: In addition to the accrued DB pension at 31 March 2016 above, there is an accrued lump sum entitlement of £129,000 as at 31 March 2016. The increase to the accumulated lump sum, net of inflation, was £2,000 in the year to 31 March 2016. The increase in accrued DB pension over the year shown above is net of inflation, as UK pensions in payment or deferment increase in line with inflation.
John Pettigrew: In addition to the accrued DB pension at 31 March 2016 above, there is an accrued lump sum entitlement of £452,000 as at 31 March 2016. The increase to the accumulated lump sum, net of inflation, was £23,000 in the year to 31 March 2016. The increase in accrued DB pension over the year shown above is net of inflation, as UK pensions in payment or deferment increase in line with inflation.
Dean Seavers: The average exchange rate for 2015/16 was $1.4744:£1. Through his participation in the 401(k) plan in the US (a DC arrangement) the Company made contributions worth £27,400. The Company also made contributions worth £121,049 to the Non-Qualified Executive Supplemental Retirement Plan which pays the portion of core contributions that cannot be paid under the qualified plan due to IRS limitations. The plan also provides a supplemental top-up benefit through additional company contributions to yield an overall company contribution of 9% of pensionable pay, including both the qualified and non-qualified plan benefits. The retirement date shown is the typical retirement age in the US. The 401(k) plan does not have a retirement age. Benefits can be taken without penalty on leaving the Company from age 55 (subject to vesting requirements) or can be rolled over into another qualifying plan.
BIS calculation: In accordance with BIS methodology, the pension benefit for Andrew Bonfield and Dean Seavers is calculated as the aggregate of contributions made to a DC arrangement and cash in lieu of pension contributions. Also in accordance with BIS methodology, the pension benefit for Steve Holliday and John Pettigrew is calculated as the increase in accrued DB pension over the year shown above multiplied by 20 plus the increase in the lump sum shown above, less the reduction in salary due to FPS. Each element is calculated separately and rounded to produce the numbers in the table above.
| National Grid Annual Report and Accounts 2015/16 | Annual report on remuneration | 77 |
Corporate Governancecontinued
Annual report on remunerationcontinued
Single total figure of remuneration – Non-executive Directors (audited information)
The following table shows a single total figure in respect of qualifying service for 2015/16, together with comparative figures for 2014/15:
Fees £’000 | Other emoluments £’000 | Total £’000 | ||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
| 2015/16 | 2014/15 | 2015/16 | 2014/15 | 2015/16 | 2014/15 | |||||||||||||||||||
| ||||||||||||||||||||||||
Nora Mead Brownell | 94 | 91 | – | – | 94 | 91 | ||||||||||||||||||
Jonathan Dawson | 99 | 96 | – | – | 99 | 96 | ||||||||||||||||||
Therese Esperdy | 128 | 91 | – | – | 128 | 91 | ||||||||||||||||||
Sir Peter Gershon | 494 | 488 | 15 | 16 | 509 | 504 | ||||||||||||||||||
Paul Golby | 103 | 81 | – | – | 103 | 81 | ||||||||||||||||||
Ruth Kelly | 82 | 79 | – | – | 82 | 79 | ||||||||||||||||||
Mark Williamson | 121 | 118 | – | – | 121 | 118 | ||||||||||||||||||
| ||||||||||||||||||||||||
Total | 1,121 | 1,044 | 15 | 16 | 1,136 | 1,060 | ||||||||||||||||||
| ||||||||||||||||||||||||
Therese Esperdy: Fees for 2015/16 include £22,917 in fees for serving on the National Grid USA Board.
Sir Peter Gershon: Other emoluments comprise private medical insurance, cash in lieu of a car and the use of a driver when required.
In accordance with the Company’s expenses policies, Non-executive Directors receive reimbursement for their reasonable expenses for attending Board meetings. In instances where those costs are treated by HMRC as taxable benefits, the Company also meets the associated tax cost to the Non-executive Directors through a PAYE settlement agreement with HMRC.
The total emoluments paid to Executive and Non-executive Directors in the year was £13 million (2014/15: £15 million).
LTPP (conditional award) granted during the financial year (audited information)
The face value of the awards is calculated using the volume-average weighted share price at the date of grant (25 June 2015) (£8.5147 per share and $66.9618 per ADS).
| LTPP | Basis of award | Face value ’000 | Proportion vesting at threshold performance | Number of shares | Performance period end date | |||||||||||||||
| ||||||||||||||||||||
Andrew Bonfield | 300% of salary | £2,211 | 20% | 259,668 | June 2018 | |||||||||||||||
Steve Holliday | 350% of salary | £3,622 | 20% | 425,440 | June 2018 | |||||||||||||||
John Pettigrew | 300% of salary | £1,525 | 20% | 179,072 | June 2018 | |||||||||||||||
Dean Seavers | 300% of salary | $3,000 | 20% | 44,801 (ADSs) | June 2018 | |||||||||||||||
| ||||||||||||||||||||
Performance conditions for LTPP awards granted during the financial year (audited information)
| Weighting | Conditional share awards granted – 2015 | |||||||||||||||||||||||
| Performance measure | Andrew Bonfield | Steve Holliday | John Pettigrew | Dean Seavers | Threshold – 20% vesting | Maximum – 100% vesting | ||||||||||||||||||
| ||||||||||||||||||||||||
Group RoE | 50% | 50% | 25% | 25% | 11.0% | 12.5% or more | ||||||||||||||||||
UK RoE | 25% | | 1 percentage point above the average allowed regulatory return | | | 3.5 percentage points or more above the average allowed regulatory return | | |||||||||||||||||
US RoE |
|
25% |
|
|
90% of the average |
|
|
105% or more of the |
| |||||||||||||||
Value growth |
|
50% |
|
|
50% |
|
|
50% |
|
|
50% |
|
|
10.0% |
|
|
12.0% or more |
| ||||||
| ||||||||||||||||||||||||
Payments for loss of office (audited information)
There were no payments made for loss of office during 2015/16.
Payments to past Directors (audited information)
Nick Winser stepped down from the Board at the 2014 AGM and left the Company on 31 July 2015. Tom King stepped down from the Board and left the Company on 31 March 2015. Mr Winser and Mr King held awards over shares and ADSs, respectively, which were pro-rated according to their departure date. The vesting of all these awards will occur at the normal vesting dates subject to satisfaction of their specified performance conditions at that time. Portions of these awards vested on 1 July 2015 and pertain to the RoE portion of the 2011 LTPP and the TSR and EPS portions of the 2012 LTPP.
| Pro-rated number of share awards in 2011 (RoE portion) and 2012 LTPP | Overall vesting percentage | Number of awards vesting | Dividend equivalent shares | Total value of awards vesting and dividend equivalent shares (£’000) | ||||||||||||||||
| ||||||||||||||||||||
Tom King | 44,846 (ADSs) | 56.12% | 25,168 (ADSs) | 4,063 (ADSs) | 1,202 | |||||||||||||||
Nick Winser |
|
166,305 |
|
|
76.37% |
|
|
127,000 |
|
|
24,035 |
|
|
1,235 |
| |||||
| ||||||||||||||||||||
Shareholder dilution
Where shares may be issued or treasury shares reissued to satisfy incentives, the aggregate dilution resulting from executive share-based incentives will not exceed 5% in any 10-year period. Dilution resulting from all incentives, including all-employee incentives, will not exceed 10% in any 10-year period. The Committee reviews dilution against these limits regularly and under these limits the Company, as at 31 March 2016, had headroom of 4.01% and 7.98% respectively.
| 78 | National Grid Annual Report and Accounts 2015/16 | Corporate Governance |
Corporate Governance |
Statement of Directors’ shareholdings and share interests (audited information)
The Executive Directors are required to build up and hold a shareholding from vested share plan awards. Deferred share plan awards are not taken into account for these purposes until the end of the deferral period. Shares are valued for these purposes at the 31 March 2016 price, which was 987 pence per share ($71.42 per ADS).
The following table shows how each Executive Director complies with the shareholding requirement and also the number of shares owned by the Non-executive Directors, including connected persons, as Non-executive Directors do not have a shareholding requirement.
The shareholding is as at 31 March 2016 and the salary used to calculate the value of shareholding is the gross annual salary as at 31 March 2016:
| ● | The normal vesting dates for the conditional share awards subject to performance conditions are 1 July 2016; 1 July 2016 and 1 July 2017; 1 July 2017; and 1 July 2018 for the LTPP 2012, LTPP 2013, LTPP 2014 and LTPP 2015 respectively. |
| ● | The normal vesting dates for the conditional share awards subject to continuous employment are 13 June 2016 and 17 June 2017 for the DSP 2013 and DSP 2014 respectively. |
| ● | In each of April and May 2016 a further 15 shares were purchased on behalf of Andrew Bonfield, Steve Holliday and John Pettigrew via the Share Incentive Plan (an HMRC approved all-employee share plan), thereby increasing their beneficial interests. There have been no other changes in Directors’ shareholdings between 1 April 2016 and 18 May 2016. |
| ● | Both Andrew Bonfield and Steve Holliday have met their shareholding requirement of 400% and 500% of base salary, respectively. As both John Pettigrew and Dean Seavers were relatively new in post, they have not yet met their requirements and will not be allowed to sell shares other than to pay tax on receipt of vested shares or in exceptional circumstances until this requirement is met. |
| Directors | Share ownership requirements (multiple of salary) | Number of shares owned outright (including connected persons) | Number of shares held as a multiple of current salary | Number of options granted under the Sharesave Plan | Conditional share awards subject to performance conditions (LTPP 2012, 2013, 2014 and 2015) | Conditional share awards subject to continuous employment (DSP 2013 and 2014) | ||||||||||||||||||
| ||||||||||||||||||||||||
Executive Directors | ||||||||||||||||||||||||
Andrew Bonfield | 400% | 317,711 | 426% | 6,651 | 756,209 | 92,754 | ||||||||||||||||||
Steve Holliday | 500% | 1,306,289 | 1,246% | 3,542 | 1,224,546 | 126,771 | ||||||||||||||||||
John Pettigrew | 400% | 198,749 | 386% | 4,286 | 417,251 | 28,691 | ||||||||||||||||||
Dean Seavers (ADSs) | 400% | 1,225 | 9% | – | 85,767 | – | ||||||||||||||||||
Non-executive Directors | ||||||||||||||||||||||||
Nora Mead Brownell (ADSs) | – | 5,000 | n/a | – | – | – | ||||||||||||||||||
Jonathan Dawson | – | 36,586 | n/a | – | – | – | ||||||||||||||||||
Therese Esperdy (ADSs) | – | 1,600 | n/a | – | – | – | ||||||||||||||||||
Sir Peter Gershon | – | 83,363 | n/a | – | – | – | ||||||||||||||||||
Paul Golby | – | 2,500 | n/a | – | – | – | ||||||||||||||||||
Ruth Kelly | – | 800 | n/a | – | – | – | ||||||||||||||||||
Mark Williamson | – | 4,726 | n/a | – | – | – | ||||||||||||||||||
| ||||||||||||||||||||||||
Notes:
Overall: Sharesave options are valued using fair values. Andrew Bonfield was the only Director who made a gain on the exercise of share options during the year.
Andrew Bonfield: On 31 March 2016 Andrew Bonfield held 6,651 options granted under the Sharesave plan. 2,022 options were granted at a value of 749 pence per share and they can be exercised at 749 pence per share between April 2020 and September 2020. 1,208 options were granted at a value of 745 pence per share and they can be exercised at 745 pence per share between April 2019 and September 2019. On 1 April 2016, he exercised a Sharesave option over 3,421 shares at the option price of 455 pence per share for expiration in September 2016 at a gain of £18,549. For Andrew Bonfield, the number of conditional share awards subject to performance conditions is as follows: LTPP 2012: 53,273; LTPP 2013: 194,798; LTPP 2014: 248,470; LTPP 2015: 259,668. The number of conditional share awards subject to continuous employment is as follows: DSP 2013: 45,706; DSP 2014: 47,048.
Steve Holliday: On 31 March 2016 Steve Holliday held 3,524 options granted under the Sharesave plan. 1,502 options were granted at a value of 599 pence per share, and they can be exercised at 599 pence per share between April 2017 and September 2017. 2,022 options were granted at a value of 749 pence per share and they can be exercised at 749 pence per share between April 2020 and September 2020. For Steve Holliday, the number of conditional share awards subject to performance conditions is as follows: LTPP 2012: 84,175; LTPP 2013: 307,793; LTPP 2014: 407,138; LTPP 2015: 425,440. The number of conditional share awards subject to continuous employment is as follows: DSP 2013: 57,118; DSP 2014: 69,653.
John Pettigrew: On 31 March 2016 John Pettigrew held 4,286 options granted under the Sharesave plan. 1,252 options were granted at a value of 599 pence per share, and they can be exercised at 599 pence per share between April 2019 and September 2019. 3,034 options were granted at a value of 749 pence per share and they can be exercised at 749 pence per share between April 2020 and September 2020. The number of conditional share awards subject to performance conditions is as follows: LTPP 2012: 13,098; LTPP 2013: 63,361; LTPP 2014: 161,720; LTPP 2015: 179,072. The number of conditional share awards subject to continuous employment is as follows: DSP 2013: 14,341; DSP 2014: 14,350.
Dean Seavers: The number of conditional share awards subject to performance conditions is as follows: LTPP 2014: 40,966; LTPP 2015: 44,801.
Dean Seavers, Nora Mead Brownell and Therese Esperdy: Holdings and, for Dean Seavers, awards are shown as ADSs and each ADS represents five ordinary shares.
External appointments and retention of fees
The table below details the Executive Directors who served as non-executive directors in other companies during the year ended 31 March 2016 and were allowed to retain fees for their services:
| Company | Retained fees (£) | |||||
Andrew Bonfield | Kingfisher plc | 82,400 | ||||
Relative importance of spend on pay This chart shows the relative importance of spend on pay compared with other costs and disbursements (dividends, tax, net interest and capital expenditure). Given the capital-intensive nature of our business and the scale of our operations, these costs were chosen as the most relevant for comparison purposes. All amounts exclude exceptional items and remeasurements. |  |
| National Grid Annual Report and Accounts 2015/16 | Annual report on remuneration | 79 |
Corporate Governancecontinued
Annual report on remuneration continued
Performance graph and table This chart shows National Grid plc’s seven-year annual total shareholder return (TSR) performance against the FTSE 100 Index since 31 March 2009. The FTSE 100 Index has been chosen because it is the widely recognised performance benchmark for large companies in the UK. The Company’s TSR has outperformed that of the FTSE 100 for the last five years and underpins the pay shown for the CEO in the table below, using current and previously published single total remuneration figures. The TSR level shown at 31 March each year is the average of the closing daily TSR levels for the 30-day period up to and including that date. It assumes dividends are reinvested. CEO’s pay in the last seven financial years Steve Holliday was the CEO throughout this seven-year period. | Total shareholder return
|
| 2009/10 | 2010/11 | 2011/12 | 2012/13 | 2013/14 | 2014/15 | 2015/16 | ||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Total single figure £’000 | 3,931 | 3,738 | 3,539 | 3,170 | 4,801 | 4,845 | 5,151 | |||||||||||||||||||||
APP (proportion of maximum awarded) | 95.33% | 81.33% | 68.67% | 55.65% | 77.94% | 94.80% | 94.60% | |||||||||||||||||||||
PSP/LTPP (proportion of maximum vesting including expected vesting for RoE measure) | 100.00% | 65.15% | 49.50% | 25.15% | 76.20% | 55.81% | 63.45% | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Percentage change in CEO’s remuneration
The table below shows how the percentage change in the CEO’s salary, benefits and APP between 2014/15 and 2015/16 compares with the percentage change in the average of each of those components of remuneration for non-union employees in the UK. The Committee views this group as the most appropriate comparator group, as the CEO is UK-based and this group excludes employees represented by trade unions, whose pay and benefits are negotiated with each individual union.
| Salary | Taxable benefits | APP | ||||||||||||||||||||||||||||||||||||
| £’000 | £’000 | Increase | £’000 | £’000 | Increase | £’000 | £’000 | Increase | ||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||
| 2015/16 | 2014/15 | 2015/16 | 2014/15 | 2015/16 | 2014/15 | |||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||
Steve Holliday | 1,033 | 1,021 | 1.2% | 41 | 40 | 2.5% | 1,222 | 1,210 | 1.0% | |||||||||||||||||||||||||||||
UK non-union employees (increase per employee) | 1.9% | 7.9% | (9.1)% | |||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||
Note:
The APP for UK non-union employees decreased, which is a reflection of the reduction in payout level for the UK RoE measure which forms a key part of the APP for this population.
Statement of implementation of remuneration policy in 2016/17
The remuneration policy adopted at the 2014 AGM will continue to be implemented during 2016/17 as described below. Steve Holliday is retiring in July 2016 and will be stepping down from the Board at that time. He will be treated as a ‘good leaver’ in line with our remuneration policy. He is intending to draw from his pension from October 2016.
Salary Salary increases will normally be in line with the increase awarded to other employees in the UK and US, unless there is a change in role or responsibility. In line with the policy on recruitment remuneration, salaries for new directors may be set below market level initially and aligned to market level over time (provided the increase is merited by the individual’s contribution and performance). John Pettigrew’s base salary was increased to £825,000 upon his appointment as CEO. This was some £210,000 below that of Steve Holliday, the retiring CEO.
| ||||||||||
| From 1 June 2016 | From 1 June 2015 | Increase | ||||||||
Andrew Bonfield | £751,740 | £737,000 | 2.0% | |||||||
Steve Holliday | £1,035,000 | £1,035,000 | 0% | |||||||
Nicola Shaw from 1 July 2016 | £450,000 | – | n/a | |||||||
John Pettigrew from 1 April 2016 | £825,000 | £508,250 | 62.3% | |||||||
Dean Seavers | $1,025,000 | $1,000,000 | 2.5% | |||||||
APP measures for 2016/17 The APP targets are considered commercially sensitive and consequently will be disclosed after the end of the financial year in the 2016/17 annual report on remuneration. Steve Holliday will be eligible to receive a prorated portion of the 2016/17 APP. | ||||||
| Weighting | ||||||
Adjusted EPS | 35% | |||||
Group or UK or US RoE | 35% | |||||
Individual objectives | 30% | |||||
| 80 | Corporate Governance |
|
Performance measures for LTPP to be awarded in 2016
Steve Holliday will not receive a 2016 LTPP award. John Pettigrew’s 2016 award will increase to 350% of salary.
| Andrew Bonfield | John Pettigrew | Dean Seavers | Nicola Shaw | Threshold – 20% vesting | Maximum – 100% vesting | |||||||||||||||||||
Group RoE | 50% | 50% | 25% | 25% | 11.0% | 12.5% or more | ||||||||||||||||||
UK RoE |
|
– |
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– |
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– |
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|
25% |
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1 percentage point |
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3.5 percentage points or |
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US RoE |
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– |
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– |
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25% |
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– |
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90% of the average |
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105% or more of the |
| ||||||
Value growth |
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50% |
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50% |
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50% |
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10.0% |
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12.0% or more |
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NEDs’ fees
Committee chair fees are in addition to committee membership fees. Therese Esperdy was appointed as a Non-executive Director to the National Grid USA Board on 1 May 2015 with an annual fee of £25,000 in addition to her current NED fees.
| £’000 | ||||||
| From 1 June 2016 | From 1 June 2015 | Increase | ||||
Chairman | 500 | 495 | 1% | |||
Senior Independent Director | 22 | 22 | 0% | |||
Board fee (UK-based) | 66 | 64 | 3% | |||
Board fee (US-based) | 78 | 76 | 3% | |||
Committee membership fee | 9 | 9 | 0% | |||
Chair Audit Committee | 19 | 17 | 12% | |||
Chair Remuneration Committee | 19 | 17 | 12% | |||
Chair (other Board committee) | 12.5 | 12.5 | 0% | |||
Advisors to the Remuneration Committee
The Committee received advice during 2015/16 from independent remuneration consultants New Bridge Street (NBS), a trading name of Aon Hewitt Ltd (part of Aon plc). NBS were selected as advisors by the Committee from 1 August 2013 following a competitive tendering process.
Work undertaken by NBS included updating the Committee on trends in compensation and governance matters and advising the Committee in connection with benchmarking of the total reward packages for the Executive Directors and other senior employees. NBS are a member of the Remuneration Consultants Group and have signed up to that group’s Code of Conduct. The Committee is satisfied that any potential conflicts were appropriately managed. NBS does not provide any other advice or services to the Company. In the year to 31 March 2016 the Committee paid a total of £77,820 to NBS, with fees being charged on a time incurred basis.
The Committee also received specialist advice from the following organisations:
| ● | Alithos Limited: provision of TSR calculations for the LTPP (£10,417 paid in 2015/16); |
| ● | Linklaters LLP: advice relating to share schemes and to Directors’ service contracts (£44,621 paid in 2015/16); and |
| ● | Willis Towers Watson: advice relating to the benchmarking of the total reward packages for the Executive Committee and the Chairman (£58,509 paid in 2015/16). |
The Committee reviews the objectivity and independence of the advice it receives from its advisors each year. It is satisfied that they all provided credible and professional advice.
The Committee considers the views of the Chairman on the performance and remuneration of the CEO; and of the CEO on the performance and remuneration of the other members of the Executive Committee. The Committee is also supported by the Group General Counsel & Company Secretary who acts as Secretary to the Committee, the Group HR Director, the Group Head of Reward & Performance and the Group Head of Pensions. No other advisors have provided significant services to the Committee in the year.
Voting on 2013/14 Directors’ Remuneration Policy at 2014 AGM
The voting figures shown refer to votes cast at the 2014 AGM and represent 61.76% of the issued share capital. In addition, shareholders holding 74 million shares abstained.
| For | Against | |||||
Number of votes | 2,223,573,203 | 85,131,552 | ||||
Proportion of votes | 96.31% | 3.69% | ||||
Voting on 2014/15 Annual Remuneration Report at 2015 AGM
The voting figures shown refer to votes cast at the 2015 AGM and represent 62.61% of the issued share capital. In addition, shareholders holding 30 million shares abstained.
| For | Against | |||||
Number of votes | 2,240,539,614 | 63,053,994 | ||||
Proportion of votes | 97.26% | 2.74% | ||||
The Directors’ Remuneration Report has been approved by the Board and signed on its behalf by:
Chairman of the Remuneration Committee
|
| National Grid Annual Report and Accounts 2015/16 | Annual report on remuneration | 81 |
| 82 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
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Financial Statements |
Report of Independent Registered
Public Accounting Firm
to the Board of Directors and Shareholders of National Grid plc
Audit opinion for Form 20-F In our opinion, the accompanying consolidated Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of 31 March Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. | A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. PricewaterhouseCoopers LLP London United Kingdom
|
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 93 |
for the years ended 31 March
| Notes | 2016 £m | 2016 £m | 2015 £m | 2015 £m | 2014 £m | 2014 £m | ||||||||||||||||||||||
Revenue | 2(a | ) | 15,115 | 15,201 | 14,809 | |||||||||||||||||||||||
Operating costs | 3 | (11,030 | ) | (11,421 | ) | (11,074 | ) | |||||||||||||||||||||
Operating profit | ||||||||||||||||||||||||||||
Before exceptional items and remeasurements | 2(b | ) | 4,096 | 3,863 | 3,664 | |||||||||||||||||||||||
Exceptional items and remeasurements | 4 | (11 | ) | (83 | ) | 71 | ||||||||||||||||||||||
Total operating profit | 2(b | ) | 4,085 | 3,780 | 3,735 | |||||||||||||||||||||||
Finance income | 5 | 22 | 36 | 36 | ||||||||||||||||||||||||
Finance costs | ||||||||||||||||||||||||||||
Before exceptional items and remeasurements | 5 | (1,035 | ) | (1,069 | ) | (1,144 | ) | |||||||||||||||||||||
Exceptional items and remeasurements | 4,5 | (99 | ) | (165 | ) | 93 | ||||||||||||||||||||||
Total finance costs | 5 | (1,134 | ) | (1,234 | ) | (1,051 | ) | |||||||||||||||||||||
Share of post-tax results of joint ventures and associates | 14 | 59 | 46 | 28 | ||||||||||||||||||||||||
Profit before tax | ||||||||||||||||||||||||||||
Before exceptional items and remeasurements | 2(b | ) | 3,142 | 2,876 | 2,584 | |||||||||||||||||||||||
Exceptional items and remeasurements | 4 | (110 | ) | (248 | ) | 164 | ||||||||||||||||||||||
Total profit before tax | 2(b | ) | 3,032 | 2,628 | 2,748 | |||||||||||||||||||||||
Tax | ||||||||||||||||||||||||||||
Before exceptional items and remeasurements | 6 | (753 | ) | (695 | ) | (581 | ) | |||||||||||||||||||||
Exceptional items and remeasurements | 4,6 | 315 | 78 | 297 | ||||||||||||||||||||||||
Total tax | 6 | (438 | ) | (617 | ) | (284 | ) | |||||||||||||||||||||
Profit after tax | ||||||||||||||||||||||||||||
Before exceptional items and remeasurements | 2,389 | 2,181 | 2,003 | |||||||||||||||||||||||||
Exceptional items and remeasurements | 4 | 205 | (170 | ) | 461 | |||||||||||||||||||||||
Profit for the year | 2,594 | 2,011 | 2,464 | |||||||||||||||||||||||||
Attributable to: | ||||||||||||||||||||||||||||
Equity shareholders of the parent | 2,591 | 2,019 | 2,476 | |||||||||||||||||||||||||
Non-controlling interests | 3 | (8 | ) | (12 | ) | |||||||||||||||||||||||
| 2,594 | 2,011 | 2,464 | ||||||||||||||||||||||||||
Earnings per share1 | ||||||||||||||||||||||||||||
Basic | 7(a | ) | 69.0p | 53.2p | 65.2p | |||||||||||||||||||||||
Diluted | 7(b | ) | 68.7p | 52.9p | 64.9p | |||||||||||||||||||||||
1. Comparative amounts have been restated to reflect the impact of additional shares issued as scrip dividends.
| 94 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
Financial Statements |
Unaudited commentary on the consolidated income statement
The consolidated income statement shows all revenue earned and costs incurred in the year, with the difference being the overall profit for the year. |
Revenue
Revenue for the year ended 31 March 2016 decreased by £86m to £15,115m. This decrease was driven by lower revenues in our US Regulated business, partly offset by revenue growth across all of our other businesses, in particular UK Electricity Transmission. US Regulated revenues were £493m lower year on year due to lower commodity costs passed on to customers and unfavourable timing of recoveries. This was partly offset by higher increased revenue allowances under the Niagara Mohawk three year rate plan and the benefits of capex trackers and the stronger US dollar. UK Electricity Transmission revenue increased by £223m, mostly reflecting the recovery of higher pass-through costs such as payments to other UK network owners and system balancing costs.
Operating costs
Operating costs for the year ended 31 March 2016 of £11,030m were £391m lower than the prior year. This decrease in costs included a £72m impact in exceptional items and remeasurements, which is discussed below. Excluding exceptional items and remeasurements, operating costs were £319m lower, principally due to lower pass-through costs such as gas and electric commodity costs in the US and additional costs incurred last year in the US to improve data quality and bring regulatory filings up to date, partially offset by higher depreciation as a result of newly commissioned assets and the impact of the stronger US dollar on sterling results.
Net finance costs
For the year ended 31 March 2016, net finance costs before exceptional items and remeasurements were £20m lower than 2014/15 at £1,013m, mainly as a result of lower UK RPI inflation, continued focus on management of cash balances and the benefit of last year’s debt repurchases, partially offset by increased borrowings and the impact of the stronger US dollar.
Tax
The tax charge on profits before exceptional items and remeasurements was £58m higher than 2014/15. This was mainly a result of increased taxable profits in the year. The effective tax rate for the year was 24.0% (2014/15: 24.2%).
Exceptional items and remeasurements
Operating costs for the year ended 31 March 2016 included an £11m gain on remeasurement of commodity contracts, together with £22m exceptional costs associated with the Gas Distribution sales process. In the previous year, operating costs included a net £83m loss on remeasurements.
Finance costs for the year ended 31 March 2016 included a loss of £99m on financial remeasurements, relating to net losses on derivative financial instruments. For the previous year ended 31 March 2015, we incurred exceptional debt redemption costs of £131m and a loss of £34m on financial remeasurements. Exceptional tax for 2015/16 was a credit of £315m which represents tax credits on the exceptional items and remeasurements above, together with a deferred tax credit on the recalculation of deferred tax liabilities as a result of the reduction in the UK tax rate from 20% to 18%.
Adjusted earnings and EPS
Adjusted earnings and EPS, which exclude exceptional items and remeasurements, are provided to reflect the business performance subtotals used by the Company. The following chart shows the five year trend in adjusted profit attributable to equity shareholders of the parent (adjusted earnings) and adjusted earnings per share. See page 196 for a reconciliation of adjusted basic EPS to EPS.
Adjusted earnings and adjusted EPS1
1. Adjusted earnings and adjusted EPS are attributable to equity shareholders of the parent.
The above earnings performance translated into adjusted EPS growth in 2015/16 of 5.9p (10%).
In accordance with IAS 33, all earnings per share and adjusted earnings per share amounts for comparative periods have been restated for shares issued via scrip dividends.
Exchange rates
Our financial results are reported in sterling. Transactions for our US operations are denominated in dollars, so the related amounts that are reported in sterling depend on the dollar to sterling exchange rate. The table below shows the average and closing exchange rates of sterling to US dollars.
| 2015/16 | 2014/15 | % change | ||||||||||
| ||||||||||||
Weighted average (income statement) | 1.47 | 1.58 | (7)% | |||||||||
Year end (balance sheet) | 1.44 | 1.49 | (3)% | |||||||||
| ||||||||||||
The movement in foreign exchange during 2015/16 has resulted in a £560m increase in revenue, a £73m increase in adjusted operating profit and a £67m increase in operating profit.
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 95 |
Consolidated statement of comprehensive income
for the years ended 31 March
2016 | 2015 | 2014 | ||||||||||||||
| Notes | £m | £m | £m | |||||||||||||
| ||||||||||||||||
Profit for the year | 2,594 | 2,011 | 2,464 | |||||||||||||
Other comprehensive income/(loss) | ||||||||||||||||
Items that will never be reclassified to profit or loss: | ||||||||||||||||
Remeasurements of net retirement benefit obligations | 22 | 539 | (771) | 485 | ||||||||||||
Tax on items that will never be reclassified to profit or loss | 6 | (125) | 299 | (172) | ||||||||||||
| ||||||||||||||||
Total items that will never be reclassified to profit or loss | 414 | (472) | 313 | |||||||||||||
| ||||||||||||||||
Items that may be reclassified subsequently to profit or loss: | ||||||||||||||||
Exchange adjustments | 69 | 175 | (158) | |||||||||||||
Net gains/(losses) in respect of cash flow hedges | 50 | (154) | 63 | |||||||||||||
Transferred to profit or loss in respect of cash flow hedges | 29 | 13 | 27 | |||||||||||||
Net gains on available-for-sale investments | 43 | 41 | 6 | |||||||||||||
Transferred to profit or loss on sale of available-for-sale investments | – | (8) | (14) | |||||||||||||
Tax on items that may be reclassified subsequently to profit or loss | 6 | (32) | 11 | (2) | ||||||||||||
| ||||||||||||||||
Total items that may be reclassified subsequently to profit or loss | 159 | 78 | (78) | |||||||||||||
| ||||||||||||||||
Other comprehensive income/(loss) for the year, net of tax | 573 | (394) | 235 | |||||||||||||
| ||||||||||||||||
Total comprehensive income for the year | 3,167 | 1,617 | 2,699 | |||||||||||||
| ||||||||||||||||
Attributable to: | ||||||||||||||||
Equity shareholders of the parent | 3,164 | 1,624 | 2,711 | |||||||||||||
Non-controlling interests | 3 | (7) | (12) | |||||||||||||
| ||||||||||||||||
| 3,167 | 1,617 | 2,699 | ||||||||||||||
| ||||||||||||||||
Unaudited commentary on consolidated statement of comprehensive income
The consolidated statement of comprehensive income records certain items as prescribed by the accounting rules. For us, the majority of the income or expense included here relates to movements in actuarial assumptions on pension schemes and the associated tax impact. These items are not part of profit for the year, yet are important to allow the reader to gain a more comprehensive picture of our performance as a whole. |
Remeasurements of net retirement benefit obligations
We had a net gain after tax of £414m (2014/15: net loss of £472m) on our pension and other post-retirement benefit schemes which is due to changes in key assumptions made in the valuation calculation of pension liabilities and differences between the expected and actual pension asset returns.
Exchange adjustments
Adjustments are made when we translate the results and net assets of our companies operating outside the UK, as well as debt and derivative transactions designated as a net investment hedge of our foreign currency operations. The net movement for the year resulted in a gain of £69m (2014/15: £175m gain).
Net gains/(losses) in respect of cash flow hedges
The value of derivatives held to hedge cash flows is impacted by changes in expected interest rates and exchange rates. The net gain for the year was £50m (2014/15: £154m loss).
| 96 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
Financial Statements |
Consolidated statement of changes in equity
for the years ended 31 March
| Share capital £m | Share premium account £m | Retained earnings £m | Other equity reserves1 £m | Total £m | Non- controlling interests £m | Total equity £m | ||||||||||||||||||||||
At 1 April 2013 | 433 | 1,344 | 13,133 | (4,681 | ) | 10,229 | 5 | 10,234 | ||||||||||||||||||||
Profit for the year | – | – | 2,476 | – | 2,476 | (12 | ) | 2,464 | ||||||||||||||||||||
Total other comprehensive income/(loss) for the year | – | – | 313 | (78 | ) | 235 | – | 235 | ||||||||||||||||||||
Total comprehensive income/(loss) for the year | – | – | 2,789 | (78 | ) | 2,711 | (12 | ) | 2,699 | |||||||||||||||||||
Equity dividends | – | – | (1,059 | ) | – | (1,059 | ) | – | (1,059 | ) | ||||||||||||||||||
Scrip dividend related share issue2 | 6 | (8 | ) | – | – | (2 | ) | – | (2 | ) | ||||||||||||||||||
Issue of treasury shares | – | – | 14 | – | 14 | – | 14 | |||||||||||||||||||||
Purchase of own shares | – | – | (5 | ) | – | (5 | ) | – | (5 | ) | ||||||||||||||||||
Other movements in non-controlling interests | – | – | (4 | ) | – | (4 | ) | 15 | 11 | |||||||||||||||||||
Share-based payment | – | – | 20 | – | 20 | – | 20 | |||||||||||||||||||||
Tax on share-based payment | – | – | 7 | – | 7 | – | 7 | |||||||||||||||||||||
At 31 March 2014 | 439 | 1,336 | 14,895 | (4,759 | ) | 11,911 | 8 | 11,919 | ||||||||||||||||||||
Profit for the year | – | – | 2,019 | – | 2,019 | (8 | ) | 2,011 | ||||||||||||||||||||
Total other comprehensive (loss)/income for the year | – | – | (472 | ) | 77 | (395 | ) | 1 | (394 | ) | ||||||||||||||||||
Total comprehensive income/(loss) for the year | – | – | 1,547 | 77 | 1,624 | (7 | ) | 1,617 | ||||||||||||||||||||
Equity dividends | – | – | (1,271 | ) | – | (1,271 | ) | – | (1,271 | ) | ||||||||||||||||||
Scrip dividend related share issue2 | 4 | (5 | ) | – | – | (1 | ) | – | (1 | ) | ||||||||||||||||||
Purchase of treasury shares | – | – | (338 | ) | – | (338 | ) | – | (338 | ) | ||||||||||||||||||
Issue of treasury shares | – | – | 23 | – | 23 | – | 23 | |||||||||||||||||||||
Purchase of own shares | – | – | (7 | ) | – | (7 | ) | – | (7 | ) | ||||||||||||||||||
Other movements in non-controlling interests | – | – | (3 | ) | – | (3 | ) | 11 | 8 | |||||||||||||||||||
Share-based payment | – | – | 20 | – | 20 | – | 20 | |||||||||||||||||||||
Tax on share-based payment | – | – | 4 | – | 4 | – | 4 | |||||||||||||||||||||
At 31 March 2015 | 443 | 1,331 | 14,870 | (4,682 | ) | 11,962 | 12 | 11,974 | ||||||||||||||||||||
Profit for the year | – | – | 2,591 | – | 2,591 | 3 | 2,594 | |||||||||||||||||||||
Total other comprehensive income for the year | – | – | 414 | 159 | 573 | – | 573 | |||||||||||||||||||||
Total comprehensive income for the year | – | – | 3,005 | 159 | 3,164 | 3 | 3,167 | |||||||||||||||||||||
Equity dividends | – | – | (1,337 | ) | – | (1,337 | ) | – | (1,337 | ) | ||||||||||||||||||
Scrip dividend related share issue2 | 4 | (5 | ) | – | – | (1 | ) | – | (1 | ) | ||||||||||||||||||
Purchase of treasury shares | – | – | (267 | ) | – | (267 | ) | – | (267 | ) | ||||||||||||||||||
Issue of treasury shares | – | – | 16 | – | 16 | – | 16 | |||||||||||||||||||||
Purchase of own shares | – | – | (6 | ) | – | (6 | ) | – | (6 | ) | ||||||||||||||||||
Other movements in non-controlling interests | – | – | – | – | – | (5 | ) | (5 | ) | |||||||||||||||||||
Share-based payment | – | – | 22 | – | 22 | – | 22 | |||||||||||||||||||||
Tax on share-based payment | – | – | 2 | – | 2 | – | 2 | |||||||||||||||||||||
At 31 March 2016 | 447 | 1,326 | 16,305 | (4,523 | ) | 13,555 | 10 | 13,565 | ||||||||||||||||||||
1. For further details of other equity reserves, see note 25.
2. Included within share premium account are costs associated with scrip dividends.
Unaudited commentary on consolidated statement of changes in equity
The consolidated statement of changes in equity shows additions and reductions to equity. For us, the main items are profit earned and dividends paid in the year. |
Dividends
The Directors are proposing a final dividend of 28.34p, bringing the total dividend for the year to 43.34p, a 1.1% increase on 2014/15.
The Directors intend to continue the policy of increasing the annual dividend by at least the rate of RPI inflation for the foreseeable future.
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 97 |
Consolidated statement of financial position
as at 31 March
| Notes | 2016 £m | 2015 £m | ||||||||||
| ||||||||||||
Non-current assets | ||||||||||||
Goodwill | 9 | 5,315 | 5,145 | |||||||||
Other intangible assets | 10 | 887 | 802 | |||||||||
Property, plant and equipment | 11 | 43,364 | 40,723 | |||||||||
Other non-current assets | 12 | 82 | 80 | |||||||||
Pension assets | 22 | 410 | 121 | |||||||||
Financial and other investments | 13 | 482 | 330 | |||||||||
Investments in joint ventures and associates | 14 | 397 | 318 | |||||||||
Derivative financial assets | 15 | 1,685 | 1,539 | |||||||||
| �� | |||||||||||
Total non-current assets | 52,622 | 49,058 | ||||||||||
| ||||||||||||
Current assets | ||||||||||||
Inventories and current intangible assets | 16 | 437 | 340 | |||||||||
Trade and other receivables | 17 | 2,472 | 2,836 | |||||||||
Financial and other investments | 13 | 2,998 | 2,559 | |||||||||
Derivative financial assets | 15 | 278 | 177 | |||||||||
Cash and cash equivalents | 18 | 127 | 119 | |||||||||
| ||||||||||||
Total current assets | 6,312 | 6,031 | ||||||||||
| ||||||||||||
Total assets | 58,934 | 55,089 | ||||||||||
| ||||||||||||
Current liabilities | ||||||||||||
Borrowings | 19 | (3,611) | (3,028) | |||||||||
Derivative financial liabilities | 15 | (337) | (635) | |||||||||
Trade and other payables | 20 | (3,285) | (3,292) | |||||||||
Current tax liabilities | (252) | (184) | ||||||||||
Provisions | 23 | (236) | (235) | |||||||||
| ||||||||||||
Total current liabilities | (7,721) | (7,374) | ||||||||||
| ||||||||||||
Non-current liabilities | ||||||||||||
Borrowings | 19 | (24,733) | (22,882) | |||||||||
Derivative financial liabilities | 15 | (1,732) | (1,764) | |||||||||
Other non-current liabilities | 21 | (2,071) | (1,919) | |||||||||
Deferred tax liabilities | 6 | (4,634) | (4,297) | |||||||||
Pensions and other post-retirement benefit obligations | 22 | (2,995) | (3,379) | |||||||||
Provisions | 23 | (1,483) | (1,500) | |||||||||
| ||||||||||||
Total non-current liabilities | (37,648) | (35,741) | ||||||||||
| ||||||||||||
Total liabilities | (45,369) | (43,115) | ||||||||||
| ||||||||||||
Net assets | 13,565 | 11,974 | ||||||||||
| ||||||||||||
Equity | ||||||||||||
Share capital | 24 | 447 | 443 | |||||||||
Share premium account | 1,326 | 1,331 | ||||||||||
Retained earnings | 16,305 | 14,870 | ||||||||||
Other equity reserves | 25 | (4,523) | (4,682) | |||||||||
| ||||||||||||
Shareholders’ equity | 13,555 | 11,962 | ||||||||||
Non-controlling interests | 10 | 12 | ||||||||||
| ||||||||||||
Total equity | 13,565 | 11,974 | ||||||||||
| ||||||||||||
The consolidated financial statements set out on pages 94 to 167 were approved by the Board of Directors on 18 May 2016 and were signed on its behalf by:
Sir Peter GershonChairman
Andrew BonfieldFinance Director
National Grid plc
Registered number: 4031152
| 98 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
Financial Statements |
Unaudited commentary on consolidated statement of financial position
The consolidated statement of financial position shows all of the Group’s assets and liabilities at the year end. As a capital-intensive business, we have significant amounts of physical assets and corresponding borrowings. |
Goodwill and other intangible assets
Goodwill and intangibles increased by £255m to £6,202m as at 31 March 2016. This increase primarily relates to foreign exchange movements of £184m and software additions of £220m, partially offset by software amortisation of £147m.
Property, plant and equipment
Property, plant and equipment increased by £2,641m to £43,364m as at 31 March 2016. This was principally due to capital expenditure of £3,673m on the renewal and extension of our regulated networks and foreign exchange movements of £543m, offset by depreciation of £1,468m in the year. See page 24 for further details of our capital expenditure.
Investments and other non-current assets
Investments in joint ventures and associates, financial and other investments and other non-current assets have increased by £233m to £961m. This is primarily due to an increase in investments in joint ventures of £79m, together with an increase in available-for-sale investments of £152m.
Inventories and current intangible assets, and trade and other receivables
Inventories and current intangible assets, and trade and other receivables have decreased by £267m to £2,909m as at 31 March 2016. This is due to an increase in inventories and current intangible assets of £97m, more than offset by a net decrease in trade and other receivables of £364m. The £364m decrease consists of a foreign exchange impact of £57m due to the stronger US dollar against sterling offset by a decrease in the underlying balances of £421m, reflecting collection of high 2015 winter billings, coupled with the impact of the recent mild winter.
Trade and other payables
Trade and other payables have decreased by £7m to £3,285m, primarily due to a foreign exchange impact of £48m more than offset by movements in the US related to warmer weather and energy billing settlements.
Current tax balances
Net current tax balances have increased by £51m to £175m as at 31 March 2016, which includes a £77m current tax asset in trade and other receivables (£60m current tax asset in 2014/15). This is primarily due to the tax payments made in 2015/16 being only partially offset by a smaller current year tax charge.
Deferred tax balances
Deferred tax balances have increased by £337m to £4,634m as at 31 March 2016. This was primarily due to the impact of the £125m deferred tax charge on actuarial gains in reserves (£299m tax credit in 2014/15) and foreign exchange movements being offset by the impact of the reduction in the UK statutory tax rate.
Provisions and other non-current liabilities
Provisions (both current and non-current) and other non-current liabilities increased by £136m to £3,790m as at 31 March 2016.
Total provisions decreased by £16m in the year. The underlying movements include additions of £63m, primarily relating to an increase to the provision for the estimated environmental restoration and remediation costs for a number of sites and other provision increases of £33m, together with foreign exchange movements of £42m, offset by utilisation of £200m in relation to all classes of provisions.
Net debt
Net debt is the aggregate of cash and cash equivalents, current financial and other investments, borrowings, and derivative financial assets and liabilities. See further analysis with the consolidated cash flow statement on page 100.
Net pension and other post-retirement obligations
A summary of the total UK and US assets and liabilities and the overall net IAS 19 (revised) accounting deficit is shown below:
| Net plan liability | UK £m | US £m | Total £m | |||||||||
| ||||||||||||
As at 1 April 2015 | (672) | (2,586) | (3,258) | |||||||||
Exchange movements | – | (81) | (81) | |||||||||
Current service cost | (74) | (147) | (221) | |||||||||
Net interest cost | (18) | (94) | (112) | |||||||||
Curtailments and other | (24) | (15) | (39) | |||||||||
Actuarial (losses)/gains | ||||||||||||
– on plan assets | (18) | (320) | (338) | |||||||||
– on plan liabilities | 552 | 325 | 877 | |||||||||
Employer contributions | 239 | 348 | 587 | |||||||||
| ||||||||||||
As at 31 March 2016 | (15) | (2,570) | (2,585) | |||||||||
| ||||||||||||
Represented by: | ||||||||||||
Plan assets | 19,401 | 7,033 | 26,434 | |||||||||
Plan liabilities | (19,416) | (9,603) | (29,019) | |||||||||
| ||||||||||||
| (15) | (2,570) | (2,585) | ||||||||||
| ||||||||||||
The principal movements in net obligations during the year include net actuarial gains of £539m and employer contributions of £587m. Net actuarial gains include actuarial gains on plan liabilities of £877m arising as a consequence of decreases in the nominal discount rate in the US and experience gains reflecting liability experience throughout the year including the impact of pension increases being lower than assumed and some updates to the way a section of plan liabilities is estimated. This is partially offset by actuarial losses of £338m arising on plan assets resulting from actual asset returns being less than assumed returns which is based upon the discount rate at the start of the year.
Further information on our pension and other post-retirement obligations can be found in notes 22 and 29 to the consolidated financial statements.
Off balance sheet items
There were no significant off balance sheet items other than the contractual obligations shown in note 30(b) to the consolidated financial statements, and the commitments and contingencies discussed in note 27.
Through the ordinary course of our operations, we are party to various litigation, claims and investigations. We do not expect the ultimate resolution of any of these proceedings to have a material adverse effect on our results of operations, cash flows or financial position.
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 99 |
Consolidated cash flow statement
for the years ended 31 March
| 2016 | 2015 | 2014 | ||||||||||||||
| Notes | £m | £m | £m | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Total operating profit | 2(b | ) | 4,085 | 3,780 | 3,735 | |||||||||||
Adjustments for: | ||||||||||||||||
Exceptional items and remeasurements | 4 | 11 | 83 | (71 | ) | |||||||||||
Depreciation, amortisation and impairment | 1,614 | 1,494 | 1,417 | |||||||||||||
Share-based payment charge | 22 | 20 | 20 | |||||||||||||
Gain on exchange of associate for available-for-sale investment | (49 | ) | – | – | ||||||||||||
Changes in working capital | 456 | 301 | (59 | ) | ||||||||||||
Changes in provisions | (90 | ) | (41 | ) | (150 | ) | ||||||||||
Changes in pensions and other post-retirement benefit obligations | (327 | ) | (270 | ) | (323 | ) | ||||||||||
Cash flows relating to exceptional items | (62 | ) | (17 | ) | (150 | ) | ||||||||||
Cash generated from operations | 5,660 | 5,350 | 4,419 | |||||||||||||
Tax paid | (292 | ) | (343 | ) | (400 | ) | ||||||||||
Net cash inflow from operating activities | 5,368 | 5,007 | 4,019 | |||||||||||||
Cash flows from investing activities | ||||||||||||||||
Acquisition of investments | (116 | ) | – | (4 | ) | |||||||||||
Purchases of intangible assets | (220 | ) | (207 | ) | (179 | ) | ||||||||||
Purchases of property, plant and equipment | (3,408 | ) | (3,076 | ) | (2,944 | ) | ||||||||||
Disposals of property, plant and equipment | 4 | 9 | 4 | |||||||||||||
Dividends received from joint ventures | 72 | 79 | 38 | |||||||||||||
Interest received | 23 | 37 | 35 | |||||||||||||
Net movements in short-term financial investments | (391 | ) | 1,157 | 1,720 | ||||||||||||
Net cash flow used in investing activities | (4,036 | ) | (2,001 | ) | (1,330 | ) | ||||||||||
Cash flows from financing activities | ||||||||||||||||
Purchase of treasury shares | (267 | ) | (338 | ) | – | |||||||||||
Proceeds from issue of treasury shares | 16 | 23 | 14 | |||||||||||||
Purchase of own shares | (6 | ) | (7 | ) | (5 | ) | ||||||||||
Proceeds received from loans | 2,726 | 1,534 | 1,134 | |||||||||||||
Repayment of loans | (896 | ) | (2,839 | ) | (2,192 | ) | ||||||||||
Net movements in short-term borrowings and derivatives | (730 | ) | 623 | 37 | ||||||||||||
Interest paid | (834 | ) | (826 | ) | (901 | ) | ||||||||||
Exceptional finance costs on the redemption of debt | – | (152 | ) | – | ||||||||||||
Dividends paid to shareholders | (1,337 | ) | (1,271 | ) | (1,059 | ) | ||||||||||
Net cash flow used in financing activities | (1,328 | ) | (3,253 | ) | (2,972 | ) | ||||||||||
Net increase/(decrease) in cash and cash equivalents | 26(a | ) | 4 | (247 | ) | (283 | ) | |||||||||
Exchange movements | 4 | 24 | (26 | ) | ||||||||||||
Net cash and cash equivalents at start of year | 116 | 339 | 648 | |||||||||||||
Net cash and cash equivalents at end of year1 | 18 | 124 | 116 | 339 | ||||||||||||
1. Net of bank overdrafts of £3m (2015: £3m; 2014: £15m).
| 100 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
Financial Statements |
Unaudited commentary on the consolidated cash flow statement
The consolidated cash flow statement shows how the cash balance has moved during the year. Cash inflows and outflows are presented to allow users to understand how they relate to the day-to-day operations of the business (Operating activities); the money that has been spent or earned on assets in the year, including acquisitions of physical assets or other businesses (Investing activities); and the cash raised from debt, share issues or share buybacks and other loan borrowings or repayments (Financing activities). |
Reconciliation of cash flow to net debt
| 2016 | 2015 | |||||||
| £m | £m | |||||||
Cash generated from operations | 5,660 | 5,350 | ||||||
Net capital expenditure | (3,740 | ) | (3,274 | ) | ||||
Business net cash flow | 1,920 | 2,076 | ||||||
Net interest paid (including exceptional interest) | (811 | ) | (941 | ) | ||||
Tax paid | (292 | ) | (343 | ) | ||||
Dividends paid | (1,337 | ) | (1,271 | ) | ||||
Other cash movements | (185 | ) | (243 | ) | ||||
Non-cash movements | (705 | ) | (2,003 | ) | ||||
Increase in net debt | (1,410 | ) | (2,725 | ) | ||||
Opening net debt | (23,915 | ) | (21,190 | ) | ||||
Closing net debt | (25,325 | ) | (23,915 | ) | ||||
Cash generated from operations
Cash generated from operations(£m)
Cash flows from our operations are largely stable when viewed over the longer term. Our electricity and gas transmission and distribution operations in the UK are subject to multi-year rate agreements with regulators. In the UK, we have largely stable cash flows. However, in the US our short-term cash flows are dependent on the price of gas and electricity and the timing of customer payments. The regulatory mechanisms for recovering costs from customers can result in significant cash flow swings from year to year. Changes in volumes in the US, for example as a consequence of abnormally mild or extreme weather can affect revenues and hence, cash flows, particularly in the winter months.
For the year ended 31 March 2016, cash flow from operations increased by £310m to £5,660m.
Changes in working capital improved by £155m over the prior year, principally in the US due to the collection of winter 2015 billings and lower closing balances due to milder weather.
Net capital expenditure
Net capital expenditure in the year of £3,740m was £466m higher than the prior year. This was a result of higher spend in our US and UK regulated businesses. Further details of our capital expenditure can be seen on page 24.
Net interest paid
Net interest paid and exceptional finance costs in 2015/16 were £811m, £130m lower than 2014/15 primarily due to prior year debt redemption cash outflows.
Tax paid
Tax paid in the year to 31 March 2016 was £292m, £51m lower than the prior year. This reflected the reduction in the UK corporation tax rate from 21% to 20%, partially offset by repayments received in the US in the prior year.
Dividends paid
Dividends paid in the year ended 31 March 2016 amounted to £1,337m. This was £66m higher than 2014/15, reflecting the increase in the final dividend for the year ended 31 March 2015 paid in August 2015, together with a lower average scrip dividend take-up in the year.
Other cash movements
Other cash flows principally arise from dividends from joint ventures and movements in treasury shares, including the cost of repurchasing shares as part of the share buyback programme
(£267m, £71m lower than the prior year).
Non-cash movements
The non-cash movements are predominantly due to the strengthening of the US dollar against sterling, resulting in movements in foreign exchange arising on net debt held in US dollars. In the year, the dollar strengthened from $1.49 at 31 March 2015 to $1.44 at
31 March 2016.
Other non-cash movements are from changes in fair values of financial assets and liabilities and interest accretions and accruals.
Net debt
Net debt at 31 March(£m)
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 101 |
Notes to the consolidated financial statements
– analysis of items in the primary statements
1. Basis of preparation and recent accounting developments
| ||||||||||||
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Accounting policies describe our approach to recognising and measuring transactions and balances in the year. Accounting policies applicable across the financial statements are shown below. Accounting policies that are specific to a component of the financial statements have been incorporated into the relevant note. This section also shows areas of judgement and key sources of estimation uncertainty in these financial statements. In addition, we summarise new EU endorsed accounting standards, amendments and interpretations and whether these are effective in 2016 or later years, explaining how significant changes are expected to affect our reported results. |
National Grid’s principal activities involve the transmission and distribution of electricity and gas in Great Britain and northeastern US. The Company is a public limited liability company incorporated and domiciled in England and Wales, with its registered office at 1–3 Strand, London WC2N 5EH.
The Company has its primary listing on the London Stock Exchange and is also quoted on the New York Stock Exchange.
These consolidated financial statements were approved for issue by the Board on 18 May 2016.
These consolidated financial statements have been prepared in accordance with International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) and related interpretations as issued by the IASB and IFRS as adopted by the EU. They are prepared on the basis of all IFRS accounting standards and interpretations that are mandatory for periods ended 31 March 2016 and in accordance with the Companies Act 2006 applicable to companies reporting under IFRS and Article 4 of the EU IAS Regulation. The 2015 and 2014 comparative financial information has also been prepared on this basis.
The consolidated financial statements have been prepared on an historical cost basis, except for the recording of pension assets and liabilities, the revaluation of derivative financial instruments and certain commodity contracts and investments classified as available-for-sale.
These consolidated financial statements are presented in pounds sterling, which is also the functional currency of the Company.
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities and the reported amounts of revenue and expenses during the reporting period (see accounting policy D).
A. Going concern
The Directors considered it appropriate to prepare the financial statements on a going concern basis. The going concern basis presumes that the Group has adequate resources to remain in operation, and that the Directors intend it to do so, for at least one year from the date the financial statements are shown below. Accounting policies that are specific to a component of the financial statements have been incorporated into the relevant note.signed.
This section also shows areas of judgement and key sources of estimation uncertainty in these financial statements. In addition, we summarise new EU endorsed accounting standards, amendments and interpretations and whether these are effective in 2014 or later years, explaining how significant changes are expected to affect our reported results.
A.B. Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries, together with a share of the results, assets and liabilities of jointly controlled entities (joint ventures) and associates using the equity method of accounting, where the investment is carried at cost plus post-acquisition changes in the share of net assets of the joint venture or associate, less any provision for impairment.
A subsidiary is defined as an entity controlled by the Company. Control is achieved where the Company has the power to affect the returns of an entity to which it is exposed or to which it has rights.
Losses in excess of the consolidated interest in joint ventures and associates are not recognised, except where the Company or its subsidiaries have made a commitment to make good those losses.
Where necessary, adjustments are made to bring the accounting policies used in the individual financial statements of the Company, subsidiaries, joint ventures and associates into line with those used by the Company in its consolidated financial statements under IFRS. Intercompany transactions are eliminated.
The results of subsidiaries, joint ventures and associates acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.
Acquisitions are accounted for using the acquisition method, where the purchase price is allocated to the identifiable assets acquired and liabilities assumed on a fair value basis and the remainder recognised as goodwill.
| 102 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
Financial Statements |
B.1. Basis of preparation and recent accounting developmentscontinued
C. Foreign currencies
Transactions in currencies other than the functional currency of the Company or subsidiary concerned are recorded at the rates of exchange prevailing on the dates of the transactions. At each reporting date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at closing exchange rates. Non-monetary assets are not retranslated unless they are carried at fair value.
Gains and losses arising on the retranslation of monetary assets and liabilities are included in the income statement, except where the adoption of hedge accounting requires inclusion in other comprehensive income – note 15.
On consolidation, the assets and liabilities of operations that have a functional currency different from the Company’s functional currency of pounds sterling, principally our US operations that have a functional currency of US dollars, are translated at exchange rates prevailing at the reporting date. Income and expense items are translated at the weighted average exchange rates for the period where these do not differ materially from rates at the date of the transaction. Exchange differences arising are classified as equity and transferred to the consolidated translation reserve.
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, with its registered office at 1-3 Strand, London WC2N 5EH.
The Company has its primary listing on the London Stock Exchange and is also quoted on the New York Stock Exchange. These consolidated financial statements were approved for issue by the Board of Directors on 18 May 2014.
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 International Accounting Standards Board (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 ending 31 March 2014 and in accordance with the Companies Act 2006 applicable to companies reporting under IFRS and Article 4 of the EU IAS Regulation. The 2013 and 2012 comparative financial information has also been prepared on this basis.
The consolidated financial statements have been prepared on an historical cost basis, except for the recording of pension assets and liabilities, the revaluation of derivative financial instruments and certain commodity contracts and investments classified as available-for-sale.
The consolidated financial statements have been prepared on a going concern basis following the assessment made by the Directors as set out on page 52.
These consolidated financial statements are presented in pounds sterling, which is also the functional currency of the Company.
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities and the reported amounts of revenue and expenses during the reporting period (see accounting policy C).
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|
|
|
|
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Information about such judgements and estimations is contained in the notes to the financial statements, and the key areas are summarised below. Areas of judgement that have the most significant effect on the amounts recognised in the financial statements are as follows:
IFRS provides certain options available within accounting standards. Choices we have made, and continue to make, include the following:
Key sources of estimation uncertainty that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows:
In order to illustrate the impact that changes in assumptions could have on our results and financial position, we have included sensitivity analysis in note 33. | New IFRS accounting standards and interpretations adopted in
New IFRS accounting standards and interpretations not yet adopted The Company enters into a significant number of transactions that fall within the scope of IFRS 9 ‘Financial IFRS 15 ‘Revenue from Contracts with Customers’ was issued by the IASB in May 2014. Subject to EU endorsement, it is effective for accounting periods beginning on or after 1 January 2018. The new standard provides enhanced detail on the principle of recognising revenue to reflect the transfer of goods and services to customers at a value which the Company expects to be entitled to receive. The Group has completed an initial impact assessment of the new standard by completing a survey of all businesses identifying the likely impact of IFRS 15. This was a tailored questionnaire based on the known impacts of the new standard on power and utility companies. Whilst no material differences were identified as part of the questionnaire process, further follow-up work will be required to determine the impact, if any, on certain revenue items including, but not limited to, variable consideration contracts, take or pay arrangements and performance obligations where multiple goods or services are provided in individual contracts. Other standards and interpretations or amendments thereto which have been issued, but are not yet effective, are not expected to have a material impact on the Company’s consolidated financial statements. |
2. Segmental analysiscontinued The following table describes the main activities for each operating segment:
Other activities primarily relate to non-regulated businesses and other commercial operations not included within the above segments, including: UK gas metering activities; the Great Britain-France Interconnector; UK property management; a UK LNG import terminal (National Grid Grain LNG Limited); US LNG operations; US unregulated transmission pipelines; together with corporate activities. Sales between operating segments are priced considering the regulatory and legal requirements to which the businesses are subject. The analysis of revenue by geographical area is on the basis of destination. There are no material sales between the UK and US geographical areas. (a) Revenue
Notes to the consolidated financial statements – analysis of items in the primary statements continued 2. Segmental analysiscontinued (b) Operating profit A reconciliation of the operating segments’ measure of profit to total profit before tax is provided below. Further details of the exceptional items and remeasurements are provided in note 4.
Total non-current assets other than financial instruments and pension assets located in the UK and US were £26,261m and £23,784m respectively as at 31 March 2016 (31 March 2015: UK £25,278m, US £21,790m; 31 March 2014: UK £24,531m, US £18,349m).
Unaudited commentary on the results of our principal operations by segment | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
As a business, we have three measures of operating profit that are used on a regular basis and disclosed in this Annual Report.
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Below we have presented separately certain items included in our operating costs. These include a breakdown of payroll costs (including disclosure of amounts paid to key management personnel) and fees paid to our auditors.
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Rentals under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease. | ||||||||||||||||||||||||
Before exceptional items, remeasurements and stranded cost recoveries | Exceptional items, remeasurements and stranded cost recoveries | Total | ||||||||||||||||||||||
2014 £m | 2013 (restated)1 £m | 2012 (restated)1 £m | 2014 £m | 2013 (restated)1 £m | 2012 (restated)1 £m | 2014 £m | 2013 (restated)1 £m | 2012 (restated)1 £m | ||||||||||||||||
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Depreciation and amortisation | 1,416 | 1,361 | 1,267 | – | – | 5 | 1,416 | 1,361 | 1,272 | |||||||||||||||
Payroll costs | 1,373 | 1,434 | 1,381 | 59 | 22 | 82 | 1,432 | 1,456 | 1,463 | |||||||||||||||
Purchases of electricity | 1,513 | 1,251 | 1,356 | (49) | (111) | 89 | 1,464 | 1,140 | 1,445 | |||||||||||||||
Purchases of gas | 1,722 | 1,384 | 1,518 | 33 | (69) | 5 | 1,755 | 1,315 | 1,523 | |||||||||||||||
Rates and property taxes | 963 | 969 | 955 | – | – | – | 963 | 969 | 955 | |||||||||||||||
Balancing Services Incentive Scheme | 872 | 805 | 818 | – | – | – | 872 | 805 | 818 | |||||||||||||||
Payments to other UK network owners | 630 | 487 | 407 | – | – | – | 630 | 487 | 407 | |||||||||||||||
Other | 2,656 | 3,029 | 2,360 | (114) | 48 | 54 | 2,542 | 3,077 | 2,414 | |||||||||||||||
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| 11,145 | 10,720 | 10,062 | (71) | (110) | 235 | 11,074 | 10,610 | 10,297 | ||||||||||||||||
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Operating costs include: | ||||||||||||||||||||||||
Inventory consumed | 422 | 389 | 360 | |||||||||||||||||||||
Operating leases | 115 | 109 | 97 | |||||||||||||||||||||
Research and development expenditure | 12 | 15 | 15 | |||||||||||||||||||||
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1. See note 1 on page 92. | ||||||||||||||||||||||||
(a) Payroll costs | ||||||||||||||||||||||||
2014 £m | 2013 (restated)1 £m | 2012 (restated)1 £m | ||||||||||||||||||||||
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Wages and salaries2 | 1,575 | 1,596 | 1,566 | |||||||||||||||||||||
Social security costs | 126 | 120 | 116 | |||||||||||||||||||||
Pension costs (note 22) | 245 | 231 | 231 | |||||||||||||||||||||
Share-based payment | 20 | 20 | 24 | |||||||||||||||||||||
Severance costs (excluding pension costs) | 30 | 16 | 35 | |||||||||||||||||||||
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| 1,996 | 1,983 | 1,972 | ||||||||||||||||||||||
Less: payroll costs capitalised | (564) | (527) | (509) | |||||||||||||||||||||
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1. See note 1 on page 92. | ||||||||||||||||||||||||
2. Included within wages and salaries are US other post-retirement benefit costs of £44m (2013: £43m; 2012: £60m). For further information refer to note 22 on page 122. | ||||||||||||||||||||||||
(b) Number of employees
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| 31 March 2014 Number | Monthly average 2014 Number | 31 March 2013 Number1 | Monthly average 2013 Number1 | 31 March 2012 Number1 | Monthly average 2012 | |||||||||||||||||||
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UK | 9,693 | 9,641 | 9,990 | 9,816 | 9,696 | 9,769 | ||||||||||||||||||
US | 14,216 | 15,094 | 15,438 | 15,555 | 15,843 | 16,080 | ||||||||||||||||||
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| 23,909 | 24,735 | 25,428 | 25,371 | 25,539 | 25,849 | |||||||||||||||||||
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1. Comparatives have been re-presented on a basis consistent with the current year classification.
The vast majority of employees in the US are either directly or indirectly employed in the transmission, distribution and generation of electricity or the distribution of gas, while those in the UK are either directly or indirectly employed in the transmission and distribution of gas or the transmission of electricity. At 31 March 2014, there were 2,044 (2013: 2,151; 2012: 2,357) employees in other operations, excluding shared services.
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2014 £m | 2013 £m | 2012 £m | ||||||||||||
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Short-term employee benefits | 9 | 8 | 10 | |||||||||||
Post-employment benefits | 1 | 3 | 6 | |||||||||||
Share-based payment | 5 | 5 | 5 | |||||||||||
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Key management compensation relates to the Board of Directors, including the Executive Directors and Non-executive Directors for the years presented. |
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(d) Directors’ emoluments | ||||||||||||||
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(e) Auditors’ remuneration | ||||||||||||||
Auditors’ remuneration is presented below in accordance with the requirements of the UK Companies Act 2006 and the principal accountant fees and services disclosure requirements of Item 16C of Form 20-F.
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Audit fees1payable to the parent Company’s auditors and their associates in respect of: | ||||||||||||||
Audit of the parent Company’s individual and consolidated financial statements | 0.9 | 1.1 | 1.1 | |||||||||||
The auditing of accounts of any associate of the Company | 7.8 | 6.0 | 5.2 | |||||||||||
Other services supplied2 | 2.3 | 2.7 | 2.3 | |||||||||||
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| 11.0 | 9.8 | 8.6 | ||||||||||||
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Total other services3 | ||||||||||||||
Tax fees4 | ||||||||||||||
Tax compliance services | 0.5 | 0.5 | 0.5 | |||||||||||
Tax advisory services | 0.3 | 0.3 | 0.2 | |||||||||||
All other fees5 | ||||||||||||||
Other assurance services | 0.1 | 0.1 | 0.3 | |||||||||||
Services relating to corporate finance transactions not covered above | – | 0.3 | 0.2 | |||||||||||
Other non-audit services not covered above | 0.8 | 1.1 | 2.6 | |||||||||||
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| 1.7 | 2.3 | 3.8 | ||||||||||||
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Total auditors’ remuneration | 12.7 | 12.1 | 12.4 | |||||||||||
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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 2014, 2013 and 2012, and the review of interim financial statements for the six month periods ended 30 September 2013, 2012 and 2011 respectively. |
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2. Other services supplied represent fees payable for services in relation to other statutory filings or engagements that are required to be carried out by the auditors. In particular, this includes fees for reports under section 404 of the US Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley) and audit reports on regulatory returns. |
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3. There were no audit related fees as described in Item 16C(b) of Form 20-F. |
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4. Tax fees include amounts charged for tax compliance, tax advice and tax planning. Total tax fees for the year ended 31 March 2014 were £0.8m (2013: £0.8m; 2012: £0.7m). |
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5. All other fees include amounts relating to the review of US pensions and other post-retirement benefits census data and sundry services, all of which have been subject to approval by the Audit Committee. Total other fees for the year ended 31 March 2014 were £0.9m (2013: £1.5m; 2012: £3.1m). |
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In addition, fees of £0.1m were incurred in 2014 in relation to the audits of the pension schemes of the Company (2013: £0.1m; 2012: £0.1m). |
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Subject to the Company’s Articles of Association and the Companies Act 2006, the Audit Committee is solely and directly responsible for the approval of the appointment, reappointment, compensation and oversight of the Company’s independent auditors. It is our policy that the Audit Committee must approve in advance all non-audit work to be performed by the independent auditors to ensure that the service will not compromise auditor independence. Certain services are prohibited from being performed by the external auditors under the Sarbanes-Oxley Act 2002.
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Regulated financial performance:This Reconciliations between statutory and adjusted operating profit can be found on page 196. Reconciliations between adjusted operating profit and regulated financial performance for UK Electricity Transmission, UK Gas Transmission and UK Gas Distribution can be found on page 108. Commentary on segmental adjusted operating profit results
UK Electricity Transmission For the year ended 31 March 2016, revenue in the UK Electricity Transmission segment increased by £223m to £3,977m, and adjusted operating profit decreased by £64m to £1,173m. The revenue growth of £223m was principally due to the recovery of higher pass-through costs such as payments to other UK network owners and system balancing costs, and under-recoveries of allowed revenues in the prior year. This was partly offset by reductions in allowed revenues this year and a legal settlement received in 2014/15 that did not repeat this year. Net revenue (after deducting pass-through costs) was £14m higher. Regulated controllable costs were £28m higher due to inflation and salary growth, together with legal cost recoveries in the prior year, higher tower maintenance costs and transformation costs associated with our System Operator business. Depreciation and amortisation was £14m higher reflecting the continued capital investment programme. Other costs were £36m higher than prior year due to additional asset impairments this year and lower scrap and disposal proceeds. Capital investment remained around the same level as last year at £1,084m. UK Gas Transmission Revenue in the UK Gas Transmission segment increased by £25m in 2015/16 to £1,047m and adjusted operating profit increased by £49m to £486m. Revenue was £25m higher, principally due to over-recoveries of allowed revenues in the year. Regulated controllable costs were £10m higher than last year, mainly as a result of inflation, higher gas system service charges and organisational change costs. Depreciation costs were £6m higher due to ongoing investment (investment in the year was £186m, similar to last year). Other operating costs were £19m lower than last year, mostly reflecting additional costs in 2014/15 relating to the closure of LNG facilities. UK Gas Distribution UK Gas Distribution revenue increased by £51m in the year to £1,918m, and adjusted operating profit increased by £52m to £878m. Revenue was £51m higher, principally reflecting increased regulatory allowances. In part, these US Regulated Revenue in our The stronger US dollar increased operating profit in the year Our capital investment programme continues in the US, with a further £1,856m invested in 2015/16, including spend on gas mains replacement, gas customer growth and electric system reinforcement. Other activities Revenue in Other activities increased by £114m to £876m in the year ended 31 March 2016. Adjusted operating profit was £175m higher at £374m. In the US, adjusted operating profit was £143m higher, reflecting lower spend on upgrades to our finance systems which completed last year. In addition, we benefited from
Notes to the consolidated financial statements – analysis of items in the primary statements continued Unaudited commentary on the results of our principal operations by segmentcontinued Commentary on UK regulated financial performance
Adjustments in calculating regulatory financial performance The principal adjustments from reported operating profit to UK regulated financial performance are: Movement in regulatory ‘IOUs’: Revenue related to performance in one year may be recovered in later years. Revenue may be recovered in one year but be required to be returned to customers in future years. IFRS recognises these revenues when they flow through invoices to customers and not in the period to which they relate. Performance RAV: UK performance efficiencies are in part remunerated by the creation of additional RAV which is expected to result in future earnings under regulatory arrangements. Pension adjustment: Cash payments against pension deficits in the UK are recoverable under regulatory contracts. 3% RAV indexation: Future UK revenue allowances are expected to be set using an asset base adjusted for inflation. These will be billed in future periods and recognised under IFRS at that time. A 3% RPI inflation assumption is used, reflecting the long-run expectation. Deferred taxation adjustment: Future UK revenues are expected to recover cash taxation costs, including the unwinding of deferred taxation balances created in the current year. Regulatory depreciation: UK regulated revenues include an allowance for a return of regulatory capital in accordance with regulatory assumed asset lives. This return does not form part of regulatory profit. Fast/slow money adjustment: The regulatory remuneration of costs incurred is split between in year revenue allowances and the creation of additional RAV. This does not align with the classification of costs as operating costs and fixed asset additions under IFRS accounting principles. UK Electricity Transmission Regulated financial performance for UK Electricity Transmission decreased to £1,195m from £1,232m, down 3%. The slight year-on-year decrease is principally a result of a one-off legal settlement of £56m included in last year’s results. Electricity Transmission underlying performance and operational return on equity were broadly similar this year.
Rentals under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease.
The vast majority of employees in the US are either directly or indirectly employed in the transmission, distribution and generation of electricity or the distribution of gas, while those in the UK are either directly or indirectly employed in the transmission and distribution of gas or the transmission of electricity. At 31 March 2016, there were 2,232 (2015: 2,131; 2014: 2,044) employees in other operations, excluding shared services.
Notes to the consolidated financial statements – analysis of items in the primary statements continued 3. Operating costscontinued (c) Key management compensation
PwC has contracted with Ofgem to assess the UK gas industry’s readiness for the introduction of new settlement processes and systems. Fees for these services are paid by Xoserve Limited, a subsidiary of National Grid, on behalf of the industry, under instruction from Ofgem. As PwC has no contract with or duty of care to Xoserve Limited, these amounts are not included above. In addition, fees of £0.1m were incurred in 2016 in relation to the audits of the pension schemes of the Company (2015: £0.2m; 2014: £0.1m). Subject to the Company’s Articles of Association and the Companies Act 2006, the Audit Committee is solely and directly responsible for the approval of the appointment, reappointment, compensation and oversight of the Company’s independent auditors. It is our policy that the Audit Committee must approve in advance all non-audit work in excess of £50,000 to be performed by the independent auditors to ensure that the service will not compromise auditor independence. The Audit Committee has delegated the approval in advance for all non-audit work below this level, up to a maximum of 5% of the total audit fee, to the Finance Director. Certain services are prohibited from being performed by the external auditors under Sarbanes-Oxley. All of the above services were pre-approved pursuant to this policy.
4. Exceptional items and remeasurements
Our financial performance is analysed into two components: business performance, which excludes exceptional items Management utilises an exceptional items framework that has been discussed and approved by the Group Audit Committee. This follows a three-step process which considers the nature of the event, the financial materiality involved and any particular facts and circumstances. In considering the nature of the event, management focuses on whether the event is within the Group’s control and how frequently such an event typically occurs. In determining the facts and circumstances management considers factors such as ensuring consistent treatment between favourable and unfavourable transactions, precedent for similar items, number of periods over which costs will be spread or gains earned and the commercial context for the particular transaction. Items of income or expense that are considered by management for designation as exceptional items include such items as significant restructurings, write-downs or impairments of non-current assets, significant changes in environmental or decommissioning provisions, integration of acquired businesses, gains or losses on disposals of businesses or investments and significant debt redemption costs as a consequence of transactions such as significant disposals or issues of equity. Costs arising from restructuring programmes include redundancy costs. Redundancy costs are charged to the income statement in the year in which a commitment is made to incur the costs and the main features of the restructuring plan have been announced to affected employees. Remeasurements comprise gains or losses recorded in the income statement arising from changes in the fair value of commodity contracts and of derivative financial instruments to the extent that hedge accounting is not achieved or is not effective. These fair values increase or decrease because of changes in commodity and financial indices and prices over which we have no control.
In November 2015, the Further detail of operating exceptional items in respect of previous years Debt redemption costs in the year ending 31 March 2015 represents costs arising from a liability management programme. We reviewed and restructured the Group debt portfolio following the commencement of the RIIO price controls in 2013 and the slow down in our planned UK capital investment programme as the industry assessed the impact of Electricity Market Reform. £16m was received in year ending 31 March 2014 following the sale to a third party of a settlement award which arose as a result of a legal ruling in 2008. The business to which this item related had previously been treated as discontinued.
Notes to the consolidated financial statements – analysis of items in the primary statements continued 4. Exceptional items and remeasurementscontinued Remeasurements Commodity contracts represent mark-to-market movements on certain physical and financial commodity contract obligations in the US. These contracts primarily relate to the forward purchase of energy for supply to customers, or to the economic hedging thereof, that are required to be measured at fair value and that do not qualify for hedge accounting. Under the existing rate plans in the US, commodity costs are recoverable from customers Net (losses)/gains on derivative financial instruments comprise (losses)/gains arising on derivative financial instruments reported in the income statement. These exclude gains and losses for which hedge accounting has been effective, which have been recognised directly in other comprehensive income or which are offset by Items included within tax The Finance No. 2 Bill 2015 included a reduction in the UK corporation tax rate from 20% to 19% for the year beginning 1 April 2017, with The Finance Act 2013 enacted reductions in the UK corporation tax rate from 23% to 21% from 1 April 2014, and from 21% to 20% from 1 April 2015. Other UK tax legislation also reduced the UK corporation tax rate in prior periods (2013: from 24% to 23%). These reductions have resulted in decreases to UK deferred tax liabilities in these periods.
Notes to the consolidated financial statements – analysis of items in the primary statements continued
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The tax charge for the year can be analysed as follows:
| 2016 | 2015 | 2014 | ||||||||||
| £m | £m | £m | ||||||||||
Current tax | ||||||||||||
UK corporation tax at 20% (2015: 21%; 2014: 23%) | 322 | 309 | 355 | |||||||||
UK corporation tax adjustment in respect of prior years | (7 | ) | (2 | ) | (9 | ) | ||||||
| 315 | 307 | 346 | ||||||||||
Overseas corporation tax | 38 | 51 | 54 | |||||||||
Overseas corporation tax adjustment in respect of prior years | (19 | ) | (62 | ) | (88 | ) | ||||||
| 19 | (11 | ) | (34 | ) | ||||||||
Total current tax | 334 | 296 | 312 | |||||||||
Deferred tax | ||||||||||||
UK deferred tax | (152 | ) | 123 | (292 | ) | |||||||
UK deferred tax adjustment in respect of prior years | 26 | 7 | (3 | ) | ||||||||
| (126 | ) | 130 | (295 | ) | ||||||||
Overseas deferred tax | 229 | 138 | 276 | |||||||||
Overseas deferred tax adjustment in respect of prior years | 1 | 53 | (9 | ) | ||||||||
| 230 | 191 | 267 | ||||||||||
Total deferred tax | 104 | 321 | (28 | ) | ||||||||
Total tax charge | 438 | 617 | 284 | |||||||||
Tax (credited)/charged to other comprehensive income and equity
|
| |||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| £m | £m | £m | ||||||||||
Current tax | ||||||||||||
Share-based payment | (2 | ) | (7 | ) | (3 | ) | ||||||
Available-for-sale investments | 5 | 5 | (5 | ) | ||||||||
Deferred tax | ||||||||||||
Available-for-sale investments | 12 | 2 | 2 | |||||||||
Cash flow hedges | 15 | (18 | ) | 5 | ||||||||
Share-based payment | – | 3 | (4 | ) | ||||||||
Remeasurements of net retirement benefit obligations | 125 | (299 | ) | 172 | ||||||||
| 155 | (314 | ) | 167 | |||||||||
Total tax recognised in the statement of comprehensive income | 157 | (310 | ) | 174 | ||||||||
Total tax relating to share-based payment recognised directly in equity | (2 | ) | (4 | ) | (7 | ) | ||||||
| 155 | (314 | ) | 167 | |||||||||
| 6. Taxationcontinued | ||||||||||||||
| Tax charged/(credited) to other comprehensive income and equity | ||||||||||||||
|
| 2014 £m |
|
| 2013 (restated £m | )1
|
| 2012 (restated)1 £m |
| ||||||
| ||||||||||||||
Current tax | ||||||||||||||
Share-based payment | (3 | ) | 1 | (3) | ||||||||||
Available-for-sale investments | (5 | ) | – | – | ||||||||||
Deferred tax | ||||||||||||||
Available-for-sale investments | 2 | 2 | 2 | |||||||||||
Cash flow hedges | 5 | 13 | (2) | |||||||||||
Share-based payment | (4 | ) | 1 | – | ||||||||||
Remeasurements of net retirement benefit obligations | 172 | (179 | ) | (342) | ||||||||||
| ||||||||||||||
| 167 | (162 | ) | (345) | |||||||||||
| ||||||||||||||
Total tax recognised in the statement of comprehensive income | 174 | (164 | ) | (342) | ||||||||||
Total tax relating to share-based payment recognised directly in equity | (7 | ) | 2 | (3) | ||||||||||
| ||||||||||||||
| 167 | (162 | ) | (345) | |||||||||||
| ||||||||||||||
1. See note 1 on page 92.
|
| |||||||||||||
The tax charge for the year after exceptional items, remeasurements and stranded cost recoveries is lower (2013: lower; 2012: lower) than the standard rate of corporation tax in the UK of 23% (2013: 24%; 2012: 26%).
|
| |||||||||||||
|
| Before exceptional items, remeasurements and stranded cost recoveries 2014 £m |
|
| After exceptional items, remeasurements and stranded cost recoveries 2014 £m |
|
| Before exceptional items, remeasurements and stranded cost recoveries 2013 (restated £m |
)1
|
| After exceptional items, remeasurements and stranded cost recoveries 2013 (restated £m |
)1
|
| Before exceptional items, remeasurements and stranded cost recoveries 2012 (restated £m |
)1
|
| After exceptional items, remeasurements and stranded cost recoveries 2012 (restated)1 £m |
| |||||||||
| ||||||||||||||||||||||||||
Profit before tax | ||||||||||||||||||||||||||
Before exceptional items, remeasurements and stranded cost recoveries | 2,584 | 2,584 | 2,533 | 2,533 | 2,408 | 2,408 | ||||||||||||||||||||
Exceptional items, remeasurements and stranded cost recoveries | – | 164 | – | 178 | – | (26) | ||||||||||||||||||||
| ||||||||||||||||||||||||||
Profit before tax | 2,584 | 2,748 | 2,533 | 2,711 | 2,408 | 2,382 | ||||||||||||||||||||
| ||||||||||||||||||||||||||
Profit before tax multiplied by UK corporation tax rate of 23% (2013: 24%; 2012: 26%) | 594 | 632 | 608 | 651 | 626 | 619 | ||||||||||||||||||||
Effect of: | ||||||||||||||||||||||||||
Adjustments in respect of prior years | (109 | ) | (109 | ) | (116 | ) | (117 | ) | 1 | – | ||||||||||||||||
Expenses not deductible for tax purposes | 32 | 284 | 37 | 169 | 36 | 55 | ||||||||||||||||||||
Non-taxable income | (24 | ) | (268 | ) | (24 | ) | (152 | ) | (19 | ) | (30) | |||||||||||||||
Adjustment in respect of foreign tax rates | 98 | 138 | 116 | 140 | 63 | 63 | ||||||||||||||||||||
Impact of share-based payment | (3 | ) | (3 | ) | 2 | 2 | 1 | 1 | ||||||||||||||||||
Deferred tax impact of change in UK and US tax rates | – | (390 | ) | – | (128 | ) | – | (242) | ||||||||||||||||||
Other | (7 | ) | – | (4 | ) | (8 | ) | (11 | ) | (3) | ||||||||||||||||
| ||||||||||||||||||||||||||
Total tax | 581 | 284 | 619 | 557 | 697 | 463 | ||||||||||||||||||||
| ||||||||||||||||||||||||||
| % | % | % | % | % | % | |||||||||||||||||||||
| ||||||||||||||||||||||||||
Effective tax rate | 22.5 | 10.3 | 24.4 | 20.5 | 28.9 | 19.4 | ||||||||||||||||||||
| ||||||||||||||||||||||||||
1. See note 1 on page 92.
Factors that may affect future tax charges The Finance Act 2013 (the Act) was substantively enacted on 2 July 2013. The Act further reduced the main rate of UK corporation tax to 21% with effect from 1 April 2014 and 20% from 1 April 2015.
The reduction in the UK corporation tax rate to 20% from 1 April 2015 has been enacted and deferred tax balances have been calculated at this rate.
Effective from 1 April 2014, the state income tax rate for Massachusetts regulated utilities increased from 6.5% to 8% and, effective from 1 April 2016, the state income tax rate for New York will decrease from 7.1% to 6.5%. Neither of these rate changes is expected to have a material impact on the Group’s effective tax rate.
|
| |||||||||||||||||||||||||
| 114 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
|
|
|
|
|
| 6. Taxationcontinued | |||||||||||||||||||||||
| Taxation included within the statement of financial position | ||||||||||||||||||||||||
The following are the major deferred tax assets and liabilities recognised, and the movements thereon, during the current and prior reporting periods:
| ||||||||||||||||||||||||
| | Accelerated tax depreciation £m | | | Share- based payment £m | | | Pensions and other post- retirement benefits (restated £m | )1 | | Financial instruments | | | Other net temporary differences | | Total (restated)1 £m | |||||||||
| ||||||||||||||||||||||||
Deferred tax (assets)/liabilities | ||||||||||||||||||||||||
Deferred tax assets at 31 March 2012 | (1 | ) | (18 | ) | (1,173 | ) | (98 | ) | (702 | ) | (1,992) | |||||||||||||
Deferred tax liabilities at 31 March 2012 | 5,484 | – | 128 | 9 | 109 | 5,730 | ||||||||||||||||||
| ||||||||||||||||||||||||
At 1 April 2012 as previously reported | 5,483 | (18 | ) | (1,045 | ) | (89 | ) | (593 | ) | 3,738 | ||||||||||||||
Impact of change in accounting policy1 | – | – | (2 | ) | – | – | (2) | |||||||||||||||||
| ||||||||||||||||||||||||
At 1 April 2012 (restated) | 5,483 | (18 | ) | (1,047 | ) | (89 | ) | (593 | ) | 3,736 | ||||||||||||||
Exchange adjustments | 149 | – | (47 | ) | (1 | ) | (32 | ) | 69 | |||||||||||||||
Charged/(credited) to income statement | 329 | 2 | 65 | 68 | (23 | ) | 441 | |||||||||||||||||
Charged/(credited) to other comprehensive income and equity | – | 1 | (179 | ) | 15 | – | (163) | |||||||||||||||||
Other | – | – | – | – | (6 | ) | (6) | |||||||||||||||||
| ||||||||||||||||||||||||
At 31 March 2013 (restated) | 5,961 | (15 | ) | (1,208 | ) | (7 | ) | (654 | ) | 4,077 | ||||||||||||||
| ||||||||||||||||||||||||
Deferred tax assets at 31 March 2013 | (2 | ) | (15 | ) | (1,362 | ) | (16 | ) | (777 | ) | (2,172) | |||||||||||||
Deferred tax liabilities at 31 March 2013 | 5,963 | – | 154 | 9 | 123 | 6,249 | ||||||||||||||||||
| ||||||||||||||||||||||||
At 1 April 2013 | 5,961 | (15 | ) | (1,208 | ) | (7 | ) | (654 | ) | 4,077 | ||||||||||||||
Exchange adjustments | (282 | ) | – | 78 | – | 59 | (145) | |||||||||||||||||
(Credited)/charged to income statement | (30 | ) | (3 | ) | 141 | (7 | ) | (126 | ) | (25) | ||||||||||||||
(Credited)/charged to other comprehensive income and equity | – | (4 | ) | 172 | 7 | – | 175 | |||||||||||||||||
| ||||||||||||||||||||||||
At 31 March 2014 | 5,649 | (22 | ) | (817 | ) | (7 | ) | (721 | ) | 4,082 | ||||||||||||||
| ||||||||||||||||||||||||
Deferred tax assets at 31 March 2014 | (1 | ) | (22 | ) | (960 | ) | (13 | ) | (796 | ) | (1,792) | |||||||||||||
Deferred tax liabilities at 31 March 2014 | 5,650 | – | 143 | 6 | 75 | 5,874 | ||||||||||||||||||
| ||||||||||||||||||||||||
| 5,649 | (22 | ) | (817 | ) | (7 | ) | (721 | ) | 4,082 | |||||||||||||||
| ||||||||||||||||||||||||
1. See note 1 on page 92. | ||||||||||||||||||||||||
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 £4,082m (2013: £4,077m). | ||||||||||||||||||||||||
At the reporting date there were no material current deferred tax assets or liabilities (2013: £nil). | ||||||||||||||||||||||||
Deferred tax assets in respect of capital losses, trading losses and non-trade deficits have not been recognised as their future recovery is uncertain or not currently anticipated. The deferred tax assets not recognised are as follows:
| ||||||||||||||||||||||||
2014 £m | 2013 £m | |||||||||||||||||||||||
| ||||||||||||||||||||||||
Capital losses | 274 | 323 | ||||||||||||||||||||||
Non-trade deficits | 1 | 1 | ||||||||||||||||||||||
Trading losses | 5 | 11 | ||||||||||||||||||||||
| ||||||||||||||||||||||||
The capital losses and non-trade deficits that arise in the UK are available to carry forward indefinitely. However, the capital losses can only be offset against specific types of future capital gains and non-trade deficits against specific future non-trade profits. The trading losses arising in the US have up to a 20 year carry forward time limit. | ||||||||||||||||||||||||
The aggregate amount of temporary differences associated with the unremitted earnings of overseas subsidiaries and joint ventures for which deferred tax liabilities have not been recognised at the reporting date is approximately £2,118m (2013: £1,817m). No liability is recognised in respect of the differences because the Company and its subsidiaries are in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future. In addition, as a result of a change in UK tax legislation, which largely exempts overseas dividends received on or after 1 July 2009 from UK tax, the temporary differences are unlikely to lead to additional tax.
| ||||||||||||||||||||||||
Financial Statements | |||||||||||||||
6. Taxcontinued
The tax charge for the year after exceptional items and remeasurements is lower (2015: higher; 2014: lower) than the standard rate of corporation tax in the UK of 20% (2015: 21%; 2014: 23%):
| Before | After | Before | After | Before | After | |||||||||||||||||||
| exceptional | exceptional | exceptional | exceptional | exceptional | exceptional | |||||||||||||||||||
| items and | items and | items and | items and | items and | items and | |||||||||||||||||||
| remeasurements | remeasurements | remeasurements | remeasurements | remeasurements | remeasurements | |||||||||||||||||||
| 2016 | 2016 | 2015 | 2015 | 2014 | 2014 | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
Profit before tax | ||||||||||||||||||||||||
Before exceptional items and remeasurements | 3,142 | 3,142 | 2,876 | 2,876 | 2,584 | 2,584 | ||||||||||||||||||
Exceptional items and remeasurements | – | (110 | ) | – | (248 | ) | – | 164 | ||||||||||||||||
Profit before tax | 3,142 | 3,032 | 2,876 | 2,628 | 2,584 | 2,748 | ||||||||||||||||||
Profit before tax multiplied by UK corporation tax rate of 20% (2015: 21%; 2014: 23%) | 628 | 606 | 604 | 552 | 594 | 632 | ||||||||||||||||||
Effect of: | ||||||||||||||||||||||||
Adjustments in respect of prior years | 2 | 1 | (3 | ) | (4 | ) | (109 | ) | (109 | ) | ||||||||||||||
Expenses not deductible for tax purposes | 29 | 118 | 31 | 327 | 32 | 284 | ||||||||||||||||||
Non-taxable income | (26 | ) | (113 | ) | (20 | ) | (320 | ) | (24 | ) | (268 | ) | ||||||||||||
Adjustment in respect of foreign tax rates | 124 | 129 | 91 | 77 | 98 | 138 | ||||||||||||||||||
Impact of share-based payment | (1 | ) | (1 | ) | (1 | ) | (1 | ) | (3 | ) | (3 | ) | ||||||||||||
Deferred tax impact of change in UK and US tax rates | – | (296 | ) | – | (6 | ) | – | (390 | ) | |||||||||||||||
Other | (3 | ) | (6 | ) | (7 | ) | (8 | ) | (7 | ) | – | |||||||||||||
Total tax charge | 753 | 438 | 695 | 617 | 581 | 284 | ||||||||||||||||||
| % | % | % | % | % | % | |||||||||||||||||||
Effective tax rate | 24.0 | 14.4 | 24.2 | 23.5 | 22.5 | 10.3 | ||||||||||||||||||
Factors that may affect future tax charges
The Finance Act 2015 (No.2) (the Act) was enacted on 18 November 2015. The Act reduced the main rate of UK corporation tax to 19% with effect from 1 April 2017 and 18% from 1 April 2020 and deferred tax balances have been calculated at 18%.
The Budget in March this year announced a further reduction in the corporate tax rate to 17% from 1 April 2020, from the previously enacted 18%. This has not been substantively enacted at the reporting date. As the change to 17% had not been substantively enacted at the reporting date its effects are not included in these financial statements. The overall effect of that change, if it had applied to the deferred tax balances at the reporting date, would be to reduce the deferred tax liability by an additional £139m and reduce the tax expense for the period by £139m.
There continued to be significant international focus on tax reform during 2015/16, including the OECD’s Base Erosion and Profit Shifting (BEPS) project to address mismatches in international rules and European Commission initiatives. We will continue to monitor developments and assess the potential impact for National Grid of these and any further initiatives.
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 115 |
Notes to the consolidated financial statements
– analysis of items in the primary statements continued
financial statements6. Taxcontinued
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:
| Pensions | ||||||||||||||||||||||||
| and other | ||||||||||||||||||||||||
| Accelerated | Share- | post- | Other net | |||||||||||||||||||||
| tax | based | retirement | Financial | temporary | ||||||||||||||||||||
| depreciation | payment | benefits | instruments | differences | Total | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
Deferred tax (assets)/liabilities | ||||||||||||||||||||||||
Deferred tax assets at 31 March 2014 | (1 | ) | (22 | ) | (960 | ) | (13 | ) | (796 | ) | (1,792 | ) | ||||||||||||
Deferred tax liabilities at 31 March 2014 | 5,650 | – | 143 | 6 | 75 | 5,874 | ||||||||||||||||||
At 1 April 2014 | 5,649 | (22 | ) | (817 | ) | (7 | ) | (721 | ) | 4,082 | ||||||||||||||
Exchange adjustments | 408 | – | (99 | ) | (2 | ) | (104 | ) | 203 | |||||||||||||||
Charged/(credited) to income statement | 599 | 1 | 38 | (34 | ) | (280 | ) | 324 | ||||||||||||||||
Charged/(credited) to other comprehensive income and equity | – | 3 | (299 | ) | (16 | ) | – | (312 | ) | |||||||||||||||
At 31 March 2015 | 6,656 | (18 | ) | (1,177 | ) | (59 | ) | (1,105 | ) | 4,297 | ||||||||||||||
Deferred tax assets at 31 March 2015 | (1 | ) | (18 | ) | (1,337 | ) | (64 | ) | (1,186 | ) | (2,606 | ) | ||||||||||||
Deferred tax liabilities at 31 March 2015 | 6,657 | – | 160 | 5 | 81 | 6,903 | ||||||||||||||||||
At 1 April 2015 | 6,656 | (18 | ) | (1,177 | ) | (59 | ) | (1,105 | ) | 4,297 | ||||||||||||||
Exchange adjustments and other | 141 | 1 | (33 | ) | (1 | ) | (30 | ) | 78 | |||||||||||||||
Charged/(credited) to income statement | 266 | 3 | 47 | (6 | ) | (203 | ) | 107 | ||||||||||||||||
Charged to other comprehensive income and equity | – | – | 125 | 13 | 14 | 152 | ||||||||||||||||||
At 31 March 2016 | 7,063 | (14 | ) | (1,038 | ) | (53 | ) | (1,324 | ) | 4,634 | ||||||||||||||
Deferred tax assets at 31 March 2016 | (1 | ) | (14 | ) | (1,201 | ) | (66 | ) | (1,408 | ) | (2,690 | ) | ||||||||||||
Deferred tax liabilities at 31 March 2016 | 7,064 | – | 163 | 13 | 84 | 7,324 | ||||||||||||||||||
| 7,063 | (14 | ) | (1,038 | ) | (53 | ) | (1,324 | ) | 4,634 | |||||||||||||||
Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances net. The deferred tax balances (after offset) for statement of financial position purposes consist solely of deferred tax liabilities of £4,634m (2015: £4,297m). Deferred tax of £667m (2015: £461m) has been recognised in respect of net operating losses.
Deferred tax assets in respect of capital losses, trading losses and non-trade deficits have not been recognised as their future recovery is uncertain or not currently anticipated. The deferred tax assets not recognised are as follows:
| 2016 | 2015 | |||||||
| £m | £m | |||||||
Capital losses | 232 | 250 | ||||||
Non-trade deficits | 5 | 1 | ||||||
Trading losses | – | 4 | ||||||
The capital losses and non-trade deficits that arise in the UK are available to carry forward indefinitely. However, the capital losses can only be offset against specific types of future capital gains and non-trade deficits against specific future non-trade profits. The trading losses arising in the US have up to a 20 year carry forward time limit.
The aggregate amount of temporary differences associated with the unremitted earnings of overseas subsidiaries and joint ventures for which deferred tax liabilities have not been recognised at the reporting date is approximately £502m (2015: £773m). No liability is recognised in respect of the differences because the Company and its subsidiaries are in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future. In addition, as a result of UK tax legislation, which largely exempts overseas dividends received, the temporary differences are unlikely to lead to additional tax.
Unaudited commentary on taxation
Tax strategy National Grid manages its tax affairs in a proactive and responsible way in order to comply with all relevant legislation and minimise reputational risk. We have a good working relationship with all relevant tax authorities and actively engage with them in order to ensure that they are fully aware of our view of the tax implications of our business initiatives. Management responsibility and oversight for our tax strategy, which is approved by the Finance Committee, rests with the Finance Director and the Global Tax and Treasury Director who monitor our tax activities and report to the Finance Committee.
Total UK tax contribution National Grid has taken the decision to provide additional information in respect of its total UK tax contribution and first disclosed this in last year’s annual report. This year we have again disclosed information in respect of our total UK tax contribution for consistency and to aid transparency in an area in which there has been increasing public interest. As was the case in the prior year, the total amount of taxes we pay and collect in the UK year on year is significantly more than just the corporation tax which we pay on our UK profits. Within the total, we again include significant other taxes paid such as business rates and taxes on employment together with employee taxes and other indirect taxes.
For 2013/14 our total tax contribution to the UK Exchequer was £1.4bn (2012/13: £1.2bn). Taxes borne in 2014 were £733m, an 8% increase on taxes borne in 2013 of £678m and primarily due to higher corporation tax payments in the current year. Our 2012/13 total tax contribution of £1.2bn resulted in National Grid being the 17th highest contributor of UK taxes based on the results of the Hundred Group’s 2013 Total Tax Contribution Survey, a position commensurate with the size of our business and capitalisation relative to other contributors to the survey. In 2012 we were in 16th position. In 2013 we ranked 9th in respect of taxes borne.
Of course, National Grid’s contribution to the UK economy is broader than just the taxes it pays over to and collects on behalf of HMRC. The Hundred Group’s 2013 Total Tax Contribution Survey ranks National Grid in 4th place in respect of UK capital expenditure on fixed assets and we also rank highly in respect of investment in research and development. National Grid’s economic contribution also supports a significant number of UK jobs in our supply chain.
The most significant amounts making up the 2013/14 total tax contribution were as follows:
UK total tax contribution 2013/14
|
Tax transparency The UK tax charge for the year disclosed in the accounts in accordance with accounting standards and the UK corporation tax paid during the year will differ. For transparency we have included a reconciliation below of the tax charge per the income statement to the UK corporation tax paid in 2013/14.
The tax charge for the Group as reported in the income statement is £284m (2012/13: £557m). The UK tax charge is £51m (2012/13: £307m) and UK corporation tax paid was £329m (2012/13: £243m), with the principal differences between these two measures as follows:
|
| ||||||||
Year ended 31 March
| ||||||||||
| Reconciliation of UK total tax charge to UK corporation tax paid |
| 2014 £m |
|
| 2013 (restated)1 £m |
| ||||
| ||||||||||
Total UK tax charge (current tax £346m (2013: £289m) and deferred tax £295m credit (2013: £18m charge)) | 51 | 307 | ||||||||
Adjustment for non-cash deferred tax credit/(charge) | 295 | (18) | ||||||||
Adjustment for the current tax credit in respect of prior years | 9 | 17 | ||||||||
| ||||||||||
UK current tax charge | 355 | 306 | ||||||||
UK corporation tax instalment payments in respect of current year not payable until the following year | (179 | ) | (155) | |||||||
UK corporation tax instalment payments in respect of prior years paid in current year | 153 | 92 | ||||||||
| ||||||||||
UK corporation tax paid | 329 | 243 | ||||||||
| ||||||||||
1. All comparatives restated for IAS 19 (revised). See note 1 on page 92.
Tax losses We have total unrecognised deferred tax assets in respect of losses of £280m (2012/13: £335m) of which £274m (2012/13: £319m) are capital losses in the UK as set out on page 105. These losses arose as a result of the disposal of certain businesses or assets and may be available to offset against future capital gains in the UK.
Development of future tax policy We believe that the continued development of a coherent and transparent tax policy in the UK is critical to help drive growth in the economy.
We continue to contribute to research into the structure of business taxation and its economic impact by contributing to the funding of the Oxford University Centre for Business Taxation at the Saïd Business School.
We are a member of a number of industry groups which participate in the development of future tax policy, including the Hundred Group, which represents the views of finance directors of FTSE 100 companies and several other large UK companies. Our Finance Director is Chairman of its Tax Committee. This helps to ensure that we are engaged at the earliest opportunity on taxation issues which affect our business. For example, in the current year we have engaged with and responded to a number of HMRC consultations, the subject matter of which has a direct impact on taxes borne or collected by our business, and reviewed numerous others with a potential impact.
This unaudited commentary does not form part of the financial statements.
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| 116 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
Financial Statements |
Unaudited commentary on tax
Tax strategy
National Grid manages its tax affairs in a proactive and responsible way in order to comply with all relevant legislation and minimise reputational risk. As a regulated public utility we are very conscious of the need to manage our tax affairs responsibly in the eyes of our stakeholders. We have a good working relationship with all relevant tax authorities and actively engage with them in order to ensure that they are fully aware of our view of the tax implications of our business initiatives. Management responsibility and oversight for our tax strategy, which is approved by the Finance Committee, rests with the Finance Director and the Group Tax and Treasury Director who monitor our tax activities and report to the Finance Committee.
Total UK tax contribution
This year we have again disclosed additional information in respect of our total UK tax contribution for consistency and to aid transparency in an area in which there remains significant public interest. As was the case in prior years, the total amount of taxes we pay and collect in the UK year on year is significantly more than just the corporation tax which we pay on our UK profits. Within the total, we again include other taxes paid such as business rates and taxes on employment together with employee taxes and other indirect taxes.
For 2015/16 our total tax contribution to the UK Exchequer was £1.6bn (2014/15: £1.5bn). Taxes borne in 2015/16 were £703m, an 8% decrease on taxes borne in 2014/15 of £761m and primarily due to lower corporation tax payments in the current year. The main reasons for this are the impact of the reduction in the UK corporation tax rate, and the impact of our debt redemption costs during the year ended 31 March 2015, which reduced corporation tax payments due for that year but were settled by instalment payments made in the year ended 31 March 2016. However, our taxes collected were £899m, an increase of 21% on 2014/15 of £742m, and this was primarily due to the introduction of the VAT Domestic Reverse Charge on gas and electricity trading (introduced in July 2014) being in force for the full year, rather than for six months in 2014/15.
Our 2014/15 total tax contribution of £1.5bn resulted in National Grid being the 13th highest contributor of UK taxes based on the results of the Hundred Group’s 2015 Total Tax Contribution Survey, a position commensurate with the size of our business and capitalisation relative to other contributors to the Survey. In 2014 we were also in 13th position. In 2015 we ranked 7th in respect of taxes borne.
National Grid’s contribution to the UK economy is again broader than just the taxes it pays over to and collects on behalf of HMRC. The Hundred Group’s 2015 Total Tax Contribution Survey ranks National Grid in 5th place in respect of UK capital expenditure on fixed assets. For instance, National Grid’s economic contribution also supports a significant number of UK jobs in our supply chain.
The most significant amounts making up the 2015/16 total tax contribution were as follows:
Tax transparency
The UK tax charge for the year disclosed in the financial statements in accordance with accounting standards and the UK corporation tax paid during the year will differ. For transparency we have included a reconciliation below of the tax charge per the income statement to the UK corporation tax paid in 2015/16.
The tax charge for the Group as reported in the income statement is £438m (2014/15: £617m). The UK tax charge is £189m (2014/15: £437m) and UK corporation tax paid was £285m (2014/15: £353m), with the principal differences between these two measures as follows:
| Year ended 31 March | ||||||||
| Reconciliation of UK total tax charge | 2016 | 2015 | ||||||
| to UK corporation tax paid | £m | £m | ||||||
Total UK tax charge (current tax £315m (2015: £307m) and deferred tax credit £126m (2015: charge £130m)) | 189 | 437 | ||||||
Adjustment for non-cash deferred tax credit/(charge) | 126 | (130 | ) | |||||
Adjustments for current tax credit in respect of prior years | 7 | 2 | ||||||
UK current tax charge | 322 | 309 | ||||||
UK corporation tax instalment payments not payable until the following year | (164 | ) | (127 | ) | ||||
UK corporation tax instalment payments in respect of prior years paid in current year | 127 | 171 | ||||||
UK corporation tax paid | 285 | 353 | ||||||
Tax losses
We have total unrecognised deferred tax assets in respect of losses of £237m (2014/15: £255m) of which £232m (2014/15: £250m) are capital losses in the UK as set out above. These losses arose as a result of the disposal of certain businesses or assets and may be available to offset against future capital gains in the UK.
Development of future tax policy
We believe that the continued development of a coherent and transparent tax policy in the UK is critical to help drive growth in the economy.
We continue to contribute to research into the structure of business tax and its economic impact by contributing to the funding of the Oxford University Centre for Business Tax at the Saïd Business School.
We are a member of a number of industry groups which participate in the development of future tax policy, including the Hundred Group, which represents the views of Finance Directors of FTSE 100 companies and several other large UK companies. Our Finance Director is Chairman of its Tax Committee. This helps to ensure that we are engaged at the earliest opportunity on tax issues which affect our business. In the current year we have reviewed and responded to a number of HMRC consultations, the subject matter of which directly impacts taxes borne or collected by our business, with the aim of openly contributing to the debate and development of UK tax legislation.
UK total tax contribution 2015/16
Strategic Report
Corporate Governance
Financial Statements
Additional Information
107
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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.
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Adjusted EPS, excluding exceptional items, remeasurements and stranded cost recoveries, are provided to reflect the business performance subtotals used by the Company. For further details of exceptional items, remeasurements and stranded cost recoveries, see note 4.
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| (a) Basic earnings per share | ||||||||||||||||||||||||||
|
| Earnings 2014 £m |
| | Earnings per share 2014 pence | | | Earnings 2013 (restated £m | )1 | | Earnings per share | | | Earnings 2012 (restated £m | )1 | | Earnings per share 2012 | | |||||||||
| ||||||||||||||||||||||||||
Adjusted earnings | 2,015 | 54.0 | 1,913 | 51.4 | 1,709 | 46.0 | ||||||||||||||||||||
Exceptional items after tax | 388 | 10.4 | 75 | 2.0 | 174 | 4.7 | ||||||||||||||||||||
Remeasurements after tax | 73 | 2.0 | 156 | 4.2 | (122 | ) | (3.3) | |||||||||||||||||||
Stranded cost recoveries after tax | – | – | 9 | 0.2 | 156 | 4.2 | ||||||||||||||||||||
| ||||||||||||||||||||||||||
Earnings | 2,476 | 66.4 | 2,153 | 57.8 | 1,917 | 51.6 | ||||||||||||||||||||
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| 2014 millions | 2013 millions | 2012 millions | ||||||||||||||||||||||||
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Weighted average number of shares – basic2 | 3,729 | 3,724 | 3,719 | |||||||||||||||||||||||
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1. See note 1 on page 92. | ||||||||||||||||||||||||||
2. Comparative amounts have been restated to reflect the impact of additional shares issued as scrip dividends. |
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(b) Diluted earnings per share
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|
| Earnings 2014 £m |
| | Earnings per share 2014 pence | | | Earnings 2013 (restated £m | )1 | | Earnings per share 2013 (restated pence | )1,2 | | Earnings 2012 (restated £m | )1 | | Earnings per share 2012 (restated)1,2 pence | | |||||||||
| ||||||||||||||||||||||||||
Adjusted earnings | 2,015 | 53.8 | 1,913 | 51.1 | 1,709 | 45.7 | ||||||||||||||||||||
Exceptional items after tax | 388 | 10.4 | 75 | 2.0 | 174 | 4.7 | ||||||||||||||||||||
Remeasurements after tax | 73 | 1.9 | 156 | 4.2 | (122 | ) | (3.3) | |||||||||||||||||||
Stranded cost recoveries after tax | – | – | 9 | 0.2 | 156 | 4.2 | ||||||||||||||||||||
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Earnings | 2,476 | 66.1 | 2,153 | 57.5 | 1,917 | 51.3 | ||||||||||||||||||||
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| 2014 millions | 2013 millions | 2012 millions | ||||||||||||||||||||||||
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Weighted average number of shares – diluted2 | 3,748 | 3,742 | 3,738 | |||||||||||||||||||||||
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1. See note 1 on page 92. | ||||||||||||||||||||||||||
2. Comparative amounts have been restated to reflect the impact of additional shares issued as scrip dividends. |
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(c) Reconciliation of basic to diluted average number of shares
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| 2014 millions | 2013 millions | 2012 millions | ||||||||||||||||||||||||
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Weighted average number of ordinary shares – basic | 3,729 | 3,724 | 3,719 | |||||||||||||||||||||||
Effect of dilutive potential ordinary shares – employee share plans | 19 | 18 | 19 | |||||||||||||||||||||||
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Weighted average number of ordinary shares – diluted | 3,748 | 3,742 | 3,738 | |||||||||||||||||||||||
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| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 117 |
Notes to the consolidated financial statements
financial– analysis of items in the primary statementscontinued
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Dividends represents the return of profits to shareholders. Dividends are paid as an amount per ordinary share held. We retain part of the profits generated in the year to meet future growth plans and pay out the remainder in accordance with our dividend policy.
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Interim dividends are recognised when they become payable to the Company’s shareholders. Final dividends are recognised when they are approved by shareholders. |
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The following table shows the actual dividends paid to equity shareholders:
|
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| 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||||||||||
| Pence per share | Total £m | Settled via scrip £m | Pence per share | Total £m | Settled via scrip £m | Pence per share | Total £m | Settled via scrip £m | ||||||||||||||||||||||||||||||||
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Interim – year ended 31 March 2014 | 14.49 | 539 | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||
Final – year ended 31 March 2013 | 26.36 | 964 | 444 | – | – | – | – | – | – | |||||||||||||||||||||||||||||||
Interim – year ended 31 March 2013 | – | – | – | 14.49 | 527 | 187 | – | – | – | |||||||||||||||||||||||||||||||
Final – year ended 31 March 2012 | – | – | – | 25.35 | 906 | 436 | – | – | – | |||||||||||||||||||||||||||||||
Interim – year ended 31 March 2012 | – | – | – | – | – | – | 13.93 | 497 | 34 | |||||||||||||||||||||||||||||||
Final – year ended 31 March 2011 | – | – | – | – | – | – | 23.47 | 822 | 279 | |||||||||||||||||||||||||||||||
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| 40.85 | 1,503 | 444 | 39.84 | 1,433 | 623 | 37.40 | 1,319 | 313 | ||||||||||||||||||||||||||||||||
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The Directors are proposing a final dividend for the year ended 31 March 2014 of 27.54p per share that will absorb approximately £1,028m of shareholders’ equity (assuming all amounts are settled in cash). It will be paid on 20 August 2014 to shareholders who are on the register of members at 6 June 2014 and a scrip dividend will be offered as an alternative, subject to shareholders’ approval at the AGM. |
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EPS is the amount of post-tax profit attributable to each ordinary share. Basic EPS is calculated on profit for the year attributable to equity shareholders divided by the weighted average number of shares in issue during the year. Diluted EPS shows what the impact would be if all outstanding share options were exercised and treated as ordinary shares at year end. The weighted average number of shares is increased by additional shares issued as scrip dividends and reduced by shares repurchased by the Company during the year. | |||||||||||||||||||||
Adjusted earnings and EPS, which exclude exceptional items and remeasurements, are provided to reflect the business performance subtotals used by the Company. We have included reconciliations from this additional EPS measure to earnings for both basic and diluted EPS to provide additional detail for these items. For further details of exceptional items and remeasurements, see note 4.
(a) Basic earnings per share
| Earnings | Earnings | |||||||||||||||||||||||
| Earnings | per share | per share | ||||||||||||||||||||||
| Earnings | per share | Earnings | 2015 | Earnings | 2014 | |||||||||||||||||||
| 2016 | 2016 | 2015 | (restated)1 | 2014 | (restated)1 | |||||||||||||||||||
| £m | pence | £m | pence | £m | pence | |||||||||||||||||||
Adjusted earnings | 2,386 | 63.5 | 2,189 | 57.6 | 2,015 | 53.1 | ||||||||||||||||||
Exceptional items after tax | 278 | 7.4 | (97 | ) | (2.6) | 388 | 10.2 | |||||||||||||||||
Remeasurements after tax | (73 | ) | (1.9 | ) | (73 | ) | (1.8) | 73 | 1.9 | |||||||||||||||
Earnings | 2,591 | 69.0 | 2,019 | 53.2 | 2,476 | 65.2 | ||||||||||||||||||
| 2016 | 2015 | 2014 | ||||||||||||||||||||||
| millions | millions | millions | ||||||||||||||||||||||
Weighted average number of shares – basic1 | 3,755 | 3,798 | 3,798 | |||||||||||||||||||||
1. Comparative amounts have been restated to reflect the impact of additional shares issued as scrip dividends.
(b) Diluted earnings per share
| Earnings | Earnings | |||||||||||||||||||||||
| Earnings | per share | per share | ||||||||||||||||||||||
| Earnings | per share | Earnings | 2015 | Earnings | 2014 | |||||||||||||||||||
| 2016 | 2016 | 2015 | (restated)1 | 2014 | (restated)1 | |||||||||||||||||||
| £m | pence | £m | pence | £m | pence | |||||||||||||||||||
Adjusted earnings | 2,386 | 63.3 | 2,189 | 57.4 | 2,015 | 52.8 | ||||||||||||||||||
Exceptional items after tax | 278 | 7.3 | (97 | ) | (2.6) | 388 | 10.2 | |||||||||||||||||
Remeasurements after tax | (73 | ) | (1.9 | ) | (73 | ) | (1.9) | 73 | 1.9 | |||||||||||||||
Earnings | 2,591 | 68.7 | 2,019 | 52.9 | 2,476 | 64.9 | ||||||||||||||||||
| 2016 | 2015 | 2014 | ||||||||||||||||||||||
| millions | millions | millions | ||||||||||||||||||||||
Weighted average number of shares – diluted1 | 3,771 | 3,815 | 3,817 | |||||||||||||||||||||
1. Comparative amounts have been restated to reflect the impact of additional shares issued as scrip dividends.
(c) Reconciliation of basic to diluted average number of shares
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| 2015 | 2014 | |||||||||||||||||||||||
| 2016 | (restated)1 | (restated)1 | ||||||||||||||||||||||
| millions | millions | millions | ||||||||||||||||||||||
Weighted average number of ordinary shares – basic | 3,755 | 3,798 | 3,798 | |||||||||||||||||||||
Effect of dilutive potential ordinary shares – employee share plans | 16 | 17 | 19 | |||||||||||||||||||||
Weighted average number of ordinary shares – diluted | 3,771 | 3,815 | 3,817 | |||||||||||||||||||||
1. Comparative amounts have been restated to reflect the impact of additional shares issued as scrip dividends.
| 118 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
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Financial Statements | ||||
Dividends represent the return of profits to shareholders. Dividends are paid as an amount per ordinary share held. We retain part of the profits generated in the year to meet future growth plans and pay out the remainder in accordance with our dividend policy. |
Interim dividends are recognised when they become payable to the Company’s shareholders. Final dividends are recognised when they are approved by shareholders.
2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||||||||||
| Cash | Cash | Cash | ||||||||||||||||||||||||||||||||||||||
| dividend | Scrip | dividend | Scrip | dividend | Scrip | |||||||||||||||||||||||||||||||||||
| Pence | paid | dividend | Pence | paid | dividend | Pence | paid | dividend | ||||||||||||||||||||||||||||||||
| per share | £m | £m | per share | £m | £m | per share | £m | £m | ||||||||||||||||||||||||||||||||
Interim dividend in respect of the current year | 15.00 | 532 | 31 | 14.71 | 531 | 26 | 14.49 | 539 | – | |||||||||||||||||||||||||||||||
Final dividend in respect of the prior year | 28.16 | 805 | 248 | 27.54 | 740 | 289 | 26.36 | 520 | 444 | |||||||||||||||||||||||||||||||
| 43.16 | 1,337 | 279 | 42.25 | 1,271 | 315 | 40.85 | 1,059 | 444 | ||||||||||||||||||||||||||||||||
The Directors are proposing a final dividend for the year ended 31 March 2016 of 28.34p per share that will absorb approximately £1,059m of shareholders’ equity (assuming all amounts are settled in cash). It will be paid on 10 August 2016 to shareholders who are on the register of members at 3 June 2016 (subject to Shareholders’ approval at the AGM). A scrip dividend will be offered as an alternative.
Unaudited commentary on dividends Following the announcement of our dividend policy in March 2013, the Board remains confident that National Grid is able to support a dividend growing at least in line with RPI inflation for the foreseeable future, while continuing to invest as required in our regulated assets. With the exception of the 2013/14 interim dividend paid in January 2014, a scrip option has been offered for all interim and final dividends in the last five years. In August 2014 we began a share buyback programme that will allow us to offer the scrip dividend option for both the full-year and interim dividend. The buyback programme is designed to balance shareholders’ appetite for the scrip dividend option with our desire to operate an efficient balance sheet with appropriate leverage. | Dividend cover Ratio of earnings cover over cash dividend paid and scrip dividend
|
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 119 |
Notes to the consolidated financial statements
– analysis of items in the primary statements continued
Goodwill represents the excess of what we paid to acquire businesses over the fair value of their net assets at the acquisition date. We assess whether goodwill is recoverable each year by performing an impairment review. |
Goodwill is recognised as an asset and is not amortised, but is tested for impairment annually or more frequently if events or changes in circumstances indicate a potential impairment. Any impairment is recognised immediately in the income statement and is not subsequently reversed.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing exchange rate.
Impairment
Impairment
Impairments of goodwill are calculated as the difference between the carrying value of the goodwill and the estimated recoverable amount of the cash-generating unit to which that goodwill has been allocated. Recoverable amount is defined as the higher of fair value less costs to sell and estimated value-in-use at the date the impairment review is undertaken.
Value-in-use represents the present value of expected future cash flows, discounted using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
Impairments are recognised in the income statement and are disclosed separately.
| Total £m | ||||
Net book value at 1 April 2014 | 4,594 | |||
Impairment | (12) | |||
Exchange adjustments | 563 | |||
Net book value at 31 March 2015 | 5,145 | |||
Exchange adjustments | 170 | |||
Net book value at 31 March 2016 | 5,315 | |||
Cost at 1 April 2012
Exchange adjustments
CostThe cost of goodwill at 31 March 2013
Additions
Exchange adjustments
Cost at 31 March 2014
Net book value at 31 March 2014
2016 was £5,327m (2015: £5,157m) with an accumulated impairment charge of £12m (2015: £12m).
Net book value at 31 March 2013
The amounts disclosed above as at 31 March 20142016 include balances relating to the following cash-generating units: New York £2,640m (2013: £2,898m)£3,061m (2015: £2,964m); Massachusetts £987m (2013: £1,082m)£1,145m (2015: £1,108m); Rhode Island £367m (2013: £403m)£426m (2015: £412m); and Federal £600m (2013: £645m)£683m (2015: £661m).
Additions during the year relate to a further investment in Clean Line Energy Partners LLC, a developer of long-distance, HVDC transmission projects in the US to move renewable energy to market. Under IFRS 10, this investment is now accounted for as a subsidiary rather than an equity investment. National Grid has a 37% interest, but has the option to increase this holding.
Goodwill is reviewed annually for impairment and the recoverability of goodwill at 31 March 2014 has been assessed by comparing the carrying amount of our operations described above (our cash-generating units) with the expected recoverable amount on a value-in-use basis. In each assessment, the value-in-use has been calculated based on five year plan projections that incorporate our best estimates of future cash flows, customer rates, costs (including changes in commodity prices), future prices and growth. Such projections reflect our current regulatory rate plans taking into account regulatory arrangements to allow for future rate plan filings and recovery of investment. Our plans have proved to be reliable guides in the past and the Directors believe the estimates are appropriate.
The future economic growth rate used to extrapolate projections beyond five years has been maintained at 2.25% (2013:lowered to 2% (2015: 2.25%). The growth rate has been determined having regard to data on projected growth in US real gross domestic product (GDP). Based on our business’ place in the underlying US economy, it is appropriate for the terminal growth rate to be based upon the overall growth in real GDP and, given the nature of our operations, to extend over a long period of time. Cash flow projections have been discounted to reflect the time value of money, using an effectivea pre-tax discount rate of 9% (2013:8% (2015: 9%). The discount rate represents the estimated weighted average cost of capital of these operations.
While it is possible that a key assumption in the calculation could change, the Directors believe that no reasonably foreseeable change would result in an impairment of goodwill, in view of the long-term nature of the key assumptions and the margin by which the estimated fair value exceeds the carrying amount.
As part of their review in 2014/15, the Directors specifically reviewed the carrying value of goodwill associated with Clean Line Energy Partners LLC. This review resulted in a full impairment being recorded of £12m.
| 120 | National Grid Annual Report and Accounts 2015/16 | Financial Statements | ||||
Other intangible assets include software which is written down (amortised) over the length of period we expect to receive a benefit from the asset. |
Identifiable intangible assets are recorded at cost less accumulated amortisation and any provision for impairment. Other intangible assets are tested for impairment only if there is an indication that the carrying value of the assets may have been impaired. Impairments of assets are calculated as the difference between the carrying value of the asset and the recoverable amount, if lower. Where such an asset does not generate cash flows that are independent from other assets, the recoverable amount of the cash-generating unit to which that asset belongs is estimated. Impairments are recognised in the income statement and are disclosed separately. Any assets which suffered impairment in a previous period are reviewed for possible reversal of the impairment at each reporting date.
Internally generated intangible assets, such as software, are recognised only if: an asset is created that can be identified; it is probable that the asset created will generate future economic benefits; and the development cost of the asset can be measured reliably. Where no internally generated intangible asset can be recognised, development expenditure is recorded as an expense in the period in which it is incurred.
Other intangible assets are amortised on a straight-line basis over their estimated useful economic lives. Amortisation periods for categories of intangible assets are:
| Years | ||||
| Software | 3 to 10 | |||
| Software £m | ||||
Cost at 1 April 2014 | 1,222 | |||
Exchange adjustments | 59 | |||
Additions | 207 | |||
Reclassifications1 | 16 | |||
Cost at 31 March 2015 | 1,504 | |||
Exchange adjustments | 22 | |||
Additions | 220 | |||
Disposals | (3) | |||
Reclassifications1 | 1 | |||
Cost at 31 March 2016 | 1,744 | |||
Accumulated amortisation at 1 April 2014 | (553) | |||
Exchange adjustments | (20) | |||
Amortisation charge for the year | (121) | |||
Reclassifications1 | (8) | |||
Accumulated amortisation at 31 March 2015 | (702) | |||
Exchange adjustments | (8) | |||
Amortisation charge for the year | (147) | |||
Reclassifications1 | – | |||
Accumulated amortisation at 31 March 2016 | (857) | |||
Net book value at 31 March 2016 | 887 | |||
Net book value at 31 March 2015 | 802 | |||
1. Reclassifications includes amounts transferred (to)/from property, plant and equipment (see note 11) and reclasses between cost and accumulated amortisation of £nil (2015: £6m).
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 121 |
Notes to the consolidated financial statements
financial– analysis of items in the primary statementscontinued
| ||||||||||||
Other intangible assets includes software and acquisition-related assets (such as brand names and customer relationships), which are 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 income statement and are disclosed separately. Any assets which suffered impairment in a previous period are reviewed for possible reversal of the impairment at each reporting date. | ||||||||||||
Internally generated intangible assets, such as software, are recognised only if: an asset is created that can be identified; it is probable that the asset created will generate future economic benefits; and the development cost of the asset can be measured reliably. Where no internally generated intangible asset can be recognised, development expenditure is recorded as an expense in the period in which it is incurred. | ||||||||||||
On a business combination, as well as recording separable intangible assets possessed by the acquired entity at their fair value, identifiable intangible assets that arise from contractual or other legal rights are also included in the statement of financial position at their fair value. Acquisition-related intangible assets principally comprise customer relationships. | ||||||||||||
Other intangible assets are amortised on a straight-line basis over their estimated useful economic lives. Amortisation periods for categories of intangible assets are: | ||||||||||||
| Years | ||||||||||||
| ||||||||||||
| Software | 3 to 10 | |||||||||||
| Acquisition-related intangibles | 10 to 25 | |||||||||||
| ||||||||||||
| Software £m |
Acquisition- related £m | Total £m | ||||||||||
| ||||||||||||
| Cost at 1 April 2012 | 899 | 116 | 1,015 | |||||||||
| Exchange adjustments | 20 | 6 | 26 | |||||||||
| Additions | 175 | – | 175 | |||||||||
| Disposals | (26) | – | (26) | |||||||||
| Reclassifications1 | (37) | – | (37) | |||||||||
| ||||||||||||
| Cost at 31 March 2013 | 1,031 | 122 | 1,153 | |||||||||
| Exchange adjustments | (38) | (7) | (45) | |||||||||
| Additions | 179 | – | 179 | |||||||||
| Disposals | (16) | (115) | (131) | |||||||||
| Reclassifications1 | 66 | – | 66 | |||||||||
| ||||||||||||
| Cost at 31 March 2014 | 1,222 | – | 1,222 | |||||||||
| ||||||||||||
| Accumulated amortisation at 1 April 2012 | (353) | (116) | (469) | |||||||||
| Exchange adjustments | (6) | (6) | (12) | |||||||||
| Amortisation charge for the year | (101) | – | (101) | |||||||||
| Disposals | 9 | – | 9 | |||||||||
| Reclassifications1 | 9 | – | 9 | |||||||||
| ||||||||||||
| Accumulated amortisation at 31 March 2013 | (442) | (122) | (564) | |||||||||
| Exchange adjustments | 12 | 7 | 19 | |||||||||
| Amortisation charge for the year | (127) | – | (127) | |||||||||
| Impairment charge | (5) | – | (5) | |||||||||
| Disposals | 12 | 115 | 127 | |||||||||
| Reclassifications1 | (3) | – | (3) | |||||||||
| ||||||||||||
| Accumulated amortisation at 31 March 2014 | (553) | – | (553) | |||||||||
| ||||||||||||
| Net book value at 31 March 2014 | 669 | – | 669 | |||||||||
| ||||||||||||
| Net book value at 31 March 2013 | 589 | – | 589 | |||||||||
| ||||||||||||
1. Reclassifications represents amounts transferred (to)/from property, plant and equipment (see note 11 on page 112). | ||||||||||||
|
|
|
|
|
|
Property, plant and equipment is recorded at cost, less accumulated depreciation and any impairment losses. Cost includes the purchase price of the asset, any payroll and finance costs incurred which are directly attributable to the construction of property, plant and equipment as well as the cost of any associated asset retirement obligations. Property, plant and equipment includes assets in which the Company’s interest comprises legally protected statutory or contractual rights of use. Additions represent the purchase or construction of new assets, including capital expenditure for safety and environmental assets, and extensions to, enhancements to, or replacement of existing assets. Contributions received prior to 1 July 2009 towards the cost of property, plant and equipment are included in trade and other payables as deferred income and credited on a straight-line basis to the income statement over the estimated useful economic lives of the assets to which they relate. Contributions received post 1 July 2009 are recognised in revenue immediately, except where the contributions are consideration for a future service, in which case they are recognised initially as deferred income and revenue is subsequently recognised over the period in which the service is provided. No depreciation is provided on freehold land or assets in the course of construction. Other items of property, plant and equipment are depreciated, on a straight-line basis, at rates estimated to write off their book values over their estimated useful economic lives. In assessing estimated useful economic lives, consideration is given to any contractual arrangements and operational requirements relating to particular assets. The assessments of estimated useful economic lives and residual values of assets are performed annually. Unless otherwise determined by operational requirements, the depreciation periods for the principal categories of property, plant and equipment are, in general, as shown in the table below:
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are Items within property, plant and equipment are tested for impairment only if there is some indication that the carrying value of the assets may have been impaired. Impairments of assets are calculated as the difference between the carrying value of the asset and the recoverable amount, if lower. Where such an asset does not generate cash flows that are independent from other assets, the recoverable amount of the cash-generating unit to which that asset belongs is estimated. Material impairments are recognised in the income statement and are disclosed separately. Any assets which suffered impairment in a previous period are reviewed for possible reversal of the impairment at each reporting date. |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Land and buildings £m | Plant and machinery £m | Assets in the | Motor vehicles and office equipment £m | Total £m | ||||||||||||||||
| ||||||||||||||||||||
Cost at 1 April 2014 | 2,248 | 46,425 | 4,024 | 853 | 53,550 | |||||||||||||||
Exchange adjustments | 132 | 2,019 | 82 | 47 | 2,280 | |||||||||||||||
Additions | 55 | 544 | 2,514 | 150 | 3,263 | |||||||||||||||
Disposals | (30 | ) | (334 | ) | (1 | ) | (74 | ) | (439) | |||||||||||
Reclassifications1 | 105 | 1,981 | (2,104 | ) | 8 | (10) | ||||||||||||||
| ||||||||||||||||||||
Cost at 31 March 2015 | 2,510 | 50,635 | 4,515 | 984 | 58,644 | |||||||||||||||
Exchange adjustments | 41 | 669 | 20 | 23 | 753 | |||||||||||||||
Additions | 60 | 801 | 2,686 | 126 | 3,673 | |||||||||||||||
Disposals | (26 | ) | (393 | ) | (78 | ) | (62 | ) | (559) | |||||||||||
Reclassifications1 | 173 | 3,060 | (3,269 | ) | 100 | 64 | ||||||||||||||
| ||||||||||||||||||||
Cost at 31 March 2016 | 2,758 | 54,772 | 3,874 | 1,171 | 62,575 | |||||||||||||||
| ||||||||||||||||||||
Accumulated depreciation at 1 April 2014 | (436 | ) | (15,350 | ) | – | (585 | ) | (16,371) | ||||||||||||
Exchange adjustments | (15 | ) | (533 | ) | – | (29 | ) | (577) | ||||||||||||
Depreciation charge for the year2 | (82 | ) | (1,138 | ) | – | (143 | ) | (1,363) | ||||||||||||
Disposals | 7 | 307 | – | 74 | 388 | |||||||||||||||
Reclassifications1 | (4 | ) | 1 | – | 5 | 2 | ||||||||||||||
| ||||||||||||||||||||
Accumulated depreciation at 31 March 2015 | (530 | ) | (16,713 | ) | – | (678 | ) | (17,921) | ||||||||||||
Exchange adjustments | (32 | ) | (168 | ) | – | (10 | ) | (210) | ||||||||||||
Depreciation charge for the year2 | (79 | ) | (1,273 | ) | – | (116 | ) | (1,468) | ||||||||||||
Disposals | 6 | 386 | – | 61 | 453 | |||||||||||||||
Reclassifications1 | (5 | ) | (60 | ) | – | – | (65) | |||||||||||||
| ||||||||||||||||||||
Accumulated depreciation at 31 March 2016 | (640 | ) | (17,828 | ) | – | (743 | ) | (19,211) | ||||||||||||
| ||||||||||||||||||||
Net book value at 31 March 2016 | 2,118 | 36,944 | 3,874 | 428 | 43,364 | |||||||||||||||
| ||||||||||||||||||||
Net book value at 31 March 2015 | 1,980 | 33,922 | 4,515 | 306 | 40,723 | |||||||||||||||
| ||||||||||||||||||||
1. Represents amounts transferred between categories, (to)/from other intangible assets (see note 10) and reclasses between cost and accumulated depreciation of £64m (2015: £nil).
2. Includes amounts in respect of capitalised depreciation of £1m (2015: £2m).
2016 £m | 2015 £m | |||||||
| ||||||||
Information in relation to property, plant and equipment | ||||||||
Capitalised interest included within cost | 1,622 | 1,506 | ||||||
Net book value of assets held under finance leases (all relating to motor vehicles and office equipment) | 226 | 184 | ||||||
Additions to assets held under finance leases (all relating to motor vehicles and office equipment) | 87 | 61 | ||||||
Contributions to cost of property, plant and equipment included within: | ||||||||
Trade and other payables | 47 | 47 | ||||||
Non-current liabilities | 1,649 | 1,569 | ||||||
| ||||||||
Other non-current assets include assets that do not fall into any other non-current asset category (such as goodwill or property, plant and equipment) and the benefit to be received from the asset is not due to be received until after 31 March 2017. |
2016 £m | 2015 £m | |||||||
| ||||||||
Commodity contract assets | 10 | 29 | ||||||
Other receivables | 37 | 39 | ||||||
Prepayments | 35 | 12 | ||||||
| ||||||||
| 82 | 80 | |||||||
| ||||||||
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 123 |
Notes to the consolidated financial statements
financial– analysis of items in the primary statementscontinued
| 11. Property, plant and equipmentcontinued | ||||||||||||||||||||
| Land and buildings £m | Plant and machinery £m | Assets in the course of construction £m | Motor vehicles and office equipment £m | Total £m | ||||||||||||||||
| ||||||||||||||||||||
Cost at 1 April 2012 | 2,013 | 42,699 | 2,975 | 770 | 48,457 | |||||||||||||||
Exchange adjustments | 55 | 803 | 45 | 13 | 916 | |||||||||||||||
Additions | 141 | 704 | 2,584 | 82 | 3,511 | |||||||||||||||
Disposals | (24 | ) | (311 | ) | (2 | ) | (130 | ) | (467) | |||||||||||
Reclassifications1 | 140 | 1,471 | (1,642 | ) | 68 | 37 | ||||||||||||||
| ||||||||||||||||||||
Cost at 31 March 2013 | 2,325 | 45,366 | 3,960 | 803 | 52,454 | |||||||||||||||
Exchange adjustments | (99 | ) | (1,471 | ) | (82 | ) | (28 | ) | (1,680) | |||||||||||
Additions | 69 | 623 | 2,514 | 56 | 3,262 | |||||||||||||||
Disposals | (32 | ) | (288 | ) | (2 | ) | (98 | ) | (420) | |||||||||||
Reclassifications1 | (15 | ) | 2,195 | (2,366 | ) | 120 | (66) | |||||||||||||
| ||||||||||||||||||||
Cost at 31 March 2014 | 2,248 | 46,425 | 4,024 | 853 | 53,550 | |||||||||||||||
| ||||||||||||||||||||
Accumulated depreciation at 1 April 2012 | (436 | ) | (13,804 | ) | (2 | ) | (514 | ) | (14,756) | |||||||||||
Exchange adjustments | (11 | ) | (216 | ) | – | (9 | ) | (236) | ||||||||||||
Depreciation charge for the year2 | (75 | ) | (1,085 | ) | – | (121 | ) | (1,281) | ||||||||||||
Disposals | 23 | 299 | 2 | 96 | 420 | |||||||||||||||
Reclassifications1 | – | – | – | (9 | ) | (9) | ||||||||||||||
| ||||||||||||||||||||
Accumulated depreciation at 31 March 2013 | (499 | ) | (14,806 | ) | – | (557 | ) | (15,862) | ||||||||||||
Exchange adjustments | 16 | 399 | – | 21 | 436 | |||||||||||||||
Depreciation charge for the year2 | (84 | ) | (1,112 | ) | – | (103 | ) | (1,299) | ||||||||||||
Impairment charge for the year | (1 | ) | – | – | – | (1) | ||||||||||||||
Disposals | 25 | 234 | – | 93 | 352 | |||||||||||||||
Reclassifications1 | 107 | (65 | ) | – | (39 | ) | 3 | |||||||||||||
| ||||||||||||||||||||
Accumulated depreciation at 31 March 2014 | (436 | ) | (15,350 | ) | – | (585 | ) | (16,371) | ||||||||||||
| ||||||||||||||||||||
Net book value at 31 March 2014 | 1,812 | 31,075 | 4,024 | 268 | 37,179 | |||||||||||||||
| ||||||||||||||||||||
Net book value at 31 March 2013 | 1,826 | 30,560 | 3,960 | 246 | 36,592 | |||||||||||||||
| ||||||||||||||||||||
1. Represents amounts transferred between categories and from/(to) other intangible assets (see note 10 on page 110). | ||||||||||||||||||||
2. Includes amounts in respect of capitalised depreciation of £10m (2013: £21m).
| ||||||||||||||||||||
2014 £m | 2013 £m | |||||||||||||||||||
| ||||||||||||||||||||
Information in relation to property, plant and equipment | ||||||||||||||||||||
Capitalised interest included within cost | 1,409 | 1,275 | ||||||||||||||||||
Net book value of assets held under finance leases (all relating to motor vehicles and office equipment) | 170 | 188 | ||||||||||||||||||
Additions to assets held under finance leases (all relating to motor vehicles and office equipment) | 25 | 48 | ||||||||||||||||||
Contributions to cost of property, plant and equipment included within: | ||||||||||||||||||||
Trade and other payables | 44 | 43 | ||||||||||||||||||
Non-current liabilities | 1,526 | 1,492 | ||||||||||||||||||
| ||||||||||||||||||||
| ||||||||||||||||||||
Other non-current assets includes assets that do not fall into any other non-current asset category (such as goodwill or property, plant and equipment) and where the benefit to be received from the asset is not due to be received until after 31 March 2015.
| ||||||||||||||||||||
2014 £m | 2013 £m | |||||||||||||||||||
| ||||||||||||||||||||
Commodity contract assets | 45 | 47 | ||||||||||||||||||
Other receivables | 33 | 51 | ||||||||||||||||||
Prepayments | 9 | 6 | ||||||||||||||||||
| ||||||||||||||||||||
| 87 | 104 | |||||||||||||||||||
| ||||||||||||||||||||
|
|
|
|
13.Financial and other investments
| ||||||||||||
Financial and other investments includes two main categories. Assets classified as available-for-sale typically represent investments in short-term money funds and quoted investments in equities or bonds of other companies. The second category is loans and receivables which includes bank deposits with a maturity of greater than three months, and cash balances that cannot be readily used in operations, principally collateral pledged for certain borrowings and restricted cash balances relating to our UK pension schemes. |
| |||||||||||
Financial assets, liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into, and recognised on trade date. Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any other categories.
Available-for-sale financial investments are recognised at fair value plus directly related incremental transaction costs, and are subsequently carried at fair value in the statement of financial position. Changes in the fair value of available-for-sale investments are recognised directly in equity, until the investment is disposed of or is determined to be impaired. At this time the cumulative gain or loss previously recognised in equity is included in the income statement for the period. Investment income is recognised using the effective interest method and taken through interest income in the income statement.
Loans receivable and other receivables are initially recognised at fair value and subsequently held at amortised cost using the effective interest method. Interest income, together with gains and losses when the loans and receivables are derecognised or impaired, are recognised in the income statement.
Subsequent to initial recognition, the fair values of financial assets measured at fair value that are quoted in active markets are based on bid prices. When independent prices are not available, fair values are determined by using valuation techniques that are consistent with techniques commonly used by the relevant market. The techniques use observable market data.
|
| |||||||||||
2014 £m | 2013 £m | |||||||||||
| ||||||||||||
| Non-current | ||||||||||||
| Available-for-sale investments | 284 | 278 | ||||||||||
| ||||||||||||
| Current | ||||||||||||
| Available-for-sale investments | 2,716 | 4,441 | ||||||||||
| Loans and receivables | 883 | 990 | ||||||||||
| ||||||||||||
| 3,599 | 5,431 | |||||||||||
| ||||||||||||
| Total financial and other investments | 3,883 | 5,709 | ||||||||||
| ||||||||||||
| Financial and other investments include the following: | ||||||||||||
| Investments in short-term money funds | 2,165 | 4,120 | ||||||||||
| Managed investments in equity and bonds1 | 465 | 453 | ||||||||||
| Bank deposits1 | 355 | 165 | ||||||||||
| Cash surrender value of life insurance policies | 140 | 145 | ||||||||||
| Other investments | 2 | 4 | ||||||||||
| Restricted balances2 | 756 | 822 | ||||||||||
| ||||||||||||
| 3,883 | 5,709 | |||||||||||
| ||||||||||||
| 1. |
Includes £296m (2013: £296m) of current investments which are held by insurance captives and are therefore restricted. |
| ||||||||||
2. |
Principally comprises collateral placed with counterparties with whom we have entered into a credit support annex to the ISDA Master Agreement £402m (2013: £507m), and assets held within security accounts, with charges in favour of the UK pension schemes Trustees of £234m (2013: £179m). |
| ||||||||||
Available-for-sale investments are recorded at fair value. Due to their short maturities the carrying value of loans and receivables approximates their fair value. The maximum exposure to credit risk at the reporting date is the fair value of the financial investments. For further information on our credit risk, refer to note 30 (a). None of the financial investments are past due or impaired.
|
| |||||||||||
| ||||||||||||
Financial and other investments include two main categories. Assets classified as available-for-sale typically represent investments in short-term money funds and quoted investments in equities or bonds of other companies. The second category is loans and receivables which includes bank deposits with a maturity of greater than three months, and cash balances that cannot be readily used in operations, principally collateral pledged for certain borrowings. |
Financial assets, liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into, and recognised on trade date. Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any other categories.
Available-for-sale financial investments are recognised at fair value plus directly related incremental transaction costs, and are subsequently carried at fair value in the statement of financial position. Changes in the fair value of available-for-sale investments are recognised directly in other comprehensive income, until the investment is disposed of or is determined to be impaired. At this time the cumulative gain or loss previously recognised in equity is included in the income statement for the period. Investment income is recognised using the effective interest method and taken through interest income in the income statement.
Loans receivable and other receivables are initially recognised at fair value and subsequently held at amortised cost using the effective interest method. Interest income, together with gains and losses when the loans and receivables are derecognised or impaired, are recognised in the income statement.
Subsequent to initial recognition, the fair values of financial assets measured at fair value that are quoted in active markets are based on bid prices. When independent prices are not available, fair values are determined by using valuation techniques that are consistent with techniques commonly used by the relevant market. The techniques use observable market data.
2016 £m | 2015 £m | |||||||
| ||||||||
Non-current | ||||||||
Available-for-sale investments | 482 | 330 | ||||||
| ||||||||
Current | ||||||||
Available-for-sale investments | 1,951 | 1,232 | ||||||
Loans and receivables | 1,047 | 1,327 | ||||||
| ||||||||
| 2,998 | �� | 2,559 | ||||||
| ||||||||
| 3,480 | 2,889 | |||||||
| ||||||||
Financial and other investments include the following: | ||||||||
Investments in short-term money funds1 | 1,516 | 618 | ||||||
Managed investments in equity and bonds2 | 615 | 785 | ||||||
Cash surrender value of life insurance policies | 160 | 158 | ||||||
Other investments | – | 2 | ||||||
Restricted balances: | ||||||||
Collateral3 | 999 | 1,199 | ||||||
Other | 190 | 127 | ||||||
| ||||||||
| 3,480 | 2,889 | |||||||
| ||||||||
| 1. | Includes £8m (2015: £34m) held by insurance captives and therefore restricted. |
| 2. | All £615m (2015: £644m) is restricted and relates to investments held by insurance captives of £434m (2015: £382m), US non-qualified plan investments of £181m (2015: £170m) and assets held within security accounts with charges in favour of the UK pension scheme Trustees of £nil (2015: £92m). |
| 3. | Refers to collateral placed with counterparties with whom we have entered into a credit support annex to the ISDA (International Swaps and Derivatives Association) Master Agreement. |
Available-for-sale investments are recorded at fair value. Due to their short maturities the carrying value of loans and receivables approximates their fair value. The maximum exposure to credit risk at the reporting date is the fair value of the financial investments. For further information on our credit risk, refer to note 30(a). None of the financial investments are past due or impaired.
| 124 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
Financial Statements |
14. Investments in joint ventures and associates
Investments in joint ventures and associates represent businesses we do not control, but instead exercise joint control or significant influence. |
A joint venture is an arrangement established to engage in economic activity, which the Company jointly controls with other parties and has rights to the net assets of the arrangement. An associate is an entity which is neither a subsidiary nor a joint venture, but over which the Company has significant influence.
| 2016 £m | 2015 £m | |||||||
| ||||||||
Share of net assets at 1 April | 318 | 351 | ||||||
Exchange adjustments | 21 | (11) | ||||||
Additions | 116 | – | ||||||
Disposals | (52 | ) | – | |||||
Share of post-tax results for the year | 59 | 46 | ||||||
Dividends received | (72 | ) | (79) | |||||
Other movements | 7 | 11 | ||||||
| ||||||||
Share of net assets at 31 March | 397 | 318 | ||||||
| ||||||||
A list of joint ventures and associates including the name, proportion of ownership and principal activity is provided in note 32.
The joint ventures and associates have no significant contingent liabilities to which the Group is exposed, and the Group has no significant contingent liabilities in relation to its interest in the joint ventures and associates. The Group has capital commitments of £305m in relation to joint ventures.
Outstanding balances with joint ventures and associates are shown in note 28.
The Group’s only material joint venture or associate is in respect of its 50% equity stake in BritNed Development Limited.
Summarised financial information of this joint venture together with the carrying amount of the investment in the consolidated financial statements is as follows:
2016 £m | 2015 £m | |||||||
| ||||||||
Statement of financial position – BritNed Development Limited | ||||||||
Non-current assets | 376 | 355 | ||||||
Cash and cash equivalents | 77 | 46 | ||||||
All other current assets | 3 | 2 | ||||||
Non-current liabilities | (8 | ) | (10) | |||||
Current liabilities | (30 | ) | (14) | |||||
| ||||||||
Equity | 418 | 379 | ||||||
| ||||||||
Carrying amount of the Group’s investment (National Grid ownership 50%) | 209 | 189 | ||||||
| ||||||||
| 2016 £m | 2015 £m | |||||||
| ||||||||
Income statement – BritNed Development Limited | ||||||||
Revenue | 198 | 162 | ||||||
Depreciation and amortisation | (11 | ) | (12) | |||||
Other costs | (56 | ) | (66) | |||||
| ||||||||
Operating profit | 131 | 84 | ||||||
| ||||||||
Finance income and expense | – | – | ||||||
Income tax expense | (32 | ) | (21) | |||||
| ||||||||
Profit for the year | 99 | 63 | ||||||
| ||||||||
Group’s share in profit (National Grid ownership 50%) | 50 | 32 | ||||||
| ||||||||
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 125 |
Notes to the consolidated financial statements
financial– analysis of items in the primary statements continued
14.Investments in joint ventures and associates
| ||||||||||||||||||||||||||
Investments in joint ventures and associates represents businesses we do not control, but instead exercise joint control or significant influence. |
| |||||||||||||||||||||||||
A joint venture is an arrangement established to engage in economic activity, which the Company jointly controls with other parties and has rights to the net assets of the arrangement. An associate is an entity that is neither a subsidiary nor a joint venture, but over which the Company has significant influence.
|
| |||||||||||||||||||||||||
2014 £m | 2013 £m | |||||||||||||||||||||||||
| ||||||||||||||||||||||||||
| Share of net assets at 1 April | 371 | 341 | ||||||||||||||||||||||||
| Exchange adjustments | (16) | 9 | ||||||||||||||||||||||||
| Additions | 4 | 14 | ||||||||||||||||||||||||
| Share of post-tax results for the year | 28 | 18 | ||||||||||||||||||||||||
| Dividends received | (38) | (21) | ||||||||||||||||||||||||
| Other movements | 2 | 10 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||
| Share of net assets at 31 March | 351 | 371 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||
A list of principal joint ventures and associates including the name, proportion of ownership and principal activity is provided in note 32. |
| |||||||||||||||||||||||||
The joint ventures and associates have no significant contingent liabilities to which the Group is exposed, and the Group has no significant contingent liabilities in relation to its interest in the joint ventures and associates. |
| |||||||||||||||||||||||||
Outstanding balances with joint ventures and associates are shown in note 28. |
| |||||||||||||||||||||||||
15.Derivative financial instruments
| ||||||||||||||||||||||||||
Derivatives are financial instruments that derive their value from the price of an underlying item such as interest rates, foreign exchange, credit spreads, commodities, equity or other indices. In accordance with Board approved policies, derivatives are transacted to manage our exposure to fluctuations in interest rate and foreign exchange rate on borrowings and other contractual cash flows. Specifically, we use derivatives to manage these risks from our financing portfolio to optimise the overall cost of accessing the debt capital markets. These derivatives are analysed below. We also use derivatives to manage our operational market risks from commodities. The commodity derivative contracts are detailed in note 30 (e). |
| |||||||||||||||||||||||||
Derivative financial instruments are initially recognised at fair value and subsequently remeasured at fair value at each reporting date. Changes in fair values are recorded in the period they arise, either in the income statement or other comprehensive income depending on the applicable accounting standards. Where the fair value of a derivative is positive it is carried as a derivative asset, and where negative as a derivative liability. |
| |||||||||||||||||||||||||
We calculate fair value of the financial derivatives by discounting all future cash flows using the market yield curve at the reporting date. The market yield curve for each currency is obtained from external sources for interest and foreign exchange rates. In the absence of sufficient market data, fair values would be based on the quoted market price of similar derivatives. Analysis of these derivatives and the various methods used to calculate their respective fair values is detailed below and in note 30.
|
| |||||||||||||||||||||||||
For each class of derivative instrument type the fair value amounts are as follows:
|
| |||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||||
| Assets £m | Liabilities £m | Total £m | Assets £m | Liabilities £m | Total £m | |||||||||||||||||||||
| ||||||||||||||||||||||||||
| Interest rate swaps | 861 | (743) | 118 | 1,282 | (1,207) | 75 | ||||||||||||||||||||
| Cross-currency interest rate swaps | 1,025 | (195) | 830 | 900 | (160) | 740 | ||||||||||||||||||||
| Foreign exchange forward contracts | 68 | (12) | 56 | 15 | (63) | (48) | ||||||||||||||||||||
| Forward rate agreements | – | – | – | – | (5) | (5) | ||||||||||||||||||||
| Inflation linked swaps | 16 | (213) | (197) | 48 | (246) | (198) | ||||||||||||||||||||
| ||||||||||||||||||||||||||
| Total | 1,970 | (1,163) | 807 | 2,245 | (1,681) | 564 | ||||||||||||||||||||
| ||||||||||||||||||||||||||
|
|
|
|
|
15. Derivative financial instrumentscontinued
The maturity profile of derivative financial instruments is as follows:
|
| |||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||||
| Assets £m | Liabilities £m | Total £m | Assets £m | Liabilities £m | Total £m | |||||||||||||||||||||
| ||||||||||||||||||||||||||
Less than 1 year | 413 | (339) | 74 | 273 | (407) | (134) | ||||||||||||||||||||
| ||||||||||||||||||||||||||
Current | 413 | (339) | 74 | 273 | (407) | (134) | ||||||||||||||||||||
| ||||||||||||||||||||||||||
In 1-2 years | 54 | (26) | 28 | 42 | (44) | (2) | ||||||||||||||||||||
In 2-3 years | 73 | (57) | 16 | 75 | (51) | 24 | ||||||||||||||||||||
In 3-4 years | 71 | (103) | (32) | 119 | (121) | (2) | ||||||||||||||||||||
In 4-5 years | 244 | (128) | 116 | 84 | (55) | 29 | ||||||||||||||||||||
More than 5 years | 1,115 | (510) | 605 | 1,652 | (1,003) | 649 | ||||||||||||||||||||
| ||||||||||||||||||||||||||
Non-current | 1,557 | (824) | 733 | 1,972 | (1,274) | 698 | ||||||||||||||||||||
| ||||||||||||||||||||||||||
| 1,970 | (1,163) | 807 | 2,245 | (1,681) | 564 | |||||||||||||||||||||
| ||||||||||||||||||||||||||
For each class of derivative the notional contract* amounts are as follows:
|
| |||||||||||||||||||||||||
2014 £m | 2013 £m | |||||||||||||||||||||||||
| ||||||||||||||||||||||||||
| Interest rate swaps | (15,406) | (16,603) | ||||||||||||||||||||||||
| Cross-currency interest rate swaps | (8,614) | (9,641) | ||||||||||||||||||||||||
| Foreign exchange forward contracts | (4,698) | (3,142) | ||||||||||||||||||||||||
| Forward rate agreements | – | (2,443) | ||||||||||||||||||||||||
| Inflation linked swaps | (1,391) | (1,390) | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||
| Total | (30,109) | (33,219) | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||
*The notional contract amounts of derivatives indicate the gross nominal value of transactions outstanding at the reporting date.
Where possible, derivatives held as hedging instruments are formally designated as hedges as defined in IAS 39. Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, cash flow hedges or net investment hedges. Our use of derivatives may entail a derivative transaction qualifying for one or more hedge type designations under IAS 39.
Hedge accounting allows derivatives to be designated as a hedge of another non-derivative financial instrument, to mitigate the impact of potential volatility in the income statement of changes in the fair value of the derivative financial instruments. To qualify for hedge accounting, documentation is prepared specifying the hedging strategy, the component transactions and methodology used for effectiveness measurement. National Grid uses three hedge accounting methods, which are described as follows:
Fair value hedges Fair value hedges principally consist of interest rate and cross-currency swaps that are used to protect against changes in the fair value of fixed-rate, long-term financial instruments due to movements in market interest rates. For qualifying fair value hedges, all changes in the fair value of the derivative and changes in the fair value of the item in relation to the risk being hedged are recognised in the income statement to the extent the fair value hedge is effective. Adjustments made to the carrying amount of the hedged item for fair value hedges will be amortised over the remaining life, in line with the hedged item.
|
| |||||||||||||||||||||||||
2014 £m | 2013 £m | |||||||||||||||||||||||||
| ||||||||||||||||||||||||||
| Cross-currency interest rate/interest rate swaps | 367 | 732 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||
| Fair value hedges | 367 | 732 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||
Cash flow hedges | ||||||||||||||||||||||||||
Exposure arises from the variability in future interest and currency cash flows on assets and liabilities which bear interest at variable rates or are in a foreign currency. Interest rate and cross-currency swaps are maintained, and designated as cash flow hedges, where they qualify, to manage this exposure. Fair value changes on designated cash flow hedges are initially recognised directly in the cash flow hedge reserve, as gains or losses recognised in equity and any ineffective portion is recognised immediately in the income statement. Amounts are transferred from equity and recognised in the income statement as the income or expense is recognised on the hedged item.
|
| |||||||||||||||||||||||||
Forward foreign currency contracts are used to hedge anticipated and committed future currency cash flows. Where these contracts qualify for hedge accounting they are designated as cash flow hedges. On recognition of the underlying transaction in the financial statements, the associated hedge gains and losses, deferred in equity, are transferred and included with the recognition of the underlying transaction.
|
| |||||||||||||||||||||||||
| ||||||||||||
Derivatives are financial instruments that derive their value from the price of an underlying item such as interest rates, foreign exchange rates, credit spreads, commodities, equity or other indices. In accordance with Board approved policies, derivatives are transacted to manage our exposure to fluctuations in interest rate and foreign exchange rate on borrowings and other contractual cash flows. Specifically, we use derivatives to manage these risks from our financing portfolio to optimise the overall cost of accessing the debt capital markets. These derivatives are analysed below. We also use derivatives to manage our operational market risks from commodities. The commodity derivative contracts are detailed in note 30(e). |
Derivative financial instruments are initially recognised at fair value and subsequently remeasured at fair value at each reporting date. Changes in fair values are recorded in the period they arise, in either the income statement or other comprehensive income depending on the applicable accounting standards. Where the fair value of a derivative is positive it is carried as a derivative asset, and where negative as a derivative liability.
We calculate fair value of the financial derivatives by discounting all future cash flows using the market yield curve at the reporting date. The market yield curve for each currency is obtained from external sources for interest and foreign exchange rates. In the absence of sufficient market data, fair values would be based on the quoted market price of similar derivatives. Analysis of these derivatives and the various methods used to calculate their respective fair values is detailed below and in note 30.
For each class of derivative instrument type the total fair value amounts are as follows:
| 2016 | 2015 | |||||||||||||||||||||||
| | Assets £m | | | Liabilities £m | | | Total £m | | | Assets £m | | | Liabilities £m | | | Total £m | | |||||||
| ||||||||||||||||||||||||
Interest rate swaps | 1,095 | (908 | ) | 187 | 1,153 | (978 | ) | 175 | ||||||||||||||||
Cross-currency interest rate swaps | 690 | (589 | ) | 101 | 544 | (746 | ) | (202) | ||||||||||||||||
Foreign exchange forward contracts | 159 | (135 | ) | 24 | 18 | (294 | ) | (276) | ||||||||||||||||
Inflation linked swaps | 1 | (420 | ) | (419) | 1 | (381 | ) | (380) | ||||||||||||||||
Equity options | 18 | (17 | ) | 1 | – | – | – | |||||||||||||||||
| ||||||||||||||||||||||||
| 1,963 | (2,069 | ) | (106) | 1,716 | (2,399 | ) | (683) | |||||||||||||||||
| ||||||||||||||||||||||||
The maturity profile of derivative financial instruments is as follows:
|
| |||||||||||||||||||||||
| 2016 | 2015 | |||||||||||||||||||||||
Assets £m | Liabilities £m | Total £m | Assets £m | Liabilities £m | Total £m | |||||||||||||||||||
| ||||||||||||||||||||||||
Current | ||||||||||||||||||||||||
Less than 1 year | 278 | (337 | ) | (59) | 177 | (635 | ) | (458) | ||||||||||||||||
| ||||||||||||||||||||||||
| 278 | (337 | ) | (59) | 177 | (635 | ) | (458) | |||||||||||||||||
| ||||||||||||||||||||||||
Non-current | ||||||||||||||||||||||||
In 1 to 2 years | 31 | (213 | ) | (182) | 15 | (97 | ) | (82) | ||||||||||||||||
In 2 to 3 years | 159 | (221 | ) | (62) | 37 | (252 | ) | (215) | ||||||||||||||||
In 3 to 4 years | 139 | (159 | ) | (20) | 136 | (238 | ) | (102) | ||||||||||||||||
In 4 to 5 years | 32 | (155 | ) | (123) | 125 | (235 | ) | (110) | ||||||||||||||||
More than 5 years | 1,324 | (984 | ) | 340 | 1,226 | (942 | ) | 284 | ||||||||||||||||
| ||||||||||||||||||||||||
| 1,685 | (1,732 | ) | (47) | 1,539 | (1,764 | ) | (225) | |||||||||||||||||
| ||||||||||||||||||||||||
| 1,963 | (2,069 | ) | (106) | 1,716 | (2,399 | ) | (683) | |||||||||||||||||
| ||||||||||||||||||||||||
For each class of derivative the notional contract1 amounts are as follows:
|
| |||||||||||||||||||||||
2016 £m | 2015 £m | |||||||||||||||||||||||
| ||||||||||||||||||||||||
Interest rate swaps | (10,552 | ) | (11,125) | |||||||||||||||||||||
Cross-currency interest rate swaps | (8,316 | ) | (8,103) | |||||||||||||||||||||
Foreign exchange forward contracts | (6,903 | ) | (6,579) | |||||||||||||||||||||
Inflation linked swaps | (1,394 | ) | (1,361) | |||||||||||||||||||||
Equity options | (800 | ) | – | |||||||||||||||||||||
| ||||||||||||||||||||||||
| (27,965 | ) | (27,168) | ||||||||||||||||||||||
| ||||||||||||||||||||||||
1. The notional contract amounts of derivatives indicate the gross nominal value of transactions outstanding at the reporting date.
Where possible, derivatives held as hedging instruments are formally designated as hedges as defined in IAS 39. Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, cash flow hedges or net investment hedges. Our use of derivatives may entail a derivative transaction qualifying for one or more hedge type designations under IAS 39.
Hedge accounting allows derivatives to be designated as a hedge of another non-derivative financial instrument, to mitigate the impact of potential volatility in the income statement of changes in the fair value of the derivative instruments. To qualify for hedge accounting, documentation is prepared specifying the hedging strategy, the component transactions and methodology used for effectiveness measurement. National Grid uses three hedge accounting methods, which are described as follows:
| 126 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
Financial Statements |
15. Derivative financial instrumentscontinued
Fair value hedges
Fair value hedges principally consist of interest rate and cross-currency swaps that are used to protect against changes in the fair value of fixed-rate, long-term financial instruments due to movements in market interest rates. For qualifying fair value hedges, all changes in the fair value of the derivative and changes in the fair value of the item in relation to the risk being hedged are recognised in the income statement to the extent the fair value hedge is effective. Adjustments made to the carrying amount of the hedged item for fair value hedges will be amortised over the remaining life, in line with the hedged item.
| 2016 £m | 2015 £m | |||||||
| ||||||||
Cross-currency interest rate/interest rate swaps | 482 | 379 | ||||||
| ||||||||
Cash flow hedges
Exposure arises from the variability in future interest and currency cash flows on assets and liabilities which bear interest at variable rates or are in a foreign currency. Interest rate and cross-currency swaps are maintained, and designated as cash flow hedges, where they qualify, to manage this exposure. Fair value changes on designated cash flow hedges are initially recognised directly in the cash flow hedge reserve, as gains or losses recognised in equity, and any ineffective portion is recognised immediately in the income statement. Amounts are transferred from equity and recognised in the income statement as the income or expense is recognised on the hedged item.
Forward foreign currency contracts are used to hedge anticipated and committed future currency cash flows. Where these contracts qualify for hedge accounting they are designated as cash flow hedges. On recognition of the underlying transaction in the financial statements, the associated hedge gains and losses, deferred in equity, are transferred and included with the recognition of the underlying transaction.
When a forecast transaction is no longer expected to occur, the cumulative gain or loss previously reported in equity is transferred to the income statement.
Where a non-financial asset or a non-financial liability results from a forecast transaction or firm commitment being hedged, the amounts deferred in equity are included in the initial measurement of that non-monetary asset or liability.
| 2016 £m | 2015 £m | |||||||
| ||||||||
Cross-currency interest rate/interest rate swaps | (46 | ) | (453) | |||||
Foreign exchange forward contracts | 47 | (34) | ||||||
Inflation linked swaps | (151 | ) | (109) | |||||
| ||||||||
| (150 | ) | (596) | ||||||
| ||||||||
Net investment hedges
Borrowings, cross-currency swaps and forward currency contracts are used in the management of the foreign exchange exposure arising from the investment in non-sterling denominated subsidiaries. Where these contracts qualify for hedge accounting they are designated as net investment hedges.
| 2016 £m | 2015 £m | |||||||
| ||||||||
Cross-currency interest rate swaps | (199 | ) | (72) | |||||
Foreign exchange forward contracts | (100 | ) | (218) | |||||
| ||||||||
| (299 | ) | (290) | ||||||
| ||||||||
The cross-currency swaps and forward foreign currency contracts are hedge accounted using the spot to spot method. The foreign exchange gain or loss on retranslation of the borrowings and the spot to spot movements on the cross-currency swaps and forward currency contracts are transferred to equity to offset gains or losses on translation of the net investment in the non-sterling denominated subsidiaries, with any ineffective portion recognised immediately in the income statement.
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 127 |
Notes to the consolidated financial statements
financial– analysis of items in the primary statementscontinued
15. Derivative financial instrumentscontinued
| ||||||||||
| Cash flow hedgescontinued | ||||||||||
When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is transferred to the income statement.
|
| |||||||||
Where a non-financial asset or a non-financial liability results from a forecasted transaction or firm commitment being hedged, the amounts deferred in equity are included in the initial measurement of that non-monetary asset or liability.
|
| |||||||||
| 2014 £m | 2013 £m | |||||||||
| ||||||||||
| Cross-currency interest rate/interest rate swaps | 224 | 123 | ||||||||
| Foreign exchange forward contracts | (11) | 1 | ||||||||
| Inflation linked swaps | (32) | (16) | ||||||||
| ||||||||||
| Cash flow hedges | 181 | 108 | ||||||||
| ||||||||||
Net investment hedges |
| |||||||||
Borrowings, cross-currency swaps and forward currency contracts are used in the management of the foreign exchange exposure arising from the investment in non-sterling denominated subsidiaries. Where these contracts qualify for hedge accounting they are designated as net investment hedges.
|
| |||||||||
| 2014 £m | 2013 £m | |||||||||
| ||||||||||
| Cross-currency interest rate swaps | 342 | (56) | ||||||||
| �� | Foreign exchange forward contracts | 66 | (39) | |||||||
| ||||||||||
| Net investment hedges | 408 | (95) | ||||||||
| ||||||||||
The cross-currency swaps and forward foreign currency contracts are hedge accounted using the spot to spot method. The foreign exchange gain or loss on retranslation of the borrowings and the spot to spot movements on the cross-currency swaps and forward currency contracts are transferred to equity to offset gains or losses on translation of the net investment in the non-sterling denominated subsidiaries, with any ineffective portion recognised immediately in the income statement.
|
| |||||||||
| Derivatives not in a formal hedge relationship | ||||||||||
Our policy is not to use derivatives for trading purposes. However, due to the complex nature of hedge accounting under IAS 39 some derivatives may not qualify for hedge accounting, or are specifically not designated as a hedge where natural offset is more appropriate. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised in remeasurements within the income statement.
|
| |||||||||
| 2014 £m | 2013 £m | |||||||||
| ||||||||||
| Cross-currency interest rate/interest rate swaps | 15 | 16 | ||||||||
| Foreign exchange forward contracts | 1 | (10) | ||||||||
| Forward rate agreements | – | (5) | ||||||||
| Inflation linked swaps | (165) | (182) | ||||||||
| ||||||||||
| Derivatives not in a formal hedge relationship | (149) | (181) | ||||||||
| ||||||||||
Discontinuation of hedge accounting | ||||||||||
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, exercised or no longer qualifies for hedge accounting. At that time, any cumulative gains or losses relating to cash flow hedges recognised in equity are initially retained in equity and subsequently recognised in the income statement in the same periods in which the previously hedged item affects net profit or loss. Amounts deferred in equity with respect to net investment hedges are subsequently recognised in the income statement in the event of the disposal of the overseas operations concerned. For fair value hedges, the cumulative adjustment recorded to the carrying value of the hedged item at the date hedge accounting is discontinued is amortised to the income statement using the effective interest method.
|
| |||||||||
| Embedded derivatives | ||||||||||
No adjustment is made with respect to derivative clauses embedded in financial instruments or other contracts that are defined as closely related to those instruments or contracts. Consequently these embedded derivatives are not accounted for separately from the debt instrument. Where there are embedded derivatives in host contracts not closely related, the embedded derivative is separately accounted for as a derivative financial instrument.
|
| |||||||||
|
Our policy is not to use derivatives for trading purposes. However, due to the complex nature of hedge accounting under IAS 39 some derivatives may not qualify for hedge accounting, or are specifically not designated as a hedge where natural offset is more appropriate. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised in remeasurements within the income statement.
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
16.Inventories and current intangible assets
| ||||||||||||
Inventories represent assets that we intend to use in order to generate revenue in the short term, either by selling the asset itself (for example fuel stocks) or by using it to fulfil a service to a customer or to maintain our network (consumables). |
| |||||||||||
Inventories are stated at the lower of weighted average cost and net realisable value. |
| |||||||||||
Where applicable, cost comprises direct materials and direct labour costs as well as those overheads that have been incurred in bringing the inventories to their present location and condition. |
| |||||||||||
Emission allowances, principally relating to the emissions of carbon dioxide in the UK and sulphur and nitrous oxides in the US, are recorded as intangible assets within current assets and are initially recorded at cost and subsequently at the lower of cost and net realisable value. Where emission allowances are granted by relevant authorities, cost is deemed to be equal to the fair value at the date of allocation. Receipts of such grants are treated as deferred income, which is recognised in the income statement as the related charges for emissions are recognised or on impairment of the related intangible asset. A provision is recorded in respect of the obligation to deliver emission allowances and emission charges are recognised in the income statement in the period in which emissions are made.
|
| |||||||||||
| 2014 £m | 2013 £m | |||||||||||
| ||||||||||||
Fuel stocks | 74 | 114 | ||||||||||
Raw materials and consumables | 128 | 156 | ||||||||||
Work in progress | 13 | 13 | ||||||||||
Current intangible assets – emission allowances | 53 | 8 | ||||||||||
| ||||||||||||
| 268 | 291 | |||||||||||
| ||||||||||||
There is a provision for obsolescence of £29m against inventories as at 31 March 2014 (2013: £27m).
|
| |||||||||||
No adjustment is made with respect to derivative clauses embedded in financial instruments or other contracts that are defined as closely related to those instruments or contracts. Consequently these embedded derivatives are not accounted for separately from the debt instrument. Where there are embedded derivatives in host contracts not closely related, the embedded derivative is separately accounted for as a derivative financial instrument.
| ||||||||||||
Inventories represent assets that we intend to use in order to generate revenue in the short term, either by selling the asset itself (for example fuel stocks) or by using it to fulfil a service to a customer or to maintain our network (consumables). |
Inventories are stated at the lower of weighted average cost and net realisable value.
Where applicable, cost comprises direct materials and direct labour costs as well as those overheads that have been incurred in bringing the inventories to their present location and condition.
Emission allowances, principally relating to the emissions of carbon dioxide in the UK and sulphur and nitrous oxides in the US, are recorded as intangible assets within current assets and are initially recorded at cost and subsequently at the lower of cost and net realisable value. Where emission allowances are granted by relevant authorities, cost is deemed to be equal to the fair value at the date of allocation. Receipts of such grants are treated as deferred income, which is recognised in the income statement as the related charges for emissions are recognised or on impairment of the related intangible asset. A provision is recorded in respect of the obligation to deliver emission allowances and emission charges are recognised in the income statement in the period in which emissions are made.
| 2016 £m | 2015 £m | |||||||
| ||||||||
Fuel stocks | 120 | 112 | ||||||
Raw materials and consumables | 203 | 152 | ||||||
Work in progress | 13 | 13 | ||||||
Current intangible assets – emission allowances | 101 | 63 | ||||||
| ||||||||
| 437 | 340 | |||||||
| ||||||||
There is a provision for obsolescence of £28m against inventories as at 31 March 2016 (2015: £28m).
| 128 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
Financial Statements |
17. Trade and other receivables
Trade and other receivables are amounts which are due from our customers for services (and commodities in the US) we have provided. Other receivables also include prepayments made by us, for example, property lease rentals paid in advance. |
Trade and other receivables are initially recognised at fair value and subsequently measured at amortised cost, less any appropriate allowances for estimated irrecoverable amounts. A provision is established for irrecoverable amounts when there is objective evidence that amounts due under the original payment terms will not be collected.
2016 £m | 2015 £m | |||||||
| ||||||||
Trade receivables | 1,276 | 1,568 | ||||||
Accrued income | 796 | 852 | ||||||
Prepayments | 212 | 229 | ||||||
Commodity contract assets | 22 | 35 | ||||||
Current tax assets | 77 | 60 | ||||||
Other receivables | 89 | 92 | ||||||
| ||||||||
| 2,472 | 2,836 | |||||||
| ||||||||
Trade receivables are non interest-bearing and generally have a 30 to 90 day term. Due to their short maturities, the fair value of trade and other receivables approximates their book value. Commodity contract assets are recorded at fair value. All other receivables are recorded at amortised cost.
Provision for impairment of receivables
| 2016 £m | 2015 £m | |||||||
| ||||||||
At 1 April | 294 | 249 | ||||||
Exchange adjustments | 11 | 31 | ||||||
Charge for the year, net of recoveries | 158 | 126 | ||||||
Uncollectible amounts written off against receivables | (114 | ) | (112) | |||||
| ||||||||
At 31 March | 349 | 294 | ||||||
| ||||||||
Trade receivables past due but not impaired
| 2016 £m | 2015 £m | |||||||
| ||||||||
Up to 3 months past due | 214 | 299 | ||||||
3 to 6 months past due | 48 | 60 | ||||||
Over 6 months past due | 142 | 156 | ||||||
| ||||||||
| 404 | 515 | |||||||
| ||||||||
For further information on our wholesale and retail credit risk, refer to note 30(a). For further information on our commodity risk, refer to note 30(e).
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 129 |
Notes to the consolidated financial statements
– analysis of items in the primary statements continued
financial statements18. Cash and cash equivalentscontinued
Cash and cash equivalents include cash balances, together with short-term investments with an original maturity of less than three months that are readily convertible to cash. |
Net cash and cash equivalents reflected in the cash flow statement are net of bank overdrafts, which are reported in borrowings. The carrying amounts of cash and cash equivalents and bank overdrafts approximate their fair values.
Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for periods varying between one day and three months, depending on the immediate cash requirements, and earn interest at the respective short-term deposit rates.
Net cash and cash equivalents held in currencies other than sterling have been converted into sterling at year-end exchange rates. For further information on currency exposures, refer to note 30(d).
| 2016 £m | 2015 £m | |||||||
| ||||||||
Cash at bank | 126 | 109 | ||||||
Short-term deposits | 1 | 10 | ||||||
| ||||||||
Cash and cash equivalents excluding bank overdrafts | 127 | 119 | ||||||
Bank overdrafts | (3 | ) | (3) | |||||
| ||||||||
Net cash and cash equivalents | 124 | 116 | ||||||
| ||||||||
At 31 March 2016, £2m (2015: £1m) of cash and cash equivalents were restricted. This primarily relates to cash held in captive insurance companies.
17.Trade and other receivables
| ||||||||||
Trade and other receivables are amounts which are due from our customers for services (and commodities in the US) we have provided. Other receivables also include prepayments made by us, for example, property lease rentals paid in advance.
|
| |||||||||
Trade, loan and other receivables are initially recognised at fair value and subsequently measured at amortised cost, less any appropriate allowances for estimated irrecoverable amounts. A provision is established for irrecoverable amounts when there is objective evidence that amounts due under the original payment terms will not be collected.
|
| |||||||||
| 2014 | 2013 | |||||||||
| £m | £m | |||||||||
| ||||||||||
| Trade receivables | 1,602 | 1,325 | ||||||||
| Prepayments and accrued income | 1,090 | 1,421 | ||||||||
| Commodity contract assets | 42 | 42 | ||||||||
| Current tax assets | 11 | – | ||||||||
| Other receivables | 110 | 122 | ||||||||
| ||||||||||
| 2,855 | 2,910 | |||||||||
| ||||||||||
Trade receivables are non interest-bearing and generally have a 30-90 day term. Due to their short maturities, the fair value of trade and other receivables approximates their book value. Commodity contract assets are recorded at fair value. All other receivables are recorded at amortised cost. |
| |||||||||
Provision for impairment of receivables | ||||||||||
| 2014 | 2013 | |||||||||
| £m | £m | |||||||||
| ||||||||||
| At 1 April | 261 | 270 | ||||||||
| Exchange adjustments | (23) | 13 | ||||||||
| Charge for the year, net of recoveries | 105 | 75 | ||||||||
| Uncollectible amounts written off against receivables | (94) | (97) | ||||||||
| ||||||||||
| At 31 March | 249 | 261 | ||||||||
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Trade receivables past due but not impaired | ||||||||||
| 2014 | 2013 | |||||||||
| £m | £m | |||||||||
| ||||||||||
| Up to 3 months past due | 212 | 242 | ||||||||
| 3 to 6 months past due | 69 | 45 | ||||||||
| Over 6 months past due | 65 | 4 | ||||||||
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| 346 | 291 | |||||||||
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For further information on our wholesale and retail credit risk, refer to note 30 (a). For further information on our commodity risk, refer to note 30 (e).
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We borrow money primarily in the form of bonds and bank loans. These are for a fixed term and may have fixed or floating interest rates or are linked to RPI. As indicated in note 15, we use derivatives to manage risks associated with interest rates and foreign exchange. Our strategy in action Our price controls and rate plans require us to fund our networks within a certain ratio of debt to equity and, as a result, we have issued a significant amount of debt. As we continue to invest in our networks, the value of debt is expected to increase over time. To maintain a strong balance sheet and to allow us to access capital markets at commercially acceptable interest rates, we balance the amount of debt we issue with the value of our assets, and take account of certain other metrics used by credit rating agencies. |
Borrowings, which include interest-bearing and inflation linked debt and overdrafts, are recorded at their initial fair value which normally reflects the proceeds received, net of direct issue costs less any repayments. Subsequently these are stated at amortised cost, using the effective interest method. Any difference between the proceeds after direct issue costs and the redemption value is recognised over the term of the borrowing in the income statement using the effective interest method.
| 2016 £m | 2015 £m | |||||||
| ||||||||
Current | ||||||||
Bank loans | 1,179 | 561 | ||||||
Bonds | 1,282 | 1,068 | ||||||
Commercial paper | 1,092 | 1,349 | ||||||
Finance leases | 53 | 44 | ||||||
Other loans | 2 | 3 | ||||||
Bank overdrafts | 3 | 3 | ||||||
| ||||||||
| 3,611 | 3,028 | |||||||
| ||||||||
Non-current | ||||||||
Bank loans | 1,816 | 1,417 | ||||||
Bonds | 22,556 | 21,156 | ||||||
Finance leases | 190 | 159 | ||||||
Other loans | 171 | 150 | ||||||
| ||||||||
| 24,733 | 22,882 | |||||||
| ||||||||
Total borrowings | 28,344 | 25,910 | ||||||
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| 130 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
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Cash and cash equivalents includes cash balances, together with short-term investments with a maturity of less than three months that are readily convertible to cash. |
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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. |
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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. |
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Net cash and cash equivalents held in currencies other than sterling have been converted into sterling at year-end exchange rates. |
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For further information on currency exposures, refer to note 30 (d).
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| 2014 | 2013 | |||||||||
| £m | £m | |||||||||
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| Cash at bank | 75 | 99 | ||||||||
| Short-term deposits | 279 | 572 | ||||||||
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| Cash and cash equivalents excluding bank overdrafts | 354 | 671 | ||||||||
| Bank overdrafts | (15) | (23) | ||||||||
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| Net cash and cash equivalents | 339 | 648 | ||||||||
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At 31 March 2014, £24m (2013: £21m) of cash and cash equivalents were restricted. This primarily relates to cash held in captive insurance companies. |
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We borrow money primarily in the form of bonds and bank loans. These are for a fixed term and may have fixed or floating interest rates or are linked to RPI. As indicated in note 15, we use derivatives to manage risks associated with interest rates and foreign exchange. |
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Our strategy in action |
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Our price controls and rate plans require us to fund our networks within a certain ratio of debt to equity and, as a result, we have issued a significant amount of debt. As we continue to invest in our networks, the level of debt is expected to increase over time. To maintain a strong balance sheet and to allow us to access capital markets at commercially acceptable interest rates, we balance the amount of debt we issue with the value of our assets and take account of certain other metrics used by credit rating agencies.
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Borrowings, which include interest-bearing and inflation linked debt and overdrafts are recorded at their initial fair value which normally reflects the proceeds received, net of direct issue costs less any repayments. Subsequently these are stated at amortised cost, using the effective interest method. Any difference between the proceeds after direct issue costs and the redemption value is recognised over the term of the borrowing in the income statement using the effective interest method. |
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The Finance Committee controls refinancing risk by limiting the amount of our debt maturities arising from borrowings in any one year which is demonstrated by our maturity profile.
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| 2014 | 2013 | |||||||||
| £m | £m | |||||||||
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| Current | ||||||||||
| Bank loans | 1,485 | 1,194 | ||||||||
| Bonds | 1,730 | 1,761 | ||||||||
| Commercial paper | 252 | 438 | ||||||||
| Finance leases | 19 | 20 | ||||||||
| Other loans | 10 | 12 | ||||||||
| Bank overdrafts | 15 | 23 | ||||||||
| ||||||||||
| 3,511 | 3,448 | |||||||||
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| Non-current | ||||||||||
| Bank loans | 1,414 | 1,863 | ||||||||
| Bonds | 20,732 | 22,435 | ||||||||
| Finance leases | 151 | 175 | ||||||||
| Other loans | 142 | 174 | ||||||||
| ||||||||||
| 22,439 | 24,647 | |||||||||
| ||||||||||
| Total | 25,950 | 28,095 | ||||||||
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Financial Statements | |||||||||||||||
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| 19. Borrowingscontinued | ||||||||
| Total borrowings are repayable as follows: | ||||||||
| 2014 | 2013 | |||||||
| £m | £m | |||||||
| ||||||||
Less than 1 year | 3,511 | 3,448 | ||||||
In 1-2 years | 895 | 1,872 | ||||||
In 2-3 years | 1,177 | 860 | ||||||
In 3-4 years | 1,661 | 1,255 | ||||||
In 4-5 years | 1,509 | 1,420 | ||||||
More than 5 years: | ||||||||
by instalments | 175 | 71 | ||||||
other than by instalments | 17,022 | 19,169 | ||||||
| ||||||||
| 25,950 | 28,095 | |||||||
| ||||||||
The fair value of borrowings at 31 March 2014 was £28,131m (2013: £30,792m). Where market values were available, fair value of borrowings (Level 1) was £17,388m (2013: £20,543m). Where market values were not available, fair value of borrowings (Level 2) was £10,743m (2013: £10,249m), calculated by discounting cash flows at prevailing interest rates. The notional amount outstanding of the debt portfolio at 31 March 2014 was £25,539m (2013: £27,391m). |
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The assets of the Colonial Gas Company and the Niagara Mohawk Power Corporation and certain gas distribution assets of the Narragansett Electric Company are subject to liens and other charges and are provided as collateral over borrowings totalling £438m at 31 March 2014 (2013: £512m). |
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Collateral is placed with or received from any counterparty where we have entered into a credit support annex to the ISDA Master Agreement once the current mark-to-market valuation of the trades between the parties exceeds an agreed threshold. Included in current bank loans is £843m (2013: £730m) in respect of cash received under collateral agreements. For further details of our borrowing facilities, refer to note 31. For further details of our bonds in issue, please refer to the debt investor section of our website. |
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Assets held under finance leases are recognised at their fair value or, if lower, the present value of the minimum lease payments on inception. The corresponding liability is recognised as a finance lease obligation within borrowings. Rental payments are apportioned between finance costs and reduction in the finance lease obligation, so as to achieve a constant rate of interest. |
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Assets held under finance leases are depreciated over the shorter of their useful life and the lease term. |
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Finance lease obligations |
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| 2014 | 2013 | |||||||
| £m | £m | |||||||
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Gross finance lease liabilities are repayable as follows: | ||||||||
Less than 1 year | 19 | 20 | ||||||
1-5 years | 89 | 109 | ||||||
More than 5 years | 100 | 101 | ||||||
| ||||||||
| 208 | 230 | |||||||
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Less: finance charges allocated to future periods | (38) | (35) | ||||||
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| 170 | 195 | |||||||
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The present value of finance lease liabilities is as follows: | ||||||||
Less than 1 year | 19 | 20 | ||||||
1-5 years | 70 | 96 | ||||||
More than 5 years | 81 | 79 | ||||||
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| 170 | 195 | |||||||
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The fair value of borrowings at 31 March The assets of the Colonial Gas Company and the Niagara Mohawk Power Corporation and certain gas distribution assets of the Narragansett Electric Company are subject to liens and other charges and are provided as collateral over borrowings totalling £385m at 31 March 2016 (2015: £424m). Collateral is placed with or received from any counterparty where we have entered into a credit support annex to the ISDA Master Agreement once the current mark-to-market valuation of the trades between the parties exceeds an agreed threshold. Included in current bank loans
Assets held under finance leases are depreciated over the shorter of their useful life and the lease term. Finance lease obligations
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Trade and other payables include amounts owed to suppliers, tax authorities and other parties which are due to be settled within 12 months. The total also includes deferred income, which represents monies received from customers but for which we have not yet delivered the associated service. These amounts are recognised as revenue when the service is provided. |
Trade payables are initially recognised at fair value and subsequently measured at amortised cost.
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Trade and other payables includes amounts owed to suppliers, tax authorities and other parties which are due to be settled within 12 months. The total also includes deferred income, which represents monies received from customers but for which we have not yet completed the associated service. These amounts are recognised as revenue when the service is provided.
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Trade payables are initially recognised at fair value and subsequently measured at amortised cost.
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| 2014 | 2013 | |||||||||
| £m | £m | |||||||||
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Trade payables | 1,942 | 2,033 | ||||||||
Deferred income | 224 | 155 | ||||||||
Commodity contract liabilities | 77 | 69 | ||||||||
Social security and other taxes | 146 | 131 | ||||||||
Other payables | 642 | 663 | ||||||||
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| 3,031 | 3,051 | |||||||||
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Due to their short maturities, the fair value of trade and other payables approximates their book value. Commodity contract liabilities are recorded at fair value. All other trade and other payables are recorded at amortised cost. |
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21.Other non-current liabilities
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Other non-current liabilities includes deferred income which will not be recognised as income until after 31 March 2015. It also includes payables that are not due until after that date.
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| 2014 | 2013 | |||||||||
| £m | £m | |||||||||
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Deferred income | 1,605 | 1,579 | ||||||||
Commodity contract liabilities | 46 | 70 | ||||||||
Other payables | 190 | 235 | ||||||||
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| 1,841 | 1,884 | |||||||||
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Commodity contract liabilities are recorded at fair value. All other non-current liabilities are recorded at amortised cost. There is no material difference between the fair value and the carrying value of other non-current liabilities. |
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22.Pensions and other post-retirement benefits
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Substantially all our employees are members of either DB or DC pension plans. The principal UK plans are the National Grid UK Pension Scheme, the National Grid Electricity Group of the Electricity Supply Pension Scheme and The National Grid YouPlan. In the US, we have a number of plans and also provide healthcare and life insurance benefits to eligible retired US employees.
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The fair value of associated plan assets and present value of DB obligations are updated annually. For further details and the actuarial assumptions used to value the obligations, see note 29.
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With the adoption of IAS 19 (revised), we have increased our disclosures by separately presenting our UK and US pension plans to show geographical split.
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Below we provide a more detailed analysis of the amounts recorded in the primary financial statements.
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For DC plans, the Group pays contributions into separate funds on behalf of the employee and has no further obligations to employees. The risks associated with this type of plan are assumed by the member.
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For DB retirement plans, members receive benefits on retirement, the value of which is dependent on factors such as salary and length of pensionable service. The Group underwrites both financial and demographic risks associated with this type of plan.
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The cost of providing benefits in a DB plan is determined using the projected unit method, with actuarial valuations being carried out at each reporting date by a qualified actuary. This valuation method is an accrued benefits valuation method that makes allowance for projected earnings.
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The Group’s obligation in respect of DB pension plans is calculated separately for each plan by projecting the estimated amount of future benefit payments that employees have earned for their pensionable service in the current and prior periods. These future benefit payments are discounted to determine the present value of the liabilities and the fair value of plan assets and any unrecognised past service cost is then deducted. The discount rate used is the yield at the valuation date on high-quality corporate bonds.
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2016 £m | 2015 £m | |||||||
| ||||||||
Trade payables | 2,038 | 2,050 | ||||||
Deferred income | 275 | 236 | ||||||
Commodity contract liabilities | 96 | 116 | ||||||
Social security and other taxes | 159 | 196 | ||||||
Other payables | 717 | 694 | ||||||
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| 3,285 | 3,292 | |||||||
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Due to their short maturities, the fair value of trade payables approximates their book value. Commodity contract liabilities are recorded at fair value. All other trade and other payables are recorded at amortised cost.
21. Other non-current liabilities
Other non-current liabilities include deferred income which will not be recognised as income until after 31 March 2017. It also includes payables that are not due until after that date. |
Commodity contract liabilities are recorded at fair value. All other non-current liabilities are recorded at amortised cost.
2016 £m | 2015 £m | |||||||
| ||||||||
Deferred income | 1,802 | 1,648 | ||||||
Commodity contract liabilities | 39 | 55 | ||||||
Other payables | 230 | 216 | ||||||
| ||||||||
| 2,071 | 1,919 | |||||||
| ||||||||
There is no material difference between the fair value and the carrying value of other non-current liabilities.
22. Pensions and other post-retirement benefits
Substantially all our employees are members of either DB (defined benefit) or DC (defined contribution) pension plans. The principal UK plans are the National Grid UK Pension Scheme, the National Grid Electricity Group of the Electricity Supply Pension Scheme and the National Grid YouPlan. In the US, we have a number of plans and also provide healthcare and life insurance benefits to eligible retired US employees. The fair value of associated plan assets and present value of DB obligations are updated annually in accordance with IAS 19 (revised). For further details and the actuarial assumptions used to value the obligations, see note 29. We separately present our UK and US pension plans to show geographical split. Below we provide a more detailed analysis of the amounts recorded in the primary financial statements. For DC pension plans, National Grid pays contributions into separate funds on behalf of the employee and has no further obligations to employees. The risks associated with this type of plan are assumed by the member. For DB pension plans, members receive benefits on retirement, the value of which is dependent on factors such as salary and length of pensionable service. National Grid underwrites both financial and demographic risks associated with this type of plan. The cost of providing benefits in a DB plan is determined using the projected unit method, with actuarial valuations being carried out at each reporting date by a qualified actuary. This valuation method is an accrued benefits valuation method that makes allowance for projected earnings.
Financial Statements
22. Pensions and other post-retirement benefitscontinued National Grid’s obligation in respect of DB pension plans is calculated separately for each plan by projecting the estimated amount of future benefit payments that employees have earned for their pensionable service in the current and prior periods. These future benefit payments are discounted to determine the present value of the liabilities and the fair value of plan assets and any unrecognised past service cost is then deducted. The discount rate used is the yield at the valuation date on high-quality corporate bonds. National Grid takes advice from independent actuaries relating to the appropriateness of any key assumptions applied which include life expectancy of members, expected salary and pension increases, and inflation. It should be noted that comparatively small changes in the assumptions used may have a significant effect on the amounts recognised in the income statement and the statement of other comprehensive income and the net liability recognised in the statement of financial position. Remeasurements of net retirement obligations are recognised in full in the period in which they occur in the statement of other comprehensive income. Risks The DB pension obligations and other post-retirement benefit liabilities are exposed to the primary risks outlined below. Liabilities are calculated using discount rates set with reference to yields on high-quality corporate bonds prevailing in the US and UK debt markets and will fluctuate as yields change. Plan funds are invested in a variety of asset classes, principally: equities, government securities, corporate bonds and property. Consequently, actual returns will differ from the underlying discount rate adopted and therefore have an impact on the net balance sheet liability. Changes in inflation will affect both current and future pension payments and are partially mitigated through investment in inflation matching assets and hedging instruments. Longevity is also a key driver of liabilities and changes in expected mortality will have a direct impact on liabilities. The liabilities are, in aggregate, relatively mature which serves to mitigate this risk to some extent. Each plan’s investment strategy seeks to balance the level of investment return sought with the aim of reducing volatility and risk. In undertaking this approach reference is made both to the maturity of the liabilities and the funding level of that plan. A number of further strategies are employed to manage underlying risks, including liability matching asset strategies, diversification of asset portfolios, interest rate hedging and management of foreign exchange exposure. Amounts recognised in the statement of financial position
The geographical split of pensions and other post-retirement benefits is as shown below:
These figures reflect legal and actuarial advice that we have taken regarding recognition of surplus under IFRIC 14.
Notes to the consolidated financial statements – analysis of items in the primary statements continued 22. Pensions and other post-retirement benefitscontinued Amounts recognised in the income statement and statement of other comprehensive income
22. Pensions and other post-retirement benefitscontinued Reconciliation of the net defined benefit liability
Notes to the consolidated financial statements – analysis of items in the primary statements continued 22. Pensions and other post-retirement benefitscontinued Changes in the present value of defined benefit obligations (including unfunded obligations)
22. Pensions and other post-retirement benefitscontinued Changes in the fair value of plan assets
Notes to the consolidated financial statements – analysis of items in the primary statements continued
Provisions are recognised where a legal or constructive obligation exists at the reporting date, as a result of a past event, where the amount of the obligation can be reliably estimated and where the outflow of economic benefit is probable. Provision is made for decommissioning and environmental costs, based on future estimated expenditures, discounted to present values. An initial estimate of decommissioning and environmental costs attributable to property, plant and equipment is recorded as part of the original cost of the related property, plant and equipment. Changes in the provision arising from revised estimates or discount rates or changes in the expected timing of expenditures that relate to property, plant and equipment are recorded as adjustments to their carrying value and depreciated prospectively over their remaining estimated useful economic lives; otherwise such changes are recognised in the income statement. The unwinding of the discount is included within the income statement as a financing charge.
23. Provisionscontinued Environmental provision The environmental provision represents the estimated restoration and remediation costs relating to a number of sites owned and managed by subsidiary undertakings, together with certain US sites that National Grid no longer owns. The environmental provision is as follows:
The remediation expenditure in the UK relates to old gas manufacturing sites and also to electricity transmission sites. Cash flows are expected to be incurred between 2016 and 2060. A number of estimation uncertainties affect the calculation of the provision, including the impact of regulation, accuracy of the site surveys, unexpected contaminants, transportation costs, the impact of alternative technologies and changes in the discount rate. This provision incorporates our best estimate of the financial effect of these uncertainties, but future changes in any of the assumptions could materially impact the calculation of the provision. The undiscounted amount is the undiscounted best estimate of the liability having regard to these uncertainties. The remediation expenditure in the US is expected to be incurred between 2016 and 2071. The uncertainties regarding the calculation of this provision are similar to those considered in respect of UK sites. This expenditure is expected to be largely recoverable from ratepayers under the terms of various rate agreements in the US. Decommissioning provision The decommissioning provision represents £66m (2015: £51m) of expenditure relating to asset retirement obligations estimated to be incurred until 2095, and £37m (2015: £64m) of expenditure relating to the demolition of gas holders estimated to be incurred until 2020. It also includes the net present value of the estimated expenditure (discounted at a real rate of 2%) expected to be incurred until 2033 in respect of the decommissioning of certain US nuclear generating units that National Grid no longer owns. Restructuring provision The restructuring provision principally relates to business reorganisation costs in the UK and is expected to be incurred until 2023. Emissions provision The provision for emission costs is expected to be settled using emission allowances granted. Other provisions Included within other provisions at 31 March 2016 are amounts provided in respect of onerous lease commitments and rates payable on surplus properties of £100m (2015: £117m) with expenditure expected to be incurred until 2039. Other provisions also include £190m (2015: £182m) of estimated liabilities in respect of past events insured by insurance subsidiary undertakings, including employer liability claims. In accordance with insurance industry practice, these estimates are based on experience from previous years and there is, therefore, no identifiable payment date. Other provisions also include £13m (2015: £13m) in respect of obligations associated with investments in joint ventures.
Notes to the consolidated financial statements – analysis of items in the primary statements continued
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.
The share capital of the Company consists of ordinary shares of 11 17⁄43 pence nominal value each including ADSs. The ordinary shares and ADSs allow holders to receive dividends and vote at general meetings 43 of the Company. The Company holds treasury shares but may not exercise any rights over these shares including the entitlement to vote or receive dividends. There are no restrictions on the transfer or sale of ordinary shares. In line with the provisions of the Companies Act 2006, the Company has amended its Articles of Association and ceased to have authorised share capital. Treasury shares At 31 March 2016, the Company held 179m (2015: 153m) of its own shares. The market value of these shares as at 31 March 2016 was £1,767m (2015: £1,323m). The Company made the following transactions in respect of its own shares during the year ended 31 March 2016:
The shares repurchased have a nominal value of £4m (2015: £4m) and represented approximately 1% (2015: 1%) of the ordinary shares in issue as at 31 March 2016.
The maximum number of shares held during the year was 179m ordinary shares (2015: 153m) representing approximately 4.6% (2015: 3.9%) of the ordinary shares in issue as at 31 March 2016 and having a nominal value of £20m (2015: £17m).
Other equity reserves comprise the translation reserve (see accounting policy C in note 1), cash flow hedge reserve (see note 15), available-for-sale reserve (see note 13), the capital redemption reserve and the merger reserve. The merger reserve arose as a result of the application of merger accounting principles under the then prevailing UK GAAP, which under IFRS 1 was retained for mergers that occurred prior to the IFRS transition date. Under merger accounting principles, the difference between the carrying amount of the capital structure of the acquiring vehicle and that of the acquired business was treated as a merger difference and included within reserves. As the amounts included in other equity reserves are not attributable to any of the other classes of equity presented, they have been disclosed as a separate classification of equity.
The merger reserve represents the difference between the carrying value of subsidiary undertaking investments and their respective capital structures following the Lattice demerger from BG Group plc and the 1999 Lattice refinancing. The cash flow hedge reserve will be continuously transferred to the income statement until the borrowings are repaid. The amount due to be released from reserves to the income statement next year is £21m (pre-tax) and the remainder released with the same maturity profile as borrowings due after more than one year.
Notes to the consolidated financial statements – analysis of items in the primary statements continued
Funding and liquidity risk management is carried out by the treasury function under policies and guidelines approved by the Finance Committee of the Board. The Finance Committee is responsible for the regular review and monitoring of treasury activity and for the approval of specific transactions, the authority for which fall outside the delegation of authority to management. The primary objective of the treasury function is to manage our funding and liquidity requirements. A secondary objective is to manage the associated financial risks, in the form of interest rate risk and foreign exchange risk, to within pre-authorised parameters. Details of the main risks arising from our financing and commodity hedging activities can be found in the risk factors discussion starting on page 183 and in note 30 to the consolidated financial statements on pages 149 to 155. Investment of surplus funds, usually in short-term fixed deposits or placements with money market funds that invest in highly liquid instruments of high credit quality, is subject to our counterparty risk management policy. The movement in cash and cash equivalents is reconciled to movements in net debt. (a) Reconciliation of net cash flow to movement in net debt
26. Net debtcontinued (b) Analysis of changes in net debt
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 risk that could affect us in the future. We also include specific disclosures for British Transco Finance Inc., Niagara Mohawk Power Corporation and National Grid Gas plc in accordance with various rules including Rule 3-10 of Regulation S-X (a US SEC requirement), as they have issued public debt securities which have been guaranteed by National Grid plc and one of its subsidiary companies, National Grid Gas plc. Additional disclosures have also been included in respect of the two guarantor companies. These disclosures are in lieu of publishing separate financial statements for these companies. See note 34 for further information. 27. Commitments and contingencies
The total of future minimum sublease payments expected to be received under non-cancellable subleases is £21m (2015: £26m). Through the ordinary course of our operations, we are party to various litigation, claims and investigations. We do not expect the ultimate resolution of any of these proceedings to have a material adverse effect on our results of operations, cash flows or financial position.
28. Related party transactions
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:
Details of investments in principal subsidiary undertakings, joint ventures and associates are disclosed in note 32 and information relating to pension fund arrangements is disclosed in notes 22 and 29. For details of Directors’ and key management remuneration, refer to the audited section of the Remuneration Report and note 3(c). 29. Actuarial information on pensions and other post-retirement benefits
UK pension plans National Grid’s defined benefit pension arrangements are funded with assets held in separate trustee administered funds. The arrangements are managed by trustee companies with boards consisting of company and member appointed directors. The directors are required to manage the arrangements in accordance with local regulations and the arrangements’ governing documents, acting on behalf of their beneficiaries. The arrangements are subject to independent actuarial funding valuations at least every three years and following consultation and agreement with us, the qualified actuary certifies the employers’ contribution, which, together with the specified contributions payable by the employees and proceeds from the plans’ assets, are expected to be sufficient to fund the benefits payable. The last full actuarial valuations were carried out as at 31 March 2013. The 2016 valuation processes have commenced. The results of the 2013 valuations are shown below:
From April 2014 an annual cap was placed on future increases to the salary used to calculate pensions at the lower of 3% or the annual increase in RPI. This capped salary applied to all pensionable service from 1 April 2013 onwards. During the year ended 31 March 2014 these changes resulted in a past service credit of £11m to the income statement (see note 22) and a change to the salary increase assumption which affects how our DB liabilities as at 31 March have been calculated. These changes are to ensure our schemes remain affordable and sustainable over the coming years.
Notes to the consolidated financial statements – supplementary information continued 29. Actuarial information on pensions and other post-retirement benefitscontinued National Grid UK Pension Scheme The Following the 31 March 2027. Under the schedule of contributions,
In addition, National Grid will make a payment of £200m (increased in line with RPI) into the scheme if NGG’s credit rating by two out of three specified agencies falls below certain agreed levels for a period of 40 days. This scheme ceased to allow new hires to join from 1 April 2002. A DC section of the scheme was offered for employees joining after this date, which National Grid Electricity Group of the Electricity Supply Pension Scheme The Following the 2026/27. As part of National Grid has also agreed to make a payment in respect of the deficit up to a maximum of The scheme closed to new members from 1 April 2006. The National Grid YouPlan
YouPlan is the qualifying scheme used for automatic enrolment and US pension plans National
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National Grid also has several DC pension plans, primarily comprised of employee savings and Company matching contributions. Non-union employees hired after 1 January 2011, as well as new hires in 10 groups of represented union employees, receive a core contribution into the DC plan, irrespective of the employee’s contribution into the plan.
US retiree healthcare and life insurance plans
National Grid provides healthcare and life insurance benefits to eligible retired US employees. Eligibility is based on certain age and length of service requirements and in most cases retirees contribute to the cost of their healthcare coverage. In the US, there is no governmental requirement to pre-fund post-retirement health and welfare plans. However, in general, the Company’s policy for funding the US retiree healthcare and life insurance plans is to contribute amounts collected in rates and capitalised in the rate base during the year.
| 146 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
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29. Actuarial information on pensions and other post-retirement benefitscontinued US retiree healthcare and life insurance plans National Grid provides healthcare and life insurance benefits to eligible retired US employees. Eligibility is based on certain age and length of service requirements and in most cases retirees contribute to the cost of their healthcare coverage. In the US, there is no governmental requirement to pre-fund post-retirement health and welfare plans. However, in general, the Company’s policy for funding the US retiree healthcare and life insurance plans is to contribute amounts collected in rates and capitalised in the rate bases during the year.
Asset allocations Within the asset allocations below there is significant diversification across regions, asset managers, currencies and bond categories.
UK pensions
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| 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||||||||||
| Quoted | Unquoted | Total | Quoted | Unquoted | Total | Quoted | Unquoted | Total | ||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||
Equities1 | 4,045 | 620 | 4,665 | 4,825 | 546 | 5,371 | 4,796 | 570 | 5,366 | |||||||||||||||||||||||||||||||
Corporate bonds2 | 5,706 | – | 5,706 | 5,804 | – | 5,804 | 5,330 | – | 5,330 | |||||||||||||||||||||||||||||||
Government securities | 4,161 | – | 4,161 | 4,743 | – | 4,743 | 3,906 | – | 3,906 | |||||||||||||||||||||||||||||||
Property | 33 | 1,057 | 1,090 | – | 1,072 | 1,072 | – | 1,160 | 1,160 | |||||||||||||||||||||||||||||||
Diversified alternatives3 | – | 793 | 793 | – | – | – | – | – | – | |||||||||||||||||||||||||||||||
Other4 | 1,031 | (37 | ) | 994 | 426 | (24 | ) | 402 | 407 | (62 | ) | 345 | ||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||
Total | 14,976 | 2,433 | 17,409 | 15,798 | 1,594 | 17,392 | 14,439 | 1,668 | 16,107 | |||||||||||||||||||||||||||||||
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1. Included within equities at 31 March 2014 were ordinary shares of National Grid plc with a value of £15m (2013: £16m; 2012: £13m). 2. Included within corporate bonds at 31 March 2014 was an investment in a number of bonds issued by subsidiary undertakings with a value of £72m (2013: £69m; 2012: £50m). 3. Includes return seeking non-conventional asset classes. 4. Includes liability-driven investment vehicles, cash and cash type instruments.
US pensions
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| 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||||||||||
| Quoted | Unquoted | Total | Quoted | Unquoted | Total | Quoted | Unquoted | Total | ||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||
Equities | 508 | 1,225 | 1,733 | 507 | 1,289 | 1,796 | 619 | 1,025 | 1,644 | |||||||||||||||||||||||||||||||
Corporate bonds | 823 | 336 | 1,159 | 863 | 295 | 1,158 | 733 | 229 | 962 | |||||||||||||||||||||||||||||||
Government securities | 632 | 28 | 660 | 707 | 19 | 726 | 649 | 20 | 669 | |||||||||||||||||||||||||||||||
Property | – | 189 | 189 | – | 175 | 175 | – | 148 | 148 | |||||||||||||||||||||||||||||||
Diversified alternatives1 | – | 434 | 434 | – | 465 | 465 | – | 411 | 411 | |||||||||||||||||||||||||||||||
Other | – | 54 | 54 | – | 58 | 58 | – | 16 | 16 | |||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||
Total | 1,963 | 2,266 | 4,229 | 2,077 | 2,301 | 4,378 | 2,001 | 1,849 | 3,850 | |||||||||||||||||||||||||||||||
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1. Includes return seeking non-conventional asset classes.
US other post-retirement benefits
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| 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||||||||||
| Quoted | Unquoted | Total | Quoted | Unquoted | Total | Quoted | Unquoted | Total | ||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||
Equities | 245 | 852 | 1,097 | 195 | 774 | 969 | 252 | 523 | 775 | |||||||||||||||||||||||||||||||
Corporate bonds | 2 | 10 | 12 | 2 | 11 | 13 | 1 | 10 | 11 | |||||||||||||||||||||||||||||||
Government securities | 357 | 1 | 358 | 361 | 2 | 363 | 262 | 4 | 266 | |||||||||||||||||||||||||||||||
Diversified alternatives1 | 43 | 110 | 153 | 43 | 127 | 170 | 87 | 53 | 140 | |||||||||||||||||||||||||||||||
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Total | 647 | 973 | 1,620 | 601 | 914 | 1,515 | 602 | 590 | 1,192 | |||||||||||||||||||||||||||||||
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1. Includes return seeking non-conventional asset classes.
Target asset allocations Each plan’s investment strategy is formulated specifically in order to manage risk, through investment in diversified asset classes, including the use of liability matching assets and where appropriate through the employment of interest rate and inflation hedging instruments. The target asset allocation of the plans as at 31 March 2014 is as follows:
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| UK pensions | US pensions | US other post-retirement benefits | ||||||||||||||||||||||||||||||||||||||
| % | % | % | ||||||||||||||||||||||||||||||||||||||
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Equities | 31 | 47 | 70 | |||||||||||||||||||||||||||||||||||||
Other | 69 | 53 | 30 | |||||||||||||||||||||||||||||||||||||
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Total | 100 | 100 | 100 | |||||||||||||||||||||||||||||||||||||
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Financial Statements | |||||||||||||||
29. Actuarial information on pensions and other post-retirement benefits continued
Asset allocations
Within the asset allocations below there is significant diversification across regions, asset managers, currencies and bond categories.
UK pensions
| 2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||||||||
Quoted £m | Unquoted £m | Total £m | Quoted £m | Unquoted £m | Total £m | Quoted £m | Unquoted £m | Total £m | ||||||||||||||||||||||||||||||
Equities1 | 3,272 | 962 | 4,234 | 3,848 | 761 | 4,609 | 4,045 | 620 | 4,665 | |||||||||||||||||||||||||||||
Corporate bonds2 | 5,601 | – | 5,601 | 6,494 | – | 6,494 | 5,706 | – | 5,706 | |||||||||||||||||||||||||||||
Government securities | 6,059 | – | 6,059 | 4,637 | – | 4,637 | 4,161 | – | 4,161 | |||||||||||||||||||||||||||||
Property | 90 | 1,081 | 1,171 | 86 | 1,082 | 1,168 | 33 | 1,057 | 1,090 | |||||||||||||||||||||||||||||
Diversified alternatives3 | 159 | 505 | 664 | – | 716 | 716 | – | 793 | 793 | |||||||||||||||||||||||||||||
Liability matching assets4 | 1,020 | – | 1,020 | 878 | – | 878 | 598 | – | 598 | |||||||||||||||||||||||||||||
Other5 | 649 | 3 | 652 | 936 | 15 | 951 | 433 | (37 | ) | 396 | ||||||||||||||||||||||||||||
| 16,850 | 2,551 | 19,401 | 16,879 | 2,574 | 19,453 | 14,976 | 2,433 | 17,409 | ||||||||||||||||||||||||||||||
1. Included within equities at 31 March 2016 were ordinary shares of National Grid plc with a value of £7m (2015: £14m; 2014: £15m). 2. Included within corporate bonds at 31 March 2016 was an investment in a number of bonds issued by subsidiary undertakings with a value of £70m (2015: £80m; 2014: £72m). 3. Includes return seeking non-conventional asset classes. 4. Includes liability-driven investment vehicles. 5. Includes cash and cash type instruments.
US pensions
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| 2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||||||||
| Quoted £m | Unquoted £m | Total £m | Quoted £m | Unquoted £m | Total £m | Quoted £m | Unquoted £m | Total £m | ||||||||||||||||||||||||||||||
Equities1 | 625 | 1,508 | 2,133 | 617 | 1,455 | 2,072 | 508 | 1,225 | 1,733 | |||||||||||||||||||||||||||||
Corporate bonds1 | 954 | 483 | 1,437 | 969 | 473 | 1,442 | 823 | 336 | 1,159 | |||||||||||||||||||||||||||||
Government securities1 | 711 | – | 711 | 727 | – | 727 | 632 | 28 | 660 | |||||||||||||||||||||||||||||
Property | – | 276 | 276 | – | 249 | 249 | – | 189 | 189 | |||||||||||||||||||||||||||||
Diversified alternatives1,2 | 163 | 334 | 497 | 164 | 334 | 498 | 139 | 295 | 434 | |||||||||||||||||||||||||||||
Other | – | 82 | 82 | – | 64 | 64 | – | 54 | 54 | |||||||||||||||||||||||||||||
| 2,453 | 2,683 | 5,136 | 2,477 | 2,575 | 5,052 | 2,102 | 2,127 | 4,229 | ||||||||||||||||||||||||||||||
1. Comparatives have been represented on a basis consistent with the current year presentation. 2. Includes return seeking non-conventional asset classes.
US other post-retirement benefits
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| 2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||||||||
| Quoted £m | Unquoted £m | Total £m | Quoted £m | Unquoted £m | Total £m | Quoted £m | Unquoted £m | Total £m | ||||||||||||||||||||||||||||||
Equities1 | 281 | 853 | 1,134 | 289 | 872 | 1,161 | 245 | 823 | 1,068 | |||||||||||||||||||||||||||||
Corporate bonds | 37 | 1 | 38 | 34 | – | 34 | 2 | 10 | 12 | |||||||||||||||||||||||||||||
Government securities | 390 | – | 390 | 382 | – | 382 | 357 | 1 | 358 | |||||||||||||||||||||||||||||
Diversified alternatives1,2 | 122 | 104 | 226 | 114 | 100 | 214 | 102 | 80 | 182 | |||||||||||||||||||||||||||||
Other | – | 109 | 109 | – | 112 | 112 | – | – | – | |||||||||||||||||||||||||||||
| 830 | 1,067 | 1,897 | 819 | 1,084 | 1,903 | 706 | 914 | 1,620 | ||||||||||||||||||||||||||||||
1. Comparatives have been represented on a basis consistent with the current year presentation. 2. Includes return seeking non-conventional asset classes. | ||||||||||||||||||||||||||||||||||||||
Target asset allocations
Each plan’s investment strategy is formulated specifically in order to manage risk, through investment in diversified asset classes, including the use of liability matching assets and where appropriate through the employment of interest rate and inflation hedging instruments. The target asset allocation of the plans as at 31 March 2016 is as follows:
| UK pensions % | US pensions % | US other % | ||||||||||
Equities | 21 | 40 | 65 | |||||||||
Other | 79 | 60 | 35 | |||||||||
| 100 | 100 | 100 | ||||||||||
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 147 |
Notes to the consolidated financial statements
– supplementary information continued
financial statements29. Actuarial information on pensions and other post-retirement benefitscontinued
Actuarial assumptions
The Company has applied the following financial assumptions in assessing DB liabilities.
| UK pensions | US pensions | US other post-retirement benefits | ||||||||||||||||||||||||||||||||||||||
2016 % | 2015 % | 2014 % | 2016 % | 2015 % | 2014 % | 2016 % | 2015 % | 2014 % | ||||||||||||||||||||||||||||||||
Discount rate1 | 3.3 | 3.3 | 4.3 | 4.3 | 4.1 | 4.8 | 4.3 | 4.1 | 4.8 | |||||||||||||||||||||||||||||||
Rate of increase in salaries2 | 3.2 | 3.2 | 3.6 | 3.5 | 3.5 | 3.5 | 3.5 | 3.5 | 3.5 | |||||||||||||||||||||||||||||||
Rate of increase in RPI3 | 2.9 | 2.9 | 3.3 | n/a | n/a | n/a | n/a | n/a | n/a | |||||||||||||||||||||||||||||||
Initial healthcare cost trend rate | n/a | n/a | n/a | n/a | n/a | n/a | 7.5 | 8.0 | 8.0 | |||||||||||||||||||||||||||||||
Ultimate healthcare cost trend rate | n/a | n/a | n/a | n/a | n/a | n/a | 4.5 | 5.0 | 5.0 | |||||||||||||||||||||||||||||||
| 1. | The discount rates for pension liabilities have been determined by reference to appropriate yields on high-quality corporate bonds prevailing in the UK and US debt markets at the reporting date. |
| 2. | A promotional scale has also been used where appropriate. The UK assumption stated is that relating to service prior to 1 April 2014. The UK assumption for the rate of increase in salaries for service after this date is 2.1% (2015: 2.1%). |
| 3. | This is the key assumption that determines assumed increases in pensions in payment and deferment in the UK only. The assumptions for the UK were 2.9% (2015: 2.9%; 2014: 3.3%) for increases in pensions in payment and 2.9% (2015: 2.9%; 2014: 3.3%) for increases in pensions in deferment. |
For sensitivity analysis see note 33.
| 2016 | 2015 | 2014 | ||||||||||||||||||||||||||
| UK years | US years | UK years | US years | UK years | US years | |||||||||||||||||||||||
Assumed life expectations for a retiree age 65 | ||||||||||||||||||||||||||||
Today: | ||||||||||||||||||||||||||||
Males | 22.8 | 21.8 | 22.7 | 21.7 | 22.9 | 20.6 | ||||||||||||||||||||||
Females | 25.2 | 24.0 | 25.1 | 23.9 | 25.4 | 22.9 | ||||||||||||||||||||||
In 20 years: | ||||||||||||||||||||||||||||
Males | 25.1 | 23.5 | 24.9 | 23.4 | 25.2 | 22.8 | ||||||||||||||||||||||
Females | 27.6 | 25.6 | 27.4 | 25.6 | 27.8 | 24.7 | ||||||||||||||||||||||
Maturity profile of DB obligations
The weighted average duration of the DB obligation for each category of scheme is 16 years for UK pension schemes; 13 years for US pension schemes and 17 years for US other post-retirement benefits.
29. Actuarial information on pensions and other post-retirement benefitscontinued
Actuarial assumptions The Company has applied the following financial assumptions in assessing DB liabilities:
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| 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||
| % | % | % | % | % | % | % | % | % | ||||||||||||||||||||||||||||||
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Discount rate1 | 4.3 | 4.3 | 4.8 | 4.8 | 4.7 | 5.1 | 4.8 | 4.7 | 5.1 | |||||||||||||||||||||||||||||
Rate of increase in salaries2 | 3.6 | 4.1 | 4.0 | 3.5 | 3.5 | 3.5 | 3.5 | 3.5 | 3.5 | |||||||||||||||||||||||||||||
Rate of increase in RPI3 | 3.3 | 3.4 | 3.2 | n/a | n/a | n/a | n/a | n/a | n/a | |||||||||||||||||||||||||||||
Initial healthcare cost trend rate | n/a | n/a | n/a | n/a | n/a | n/a | 8.0 | 8.0 | 8.0 | |||||||||||||||||||||||||||||
Ultimate healthcare cost trend rate | n/a | n/a | n/a | n/a | n/a | n/a | 5.0 | 5.0 | 5.0 | |||||||||||||||||||||||||||||
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1. |
The discount rates for pension liabilities have been determined by reference to appropriate yields on high-quality corporate bonds prevailing in the UK and US debt markets at the reporting date. |
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2. |
A promotional scale has also been used where appropriate. The UK assumption stated is that relating to service prior to 1 April 2013. The UK assumption for the rate of increase in salaries for service after this date is 2.5%. |
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3. |
This is the key assumption that determines assumed increases in pensions in payment and deferment in the UK only. The assumptions for the UK were 3.3% (2013: 3.4%; 2012: 3.2%) for increases in pensions in payment and 3.3% (2013: 3.4%; 2012: 3.2%) for increases in pensions in deferment.
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| 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||||||||
| UK | US | UK | US | UK | US | |||||||||||||||||||||||||||||||||
| years | years | years | years | years | years | |||||||||||||||||||||||||||||||||
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Assumed life expectations for a retiree age 65 |
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Today | ||||||||||||||||||||||||||||||||||||||
Males | 22.9 | 20.6 | 22.7 | 19.5 | 22.5 | 19.4 | ||||||||||||||||||||||||||||||||
Females | 25.4 | 22.9 | 25.2 | 21.4 | 25.0 | 21.3 | ||||||||||||||||||||||||||||||||
In 20 years | ||||||||||||||||||||||||||||||||||||||
Males | 25.2 | 22.8 | 25.0 | 21.0 | 24.9 | 20.9 | ||||||||||||||||||||||||||||||||
Females
| 27.8 | 24.7 | 27.6 | 22.2 | 27.5 | 22.2 | ||||||||||||||||||||||||||||||||
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Maturity profile of defined benefit obligations The weighted average duration of the DB obligation for each category of scheme is 16 years for UK pension schemes; 13 years for US pension schemes and 15 years for US other post-retirement benefits. The forecast timing of benefits payable to scheme members for each of these categories is shown on a net present value basis in the chart below.
Maturity profile £m |
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| 148 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
Financial Statements |
Strategic Report
Corporate Governance
Additional Information
137
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Our activities expose us to a variety of financial risk including currency risk, interest rate risk, commodity price risk, credit risk, capital risk and liquidity risk. Our risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential volatility of financial performance of these risks. We use financial instruments, including derivative financial instruments, to manage risks of this type.
This note describes our approach to managing risk, including an analysis of assets and liabilities by currency type and an analysis of interest rate category for our net debt. We are required by accounting standards to also include a number of specific disclosures (such as a maturity analysis of contractual undiscounted cash flows) and have included these requirements below. |
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Risk management related to financing activities is carried out by a central treasury department under policies approved by the Finance Committee of the Board. The objective of the treasury department is to manage funding and liquidity requirements, including managing associated financial risks, to within acceptable boundaries. The Finance Committee provides written principles for overall risk management, as well as written policies covering specific areas such as foreign exchange risk, interest rate risk, credit risk, liquidity risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity.
We have exposure to the following risks, which are described in more detail below:
— credit risk; — liquidity risk; — interest rate risk; — currency risk; — commodity risk; and — capital risk
(a) Credit risk We are exposed to the risk of loss resulting from counterparties’ default on their commitments including failure to pay or make a delivery on a contract. This risk is inherent in our commercial business activities. We are exposed to credit risk on our cash and cash equivalents, derivative financial instruments, deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables and committed transactions.
Treasury credit risk Counterparty risk arises from the investment of surplus funds and from the use of derivative instruments. As at 31 March 2014, the following limits were in place for investments held with banks and financial institutions:
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| Maximum limit | Long-term limit | |||||||||
| £m | £m | |||||||||
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AAA rated G8 sovereign entities | Unlimited | Unlimited | ||||||||
Triple ‘A’ vehicles | 311 | 263 | ||||||||
Triple ‘A’ range institutions (AAA) | 1,060 to 1,599 | 534 to 837 | ||||||||
Double ‘A’ range institutions (AA) | 633 to 797 | 322 to 398 | ||||||||
Single ‘A’ range institutions (A) | 218 to 311 | 111 to 159 | ||||||||
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As at 31 March 2013 and 2014, we had a number of exposures to individual counterparties. In accordance with our treasury policies, counterparty credit exposure utilisations are monitored daily against the counterparty credit limits. Counterparty credit ratings and market conditions are reviewed continually with limits being revised and utilisation adjusted, if appropriate. Management does not expect any significant losses from non performance by these counterparties.
Commodity credit risk The credit policy for commodity transactions is owned and monitored by the Executive Energy Risk Committee, under authority delegated by the Board and Executive Committee, and establishes controls and procedures to determine, monitor and minimise the credit risk of counterparties.
Wholesale and retail credit risk Our principal commercial exposure in the UK is governed by the credit rules within the regulated codes Uniform Network Code and Connection and Use of System Code. These set out the level of credit relative to the RAV for each credit rating. In the US, we are required to supply electricity and gas under state regulations. Our credit policies and practices are designed to limit credit exposure by collecting security deposits prior to providing utility services, or after utility service has commenced if certain applicable regulatory requirements are met. Collection activities are managed on a daily basis. Sales to retail customers are usually settled in cash, cheques, electronic bank payments or by using major credit cards. We are committed to measuring, monitoring, minimising and recording counterparty credit risk in our wholesale business. The utilisation of credit limits is regularly monitored and collateral is collected against these accounts when necessary. Management does not expect any significant losses of receivables that have not been provided for as shown in note 17.
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Our activities expose us to a variety of financial risks including currency risk, interest rate risk, commodity price risk, credit risk, capital risk and liquidity risk. Our risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential volatility of financial performance from these risks. We use financial instruments, including derivative financial instruments, to manage risks of this type. This note describes our approach to managing risk, including an analysis of assets and liabilities by currency type and an analysis of interest rate category for our net debt. We are required by accounting standards to also include a number of specific disclosures (such as a maturity analysis of contractual undiscounted cash flows) and have included these requirements below. |
Risk management related to financing activities is carried out by a central treasury department under policies approved by the Finance Committee of the Board. The objective of the treasury department is to manage funding and liquidity requirements, including managing associated financial risks, to within acceptable boundaries. The Finance Committee provides written principles for overall risk management, as well as written policies covering specific areas such as foreign exchange risk, interest rate risk, credit risk, liquidity risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity.
We have exposure to the following risks, which are described in more detail below:
| ● | credit risk; |
| ● | liquidity risk; |
| ● | interest rate risk; |
| ● | currency risk; |
| ● | commodity risk; and |
| ● | capital risk. |
(a) Credit risk
We are exposed to the risk of loss resulting from counterparties’ default on their commitments including failure to pay or make a delivery on a contract. This risk is inherent in our commercial business activities. We are exposed to credit risk on our cash and cash equivalents, derivative financial instruments, deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables and committed transactions.
Treasury credit risk
Counterparty risk arises from the investment of surplus funds and from the use of derivative financial instruments. As at 31 March 2016, the following limits were in place for investments held with banks and financial institutions:
| Maximum limit £m | Long-term limit £m | |||||||
Triple ‘A’ G8 sovereign entities (AAA) | Unlimited | Unlimited | ||||||
Triple ‘A’ vehicles (AAA) | 322 | 273 | ||||||
Triple ‘A’ range institutions and non G8 sovereign entities (AAA) | 1,099 to 1,658 | 553 to 867 | ||||||
Double ‘A+’ G8 sovereign entities (AA+) | 1,658 | 867 | ||||||
Double ‘A’ range institutions (AA) | 656 to 826 | 334 to 413 | ||||||
Single ‘A’ range institutions (A) | 226 to 322 | 115 to 165 | ||||||
As at 31 March 2015 and 2016, we had a number of exposures to individual counterparties. In accordance with our treasury policies, counterparty credit exposure utilisations are monitored daily against the counterparty credit limits. Counterparty credit ratings and market conditions are reviewed continually with limits being revised and utilisation adjusted, if appropriate. Management does not expect any significant losses from non performance by these counterparties.
Commodity credit risk
The credit policy for commodity transactions is owned and monitored by the Energy Procurement Risk Management Committee, under authority delegated by the Board and Executive Committee, and establishes controls and procedures to determine, monitor and minimise the credit risk of counterparties.
Wholesale and retail credit risk
Our principal commercial exposure in the UK is governed by the credit rules within the regulated codes: Uniform Network Code and Connection and Use of System Code. These set out the level of credit relative to the RAV for each credit rating. In the US, we are required to supply electricity and gas under state regulations. Our credit policies and practices are designed to limit credit exposure by collecting security deposits prior to providing utility services, or after utility service has commenced if certain applicable regulatory requirements are met. Collection activities are managed on a daily basis. Sales to retail customers are usually settled in cash, cheques, electronic bank payments or by using major credit cards. We are committed to measuring, monitoring, minimising and recording counterparty credit risk in our wholesale business. The utilisation of credit limits is regularly monitored and collateral is collected against these accounts when necessary. Management does not expect any significant losses of receivables that have not been provided for as shown in note 17.
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 149 |
Notes to the consolidated financial statements
– supplementary information continued
financial statements30. Financial risk managementcontinued
a) Credit riskcontinued
Offsetting financial assets and liabilities
The following tables set out our financial assets and liabilities which are subject to offset and to enforceable master netting arrangements or similar agreements. The tables show the amounts which are offset and reported net in the statement of financial position. Amounts which cannot be offset under IFRS, but which could be settled net under terms of master netting agreements if certain conditions arise, and with collateral received or pledged, are shown to present National Grid’s net exposure.
Financial assets and liabilities on different transactions are only reported net if the transactions are with the same counterparty, a legal right of offset exists and the cash flows are intended to be settled on a net basis.
Amounts which do not meet the criteria for offsetting on the statement of financial position but could be settled net in certain circumstances principally relate to derivative transactions under ISDA agreements where each party has the option to settle amounts on a net basis in the event of default of the other party.
Commodity contracts that have not been offset on the balance sheet may be settled net in certain circumstances under ISDA or NAESB (North American Energy Standards Board) agreements.
National Grid has similar arrangements in relation to bank account balances and bank overdrafts; and trade payables and trade receivables which are subject to general terms and conditions. However, these balances are immaterial.
| Related amounts available to be offset but not offset in statement of financial position | ||||||||||||||||||||||||
| At 31 March 2016 | | Gross carrying amounts £m | |
| Gross amounts offset £m | 1
|
| Net amount presented in statement of financial position £m |
| | Financial instruments £m | | | Cash collateral received/ pledged £m | | | Net amount £m | | ||||||
Assets | ||||||||||||||||||||||||
Derivative financial instruments | 1,963 | – | 1,963 | (997 | ) | (597 | ) | 369 | ||||||||||||||||
Commodity contracts | 33 | (1 | ) | 32 | (4 | ) | – | 28 | ||||||||||||||||
| 1,996 | (1 | ) | 1,995 | (1,001 | ) | (597 | ) | 397 | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Derivative financial instruments | (2,069 | ) | – | (2,069 | ) | 997 | 932 | (140 | ) | |||||||||||||||
Commodity contracts | (145 | ) | 10 | (135 | ) | 4 | 20 | (111 | ) | |||||||||||||||
| (2,214 | ) | 10 | (2,204 | ) | 1,001 | 952 | (251 | ) | ||||||||||||||||
| ||||||||||||||||||||||||
| (218 | ) | 9 | (209 | ) | – | 355 | 146 | |||||||||||||||||
Related amounts available to be offset but | ||||||||||||||||||||||||
| At 31 March 2015 | | Gross carrying amounts £m | |
| Gross amounts offset £m | 1
|
| Net amount presented in statement of financial position £m |
| | Financial instruments £m | |
| Cash collateral received/ pledged £m |
| | Net amount £m | | ||||||
Assets | ||||||||||||||||||||||||
Derivative financial instruments | 1,716 | – | 1,716 | (839 | ) | (527 | ) | 350 | ||||||||||||||||
Commodity contracts | 64 | – | 64 | (11 | ) | – | 53 | |||||||||||||||||
| 1,780 | – | 1,780 | (850 | ) | (527 | ) | 403 | |||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Derivative financial instruments | (2,399 | ) | – | (2,399 | ) | 839 | 1,125 | (435 | ) | |||||||||||||||
Commodity contracts | (182 | ) | 11 | (171 | ) | 11 | – | (160 | ) | |||||||||||||||
| (2,581 | ) | 11 | (2,570 | ) | 850 | 1,125 | (595 | ) | ||||||||||||||||
| ||||||||||||||||||||||||
| (801 | ) | 11 | (790 | ) | – | 598 | (192 | ) | ||||||||||||||||
| 1. | The gross financial assets and liabilities offset in the statement of financial position primarily relate to commodity contracts. Offsets relate to margin payments for NYMEX gas futures which are traded on a recognised exchange. |
30. Financial risk managementcontinued
(a) Credit riskcontinued Offsetting financial assets and liabilities The following tables set out our financial assets and liabilities which are subject to offset and to enforceable master netting arrangements or similar agreements. The tables show the amounts which are offset and reported net in the statement of financial position. Amounts which cannot be offset under IFRS, but which could be settled net under terms of master netting agreements if certain conditions arise, and with collateral received or pledged, are shown to present National Grid’s net exposure.
Financial assets and liabilities on different transactions are only reported net if the transactions are with the same counterparty, a legal right of offset exists and the cash flows are intended to be settled on a net basis.
Amounts which do not meet the criteria for offsetting on the statement of financial position but could be settled net in certain circumstances principally relate to derivative transactions under ISDA (International Swaps and Derivatives Association) agreements where each party has the option to settle amounts on a net basis in the event of default of the other party.
Commodity contracts that have not been offset on the balance sheet may be settled net in certain circumstances under ISDA or NAESB (North American Energy Standards Board) agreements.
National Grid has similar arrangements in relation to bank account balances and bank overdrafts; and trade payables and trade receivables which are subject to general terms and conditions. However, these balances are immaterial.
|
| |||||||||||||||||||||||||||
| Related amounts available to be offset but not offset in statement of financial position | ||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||
As at 31 March 2014 | Gross £m | Gross £m | Net amount £m | Financial £m | Cash £m | Net amount £m | ||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||
Derivative financial instruments | 1,970 | – | 1,970 | (609 | ) | (831 | ) | 530 | ||||||||||||||||||||
Commodity contracts
|
| 89
|
|
| (2
| )
|
| 87
|
|
| (7
| )
|
| (2
| )
|
| 78
|
| ||||||||||
| ||||||||||||||||||||||||||||
| 2,059 | (2 | ) | 2,057 | (616 | ) | (833 | ) | 608 | ||||||||||||||||||||
| ||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||
Derivative financial instruments | (1,163 | ) | – | (1,163 | ) | 609 | 374 | (180) | ||||||||||||||||||||
Commodity contracts
|
| (123
| )
|
| –
|
|
| (123
| )
|
| 7
|
|
| –
|
|
| (116)
|
| ||||||||||
| ||||||||||||||||||||||||||||
| (1,286 | ) | – | (1,286 | ) | 616 | 374 | (296) | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Total | 773 | (2 | ) | 771 | – | (459 | ) | 312 | ||||||||||||||||||||
| ||||||||||||||||||||||||||||
Related amounts available to be offset but not offset in statement of financial position | ||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||
| As at 31 March 2013 | Gross £m | Gross £m | Net amount £m | Financial £m | Cash £m | Net amount £m | ||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||
Derivative financial instruments | 2,245 | – | 2,245 | (891 | )2 | (709 | ) | 645 | ||||||||||||||||||||
Commodity contracts
|
| 91
|
|
| (2
| )
|
| 89
|
|
| (1
| )
|
| –
|
|
| 88
|
| ||||||||||
| ||||||||||||||||||||||||||||
| 2,336 | (2 | ) | 2,334 | (892 | ) | (709 | ) | 733 | ||||||||||||||||||||
| ||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||
Derivative financial instruments | (1,681 | ) | – | (1,681 | ) | 891 | 2 | 440 | (350) | |||||||||||||||||||
Commodity contracts
|
| (140
| )
|
| 1
|
|
| (139
| )
|
| 1
|
|
| –
|
|
| (138)
|
| ||||||||||
| ||||||||||||||||||||||||||||
| (1,821 | ) | 1 | (1,820 | ) | 892 | 440 | (488) | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Total | 515 | (1 | ) | 514 | – | (269 | ) | 245 | ||||||||||||||||||||
| ||||||||||||||||||||||||||||
1. |
The gross financial assets and liabilities offset in the statement of financial position primarily relate to commodity contracts. Offsets relate to margin payments for NYMEX gas futures which are traded on a recognised exchange. |
| ||||||||||||||||||||||||||
2. |
Comparatives have been restated to present items on a basis consistent with the current year.
|
| ||||||||||||||||||||||||||
| 150 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
|
|
|
|
|
30. Financial risk managementcontinued
(b) Liquidity risk Our policy is to determine our liquidity requirements by the use of both short-term and long-term cash flow forecasts. These forecasts are supplemented by a financial headroom analysis which is used to assess funding requirements for at least a 24 month period and maintain adequate liquidity for a continuous 12 month period.
We believe our contractual obligations, including those shown in commitments and contingencies in note 27 can be met from existing cash and investments, operating cash flows and other financings that we reasonably expect to be able to secure in the future, together with the use of committed facilities if required.
Our debt agreements and banking facilities contain covenants, including those relating to the periodic and timely provision of financial information by the issuing entity and financial covenants such as restrictions on the level of subsidiary indebtedness. Failure to comply with these covenants, or to obtain waivers of those requirements, could in some cases trigger a right, at the lender’s discretion, to require repayment of some of our debt and may restrict our ability to draw upon our facilities or access the capital markets.
The following is an analysis of the contractual undiscounted cash flows payable under financial liabilities and derivative assets and liabilities as at the reporting date:
|
| |||||||||||||||||||||||
| At 31 March 2014 | Less £m | 1-2 years £m | 2-3 years £m | More £m | Total £m | |||||||||||||||||||
| ||||||||||||||||||||||||
Non-derivative financial liabilities | ||||||||||||||||||||||||
Borrowings, excluding finance lease liabilities | (3,091 | ) | (864 | ) | (1,140 | ) | (20,275 | ) | (25,370) | |||||||||||||||
Interest payments on borrowings1 | (826 | ) | (812 | ) | (796 | ) | (14,571 | ) | (17,005) | |||||||||||||||
Finance lease liabilities | (18 | ) | (19 | ) | (20 | ) | (112 | ) | (169) | |||||||||||||||
Other non-interest bearing liabilities | (2,584 | ) | (190 | ) | – | – | (2,774) | |||||||||||||||||
| ||||||||||||||||||||||||
Derivative financial liabilities | ||||||||||||||||||||||||
Derivative contracts – receipts | 1,068 | 950 | 153 | 1,155 | 3,326 | |||||||||||||||||||
Derivative contracts – payments | (556 | ) | (861 | ) | (144 | ) | (1,638 | ) | (3,199) | |||||||||||||||
Commodity contracts
|
| (177
| )
|
| (30
| )
|
| (22
| )
|
| 2
|
|
| (227)
|
| |||||||||
| ||||||||||||||||||||||||
Total
|
| (6,184
| )
|
| (1,826
| )
|
| (1,969
| )
|
| (35,439
| )
|
| (45,418)
|
| |||||||||
| ||||||||||||||||||||||||
At 31 March 2013 | Less £m | 1-2 years £m | 2-3 years £m | More £m | Total £m | |||||||||||||||||||
| ||||||||||||||||||||||||
Non-derivative financial liabilities | ||||||||||||||||||||||||
Borrowings, excluding finance lease liabilities | (3,061 | ) | (1,836 | ) | (790 | ) | (21,704 | ) | (27,391) | |||||||||||||||
Interest payments on borrowings1 | (951 | ) | (861 | ) | (842 | ) | (15,775 | ) | (18,429) | |||||||||||||||
Finance lease liabilities | (27 | ) | (26 | ) | (26 | ) | (151 | ) | (230) | |||||||||||||||
Other non-interest bearing liabilities | (2,696 | ) | (235 | ) | – | – | (2,931) | |||||||||||||||||
| ||||||||||||||||||||||||
Derivative financial liabilities | ||||||||||||||||||||||||
Derivative contracts – receipts | 1,388 | 816 | 1,053 | 441 | 3,698 | |||||||||||||||||||
Derivative contracts – payments2 | (1,309 | ) | (469 | ) | (969 | ) | (1,039 | ) | (3,786) | |||||||||||||||
Commodity contracts
|
| (150
| )
|
| (41
| )
|
| (35
| )
|
| (25
| )
|
| (251)
|
| |||||||||
| ||||||||||||||||||||||||
Total
|
| (6,806
| )
|
| (2,652
| )
|
| (1,609
| )
|
| (38,253
| )
|
| (49,320)
|
| |||||||||
| ||||||||||||||||||||||||
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 comparatives have been restated on a basis consistent with the current year.
|
| ||||||||||||||||||||||
Financial Statements | |||||||||||||||
30. Financial risk managementcontinued
(b) Liquidity risk
Our policy is to determine our liquidity requirements by the use of both short-term and long-term cash flow forecasts. These forecasts are supplemented by a financial headroom analysis which is used to assess funding requirements for at least a 24 month period and maintain adequate liquidity for a continuous 12 month period.
We believe our contractual obligations, including those shown in commitments and contingencies in note 27 can be met from existing cash and investments, operating cash flows and other financings that we reasonably expect to be able to secure in the future, together with the use of committed facilities if required.
Our debt agreements and banking facilities contain covenants, including those relating to the periodic and timely provision of financial information by the issuing entity and financial covenants such as restrictions on the level of subsidiary indebtedness. Failure to comply with these covenants, or to obtain waivers of those requirements, could in some cases trigger a right, at the lender’s discretion, to require repayment of some of our debt and may restrict our ability to draw upon our facilities or access the capital markets.
The following is an analysis of the contractual undiscounted cash flows payable under financial liabilities and derivative assets and liabilities as at the reporting date:
| At 31 March 2016 | Less than 1 year £m | 1 to 2 years £m | 2 to 3 years £m | More than 3 years £m | Total £m | |||||||||||||||
Non-derivative financial liabilities | ||||||||||||||||||||
Borrowings, excluding finance lease liabilities | (3,225 | ) | (1,777 | ) | (1,760 | ) | (20,831 | ) | (27,593 | ) | ||||||||||
Interest payments on borrowings1 | (839 | ) | (806 | ) | (746 | ) | (13,549 | ) | (15,940 | ) | ||||||||||
Finance lease liabilities | (53 | ) | (58 | ) | (43 | ) | (130 | ) | (284 | ) | ||||||||||
Other non-interest bearing liabilities | (2,755 | ) | (230 | ) | – | – | (2,985 | ) | ||||||||||||
Derivative financial liabilities | ||||||||||||||||||||
Derivative contracts – receipts | 314 | 487 | 846 | 811 | 2,458 | |||||||||||||||
Derivative contracts – payments | (389 | ) | (964 | ) | (855 | ) | (914 | ) | (3,122 | ) | ||||||||||
Commodity contracts | (104 | ) | (32 | ) | (9 | ) | 1 | (144 | ) | |||||||||||
| (7,051 | ) | (3,380 | ) | (2,567 | ) | (34,612 | ) | (47,610 | ) | |||||||||||
| At 31 March 2015 | Less than £m | 1 to 2 £m | 2 to 3 £m | More than 3 years £m | Total £m | |||||||||||||||
Non-derivative financial liabilities | ||||||||||||||||||||
Borrowings, excluding finance lease liabilities | (2,289 | ) | (1,179 | ) | (1,513 | ) | (20,235 | ) | (25,216 | ) | ||||||||||
Interest payments on borrowings1 | (790 | ) | (790 | ) | (766 | ) | (13,587 | ) | (15,933 | ) | ||||||||||
Finance lease liabilities | (44 | ) | (41 | ) | (32 | ) | (86 | ) | (203 | ) | ||||||||||
Other non-interest bearing liabilities | (2,744 | ) | (216 | ) | – | – | (2,960 | ) | ||||||||||||
Derivative financial liabilities | ||||||||||||||||||||
Derivative contracts – receipts | 602 | 244 | 411 | 1,194 | 2,451 | |||||||||||||||
Derivative contracts – payments | (935 | ) | (318 | ) | (952 | ) | (1,631 | ) | (3,836 | ) | ||||||||||
Commodity contracts | (116 | ) | (43 | ) | (21 | ) | – | (180 | ) | |||||||||||
| (6,316 | ) | (2,343 | ) | (2,873 | ) | (34,345 | ) | (45,877 | ) | |||||||||||
| 1. | The interest on borrowings is calculated based on borrowings held at 31 March without taking account of future issues. Floating rate interest is estimated using a forward interest rate curve as at 31 March. Payments are included on the basis of the earliest date on which the Company can be required to settle. |
(c) Interest rate risk
National Grid’s interest rate risk arises from our long-term borrowings. Borrowings issued at variable rates expose National Grid to cash flow interest rate risk, partially offset by cash held at variable rates. Borrowings issued at fixed rates expose National Grid to fair value interest rate risk.
Our interest rate risk management policy is to seek to minimise total financing costs (being interest costs and changes in the market value of debt) subject to constraints. We do this by using fixed and floating rate debt and derivative financial instruments including interest rate swaps, swaptions and forward rate agreements.
We hold some borrowings on issue that are inflation linked. We believe that these provide a partial economic offset to the inflation risk associated with our UK inflation linked revenues.
The table in note 19 sets out the carrying amount, by contractual maturity, of borrowings that are exposed to interest rate risk before taking into account interest rate swaps.
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 151 |
Notes to the consolidated financial statements
– supplementary information continued
financial statements30. Financial risk managementcontinued
(c) Interest rate riskcontinued
During 2016 and 2015, net debt was managed using derivative instruments to hedge interest rate risk as follows:
| 2016 | 2015 | |||||||||||||||||||||||||||||||||||||||
| | Fixed rate £m | |
| Floating rate £m |
| | Inflation linked £m | |
| Other £m | 1
| | Total £m | | | Fixed rate £m | |
| Floating rate £m |
| | Inflation linked £m | |
| Other £m | 1
| Total £m | |||||||||||||
Cash and cash equivalents | 1 | 126 | – | – | 127 | 1 | 118 | – | – | 119 | ||||||||||||||||||||||||||||||
Financial investments | 54 | 2,939 | – | 5 | 2,998 | 281 | 2,273 | – | 5 | 2,559 | ||||||||||||||||||||||||||||||
Borrowings2 | (17,706 | ) | (3,008 | ) | (7,629 | ) | (1 | ) | (28,344 | ) | (16,229 | ) | (2,746 | ) | (6,933 | ) | (2 | ) | (25,910) | |||||||||||||||||||||
Pre-derivative position | (17,651 | ) | 57 | (7,629 | ) | 4 | (25,219 | ) | (15,947 | ) | (355 | ) | (6,933 | ) | 3 | (23,232) | ||||||||||||||||||||||||
Derivative effect3 | 1,788 | (2,481 | ) | 587 | – | (106 | ) | 1,593 | (2,294 | ) | 18 | – | (683) | |||||||||||||||||||||||||||
Net debt position | (15,863 | ) | (2,424 | ) | (7,042 | ) | 4 | (25,325 | ) | (14,354 | ) | (2,649 | ) | (6,915 | ) | 3 | (23,915) | |||||||||||||||||||||||
1. Represents financial instruments which are not directly affected by interest rate risk, such as investments in equity or other similar financial instruments. 2. Includes bank overdrafts. 3. The impact of 2016/17 (2015: 2015/16) maturing short-dated interest rate derivatives is included.
(d) Currency risk National Grid operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the dollar. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities, and investments in foreign operations.
Our policy for managing foreign exchange transaction risk is to hedge contractually committed foreign currency cash flows over a prescribed minimum size. Where foreign currency cash flow forecasts are less certain, our policy is to hedge a proportion of such cash flows based on the probability of those cash flows occurring. Instruments used to manage foreign exchange transaction risk include foreign exchange forward contracts and foreign exchange swaps.
Our policy for managing foreign exchange translation risk relating to our net investment in foreign operations is to maintain a percentage of net debt and foreign exchange forwards so as to provide an economic offset. The primary managed foreign exchange exposure arises from the dollar denominated assets and liabilities held by our US operations, with a further small euro exposure in respect of a joint venture investment.
During 2016 and 2015, derivative financial instruments were used to manage foreign currency risk as follows:
| ||||||||||||||||||||||||||||||||||||||||
| 2016 | 2015 | |||||||||||||||||||||||||||||||||||||||
| Sterling £m | Euro £m | Dollar £m | Other £m | Total £m | Sterling £m | Euro £m | Dollar £m | Other £m | Total £m | |||||||||||||||||||||||||||||||
Cash and cash equivalents | 3 | 1 | 123 | – | 127 | 12 | – | 107 | – | 119 | ||||||||||||||||||||||||||||||
Financial investments | 1,201 | 105 | 1,622 | 70 | 2,998 | 1,227 | 90 | 1,181 | 61 | 2,559 | ||||||||||||||||||||||||||||||
Borrowings1 | (13,131 | ) | (5,061 | ) | (8,806 | ) | (1,346 | ) | (28,344 | ) | (11,791 | ) | (5,099 | ) | (7,604 | ) | (1,416 | ) | (25,910) | |||||||||||||||||||||
Pre-derivative position | (11,927 | ) | (4,955 | ) | (7,061 | ) | (1,276 | ) | (25,219 | ) | (10,552 | ) | (5,009 | ) | (6,316 | ) | (1,355 | ) | (23,232) | |||||||||||||||||||||
Derivative effect | 2,374 | 4,971 | (8,989 | ) | 1,538 | (106 | ) | 1,608 | 5,203 | (8,858 | ) | 1,364 | (683) | |||||||||||||||||||||||||||
Net debt position | (9,553 | ) | 16 | (16,050 | ) | 262 | (25,325 | ) | (8,944 | ) | 194 | (15,174 | ) | 9 | (23,915) | |||||||||||||||||||||||||
1. Includes bank overdrafts.
The overall exposure to dollars largely relates to our net investment hedge activities as described in note 15.
The currency exposure on other financial instruments is as follows:
| ||||||||||||||||||||||||||||||||||||||||
| 2016 | 2015 | |||||||||||||||||||||||||||||||||||||||
| Sterling £m | Euro £m | Dollar £m | Other £m | Total £m | Sterling £m | Euro £m | Dollar £m | Other £m | Total £m | |||||||||||||||||||||||||||||||
Trade and other receivables | 220 | 8 | 1,236 | – | 1,464 | 200 | – | 1,495 | – | 1,695 | ||||||||||||||||||||||||||||||
Trade and other payables | (1,380 | ) | – | (1,471 | ) | – | (2,851 | ) | (1,403 | ) | – | (1,457 | ) | – | (2,860) | |||||||||||||||||||||||||
Other non-current assets | (17 | ) | – | (252 | ) | – | (269 | ) | (19 | ) | – | (252 | ) | – | (271) | |||||||||||||||||||||||||
The carrying amounts of other financial instruments are denominated in the above currencies, which in most instances are the functional currency of the respective subsidiaries. Our exposure to dollars is due to activities in our US subsidiaries. We do not have any other significant exposure to currency risk on these balances.
30. Financial risk management continued
(c) Interest rate risk National Grid’s interest rate risk arises from our long-term borrowings. Borrowings issued at variable rates expose National Grid to cash flow interest rate risk, partially offset by cash held at variable rates. Borrowings issued at fixed rates expose National Grid to fair value interest rate risk.
Our interest rate risk management policy is to seek to minimise total financing costs (being interest costs and changes in the market value of debt) subject to constraints. We do this by using fixed and floating rate debt and derivative financial instruments including interest rate swaps, swaptions and forward rate agreements.
We hold some borrowings on issue that are inflation linked. We believe that these provide a partial economic offset to the inflation risk associated with our UK inflation linked revenues.
The table in note 19 sets out the carrying amount, by contractual maturity, of borrowings that are exposed to interest rate risk before taking into account interest rate swaps.
During 2014 and 2013, net debt was managed using derivative instruments to hedge interest rate risk as follows:
| ||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||
Fixed rate £m | Floating £m | Inflation £m | Other1 £m | Total £m | Fixed rate £m | Floating £m | Inflation £m | Other1 £m | Total £m | |||||||||||||||
| ||||||||||||||||||||||||
Cash and cash equivalents | 175 | 179 | – | – | 354 | 577 | 94 | – | – | 671 | ||||||||||||||
Financial investments | 615 | 2,979 | – | 5 | 3,599 | 540 | 4,843 | – | 48 | 5,431 | ||||||||||||||
Borrowings2 | (15,585) | (3,520) | (6,836) | (9) | (25,950) | (17,767) | (3,700) | (6,617) | (11) | (28,095) | ||||||||||||||
| ||||||||||||||||||||||||
Pre-derivative position | (14,795) | (362) | (6,836) | (4) | (21,997) | (16,650) | 1,237 | (6,617) | 37 | (21,993) | ||||||||||||||
Derivative effect3 | 3,359 | (2,743) | 191 | – | 807 | 1,555 | (1,132) | 141 | – | 564 | ||||||||||||||
| ||||||||||||||||||||||||
Net debt position | (11,436) | (3,105) | (6,645) | (4) | (21,190) | (15,095) | 105 | (6,476) | 37 | (21,429) | ||||||||||||||
| ||||||||||||||||||||||||
1. |
Represents financial instruments which are not directly affected by interest rate risk, such as investments in equity or other similar financial instruments. | |||||||||||||||||||||||
| 2. | Includes bank overdrafts. | |||||||||||||||||||||||
| 3. | The impact of 2014/15 (2013: 2013/14) maturing short-dated interest rate derivatives is included. | |||||||||||||||||||||||
(d) Currency risk National Grid operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the dollar. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities, and investments in foreign operations.
Our policy for managing foreign exchange transaction risk is to hedge contractually committed foreign currency cash flows over a prescribed minimum size. Where foreign currency cash flow forecasts are less certain, our policy is to hedge a proportion of such cash flows based on the probability of those cash flows occurring. Instruments used to manage foreign exchange transaction risk include foreign exchange forward contracts and foreign exchange swaps.
Our policy for managing foreign exchange translation risk relating to our net investment in foreign operations is to maintain a percentage of net debt and foreign exchange forwards so as to provide an economic offset of our cash flows arising in the foreign currency. The primary managed foreign exchange exposure arises from the dollar denominated assets and liabilities held by our US operations, with a further small euro exposure in respect of a joint venture investment.
During 2014 and 2013, derivative financial instruments were used to manage foreign currency risk as follows:
| ||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||
| Sterling £m | Euro £m | Dollar £m | Other £m | Total £m | Sterling £m | Euro £m | Dollar £m | Other £m | Total £m | |||||||||||||||
| ||||||||||||||||||||||||
Cash and cash equivalents | 16 | – | 338 | – | 354 | 238 | 1 | 432 | – | 671 | ||||||||||||||
Financial investments | 1,879 | 111 | 1,553 | 56 | 3,599 | 3,938 | 124 | 1,289 | 80 | 5,431 | ||||||||||||||
Borrowings1 | (12,780) | (4,479) | (7,330) | (1,361) | (25,950) | (12,573) | (5,220) | (8,678) | (1,624) | (28,095) | ||||||||||||||
| ||||||||||||||||||||||||
Pre-derivative position | (10,885) | (4,368) | (5,439) | (1,305) | (21,997) | (8,397) | (5,095) | (6,957) | (1,544) | (21,993) | ||||||||||||||
Derivative effect | 3,137 | 4,670 | (8,326) | 1,326 | 807 | 320 | 5,368 | (6,684) | 1,560 | 564 | ||||||||||||||
| ||||||||||||||||||||||||
Net debt position | (7,748) | 302 | (13,765) | 21 | (21,190) | (8,077) | 273 | (13,641) | 16 | (21,429) | ||||||||||||||
| ||||||||||||||||||||||||
1. |
Includes bank overdrafts. | |||||||||||||||||||||||
The overall exposure to dollars largely relates to our net investment hedge activities as described in note 15.
| ||||||||||||||||||||||||
| 152 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
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|
|
30. Financial risk managementcontinued
(d) Currency risk continued The currency exposure on other financial instruments is as follows:
|
| |||||||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||||||||||||||||||||
| Sterling £m | Euro £m | Dollar £m | Other £m | Total £m | Sterling £m | Euro £m | Dollar £m | Other £m | Total £m | |||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||
Trade and other receivables | 142 | – | 1,623 | – | 1,765 | 151 | – | 1,338 | – | 1,489 | ||||||||||||||||||||||||||||||||
Trade and other payables | (1,370 | ) | – | (1,291 | ) | – | (2,661) | (1,328 | ) | – | (1,437) | – | (2,765) | |||||||||||||||||||||||||||||
Other non-current liabilities | (16 | ) | – | (220 | ) | – | (236) | (22 | ) | – | (283) | – | (305) | |||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||
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.
(e) Commodity risk We purchase electricity and gas to supply our customers in the US and to meet our own energy needs. Substantially all our costs of purchasing electricity and gas for supply to customers are recoverable at an amount equal to cost. The timing of recovery of these costs can vary between financial periods leading to an under- or over-recovery within any particular year, that can lead to large fluctuations in the income statement. We follow approved policies to manage price and supply risks for our commodity activities.
Our energy procurement risk management policy and delegations of authority govern our US commodity trading activities for energy transactions. The purpose of this policy is to ensure we transact within pre-defined risk parameters and only in the physical and financial markets where we or our customers have a physical market requirement. In addition, state regulators require National Grid to manage commodity risk and cost volatility prudently through diversified pricing strategies. In some jurisdictions we are required to file a plan outlining our strategy to be approved by regulators. In certain cases we might receive guidance with regard to specific hedging limits.
Energy purchase contracts for the forward purchase of electricity or gas that are used to satisfy physical delivery requirements to customers or for energy that the Company uses itself meet the normal purchase, sale or usage exemption of IAS 39. They are, therefore, not recognised in the financial statements. Disclosure of commitments under such contracts is made in note 27.
We enter into forward contracts for the purchase of commodities, some of which do not meet the own use exemption for accounting purposes and hence are accounted for as derivatives. We also enter into derivative financial instruments linked to commodity prices, including index-linked futures, swaps and options contracts. These derivative financial instruments are used to manage market price volatility and are carried at fair value on the statement of financial position, with the mark-to-market changes reflected through earnings.
|
| |||||||||||||||||||||||||||||||||||||||||
Financial Statements | |||||||||||||||
30. Financial risk managementcontinued
(e) Commodity risk
We purchase electricity and gas to supply our customers in the US and to meet our own energy needs. Substantially all our costs of purchasing electricity and gas for supply to customers are recoverable at an amount equal to cost. The timing of recovery of these costs can vary between financial periods leading to an under- or over-recovery within any particular year that can lead to large fluctuations in the income statement. We follow approved policies to manage price and supply risks for our commodity activities.
Our energy procurement risk management policy and delegations of authority govern our US commodity trading activities for energy transactions. The purpose of this policy is to ensure we transact within pre-defined risk parameters and only in the physical and financial markets where we or our customers have a physical market requirement. In addition, state regulators require National Grid to manage commodity risk and cost volatility prudently through diversified pricing strategies. In some jurisdictions we are required to file a plan outlining our strategy to be approved by regulators. In certain cases we might receive guidance with regard to specific hedging limits.
Energy purchase contracts for the forward purchase of electricity or gas that are used to satisfy physical delivery requirements to customers or for energy that the Company uses itself meet the normal purchase, sale or usage exemption of IAS 39. They are, therefore, not recognised in the financial statements. Disclosure of commitments under such contracts is made in note 27.
We enter into forward contracts for the purchase of commodities, some of which do not meet the own use exemption for accounting purposes and hence are accounted for as derivatives. We also enter into derivative financial instruments linked to commodity prices, including index-linked futures, swaps and options contracts. These derivative financial instruments are used to manage market price volatility and are carried at fair value on the statement of financial position, with the mark-to-market changes reflected through earnings.
The fair value of our commodity contracts by type can be analysed as follows:
| 2016 | 2015 | |||||||||||||||||||||||||
Assets £m | Liabilities £m | Total £m | Assets £m | Liabilities £m | Total £m | |||||||||||||||||||||
Commodity purchase contracts accounted for as derivative contracts | ||||||||||||||||||||||||||
Forward purchases of electricity | – | (26 | ) | (26 | ) | – | (42 | ) | (42 | ) | ||||||||||||||||
Forward purchases of gas | 25 | (27 | ) | (2 | ) | 42 | (42 | ) | – | |||||||||||||||||
Derivative financial instruments linked to commodity prices | ||||||||||||||||||||||||||
Electricity capacity | 2 | – | 2 | – | – | – | ||||||||||||||||||||
Electricity swaps | 2 | (69 | ) | (67 | ) | 21 | (59 | ) | (38 | ) | ||||||||||||||||
Electricity options | – | (1 | ) | (1 | ) | – | (1 | ) | (1 | ) | ||||||||||||||||
Gas swaps | 3 | (12 | ) | (9 | ) | 1 | (27 | ) | (26 | ) | ||||||||||||||||
| 32 | (135 | ) | (103 | ) | 64 | (171 | ) | (107 | ) | |||||||||||||||||
The maturity profile of commodity contracts is as follows:
|
| |||||||||||||||||||||||||
| 2016 | 2015 | |||||||||||||||||||||||||
| Assets £m | Liabilities £m | Total £m | Assets £m | Liabilities £m | Total £m | |||||||||||||||||||||
Current | ||||||||||||||||||||||||||
Less than one year | 22 | (96 | ) | (74 | ) | 35 | (116 | ) | (81 | ) | ||||||||||||||||
| 22 | (96 | ) | (74 | ) | 35 | (116 | ) | (81 | ) | |||||||||||||||||
Non-current | ||||||||||||||||||||||||||
In 1 to 2 years | 8 | (30 | ) | (22 | ) | 25 | (37 | ) | (12 | ) | ||||||||||||||||
In 2 to 3 years | 1 | (9 | ) | (8 | ) | 2 | (18 | ) | (16 | ) | ||||||||||||||||
In 3 to 4 years | – | – | – | 1 | – | 1 | ||||||||||||||||||||
In 4 to 5 years | – | – | – | 1 | – | 1 | ||||||||||||||||||||
More than 5 years | 1 | – | 1 | – | – | – | ||||||||||||||||||||
| 10 | (39 | ) | (29 | ) | 29 | (55 | ) | (26 | ) | |||||||||||||||||
| 32 | (135 | ) | (103 | ) | 64 | (171 | ) | (107 | ) | |||||||||||||||||
For each class of commodity contract, our exposure based on the notional quantities is as follows:
| 2016 | 2015 | |||||||
Forward purchases of electricity1 | 481 GWh | 984 GWh | ||||||
Forward purchases/sales of gas2 | 44m Dth | 55m Dth | ||||||
Electricity swaps | 11,786 GWh | 10,779 GWh | ||||||
Electricity options | 22,375 GWh | 25,157 GWh | ||||||
Electricity capacity | 1 kWm | – | ||||||
Gas swaps | 76m Dth | 65m Dth | ||||||
Gas options | 16m Dth | 4m Dth | ||||||
NYMEX gas futures3 | 14m Dth | 20m Dth | ||||||
1. Forward electricity purchases have terms up to three years. The contractual obligations under these contracts are £40m (2015: £77m).
2. Forward gas purchases have terms up to five years. The contractual obligations under these contracts are £20m (2015: £26m).
3. NYMEX gas futures have been offset with related margin accounts (see note 30(a)).
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 153 |
Notes to the consolidated financial statements
– supplementary information continued
financial statements30. Financial risk managementcontinued
(f) Capital risk management
The capital structure of the Group consists of shareholders’ equity, as disclosed in the consolidated statement of changes in equity, and net debt (note 26). National Grid’s objectives when managing capital are: to safeguard our ability to continue as a going concern; to remain within regulatory constraints of our regulated operating companies; and to maintain an efficient mix of debt and equity funding thus achieving an optimal capital structure and cost of capital. We regularly review and manage the capital structure as appropriate in order to achieve these objectives.
Maintaining appropriate credit ratings for our regulated companies is an important aspect of our capital risk management strategy and balance sheet efficiency. As noted on page 25, we monitor our balance sheet efficiency using several metrics including our retained cash flow/net debt and interest cover. Interest cover for the year ended 31 March 2016 was 5.5 (2015: 5.1). Our long-term target range for interest cover is greater than 3.0, which we believe is consistent with single A range long-term senior unsecured debt credit ratings within our main UK operating companies, NGET and NGG, based on guidance from the rating agencies.
In addition, we monitor the RAV gearing within each of NGET and the regulated transmission and distribution businesses within NGG. This is calculated as net debt expressed as a percentage of RAV, and indicates the level of debt employed to fund our UK regulated businesses. It is compared with the level of RAV gearing indicated by Ofgem as being appropriate for these businesses, at around 60 to 65%.
The majority of our regulated operating companies in the US and the UK (and one intermediate UK holding company), are subject to certain restrictions on the payment of dividends by administrative order, contract and/or licence. The types of restrictions that a company may have that would prevent a dividend being declared or paid unless they are met include:
| ● | dividends must be approved in advance by the relevant US state regulatory commission; |
| ● | the subsidiary must have at least two recognised rating agency credit ratings of at least investment grade; |
| ● | dividends must be limited to cumulative retained earnings, including pre-acquisition retained earnings; |
| ● | National Grid plc must maintain an investment grade credit rating and if that rating is the lowest investment grade bond rating it cannot have a negative watch/review for downgrade notice by a credit rating agency; |
| ● | the subsidiary must not carry on any activities other than those permitted by the licences; |
| ● | the subsidiary must not create any cross-default obligations or give or receive any intra-group cross-subsidies; and |
| ● | the percentage of equity compared with total capital of the subsidiary must remain above certain levels. |
There is a further restriction relating only to the Narragansett Electric Company, which is required to maintain its consolidated net worth above certain levels.
These restrictions are subject to alteration in the US as and when a new rate case or rate plan is agreed with the relevant regulatory bodies for each operating company and in the UK through the normal licence review process.
As most of our business is regulated, at 31 March 2016 the majority of our net assets are subject to some of the restrictions noted above. These restrictions are not considered to be significantly onerous, nor do we currently expect they will prevent the planned payment of dividends in future in line with our dividend policy.
Some of our regulatory and bank loan agreements additionally impose lower limits for the long-term credit ratings that certain companies within the Group must hold. All the above requirements are monitored on a regular basis in order to ensure compliance. The Company has complied with all externally imposed capital requirements to which it is subject.
(g) Fair value analysis
The financial instruments included on the statement of financial position are measured at fair value. These fair values can be categorised into hierarchy levels that are representative of the inputs used in measuring the fair value. The best evidence of fair value is a quoted price in an actively traded market. In the event that the market for a financial instrument is not active, a valuation technique is used.
| 2016 | 2015 | |||||||||||||||||||||||||||||||||
| Level 1 £m | Level 2 £m | Level 3 £m | Total £m | Level 1 £m | Level 2 £m | Level 3 £m | Total £m | |||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||
Available-for-sale investments | 2,040 | 393 | – | 2,433 | 1,315 | 247 | – | 1,562 | ||||||||||||||||||||||||||
Derivative financial instruments | – | 1,945 | 18 | 1,963 | – | 1,702 | 14 | 1,716 | ||||||||||||||||||||||||||
Commodity contracts | – | 5 | 27 | 32 | – | 22 | 42 | 64 | ||||||||||||||||||||||||||
| 2,040 | 2,343 | 45 | 4,428 | 1,315 | 1,971 | 56 | 3,342 | |||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||
Derivative financial instruments | – | (1,855 | ) | (214 | ) | (2,069 | ) | – | (2,219 | ) | (180 | ) | (2,399 | ) | ||||||||||||||||||||
Commodity contracts | – | (81 | ) | (54 | ) | (135 | ) | – | (87 | ) | (84 | ) | (171 | ) | ||||||||||||||||||||
| – | (1,936 | ) | (268 | ) | (2,204 | ) | – | (2,306 | ) | (264 | ) | (2,570 | ) | |||||||||||||||||||||
| 2,040 | 407 | (223 | ) | 2,224 | 1,315 | (335 | ) | (208 | ) | 772 | ||||||||||||||||||||||||
| Level 1: | Financial instruments with quoted prices for identical instruments in active markets. | |
| Level 2: | Financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are based directly or indirectly on observable market data. | |
| Level 3: | Financial instruments valued using valuation techniques where one or more significant inputs are based on unobservable market data. | |
30. Financial risk management continued
(e) Commodity riskcontinued The fair value of our commodity contracts by type can be analysed as follows:
|
| |||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||||
| Assets £m | Liabilities £m | Total £m | Assets £m | Liabilities £m | Total £m | |||||||||||||||||||||
| ||||||||||||||||||||||||||
Commodity purchase contracts accounted for as derivative contracts | ||||||||||||||||||||||||||
Forward purchases of electricity | 1 | (49 | ) | (48) | – | (89) | (89) | |||||||||||||||||||
Forward purchases of gas | 30 | (66 | ) | (36) | 46 | (45) | 1 | |||||||||||||||||||
Derivative financial instruments linked to commodity prices | ||||||||||||||||||||||||||
Electricity swaps | 26 | (6 | ) | 20 | 16 | (1) | 15 | |||||||||||||||||||
Electricity options | 22 | – | 22 | 16 | – | 16 | ||||||||||||||||||||
Gas swaps | 7 | (2 | ) | 5 | 10 | (4) | 6 | |||||||||||||||||||
Gas options | 1 | – | 1 | 1 | – | 1 | ||||||||||||||||||||
| ||||||||||||||||||||||||||
| 87 | (123 | ) | (36) | 89 | (139) | (50) | ||||||||||||||||||||
| ||||||||||||||||||||||||||
| The maturity profile of commodity contracts is as follows: | ||||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||||
Assets £m | Liabilities £m | Total £m | Assets £m | Liabilities £m | Total £m | |||||||||||||||||||||
| ||||||||||||||||||||||||||
Less than one year | 42 | (77 | ) | (35) | 42 | (69) | (27) | |||||||||||||||||||
| ||||||||||||||||||||||||||
Current | 42 | (77 | ) | (35) | 42 | (69) | (27) | |||||||||||||||||||
| ||||||||||||||||||||||||||
In 1-2 years | 13 | (22 | ) | (9) | 13 | (23) | (10) | |||||||||||||||||||
In 2-3 years | 15 | (17 | ) | (2) | 10 | (23) | (13) | |||||||||||||||||||
In 3-4 years | 4 | (7 | ) | (3) | 14 | (16) | (2) | |||||||||||||||||||
In 4-5 years | 3 | – | 3 | 2 | (8) | (6) | ||||||||||||||||||||
More than 5 years | 10 | – | 10 | 8 | – | 8 | ||||||||||||||||||||
| ||||||||||||||||||||||||||
Non-current | 45 | (46 | ) | (1) | 47 | (70) | (23) | |||||||||||||||||||
| ||||||||||||||||||||||||||
Total | 87 | (123 | ) | (36) | 89 | (139) | (50) | |||||||||||||||||||
| ||||||||||||||||||||||||||
For each class of commodity contract, our exposure based on the notional quantities is as follows:
|
| |||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||||
| ||||||||||||||||||||||||||
Forward purchases of electricity1 | 1,740 GWh | 2,595 GWh | ||||||||||||||||||||||||
Forward purchases/sales of gas2 | 84m Dth | 59m Dth | ||||||||||||||||||||||||
Electricity swaps | 6,603 GWh | 6,309 GWh | ||||||||||||||||||||||||
Electricity options | 28,760 GWh | 32,999 GWh | ||||||||||||||||||||||||
Gas swaps | 50m Dth | 66m Dth | ||||||||||||||||||||||||
Gas options | 23m Dth | 4m Dth | ||||||||||||||||||||||||
NYMEX gas futures3 | 20m Dth | 17m Dth | ||||||||||||||||||||||||
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1. |
Forward electricity purchases have terms up to four years. The contractual obligations under these contracts are £106m (2013: £174m). |
| ||||||||||||||||||||||||
| 2. | Forward gas purchases have terms up to five years. The contractual obligations under these contracts are £171m (2013: £119m). | |||||||||||||||||||||||||
| 3. | NYMEX gas futures have been offset with related margin accounts (see note 30 (a) on page 137). | |||||||||||||||||||||||||
(f) Capital risk management 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 maintain or adjust the capital structure as appropriate in order to achieve these objectives.
Maintaining appropriate credit ratings for our regulated companies is an important aspect of our capital risk management strategy and balance sheet efficiency. We monitor our balance sheet efficiency using several metrics including our interest cover. Interest cover for the year ended 31 March 2014 was 4.1 (2013: 3.9). Our long-term target range for interest cover is greater than 3.0, which we believe is consistent with single A range long-term senior unsecured debt credit ratings within our main UK operating companies, NGET and NGG, based on guidance from the rating agencies.
In addition, we monitor the RAV gearing within each of NGET and the regulated transmission and distribution businesses within NGG. This is calculated as net debt expressed as a percentage of RAV, and indicates the level of debt employed to fund our UK regulated businesses. It is compared with the level of RAV gearing indicated by Ofgem as being appropriate for these businesses, at around 60-65%.
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| 154 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
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30. Financial risk management continued
(f) Capital risk management continued The majority of our regulated operating companies in the US and the UK (and one intermediate UK holding company), which are all consolidated subsidiaries of National Grid, are subject to certain restrictions on the payment of dividends by administrative order (by regulators relevant to the individual company), contract and/or licence. The types of restrictions that a company may have that would prevent a dividend being declared or paid unless they are met include:
| ||||||||||||||||||||
— dividends must be approved in advance by the relevant US state regulatory commission; | ||||||||||||||||||||
— the subsidiary must have at least two recognised rating agency credit ratings of at least investment grade; | ||||||||||||||||||||
— dividends must be limited to cumulative retained earnings, including pre-acquisition retained earnings; | ||||||||||||||||||||
— National Grid plc must maintain an investment grade credit rating and if that rating is the lowest investment grade bond rating it cannot have a negative watch/review 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 2014 the majority of our net assets are subject to some of the restrictions noted above. These restrictions are not considered to be significantly onerous, nor do we currently expect they will prevent the planned payment of dividends in future in line with our dividend policy.
Some of our regulatory and bank loan agreements additionally impose lower limits for the long-term credit ratings that certain companies within the Group must hold. All the above requirements are monitored on a regular basis in order to ensure compliance. The Company has complied with all externally imposed capital requirements to which it is subject.
(g) Fair value analysis The financial instruments included on the statement of financial position are measured at fair value. These fair values can be categorised into hierarchy levels that are representative of the inputs used in measuring the fair value. The best evidence of fair value is a quoted price in an actively traded market. In the event that the market for a financial instrument is not active, a valuation technique is used.
| ||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||
Level 1 £m | Level 2 £m | Level 3 £m | Total £m | Level 1 £m | Level 2 £m | Level 3 £m | Total £m | |||||||||||||
| ||||||||||||||||||||
| Assets | ||||||||||||||||||||
Available-for-sale investments | 2,786 | 214 | – | 3,000 | 4,510 | 209 | – | 4,719 | ||||||||||||
Derivative financial instruments | – | 1,950 | 20 | 1,970 | – | 2,197 | 48 | 2,245 | ||||||||||||
Commodity contracts | – | 34 | 53 | 87 | – | 26 | 63 | 89 | ||||||||||||
| ||||||||||||||||||||
| 2,786 | 2,198 | 73 | 5,057 | 4,510 | 2,432 | 111 | 7,053 | |||||||||||||
| ||||||||||||||||||||
| Liabilities | ||||||||||||||||||||
Derivative financial instruments | – | (1,043) | (120) | (1,163) | – | (1,529) | (152) | (1,681) | ||||||||||||
Commodity contracts | – | (12) | (111) | (123) | – | (5) | (134) | (139) | ||||||||||||
| ||||||||||||||||||||
| – | (1,055) | (231) | (1,286) | – | (1,534) | (286) | (1,820) | |||||||||||||
| ||||||||||||||||||||
Total | 2,786 | 1,143 | (158) | 3,771 | 4,510 | 898 | (175) | 5,233 | ||||||||||||
| ||||||||||||||||||||
Level 1: |
Financial instruments with quoted prices for identical instruments in active markets. | |||||||||||||||||||
Level 2: |
Financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are based directly or indirectly on observable market data. | |||||||||||||||||||
Level 3: |
Financial instruments valued using valuation techniques where one or more significant inputs are based on unobservable market data.
| |||||||||||||||||||
| Financial Statements | |||||||||||
30. Financial risk managementcontinued
(g) Fair value analysiscontinued
Our level 3 derivative financial instruments include cross-currency swaps, inflation linked swaps and equity options, all of which are traded on illiquid markets. In valuing these instruments a third-party valuation is obtained to support each reported fair value.
Our level 3 commodity contracts primarily consist of our forward purchases of electricity and gas where pricing inputs are unobservable, as well as other complex transactions. Complex transactions can introduce the need for internally developed models based on reasonable assumptions. Industry standard valuation techniques such as the Black-Scholes pricing model and Monte Carlo simulation are used for valuing such instruments. Level 3 is also applied in cases when optionality is present or where an extrapolated forward curve is considered unobservable. All published forward curves are verified to market data; if forward curves differ from market data by 5% or more they are considered unobservable.
The changes in value of our level 3 derivative financial instruments are as follows:
| Derivative financial instruments | Commodity contracts | Total | ||||||||||||||||||||||||||
|
| 2016 £m |
|
| 2015 £m |
|
| 2016 £m |
|
| 2015 £m |
|
| 2016 £m |
|
| 2015 £m |
| |||||||||||
At 1 April | (166 | ) | (100 | ) | (42 | ) | (58 | ) | (208 | ) | (158 | ) | ||||||||||||||||
Net gains/(losses) for the year1,2 | (20 | ) | (63 | ) | (27 | ) | (53 | ) | (47 | ) | (116 | ) | ||||||||||||||||
Purchases3 | 1 | – | 13 | 38 | 14 | 38 | ||||||||||||||||||||||
Settlements | (11 | ) | (3 | ) | 29 | 28 | 18 | 25 | ||||||||||||||||||||
Reclassification/transfers out of level 3 | – | – | – | 3 | – | 3 | ||||||||||||||||||||||
At 31 March | (196 | ) | (166 | ) | (27 | ) | (42 | ) | (223 | ) | (208 | ) | ||||||||||||||||
1. Loss of £17m (2015: £63m loss) is attributable to derivative financial instruments held at the end of the reporting period and has been recognised in finance costs in the income statement.
2. Loss of £28m (2015: £48m loss) is attributable to commodity contract financial instruments held at the end of the reporting period.
3. Purchases in the year relate to equity options.
The impacts on a post-tax basis of reasonably possible changes in significant level 3 assumptions are as follows:
| Derivative financial instruments | Commodity contracts | |||||||||||||||||
2016 Income statement | 2015 Income statement | 2016 Income statement £m | 2015 Income statement £m | |||||||||||||||
10% increase in commodity prices1 | – | – | 4 | 4 | ||||||||||||||
10% decrease in commodity prices1 | – | – | – | (3 | ) | |||||||||||||
Volume forecast uplift2 | – | – | (1 | ) | (2 | ) | ||||||||||||
Volume forecast reduction2 | – | – | 1 | 2 | ||||||||||||||
+10% market area price change | – | – | (2 | ) | (4 | ) | ||||||||||||
–10% market area price change | – | – | 2 | 4 | ||||||||||||||
+20 basis point change in Limited Price Inflation (LPI) market curve3 | (83 | ) | (77 | ) | – | – | ||||||||||||
–20 basis points change in LPI market curve3 | 80 | 75 | – | – | ||||||||||||||
1. Level 3 commodity price sensitivity is included within the sensitivity analysis disclosed in note 33.
2. Volumes were flexed using maximum and minimum historical averages, or by >10% where historical averages were not available.
3. A reasonably possible change in assumption of other level 3 derivative financial instruments is unlikely to result in a material change in fair values.
The impacts disclosed above were considered on a contract by contract basis with the most significant unobservable inputs identified.
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 155 |
Notes to the consolidated financial statements
– supplementary information continued
financial statements31. Borrowing facilitiescontinued
To support our long-term liquidity requirements and provide backup to commercial paper and other borrowings, we agree loan facilities with financial institutions over and above the value of borrowings that may be required. These facilities have never been drawn, and our undrawn amounts are listed below. |
At 31 March 2016, we had bilateral committed credit facilities of £2,808m (2015: £2,094m). In addition, we had committed credit facilities from syndicates of banks of £295m at 31 March 2016 (2015: £884m). All committed credit facilities were undrawn in 2016 and 2015. An analysis of the maturity of these undrawn committed facilities is shown below:
2016 £m | 2015 £m | |||||||
Undrawn committed borrowing facilities expiring: | ||||||||
Less than 1 year | – | 572 | ||||||
In 1 to 2 years | – | – | ||||||
In 2 to 3 years | 1,115 | 874 | ||||||
In 3 to 4 years | 295 | 1,220 | ||||||
In 4 to 5 years | – | 312 | ||||||
More than 5 years | 1,693 | – | ||||||
| 3,103 | 2,978 | |||||||
Of the unused facilities at 31 March 2016, £2,808m (2015: £2,666m) was held as backup to commercial paper and similar borrowings, while £295m (2015: £312m) is available as backup to specific US borrowings.
In addition to the above, the Group has a bank loan agreement totalling £1,500m with the European Investment Bank (EIB), of which £900m is currently undrawn, and an Export Credit Agreement (ECA) totalling £162m, which is undrawn.
Further information on our bonds can be found on the debt investor section of our website.
30. Financial risk managementcontinued
(g) Fair value analysis continued Our level 3 derivative financial instruments include cross-currency swaps with an embedded call option, currency swaps where the currency forward curve is illiquid and inflation linked swaps where the inflation curve is illiquid. In valuing these instruments a third-party valuation is obtained to support each reported fair value.
Our level 3 commodity contracts primarily consist of our forward purchases of electricity and gas where pricing inputs are unobservable, as well as other complex transactions. Complex transactions can introduce the need for internally developed models based on reasonable assumptions. Industry standard valuation techniques such as the Black-Scholes pricing model and Monte Carlo simulation are used for valuing such instruments. Level 3 is also applied in cases when optionality is present or where an extrapolated forward curve is considered unobservable. All published forward curves are verified to market data; if forward curves differ from market data by 5% or more they are considered unobservable.
The changes in value of our level 3 derivative financial instruments are as follows:
|
| |||||||||||||||||||||
Derivative financial instruments | Commodity contracts | Total | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||
| 2014 Level 3 valuation £m | 2013 Level 3 valuation £m | 2014 Level 3 valuation £m | 2013 Level 3 valuation £m | 2014 Level 3 valuation £m | 2013 Level 3 valuation £m | |||||||||||||||||
| ||||||||||||||||||||||
At 1 April | (104 | ) | (180) | (71 | ) | (140) | (175 | ) | (320) | |||||||||||||
Net gains/(losses) for the year1,2 | 7 | 79 | 19 | 45 | 26 | 124 | ||||||||||||||||
Purchases | – | – | 1 | (14) | 1 | (14) | ||||||||||||||||
Settlements | (3 | ) | (3) | (7 | ) | 39 | (10 | ) | 36 | |||||||||||||
Reclassification out of level 3 | – | – | – | (1) | – | (1) | ||||||||||||||||
| ||||||||||||||||||||||
At 31 March | (100 | ) | (104) | (58 | ) | (71) | (158 | ) | (175) | |||||||||||||
| ||||||||||||||||||||||
1. Gain of £7m (2013: £79m gain) is attributable to derivative financial instruments held at the end of the reporting period. 2. Loss of £30m (2013: £51m gain) is attributable to commodity contract financial instruments held at the end of the reporting period.
In 2014 the transfers out of level 3 were immaterial.
The impacts on a post-tax basis of reasonably possible changes in significant level 3 assumptions are as follows:
|
| |||||||||||||||||||||
Derivative financial instruments | Commodity contracts | |||||||||||||||||||||
|
|
|
| |||||||||||||||||||
| 2014 Income statement £m | 2013 Income statement £m | 2014 Income statement £m | 2013 Income statement £m | |||||||||||||||||||
| ||||||||||||||||||||||
10% increase in commodity prices1 | – | – | 33 | 40 | ||||||||||||||||||
10% decrease in commodity prices1 | – | – | (15 | ) | (23) | |||||||||||||||||
Volume forecast uplift2 | – | – | (2 | ) | (4) | |||||||||||||||||
Volume forecast reduction2 | – | – | 2 | 4 | ||||||||||||||||||
Forward curve extrapolation | – | – | 1 | – | ||||||||||||||||||
+20 basis point change in LPI market curve3 | (54 | ) | (62) | – | – | |||||||||||||||||
–20 basis point change in LPI market curve3 | 53 | 60 | – | – | ||||||||||||||||||
| ||||||||||||||||||||||
1. Level 3 commodity price sensitivity is included within the sensitivity analysis disclosed in note 33 on page 147. 2. Volumes were flexed using maximum and minimum historical averages, or by >10% where historical averages were not available. 3. A reasonably possible change in assumption of other level 3 derivative financial instruments is unlikely to result in a material change in fair values.
The impacts disclosed above were considered on a contract by contract basis with the most significant unobservable inputs identified.
|
| |||||||||||||||||||||
| 156 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
|
|
|
|
|
To support our long-term liquidity requirements and provide backup to commercial paper and other borrowings, we agree loan facilities with financial institutions over and above the value of borrowings that may be required. These facilities have never been drawn, and our undrawn amounts are listed below.
| ||||||||
At 31 March 2014, we had bilateral committed credit facilities of £2,073m (2013: £2,009m). In addition, we had committed credit facilities from syndicates of banks of £800m at 31 March 2014 (2013: £877m). All committed credit facilities were undrawn in 2014 and 2013. An analysis of the maturity of these undrawn committed facilities is shown below:
| ||||||||
2014 £m | 2013 £m | |||||||
| ||||||||
Undrawn committed borrowing facilities expiring: | ||||||||
Less than 1 year | – | – | ||||||
In 1-2 years | 800 | 1,140 | ||||||
In 2-3 years | – | 877 | ||||||
In 3-4 years | 853 | – | ||||||
In 4-5 years | 1,220 | 869 | ||||||
| ||||||||
| 2,873 | 2,886 | |||||||
| ||||||||
Of the unused facilities at 31 March 2014, £2,583m (2013: £2,568m) was held as backup to commercial paper and similar borrowings, while £290m (2013: £318m) is available as backup to specific US borrowings.
Further information on our bonds can be found on the debt investor section of our website. | ||||||||
| ||||||||||||
Financial Statements
|
Subsidiary undertakings A list of the Group’s subsidiaries as at 31 March 2016 is given below. The entire share capital of subsidiaries is held within the Group except where the Group’s ownership percentages are shown. These percentages give the Group’s ultimate interest and therefore allow for the situation where subsidiaries are owned by partly-owned intermediate subsidiaries. Where subsidiaries have different classes of shares, this is largely for historical reasons and the effective percentage holdings given represent both the Group’s voting rights and equity holding. Shares in National Grid (US) Holdings Limited, National Grid Holdings One plc and NGG Finance plc are held directly by National Grid plc. All other holdings in subsidiaries are owned by other subsidiaries of the National Grid plc Group. All subsidiaries are consolidated in the Group’s financial statements. Principal Group companies are identified inbold. These companies are incorporated and principally operate in the countries under which they are shown.
– supplementary information continued
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32. Subsidiary undertakings, joint ventures and associatescontinued Incorporated in the US Boston Gas Company British Transco Capital Inc. British Transco Finance, Inc. Broken Bridge Corp. Colonial Gas Company EUA Energy Investment Corporation GridAmerica Holdings Inc. Grid NY LLC KeySpan CI Midstream Limited KeySpan Corporation KeySpan Energy Corporation KeySpan Energy Services Inc. KeySpan Gas East Corporation KeySpan International Corporation KeySpan MHK, Inc. KeySpan Midstream, Inc. KeySpan Plumbing Solutions, Inc. KSI Contracting, LLC KSI Electrical, LLC KSI Mechanical, LLC Land Management & Development, Inc. Landwest, Inc. Massachusetts Electric Company Metro Energy L.L.C. Metrowest Realty LLC Mystic Steamship Corporation Nantucket Electric Company National Grid | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Algonquin LLC National Grid National Grid Electric Services LLC National Grid Energy Management LLC National Grid Energy Services LLC National Grid Energy Trading Services LLC National Grid Engineering & Survey Inc. National Grid Generation LLC National Grid Generation Ventures LLC National Grid Glenwood Energy Center LLC National Grid IGTS Corp. National Grid Insurance USA Ltd National Grid Islander East Pipeline LLC National Grid LNG GP LLC National Grid LNG LLC National Grid LNG LP LLC National Grid Millennium LLC National Grid NE Holdings 2 LLC National Grid North America Inc. National Grid North East Ventures Inc. National Grid Port Jefferson Energy Center LLC National Grid Services, Inc. National Grid Technologies Inc. National Grid Transmission | Services Corporation National Grid US LLC National Grid US 6 LLC National Grid USA National Grid USA Service Company, Inc. Nees Energy, Inc. New England Electric Transmission | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporation New England Energy Incorporated New England Hydro Finance Company, Inc. (53.704%) New England Hydro-Transmission Corporation (53.704%) New England Hydro-Transmission Electric Company, Inc. (53.704%) New England Power Company | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Newport America Corporation NGNE LLC Niagara Mohawk Energy, Inc. Niagara Mohawk Holdings, Inc. Niagara Mohawk Power Corporation | NM Properties, Inc. North East Transmission Co., Inc. Opinac North America, Inc. Philadelphia Coke Co., Inc. Port of | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The Brooklyn Union Gas Company | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The Narragansett Electric Company Transgas Inc. Upper Hudson Development Inc. Valley Appliance and Merchandising Company Wayfinder Group, Inc. Incorporated in Australia National Grid | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Incorporated in Canada Keyspan Energy Development Co. Incorporated in the Cayman Islands British Transco Finance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (No 1) Limited** British Transco Finance (No 2) Limited** Keyspan C.I. II Ltd** Keyspan C.I. Ltd** NGT Five Limited** NGT Four Limited** Incorporated in Chile Inversiones ABC Limitada (98.84%) SCC Uno S.A. Incorporated in the Isle of Man Lattice Telecom Finance (No 1) Limited** National Grid (IOM) UK Ltd** National Grid Insurance Company (Isle of Man) Limited NGT Holding Company (Isle of Man) Limited Incorporated in Jersey National Grid Jersey Investments Limited NG Jersey Limited Incorporated in the Netherlands British Transco International Finance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
B.V.
| National Grid Holdings B.V. Incorporated in the | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
National Grid (Ireland) 1** National Grid (Ireland) 2** National Grid Insurance Company (Ireland) Designated Activity Company *Dissolved 14 April 2016 **In liquidation
Joint ventures A list of the Group’s joint ventures
Associates A list of the Group’s associates as at 31 March
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| Incorporated in the US | Incorporated in Belgium | |||||||||||
| Algonquin Gas Transmission LLC (20%) | Coreso SA (20%) | |||||||||||
| Clean Line Energy Partners LLC (32%) | ||||||||||||
| Connecticut Yankee Atomic Power Company (19.5%) | ||||||||||||
| Direct Global Power, Inc. (26%) | ||||||||||||
| Energis plc (33.06%) | ||||||||||||
| Energy Impact Fund LP (33%) | ||||||||||||
| Maine Yankee Atomic Power Company (24%) | ||||||||||||
| Millennium Pipeline Company LLC (26.25%) | ||||||||||||
| New York Transco LLC (28.3%) | ||||||||||||
| Nysearch RMLD LLC (22.63%) | ||||||||||||
| Yankee Atomic Electric Company (34.5%) | ||||||||||||
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Our interests and activities are held or operated through the subsidiaries, branches, 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.
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 159 |
Notes to the consolidated financial statements
– supplementary information continued
33. Sensitivities on areas of estimation and uncertainty
In order to give a clearer picture of the impact on our results or financial position of potential changes in significant estimates and assumptions, the following sensitivities are presented. These sensitivities are hypothetical, as they are based on assumptions and conditions prevailing at the year end, and should be used with caution. The effects provided are not necessarily indicative of the actual effects that would be experienced because our actual exposures are constantly changing. |
The sensitivities in the tables below show the potential impact in the income statement (and consequential impact on net assets) for a range of different variables each of which have been considered in isolation (i.e. with all other variables remaining constant). There are a number of different jurisdictions.these sensitivities which are mutually exclusive and therefore if one were to happen, another would not, meaning a total showing how sensitive our results are to these external factors is not meaningful.
We are further required to show additional sensitivity analysis for changes in interest and exchange rates and these are shown separately in the subsequent table due to the additional assumptions that are made in order to produce meaningful sensitivity disclosures.
The sensitivities included in the tables below all have an equal and opposite effect if the sensitivity increases or decreases by the same amount unless otherwise stated. For example, a 10% increase in unbilled revenue at 31 March 2016 would result in an increase in the income statement of £58m and a 10% decrease in unbilled revenue would have the equal but opposite effect.
| 2016 | 2015 | |||||||||||||||||
| Income statement £m | Net assets £m | Income statement £m | Net assets £m | |||||||||||||||
One year average change in useful economic lives (pre-tax): | ||||||||||||||||||
Depreciation charge on property, plant and equipment | 79 | 79 | 69 | 69 | ||||||||||||||
Amortisation charge on intangible assets | 20 | 20 | 26 | 26 | ||||||||||||||
Estimated future cash flows in respect of provisions, change of 10% (pre-tax) | 172 | 172 | 174 | 174 | ||||||||||||||
Assets and liabilities carried at fair value change of 10% (pre-tax): | ||||||||||||||||||
Derivative financial instruments1 | (11) | (11 | ) | 68 | 68 | |||||||||||||
Commodity contract liabilities | (10) | (10 | ) | 11 | 11 | |||||||||||||
Pensions and other post-retirement benefits2 (pre-tax): | ||||||||||||||||||
UK discount rate change of 0.5%3 | 11 | 1,482 | 9 | 1,575 | ||||||||||||||
US discount rate change of 0.5%3 | 16 | 640 | 12 | 670 | ||||||||||||||
UK RPI rate change of 0.5%4 | 9 | 1,268 | 9 | 1,349 | ||||||||||||||
UK long-term rate of increase in salaries change of 0.5%5 | 2 | 87 | 1 | 93 | ||||||||||||||
US long-term rate of increase in salaries change of 0.5% | 3 | 45 | 2 | 42 | ||||||||||||||
UK change of one year to life expectancy at age 65 | 2 | 703 | 1 | 620 | ||||||||||||||
US change of one year to life expectancy at age 65 | 3 | 295 | 3 | 352 | ||||||||||||||
Assumed US healthcare cost trend rates change of 1% | 35 | 514 | 28 | 465 | ||||||||||||||
Unbilled revenue at 31 March change of 10% (post-tax) | 58 | 58 | 60 | 60 | ||||||||||||||
No hedge accounting for our derivative financial instruments (post-tax) | (123) | 36 | (611) | 316 | ||||||||||||||
Commodity risk6 (post-tax): | ||||||||||||||||||
10% increase in commodity prices | 22 | 22 | 26 | 26 | ||||||||||||||
10% decrease in commodity prices | (22) | (22 | ) | (24) | (24 | ) | ||||||||||||
| 1. | The effect of a 10% change in fair value assumes no hedge accounting. | ||
| 2. | The changes shown are a change in the annual pension or other post-retirement benefit service charge and change in the defined benefit obligations. |
| 3. | A change in the discount rate is likely to occur as a result of changes in bond yields and as such would be expected to be offset to a significant degree by a change in the value of the bond assets held by the plans. |
| 4. | The projected impact resulting from a change in RPI reflects the underlying effect on pensions in payment, pensions in deferment and resultant increases in salary assumptions. |
| 5. | This change has been applied to both the pre 1 April 2014 and post 1 April 2014 rate of increase in salary assumption. |
| 6. | Represents potential impact on fair values of commodity contracts only. |
| 2016 | 2015 | |||||||||||||||||
| Income statement £m | Other equity reserves £m | Income statement £m | Other equity reserves £m | |||||||||||||||
Financial risk (post-tax): | ||||||||||||||||||
UK RPI change of 0.5%1 | 31 | – | 27 | – | ||||||||||||||
UK interest rates change of 0.5% | 76 | 85 | 92 | 101 | ||||||||||||||
US interest rates change of 0.5% | 66 | 17 | 77 | 11 | ||||||||||||||
US dollar exchange rate change of 10%2 | 57 | 553 | 62 | 607 | ||||||||||||||
| 1. | Excludes sensitivities to LPI curve. Further details on sensitivities are provided in note 30(g). |
| 2. | The other equity reserves impact does not reflect the exchange translation in our US subsidiaries’ net assets. It is estimated this would change by £788m (2015: £771m) in the opposite direction if the dollar exchange rate changed by 10%. |
| 160 | National Grid Annual Report and Accounts 2015/16 | |||||||||||||
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| Financial Statements |
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Financial Statements |
| 33.Sensitivities on areas of estimation and uncertainty | ||||||||||||||
In order to give a clearer picture of the impact on our results or financial position of potential changes in significant estimates and assumptions, the following sensitivities are presented. These sensitivities are hypothetical, as they are based on assumptions and conditions prevailing at the year end, and should be used with caution. The effects provided are not necessarily indicative of the actual effects that would be experienced because our actual exposures are constantly changing.
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The sensitivities in the table below show the potential impact in the income statement (and consequential impact on net assets) for a range of different variables which each have been considered in isolation (ie with all other variables remaining constant). There are a number of these sensitivities which are mutually exclusive and therefore if one were to happen, another would not, meaning a total showing how sensitive our results are to these external factors is not meaningful.
We are further required to show additional sensitivity analysis for changes in interest and exchange rates and these are shown separately in the table below due to the additional assumptions that are made in order to produce meaningful sensitivity disclosures.
The sensitivities included in the table below all have an equal and opposite effect if the sensitivity increases or decreases by the same amount unless otherwise stated. For example a 10% increase in unbilled revenue at 31 March 2014 would result in a decrease in the income statement of £58m and a 10% decrease in unbilled revenue would have the equal but opposite effect.
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Income statement £m | Net assets £m | Income statement £m | Net assets £m | |||||||||||
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One year average change in economic useful lives (pre-tax) | ||||||||||||||
Depreciation charge on property, plant and equipment | 68 | 68 | 68 | 68 | ||||||||||
Amortisation charge on intangible assets | 18 | 18 | 15 | 15 | ||||||||||
Estimated future cash flows in respect of provisions change of 10% (pre-tax) | 164 | 164 | 176 | 176 | ||||||||||
Assets and liabilities carried at fair value change of 10% (pre-tax) | ||||||||||||||
Derivative financial instruments1 | 81 | 81 | 56 | 56 | ||||||||||
Commodity contract liabilities | 4 | 4 | 5 | 5 | ||||||||||
Pensions and other post-retirement benefits2(pre-tax) | ||||||||||||||
UK discount rate change of 0.5%3 | 13 | 1,347 | 12 | 1,460 | ||||||||||
US discount rate change of 0.5%3 | 15 | 473 | 12 | 568 | ||||||||||
UK RPI rate change of 0.5%4 | 12 | 1,217 | 12 | 1,185 | ||||||||||
UK long-term rate of increase in salaries change of 0.5%5 | 5 | 95 | 5 | 128 | ||||||||||
US long-term rate of increase in salaries change of 0.5%5 | 4 | 39 | 5 | 43 | ||||||||||
UK change of one year to life expectancy at age 65 | 3 | 548 | 3 | 597 | ||||||||||
US change of one year to life expectancy at age 65 | 12 | 220 | 11 | 197 | ||||||||||
Assumed US healthcare cost trend rates change of 1% | 28 | 355 | 29 | 416 | ||||||||||
Unbilled revenue at 31 March change of 10% (post-tax) | 58 | 58 | 77 | 77 | ||||||||||
No hedge accounting for our derivative financial instruments (post-tax) | 350 | (294) | (184) | 106 | ||||||||||
Commodity risk6(post-tax) | ||||||||||||||
Commodity prices +10% | 50 | 50 | 45 | 45 | ||||||||||
Commodity prices –10% | (33) | (33) | (34) | (34) | ||||||||||
Financial risk7(post-tax) | ||||||||||||||
UK RPI rate change of 0.5%8 | 26 | – | 25 | – | ||||||||||
UK interest rates change of 0.5% | 93 | 68 | 98 | 90 | ||||||||||
US interest rates change of 0.5% | 70 | 13 | 87 | 16 | ||||||||||
US dollar exchange rate change of 10% | 55 | 641 | 65 | 600 | ||||||||||
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| 1. | The effect of a 10% change in fair value assumes no hedge accounting. | |||||||||||||
| 2. | The changes shown are a change in the annual pension or other post-retirement benefit costs and change in the defined benefits obligations. | |||||||||||||
| 3. | A change in the discount rate is likely to occur as a result of changes in bond yields and as such would be expected to be offset to a significant degree by a change in the value of the bond assets held by the plans. | |||||||||||||
| 4. | The projected impact resulting from a change in RPI reflects the underlying effect on pensions in payment, pensions in deferment and resultant increases in salary assumptions. | |||||||||||||
| 5. | This change has been applied to both the pre 1 April 2013 and post 1 April 2013 rate of increase in salary assumption. | |||||||||||||
| 6. | Represents potential impact on fair values of commodity contracts only. | |||||||||||||
| 7. | The impact on net assets does not reflect the exchange translation in our US subsidiary net assets. It is estimated this would change by £781m (2013: £712m) in the opposite direction if the dollar exchange rate changed by 10%. | |||||||||||||
| 8. | Excludes sensitivities to LPI index. Further details on sensitivities are provided in note 30 (g) on page 143. | |||||||||||||
| With the adoption of IAS 19 (revised), we have reviewed the pension assumptions that we consider key (as shown on page 136), and as a result have changed the sensitivities presented in the table above. | ||||||||||||||
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33. Sensitivities on areas of estimation and uncertaintycontinued
Pensions and other post-retirement benefits assumptions Sensitivities have been prepared to show how the DB obligations and annual service costs could potentially be impacted by changes in the relevant actuarial
Financial instruments assumptions Our financial instruments are sensitive to changes in market variables, being UK and US interest rates, the UK RPI and the dollar to sterling exchange rate. The changes in market variables The following main assumptions were made in calculating the sensitivity analysis:
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The following condensed consolidating financial information, comprising statements of comprehensive income, statements of financial position and cash flow statements, is given in respect of National Grid Gas plc (subsidiary guarantor), which became joint full and unconditional guarantor on 11 May 2004 with National Grid plc (parent guarantor) of the 6.625% Guaranteed Notes due 2018 issued in June 1998 by British Transco Finance Inc., then known as British Gas Finance Inc. (issuer of notes). Condensed consolidating financial information is also provided in respect of Niagara Mohawk Power Corporation as a result of National Grid plc’s guarantee, dated 29 October 2007, of Niagara Mohawk’s 3.6% and 3.9% issued preferred shares. National Grid Gas plc, British Transco Finance Inc., and Niagara Mohawk Power Corporation are Gas plc and National Grid plc are joint and several. The following financial information for National Grid plc, National Grid Gas plc, British Transco Finance Inc., and Niagara Mohawk Power Corporation on a condensed consolidating basis is intended to provide investors with meaningful and comparable financial information and is provided pursuant to various rules including Rule 3-10 of Regulation S-X in lieu of the separate financial statements of each subsidiary issuer of public debt securities. This financial information should be read in conjunction with the other | |||||||||||||||||||||||||||||||||||||||||||||||||
Summary statements of comprehensive income are presented, on a consolidated basis, for the three years ended 31 March 2016. Summary statements of comprehensive income of National Grid plc and National Grid Gas plc are presented under IFRS measurement principles, as modified by the inclusion of the results of subsidiary undertakings on the basis of equity accounting principles.
The summary statements of financial position of National Grid plc and National Grid Gas plc include the investments in subsidiaries recorded on the basis of equity accounting principles for the purposes of presenting condensed consolidating financial information under IFRS. The summary statements of financial position present these investments within non-current financial and other investments.
The consolidation adjustments column includes the necessary amounts to eliminate the intercompany balances and transactions between National Grid plc, National Grid Gas plc, British Transco Finance Inc., Niagara Mohawk Power Corporation and other subsidiaries.
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34. Additional disclosures in respect of guaranteed securitiescontinued
Summary statements of comprehensive income are presented, on a consolidating basis, for the three years ended 31 March 2014. Summary statements of comprehensive income of National Grid plc and National Grid Gas plc are presented under IFRS measurement principles, as modified by the inclusion of the results of subsidiary undertakings on the basis of equity accounting principles.
The summary statements of financial position of National Grid plc and National Grid Gas plc include the investments in subsidiaries recorded on the basis of equity accounting principles for the purposes of presenting condensed consolidating financial information under IFRS. The summary statements of financial position present these investments within non-current financial and other investments.
The consolidation adjustments column includes the necessary amounts to eliminate the intercompany balances and transactions between National Grid plc, National Grid Gas plc, British Transco Finance Inc., Niagara Mohawk Power Corporation and other subsidiaries.
Summary statements of comprehensive income for the year ended 31 March 2014 – IFRS
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Parent guarantor | Issuer of notes | Subsidiary guarantor | ||||||||||||||||||||||||||
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National Grid plc £m | Niagara Mohawk Power Corporation | British Transco Finance Inc. | National Grid Gas plc £m | Other subsidiaries £m | Consolidation adjustments £m | National Grid consolidated £m | ||||||||||||||||||||||
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Revenue | 4 | 2,185 | – | 3,141 | 9,653 | (174) | 14,809 | |||||||||||||||||||||
Operating costs | ||||||||||||||||||||||||||||
Depreciation and amortisation | – | (127) | – | (529) | (760) | – | (1,416) | |||||||||||||||||||||
Payroll costs | – | (278) | – | (251) | (903) | – | (1,432) | |||||||||||||||||||||
Purchases of electricity | – | (647) | – | – | (817) | – | (1,464) | |||||||||||||||||||||
Purchases of gas | – | (194) | – | (112) | (1,449) | – | (1,755) | |||||||||||||||||||||
Rates and property tax | – | (137) | – | (241) | (585) | – | (963) | |||||||||||||||||||||
Balancing Service Incentive Scheme | – | – | – | – | (872) | – | (872) | |||||||||||||||||||||
Payments to other UK network owners | – | – | – | – | (630) | – | (630) | |||||||||||||||||||||
Other operating costs | 15 | (440) | – | (661) | (1,630) | 174 | (2,542) | |||||||||||||||||||||
| 15 | (1,823) | – | (1,794) | (7,646) | 174 | (11,074) | ||||||||||||||||||||||
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Operating profit | 19 | 362 | – | 1,347 | 2,007 | – | 3,735 | |||||||||||||||||||||
Net finance costs | (128) | (85) | – | (285) | (517) | – | (1,015) | |||||||||||||||||||||
Dividends receivable | – | – | – | – | 600 | (600) | – | |||||||||||||||||||||
Interest in equity accounted affiliates | 2,550 | – | – | 11 | 28 | (2,561) | 28 | |||||||||||||||||||||
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Profit before tax | 2,441 | 277 | – | 1,073 | 2,118 | (3,161) | 2,748 | |||||||||||||||||||||
Taxation | 35 | (97) | – | 3 | (225) | – | (284) | |||||||||||||||||||||
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Profit for the year | 2,476 | 180 | –1 | 1,076 | 1,893 | (3,161) | 2,464 | |||||||||||||||||||||
Amounts recognised in other comprehensive income2 | 235 | (8) | – | 9 | 383 | (384) | 235 | |||||||||||||||||||||
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Total comprehensive income for the year | 2,711 | 172 | – | 1,085 | 2,276 | (3,545) | 2,699 | |||||||||||||||||||||
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Attributable to: | ||||||||||||||||||||||||||||
Equity shareholders | 2,711 | 172 | – | 1,085 | 2,288 | (3,545) | 2,711 | |||||||||||||||||||||
Non-controlling interests | – | – | – | – | (12) | – | (12) | |||||||||||||||||||||
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| 2,711 | 172 | – | 1,085 | 2,276 | (3,545) | 2,699 | ||||||||||||||||||||||
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1. Profit for the year for British Transco Finance Inc. is £nil as interest payable to external bond holders is offset by interest receivable on loans to National Grid Gas plc. 2. Includes other comprehensive income relating to interest in equity accounted affiliates. | ||||||||||||||||||||||||||||
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34. Additional disclosures in respect of guaranteed securitiescontinued Summary statements of comprehensive income for the year ended 31 March 2013 – IFRS
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Parent guarantor | Issuer of notes | Subsidiary guarantor | ||||||||||||||||||||||||||
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National Grid plc (restated)1 £m | Niagara Mohawk Power Corporation (restated)1 £m | British Transco Finance Inc. (restated)1 £m | National Grid Gas plc (restated)1 £m | Other subsidiaries (restated)1 £m | Consolidation adjustments (restated)1 £m | National Grid consolidated (restated)1 £m | ||||||||||||||||||||||
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Revenue | – | 2,129 | – | 3,062 | 9,345 | (177) | 14,359 | |||||||||||||||||||||
Operating costs | ||||||||||||||||||||||||||||
Depreciation and amortisation | – | (119) | – | (511) | (731) | – | (1,361) | |||||||||||||||||||||
Payroll costs | – | (276) | – | (238) | (942) | – | (1,456) | |||||||||||||||||||||
Purchases of electricity | – | (561) | – | – | (579) | – | (1,140) | |||||||||||||||||||||
Purchases of gas | – | (151) | – | (128) | (1,036) | – | (1,315) | |||||||||||||||||||||
Rates and property tax | – | (141) | – | (235) | (593) | – | (969) | |||||||||||||||||||||
Balancing Service Incentive Scheme | – | – | – | – | (805) | – | (805) | |||||||||||||||||||||
Payments to other UK network owners | – | – | – | – | (487) | – | (487) | |||||||||||||||||||||
Other operating costs | – | (357) | – | (579) | (2,318) | 177 | (3,077) | |||||||||||||||||||||
| – | (1,605) | – | (1,691) | (7,491) | 177 | (10,610) | ||||||||||||||||||||||
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Operating profit | – | 524 | – | 1,371 | 1,854 | – | 3,749 | |||||||||||||||||||||
Net finance costs | (181) | (88) | – | (274) | (513) | – | (1,056) | |||||||||||||||||||||
Dividends receivable | – | – | – | – | 1,900 | (1,900) | – | |||||||||||||||||||||
Interest in equity accounted affiliates | 2,295 | – | – | 8 | 18 | (2,303) | 18 | |||||||||||||||||||||
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Profit before tax | 2,114 | 436 | – | 1,105 | 3,259 | (4,203) | 2,711 | |||||||||||||||||||||
Taxation | 39 | (168) | – | (174) | (254) | – | (557) | |||||||||||||||||||||
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Profit for the year | 2,153 | 268 | –2 | 931 | 3,005 | (4,203) | 2,154 | |||||||||||||||||||||
Amounts recognised in other comprehensive income3 | (381) | (35) | – | 3 | (353) | 385 | (381) | |||||||||||||||||||||
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Total comprehensive income for the year | 1,772 | 233 | – | 934 | 2,652 | (3,818) | 1,773 | |||||||||||||||||||||
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Attributable to: | ||||||||||||||||||||||||||||
Equity shareholders | 1,772 | 233 | – | 934 | 2,651 | (3,818) | 1,772 | |||||||||||||||||||||
Non-controlling interests | – | – | – | – | 1 | – | 1 | |||||||||||||||||||||
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| 1,772 | 233 | – | 934 | 2,652 | (3,818) | 1,773 | ||||||||||||||||||||||
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1. See note 1 on page 92. 2. Profit for the year for British Transco Finance Inc. is £nil as interest payable to external bond holders is offset by interest receivable on loans to National Grid Gas plc. 3. Includes other comprehensive income relating to interest in equity accounted affiliates.
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34. Additional disclosures in respect of guaranteed securitiescontinued Summary statements of comprehensive income for the year ended 31 March 2012 – IFRS
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| Parent guarantor | Issuer of notes | Subsidiary guarantor | ||||||||||||||||||||||||||
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National Grid plc | Niagara Mohawk Power Corporation (restated)1 £m | British £m | National Grid Gas plc | Other subsidiaries (restated)1 £m | Consolidation adjustments (restated)1 £m | National Grid £m | ||||||||||||||||||||||
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| Revenue | – | 2,269 | – | 2,909 | 8,828 | (174) | 13,832 | |||||||||||||||||||||
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Depreciation and amortisation | – | (115) | – | (491) | (666) | – | (1,272) | |||||||||||||||||||||
Payroll costs | – | (267) | – | (228) | (968) | – | (1,463) | |||||||||||||||||||||
Purchases of electricity | – | (530) | – | – | (915) | – | (1,445) | |||||||||||||||||||||
Purchases of gas | – | (169) | – | (133) | (1,221) | – | (1,523) | |||||||||||||||||||||
Rates and property tax | – | (137) | – | (236) | (582) | – | (955) | |||||||||||||||||||||
Balancing Service Incentive Scheme | – | – | – | – | (818) | – | (818) | |||||||||||||||||||||
Payments to other UK network owners | – | – | – | – | (407) | – | (407) | |||||||||||||||||||||
Other operating costs | 1 | (502) | – | (492) | (1,595) | 174 | (2,414) | |||||||||||||||||||||
| 1 | (1,720) | – | (1,580) | (7,172) | 174 | (10,297) | ||||||||||||||||||||||
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Operating profit | 1 | 549 | – | 1,329 | 1,656 | – | 3,535 | |||||||||||||||||||||
Net finance costs | (133) | (97) | – | (400) | (530) | – | (1,160) | |||||||||||||||||||||
Dividends receivable | – | – | – | – | 350 | (350) | – | |||||||||||||||||||||
Interest in equity accounted affiliates | 2,022 | – | – | 5 | 7 | (2,027) | 7 | |||||||||||||||||||||
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Profit before tax | 1,890 | 452 | – | 934 | 1,483 | (2,377) | 2,382 | |||||||||||||||||||||
Taxation | 27 | (187) | – | (102) | (201) | – | (463) | |||||||||||||||||||||
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Profit for the year | 1,917 | 265 | –2 | 832 | 1,282 | (2,377) | 1,919 | |||||||||||||||||||||
Amounts recognised in other comprehensive income3 | (763) | (33) | – | 9 | (773) | 797 | (763) | |||||||||||||||||||||
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Total comprehensive income for the year | 1,154 | 232 | – | 841 | 509 | (1,580) | 1,156 | |||||||||||||||||||||
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Attributable to: | ||||||||||||||||||||||||||||
Equity shareholders | 1,154 | 232 | – | 841 | 507 | (1,580) | 1,154 | |||||||||||||||||||||
Non-controlling interests | – | – | – | – | 2 | – | 2 | |||||||||||||||||||||
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| 1,154 | 232 | – | 841 | 509 | (1,580) | 1,156 | ||||||||||||||||||||||
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1. See note 1 on page 92. 2. Profit for the year for British Transco Finance Inc. is £nil as interest payable to external bond holders is offset by interest receivable on loans to National Grid Gas plc. 3. Includes other comprehensive income relating to interest in equity accounted affiliates. | ||||||||||||||||||||||||||||
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| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 161 |
Notes to the consolidated financial statements
– supplementary information continued
financial statements34. Additional disclosures in respect of guaranteed securitiescontinued
Summary statements of comprehensive income for the year ended 31 March 2016 – IFRS
| Parent guarantor | Issuer of notes | Subsidiary guarantor | ||||||||||||||||||||||||||||||||||||||
National Grid plc £m | Niagara Mohawk Power Corporation £m | British Transco Finance Inc. £m | National Grid Gas plc £m | Other subsidiaries £m | Consolidation adjustments £m | National Grid consolidated £m | ||||||||||||||||||||||||||||||||||
Revenue | – | 2,027 | – | 3,165 | 10,104 | (181 | ) | 15,115 | ||||||||||||||||||||||||||||||||
Operating costs: | ||||||||||||||||||||||||||||||||||||||||
Depreciation and amortisation | – | (162 | ) | – | (553 | ) | (899 | ) | – | (1,614 | ) | |||||||||||||||||||||||||||||
Payroll costs | – | (260 | ) | – | (269 | ) | (977 | ) | – | (1,506 | ) | |||||||||||||||||||||||||||||
Purchases of electricity | – | (484 | ) | – | – | (828 | ) | – | (1,312 | ) | ||||||||||||||||||||||||||||||
Purchases of gas | – | (86 | ) | – | (92 | ) | (806 | ) | – | (984 | ) | |||||||||||||||||||||||||||||
Rates and property tax | – | (155 | ) | – | (252 | ) | (643 | ) | – | (1,050 | ) | |||||||||||||||||||||||||||||
Balancing Service Incentive Scheme | – | – | – | – | (907 | ) | – | (907 | ) | |||||||||||||||||||||||||||||||
Payments to other UK network owners | – | – | – | – | (971 | ) | – | (971 | ) | |||||||||||||||||||||||||||||||
Other operating costs | – | (433 | ) | – | (605 | ) | (1,829 | ) | 181 | (2,686 | ) | |||||||||||||||||||||||||||||
| – | (1,580 | ) | – | (1,771 | ) | (7,860 | ) | 181 | (11,030 | ) | ||||||||||||||||||||||||||||||
Total operating profit | – | 447 | – | 1,394 | 2,244 | – | 4,085 | |||||||||||||||||||||||||||||||||
Net finance income/(costs) | 701 | (87 | ) | – | (242 | ) | (1,484 | ) | – | (1,112 | ) | |||||||||||||||||||||||||||||
Dividends receivable | – | – | – | – | 620 | (620 | ) | – | ||||||||||||||||||||||||||||||||
Interest in equity accounted affiliates | 1,843 | – | – | 33 | 59 | (1,876 | ) | 59 | ||||||||||||||||||||||||||||||||
Profit before tax | 2,544 | 360 | – | 1,185 | 1,439 | (2,496 | ) | 3,032 | ||||||||||||||||||||||||||||||||
Tax | 47 | (141 | ) | – | (80 | ) | (264 | ) | – | (438 | ) | |||||||||||||||||||||||||||||
Profit for the year | 2,591 | 219 | – | 1 | 1,105 | 1,175 | (2,496 | ) | 2,594 | |||||||||||||||||||||||||||||||
Amounts recognised in other comprehensive income2 | 573 | (1 | ) | – | (5 | ) | 509 | (503 | ) | 573 | ||||||||||||||||||||||||||||||
Total comprehensive income for the year | 3,164 | 218 | – | 1,100 | 1,684 | (2,999 | ) | 3,167 | ||||||||||||||||||||||||||||||||
Attributable to: | ||||||||||||||||||||||||||||||||||||||||
Equity shareholders | 3,164 | 218 | – | 1,100 | 1,681 | (2,999 | ) | 3,164 | ||||||||||||||||||||||||||||||||
Non-controlling interests | – | – | – | – | 3 | – | 3 | |||||||||||||||||||||||||||||||||
| 3,164 | 218 | – | 1,100 | 1,684 | (2,999 | ) | 3,167 | |||||||||||||||||||||||||||||||||
1. Profit for the year for British Transco Finance Inc. is £nil as interest payable to external bond holders is offset by interest receivable on loans to National Grid Gas plc.
2. Includes other comprehensive income relating to interest in equity accounted affiliates.
34. Additional disclosures in respect of guaranteed securitiescontinued Statements of financial position as at 31 March 2014 – IFRS | ||||||||||||||||||||||||||||
Parent guarantor | Issuer of notes | Subsidiary guarantor | ||||||||||||||||||||||||||
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National Grid plc £m | Niagara Mohawk Power Corporation £m | British Transco Finance Inc. £m | National Grid Gas plc £m | Other subsidiaries £m | Consolidation £m | National Grid consolidated £m | ||||||||||||||||||||||
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Non-current assets | ||||||||||||||||||||||||||||
Goodwill | – | 581 | – | – | 4,013 | – | 4,594 | |||||||||||||||||||||
Other intangible assets | – | – | – | 230 | 439 | – | 669 | |||||||||||||||||||||
Property, plant and equipment | – | 4,266 | – | 12,259 | 20,654 | – | 37,179 | |||||||||||||||||||||
Other non-current assets | – | 26 | – | 15 | 46 | – | 87 | |||||||||||||||||||||
Amounts owed by subsidiary undertakings | 305 | – | 180 | 5,609 | 2,676 | (8,770) | – | |||||||||||||||||||||
Pension assets | – | – | – | – | 174 | – | 174 | |||||||||||||||||||||
Financial and other investments | 14,520 | 22 | – | 50 | 9,896 | (23,853) | 635 | |||||||||||||||||||||
Derivative financial assets | 643 | – | – | 642 | 272 | – | 1,557 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Total non-current assets | 15,468 | 4,895 | 180 | 18,805 | 38,170 | (32,623) | 44,895 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||||||
Inventories and current intangible assets | – | 27 | – | 24 | 217 | – | 268 | |||||||||||||||||||||
Trade and other receivables | 3 | 572 | – | 361 | 1,855 | 64 | 2,855 | |||||||||||||||||||||
Amounts owed by subsidiary undertakings | 9,025 | 11 | 5 | 262 | 11,100 | (20,403) | – | |||||||||||||||||||||
Financial and other investments | 1,481 | 10 | – | 420 | 1,688 | – | 3,599 | |||||||||||||||||||||
Derivative financial assets | 284 | – | – | 63 | 174 | (108) | 413 | |||||||||||||||||||||
Cash and cash equivalents | 24 | 16 | – | – | 314 | – | 354 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
| Total current assets | 10,817 | 636 | 5 | 1,130 | 15,348 | (20,447) | 7,489 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
| Total assets | 26,285 | 5,531 | 185 | 19,935 | 53,518 | (53,070) | 52,384 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||||||
Borrowings | (1,327) | (328) | (4) | (568) | (1,284) | – | (3,511) | |||||||||||||||||||||
Derivative financial liabilities | (286) | – | – | (99) | (62) | 108 | (339) | |||||||||||||||||||||
Trade and other payables | (37) | (252) | – | (809) | (1,933) | – | (3,031) | |||||||||||||||||||||
Amounts owed to subsidiary undertakings | (8,695) | (56) | – | (2,212) | (9,440) | 20,403 | – | |||||||||||||||||||||
Current tax liabilities | – | (64) | – | (27) | (13) | (64) | (168) | |||||||||||||||||||||
Provisions | – | – | – | (74) | (208) | – | (282) | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Total current liabilities | (10,345) | (700) | (4) | (3,789) | (12,940) | 20,447 | (7,331) | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Non-current liabilities | ||||||||||||||||||||||||||||
Borrowings | (1,850) | (1,321) | (180) | (6,048) | (13,040) | – | (22,439) | |||||||||||||||||||||
Derivative financial liabilities | (154) | – | – | (279) | (391) | – | (824) | |||||||||||||||||||||
Other non-current liabilities | – | (245) | – | (1,045) | (551) | – | (1,841) | |||||||||||||||||||||
Amounts owed to subsidiary undertakings | (2,022) | – | – | (654) | (6,094) | 8,770 | – | |||||||||||||||||||||
Deferred tax liabilities | (3) | (609) | – | (1,601) | (1,869) | – | (4,082) | |||||||||||||||||||||
Pension and other post-retirement benefit obligations | – | (652) | – | – | (1,933) | – | (2,585) | |||||||||||||||||||||
Provisions | – | (243) | – | (158) | (962) | – | (1,363) | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Total non-current liabilities | (4,029) | (3,070) | (180) | (9,785) | (24,840) | 8,770 | (33,134) | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Total liabilities | (14,374) | (3,770) | (184) | (13,574) | (37,780) | 29,217 | (40,465) | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Net assets | 11,911 | 1,761 | 1 | 6,361 | 15,738 | (23,853) | 11,919 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Equity | ||||||||||||||||||||||||||||
Share capital | 439 | 112 | – | 45 | 182 | (339) | 439 | |||||||||||||||||||||
Share premium account | 1,336 | 1,808 | – | 204 | 8,032 | (10,044) | 1,336 | |||||||||||||||||||||
Retained earnings | 14,895 | (159) | 1 | 4,814 | 7,628 | (12,284) | 14,895 | |||||||||||||||||||||
Other equity reserves | (4,759) | – | – | 1,298 | (112) | (1,186) | (4,759) | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Shareholders’ equity | 11,911 | 1,761 | 1 | 6,361 | 15,730 | (23,853) | 11,911 | |||||||||||||||||||||
Non-controlling interests | – | – | – | – | 8 | – | 8 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Total equity | 11,911 | 1,761 | 1 | 6,361 | 15,738 | (23,853) | 11,919 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
| 162 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
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|
|
34. Additional disclosures in respect of guaranteed securitiescontinued Statements of financial position as at 31 March 2013 – IFRS
| ||||||||||||||||||||||||||||
| Parent guarantor | Issuer of notes | Subsidiary guarantor | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||
| National Grid plc (restated)1 £m | Niagara £m | British Finance Inc. £m | National plc £m | Other subsidiaries (restated)1 £m | Consolidation adjustments (restated)1 £m | National (restated)1 £m | ||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Non-current assets | ||||||||||||||||||||||||||||
Goodwill | – | 737 | – | – | 4,291 | – | 5,028 | |||||||||||||||||||||
Other intangible assets | – | – | – | 199 | 390 | – | 589 | |||||||||||||||||||||
Property, plant and equipment | – | 4,441 | – | 12,122 | 20,029 | – | 36,592 | |||||||||||||||||||||
Other non-current assets | – | 21 | – | 12 | 71 | – | 104 | |||||||||||||||||||||
Amounts owed by subsidiary undertakings | 295 | – | – | 5,609 | 2,043 | (7,947) | – | |||||||||||||||||||||
Pension assets | – | 195 | – | – | – | – | 195 | |||||||||||||||||||||
Financial and other investments | 12,167 | 21 | – | 43 | 9,896 | (21,478) | 649 | |||||||||||||||||||||
Derivative financial assets | 585 | – | – | 977 | 410 | – | 1,972 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Total non-current assets | 13,047 | 5,415 | – | 18,962 | 37,130 | (29,425) | 45,129 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||||||
Inventories and current intangible assets | – | 28 | – | 22 | 241 | – | 291 | |||||||||||||||||||||
Trade and other receivables | 3 | 428 | – | 380 | 2,099 | – | 2,910 | |||||||||||||||||||||
Amounts owed by subsidiary undertakings | 9,470 | 18 | 202 | 202 | 12,250 | (22,142) | – | |||||||||||||||||||||
Financial and other investments | 2,385 | 32 | – | 854 | 2,160 | – | 5,431 | |||||||||||||||||||||
Derivative financial assets | 163 | – | – | 119 | 60 | (69) | 273 | |||||||||||||||||||||
Cash and cash equivalents | 338 | 9 | – | 20 | 304 | – | 671 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Total current assets | 12,359 | 515 | 202 | 1,597 | 17,114 | (22,211) | 9,576 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Total assets | 25,406 | 5,930 | 202 | 20,559 | 54,244 | (51,636) | 54,705 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||||||
Borrowings | (613) | (69) | (4) | (1,103) | (1,659) | – | (3,448) | |||||||||||||||||||||
Derivative financial liabilities | (228) | – | – | (86) | (162) | 69 | (407) | |||||||||||||||||||||
Trade and other payables | (44) | (132) | – | (590) | (2,285) | – | (3,051) | |||||||||||||||||||||
Amounts owed to subsidiary undertakings | (9,029) | (70) | – | (3,152) | (9,891) | 22,142 | – | |||||||||||||||||||||
Current tax liabilities | – | (59) | – | (26) | (146) | – | (231) | |||||||||||||||||||||
Provisions | – | – | – | (63) | (245) | – | (308) | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Total current liabilities | (9,914) | (330) | (4) | (5,020) | (14,388) | 22,211 | (7,445) | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Non-current liabilities | ||||||||||||||||||||||||||||
Borrowings | (2,762) | (1,798) | (198) | (6,247) | (13,642) | – | (24,647) | |||||||||||||||||||||
Derivative financial liabilities | (458) | – | – | (420) | (396) | – | (1,274) | |||||||||||||||||||||
Other non-current liabilities | – | (281) | – | (1,053) | (550) | – | (1,884) | |||||||||||||||||||||
Amounts owed to subsidiary undertakings | (2,042) | – | – | – | (5,905) | 7,947 | – | |||||||||||||||||||||
Deferred tax liabilities | (1) | (562) | – | (1,817) | (1,697) | – | (4,077) | |||||||||||||||||||||
Pension and other post-retirement benefit obligations | – | (980) | – | – | (2,712) | – | (3,692) | |||||||||||||||||||||
Provisions | – | (268) | – | (121) | (1,063) | – | (1,452) | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Total non-current liabilities | (5,263) | (3,889) | (198) | (9,658) | (25,965) | 7,947 | (37,026) | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Total liabilities | (15,177) | (4,219) | (202) | (14,678) | (40,353) | 30,158 | (44,471) | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Net assets | 10,229 | 1,711 | – | 5,881 | 13,891 | (21,478) | 10,234 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Equity | ||||||||||||||||||||||||||||
Share capital | 433 | 123 | – | 45 | 182 | (350) | 433 | |||||||||||||||||||||
Share premium account | 1,344 | 1,930 | – | 204 | 7,426 | (9,560) | 1,344 | |||||||||||||||||||||
Retained earnings | 13,133 | (342) | – | 4,325 | 6,471 | (10,454) | 13,133 | |||||||||||||||||||||
Other equity reserves | (4,681) | – | – | 1,307 | (193) | (1,114) | (4,681) | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Shareholders’ equity | 10,229 | 1,711 | – | 5,881 | 13,886 | (21,478) | 10,229 | |||||||||||||||||||||
Non-controlling interests | – | – | – | – | 5 | – | 5 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Total equity | 10,229 | 1,711 | – | 5,881 | 13,891 | (21,478) | 10,234 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
| 1. See note 1 on page 92. | ||||||||||||||||||||||||||||
Financial Statements | |||||||||||||||
34. Additional disclosures in respect of guaranteed securitiescontinued
Summary statements of comprehensive income for the year ended 31 March 2015 – IFRS
| Parent guarantor | Issuer of notes | Subsidiary guarantor | ||||||||||||||||||||||||||||||||||||||
National Grid plc £m | Niagara Mohawk Power Corporation £m | British Transco Finance Inc. £m | National plc £m | Other subsidiaries £m | Consolidation adjustments £m | National Grid consolidated £m | ||||||||||||||||||||||||||||||||||
Revenue | – | 2,109 | – | 3,136 | 10,125 | (169 | ) | 15,201 | ||||||||||||||||||||||||||||||||
Operating costs: | ||||||||||||||||||||||||||||||||||||||||
Depreciation and amortisation | – | (146 | ) | – | (540 | ) | (796 | ) | – | (1,482 | ) | |||||||||||||||||||||||||||||
Payroll costs | – | (256 | ) | – | (253 | ) | (950 | ) | – | (1,459 | ) | |||||||||||||||||||||||||||||
Purchases of electricity | – | (604 | ) | – | – | (1,081 | ) | – | (1,685 | ) | ||||||||||||||||||||||||||||||
Purchases of gas | – | (147 | ) | – | (98 | ) | (1,171 | ) | – | (1,416 | ) | |||||||||||||||||||||||||||||
Rates and property tax | – | (146 | ) | – | (247 | ) | (611 | ) | – | (1,004 | ) | |||||||||||||||||||||||||||||
Balancing Service Incentive Scheme | – | – | – | – | (874 | ) | – | (874 | ) | |||||||||||||||||||||||||||||||
Payments to other UK network owners | – | – | – | – | (801 | ) | – | (801 | ) | |||||||||||||||||||||||||||||||
Other operating costs | – | (501 | ) | – | (655 | ) | (1,713 | ) | 169 | (2,700 | ) | |||||||||||||||||||||||||||||
| – | (1,800 | ) | – | (1,793 | ) | (7,997 | ) | 169 | (11,421 | ) | ||||||||||||||||||||||||||||||
Total operating profit | – | 309 | – | 1,343 | 2,128 | – | 3,780 | |||||||||||||||||||||||||||||||||
Net finance costs | (223 | ) | (76 | ) | – | (352 | ) | (547 | ) | – | (1,198 | ) | ||||||||||||||||||||||||||||
Dividends receivable | – | – | – | – | 700 | (700 | ) | – | ||||||||||||||||||||||||||||||||
Interest in equity accounted affiliates | 2,192 | – | – | 8 | 46 | (2,200 | ) | 46 | ||||||||||||||||||||||||||||||||
Profit before tax | 1,969 | 233 | – | 999 | 2,327 | (2,900 | ) | 2,628 | ||||||||||||||||||||||||||||||||
Tax | 50 | (98 | ) | – | (230 | ) | (339 | ) | – | (617 | ) | |||||||||||||||||||||||||||||
Profit for the year | 2,019 | 135 | – | 1 | 769 | 1,988 | (2,900 | ) | 2,011 | |||||||||||||||||||||||||||||||
Amounts recognised in other comprehensive income2 | (395 | ) | 1 | – | 22 | (588 | ) | 566 | (394 | ) | ||||||||||||||||||||||||||||||
Total comprehensive income for the year | 1,624 | 136 | – | 791 | 1,400 | (2,334 | ) | 1,617 | ||||||||||||||||||||||||||||||||
Attributable to: | ||||||||||||||||||||||||||||||||||||||||
Equity shareholders | 1,624 | 136 | – | 791 | 1,407 | (2,334 | ) | 1,624 | ||||||||||||||||||||||||||||||||
Non-controlling interests | – | – | – | – | (7 | ) | – | (7 | ) | |||||||||||||||||||||||||||||||
| 1,624 | 136 | – | 791 | 1,400 | (2,334 | ) | 1,617 | |||||||||||||||||||||||||||||||||
1. Profit for the year for British Transco Finance Inc. is £nil as interest payable to external bond holders is offset by interest receivable on loans to National Grid Gas plc.
2. Includes other comprehensive income relating to interest in equity accounted affiliates.
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 163 |
Notes to the consolidated financial statements
financial statements– supplementary information continued
34. Additional disclosures in respect of guaranteed securitiescontinued Cash flow statements
|
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| Parent guarantor | Issuer of notes | Subsidiary guarantor | ||||||||||||||||||||||||||||
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National £m | Niagara Mohawk Power Corporation £m | British Inc. £m | National £m | Other subsidiaries £m | Consolidation adjustments £m | National Grid consolidated £m | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||
Year ended 31 March 2014 | ||||||||||||||||||||||||||||||
Net cash flow from operating activities | 52 | 581 | – | 1,717 | 1,669 | – | 4,019 | |||||||||||||||||||||||
Net cash flow from/(used in) investing activities | 1,358 | (555) | – | (91) | (993) | (1,049) | (1,330) | |||||||||||||||||||||||
Net cash flow (used in)/from financing activities | (1,724) | (18) | – | (1,632) | (647) | 1,049 | (2,972) | |||||||||||||||||||||||
| ||||||||||||||||||||||||||||||
Net (decrease)/increase in cash and cash equivalents in the year | (314) | 8 | – | (6) | 29 | – | (283) | |||||||||||||||||||||||
| ||||||||||||||||||||||||||||||
Year ended 31 March 2013 | ||||||||||||||||||||||||||||||
Net cash flow from operating activities | 36 | 162 | – | 1,608 | 1,944 | – | 3,750 | |||||||||||||||||||||||
Net cash flow used in investing activities | (979) | (286) | – | (1,345) | (1,048) | (2,472) | (6,130) | |||||||||||||||||||||||
Net cash flow from/(used in) financing activities | 1,255 | 132 | – | (240) | (904) | 2,472 | 2,715 | |||||||||||||||||||||||
| ||||||||||||||||||||||||||||||
Net increase/(decrease) in cash and cash equivalents in the year | 312 | 8 | – | 23 | (8) | – | 335 | |||||||||||||||||||||||
| ||||||||||||||||||||||||||||||
Year ended 31 March 2012 | ||||||||||||||||||||||||||||||
Net cash flow from operating activities | 75 | 441 | – | 1,596 | 2,116 | – | 4,228 | |||||||||||||||||||||||
Net cash flow from/(used in) investing activities | 559 | (287) | – | (1,171) | (1,166) | (306) | (2,371) | |||||||||||||||||||||||
Net cash flow (used in)/from financing activities | (808) | (155) | – | (502) | (741) | 306 | (1,900) | |||||||||||||||||||||||
| ||||||||||||||||||||||||||||||
Net (decrease)/increase in cash and cash equivalents in the year | (174) | (1) | – | (77) | 209 | – | (43) | |||||||||||||||||||||||
| ||||||||||||||||||||||||||||||
Cash dividends were received by National Grid plc from subsidiary undertakings amounting to £1,050m during the year ended 31 March 2014 (2013: £570m; 2012: £200m).
|
| |||||||||||||||||||||||||||||
Maturity analysis of parent Company borrowings
|
| |||||||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||||||||
| £m | £m | |||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||
| Total borrowings are repayable as follows: | ||||||||||||||||||||||||||||||
Less than 1 year | 1,327 | 613 | ||||||||||||||||||||||||||||
In 1-2 years | 46 | 835 | ||||||||||||||||||||||||||||
In 2-3 years | 580 | 51 | ||||||||||||||||||||||||||||
In 3-4 years | – | 642 | ||||||||||||||||||||||||||||
In 4-5 years | 506 | – | ||||||||||||||||||||||||||||
More than 5 years | 718 | 1,234 | ||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||
| 3,177 | 3,375 | |||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||
|
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|
|
|
34. Additional disclosures in respect of guaranteed securitiescontinued
Summary statements of comprehensive income for the year ended 31 March 2014 – IFRS
| Parent guarantor | Issuer of notes | Subsidiary guarantor | ||||||||||||||||||||||||||||||||||||||
National Grid plc £m | Niagara Mohawk Power Corporation £m | British Transco Finance Inc. £m | National plc £m | Other subsidiaries £m | Consolidation adjustments £m | National Grid consolidated £m | ||||||||||||||||||||||||||||||||||
Revenue | 4 | 2,185 | – | 3,141 | 9,653 | (174 | ) | 14,809 | ||||||||||||||||||||||||||||||||
Operating costs: | ||||||||||||||||||||||||||||||||||||||||
Depreciation and amortisation | – | (127 | ) | – | (529 | ) | (760 | ) | – | (1,416 | ) | |||||||||||||||||||||||||||||
Payroll costs | – | (278 | ) | – | (251 | ) | (689 | ) | – | (1,218 | ) | |||||||||||||||||||||||||||||
Purchases of electricity | – | (647 | ) | – | – | (817 | ) | – | (1,464 | ) | ||||||||||||||||||||||||||||||
Purchases of gas | – | (194 | ) | – | (112 | ) | (1,449 | ) | – | (1,755 | ) | |||||||||||||||||||||||||||||
Rates and property tax | – | (137 | ) | – | (241 | ) | (585 | ) | – | (963 | ) | |||||||||||||||||||||||||||||
Balancing Service Incentive Scheme | – | – | – | – | (872 | ) | – | (872 | ) | |||||||||||||||||||||||||||||||
Payments to other UK network owners | – | – | – | – | (630 | ) | – | (630 | ) | |||||||||||||||||||||||||||||||
Other operating costs | 15 | (440 | ) | – | (661 | ) | (1,844 | ) | 174 | (2,756 | ) | |||||||||||||||||||||||||||||
| 15 | (1,823 | ) | – | (1,794 | ) | (7,646 | ) | 174 | (11,074 | ) | ||||||||||||||||||||||||||||||
Total operating profit | 19 | 362 | – | 1,347 | 2,007 | – | 3,735 | |||||||||||||||||||||||||||||||||
Net finance costs | (128 | ) | (85 | ) | – | (285 | ) | (517 | ) | – | (1,015 | ) | ||||||||||||||||||||||||||||
Dividends receivable | – | – | – | – | 600 | (600 | ) | – | ||||||||||||||||||||||||||||||||
Interest in equity accounted affiliates | 2,550 | – | – | 11 | 28 | (2,561 | ) | 28 | ||||||||||||||||||||||||||||||||
Profit before tax | 2,441 | 277 | – | 1,073 | 2,118 | (3,161 | ) | 2,748 | ||||||||||||||||||||||||||||||||
Tax | 35 | (97 | ) | – | 3 | (225 | ) | – | (284 | ) | ||||||||||||||||||||||||||||||
Profit for the year | 2,476 | 180 | – | 1 | 1,076 | 1,893 | (3,161 | ) | 2,464 | |||||||||||||||||||||||||||||||
Amounts recognised in other comprehensive income2 | 235 | (8 | ) | – | 9 | 383 | (384 | ) | 235 | |||||||||||||||||||||||||||||||
Total comprehensive income for the year | 2,711 | 172 | – | 1,085 | 2,276 | (3,545 | ) | 2,699 | ||||||||||||||||||||||||||||||||
Attributable to: | ||||||||||||||||||||||||||||||||||||||||
Equity shareholders | 2,711 | 172 | – | 1,085 | 2,288 | (3,545 | ) | 2,711 | ||||||||||||||||||||||||||||||||
Non-controlling interests | – | – | – | – | (12 | ) | – | (12 | ) | |||||||||||||||||||||||||||||||
| 2,711 | 172 | – | 1,085 | 2,276 | (3,545 | ) | 2,699 | |||||||||||||||||||||||||||||||||
1. Profit for the year for British Transco Finance Inc. is £nil as interest payable to external bond holders is offset by interest receivable on loans to National Grid Gas plc.
2. Includes other comprehensive income relating to interest in equity accounted affiliates.
| 164 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
Financial Statements |
34. Additional disclosures in respect of guaranteed securitiescontinued
Statements of financial position as at 31 March 2016 – IFRS
| Parent guarantor | Issuer of notes | Subsidiary guarantor | ||||||||||||||||||||||||||||||||||||||
National Grid plc £m | Niagara Mohawk Power Corporation £m | British £m | National plc £m | Other subsidiaries £m | Consolidation adjustments £m | National Grid consolidated £m | ||||||||||||||||||||||||||||||||||
Non-current assets | ||||||||||||||||||||||||||||||||||||||||
Goodwill | – | 664 | – | – | 4,651 | – | 5,315 | |||||||||||||||||||||||||||||||||
Other intangible assets | – | – | – | 239 | 648 | – | 887 | |||||||||||||||||||||||||||||||||
Property, plant and equipment | – | 5,466 | – | 12,628 | 25,270 | – | 43,364 | |||||||||||||||||||||||||||||||||
Other non-current assets | – | 7 | – | 41 | 34 | – | 82 | |||||||||||||||||||||||||||||||||
Amounts owed by subsidiary undertakings | 318 | – | 209 | 5,609 | 2,630 | (8,766 | ) | – | ||||||||||||||||||||||||||||||||
Pension assets | – | 125 | – | – | 285 | – | 410 | |||||||||||||||||||||||||||||||||
Financial and other investments | 17,428 | 26 | – | 86 | 10,131 | (26,792 | ) | 879 | ||||||||||||||||||||||||||||||||
Derivative financial assets | 157 | – | – | 1,014 | 514 | – | 1,685 | |||||||||||||||||||||||||||||||||
Total non-current assets | 17,903 | 6,288 | 209 | 19,617 | 44,163 | (35,558 | ) | 52,622 | ||||||||||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||||||||||||||||||
Inventories and current intangible assets | – | 42 | – | 26 | 369 | – | 437 | |||||||||||||||||||||||||||||||||
Trade and other receivables | 1 | 413 | – | 432 | 1,626 | – | 2,472 | |||||||||||||||||||||||||||||||||
Amounts owed by subsidiary undertakings | 11,516 | 300 | 6 | 57 | 12,785 | (24,664 | ) | – | ||||||||||||||||||||||||||||||||
Financial and other investments | 1,244 | 28 | – | 116 | 1,610 | – | 2,998 | |||||||||||||||||||||||||||||||||
Derivative financial assets | 279 | – | – | 66 | 131 | (198 | ) | 278 | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | 1 | 4 | – | – | 126 | (4 | ) | 127 | ||||||||||||||||||||||||||||||||
Total current assets | 13,041 | 787 | 6 | 697 | 16,647 | (24,866 | ) | 6,312 | ||||||||||||||||||||||||||||||||
Total assets | 30,944 | 7,075 | 215 | 20,314 | 60,810 | (60,424 | ) | 58,934 | ||||||||||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||||||||||||||||||
Borrowings | (933 | ) | (47 | ) | (5 | ) | (602 | ) | (2,028 | ) | 4 | (3,611 | ) | |||||||||||||||||||||||||||
Derivative financial liabilities | (239 | ) | – | – | (39 | ) | (257 | ) | 198 | (337 | ) | |||||||||||||||||||||||||||||
Trade and other payables | (43 | ) | (248 | ) | – | (661 | ) | (2,333 | ) | – | (3,285 | ) | ||||||||||||||||||||||||||||
Amounts owed to subsidiary undertakings | (12,633 | ) | – | – | (1,518 | ) | (10,513 | ) | 24,664 | – | ||||||||||||||||||||||||||||||
Current tax liabilities | (3 | ) | (61 | ) | – | (34 | ) | (154 | ) | – | (252 | ) | ||||||||||||||||||||||||||||
Provisions | – | – | – | (55 | ) | (181 | ) | – | (236 | ) | ||||||||||||||||||||||||||||||
Total current liabilities | (13,851 | ) | (356 | ) | (5 | ) | (2,909 | ) | (15,466 | ) | 24,866 | (7,721 | ) | |||||||||||||||||||||||||||
Non-current liabilities | ||||||||||||||||||||||||||||||||||||||||
Borrowings | (1,194 | ) | (2,043 | ) | (209 | ) | (6,078 | ) | (15,209 | ) | – | (24,733 | ) | |||||||||||||||||||||||||||
Derivative financial liabilities | (358 | ) | – | – | (527 | ) | (847 | ) | – | (1,732 | ) | |||||||||||||||||||||||||||||
Other non-current liabilities | – | (297 | ) | – | (1,031 | ) | (743 | ) | – | (2,071 | ) | |||||||||||||||||||||||||||||
Amounts owed to subsidiary undertakings | (1,982 | ) | – | – | (1,174 | ) | (5,610 | ) | 8,766 | – | ||||||||||||||||||||||||||||||
Deferred tax liabilities | (4 | ) | (939 | ) | – | (1,548 | ) | (2,143 | ) | – | (4,634 | ) | ||||||||||||||||||||||||||||
Pensions and other post-retirement benefit obligations | – | (761 | ) | – | – | (2,234 | ) | – | (2,995 | ) | ||||||||||||||||||||||||||||||
Provisions | – | (250 | ) | – | (126 | ) | (1,107 | ) | – | (1,483 | ) | |||||||||||||||||||||||||||||
Total non-current liabilities | (3,538 | ) | (4,290 | ) | (209 | ) | (10,484 | ) | (27,893 | ) | 8,766 | (37,648 | ) | |||||||||||||||||||||||||||
Total liabilities | (17,389 | ) | (4,646 | ) | (214 | ) | (13,393 | ) | (43,359 | ) | 33,632 | (45,369 | ) | |||||||||||||||||||||||||||
Net assets | 13,555 | 2,429 | 1 | 6,921 | 17,451 | (26,792 | ) | 13,565 | ||||||||||||||||||||||||||||||||
Equity | ||||||||||||||||||||||||||||||||||||||||
Share capital | 447 | 130 | – | 45 | 182 | (357 | ) | 447 | ||||||||||||||||||||||||||||||||
Share premium account | 1,326 | 2,119 | – | 204 | 8,033 | (10,356 | ) | 1,326 | ||||||||||||||||||||||||||||||||
Retained earnings | 16,305 | 180 | 1 | 5,400 | 9,316 | (14,897 | ) | 16,305 | ||||||||||||||||||||||||||||||||
Other equity reserves | (4,523 | ) | – | – | 1,272 | (90 | ) | (1,182 | ) | (4,523 | ) | |||||||||||||||||||||||||||||
Shareholders’ equity | 13,555 | 2,429 | 1 | 6,921 | 17,441 | (26,792 | ) | 13,555 | ||||||||||||||||||||||||||||||||
Non-controlling interests | – | – | – | – | 10 | – | 10 | |||||||||||||||||||||||||||||||||
Total equity | 13,555 | 2,429 | 1 | 6,921 | 17,451 | (26,792 | ) | 13,565 | ||||||||||||||||||||||||||||||||
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 165 |
Notes to the consolidated financial statements
– supplementary information continued
34. Additional disclosures in respect of guaranteed securitiescontinued
Statements of financial position as at 31 March 2015 – IFRS
| Parent guarantor | Issuer of notes | Subsidiary guarantor | ||||||||||||||||||||||||||||||||||||||
National Grid plc £m | Niagara Mohawk Power Corporation £m | British Transco Finance Inc. £m | National plc £m | Other subsidiaries £m | Consolidation adjustments £m | National Grid consolidated £m | ||||||||||||||||||||||||||||||||||
Non-current assets | ||||||||||||||||||||||||||||||||||||||||
Goodwill | – | 653 | – | – | 4,492 | – | 5,145 | |||||||||||||||||||||||||||||||||
Other intangible assets | – | – | – | 232 | 570 | – | 802 | |||||||||||||||||||||||||||||||||
Property, plant and equipment | – | 5,025 | – | 12,428 | 23,270 | – | 40,723 | |||||||||||||||||||||||||||||||||
Other non-current assets | – | 11 | – | 18 | 51 | – | 80 | |||||||||||||||||||||||||||||||||
Amounts owed by subsidiary undertakings | 341 | – | 202 | 5,609 | 3,017 | (9,169 | ) | – | ||||||||||||||||||||||||||||||||
Pension assets | – | 121 | – | – | – | – | 121 | |||||||||||||||||||||||||||||||||
Financial and other investments | 14,988 | 26 | – | 56 | 9,905 | (24,327 | ) | 648 | ||||||||||||||||||||||||||||||||
Derivative financial assets | 148 | – | – | 988 | 403 | – | 1,539 | |||||||||||||||||||||||||||||||||
Total non-current assets | 15,477 | 5,836 | 202 | 19,331 | 41,708 | (33,496 | ) | 49,058 | ||||||||||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||||||||||||||||||
Inventories and current intangible assets | – | 40 | – | 26 | 274 | – | 340 | |||||||||||||||||||||||||||||||||
Trade and other receivables | 2 | 502 | – | 417 | 1,915 | – | 2,836 | |||||||||||||||||||||||||||||||||
Amounts owed by subsidiary undertakings | 11,484 | 254 | 5 | 298 | 13,052 | (25,093 | ) | – | ||||||||||||||||||||||||||||||||
Financial and other investments | 740 | 9 | – | 363 | 1,447 | – | 2,559 | |||||||||||||||||||||||||||||||||
Derivative financial assets | 281 | – | – | 70 | 88 | (262 | ) | 177 | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | 10 | 11 | – | 4 | 104 | (10 | ) | 119 | ||||||||||||||||||||||||||||||||
Total current assets | 12,517 | 816 | 5 | 1,178 | 16,880 | (25,365 | ) | 6,031 | ||||||||||||||||||||||||||||||||
Total assets | 27,994 | 6,652 | 207 | 20,509 | 58,588 | (58,861 | ) | 55,089 | ||||||||||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||||||||||||||||||
Borrowings | (1,068 | ) | (44 | ) | (5 | ) | (521 | ) | (1,400 | ) | 10 | (3,028 | ) | |||||||||||||||||||||||||||
Derivative financial liabilities | (289 | ) | – | – | (133 | ) | (475 | ) | 262 | (635 | ) | |||||||||||||||||||||||||||||
Trade and other payables | (39 | ) | (267 | ) | – | (877 | ) | (2,109 | ) | – | (3,292 | ) | ||||||||||||||||||||||||||||
Amounts owed to subsidiary undertakings | (11,208 | ) | – | – | (1,973 | ) | (11,912 | ) | 25,093 | – | ||||||||||||||||||||||||||||||
Current tax liabilities | (3 | ) | (61 | ) | – | (34 | ) | (86 | ) | – | (184 | ) | ||||||||||||||||||||||||||||
Provisions | – | – | – | (39 | ) | (196 | ) | – | (235 | ) | ||||||||||||||||||||||||||||||
Total current liabilities | (12,607 | ) | (372 | ) | (5 | ) | (3,577 | ) | (16,178 | ) | 25,365 | (7,374 | ) | |||||||||||||||||||||||||||
Non-current liabilities | ||||||||||||||||||||||||||||||||||||||||
Borrowings | (1,117 | ) | (2,021 | ) | (202 | ) | (6,056 | ) | (13,486 | ) | – | (22,882 | ) | |||||||||||||||||||||||||||
Derivative financial liabilities | (411 | ) | – | – | (481 | ) | (872 | ) | – | (1,764 | ) | |||||||||||||||||||||||||||||
Other non-current liabilities | – | (287 | ) | – | (1,038 | ) | (594 | ) | – | (1,919 | ) | |||||||||||||||||||||||||||||
Amounts owed to subsidiary undertakings | (1,894 | ) | – | – | (1,123 | ) | (6,152 | ) | 9,169 | – | ||||||||||||||||||||||||||||||
Deferred tax liabilities | (3 | ) | (782 | ) | – | (1,655 | ) | (1,857 | ) | – | (4,297 | ) | ||||||||||||||||||||||||||||
Pensions and other post-retirement benefit obligations | – | (801 | ) | – | – | (2,578 | ) | – | (3,379 | ) | ||||||||||||||||||||||||||||||
Provisions | – | (267 | ) | – | (168 | ) | (1,065 | ) | – | (1,500 | ) | |||||||||||||||||||||||||||||
Total non-current liabilities | (3,425 | ) | (4,158 | ) | (202 | ) | (10,521 | ) | (26,604 | ) | 9,169 | (35,741 | ) | |||||||||||||||||||||||||||
Total liabilities | (16,032 | ) | (4,530 | ) | (207 | ) | (14,098 | ) | (42,782 | ) | 34,534 | (43,115 | ) | |||||||||||||||||||||||||||
Net assets | 11,962 | 2,122 | – | 6,411 | 15,806 | (24,327 | ) | 11,974 | ||||||||||||||||||||||||||||||||
Equity | ||||||||||||||||||||||||||||||||||||||||
Share capital | 443 | 126 | – | 45 | 182 | (353 | ) | 443 | ||||||||||||||||||||||||||||||||
Share premium account | 1,331 | 2,039 | – | 204 | 8,033 | (10,276 | ) | 1,331 | ||||||||||||||||||||||||||||||||
Retained earnings | 14,870 | (43 | ) | – | 4,885 | 7,761 | (12,603 | ) | 14,870 | |||||||||||||||||||||||||||||||
Other equity reserves | (4,682 | ) | – | – | 1,277 | (182 | ) | (1,095 | ) | (4,682 | ) | |||||||||||||||||||||||||||||
Shareholders’ equity | 11,962 | 2,122 | – | 6,411 | 15,794 | (24,327 | ) | 11,962 | ||||||||||||||||||||||||||||||||
Non-controlling interests | – | – | – | – | 12 | – | 12 | |||||||||||||||||||||||||||||||||
Total equity | 11,962 | 2,122 | – | 6,411 | 15,806 | (24,327 | ) | 11,974 | ||||||||||||||||||||||||||||||||
| 166 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
Financial Statements |
34. Additional disclosures in respect of guaranteed securitiescontinued
Cash flow statements
| Parent guarantor | Issuer of notes | Subsidiary guarantor | ||||||||||||||||||||||||||||||||||||||
National Grid plc £m | Niagara Mohawk Power Corporation £m | British Transco Finance Inc. £m | National plc £m | Other subsidiaries £m | Consolidation adjustments | National Grid consolidated £m | ||||||||||||||||||||||||||||||||||
Year ended 31 March 2016 | ||||||||||||||||||||||||||||||||||||||||
Net cash flow from operating activities | 57 | 580 | – | 1,743 | 2,988 | – | 5,368 | |||||||||||||||||||||||||||||||||
Net cash flow from/(used in) investing activities | 502 | (440 | ) | 13 | (506 | ) | (1,736 | ) | (1,869 | ) | (4,036 | ) | ||||||||||||||||||||||||||||
Net cash flow (used in)/from financing activities | (555 | ) | (148 | ) | (13 | ) | (1,248 | ) | (1,233 | ) | 1,869 | (1,328 | ) | |||||||||||||||||||||||||||
Net increase/(decrease) in cash and cash equivalents in the year | 4 | (8 | ) | – | (11 | ) | 19 | – | 4 | |||||||||||||||||||||||||||||||
Year ended 31 March 2015 | ||||||||||||||||||||||||||||||||||||||||
Net cash flow from operating activities | 38 | 531 | – | 1,575 | 2,863 | – | 5,007 | |||||||||||||||||||||||||||||||||
Net cash flow from/(used in) investing activities | 2,103 | (393 | ) | – | (603 | ) | (1,051 | ) | (2,057 | ) | (2,001 | ) | ||||||||||||||||||||||||||||
Net cash flow (used in)/from financing activities | (2,169 | ) | (145 | ) | – | (959 | ) | (2,037 | ) | 2,057 | (3,253 | ) | ||||||||||||||||||||||||||||
Net (decrease)/increase in cash and cash equivalents in the year | (28 | ) | (7 | ) | – | 13 | (225 | ) | – | (247 | ) | |||||||||||||||||||||||||||||
Year ended 31 March 2014 | ||||||||||||||||||||||||||||||||||||||||
Net cash flow from operating activities | 52 | 581 | – | 1,717 | 1,669 | – | 4,019 | |||||||||||||||||||||||||||||||||
Net cash flow from/(used in) investing activities | 1,358 | (555 | ) | – | (91 | ) | (993 | ) | (1,049 | ) | (1,330 | ) | ||||||||||||||||||||||||||||
Net cash flow (used in)/from financing activities | (1,724 | ) | (18 | ) | – | (1,632 | ) | (647 | ) | 1,049 | (2,972 | ) | ||||||||||||||||||||||||||||
Net (decrease)/increase in cash and cash equivalents in the year | (314 | ) | 8 | – | (6 | ) | 29 | – | (283 | ) | ||||||||||||||||||||||||||||||
Cash dividends were received by National Grid plc from subsidiary undertakings amounting to £930m during the year ended 31 March 2016 (2015: £1,355m; 2014: £1,050m).
Maturity analysis of parent Company borrowings
2016 £m | 2015 £m | |||||||||
Total borrowings are repayable as follows: | ||||||||||
Less than 1 year | 933 | 1,068 | ||||||||
In 1 to 2 years | – | – | ||||||||
In 2 to 3 years | 482 | – | ||||||||
In 3 to 4 years | 395 | 443 | ||||||||
In 4 to 5 years | – | 360 | ||||||||
More than 5 years | 317 | 314 | ||||||||
| 2,127 | 2,185 | |||||||||
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 167 |
We are required to include the stand-alone balance sheet of our ultimate parent Company, National Grid plc, under the Companies Act 2006. This is because the publicly traded shares are actually those of National Grid plc (the Company) and the following disclosures provide additional information to shareholders. |
A. Basis of preparation
National Grid plc is the parent company of the National Grid Group which is engaged in the transmission and distribution of electricity and gas in Great Britain and northeastern US. The Company is a public limited liability company incorporated and domiciled in England, with its registered office at 1–3 Strand, London, WC2N 5EH.
The financial statements of National Grid plc for the year ended 31 March 2016 were approved by the Board of Directors on 18 May 2016. The Company meets the definition of a qualifying entity under Financial Reporting Standard 100 (FRS 100) issued by the Financial Reporting Council. Accordingly these individual financial statements of the Company were prepared in accordance with Financial Reporting Standard 101 ‘Reduced Disclosure Framework’ (FRS 101). In preparing these financial statements the Company applies the recognition and measurement requirements of International Financial Reporting Standards (IFRS) as adopted by the EU, but makes amendments where necessary in order to comply with the provisions of the Companies Act 2006 and sets out below where advantage of the FRS 101 disclosure exemptions has been taken.
These individual financial statements for the year ended 31 March 2016 are the first prepared in accordance with FRS 101. Accordingly the date of transition is 1 April 2014. The 2015 comparative financial information has also been prepared on this basis.
There were no material measurement or recognition adjustments on the adoption of FRS 101.
These individual financial statements of the Company have been prepared in accordance with applicable UK accounting and financial reporting standards and the Companies Act 2006. ThisThey have been prepared on an historical cost basis, except for the revaluation of financial instruments, and are presented in pounds sterling, which is because the publicly tradedcurrency of the primary economic environment in which the Company operates.
These individual financial statements have been prepared on a going concern basis, which presumes that the Company has adequate resources to remain in operation, and that the Directors intend it to do so, for at least one year from the date the financial statements are signed. As the Company is part of a larger group it participates in the Group’s centralised treasury arrangements and so shares banking arrangements with its subsidiaries. The Company is expected to continue to generate positive cash flows or be in a position to obtain finance via intercompany loans to continue to operate for the foreseeable future.
The Directors are thosenot aware of any material uncertainties related to events or conditions that may cast significant doubt upon the Company’s ability to continue as a going concern. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
The Company has not presented its own income statement or statement of comprehensive income as permitted by section 408 of the Companies Act 2006.
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; |
| ● | the presentation of a third balance sheet (being the opening balance sheet of the Company at the date of application of FRS 101); and |
| ● | the effects of new but not yet effective IFRSs. |
As the consolidated financial statements of National Grid plc, which are available from the registered office, include the equivalent disclosures, the Company has also taken the exemptions under FRS 101 in respect of certain disclosures required by IFRS 13 ‘Fair value measurement’ and the following disclosures provide additional informationrequired by IFRS 7 ‘Financial instruments: disclosures’. The Company intends to shareholders.apply the above exemptions in the financial statements for the year ending 31 March 2017.
There are no critical areas of judgement that are considered to have a significant effect on the amounts recognised in the financial statements. Key sources of estimation uncertainty that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are the valuation of financial instruments and derivatives.
The balance sheet has been prepared in accordance with the Company’s accounting policies approved by the Board and described below:
B. Fixed asset investments
Investments held as fixed assets are stated at cost less any provisions for impairment. Investments are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairments are calculated such that the carrying value of the fixed asset investment is the lower of its cost or recoverable amount. Recoverable amount is the higher of its net realisable value and its value-in-use.
C. Tax
Current tax for the current and prior periods is provided at the amount expected to be paid or recovered using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is provided in full on temporary differences which result in an obligation at the balance sheet date to pay more tax, or the right to pay less tax, at a future date, at tax rates expected to apply when the temporary differences reverse based on tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is provided for using the balance sheet liability method and is recognised on temporary differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit.
Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. Deferred tax assets and liabilities are not discounted.
| 168 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
Financial Statements |
D. Foreign currencies
Transactions in currencies other than the functional currency of the Company are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at closing exchange rates. Gains and losses arising on retranslation of monetary assets and liabilities are included in the profit and loss account.
E. Financial instruments
The Company’s accounting policies under UK GAAP, namely FRS 25 ‘Financial Instruments: Presentation’, FRS 26 ‘Financial Instruments: Measurement’ and FRS 29 ‘Financial Instruments: Disclosures’, are the same as the Group’s accounting policies under IFRS, namely IAS 32 ‘Financial Instruments: Presentation’, IAS 39 ‘Financial Instruments: Recognition and Measurement’ and IFRS 7 ‘Financial Instruments: Disclosures’. The Company applies these policies only in respect of the financial instruments that it has, namely investments, derivative financial instruments, debtors, cash at bank and in hand, borrowings and creditors.
The policies are set out in notes 13, 15, 17, 18, 19 and 20 to the consolidated financial statements. The Company is taking the exemption for financial instruments disclosures, because IFRS 7 disclosures are given in notes 30 and 33 to the consolidated financial statements.
F. Hedge accounting
The Company applies the same accounting policy as the Group in respect of fair value hedges and cash flow hedges. This policy is set out in note 15 to the consolidated financial statements.
G. Parent Company guarantees
The Company has guaranteed the repayment of the principal sum, any associated premium and interest on specific loans due by certain subsidiary undertakings primarily to third parties. In the event of default or non performance by the subsidiary, the Company recognises such guarantees as insurance contracts, at fair value with a corresponding increase in the carrying value of the investment.
H. Share awards to employees of subsidiary undertakings
The issuance by the Company to employees of its subsidiaries of a grant over the Company’s options represents additional capital contributions by the Company to its subsidiaries. An additional investment in subsidiaries results in a corresponding increase in shareholders’ equity. The additional capital contribution is based on the fair value of the option at the date of grant, allocated over the underlying grant’s vesting period. Where payments are subsequently received from subsidiaries, these are accounted for as a return of a capital contribution and credited against the Company’s investments in subsidiaries. The Company has no employees.
I. Dividends
Interim dividends are recognised when they are paid to the Company’s shareholders. Final dividends are recognised when they are approved by shareholders.
J. Directors’ remuneration
Full details of Directors’ remuneration are disclosed on pages 68 to 81.
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 169 |
A. Basis of preparation of individual financial statements under UK GAAPCompany balance sheet
Theseat 31 March
| 2016 | 2015 | |||||||
| Notes | £m | £m | ||||||
| ||||||||
Fixed assets | ||||||||
Investments | 1 | 8,845 | 8,823 | |||||
| ||||||||
Current assets | ||||||||
Debtors (amounts falling due within one year) | 2 | 11,796 | 11,767 | |||||
Debtors (amounts falling due after more than one year) | 2 | 475 | 489 | |||||
Investments | 5 | 1,244 | 750 | |||||
Cash at bank and in hand | 1 | – | ||||||
| ||||||||
Total current assets | 13,516 | 13,006 | ||||||
Creditors (amounts falling due within one year) | 3 | (13,851) | (12,607) | |||||
| ||||||||
Net current (liabilities)/assets | (335) | 399 | ||||||
| ||||||||
Total assets less current liabilities | 8,510 | 9,222 | ||||||
Creditors (amounts falling due after more than one year) | 3 | (3,538) | (3,425) | |||||
| ||||||||
Net assets | 4,972 | 5,797 | ||||||
| ||||||||
Equity | ||||||||
Share capital | 7 | 447 | 443 | |||||
Share premium account | 1,326 | 1,331 | ||||||
Cash flow hedge reserve | 17 | 17 | ||||||
Available-for-sale reserve | – | – | ||||||
Other equity reserves | 302 | 280 | ||||||
Profit and loss account | 8 | 2,880 | 3,726 | |||||
| ||||||||
Total shareholders’ equity | 4,972 | 5,797 | ||||||
| ||||||||
The notes on pages 172 and 173 form part of the individual financial statements of the Company, have been prepared in accordance with applicable UK accountingwhich were approved by the Board of Directors on 18 May 2016 and financial reporting standards and the Companies Act 2006. They have been preparedwere signed 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 2013 comparative financial information has also been prepared on this basis.its behalf by:
Sir Peter Gershon Chairman
Andrew Bonfield Finance Director
National Grid plc
Registered number: 4031152
| 170 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
Financial Statements |
These individualCompany statement of changes in equity
for the years ended 31 March
Share capital £m | Share premium account £m | Cash flow hedge reserve £m | Available- for-sale reserve £m | Other equity reserves £m | Profit and loss account £m | Total equity £m | ||||||||||||||||||||||
| ||||||||||||||||||||||||||||
At 1 April 2014 | 439 | 1,336 | 20 | 1 | 260 | 4,138 | 6,194 | |||||||||||||||||||||
Profit for the year | – | – | – | – | – | 1,181 | 1,181 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Other comprehensive income/(loss) | ||||||||||||||||||||||||||||
Transferred from equity in respect of cash flow hedges (net of tax) | – | – | (3) | – | – | – | (3) | |||||||||||||||||||||
Net losses taken to income statement | – | – | – | (1) | – | – | (1) | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Other equity movements | ||||||||||||||||||||||||||||
Scrip dividend related share issue1 | 4 | (5) | – | – | – | – | (1) | |||||||||||||||||||||
Purchase of treasury shares | – | – | – | – | – | (338) | (338) | |||||||||||||||||||||
Issue of treasury shares | – | – | – | – | – | 23 | 23 | |||||||||||||||||||||
Purchase of own shares | – | – | – | – | – | (7) | (7) | |||||||||||||||||||||
Share awards to employees of subsidiary undertakings | – | – | – | – | 20 | – | 20 | |||||||||||||||||||||
Dividends paid to equity shareholders | – | – | – | – | – | (1,271) | (1,271) | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
At 31 March 2015 | 443 | 1,331 | 17 | – | 280 | 3,726 | 5,797 | |||||||||||||||||||||
Profit for the year | – | – | – | – | – | 748 | 748 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Other equity movements | ||||||||||||||||||||||||||||
Scrip dividend related share issue1 | 4 | (5) | – | – | – | – | (1) | |||||||||||||||||||||
Purchase of treasury shares | – | – | – | – | – | (267) | (267) | |||||||||||||||||||||
Issue of treasury shares | – | – | – | – | – | 16 | 16 | |||||||||||||||||||||
Purchase of own shares | – | – | – | – | – | (6) | (6) | |||||||||||||||||||||
Share awards to employees of subsidiary undertakings | – | – | – | – | 22 | – | 22 | |||||||||||||||||||||
Dividends paid to equity shareholders | – | – | – | – | – | (1,337) | (1,337) | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
At 31 March 2016 | 447 | 1,326 | 17 | – | 302 | 2,880 | 4,972 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
1. Included within share premium account are costs associated with scrip dividends.
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 171 |
Notes to the Company financial statements have been prepared on
Shares in subsidiary undertakings £m | ||
At 1 April 2014 | 8,803 | |
Additions | 20 | |
At 31 March 2015 | 8,823 | |
Additions | 22 | |
At 31 March 2016 | 8,845 | |
During the year there was a going concern basis followingcapital contribution of £22m (2015: £20m) which represents the assessment madefair value of equity instruments granted to subsidiaries’ employees arising from equity-settled employee share schemes.
The names of the subsidiary undertakings, joint ventures and associates are included in note 32 to the consolidated financial statements. The Directors believe that the carrying value of the investments is supported by the Directorsfair value of their underlying net assets.
2016 £m | 2015 £m | |||
| ||||
Amounts falling due within one year | ||||
Derivative financial instruments (note 4) | 279 | 281 | ||
Amounts owed by subsidiary undertakings | 11,516 | 11,484 | ||
Prepayments and accrued income | 1 | 2 | ||
| ||||
| 11,796 | 11,767 | |||
| ||||
Amounts falling due after more than one year | ||||
Derivative financial instruments (note 4) | 157 | 148 | ||
Amounts owed by subsidiary undertakings | 318 | 341 | ||
| ||||
| 475 | 489 | |||
| ||||
The carrying values stated above are considered to represent the fair values of the assets.
2016 £m | 2015 £m | |||
| ||||
Amounts falling due within one year | ||||
Borrowings (note 6) | 933 | 1,068 | ||
Derivative financial instruments (note 4) | 239 | 289 | ||
Amounts owed to subsidiary undertakings | 12,633 | 11,208 | ||
Corporation tax payable | 3 | 3 | ||
Other creditors | 43 | 39 | ||
| ||||
| 13,851 | 12,607 | |||
| ||||
Amounts falling due after more than one year | ||||
Borrowings (note 6) | 1,194 | 1,117 | ||
Derivative financial instruments (note 4) | 358 | 411 | ||
Amounts owed to subsidiary undertakings1 | 1,982 | 1,894 | ||
Deferred tax | 4 | 3 | ||
| ||||
| 3,538 | 3,425 | |||
| ||||
1. All amounts owed to subsidiary undertakings in 2015 and 2016 are repayable after five years.
The carrying values stated above are considered to represent the fair values of the liabilities. A reconciliation of the movement in deferred tax in the year is shown below:
Deferred tax £m | ||
At 1 April 2014 | 3 | |
Charged to the profit and loss account | 1 | |
Credited to equity | (1) | |
At 31 March 2015 | 3 | |
Charged to the profit and loss account | 1 | |
At 31 March 2016 | 4 | |
| 172 | National Grid Annual Report and Accounts 2015/16 | Financial Statements |
Financial Statements |
4. Derivative financial instruments
The fair values of derivative financial instruments are:
| 2016 | 2015 | |||||||||||||
Assets £m | Liabilities £m | Total £m | Assets £m | Liabilities £m | Total £m | |||||||||
Amounts falling due within one year | 279 | (239) | 40 | 281 | (289) | (8) | ||||||||
Amounts falling due after more than one year | 157 | (358) | (201) | 148 | (411) | (263) | ||||||||
| 436 | (597) | (161) | 429 | (700) | (271) |
For each class of derivative the notional contract1 amounts are as setfollows:
2016 £m | 2015 £m | |||
| ||||
Interest rate swaps | (2,442) | (2,499) | ||
Cross-currency interest rate swaps | (3,537) | (3,529) | ||
Foreign exchange forward contracts | (14,361) | (13,708) | ||
| ||||
| (20,340) | (19,736) | |||
| ||||
1. The notional contract amounts of derivatives indicate the gross nominal value of transactions outstanding at the balance sheet date.
The following table sets out on page 52.the Company’s current asset investments:
2016 £m | 2015 £m | |||
| ||||
Investments in short-term money funds | 1,007 | 217 | ||
Short-term deposits | – | 252 | ||
Restricted balances – collateral | 237 | 281 | ||
| ||||
| 1,244 | 750 | |||
| ||||
The following table analyses the Company’s total borrowings:
2016 £m | 2015 £m | |||
| ||||
Amounts falling due within one year | ||||
Bank overdrafts | – | 13 | ||
Bank loans | 28 | 28 | ||
Bonds | 21 | 70 | ||
Commercial paper | 884 | 957 | ||
| ||||
| 933 | 1,068 | |||
| ||||
Amounts falling due after more than one year | ||||
Bonds | 1,194 | 1,117 | ||
| ||||
| 2,127 | 2,185 | |||
| ||||
The maturity of total borrowings is disclosed in note 34 to the consolidated financial statements. There are no differences in the maturities as calculated under IFRS or FRS 101 ‘Reduced Disclosure Framework’.
The notional amount of borrowings outstanding as at 31 March 2016 was £2,101m (2015: £2,157m). Further information on significant borrowings can be found on the debt investors section of our website.
The share capital amounting to £447m (2015: £443m) consists of 3,924,038,086 (2015: 3,891,691,900) ordinary shares. For further information on share capital, refer to note 24 to the consolidated financial statements.
8. Shareholders’ equity and reserves
At 31 March 2016 the profit and loss account reserve stood at £2,880m (2015: £3,726m) of which £86m (2015: £86m) related to gains on intra-group transactions which was not distributable to shareholders.
For further details of dividends paid and payable to shareholders, refer to note 8 to the consolidated financial statements.
The Company has not presented its own profit and loss account as permitted by section 408guaranteed the repayment of the Companies Act 2006.principal sum, any associated premium and interest on specific loans due by certain subsidiary undertakings primarily to third parties. At 31 March 2016, the sterling equivalent amounted to £2,674m (2015: £2,593m). The guarantees are for varying terms from less than one year to open-ended.
The Company has taken advantageaudit fee in respect of the exemptions in FRS 8 ‘Related Party Disclosures’ from disclosing transactions with other members of the National Grid plc group of companies.
In accordance with exemptions under FRS 29 ‘Financial Instruments: Disclosures’,parent Company was £28,380 (2015: £27,553). Fees payable to PricewaterhouseCoopers LLP for non-audit services to the Company hasare not presented the financial instruments disclosures required by the standard,to be disclosed as disclosures which comply with the standardthey are included inwithin note 3 to the consolidated financial statements.
B. Fixed asset investments
Investments held as fixed assets are stated at cost less any provisions for impairment. Investments are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairments are calculated such that the carrying value of the fixed asset investment is the lower of its cost or recoverable amount. Recoverable amount is the higher of its net realisable value and its value-in-use.
C. Taxation
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 timing 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 timing differences reverse based on tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the financial statements.
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.
| National Grid Annual Report and Accounts 2015/16 | Financial Statements | 173 |
Additional Information contents
| 174 | The business in detail | |||
| 174 | Key milestones | |||
| 175 | Where we operate | |||
| 176 | UK regulation | |||
| 178 | US regulation | |||
| 183 | Internal control and risk factors | |||
| 183 | Disclosure controls | |||
| 183 | Internal control over financial reporting | |||
| 183 | Risk factors | |||
| 187 | Shareholder information | |||
| 187 | Articles of Association | |||
| 188 | Depositary payments to the Company | |||
| 188 | Description of securities other than equity securities: depositary fees and charges | |||
| 188 | Documents on display | |||
| 188 | Events after the reporting period | |||
| 188 | Exchange controls | |||
| 189 | Exchange rates | |||
| 189 | Material interests in shares | |||
| 189 | Share capital | |||
| 190 | Share price | |||
| 190 | Shareholder analysis | |||
| 190 | Taxation | |||
| 193 | Other disclosures | |||
| 193 | All-employee share plans | |||
| 193 | Change of control provisions | |||
| 193 | Code of Ethics | |||
| 193 | Conflicts of interest | |||
| 193 | Corporate governance practices: differences from New York Stock Exchange (NYSE) listing standards | |||
| 194 | Directors’ indemnity | |||
| 194 | Employees | |||
| 194 | Human rights | |||
| 194 | Listing Rule 9.8.4 R cross reference table | |||
| 194 | Material contracts | |||
| 194 | Political donations and expenditure | |||
| 194 | Property, plant and equipment | |||
| 194 | Research and development | |||
| 195 | Unresolved SEC staff comments | |||
| 196 | Other unaudited financial information | |||
| 200 | Summary consolidated financial information | |||
| 202 | Further information regarding financial KPIs and other performance measures | |||
| 203 | Definitions and glossary of terms | |||
| 207 | Want more information or help? | |||
Some of the key dates and actions in the corporate history of National Grid are listed below. The full history goes back much further. | ||||||||
| 1986 | British Gas (BG) privatisation | |||||||
| 1990 | Electricity transmission network in England and Wales transferred to National Grid on electricity privatisation | |||||||
| 1995 | National Grid listed on the London Stock Exchange | |||||||
| 1997 | Centrica demerged from BG | |||||||
| Energis demerged from National Grid | ||||||||
| 2000 | Lattice Group demerged from BG and listed separately | |||||||
| New England Electric System and Eastern Utilities Associates acquired | ||||||||
| 2002 | Niagara Mohawk Power Corporation merged with National Grid in US | |||||||
| National Grid and Lattice Group merged to form National Grid Transco | ||||||||
| 2004 | UK wireless infrastructure network acquired from Crown Castle International Corp | |||||||
| 2005 | Four UK regional gas distribution networks sold and National Grid adopted as our name | |||||||
| 2006 | Rhode Island gas distribution network acquired | |||||||
| 2007 | UK and US wireless infrastructure operations and the Basslink electricity interconnector in Australia sold | |||||||
| KeySpan Corporation acquired | ||||||||
| 2008 | Ravenswood generation station sold | |||||||
| 2010 | Rights issue raised £3.2 billion | |||||||
| 2012 | New Hampshire electricity and gas distribution businesses sold | |||||||
| 174 | National Grid Annual Report and Accounts 2015/16 | Additional Information |
| ||||||||||||
|
| Notes | 2014 £m | 2013 £m | ||||||||||||
| ||||||||||||||
Fixed assets | ||||||||||||||
Investments | 1 | 8,803 | 8,177 | |||||||||||
| ||||||||||||||
Current assets | ||||||||||||||
Debtors (amounts falling due within one year) | 2 | 9,312 | 9,636 | |||||||||||
Debtors (amounts falling due after more than one year) | 2 | 948 | 880 | |||||||||||
Investments | 5 | 1,504 | 2,723 | |||||||||||
Cash at bank and in hand | 1 | – | ||||||||||||
| ||||||||||||||
Total current assets | 11,765 | 13,239 | ||||||||||||
Creditors (amounts falling due within one year) | 3 | (10,345) | (9,914) | |||||||||||
| ||||||||||||||
Net current assets | 1,420 | 3,325 | ||||||||||||
| ||||||||||||||
Total assets less current liabilities | 10,223 | 11,502 | ||||||||||||
Creditors (amounts falling due after more than one year) | 3 | (4,029) | (5,263) | |||||||||||
| ||||||||||||||
Net assets | 6,194 | 6,239 | ||||||||||||
| ||||||||||||||
Capital and reserves | ||||||||||||||
Called up share capital | 7 | 439 | 433 | |||||||||||
Share premium account | 8 | 1,336 | 1,344 | |||||||||||
Cash flow hedge reserve | 8 | 20 | 12 | |||||||||||
Available-for-sale reserve | 8 | 1 | – | |||||||||||
Other equity reserves | 8 | 260 | 240 | |||||||||||
Profit and loss account | 8 | 4,138 | 4,210 | |||||||||||
| ||||||||||||||
Total shareholders’ funds | 9 | 6,194 | 6,239 | |||||||||||
| ||||||||||||||
The notes on pages 157 to 159 form part of the individual financial statements of the Company, which were approved by the Board of Directors on 18 May 2014 and were signed on its behalf by:
Sir Peter Gershon Chairman Andrew Bonfield Finance Director |
| |||||||||||||
|
|
| Additional Information
|
|
Notes to the Company financial statements
| ||||||||||
| 1.Fixed asset investments | ||||||||||
| Shares in subsidiary undertakings £m | ||||||||||
| ||||||||||
At 1 April 2012 |
| 8,157 | ||||||||
Additions |
| 20 | ||||||||
| ||||||||||
At 31 March 2013 |
| 8,177 | ||||||||
Additions |
| 626 | ||||||||
| ||||||||||
At 31 March 2014 |
| 8,803 | ||||||||
| ||||||||||
During the year there was a capital contribution of £20m (2013: £20m) which represents the fair value of equity instruments granted to subsidiaries’ employees arising from equity-settled employee share schemes. On 27 March 2014, the Company also acquired a further 98,851 ordinary shares of £1 each in National Grid (US) Holdings Limited for a total consideration of £606m.
The names of the principal subsidiary undertakings, joint ventures and associates are included in note 32 to the consolidated financial statements. The Directors believe that the carrying value of the investments is supported by the fair value of their underlying net assets.
| ||||||||||
| 2014 £m | 2013 £m | |||||||||
| ||||||||||
Amounts falling due within one year | ||||||||||
Derivative financial instruments (note 4) | 284 | 163 | ||||||||
Amounts owed by subsidiary undertakings | 9,025 | 9,470 | ||||||||
Prepayments and accrued income | 3 | 3 | ||||||||
| ||||||||||
| 9,312 | 9,636 | |||||||||
| ||||||||||
Amounts falling due after more than one year | ||||||||||
Derivative financial instruments (note 4) | 643 | 585 | ||||||||
Amounts owed by subsidiary undertakings | 305 | 295 | ||||||||
| ||||||||||
| 948 | 880 | |||||||||
| ||||||||||
The carrying values stated above are considered to represent the fair values of the assets.
| ||||||||||
| 2014 £m | 2013 £m | |||||||||
| ||||||||||
Amounts falling due within one year | ||||||||||
Borrowings (note 6) | 1,327 | 613 | ||||||||
Derivative financial instruments (note 4) | 286 | 228 | ||||||||
Amounts owed to subsidiary undertakings | 8,695 | 9,029 | ||||||||
Other creditors | 37 | 44 | ||||||||
| ||||||||||
| 10,345 | 9,914 | |||||||||
| ||||||||||
Amounts falling due after more than one year | ||||||||||
Borrowings (note 6) | 1,850 | 2,762 | ||||||||
Derivative financial instruments (note 4) | 154 | 458 | ||||||||
Amounts owed to subsidiary undertakings | 2,022 | 2,042 | ||||||||
Deferred taxation | 3 | 1 | ||||||||
| ||||||||||
| 4,029 | 5,263 | |||||||||
| ||||||||||
The carrying values stated above are considered to represent the fair values of the liabilities.
| ||||||||||
Deferred £m | ||||||||||
| ||||||||||
At 1 April 2012 | (1) | |||||||||
Charged to the profit and loss account | 1 | |||||||||
Charged to equity | 1 | |||||||||
| ||||||||||
At 31 March 2013 | 1 | |||||||||
Charged to the profit and loss account | 1 | |||||||||
Charged to equity | 1 | |||||||||
| ||||||||||
At 31 March 2014 | 3 | |||||||||
| ||||||||||
| ||||||||||||
|
4.Derivative financial instruments The fair values of derivative financial instruments are:
|
| |||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||||
|
| |||||||||||||||||||||||||
| Assets £m | Liabilities £m | Total £m | Assets £m | Liabilities £m | Total £m | |||||||||||||||||||||
| ||||||||||||||||||||||||||
Amounts falling due within one year | 284 | (286) | (2) | 163 | (228) | (65) | ||||||||||||||||||||
Amounts falling due after more than one year | 643 | (154) | 489 | 585 | (458) | 127 | ||||||||||||||||||||
| ||||||||||||||||||||||||||
| 927 | (440) | 487 | 748 | (686) | 62 | |||||||||||||||||||||
| ||||||||||||||||||||||||||
For each class of derivative the notional contract* amounts are as follows:
|
| |||||||||||||||||||||||||
2014 £m | 2013 £m | |||||||||||||||||||||||||
| ||||||||||||||||||||||||||
Interest rate swaps | (6,531) | (8,015) | ||||||||||||||||||||||||
Cross-currency interest rate swaps | (4,490) | (5,376) | ||||||||||||||||||||||||
Foreign exchange forward contracts | (11,626) | (9,080) | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||
Total | (22,647) | (22,471) | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||
*The notional contract amounts of derivatives indicate the gross nominal value of transactions outstanding at the balance sheet date.
The following table sets out the Company’s current asset investments:
|
| |||||||||||||||||||||||||
2014 £m | 2013 £m | |||||||||||||||||||||||||
| ||||||||||||||||||||||||||
Investments in short-term money funds | 1,238 | 2,113 | ||||||||||||||||||||||||
Short-term deposits | 245 | 438 | ||||||||||||||||||||||||
Restricted cash balances – collateral | 21 | 172 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||
| 1,504 | 2,723 | |||||||||||||||||||||||||
| ||||||||||||||||||||||||||
The following table analyses the Company’s total borrowings:
|
| |||||||||||||||||||||||||
2014 £m | 2013 £m | |||||||||||||||||||||||||
| ||||||||||||||||||||||||||
Amounts falling due within one year | ||||||||||||||||||||||||||
Bank loans | 423 | 277 | ||||||||||||||||||||||||
Bonds | 904 | 336 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||
| 1,327 | 613 | |||||||||||||||||||||||||
| ||||||||||||||||||||||||||
Amounts falling due after more than one year | ||||||||||||||||||||||||||
Bonds | 1,850 | 2,762 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||
Total borrowings | 3,177 | 3,375 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||
The maturity of total borrowings is disclosed in note 34 to the consolidated financial statements. There are no differences in the maturities as calculated under IFRS or UK GAAP.
The notional amount of borrowings outstanding as at 31 March 2014 was £3,074m (2013: £3,250m). Further information on significant borrowings can be found on the debt investors section of our website.
The called up share capital amounting to £439m (2013: £433m) consists of 3,854,339,684 (2013: 3,794,575,998) ordinary shares. For further information on share capital, refer to note 24 to the consolidated financial statements. |
| |||||||||||||||||||||||||
|
|
|
|
|
| 8.Reserves | ||||||||||||||||||||||
Share premium account £m | Cash flow hedge reserve £m | Available- for-sale reserve £m | Other equity reserves £m | Profit and loss account £m | ||||||||||||||||||
| ||||||||||||||||||||||
At 1 April 2012 | 1,355 | 9 | – | 220 | 4,579 | |||||||||||||||||
Transferred from equity in respect of cash flow hedges (net of tax) | – | 3 | – | – | – | |||||||||||||||||
Shares issued in lieu of dividends | (11) | – | – | – | – | |||||||||||||||||
Issue of treasury shares | – | – | – | – | 19 | |||||||||||||||||
Purchase of own shares | – | – | – | – | (6) | |||||||||||||||||
Share awards to employees of subsidiary undertakings | – | – | – | 20 | – | |||||||||||||||||
Loss for the financial year | – | – | – | – | (382) | |||||||||||||||||
| ||||||||||||||||||||||
At 31 March 2013 | 1,344 | 12 | – | 240 | 4,210 | |||||||||||||||||
Transferred from equity in respect of cash flow hedges (net of tax) | – | 8 | – | – | – | |||||||||||||||||
Net gains taken to equity | – | – | 1 | – | – | |||||||||||||||||
Shares issued in lieu of dividends | (8) | – | – | – | – | |||||||||||||||||
Issue of treasury shares | – | – | – | – | 14 | |||||||||||||||||
Purchase of own shares | – | – | – | – | (3) | |||||||||||||||||
Share awards to employees of subsidiary undertakings | – | – | – | 20 | – | |||||||||||||||||
Loss for the financial year | – | – | – | – | (83) | |||||||||||||||||
| ||||||||||||||||||||||
At 31 March 2014 | 1,336 | 20 | 1 | 260 | 4,138 | |||||||||||||||||
| ||||||||||||||||||||||
There were no gains and losses, other than losses for the years stated above; therefore no separate statement of total recognised gains and losses has been presented. At 31 March 2014, £86m (2013: £86m) of the profit and loss account reserve relating to gains on intra-group transactions was not distributable to shareholders.
9.Reconciliation of movements in total shareholders’ funds
| ||||||||||||||||||||||
2014 £m | 2013 £m | |||||||||||||||||||||
| ||||||||||||||||||||||
Profit for the financial year | 976 | 428 | ||||||||||||||||||||
Dividends1 | (1,059) | (810) | ||||||||||||||||||||
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Loss for the financial year | (83) | (382) | ||||||||||||||||||||
Issue of treasury shares | 14 | 19 | ||||||||||||||||||||
Purchase of own shares | (3) | (6) | ||||||||||||||||||||
Shares issued in lieu of dividends2 | (2) | – | ||||||||||||||||||||
Movement on cash flow hedge reserve (net of tax) | 8 | 3 | ||||||||||||||||||||
Movement on available-for-sale reserve | 1 | – | ||||||||||||||||||||
Share awards to employees of subsidiary undertakings | 20 | 20 | ||||||||||||||||||||
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Net decrease in shareholders’ funds | (45) | (346) | ||||||||||||||||||||
Opening shareholders’ funds | 6,239 | 6,585 | ||||||||||||||||||||
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| Closing shareholders’ funds | 6,194 | 6,239 | ||||||||||||||||||||
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1. For further details of dividends paid and payable to shareholders, refer to note 8 to the consolidated financial statements.
2. Included within share premium account are costs associated with scrip dividends.
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 2014, the sterling equivalent amounted to £2,713m (2013: £2,767m). The guarantees are for varying terms from less than one year to open-ended.
The audit fee in respect of the parent Company was £26,750 (2013: £25,750). Fees payable to PricewaterhouseCoopers LLP for non-audit services to the Company are included within note 3 (e) to the consolidated financial statements.
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| National Grid Annual Report and Accounts 2015/16 | The business in detail | 175 |
AdditionalThe business in detail
Informationcontinued
information in detail
Our licences are established under the Gas Act 1986 and Electricity Act 1989, as amended (the Acts),. They require us to develop, maintain and operate economic and efficient networks and to facilitate competition in the supply of gas and electricity in Great Britain.Britain (GB). They also give us statutory powers, such aspowers. These include the right to bury our pipes or cables under public highways and the ability to use compulsory powers to purchase land to enable theso we can conduct of our business.
Our networks are regulated by Ofgem, which has established price control mechanisms that set the amount of revenue that can be earned by our regulated businesses.businesses can earn. Price control regulation is designed to ensuremake sure our interests, as a monopoly, are balanced with those of our customers. Ofgem allows us to charge reasonable, but not excessive, prices givingprices. This gives us a future level of revenue that is sufficient to meet our statutory duties and licence obligations, and also to makemakes a reasonable return on our investment.
The price control includes a number of mechanisms designed to help achieve its objectives, includingobjectives. These include financial incentives designed tothat encourage us to: continuously improve the cost and effectiveness of our services; manage and operate our networks efficiently; deliver high-quality services to our customers and wider stakeholder community; and invest in the development of the network in a manner that ensures long-term security of supply.
| ● | efficiently deliver by investment and maintenance the network outputs that customers and stakeholders require, including reliable supplies, new connections and infrastructure capacity; |
| ● | innovate in order to continuously improve the services we give our customers, stakeholders and communities; and |
| ● | efficiently balance the transmission networks to support the wholesale markets. |
Our UK Electricity Transmission (UK ET), UK Gas Transmission (UK GT) and UK Gas Distribution (UK GD) businesses operate under eight separate price controls in the UK. These comprise two for our UK ET operations, one covering our role as transmission owner (TO) and the other for our role as system operator (SO); two for our UK GT operations, again one as TO and one as SO; and one for each of our four regional gas distribution networks. While each of the eight price controls may have differing terms, they are based on a consistent regulatory framework.
In addition to the eight price controls, our LNG storage business has a price control covering some aspects of its operations. Therethere is also a tariff cap price control applied to certain elements of domestic metering and daily meter reading activities undertakencarried out by National Grid Metering.
Interconnectors derive their revenues from congestion revenues. Congestionsales of capacity to users who wish to move power between market areas with different prices. These sales revenues are dependentcalled congestion revenues because market price differences result from the congestion on the existence offinite interconnector capacity, which limits full price differentials between markets at either end of the interconnector.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 via market-based methods, iethrough auctions.
There are two routesa range of different regulatory models available for interconnector investment: aprojects. These involve various levels of regulatory intervention ranging from fully merchant (the project is fully reliant on sales of interconnector capacity) to cap and floor (where sales revenues above the cap are returned to transmission system users and revenues below the floor are topped up by transmission system users, thus reducing the overall project risk).
The cap and floor regime is now the regulated route wherefor interconnector investment in GB, which sits alongside the exemption route (whereby project developers have to comply with allapply for exemptions from aspects of European legislation on cross-border electricity infrastructure and receivelegislation).
RIIO price controls
On 1 April 2013, Ofgem introduced a regulated returnnew regulatory framework called RIIO (revenue = incentives + innovation + outputs), with the first price control agreed under the new framework lasting for their investment; or a merchant-exempt route, where developers would face the full upside and downsideeight years. The building blocks of the investmentRIIO price control are broadly similar to the historical price controls used in the UK. However, there are some significant differences in the mechanics of the calculations.
How is revenue calculated?
Under RIIO the outputs we deliver are clearly articulated and typicallyare integrally linked to the calculation of our allowed revenue. These outputs have been determined through an exemption from European legislation.extensive consultation process, which has given stakeholders a greater opportunity to influence the decisions.
There are six output categories:
National Grid’s UK interconnectors earn their revenue by auctioning capacity based onSafety: ensuring the provision of a safe energy network.
Reliability (and availability): promoting networks capable of delivering long-term reliability, as well as minimising the number and duration of interruptions experienced over the price differencecontrol period, and ensuring adaptation to climate change.
Environmental impact: encouraging companies to play their role in achieving broader environmental objectives – specifically, facilitating the reduction of carbon emissions – as well as minimising their own carbon footprint.
Customer and stakeholder satisfaction: maintaining high levels of customer satisfaction and stakeholder engagement, and improving service levels.
Customer connections: encouraging networks to connect customers quickly and efficiently.
Social obligations (UK GD only): extending the gas network to communities that are fuel poor where it is efficient to do so, and introducing measures to address carbon monoxide poisoning incidents.
Within each of these output categories are a number of primary and secondary deliverables, reflecting what our stakeholders want us to deliver over the coming price control period. The nature and number of these deliverables varies according to the output category, with some being linked directly to our allowed revenue, some linked to legislation, and others having only a reputational impact.
Ofgem, using information we have submitted, along with independent assessments, determines the efficient level of expected costs necessary to deliver them. Under RIIO this is known as totex, which is a component of total allowable expenditure, and is the sum of what was defined in previous price controls as operating expenditure (opex), capital expenditure (capex) and, in UK GD controls, mains replacement expenditure (repex).
A number of assumptions are necessary in setting these outputs, such as certain prices or the volumes of work that will be needed. Consequently, there are a number of uncertainty mechanisms within the RIIO framework that can result in adjustments to totex if actual prices or volumes differ from the assumptions. These mechanisms protect us and our customers from windfall gains and losses.
Where we under- or over-spend the allowed totex for reasons that are not covered by uncertainty mechanisms, there is a sharing factor. This means the under- or over-spend is shared between us and customers through an adjustment to allowed revenues in future years. This sharing factor provides an incentive for us to provide the markets at each endoutputs efficiently, as we are able to keep a portion of savings we make, with the remainder benefiting our customers.
This sharing factor is one of the link and are referredways that RIIO has given innovation more prominence. Innovation includes traditional areas such as new technologies, as well as the broader challenge of finding new ways of working to as merchant interconnectors; this being the typical UK model.deliver outputs more efficiently. This broader challenge has an impact on everyone in our business.
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| 176 | National Grid Annual Report and Accounts 2015/16 | Additional Information |
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RIIO price controls Our UK regulator has introduced a new regulatory framework called RIIO (revenue = incentives + innovation + outputs) that became effective on 1 April 2013 and lasts for eight years. The building blocks of the RIIO price control are broadly similar to the historical price controls used in the UK; however there are some significant differences in the mechanics of the calculations.
How is revenue calculated? Under RIIO the outputs we deliver are clearly articulated and are integrally linked to the calculation of our allowed revenue. These outputs have been determined through an extensive consultation process which has given stakeholders a greater opportunity to input to these decisions. The clarity around outputs should lead to greater transparency of our performance in delivering them.
The six key output categories are:
· Safety: ensuring the provision of a safe energy network. · Reliability (and availability): promoting networks capable of delivering long-term reliability, as well as minimising the number and duration of interruptions experienced over the price control period, and ensuring adaptation to climate change. · Environmental impact: encouraging companies to play their role in achieving broader environmental objectives – specifically facilitating the reduction of carbon emissions – as well as minimising their own carbon footprint. · Customer and stakeholder satisfaction: maintaining high levels of customer satisfaction and stakeholder engagement, and improving service levels. · Customer connections: encouraging networks to connect customers quickly and efficiently. · Social obligations (UK GD only): extending the gas network to communities that are fuel poor where it is efficient to do so and introducing measures to address carbon monoxide poisoning incidents.
Within each of these output categories are a number of primary and secondary deliverables, reflecting what our stakeholders want us to deliver over the coming price control period. The nature and number of these deliverables varies according to the output category, with some being linked directly to our allowed revenue, some linked to legislation, and others having only a reputational impact. Ofgem, using information submitted by us along with independent assessments, determines the efficient level of expected costs necessary to deliver them. Under RIIO this is known as totex, short for total expenditure, and is similar to the sum of controllable opex, capex and repex (for UK GD) under the previous price control.
A number of assumptions are necessary in setting these outputs, such as certain prices or the volumes of work that will be needed. As a result, to protect us and our customers from windfall gains and losses, there are a number of uncertainty mechanisms within the RIIO framework that can result in adjustments to totex if actual prices or volumes differ from the assumptions.
Where we under- or over-spend the allowed totex for reasons that are not covered by uncertainty mechanisms, there is a sharing factor, ie the under- or over-spend is shared between us and customers through an adjustment to allowed revenues in a future year. This sharing factor provides an incentive for us to provide the outputs efficiently as we are able to keep a portion of the savings, with the remainder benefiting our customers. | This sharing factor is one of the ways that RIIO has given innovation more prominence. Innovation includes traditional areas such as new technologies, as well as the broader challenge of finding new ways of working to deliver outputs more efficiently. This broader challenge will have an impact on everyone in our business.
Totex is then split between fast and slow money, a new concept under RIIO, based on a specified percentage. Fast money represents the amount of totex that we are able to recover in the current year. Slow money is added to our RAV.
In addition to fast money, in each year we are allowed to collect a depreciation of and a return on our RAV.
This operates in a similar way to the previous price control, although there have been changes to the asset lives for electricity transmission (transition from 20 years to 45 years evenly across the RIIO period) and the depreciation calculation for UK GD (changed from 45 years straight line to 45 years sum of digits for assets added post 2002). We are also allowed to collect additional revenues related to non-controllable costs and incentives.
The incentive mechanisms can increase or decrease our allowed revenue and result from our performance against various measures related to our outputs. RIIO has introduced new incentive mechanisms as a way to provide further incentives to align our objectives with those of our customers and other stakeholders. For example, performance against our customer satisfaction targets can have a positive or negative effect of up to 1% of allowed annual revenues. Incentives will normally affect our revenues two years after the year of performance.
RIIO regulatory building blocks
Allowed returns The cost of capital allowed under RIIO is as follows: | |||||||||||||||
| Transmission | Gas Distribution | |||||||||||||||
| Gas | Electricity | |||||||||||||||
| Cost of equity (post-tax real) | 6.8% | 7.0% | 6.7% | |||||||||||||
| Cost of debt (pre-tax real) | iBoxx 10 year simple trailing average index (2.92% for 2013/14) | |||||||||||||||
| Notional gearing | 62.5% | 60.0% | 65.0% | |||||||||||||
| Vanilla WACC1 | 4.38% | 4.55% | 4.24% | |||||||||||||
1. Vanilla WACC = cost of debt x gearing + cost of equity x (1- gearing). | ||||||||||||||||
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Allowed revenue to fund totex costs are split between fast and slow money – a concept under RIIO, based on a specified percentage that is fixed for the duration of the price control (except for UK GD’s repex which changes on a linear scale across the price control). Fast money represents the amount of totex we are able to recover in
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The asset life for regulatory depreciation in electricity transmission spans 45 years across the RIIO period. This is also the case for the asset life depreciation for UK GD. We are also allowed to collect additional revenues related to non-controllable costs and incentives.
The incentive mechanisms can increase or decrease our allowed revenue and result from our performance against various measures related to our outputs. RIIO has incentive mechanisms that encourage us to align our objectives with those of our customers and other stakeholders. For example, performance against our customer satisfaction targets can have a positive or negative effect of up to 1% of allowed annual revenues. Most of our incentives affect our revenues two years after the year of performance.
The RIIO controls for both our transmission and gas distribution businesses were introduced on 1 April 2013 and the first price control period lasts for eight years. During the eight year period our regulator included a provision for a potential mid-period review, with scope driven by:
| Gas Transmission | Electricity Transmission | Gas Distribution | ||||||||||||||||||||
Transmission |
System |
Transmission |
System |
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East of England |
West Midlands | London | |||||||||||||||
| Repex: | Stepped decline from 50% in 2013/14 to 0% in 2020/21 | |||||||||||||||||||||
| Baseline 35.6% | in seven equal instalments of 7.14% per annum | |||||||||||||||||||||
1 Fast | Uncertainty 10% | 62.60% | 15.00% | 72.10% | 73.90% | 73.37% | 75.05% | 76.53% | ||||||||||||||
| Repex: | Stepped increase from 50% in 2013/14 to 100% in 2020/21 | |||||||||||||||||||||
| Baseline 64.4% | in seven equal instalments of 7.14% per annum | |||||||||||||||||||||
2 Slow | Uncertainty 90% | 37.40% | 85.00% | 27.90% | 26.10% | 26.63% | 24.95% | 23.47% | ||||||||||||||
3 Sharing | 44.36% | 46.89% | 63.04% | |||||||||||||||||||
In November 2015, Ofgem launched a consultation on a potentialRIIO-T1 and GD1 mid-period review. Under the RIIO controls, we are required to deliver agreed outputs for consumers and are funded to cover the costs of delivering these. The eight year price control includes a number of uncertainty mechanisms to take account of the fact that some outputs and funding cannot be set with certainty at the start of the period. One of these uncertainty mechanisms is the review of outputs. In May 2016, Ofgem decided to launch a mid-period review focusing on the transmission outputs. RIIO regulatory building blocks
Allowed returns The cost of capital allowed under RIIO is as follows:
1. Vanilla WACC = cost of debt x gearing + cost of equity x (1-gearing). The sharing factor means that any over- and under-spend is shared between the businesses and consumers. The shared figures displayed in the table below are the sharing factors that apply to UK ET, UK GT and UK GD. For more information on RIIO, including incentive mechanisms, please see the relevant investor fact sheets on the Investor Relations section of our website.
Sharing factors under RIIO are as follows:
The business in detailcontinued Regulators In the US, public utilities’ retail transactions are regulated by state utility
Utilities are regulated at the federal level (FERC) for wholesale transactions, such as interstate transmission and wholesale electricity sales, including rates for these services. FERC also regulates public utility holding companies and centralised service companies, including those of our US businesses.
Regulatory process The US regulatory regime is premised on allowing the utility the opportunity to recover its cost of service and earn a reasonable return on its investments as determined by the commission. Utilities case due to complaints filed with the commission or at the commission’s own discretion. The rate case
| Gas and electricity rates are established from a revenue requirement,
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 US regulatory
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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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networks (upstate New York, New York City, Long Island, Massachusetts Our operating companies have revenue decoupling mechanisms that de-link the companies’ revenues from the quantity of energy delivered and volumes. Our rate plans are designed to a specific allowed RoE, by reference to an allowed operating expense level and rate base. Some rate plans include earnings sharing mechanisms that allow us to retain a proportion of the earnings above our allowed RoE, In addition, our performance under certain rate plans is subject to service performance targets. We may be subject to monetary penalties in cases where we do not meet those targets.
One measure used to monitor the performance of our regulated businesses is a comparison of achieved RoE to allowed
We work to increase achieved Features of our rate plans We A substantial proportion of our costs, in particular electricity and gas commodity purchases, | or recovered from, our customers. Our FERC-regulated transmission companies use formula rates (instead of rate cases) to set rates annually to recover their cost of service. Through the use of annual true-ups, formula rates recover our actual costs the allowed RoE based on the actual transmission rate base each year. The Company must make annual formula rate filings documenting the revenue requirement, which customers can review and challenge. Revenue for our wholesale transmission businesses in New England and New York is collected from wholesale transmission customers, who are typically other utilities and include our own New England electricity distribution businesses. With the exception of upstate New York, which continues to combine retail transmission and distribution rates to
Our Long Island generation plants sell capacity to LIPA under US regulatory filings The objectives of our rate case filings are to 182. Below, we summarise significant developments in rate filings and the regulatory environment during the year. We completed the final stabilisation upgrade to our new financial systems in July 2014. With 12 months of historical ‘test year’ data available from the stabilised financial systems, we commenced a new round of full rate case filings, starting with the filing for Massachusetts Electric in November 2015, and followed by the filings for KEDNY and KEDLI in January 2016. We expect to make a number of such filings over the next two to three years to update the capital investment allowances and rate bases across many of our businesses. These filings are expected to capture the benefit of recent increased investments in asset replacement and network reliability, and reflect long-term growth in costs, including property tax and healthcare costs. Along with a clear focus on productivity, the filings are key to improving achieved returns in the Company’s US distribution activities. Moreover, as part of current regulatory initiatives, we filed a proposal for investments in grid modernisation in Massachusetts and anticipate a similar proposal for innovative technology deployments and service offerings as part of the Reforming the Energy Vision (REV) effort in New York in 2016. Massachusetts Massachusetts electric rate case On 6 November 2015, we filed a one-year rate plan for our Massachusetts electric business to take effect from 1 October 2016, which was updated on 29 April 2016. The updated rate case filing requests an annualised net increase in distribution revenue of approximately $137 million. The filing includes a request to increase annual capital investment subject to the capital investment recovery mechanism from $170 million to $285 million, and to include property tax recovery on incremental capital placed in service. The filing also requests an increase in annual base rate funding of the storm fund mechanism from $4.3 million to $14 million, and a 14-month extension of the incremental funding to address the storm fund’s deficit, created by weather events occurring through February 2015. The filing is based on an RoE of 10.5% and a capital structure of 52% equity and 48% debt. Capital investment programmes
Storm fund recovery The Massachusetts electricity business collects $4.3 million MADPU allowed us to begin collecting $40 million Grid modernisation In response to a 2014 regulatory requirement, the Company filed a Massachusetts electricity grid modernisation plan on 19 August 2015 that proposed multiple investment options that would further MADPU’s goals of reducing the effect of outages, optimising demand, integrating distributed resources, and improving workforce and asset management. The Company presented a range of investment options for MADPU to consider, with investment levels over five years ranging from $225 million to $831 million. MADPU established criteria that, if met, would allow the capital costs from the plan to be
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New York Upstate New York to fund capital expenditures With the three-year rate plan
Reforming the Energy Vision (REV) In April 2014, NYPSC instituted the REV proceeding, which envisions a new role for utilities as distributed system platform (DSP) providers who create markets for distributed energy resources (DER) and more fully integrate DER in distribution system operations and planning. The REV proceeding’s objectives include: enhanced customer energy choices and control; improved electricity system efficiency, reliability, and resiliency; and cleaner, more diverse electricity generation. NYPSC is expected to issue an order in 2016 to address rate-making issues under REV, including opportunities for outcome-based shareholder incentive mechanisms, market-based earnings, changes to rate design, DER compensation and the rate-making process. The Company’s first five-year distributed system implementation plan is expected to be filed in June 2016 and will identify incremental investments in utility infrastructure necessary for implementation of the DSP role and greater DER integration.
The business in detailcontinued KEDLI gas investment plan In June 2014, KEDLI petitioned NYPSC for approval of a deferral mechanism related to a proposed gas infrastructure investment programme. In December 2014, NYPSC approved two gas investment plans for 2015 and 2016, one for leak-prone pipe capital expenditures (capped at $211.7 million in total) and one for gas service expansion expenditures (capped at $202.7 million in total). NYPSC approved a surcharge to begin recovery of the deferred leak-prone pipeline investment costs, allowing for the recovery up to a total of $23.4 million through a surcharge effective from 1 April 2015 until the end of 2016. KEDLI received approval to establish a new deferral accounting mechanism for the balance of the approved costs not covered by the surcharge. KEDNY gas investment plan and site investigation and remediation (SIR) surcharge In October 2015, NYPSC approved KEDNY’s petition to extend its capital investment recovery mechanism and reconciliation period for two more years through 2016 and to use a deferred credit balance from underspending in 2013 and 2014 to offset the revenue requirement associated with over $870 million of total capital investment in 2015 and 2016 (compared with a total capital allowance of roughly $614 million for 2013 and 2014). Also in October 2015, NYPSC approved KEDNY’s petition to increase its current SIR surcharge by $37.5 million annually, effective from 1 November 2015, to offset its SIR deferral balances. KEDNY and KEDLI rate cases On 29 January 2016, KEDNY and KEDLI filed base rate cases with NYPSC to increase their delivery revenues by $245 million and $142 million, respectively, with new rates expected to come into effectin early 2017. The cases include capital investment of approximately $610 million for KEDNY and $340 million for KEDLI for 2017. The rate case filings maintain tracker and true-up mechanisms for property taxes, commodity-related bad debt, and pension/OPEBs and seek to establish reconciling mechanisms for city/state construction-related costs and SIR recovery surcharge/tracker mechanisms. KEDNY and KEDLI filed one year cases, but submitted two additional years of data to facilitate a multi-year settlement. The filings are based on a RoE of
Operations staffing audit In January 2014, NYPSC initiated an operational audit to review internal staffing levels and use of contractors for the
succession planning. The final report is expected to be
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Rhode Island Rhode Island reliability (ISR) plans
on 25 February 2016. The electricity ISR plan encompasses The gas ISR plan encompasses Changing distribution system and modernisation of rates On 3 March 2016, RIPUC opened a docket to investigate the modernisation of rates in light of the changing electric distribution system, including the costs and benefits of distributed energy resources. FERC
In September 2011, On 22 March 2016, a FERC administrative law judge On 29 April 2016, a
In A number of entities intervened in the docket and challenged various aspects of the The settlement included an RoE of 10% inclusive of 0.50% incentives. FERC approved the settlement without modification on 17 March 2016. National
National Grid LNG LLC On 1 April 2016, the Company filed an application seeking FERC approval of a planned $180 million liquefaction facility at the Providence, Rhode Island, LNG plant, with a FERC decision expected by November 2016. The expected in-service date is December 2018. Rates for the new liquefaction service will be cost-based formula rates charged to customers who opt to take liquefaction service. New England gas and electricity interdependency New England’s gas and electricity systems have become increasingly interdependent as the region’s reliance on gas-fired electricity generation has grown without commensurate pipeline infrastructure expansion, driving significant increases in the region’s wholesale and retail electricity costs and electricity reliability concerns. To address this challenge, New England’s governors are pursuing strategic infrastructure investments focused on expanding the region’s energy portfolio. Working with state representatives and our peer utilities, our Massachusetts and Rhode Island electricity distribution companies issued a multi-state solicitation for proposals for clean energy and associated transmission infrastructure to increase the ability to deliver low-carbon energy. Proposals were submitted on 28 January 2016, including a proposal comprised of the Vermont Green Line being developed by Anbaric and National Grid paired with renewable energy generation. A multi-year effort in coordination with representatives from several states, other regional utilities, interstate gas pipelines, state regulators and FERC led to a filing in January 2016 in Massachusetts by our electricity distribution companies for approval of precedent agreements to enter into gas interstate pipeline and storage capacity contracts with the Access Northeast pipeline project sponsored by Spectra Energy. The Company also plans to make a filing in Rhode Island in mid 2016 seeking approval of a similar contract on behalf of Narragansett Electric Company. With these contracts, our electricity distribution companies will secure incremental pipeline capacity to release to electricity generators that will both improve electricity reliability and lower electricity costs for customers. National Grid is a co-developer, with a 20% stake, of the Access Northeast project. Formula rate transparency 206 proceeding On 28 December 2015, FERC initiated a proceeding against National Grid and other New England transmission owners under Section 206 of the Federal Power Act. FERC found that the tariff governing electricity transmission service in New England lacks adequate transparency and challenge procedures with regard to the formula rates through which the Company recovers its costs and that the formula rates appear to lack sufficient detail regarding certain costs recovered. The parties are currently involved in settlement negotiations to develop formula rate protocols and to address FERC’s concerns about specific elements of the formula rate. FERC financial audit of National Grid USA and affiliates On 24 November 2015, FERC commenced a financial audit of National Grid USA, including its service companies and other affiliates, which covers the period from 1 January 2013 to the present. The audit will evaluate compliance with the FERC’s accounting, record keeping and reporting requirements as well as interactions among the service companies and affiliated operating companies. Based on past audits, we expect the audit to last about 18 months. FERC Order 1000 Issued in 2011, Order 1000 was FERC’s major policy order intended to foster regional and inter-regional transmission planning, address transmission needs driven by public policy requirements and increase competition in the electricity transmission industry. Policies to comply with Order 1000 have been in effect in New York and New England since January 2014 and May 2015 respectively. The competitive transmission planning processes instituted under Order 1000 have opened National Grid’s service territory to competition from non-incumbent transmission developers and also created opportunities for National Grid to compete for transmission projects outside of the Company’s current geographic footprint. In the first applications of the Order 1000 planning and competitive solicitation processes in New York or New England, NYPSC has identified two transmission needs in New York driven by public policy goals. The first, in western New York, is intended to relieve congestion and to maximise hydropower and Ontario imports. In December 2015, National Grid submitted two competitive transmission proposals for projects to address the need in western New York. In addition, NYPSC identified a transmission need to allow greater flow of power from upstate to downstate New York. Competitive proposals to meet this transmission need were solicited in February 2016. National Grid submitted a competitive transmission proposal in April 2016, with project selection expected in 2016.
The business in detailcontinued Summary of US price controls and rate plans
Additional Information
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