Form 20-F
Table of Contents

 

 

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 2015
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 2015 was

Ordinary Shares of 11 17/43 pence each   3,891,691,900

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 2015 and is dated 5 June 2015. Details of events occurring subsequent to the approval of the annual report on 20 May 2015 are summarised in section “Further Information” which forms a part of this Form 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.

 

 

 


Table of Contents

Form 20-F Cross Reference Table

 

Item

   Form 20-F caption    Location in the document        Page(s)   

1

  

 

Identity of directors, senior management and advisors

  

 

Not applicable

     –       

2

  

 

Offer statistics and expected timetable

  

 

Not applicable

     –       

3

  

 

Key Information

     
  

3A Selected financial data

  

“Additional Information—Summary consolidated financial information”

     190-191   
     

“Strategic Report—Financial review”

     20-23   
     

“Financial Statements—Unaudited commentary on consolidated statement of financial position—Net debt”

     91   
     

“Financial Statements—Unaudited commentary on the consolidated cash flow statement—Net debt”

     93   
     

“Additional Information—Other unaudited financial information—Reconciliations of adjusted profit measures”

     186   
     

“Additional Information—Shareholder information—Exchange rates”

     180   
     

“Exchange Rates”

    

 

“Further

Information”

 

  

  

3B Capitalization and indebtedness

  

Not applicable

     –       
  

3C Reasons for the offer and use of proceeds

  

Not applicable

     –       
    

3D Risk Factors

  

“Additional Information—The business in detail—Risk factors”

     173-176   

4

  

Information on the company

     
  

4A History and development of the company

  

“Want more information or help?”

    

 

196-

Back cover

  

  

     

“Additional Information—The business in detail—Key milestones”

     164   
     

“Strategic Report—Chief Executive’s review”

     4-5   
     

“Strategic Report—Our vision and strategy”

     14-15   
     

“Strategic Report—Operating environment”

     6-7   
     

“Additional Information—Shareholder information—Articles of Association”

     177-178   
     

“Financial Statements—Consolidated statement of financial position—Unaudited commentary on consolidated statement of financial position—Property, plant and equipment”

     91   
     

“Financial Statements—Consolidated cash flow statement—Unaudited commentary on the consolidated cash flow statement—Net capital expenditure”

     93   
     

“Additional Information—Other unaudited financial information—Commentary on consolidated financial statements for the year ended 31 March 2014”

     187-189   
     

“Financial Statements—Notes to the consolidated financial statements—2. Segmental analysis—(c) Capital expenditure, depreciation and amortisation”

     98   
     

“Strategic Report—How our strategy creates value”

     15   
  

4B Business overview

  

“Additional Information—The business in detail—Where we operate”

     165   
     

“Strategic Report—Operating environment”

     6-7   
     

“Strategic Report”—What we do – Electricity”;

     8-9   

 

i


Table of Contents

Item

   Form 20-F caption    Location in the document      Page(s)     
     

“—What we do – Gas”;

“—Our Business model”;

“—Our vision and strategy”

and

    

 

 

10-11

12-13

14-19

  

  

  

     

“—How our strategy creates value”

     15   
     

“Strategic Report—Principal operations”

     27-36   
     

“Strategic Report—Delivering our strategy – key performance indicators”

     16-19   
     

“Financial Statements—Notes to the consolidated financial statements—2. Segmental analysis” and “—unaudited commentary on the results of our principal operations by segment”

     96-100   
     

“Additional Information—Internal control and risk factors—Risk factors—Infrastructure and IT systems—We may suffer a major network failure or interruption, or may not be able to carry out critical operations due to the failure of infrastructure, data, technology or a lack of supply”; “—Law and Regulation—Changes in law or regulation or decisions by governmental bodies or regulators could materially adversely affect us”; and “—Customers and counterparties—Customers and counterparties may not perform their obligations”

    

 

 

174

174

176

  

  

  

     

“Additional Information—The business in detail—UK regulation”; “—US regulation”; and “—Summary of US price controls and rate plans”

     166-172   
     

“Strategic Report—Our Business model”

     12-13   
  

4C Organizational structure

  

“Financial Statements—Notes to the consolidated financial statements—32. Subsidiary undertakings, joint ventures and associates—Principal subsidiary undertakings”

     150   
  

4D Property, plants and equipment

  

“Additional Information—The business in detail—Where we operate” and

— “Property, plant and equipment

    

 

165

185

  

  

     

“Strategic Report—What we do – Electricity”; “—What we do – Gas”; and

     8-11   
     

“—Our Business model”;

     12-13   
     

“Strategic Report—Principal operations”

     27-36   
     

“Strategic Report—Our vision and strategy—Embed sustainability” and “—Drive growth”

     14   
     

“Strategic Report—Operating environment—Changing energy mix”; “—Energy policy”; “—Regulation”; and “—Innovation and technology”

     6-7   
     

“Financial Statements—Consolidated statement of financial position—Unaudited commentary on consolidated statement of financial position—Property, plant and equipment”

     91   
     

“Additional Information—Other disclosures—Property, plant and equipment”

     185   
     

“Financial Statements—Notes to the consolidated financial statements—11.

     115-116   

 

ii


Table of Contents

Item

     Form 20-F caption    Location in the document      Page(s)     
       

Property, plant and equipment”

  
           

“Financial Statements—Notes to the consolidated financial statements—19. Borrowings”

     123-125   

4A

    

 

Unresolved staff comments

  

“Additional Information—Other disclosures—Unresolved SEC staff comments”

     185   

5

    

 

Operating and financial review and prospects

     
    

5A Operating results

  

“Strategic Report—Financial review”

     20-23   
       

“Strategic Report—Operating environment”

     6-7   
       

“Additional Information—The business in detail—UK regulation”; “—US regulation”; and “—Summary of US price controls and rate plans”

     166-172   
       

“Strategic Report—Principal operations”

     27-36   
       

“Financial Statements—Consolidated income statement—Unaudited commentary on the consolidated income statement”

     87   
       

“Financial Statements—Notes to the consolidated financial statements—2. Segmental analysis—Unaudited commentary on the results of our principal operations by segment”

     99   
       

“Additional Information—Other unaudited financial information”

     186-189   
       

“Financial Statements—Notes to the consolidated financial statements—30. Financial risk management—(d) Currency risk”

     144-145   
    

5B Liquidity and capital resources

  

“Strategic Report—Financial review”

     20-23   
       

“Corporate Governance—Going concern”

     54   
       

“Financial Statements—Consolidated cash flow statement”

     92-93   
       

“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”

     176   
       

“Financial Statements—Notes to the consolidated financial statements—2. Segmental analysis—Unaudited commentary on the results of our principal operations by segment”

     99   
       

“Financial Statements—Notes to the consolidated financial statements—26. Net debt”

     134-135   
       

“Financial Statements—Notes to the consolidated financial statements—19. Borrowings”

     123-125   
       

“Financial Statements—Notes to the consolidated financial statements—15. Derivative financial instruments”

     118-120   
       

“Additional Information—The business in detail—FERC—Short-term borrowing authorisation”

     171   
       

“Additional Information—Shareholder information—Material interests in shares”

     180-181   
       

“Material Interests in Shares” and “Material

     “Further Information”   

 

iii


Table of Contents

Item

   Form 20-F caption    Location in the document      Page(s)     
     

interest in American Depositary Shares”

  
  

5C Research and development, patents and licenses, etc.

  

“Additional Information—Other disclosures—Research and development”

     185   
  

5D Trend information

  

“Strategic Report—Financial review”

     20-23   
     

“Strategic Report—Principal operations”

     27-36   
     

“Strategic Report—Operating environment”

     6-7   
  

5E Off-balance sheet arrangements

  

“Financial Statements—Unaudited commentary on consolidated statement of financial condition—Off balance sheet items”

     91   
  

5F Tabular disclosure of contractual obligations

  

“Financial Statements—Notes to the consolidated financial statements—27. Commitments and contingencies”

     136   
  

5G Safe Harbor

  

“Important notice”

     1   
     

“Want more information or help?—Cautionary statement”

     Back cover   

6

  

 

Directors, senior management and employees

             
  

6A Directors and senior management

  

“Corporate Governance—Our Board”

     43   
     

“Additional Information—Shareholder Information—Board biographies”

     178-179   
  

6B Compensation

  

“Corporate Governance—Directors’ Remuneration Report”

     60-75   
     

“Financial Statements—Notes to the consolidated financial statements—3. Operating costs—(c) Key management compensation”

     102   
     

“Financial Statements—Notes to the consolidated financial statements—22. Pensions and other post-retirement benefits”

     126-129   
     

“Financial Statements—Notes to the consolidated financial statements—29. Actuarial information on pensions and other post-retirement benefits”

     137-140   
     

“Share Ownership”

     “Further Information”   
  

6C Board practices

  

“Corporate Governance—Our Board”

     43-49   
     

“Additional Information—Shareholder information”

     177-179   
     

“Additional Information—Other disclosures” “—Conflict of interest”; and —Director’s indemnity”

     184-185   
     

“Corporate Governance—Our Board and its committees—Audit Committee”; “—Finance Committee”; “—Safety, Environment and Health Committee”; “—Nominations Committee”; “—Executive Committee”; “—Management committees”

     49-59   
     

“Corporate Governance—Directors’ Remuneration Report—Annual statement from the Remuneration Committee chairman”

     60-61   
     

“Corporate Governance—Directors’ Remuneration Report—Approved policy table – Executive Directors”

     62-65   
     

“Corporate Governance— Directors’ Remuneration Report—Approved policy table – Non-executive Directors (NEDs)”

     65   
     

“Corporate Governance—Directors’ Remuneration Report—Service contracts

     67   

 

iv


Table of Contents

Item

   Form 20-F caption    Location in the document      Page(s)     
     

and policy on payment for loss of office” and “—Dates of Directors’ service contracts/letters of appointment”

  
  

6D Employees

  

“Financial Statements—Notes to the consolidated financial statements—3. Operating costs—(b) Number of employees”

     101   
     

“Additional Information—Other disclosures—Employees”

     185   
  

6E Share ownership

  

“Corporate Governance—Directors’ Remuneration Report—Shareholding requirement” and “—Differences in remuneration policy for all employees”

     66   
     

“Corporate Governance—Directors’ Remuneration Report—Statement of Directors’ shareholdings and share interests (audited information)”

     72-73   
     

“Corporate Governance—Directors’ Remuneration Report—Annual report on remuneration”

     69-75   
     

“Additional Information—Other disclosures—All-employee share plans”

     184   
     

“Share ownership”

     “Further Information”   

7

  

 

Major shareholders and related party transactions

             
  

7A Major shareholders

  

“Additional Information—Shareholder information—Material interests in shares”

     180-181   
     

“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”

     137   
  

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”

     85   
     

“Financial Statements—Notes to the consolidated financial statements—1. Basis of preparation and recent accounting developments”

     94-96   
     

“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”

     86-93   
     

“Financial Statements—Notes to the consolidated financial statements – analysis of items in the primary statements”

     94-135   
     

“Financial Statements—Notes to the consolidated financial statements – supplementary information”

     136-158   
     

“Strategic Report—Chairman’s statement”

     2-3   
    

8B Significant changes

  

“Subsequent Events”

     “Further Information”   

 

v


Table of Contents

Item

   Form 20-F caption    Location in the document      Page(s)     

9

  

The offer and listing

     
  

9A Offer and listing details

  

“Additional Information—Shareholder information—“Exchange Rates”, “—Share price”, “— Price History”

    

 

180-182

“Further Information”

  

  

  

9B Plan of distribution

  

Not applicable

  
  

9C Markets

  

“Additional Information—Shareholder information—Share price”

     181-182   
  

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—Shareholder Information—Articles of Association”

     177-178   
     

“Additional Information—

Other disclosures—Corporate governance practices: differences from New York Stock Exchange (NYSE) listing standards”

     184   
     

“Additional Information—Shareholder information—Share capital”

     181   
  

10C Material contracts

  

“Additional Information—Other disclosures—Material contracts”

     185   
  

10D Exchange controls

  

“Additional Information—Shareholder information—Exchange controls”

     180   
  

10E Taxation

  

“Additional Information——Shareholder information—Taxation”

     182-183   
  

10F Dividends and paying agents

  

Not applicable

       
  

10G Statement by experts

  

Not applicable

       
  

10H Documents on display

  

“Additional Information—Shareholder information—Documents on display”

     180   
    

10I Subsidiary information

  

Not applicable

       

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”

     118-120   
     

“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”

     141-148   
     

“Strategic Report—Financial review”

     20-23   
  

11B Qualitative information about market risk

  

“Financial Statements—Notes to the consolidated financial statements—15. Derivative financial instruments”

     118-120   
     

“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”

     141-148   
     

“Strategic Report—Financial review”

     20-23   

 

vi


Table of Contents

Item

   Form 20-F caption    Location in the document      Page(s)     
         

“Additional Information—Internal Control and Risk factors—Risk Factors”

     173-176   

12

  

 

Description of securities other than equity securities

     
  

12A Debt securities

  

Not applicable

     –       
  

12B Warrants and rights

  

Not applicable

     –       
  

12C Other securities

  

Not applicable

     –       
  

12D American depositary shares

  

“Additional Information—Shareholder information—Description of securities other than equity securities: depositary fees and charges”

     180   
     

“Additional Information—Shareholder information—Depositary payments to the Company”

     180   
         

“Additional Information—Definitions and glossary of terms”

     192-195   

13

  

 

Defaults, dividend arrearages and delinquencies

  

Not applicable

     –       

14

  

 

Material modifications to the rights of security holders and use of proceeds

  

Not applicable

     –       

15

  

 

Controls and procedures

  

“Additional Information—Internal control and risk factors—Disclosure controls” and “—Internal control over financial reporting”

     173   

16

  

 

16A Audit committee financial expert

  

“Corporate Governance—Audit Committee—Experience”

     51   
  

16B Code of ethics

  

“Additional Information—Other disclosures—Code of Ethics”

     184   
  

16C Principal accountant fees and services

  

“Corporate Governance—Audit Committee—External audit”

     52   
     

“Financial Statements—Notes to the consolidated financial statements—3. Operating costs—(e) Auditors’ remuneration”

     102   
  

16D Exemptions from the listing standards for audit committees

  

Not applicable

     –       
  

16E Purchases of equity securities by the issuer and affiliated purchasers

  

Not applicable

     –       
  

16F Change in registrant’s certifying accountant

  

Not applicable

     –       
  

16G Corporate governance

  

“Additional Information—Other disclosures—Corporate governance practices: differences from New York Stock Exchange (NYSE) listing standards”

     184   
    

16H Mine safety disclosure

  

Not applicable

     –       

17

  

 

Financial statements

  

Not applicable

     –       

18

  

 

Financial statements

  

“Financial Statements—Company accounting policies”

     159   
     

“Financial Statements—Notes to the consolidated financial statements—1. Basis of preparation and recent accounting developments”

     94-96   
     

“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”

     86-93   
     

“Financial Statements—Notes to the

     94-135   

 

vii


Table of Contents

Item

   Form 20-F caption    Location in the document      Page(s)     
     

consolidated financial statements – analysis of items in the primary statements”

  
     

“Financial Statements—Notes to the consolidated financial statements – supplementary information”

     136-158   
         

“Financial Statements—Report of Independent Registered Public Accounting Firm—Audit opinion for Form 20-F”

     85   

19

  

 

Exhibits

  

Filed with the SEC

     –       

 

viii


Table of Contents

LOGO

national grid
Connecting to life
Annual Report and Accounts 2014/15


Table of Contents

LOGO

    
Overview
About National Grid 01
    

    

LOGO

 

Strategic Report pages 02–41

Chairman’s statement 02
Chief Executive’s review 04
Operating environment 06
What we do 08
Our business model 12
Our vision and strategy 14
Delivering our strategy – key performance indicators 16
Financial review 20
Our people 24
Principal operations 27
Internal control and risk management 38
    

    

LOGO

 

Corporate Governance pages 42–75

The Corporate Governance Report, introduced by the Chairman, contains details about the activities of the Board and its committees during the year, including reports from the Audit, Nominations, Remuneration, Finance, and Safety, Environment and Health Committees, as well as details of our shareholder engagement activities.
Corporate Governance contents 42
Directors’ Report and other disclosures 59
Directors’ Remuneration Report 60
    

    

LOGO

 

Financial Statements pages 76–163

Including the independent auditors’ reports, consolidated financial statements prepared in accordance with IFRS and notes to the consolidated financial statements, as well as the Company financial statements prepared in accordance with UK GAAP.
Financial Statements contents 76
Introduction to the financial statements 77
Statement of Directors’ responsibilities 78
Independent auditors’ report 79
Report of Independent Registered Public
Accounting Firm
85
    
    
LOGO

 

Additional Information

pages 164–inside back cover

Additional disclosures and information, definitions and glossary of terms, summary consolidated financial information and other useful information for shareholders, including contact details for more information or help.
Additional Information contents 164

 

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 for this information.

Definitions and glossary of terms 192
Want more information or help? 196
    
    
LOGO

 

Online

For a full search facility, please go to the pdf of our Annual Report and Accounts 2014/15 in the investor relations section of our website (www.nationalgrid.com) and use a word search.

    

LOGO

 


Table of Contents

    

LOGO

About National Grid
Our job is to connect people to the energy they use, safely. We are at the heart of one of the greatest challenges facing our society – delivering clean energy to support our world long into the future.
Financial highlights
Adjusted operating profit1 Adjusted earnings per share1 Operating profit Earnings per share
£3,863m 58.1p £3,780m 53.6p
+5% +9% +1% -18%
2013/14: £3,664m 2013/14: 53.5p2 2013/14: £3,735m 2013/14: 65.7p2
Group return on equity Regulated assets Cash generated from operations Ordinary dividends
11.8% £37.0bn £5,350m 42.87p
+4% +7% +21% +2%
2013/14: 11.4% 2013/14: £34.7bn 2013/14: £4,419m 2013/14: 42.03p
24,274 £3.5bn 0.13IFR 7.3 75%
Employees Capital investment Best overall group safety performance to date Greenhouse gas emissions (million tonnes
carbon dioxide equivalent) Best employee engagement score to date
Our principal operations
UK Electricity Transmission UK Gas Transmission UK Gas Distribution US Regulated Adjusted operating
We own and operate an electricity transmission network and electricity and gas distribution networks serving consumers across the northeastern US.
profit %
We own and maintain the high voltage electricity transmission network in England and Wales, balancing supply with demand on a minute-by-minute basis.
All gas in the UK passes through National Grid’s national transmission system on its way to consumers.
We own and operate four of the eight regional gas distribution networks in Great Britain.
5 32 30 11 22
UK Electricity Transmission
UK Gas Transmission
UK Gas Distribution
US Regulated
Other activities
See page 28 See page 29 See page 30 See pages 33–35
1. Excludes the impact of exceptional items, remeasurements and stranded cost recoveries. See page 186 for more information about these adjusted profit measures.
Important notice
This document contains certain statements that are neither reported financial results nor other historical information. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. For a description of factors that could affect future results, please refer to the full cautionary statement on the inside back cover and to the risk factors section on pages 173 to 176.
2. Comparative earnings per share (EPS) data has been restated for the impact of the scrip dividend issues.
Our financial results are reported in sterling. The average exchange rate, as detailed on page 87, was $1.58 to £1 in 2014/15 compared with the average rate of $1.62 to £1 in 2013/14. Except as otherwise noted, the figures in this Report are stated in sterling or US dollars.
All references to dollars or $ are to the US currency.
Acting responsibly
We have won Business in the Community’s highest award, Responsible Business of the Year 2014. This accolade acknowledges all of our efforts in getting involved with the things that really matter to us and to society, and doing the right things in the right way.
RESPONSIBLE BUSINESS OF THE YEAR 2014
BUSINESS IN THE COMMUNITY
NATIONAL GRID ANNUAL REPORT AND ACCOUNTS 2014/15
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Strategic Report

 

Chairman’s statement

 

It’s been a challenging year for the energy sector. Energy policies in the UK and US have continued to evolve against a backdrop of political uncertainty, seeking an acceptable balance between affordability to consumers, security of supply and sustainability considerations.

 

 

LOGO

 

 In focus:

 

 

In the UK, we saw debate around the cost of living lead to a sharper focus on the costs of energy and the competitiveness of energy markets. This focus has included an Energy and Climate Change Select Committee inquiry into energy network costs, as well as an investigation by the Competition and Markets Authority into the supply and acquisition of energy in Great Britain.

 

In the UK, Electricity Market Reform

 

 The Board is proposing  

 a recommended  full-year  dividend of

 

42.87p

 (2013/14: 42.03p)

 

(EMR) was implemented successfully, and we saw developments in significant interconnector projects (see page 27). In the US, there were mid-term US congressional and gubernatorial elections and debate continued on essential infrastructure, resilience and sustainability.

 

Transparency

In January we announced our decision to stop publishing formal Interim Management Statements (IMSs), following the changes in legislation that removed this requirement. Mandatory requirements to publish information can frequently provide an unnecessary focus on matters of little relevance to a long-term business such as National Grid.

 

Alongside our major announcements at the half year and full year we will continue to provide updates covering market and Company developments.

 

We also continue to provide commentary on both our IFRS reported results and underlying economic (regulatory) performance, including reconciliations between the key metrics for both results. To help explain this more fully, we have increased the commentary on our regulatory performance on page 23, and have included further analysis of our regulatory performance by segment on page 100. We support the development of an accounting standard for rate-regulated activities, which would reduce the need for additional explanations of our results, and submitted a response to the IASB’s project in January this year.

 

Dividend

The Board has recommended an increase in the final dividend to 28.16 pence per ordinary share ($2.1866 per American Depositary Share). If approved, this will bring the full-year dividend to 42.87 pence per ordinary share ($3.3584 per American Depositary Share), an increase of 2.0% over the 42.03 pence per ordinary share in respect of the financial year ending 31 March 2014.

 

In August 2014 we began a share buyback programme designed to operate alongside our scrip dividend option, which we offered for the interim dividend and will offer again for the full-year dividend. The buyback programme, which operates under authorities granted at our 2014 AGM, is designed to balance shareholders’ appetite for the scrip dividend option with our desire to operate an efficient balance sheet with appropriate leverage.

 

Effective governance

In July 2014, John Pettigrew, who joined the Board in April 2014, became Executive Director, UK and Nick Winser and Maria Richter both stepped down from the Board.

 

 

 

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Philip Aiken stepped down from the Board in February 2015 before his appointment as Balfour Beatty’s new Chairman. He was a National Grid Non-executive Director for six years and played an important role in chairing our Safety, Environment and Health Committee. Following Philip’s departure, Paul Golby was appointed as chairman of the Safety, Environment and Health Committee, as well as a member of the Audit Committee. Paul remains a member of the Nominations and Remuneration Committees.

 

Tom King stepped down from the Board and left the Company on 31 March 2015. He was succeeded by Dean Seavers, who joined the Company in December 2014 and, following a thorough handover, joined the Board as Executive Director, US with effect from 1 April 2015.

 

John and Dean’s appointments bring fresh perspective, experience and challenge to our Board. Dean joined us after a career that has included business leadership roles of major divisions within GE, United Technologies and Tyco. In particular, he has led major change and performance improvement programmes that have improved operational efficiency and customer satisfaction – important priorities for our US business.

 

I would like to thank Nick, Tom, Philip and Maria for their commitment to the Board and the very valuable contribution they have made.

 

National Grid’s UK regulated entities appointed Catherine Bell and Clive Elphick as Non-executive Directors with effect from 1 April 2014. The appointment of two Non-executive Directors is a new requirement promoted by Ofgem, which has termed the appointments Sufficiently Independent Directors. The arrangements are designed to enhance the financial ring-fencing conditions that already exist in the companies’ licences.

 

Responsible business

At National Grid, we believe that what we do and how we do it are equally important. In July 2014, National Grid was named Responsible Business of the Year 2014 by Business in the Community (BITC). To win this award we had to demonstrate how we operate responsibly in everything we do, and how we are improving the outcomes for society through our work.

 

     

 

As you can read on page 17, we are adding new KPIs to our reporting, so we can more fully reflect the issues that really matter to the Company and our stakeholders. For our 2014/15 Report, we have included workforce diversity as a new KPI and you can read more about our approach to this on pages 18 and 19, as well as progress in relation to our Board diversity policy on page 58.

 

You can find more information about our approach to being a responsible business, including our Total Contribution Report, on our website.

 

Looking ahead

We will face both opportunities and challenges over the coming year. For example, in the UK Ofgem has concluded its Integrated Transmission Planning and Regulation project. As part of this, the System Operator is expected to undertake a number of new advisory roles. We have a long track record in successfully managing potential conflicts of interest from our System Operator role and will work closely with Ofgem to make sure this continues.

 

In the US we expect to file important applications for new rate plans – you can read more about this on page 169. We will continue to work with policymakers, customers, and stakeholders to transform the energy industry through initiatives in Massachusetts, New York, and Rhode Island (see pages 33 to 35).

 

We must adapt to developments in corporate governance requirements. For example, the updated UK Corporate Governance Code enhances the quality of information investors can expect to receive about the long-term health and strategy of listed companies, and encourages companies to be more transparent about risk management and internal control.

 

Finally, I am confident that our people will continue to help make National Grid a company we can all be proud of and I thank all our employees for their hard work and commitment to our success.

 

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Sir Peter Gershon

 

     

 

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I was delighted that the judging panel commended our long-term vision based on trust and connectivity. They noted our foresight in using technology and innovation to develop solutions that protect our employees, customers and wider society; and recognised our appetite to inspire others.

 

 

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In the UK, we are in discussions with the Living Wage Foundation about the opportunity to become a fully accredited Living Wage employer. We can confirm that all our UK employees fulfil the criteria for accreditation. We are also working through the Living Wage Charter to understand the impact it would have on our supply chain, including the companies our suppliers use as sub-contractors, should we decide to adopt it.

 

 

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Chief Executive’s review

 

I’m really proud of our performance this year. Overall, our businesses in both the UK and US achieved a strong operating performance.

 

 

LOGO

 

 In focus:

 

In the UK, there has been a lot of public focus on how secure and reliable our energy supply is, particularly on tighter margins between electricity supply and demand in the winter. Despite tighter margins than previous years, we were able to operate the system without calling upon our additional reserve. This was because of stronger than expected plant availability, mild weather,

 

 Employee

 engagement score                

 

75%

 (2013/14: 71%)

 

healthy wind output and consistent interconnector imports from France and the Netherlands.

 

We also tendered the two new balancing services for additional reserves of supply. Although these additional reserves were not used, this was a sensible precaution in case of colder weather or a series of unexpected plant shutdowns.

 

In the US, we saw an extremely harsh and prolonged period of plunging temperatures and record levels of snowfall in parts of New England, particularly in February and March. Again, our network resilience held up well. We have invested millions of dollars in both our electricity and gas infrastructure to improve resilience and help reduce the impact of service interruptions.

 

In December 2014 we received an award for excellence in energy efficiency from Platts Global Energy. Platts commended us for ongoing initiatives to upgrade equipment, reduce emissions, and improve safety and network efficiency. And in March 2015, the Edison Electric Institute presented us with its Emergency Recovery Award for our power restoration efforts following the severe ice storm in northern New York in December 2013.

 

Safety

Safety remains a hugely important priority for us. Regrettably, there were two fatalities during the year – a member of the public in the UK who fell when climbing on one of our pipelines, and a contractor at our Rhode Island gas distribution business. Despite these incidents, we achieved our best-ever Group safety performance during 2014/15. We can never be complacent about our performance and must continually strive to improve.

 

Our operations

We have continued to provide good value and reliability for customers while keeping our element of bills as low as possible.

 

We are totally committed to providing the best value we can for our customers, investors and other stakeholders, so we’re working hard to make sure we are being as efficient as possible in everything we do. To help achieve this, we have continued to develop a way of working we call ‘Performance Excellence’, which you can read about on page 27. We also reorganised our UK business to increase clarity around what we do and who is accountable.

 

In the US, we finally completed the stabilisation work on our new financial systems (see page 34). This fixed a number of long-standing problems, such as inefficient payroll processing, which had previously required expensive manual interventions. Long term,

 

 

 

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the robust data we can produce with the new systems is an essential foundation to the future performance improvements and regulatory filings that we need for profitable growth in the US. 

 

It is increasingly recognised in the US that investment levels in some areas will need to rise compared with the earlier part of this decade, and we have seen increased activity this year, making it our highest ever year of US investment. 

 

In December 2014 the NYPSC approved $200 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.

 

The NYPSC also published the results of the regulatory audit of our New York gas companies. These audits are a regular feature of the New York regulatory process. The audit was broadly supportive of our performance and structure and, as is usual, made some helpful recommendations for further improvement. We have responded with an implementation plan to provide these benefits on behalf of New York customers.

 

As you can read on pages 18 and 19, our customer satisfaction scores were mixed. We exceeded our UK electricity and gas transmission targets. However, we did not meet our US targets and I recognise this is an area in which we must improve.

 

Responsible Business of the Year

As Sir Peter has described in his statement, National Grid was named Responsible Business of the Year 2014, which is BITC’s top award. I am extremely proud of this achievement, which is terrific recognition of how we are running a responsible and sustainable business, bringing long-term benefits to society. Although BITC is a UK body, the award was given to the entire Company and recognises the excellent work we’re doing across our entire service area in the UK and US.

 

For example, in the UK we are completing a test line for the T-pylon at our training academy. It is smaller than the existing lattice towers and provides communities with added choice. Our property business entered into a new arrangement with the Berkeley Group to develop a number of our sites in London and the surrounding area. The first phase of investments could lead to the development of over 7,000 new homes, including affordable housing, alongside schools and public spaces.

 

Our EmployAbility programme provides supported internship opportunities for students with additional learning needs. Now into its second year, we have extended the programme and will continue to do this across more of our UK sites.

 

We are helping schools, parents and children see engineering as a modern, dynamic, desirable sector with a great future. Our careers education programmes in the UK include Careers Lab, an initiative we developed that has now been taken up by BITC. It links working professionals with schools 

   

 

to bring the world of work to life for secondary school children. Our US initiatives include partnering with seven local community colleges to deliver energy utility technology training programmes that are designed to equip people for jobs in the energy industry. We are doing a great deal of work in this area, as you can read on page 24.

 

All this is business as usual for us – the BITC recognition is not the result of any special new initiative we have done to win the award. But it would not have been possible without the efforts of our employees. I was delighted to see that the results of our 2015 employee opinion survey – a good measure of how satisfied employees are with their employer – included an engagement score of 75% – our highest since we started conducting Group-wide employee opinion surveys.

 

I would like to thank all our people for making a positive impact, through their work for National Grid, their volunteering and fundraising achievements, and by getting involved in activities that really matter to us and to society.

 

Priorities for 2015/16

Safety: continue to build on our strong performance so we can achieve a consistent world-class safety performance;

 

Customers and stakeholders: improve the service we provide for our customers and continue to build trust among our stakeholders;

 

Performance Excellence: focus on being efficient in our end-to-end processes so we can continue to improve our overall performance and efficiency; and

 

Regulatory filings: prepare and file applications for new rate plans in New York, Long Island and Massachusetts.

 

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Steve Holliday

 

 

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Strategic Report

 

 

Operating environment

 

 

The UK economy has been recovering steadily in the past year, with 2.6%

economic growth, falling unemployment and falling inflation.

 

 

   

 

Growth in the fourth quarter of 2014, however, dropped to 0.5% as sluggish eurozone growth depressed exports and wider geopolitical events increased the perceived risk of investment. In the US, employment levels have continued to rise. The Federal Reserve ended its quantitative easing programme of bond purchases, though treasury yields continue to be at or near

 

 

historical lows. GDP increased 2.4% in 2014, although growth in the first quarter of 2015 was only 0.2%.

 

Below, we highlight our main market drivers and the impact they have on our business.

   

 

Market driver

 

  

 

Impact

 

   

 

Changing energy mix

Changing fuel costs and environmental programmes are affecting traditional electricity generation

UK

In February 2015 DECC announced the results of the first Contracts for Difference (CfD) auction allocation rounds, with wind technology making up the bulk of contracted generation. Continued support for solar PV through Feed in Tariffs (FiTs) and the Renewables Obligation contributed to growth in installed solar PV.

 

Older fossil fuel plants continue to face the challenge of environmental regulations while the new nuclear plant at Hinkley received State Aid approval from the European Commission in October 2014.

 

US

In the US, shale gas development has continued to keep national wholesale prices low.

 

Environmental Protection Agency regulations have led to generator retirements or increased costs for compliance.

 

Renewables are growing their share of electricity generation and account for a significant amount of newly installed capacity. Distributed generation, such as rooftop solar, has grown substantially in our service territory.

  

 

This could lead to significant network investment opportunities

UK

Increasing deployment of large-scale wind, large-scale solar  PV and nuclear will require more investment in transmission networks to connect new plant and reinforce the network. Variable output from solar PV and wind makes balancing demand and supply more challenging.

 

More interconnection between the UK and adjacent European markets will deliver net benefits to the UK.

 

US

Lower national wholesale gas prices have increased the amount of gas used for electric generation, causing constraints into the northeast US.

 

Oil to gas conversions will continue as gas maintains its price advantage. New interstate gas pipeline capacity is needed to overcome growing gas demand.

 

The electric transmission system will need upgrades and rebalancing due to generation retirements and to connect new renewable sources. Increasing amounts of distributed generation, particularly solar, will require investment in the electric distribution network.

 

 

 

Energy policy

 

    
 

Sustainability, security of supply and affordability underpin EU policy

Against a difficult economic and financial background, the EU’s energy policy is underpinned by sustainability, security of supply and affordability. In October 2014 the EU heads of state agreed the EU’s 2030 Climate Change and Energy Framework. This includes a 40% reduction target for carbon emissions, alongside other objectives for renewables, energy efficiency and interconnections.

 

Negotiations for a new international agreement on climate change continued at the twentieth session of the Conference of Parties (COP20) in Lima in December 2014. Nations are looking to the Paris worldwide conference in 2015 as the next opportunity to work out a new climate change deal.

 

Finally, the creation of a ‘genuine energy union’ was highlighted as one of the main priorities of the new European Commission, which took office in November 2014.

 

  

Policy decisions can affect our investment needs and compliance obligations

Greater levels of market integration, interconnection and renewable generation are fundamental to achieving the EU’s policy objectives.

 

While European developments present challenges, the significant level of investment required will create opportunities for growth. For example, potential future interconnector opportunities include connections between the UK and France, Ireland, Denmark and Iceland. Such opportunities would help the EU achieve its interconnection targets. See page 27 for more information about our interconnector projects.

 

 

UK energy policies are attracting investment and there is significant political focus on reducing costs for consumers

Energy policy continues to evolve from the Climate Change Act 2008, which commits the UK Government to reducing UK greenhouse gas emissions to at least 80% lower than a 1990 baseline by 2050. The Energy Act 2013 implements the main aspects of EMR, and puts in place measures to attract the investment needed. The run-up to the General Election in May 2015, saw a sharp focus on the costs of energy and the competitiveness of energy markets.

 

  

 

National Grid is central to the delivery of EMR and active on driving down costs

National Grid has been performing its role as delivery body for the Government on EMR, as described on page 39.

 

The focus on the cost of energy is important to National Grid. We are working hard to highlight to our stakeholders how the RIIO regulatory framework is helping us to reduce costs for consumers while creating incentives for vital investment.

 

      

 

 

 

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Market driver

 

      

Impact

 

 
   

 

US policy is evolving to meet environmental and energy diversity goals

In the US, many federal level developments have been through federal agency regulations and Presidential executive orders. At a state level, energy policy continues to evolve in the northeastern US, driven by interest in promoting energy efficiency, maintaining reliability and deploying renewable technologies that help meet environmental and energy diversity goals.

 

      

 

Options for increased renewable and distributed generation are being explored

In the US, the impact on natural gas dependency has resulted in an evaluation of the best way of increasing fuel diversity through renewable and distributed generation resources. We continue to support movement towards a clean energy economy; and support additional measures to increase America’s energy productivity.

 

   
   

 

Regulation

            
    Infrastructure investment needs must be balanced with affordability        We must accommodate customers’ cost concerns and also provide safe, up-to-date systems  
   

Regulators acknowledge that there is a significant need for infrastructure investment. However, affordability continues to be a primary concern.

 

Ageing gas mains can be riskier to use and can contribute to greenhouse gas emissions through leaks. Regulators and policymakers are asking utilities to put plans in place to strengthen their networks’ ability to withstand the effects of severe weather.

 

       We must accommodate our customers’ affordability concerns while fulfilling our obligations to provide safe and reliable services and upgrading our systems. Investment is required for new connections, to meet the challenges of changing supply and demand patterns, and to replace ageing infrastructure in the UK and US.  
   

 

UK regulators want greater efficiency and innovation

In the UK, the regulatory focus during the year has been on the RIIO price controls which give greater focus to incentives and innovation than the previous regulatory regime.

 

We continue to be engaged in the debate on the regulatory approach to electricity transmission investment, stemming from the projected increase in offshore wind generation and interconnection.

 

      

 

This is driving them to favour more market competition

In the UK, competition is already in place for offshore development and Ofgem has stated its intent to retain the option of using greater competition for certain large onshore projects.

 

For more information about network efficiency and innovation, see pages 27 to 31.

   
   

 

In the UK, Ofgem is reviewing the arrangements for planning and delivering Britain’s transmission networks

We are facing new challenges from an ageing infrastructure and a changing energy mix. Technical developments and innovation also mean that there could be opportunities to coordinate and integrate those investments.

 

The Integrated Transmission Planning and Regulation (ITPR) project is looking at long-term challenges such as ageing infrastructure, the changing energy mix, technical developments and innovation, to assess whether the regulatory arrangements currently in place are sufficient to ensure coordination and efficiency in the future planning of electricity transmission.

 

      

 

We need to make sure the network is planned in an economic, efficient and coordinated way

Ofgem has proposed enhancing our role as System Operator (SO) so that the SO has a greater role in system planning. No organisation is currently responsible for taking an overarching view of system development, so opportunities for coordination can potentially be missed. We are working with Ofgem to develop the framework for how the system will be planned and how assets will be managed.

   
   

 

US regulators are focused on system modernisation and integration of new distributed energy resources

State officials in Massachusetts and New York have approved gas system investment programmes to accelerate replacement of ageing infrastructure. The Massachusetts Grid Modernization proceeding and New York’s Reforming the Energy Vision effort both focus on deploying advanced electric grid capabilities to improve reliability, more fully exploit distributed energy resources, and provide new opportunities for customers to control their energy use.

 

      

 

Investments to modernise networks and integrate distributed resources will offer new options and value to customers

We are expanding gas system enhancement investment programmes and are developing electric grid modernisation plans. Through our regulatory efforts and stakeholder engagement we are seeking to create a regulatory framework that integrates distributed energy resources into the electric grid in a way that is cost effective and delivers benefits to customers.

   
   

 

In the US, FERC is reforming transmission planning and promoting competition in the transmission industry

FERC issued Order 1000 in 2011 to improve transmission planning and increase competition in the transmission industry. Policies to comply with the Order took effect in New York and New England in 2014 and 2015, respectively.

 

      

 

Competitive transmission planning provides opportunities for us

Order 1000 has opened our service territory to competition from non-incumbent transmission developers and also created opportunities for us to compete for transmission projects outside of our current geographic footprint.

 

   
   

 

Innovation and technology

            
   

Performance improvements and cost declines have led to continued growth in new technologies

Distributed generation of solar power has grown significantly due to price declines and tax incentives. Energy storage is growing in the US as certain states set goals and other utilities announce investment plans for storage capacity.

 

The UK hit a record high for wind generation in 2014 of 28 terawatt hours (TWh), 15% greater than the previous year.

 

Plug-in electric vehicle sales in the US and worldwide grew, even as gasoline prices dropped throughout the past year.

 

      

Further investment in electricity distribution networks may be necessary to integrate these new technologies

Investment in renewable energy continues to grow. Regulatory proceedings are underway to enhance the value of distributed resources to the grid and give customers more control over their energy use.

 

These could require significant network investment in order to integrate new and variable resources and provide customers with more information on their usage.

   

 

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What we do – Electricity

The electricity industry connects generation sources to homes and businesses through transmission and distribution networks. Companies that pay to use transmission networks buy electricity from generators and sell it to consumers.

 

 

 

   

 

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 are SO for the offshore electricity transmission regime.

 

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 SO, our price control includes incentives to minimise the costs and associated risks of balancing the system through buying and selling energy, as well as procuring balancing services from industry participants.

 

In the US, similar services are provided by independent system operators.

 

       

will deliver significant benefits to consumers. These include opportunities for interconnection with Iceland, Denmark and a further link with France.

   

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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.

   
         

 

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Transmission systems generally include overhead lines, underground cables and substations. They connect generation and interconnectors to the distribution system.

   
         

 

We own and operate the transmission network in England and Wales. We operate but do not own the Scottish networks. We are also working in a joint venture with Scottish Power Transmission to construct an interconnector to reinforce the GB transmission system between Scotland and England and Wales.

   
   

 

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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 4.6 MW of solar generation in Massachusetts. We do not own or operate any electricity generation in the UK.

 

We sell the electricity generated by our plants on Long Island to LIPA under a long-term power supply agreement. The contract allows us to recover our efficient operating costs and provides a return on equity on our investment in the generation assets.

 

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 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. National Grid owns 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 Norway. We are continuing to work on developing additional interconnector projects, which we believe

       

 

In the US, we jointly own and operate transmission facilities spanning upstate New York, Massachusetts, New Hampshire, Rhode Island and Vermont.

 

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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.

 

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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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Strategic Report
3.8 GW
Generation produced in the US
1 Generation
260 km
Approximate length of BritNed interconnector
2 Interconnectors
3 Transmission
99.99999%
Electricity transmission reliability in England and Wales
30 TWh
Approximate amount of electricity we forecast, plan for and procure annually across three states in the US
4 Distribution
3.5 million
US electricity customers
ELECTRICITY
5 Supply
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Strategic Report
4 Supply
3.6 million
US gas customers
7,660 km
of high pressure pipeline in the UK
3 Distribution
2 Transmission
26,882
New gas heating customers in the US
10.9 million
Customers serviced in the UK
1 Production and importation
14.9%
Approximate percentage of UK gas from LNG imports
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What we do – Gas

 

 

The gas industry connects producers, processors, storage, transmission

and distribution network operators, as well as suppliers to industrial,

commercial and domestic users.

 

 

 

   

 

System operator

As system operator we are responsible for the high pressure gas National Transmission System (NTS) in Great Britain. We have responsibility for the residual balancing activities on the NTS and for keeping the physical system within safe operating limits.

 

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.

 

    

 

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).

 

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In the UK, gas leaves the transmission system and enters the distribution networks at high pressure. It is then transported through a number of reducing pressure tiers until it is finally delivered to consumers.

 

There are eight regional gas distribution networks in the UK, four of which are owned by National Grid. In the US, gas is delivered by the interstate pipeline companies to local distribution networks. Each local distribution company has a geographically defined service territory and is the only local distribution company within that territory. Local distribution companies are regulated by the relevant local state’s utility commission.

 

Our networks deliver gas to 10.9 million consumers in the UK and 3.6 million customers in the US.

 

LOGO

 

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.

   

LOGO

   

 

LOGO

 

Gas used in the UK is mainly sourced from gas fields in the North and Irish seas, piped from Europe and imported as LNG.

 

There are seven gas reception terminals, three LNG importation terminals and three interconnectors connecting Great Britain via undersea pipes with Ireland, Belgium and the Netherlands. Importers bring LNG from the Middle East, the Americas and other places.

 

Gas used in the US is produced mainly in North America. We import LNG from a number of countries.

 

We do not produce gas in either the UK or US.

 

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.

 

LOGO

 

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.

 

        
             LOGO
            

 

LOGO
 

 

          NATIONAL GRID ANNUAL REPORT AND ACCOUNTS 2014/15    11


Table of Contents
 

Strategic Report

 

 

Our business model

 

  How we generate long-term value.

 

 

 

 

 

LOGO

 

LOGO

 

  12


Table of Contents

 

 

 

 

 

LOGO

 

LOGO

 

LOGO

 

 

    NATIONAL GRID ANNUAL REPORT AND ACCOUNTS 2014/15    13                                


Table of Contents

Strategic Report

Our vision and strategy

Our vision describes our intentions and aspirations at the highest level. Our strategic objectives set out what we believe we need to achieve to deliver our vision and be recognised as a leader in the development and operation of safe, reliable and resilient energy infrastructure.

 

    

 

Strategic objective

 

  

 

Description

     

 

How we deliver

     
    

 

Deliver
operational
excellence

 

 

LOGO

 

  

 

Achieve world-class levels of safety, reliability, security and customer service.

       

 

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.

 

    
    

 

Engage
our people

 

 

LOGO

 

  

 

Create an inclusive, high-performance culture by developing all our employees.

       

 

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

 

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.

 

    
    

 

Stimulate
innovation

 

 

LOGO

 

  

 

Promote new ideas to work more efficiently and effectively.

       

 

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

 

Embedding innovation and new technology into our operations helps us deliver continuous improvements in the quality and cost of our services.

 

    
    

 

Engage
externally

 

LOGO

 

  

 

Work with external stakeholders to shape UK, EU and US energy policy.

       

 

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

 

    
    

 

Embed
sustainability

 

LOGO

 

  

 

Integrate sustainability into our decision making to create value, preserve natural resources and respect the interests of our communities.

 

       

 

Our long-term sustainability strategy sets our ambition to deliver these aims and to embed a culture of sustainability within our organisation.

 

That culture will allow us to make decisions that 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 2 greenhouse gas emissions by 2020 and 80% by 2050.

    
    

 

Drive growth

 

 

LOGO

 

  

 

Grow our core businesses and develop future new business options.

       

 

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

 

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.

 

    

 

     14   


Table of Contents
 

    

 

 

    

 

      

 

 

 

 

 

Relevant KPIs

 

        Our vision
   

 

   Employee IFR

   Network reliability

   Customer satisfaction

 

LOGO See pages 16–19

 

 

         

Connecting you to your
energy today, trusted to
help you meet your energy
needs tomorrow.

 

 

 

 

How our strategy creates value

Our vision and strategic objectives explain what is important to us, so we can meet our commitments and deliver value.

 

   

 

   Employee engagement index

   Workforce diversity

 

LOGO See pages 18–19

 

 

         
   

 

   Value added

   Network reliability

 

LOGO See pages 16–19

 

 

       

Customer and community value

Safety and reliability – we strive to provide reliable networks safely, which is essential to safeguard our customers, employees and the communities in which we operate.

 

Affordability – we strive to provide services efficiently, which helps to reduce the amount of money consumers have to pay for their energy.

 

Customer service – providing essential services that meet the needs of our customers and communities is a crucial part of the value they expect from us.

 

Sustainability – we strive to protect the environment and preserve resources for current and future generations.

 

Emergency services – we provide telephone call centres, coordinate the response to gas emergencies, and respond to severe weather events.

 

Community engagement – we listen to the communities we serve and work hard to address concerns about the development of our networks. Our employees volunteer for community-based projects and we support educational initiatives in schools.

     

Shareholder value

Regulatory frameworks – operating within sound regulatory frameworks provides stability. Making sure these frameworks maintain a balance between risk and return underpins our investment proposition.

 

Reputation – our approach to safety and our reliability record underpin our reputation. These are crucial factors that contribute towards positive regulatory discussions and help us pursue new business opportunities.

 

Efficient operations – efficient capital and operational expenditure allows us to deliver network services at a lower cost and reduces working capital requirements.

 

Maximising incentives – if we perform well against our incentives, and deliver the outputs our customers and regulatory stakeholders require, we can make the most of our allowed returns.

 

Funding and cash flow management – securing low-cost funding and carefully managing our cash flows help us maintain strong returns for our investors.

 

Disciplined investment – we can increase our revenue and earnings by investing in both regulated and non-regulated assets. This helps us deliver attractive returns for our shareholders.

 

 

 

   

 

   Customer satisfaction

 

LOGO See pages 18–19

 

 

               
   

 

   Greenhouse gas emissions

 

LOGO See pages 18–19

 

 

               
   

 

   Regulated asset growth

   Adjusted EPS

 

LOGO See pages 16–17

 

 

               

 

LOGO
 

 

  NATIONAL GRID ANNUAL REPORT AND ACCOUNTS 2014/15    15


Table of Contents

Strategic Report

Delivering our strategy – key performance indicators

The Board uses a range of financial and non-financial metrics, reported periodically, against which we measure Group performance.

 

 

 

 

   

 

KPI and definition

 

          

 

Our performance

 

    
   

 

Adjusted EPS

 

Adjusted earnings represent profit for the year attributable to equity shareholders. This excludes exceptional items, remeasurements and stranded cost recoveries (see pages 103 and 104).

 

Adjusted earnings per share provides a measure of shareholder return that is comparable over time.

 

          

 

Adjusted EPS pence1

 

LOGO

 

1.  Comparative amounts have been restated to reflect the impact of additional shares issued as scrip dividends.

 

   

 

Group return on equity (RoE)

 

We measure our performance in generating value for our shareholders by dividing our annual return by our equity base.

 

This calculation provides a measure of the performance of the whole Group compared with the amounts invested by the Group in assets attributable to equity shareholders.

 

          

 

Group return on equity %

 

LOGO

 

   

 

Regulated asset growth

 

Maintaining efficient growth in our regulated assets ensures we are well positioned to provide consistently high levels of service to our customers and increases our revenue allowances in future years.

 

          

 

Total regulated assets and regulated asset growth £bn

 

LOGO

 

1.  US base rate calculated as at 31 December 2010 in this year.

2.  Estimated figure until the conclusion of the regulatory reporting cycle.

 

   

 

Value added

 

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

          

 

Value added £bn

 

LOGO

 

   

 

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.

 

          

 

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

 

LOGO

 

 

     16   


Table of Contents
 

 

We are adding new KPIs to better reflect the issues that matter most to our Company and our stakeholders. For this 2014/15 Report, we have included information about workforce diversity, as set out on pages 18 and 19. We aim to include two further new KPIs in our 2015/16 Report. These relate to community engagement and investment in education, skills and capabilities. Executive remuneration is linked to some of our KPIs.

 

 

 

 

 

 

Commentary

 

     Target
   

 

For the year ended 31 March 2015, adjusted earnings attributable to equity shareholders increased by £174 million to £2,189 million. This increase in earnings resulted in an adjusted earnings per share of 58.1 pence, an increase of 9% on 2013/14.

 

The earnings increase was driven by a £199 million increase in adjusted operating profit. With the exception of our UK Gas Distribution business, we saw increases in adjusted operating profit across all of our business segments.

 

  

 

Overall adjusted net finance costs reduced by £75 million across the Group which was broadly offset by a higher adjusted tax charge of £114 million reflecting the increase in profits across the Group.

 

LOGO  See page 20

 

 

The adjusted EPS target set as part of executive remuneration for APP was more than met with 100% of maximum achieved (see page 70).

   

 

Group RoE has increased during the year to 11.8%, from 11.4% in 2013/14.

 

The UK regulated businesses delivered good returns of 13.7% in aggregate in the second year of their new price controls, including the assumed 3% long run average RPI inflation.

 

  

 

US returns of 8.4% were slightly down on last year, reflecting the additional costs incurred on gas leak repair and compliance and the increased level of rate base growth since 2013.

 

LOGO  See page 21

 

 

The Group RoE target set as part of executive remuneration for APP was more than met with 100% of maximum achieved (see page 70).

   

 

Our regulated assets have increased by 7% (£2.3 billion) to £37.0 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 rate of growth at constant currency was 3%.

  

 

The UK regulatory asset value (RAV) increased by £0.5 billion, reflecting significant capital expenditure, together with inflation, although at 0.9% RPI, this has had a smaller impact than in recent years. US rate base has increased by £1.8 billion this year. Of this, £1.2 billion was due to foreign exchange movements increasing the rate base reported in sterling. Excluding foreign exchange, rate base increased by £0.6 billion, reflecting a record year of US investment.

 

LOGO  See page 21

 

 

 

No specific target. Our overall aim is to increase regulated asset growth above the underlying rate of inflation.

   

 

Value added in the year was lower than 2013/14, primarily due to the impact of lower RPI on UK regulated asset growth. RPI inflation for March 2015 was 0.9% compared with 2.5% in March 2014 and National Grid’s long run assumption of 3%.

  

 

Of the £1.7 billion value added in 2014/15, £1,271 million was paid to shareholders as cash dividends and £335 million as share repurchases (offsetting the scrip issuance during the year), with £79 million retained in the business.

 

LOGO  See page 21

 

 

 

No specific target. Our overall aim is to sustainably grow value added over the long term while maintaining performance of our other financial KPIs.

   

 

In the UK we maintained a world-class employee safety performance during 2014/15, with an employee injury frequency rate of 0.09. Our US business improved its safety performance, with an employee injury frequency rate of 0.15.

  

 

Overall, our Company-wide injury frequency rate of 0.13 is better than last year and means that we bettered our target of 0.15. However, we did not meet our ambition to reach a world-class level by 2015.

 

LOGO  See UK Principal operations: pages 27–31

       and US Principal operations: pages 33–35

 

 

 

We achieved our Company-wide employee IFR target of 0.15.

 

LOGO
 

 

  NATIONAL GRID ANNUAL REPORT AND ACCOUNTS 2014/15    17


Table of Contents
 

Strategic Report

 

 

Delivering our strategy – key performance indicators continued

 

 

 

 

   

 

KPI and definition

 

     

 

Our performance

 

    

 

   Network reliability

                  Performance          Measure    Target     
                      10/11    11/12    12/13    13/14    14/15         14/15    
         

 

 
 

The reliability of our electricity and gas networks.

UK Electricity

Transmission

99.9999 99.999999 99.99999 99.99999 99.99999 % 99.9999
       

 

 

UK Gas

Transmission

100 100 100 100 100 % 100
       

 

 

UK Gas

Distribution

99.999 99.999 99.999 99.999 99.999 % 99.999
         

 

 
 

Electricity

transmission – US

99.969 99.960 99.958 99.957 99.942 %
       

 

 

Electricity

distribution – US

99.997 99.977 99.980 99.980 99.969 % 1
       

 

 
     

 

1. Targets are set individually by each of our US jurisdictions.

 

 
  

 

   Customer satisfaction

      Performance   

Measure

Target  
           10/11 11/12 12/13 13/14 14/15   14/15  
         

 

 
 

We measure customer satisfaction in the UK using RIIO related metrics agreed with Ofgem. In the US, we use J.D. Power and Associates customer satisfaction surveys.

UK Electricity

Transmission

n/a n/a n/a 7.4 7.4 Score out of 10 6.91
       

 

 

UK Gas

Transmission

n/a n/a n/a 7.2 7.6 Score out of 10 6.91
       

 

 

UK Gas

Distribution

n/a n/a n/a 8.2 2 Score out of 10 8.31
       

 

 

US Gas distribution

– Residential

2nd 3rd 3rd 2nd 4th Quartile ranking

To

improve

         

 

 
 

US Gas distribution

– Commercial

4th 3rd 4th 4th 4th Quartile ranking

To

improve

       

 

 

US Electricity

– Residential

3rd 3rd 3rd 2nd 3rd Quartile ranking

To

improve

       

 

 

US Electricity

– Commercial

2nd 2nd 3rd 2nd 2nd Quartile ranking

To

improve

         

 

 
 

 

1. Figures represent our baseline targets set by Ofgem for reward or penalty under RIIO.

       

2. 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 2015/16.

 

 
  

 

   Employee engagement index

    Employee engagement index %  
 

 

A measure of how engaged our employees feel, based on the percentage of favourable responses to certain indicator questions repeated annually in our employee opinion survey.

   

 

LOGO

 

 
  

 

   Greenhouse gas emissions

    Greenhouse gas emissions million tonnes carbon dioxide equivalent  
 

 

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.

 

   

 

LOGO

 

 
  

 

   Workforce diversity

    Workforce diversity %  
 

 

Percentage of women and ethnic minorities in our workforce.

   

LOGO

 

 

 

 

 

      18   


Table of Contents
 
 
 

 

 

 

 

 

   

Commentary

 

           

Target

 

   

 

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. Despite tighter winter margins than previous years, we were able to operate the system without calling upon our additional reserve.

  

 

In the US, despite low temperatures and record levels of snowfall in parts of New England our network resilience held up well. We invested millions of dollars in both our electricity and gas infrastructure to improve resilience and help reduce the impact of service interruptions.

 

LOGO  See UK Principal operations: pages 27–31

       and US Principal operations: pages 32–35

 

 

      

 

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.

   

 

Our customer satisfaction KPI comprises seven components: Ofgem’s UK electricity transmission, gas transmission and gas 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 KPI component will be published later this year (see note opposite).

  

 

In the US, we did not achieve our targets. Customers were 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 that focused on energy saving solutions and bill management.

 

LOGO  See UK Principal operations: pages 27–31

       and US Principal operations: pages 32–35

 

 

 

      

 

Our targets for each business area are set out in the table. We achieved our UK transmission targets, but did not achieve our US targets.

   

 

We measure employee engagement through our employee opinion survey. The results of our 2015 survey, which was completed by 83% 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 by four points to 75%, our highest engagement score since we started conducting Group-wide employee opinion surveys. 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.

 

LOGO  See Our people: pages 24–25

      

 

We achieved our target of increasing engagement compared with the previous year.

   

 

Our Scope 1 and 2 greenhouse gas emissions (excluding electricity transmission and distribution line losses) for 2014/15 equate to 7.3 million tonnes carbon dioxide equivalent; a 63% reduction against our 1990 baseline. These emissions are equivalent to an intensity of around 478 tonnes per £million of revenue.

 

We measure and report our greenhouse gas emissions 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. Those Scope 1 and 2 emissions are independently assured against the international standard ISO 14064-3 Greenhouse Gas assurance protocol. A copy of this statement of assurance is available on our website.

      

 

Our target, described on the facing page, is in progress.

   

 

During 2014/15, the percentage of both women and ethnic minorities in our workforce increased slightly. For more details about the breakdown by gender at different levels of the organisation, as well as information relating to subsidiary directors, see page 25. During 2014/15 we were recognised as a Times Top 50 Employer for Women for 2015 and reached the Gold level in our benchmarking with both Race for

 

 

  

 

Opportunity and Opportunity Now. In the UK and US, our Employee Resource Groups continue to support our business goals and inclusion and diversity initiatives.

 

LOGO  See Our people: pages 24–25

      

 

No specific target set. We aim to develop and operate a business that has an inclusive and diverse culture.

 

LOGO
 

 

  NATIONAL GRID ANNUAL REPORT AND ACCOUNTS 2014/15    19


Table of Contents
 

Strategic Report

 

 
 

Financial review

 

 
  We have delivered another year of strong financial performance in the UK and solid performance in the US with record investment levels.  

 

 

 

 

 

Additional commentary on financial KPIs

Adjusted operating profit

Adjusted operating profit for the year ended 31 March 2015 was £3,863 million, up £199 million (5%) from last year. With the exception of our UK Gas Distribution business, we saw increases in operating profit in all of our business segments.

 

Adjusted operating profit by segment £m

 

LOGO

 

For the year ended 31 March 2015, adjusted operating profit in the UK Electricity Transmission segment increased by £150 million. Net regulated income after pass-through costs was £230 million higher, principally reflecting increases in allowed transmission owner revenues this year and a £43 million benefit relating to legal settlements. This was partially offset by under-recoveries of allowed revenue in the year of £89 million compared with under-recoveries of £60 million in the prior year. Regulated controllable costs were £14 million higher due to inflation, organisational change costs and additional tower maintenance costs. Depreciation and amortisation was £33 million higher reflecting the continued capital investment programme, and other costs were £4 million higher than prior year.

 

UK Gas Transmission adjusted operating profit increased by £20 million to £437 million. Net regulated income after pass-through costs was £42 million higher due to earned gas permit and constraint management incentives. In addition, under-recoveries of allowed revenue in the year of £18 million were £3 million favourable to last year’s under-recoveries of £21 million. Partially offsetting the revenue gains, regulated controllable costs were £8 million higher, including additional system operator costs relating to EU work. Other operating costs were also £17 million higher, including decommissioning costs of the Avonmouth LNG plant.

 

UK Gas Distribution adjusted operating profit decreased to £826 million from £904 million in 2013/14. Net regulated income after pass-through costs was £11 million lower, reflecting changes in allowed revenues for repex expenditure. Timing differences reduced net revenues by a further £16 million, with £13 million over-recoveries in 2014/15 compared with a £29 million over-recovery in the prior year. Regulated controllable costs were £22 million higher primarily due to inflation and organisational change costs. Depreciation and amortisation was £15 million higher reflecting the continued capital investment programme, and other costs were £14 million higher than prior year, including provision for additional asset protection costs.

      

 

Within our US Regulated businesses, adjusted operating profit increased by £39 million to £1,164 million. The stronger dollar increased operating profit in the year by £30 million. Excluding the impact of foreign exchange, net regulated income increased by £81 million, reflecting increased revenue allowances under the Niagara Mohawk three year rate plan and other regulated revenue increases, partially offset by the impact of the end of LIPA management services agreement (MSA) in December 2013. In addition, over-recoveries of allowed revenues in the year of £30 million were £20 million favourable to last year’s over-recoveries of £10 million. Regulated controllable costs increased by £17 million excluding the impact of foreign exchange, as a result of increased gas leak and compliance work and additional costs incurred to improve data quality to bring regulatory filings up to date. This was partly offset by the removal of costs associated with the LIPA MSA activities. Following last year’s exceptionally cold winter, bad debt costs were £62 million higher excluding the impact of foreign exchange. There were no major storms affecting our operations in the years ended 31 March 2014 and 2015.

 

Adjusted operating profit in Other activities was £68 million higher at £199 million. Operating profit in the French interconnector was £18 million higher as a result of strong auction revenues this year. In the US, corporate and other activities losses were £63 million lower, mainly as a result of the completion of the enterprise resource planning system stabilisation in the first half of the year.

 

Adjusted earnings

For the year ended 31 March 2015, adjusted net finance costs were £75 million lower than 2013/14 at £1,033 million, mainly as a result of lower average gross debt through the year, lower RPI rates in the UK and refinancing debt at lower rates.

 

The adjusted tax charge was £114 million higher than 2013/14. This was mainly due to higher profits before tax and the non-recurrence of one-off items that benefited the prior year. As a result of this, the effective tax rate for 2014/15 was 24.2% (2013/14: 22.5%).

 

The earnings performance described above has translated into adjusted earnings of £2,189 million, up £174 million on last year. This equates to adjusted earnings per share (EPS) of 58.1 pence, up 4.6 pence (9%) on 2013/14.

 

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 186. We present results on an adjusted basis before exceptional items, remeasurements and stranded cost recoveries. See page 186 for further details and reconciliations from the adjusted profit measures to IFRS, under which we report our financial results and position.

      LOGO
          
          
          
          
          
          
          
          
          

 

 

 

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Table of Contents

 

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 2015, 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 page 77 for further information. See pages 187 to 189 for commentary on our financial performance and position for the year ended 31 March 2014 compared with 31 March 2013. We have also included analysis of our UK regulated financial performance by segment on page 100.

 

 

 

   

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 87.

      

US rate base has increased by £1.8 billion this year. Of this, £1.2 billion was due to foreign exchange movements increasing the rate base reported in sterling. Excluding foreign exchange, rate base increased by £0.6 billion, reflecting a record 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 £1.7 billion or 44.7 pence per share as set out below:

   

LOGO

                       
         Year ended 31 March       
    £m      2015          2014        2013            
   

 

          
 

Total operating profit

Exceptional items

Remeasurements

– commodity contracts

Stranded cost recoveries

 

 

 

 

 

3,780 

– 

 

83 

– 

  

  

 

  

  

 

 

 

 

 

3,735 

(55)

 

(16)

– 

  

  

 

  

  

3,749 

84 

 

(180)

(14)

 
   

 

          
 

Adjusted operating profit

  3,863       3,664    

3,639 

 
 

Adjusted net finance costs

  (1,033)      (1,108)   

(1,124)

 
 

Share of post-tax results of

 
 

joint ventures

  46       28    

18 

 
 

Adjusted taxation

  (695)      (581)   

(619)

 
 

Attributable to non-

 
 

controlling interests

       12     (1)  
   

 

          
 

Adjusted earnings

  2,189       2,015     1,913   
   

 

                   
 

Adjusted EPS (pence)

  58.1       53.5    

50.9 

    Year ended 31 March   
   

 

                   
    £bn at constant currency   2015       2014     Change
          

 

   
    UK regulated assets1   25.5       25.2     +0.3 
   
    Group return on equity (RoE)        US regulated assets1      13.5          12.6        +0.9     
   

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 11.8%, from 11.4% in 2013/14. During the year, the UK regulated businesses delivered good returns of 13.7% in aggregate in the second year of their new price controls (2013/14: 12.7%), including the assumed 3% long-run average RPI inflation. US returns (on a higher average equity ratio than the UK) of 8.4% were down on last year, reflecting the additional costs incurred on gas mains repair and emergency leak response and the increased level of rate base growth since 2013. Overall, other activities in the Group delivered a good performance, including an improved result from the French interconnector and lower US corporate costs following the completion of the enterprise resource planning system stabilisation during the year. Treasury performance also helped the result, partly assisted by lower RPI accretions on the Group’s index-linked debt. Together, these helped to offset the headwind from lower cost of debt allowances under the tracker within the new UK price controls.

 

Regulated asset growth

In total our UK regulated asset value (RAV) and US rate base increased by £2.3 billion (7%) to £37.0 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 rate of growth at constant currency was 3%.

 

The UK RAV increased by £0.5 billion, reflecting significant capital expenditure, together with inflation, although at 0.9% RPI, this has had a smaller impact than in recent years. UK RAV growth also included capitalised efficiencies or ‘performance RAV’ of £111 million this year.

  

Other invested capital

     1.6          1.7       

-0.1 

   
      

 

   
 

Total assets

  40.6       39.5    

+1.1 

 

 

Dividend paid

 

+1.3 

 

 

Share buyback

 

+0.3 

 

Movement in goodwill

– 

 

 

Net debt

 

 

 

(23.9)

 

  

 

 

 

(22.9)

 

  

 

-1.0 

      

 

   
 

 

Value added

 

+1.7 

      

 

   
 

 

Value added per share

 

44.7p 

      

 

   
 
 

1.  Includes assets held outside RAV and rate base.

 
 

Value added in the year was lower than 2013/14 (£2.1 billion or 57.2 pence per share), primarily led by the impact of lower RPI on UK regulated asset growth. RPI inflation for March 2015 was 0.9% compared with 2.5% in March 2014 and National Grid’s long-run assumption of 3.0%. Of the £1.7 billion value added in 2014/15, £1,271 million was paid to shareholders as cash dividends and £335 million (excluding £3 million of transaction costs) as share repurchases (offsetting the scrip issuance during the year), with £79 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.

 

Other performance measures

UK regulated return on equity

The UK RoE has increased 100bps to 13.7%, reflecting particularly strong incentive performance in the Gas Transmission business and further outperformance against our totex targets in Electricity Transmission, achieved through efficiencies within the capital investment programme. This performance represents 360bps outperformance over allowed returns. Our UK RoE does not include the impact of legal settlement benefits of £56 million. If these were included UK RoE would increase by 60bps to 14.3%.

 

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Strategic Report

 

 

Financial review continued

 

 

 

 

 

UK return on equity %

 

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US regulated return on equity

The US RoE has decreased 60bps to 8.4%, reflecting the additional costs incurred this year as a result of the severe winter weather and the additional gas mains leak investigation and repair work required, together with rate base growth.

 

US return on equity1 %

 

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1.  Calculated on a calendar year basis.

 

Cash generated from operations

Cash generated from operations was £5,350 million (2013/14: £4,419 million). Changes in working capital improved by £360 million over the prior year, principally in the US (£441 million) due to the collection of high winter 2014 billings and other settlements including Superstorm Sandy reinsurance claims and LIPA receipts. Cash outflows relating to exceptional items were £133 million lower, as the prior year included reorganisation costs in the UK and LIPA MSA transition costs in the US.

 

Net debt and credit metrics

Our net debt levels will 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 the level of net debt remains appropriate for our business.

 

During 2014/15, net debt has increased by £2.7 billion. This is predominantly due to movements in foreign exchange rates as the US dollar strengthened against sterling. Gross borrowings are relatively consistent year on year, reflecting the current year net refinancing of maturities and bond repurchases, while cash and investment levels have been actively managed down.

 

With the commencement of the RIIO price controls in 2013 and the slow down in our planned near-term UK capital investment programme as the industry assesses the impact of Electricity Market Reform, we reviewed and restructured the Group debt portfolio. The review resulted in a £924 million bond repurchase programme, of which £295 million was achieved through a cash tender offer for five bonds. The net repurchase cost of £131 million has been presented as exceptional finance costs in the income statement, as noted on page 104.

    

 

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 adjustment made to net debt is to include pension deficits. RCF/net debt was 11.2% for the year (2013/14: 10.5%; 2012/13: 11.4%). 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 cost of buying back these shares reduces RCF/net debt to 9.9% 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.

     

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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 5.1 times (2013/14: 4.1 times; 2012/13: 3.9 times). Our target long-term rate for interest cover is in excess of 3 times.

 

Return on capital employed

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

 

Return on capital employed %

 

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The UK RoCE has increased from 8.0% to 8.6% in 2014/15. This reflects the strong incentive performance in Gas Transmission and further totex outperformance in Electricity Transmission, together with one-off benefits of legal settlements in the year.

 

US RoCE has decreased by 40bps in the year to 6.0%, as a result of the additional maintenance to improve reliability and safety and bring regulatory filings up to date, together with rate base growth driven by capital expenditure spend.

 

Capital expenditure

For the year ended 31 March 2015, capital expenditure of £3,470 million was at a similar level to last year, with reductions in spend in UK Electricity Transmission being offset by increases in capital spend in our US Regulated businesses.

 

The reduction in spend in UK Electricity Transmission reflected delays in the manufacture of cable for the Western HVDC link and a reduced level of overhead line work, with a number of projects having completed over the last two years. In addition

     

 

 

 

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we continue to look for innovative ways to reduce total expenditure (totex) under our RIIO regulatory arrangements while still delivering agreed outputs.

 

Within our US Regulated businesses, capital expenditure was higher year on year reflecting higher levels of mains replacement work, gas system reinforcement and growth spend, electricity capacity spend and progress on the New England East-West Solution (NEEWS) electricity transmission project.

 

Capital expenditure £m

 

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Dividend growth

We remain committed to our dividend policy to grow the dividend at least in line with the rate of average RPI inflation each year for the foreseeable future.

 

During the year we generated £2.1 billion of business net cash flow after our capital expenditure programmes. This has enabled the growth of the dividend in line with average RPI, being 2.0% (2013/14: 2.9%; 2012/13: 4.0%), taking into account the recommended final dividend of 28.16 pence.

 

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

 

Regulatory financial performance

Timing and regulated revenue adjustments

As described on pages 166 to 172, 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 £64 million (2013/14: £42 million under-collection). Our closing balance at 31 March 2015 was £27 million under-recovered.

 

In the UK, there was a cumulative under-recovery of £177 million at 31 March 2015 (2014: under-recovery of £83 million). All other things being equal, the balance will start to be recovered from customers in the year ending 31 March 2016.

 

In the US, cumulative timing over-recoveries at 31 March 2015 were £150 million (2014: £117 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 £174 million in the year (2013/14: £106 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 £1,528 million at 31 March 2015 (2014: £1,024 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 2015, these extend until 2071.

 

Major storms

Despite the very cold winter across much of the US including record snowfall in parts of New England, there were no major storms in 2014/15 or 2013/14.

     

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Strategic Report

 

 

Our people

 

 

If we are to achieve our strategic objectives, we need to

make sure our employees have the right skills and capabilities.

 

 

 

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Safeguarding the future

There is a significant skills challenge facing the engineering profession in the UK. Research by EngineeringUK has highlighted a need for 1.8 million engineers, technicians and crafts people over the period 2012–2022. Around 60% of all new jobs in this period will need science, technology, engineering and maths (STEM) qualifications, yet not enough school children succeed in these areas.

 

There is a similar challenge in the US where the number of scientists and engineers needed to meet growth and net replacement needs between 2012 and 2022 is 2.3 million, including 1.2 million in the computer occupations and more than 540,000 engineers.

 

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 work experience programmes.

 

Our careers education programmes in the UK include Careers Lab, an initiative we developed that was taken up by the charity Business in the Community in November 2014. It links working professionals from a range of sectors with schools to bring the world of work to life for secondary school children. A further initiative is the ‘Engineer Your Future’ exhibition at London’s Science Museum, which opened in December 2014 and explores engineering challenges through interactive games and digital experiences.

 

During 2014/15, we have expanded our residential work experience programme (balanced 50/50 between girls and boys) to include a non-residential programme for students aged 16–19 who are in sixth form or college and do not have an existing relationship with an employer.

 

This year, we invested nearly £900,000 in our education outreach, bringing benefits to 70 schools and more than 9,000 students who receive at least one hour of STEM/careers experience with our education ambassadors. We expect this to grow considerably in the UK through Careers Lab.

 

In the US, we continue to partner with seven local community colleges to deliver energy utility technology training programmes, designed to equip people for jobs in the energy industry. These programmes currently focus on future line workers. We plan to expand them to include technical skills for the gas industry.

 

We are continuing our partnership with the Center for Energy Workforce Development on its ‘energy industry fundamentals’, and we work with veterans through the US Troops to Energy Jobs programme. This is designed to help veterans make the transition from military service to the energy/utility industry.

    

We completed the fifth year of our Engineering Pipeline Program. This is a developmental programme designed to inspire promising students to become engineers and provide them an opportunity for fast tracked employment with National Grid.

 

We are working with the State University of New York and its network of colleges and universities. The aim is to prepare students for careers in the energy and utilities industry by improving the educational opportunities available to them. We expect this partnership to increase the volume of qualified entry-level candidates looking to join National Grid.

 

Our US work experience opportunities include six to eight week summer internships for college students, so they can gain work experience with National Grid. A number of these interns start their journey into the energy industry through our Engineering Our Future programme and go on to join our Company.

 

In the UK, we offer summer internships and also 12 month industrial placements to undergraduates in their penultimate year. These programmes offer students the opportunity to experience the culture, working and ethical practices of National Grid before they make the all-important decision to join the organisation as graduates.

 

Building skills and expertise

During 2014/15, we have worked on boosting the capabilities of our employees in the areas of Performance Excellence (see page 27), stakeholder engagement, customer focus and contract management. We see these capabilities as being crucial in helping us improve our performance and meet regulatory and customer expectations.

 

More than 900 employees have attended our Performance Excellence programmes; more than 650 employees have attended our stakeholder engagement and customer focus programmes; and around 250 employees have attended our contract management programmes.

 

Our executive team and senior leaders in the UK and US are participating in a programme to develop performance leadership skills. To prepare for our future engineering skills needs, we have built a T-pylon development facility at our Eakring learning centre in the UK.

 

We remain committed to investing in our people, providing the training and other support necessary for them to build, maintain and operate our networks safely and reliably, and this year we provided more than one million learner hours of training across our UK and US businesses.

 

 

 

 

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Promoting an inclusive and diverse workforce

We aim to develop and operate our business with an inclusive and diverse culture, with equal opportunity to all in recruitment, career development, training and reward. This applies to all employees regardless of race, gender identity, nationality, age, disability, sexual orientation, religion and background. Our policies support the attraction and retention of the best people, improve effectiveness, deliver superior performance and enhance our success.

 

In the UK we were recognised as a Times Top 50 Employer for Women for 2015 and reached the Gold level in our benchmarking with both Race for Opportunity and Opportunity Now during 2014. Both these campaigns also recognised us as a Top 10 private sector employer. Our Employee Resource Groups (ERGs) continue to support our business goals and participate in events that encourage students to consider careers needing STEM qualifications.

 

In the US, our ERGs support our business goals and ambitions. They are at the forefront of our inclusion and diversity initiatives – including our commitment to hire veterans and people with disabilities, as well as our efforts to promote understanding of unconscious bias.

 

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.

 

     

Health and wellbeing

Among our programmes for 2014/15 we have worked to address the stigma and discrimination associated with mental health. We signed the UK Government-led ‘Time to Change’ pledge and have trained a further 92 employees in mental health first aid. We have also helped more than 4,000 of our employees and our service providers’ staff understand their ‘heart age’ and run a weight-loss campaign that raised more than £4,000 for Macmillan Cancer Support.

 

In the US we have refreshed our soft tissue injury programme, aimed at helping reduce muscular skeletal disorders. Our employee opinion survey results continue to show that employees have a growing awareness of our wellbeing programmes.

 

Volunteering

Our employees continue to support our local communities, sharing their time and expertise on a range of skills-based volunteering and fundraising activities.

 

In the UK we raised over £500,000 for good causes and provided over 9,000 hours of support to community projects. Our support of City Year now includes a new mentoring programme in Birmingham and we launched ‘Good Leaders’, a programme that shares our leadership expertise with the charity sector. 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

Respect for human rights is incorporated into our employment practices and our values. See page 185 for more information.

   

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         Financial year ended 31 March 2015                          
          Male     Female   Total  

Male

%

 

Female 

                        
   

Our Board

    8      3   11   72.7   27.3               
   

Senior management

    183      58   241   75.9   24.1               
   

Whole Company*

    18,554      5,720   24,274   76.4   23.6               
   

 

* This measure is also one of our Company KPIs. See pages 18 and 19 for more information.

         
                           
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Inspiring future engineers
Connecting to life:
Engineer Your Future
We are part of a business consortium supporting ‘Engineer Your Future’ at the UK’s Science Museum in London. The exhibition will run until the end of 2017 and is designed to inspire and engage young people about the exciting world of engineering. This complements the work we are doing with young people and organisations like VEX Robotics, shown above.
The exhibition features a series of interactive hands-on exhibits, including FutureVille, a vibrant futuristic cityscape controlled by the visitor’s smartphone. The Science Museum is using ‘Engineer Your Future’ to pledge support to the UK Government’s Your Life campaign, which aims to boost the number of young people in the UK studying physics and mathematics. nationalgridconnecting.com/inspiring-for-the-future sciencemuseum.org.uk/engineeryourfuture
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Principal operations

 

  Overview of our UK operational businesses during 2014/15

 

 

 

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Our UK regulated businesses delivered a strong financial performance in the second year of RIIO. We aim to create value for our stakeholders by focusing on performance and making sure our processes are as efficient as they can be (see ‘Performance Excellence’ below). Savings generated in the first two years of RIIO will reduce future customer bills by around £200 million.

 

We have also established a new organisational structure to give stakeholders a clearer picture of how our activities are organised and delivered.

 

We have responded to concerns about the cost of energy and the security of the UK’s energy supply. In evidence to parliamentary inquiries we have explained our role, the services we provide and what those services cost. We have also been working with stakeholders in Europe to plan for the future impact of European Union energy policy on our business.

 

Our non-regulated businesses have been focused on getting the best value from our existing portfolio and exploring opportunities for future growth. For further information see page 36. We have also signed two new interconnector agreements: with Elia, the Belgian Transmission System Operator, for an electricity interconnector between the UK and Belgium; and with Statnett, the Norwegian Transmission System Operator, for NSN Link, the first interconnector between the UK and Norway. These agreements signal the start of the construction phases of these projects.

 

Principal risks

As described in the Internal controls and risk management section (pages 38 to 41), we identify, monitor and manage risks at various levels within our Company. The key risks our UK business faces are organised into a UK regional risk profile which is regularly reviewed by UK senior leadership. The main risk themes currently featured in this profile are:

 

  the risk of changes to the complex political and regulatory agenda for UK and European energy policy development and their potential implications for our business;

  challenges associated with making sure the data required to deliver business processes and regulatory requirements is complete, accurate and consistent;

  the impact of changes in our business structure and processes on our ability to continue to perform under RIIO; and

    

  continued management of safety, security and network resilience.

 

System Operator (SO) progress

Our SO role is described on pages 08 and 11.

 

The UK faces tightening capacity margins between supply and demand for the next three years. Helping the market to make the right decisions to maintain security of supply has been an important theme in our role as SO during 2014/15.

 

Following a number of generation plant outages over the winter, the two new balancing services developed to provide additional reserves were tendered as a precaution. Although these additional reserves were not used this year, they have also been tendered to procure additional capacity for winter 2015/16 when margins are predicted to tighten further.

 

We have continued to work with stakeholders to develop and implement EMR. We completed pre-qualification and auctions for the Capacity Market and the Contract for Difference (CfD) feed-in tariff regime. The capacity market auction this year procured additional capacity ready for the first year of delivery in 2018/19. Contracts were signed with 25 applicants following the first auction for CfD.

 

We have led the development of changes to the gas transmission regulatory framework that will help customers plan their long-term projects through an improved way of reserving capacity. We have also developed a new framework that adds current system operation knowledge to long-term predictions about the future energy landscape. This helps us plan for the right services and products to operate the system in the future.

 

 
       

Priorities for the year ahead

Our role as SO is set to evolve during 2015/16, following the conclusion of Ofgem’s Integrated Transmission Planning and Regulation project. As part of this, the SO is expected to undertake a number of new advisory roles. We have a long track record in successfully managing potential conflicts of interest from our SO role and will work closely with Ofgem to make sure this continues.

 

We will also be engaging further with the industry, aiming to increase opportunities for demand-side participation within the GB market.

 

 
         
  

 

Performance Excellence

Performance Excellence is an approach that will help us to achieve our Company objectives by looking for improvements to all of our processes. It aims to save time and make us more efficient so we can deliver better value for our customers and stakeholders – from new ideas that improve processes, to introducing equipment that does things more effectively. For example, in our UK Gas Distribution business, regional Performance Excellence teams are working with our operational teams to identify their common challenges and find the right solutions. As a result we have introduced a new helpdesk service for our Gas Distribution field force. This new service means technology problems are resolved more quickly, helping them to be more productive and better meet customer needs. See page 35 to read more about Performance Excellence in the US.

 

 

 

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Strategic Report

 

 

Principal operations continued

 

  UK Electricity Transmission

 

 

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What we do

We own the electricity transmission system in England and Wales. Our networks comprise approximately 7,200 kilometres (4,470 miles) of overhead line, 1,500 kilometres (932 miles) of underground cable and 336 substations.

 

Market context

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 respond by developing the way we balance and operate our network to accommodate these sources.

 

Over the last two years, some generators have delayed their connection dates to the network and this means our future investment profile for electricity transmission is flatter than in previous years. However, we are ready to respond to connection dates when we need to. We will continue to renew our network to deliver the network reliability our customers require as efficiently as possible.

 
         
  

 

What we’ve achieved during 2014/15

The full tunnel network on our London Power Tunnels project has been completed, and the remaining works programme is forecast to complete ahead of schedule and under budget. We have also completed the development of a £164 million asset replacement and customer connection project for Wimbledon.

 

We made progress on substation and cable construction work for several new Network Rail connections, as well as Crossrail connections in London. These connections are required to support the national railway electrification programme from 2015 to 2017.

 

We achieved a significant engineering milestone, installing the first ever series compensation device on the UK network. This device, which adds capacity to a transmission circuit, can increase power flows from Scotland. With both National Grid and Scottish Power series compensation in service, the Scotland-England boundary capacity is expected to increase by 1 GW.

 

We have continued to develop the innovative T-pylon and are considering where it could be offered alongside other connection options when developing new transmission circuits. The first T-pylon has been installed at our Eakring training facility.

 

    

 

Our Visual Impact Provision (VIP) project gathered pace. Our policy to make use of the £500 million allowance under RIIO to mitigate the visual impact of our overhead lines in National Parks and Areas of Outstanding Natural Beauty was agreed with Ofgem. A stakeholder advisory group, including representatives of organisations with a national focus on our natural heritage, is helping us choose which transmission lines should be prioritised and how the fund should be allocated.

 

We agreed an RPI-linked bank loan facility of £1.5 billion with the European Investment Bank (EIB). This is the largest ever single loan by the EIB and is now available to fund capital investment in National Grid Electricity Transmission plc.

 

We also deployed new tools and systems to our field workforce, winning the Mobile Innovation category at the SAP UK Quality Awards.

 

 
       

 

Priorities for the year ahead

Safety: Make sure our suppliers and employees manage their safety performance when working near our transmission assets. This includes seeking evidence that they are using effective safety management systems.

 

Maintenance: Establish a programme to change the way we plan and deliver all work on our assets by balancing risk, performance and delivery costs.

 

 

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Hinkley Point C connection: Continue to progress the regulatory submissions needed for the Hinkley Point C connection project to secure the funding for delivery.

 

Visual Impact Provision: Through our VIP project we will identify the final locations where the visual impact of our networks will be reduced.

 

Data and technology: Continue to improve how we define and capture the network data that helps us make better decisions on our assets and respond more quickly to customer demand for new connections.

 

 

 

 

 

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   UK Gas Transmission

 

 

 

In focus:

 

  

 

What we do

  

 

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 25%, giving our customers significant flexibility over which sources of gas they choose to meet demand. Newer sources of supply, such as LNG importation terminals and storage sites, can respond to demand more quickly than traditional UKCS supplies. Our network therefore needs to be able to respond to changing day-to-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.

 

 

40 times  

 

The gas national

transmission system

operates at pressures

up to 94barg – around

40 times the pressure

of an everyday car tyre. 

 

   We own and operate the gas national transmission system in Great Britain, with day-to-day responsibility for balancing supply and demand. Our network comprises   

 

    

  

approximately 7,660 kilometres (4,760 miles) of high pressure pipe and 24 compressor stations. In 2014/15 the gas throughput across the system was over 80 billion cubic metres.

 

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

 

  

    

     
    

 

What we’ve achieved in 2014/15

We delivered a strong safety performance, particularly in our operations business where we have achieved 24 months (from April 2013) without a single lost time injury suffered by our employees or contractors.

 

We reached record levels of compressor availability in our network. Operational availability was at 100% several times during the winter, with an average of 96%. This is

  

 

To meet the stricter environmental limits imposed by the Industrial Emissions Directive (IED), our larger gas turbines will need modifying or replacing. We have sought feedback from our stakeholders on the impact of the IED, adapting our proposed solutions in response. This has helped us develop investment options to make sure the network can meet the future needs of our customers and operate as efficiently as possible.

    

a rise of 7% on the average for winter 2013/14. It follows targeted investment in our fleet of compressors and improvements to our planning process, maintenance and repair methods.

 

We received £5.7 million from Ofgem following a successful bid in the Network Innovation Competition for designing and building a robotic device that can inspect below-ground pipework at high pressure installations. The device will help us to better assess asset condition, so we can focus expenditure where it is needed, benefiting gas consumers.

  

 

Priorities for the year ahead

Safety: Sustain and improve our safety performance by implementing a new safety culture improvement programme across UK Gas Transmission.

 

Reliability: Build on improvements we have made this year in compressor availability, extending this across other critical assets in our network to further improve the service we deliver to our customers.

 

Efficiency: Continue improving end-to-end processes and deliver greater value for

 

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customers by being more efficient. Where we create additional capacity, we will look to insource some maintenance work and increase specialist pipeline services for customers.

 

Innovation: Use the innovation opportunities available through the Network Innovation Competition and Network Innovation Allowance funding. This will help us to create value for customers and the industry, and to achieve our RIIO-T1 commitments.

 

Emissions compliance projects: Continue work on existing emissions compliance projects and secure funding for continued works over the remainder of the RIIO-T1 period and beyond.

 

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Table of Contents

    Strategic Report

  Principal operations continued

  UK Gas Distribution

 

 

 

 

In focus:

 

 

What we do

 

 

Ofgem is able to make comparisons across all eight networks. It establishes outputs they are expected to deliver so that 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 that are common to all networks and customers, 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 bio-methane.

 

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Gas consumption

in our networks was     

260 TWh in 2014/15.

 

We own and operate four gas distribution networks comprising approximately 131,000 kilometres (82,000 miles) of pipeline. We transport gas from the national transmission system to around

 

We manage the

National Gas

Emergency number

(0800 111 999) on

behalf of all gas

distribution networks.

10.9 million consumers on behalf of 37 shippers.

 

Market context

We manage our networks to keep our customers

safe and warm. We are incentivised through RIIO

 

We handled nearly

2.4 million calls during   

2014/15 across the

emergency number,

enquiry lines,

appliance repair

helpline and meter

enquiry service.

 

to operate efficiently and deliver services that our customers and stakeholders value.

 

    

 

What we’ve achieved during 2014/15

We believe we are making progress towards our ambition to be the best gas distribution business in Britain by 2017. We understand where we need to

 

However, against a backdrop of increased customer complaints across the industry, our volumes have also increased. To help improve this, a particular focus this year has been on simplifying the process

    

focus to deliver our RIIO outputs and deliver better customer service.

 

We are investing in our networks to make sure we meet customer and stakeholder needs. This includes replacing approximately 1,450 kilometres of old metal pipelines with more durable materials as part of our mains replacement programme developed with the HSE and Ofgem. In London, we have replaced around 300 kilometres of iron mains, including projects in Battersea and around the City.

 

We have also completed ten commercial bio-methane connections, more than any other UK gas distribution network, including the first 100% food waste plant and the first commercial sewerage connection with Severn Trent Water.

 

Overall, we have delivered successfully against our targets to deliver world-class levels of safety performance across our combined field workers and contractor workforce. In terms of cable strikes and injuries to members of the public, although we have missed our targets, we have increased our efforts to make improvements. We have also used innovative technology that has helped reduce excavation volumes, so we can minimise disruption. We have also been helping stakeholders such as landowners and the construction industry understand how we protect pipelines and how they can operate safely around them.

 

During 2014/15, we were recognised by Ofgem as the best performing gas distribution network in understanding our customer and stakeholder needs for the previous year. Our focus in this area has seen over 1,200 fuel poor customers benefiting from an alternative, more affordable method of heating their homes since we have connected them to our gas networks.

for customers who want to connect to our networks by improving our website experience and providing them with a single point of contact.

 

We have invested in new mobile technology for our field workforce to increase productivity and provide our supervisors with real-time information. This has also helped improve employee engagement scores and the desire to drive better outcomes for our customers; our field workforce now compares favourably with industry benchmarks.

 

    

 

Priorities for the year ahead

Improve our safety performance by further reducing cable strikes, injuries to members of the public and preventing third-party encroachment. This will continue to be an important area of focus.

 

Continue to use innovative technology to deliver better services that reduce the impact on customers’ bills and minimise disruption caused by our work.

 

Improve our customers’ experience of planned replacement work projects by working with our partners to improve our processes, data capture and how we communicate and engage with our customers.

 

Continue to work with government and industry on setting out the vision for the future role of gas in the UK’s energy mix and policies that support this role, while considering how domestic smart meters can create value for customers.

 

Motivate and equip our workforce with the tools and knowledge they need to deliver the services and outcomes our customers value, while increasing productivity.

 

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Capital investment in the pipeline
Connecting to life:
London gas mains replacement
We are investing nearly £1 billion over an eight year period to 2021 in London’s gas distribution network. In particular, we’re replacing and upgrading more than 2,500 kilometres of gas mains. The work will provide vital infrastructure, supporting London’s economic growth by continuing to provide a safe and reliable gas supply.
We own and maintain more than 20,000 kilometres of gas distribution pipeline under London’s streets. Our use of innovative technologies, like Core&Vac keyhole technology, helps us to keep disruption to a minimum, allowing the City to go about its daily business while we improve the network for the future. nationalgrid.com/LondonGasMainsReplacement
NATIONAL GRID ANNUAL REPORT AND ACCOUNTS 2014/15
Strategic Report
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A network fit for the future
Connecting to life:
Improved reliability for Aquidneck Island
The electrical system that serves Aquidneck Island, part of the State of Rhode Island, is antiquated and currently stretched to its limits. The forecasted future demand peaks at 167 MW, which is 20 MW more than the current system can deliver. Our customers, like Judy Crosby of Island Books, rely on power for their livelihood. The $93 million Aquidneck Island Reliability Project will bring more reliable power to the nearly 32,000 homes and businesses in Portsmouth, Middletown and Newport.
The project includes two state-of-the-art substations, reconfiguration of two transmission lines, local distribution work, and retirement of five substations on the island. onislandngrid.com
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Principal operations continued

 

US Regulated

 

What we do and where we do it

 

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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.

 

 

 

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.

 

In focus:

 

           

 

3.5m

 

 

16bn

 

 

3.6m

 

 

30 TWh

 

electricity consumers

in New England and upstate New York.

 

 

standard cubic metres of

gas that we forecast, plan

for and procure annually.

 

 

consumers receive services from our gas distribution networks, including 26,882 new gas heating customers in 2014/15.

 

 

 

 

of electricity we forecast, plan for and procure annually across three states.

 

169km

 

 

14,355km

 

 

15 year PSA

 

(105 miles) of underground cable,

520 transmission

substations and 644

distribution substations

we operate in New England and upstate New York.

 

 

(8,920 miles) of electricity transmission system are owned and operated by National Grid.

 

 

We own and operate 50 fossil fuel-powered units on Long Island that together provide approximately 3,800 MW of power under contract to LIPA. Our Power Supply Agreement (PSA) with LIPA is for 3,634 MW of capacity, comprising eight dual fuel (gas/oil-fired) steam units at three sites, 11 dual fuel combustion turbine units, and 27 oil-fired combustion turbine/diesel units. Under a separate contract with LIPA, four dual fuel combustion turbine units provide an additional 160 MW of capacity.

 

 

 

Market context

In the US, regulators are focused on system modernisation and the integration of new distributed energy resources. In 2014 we introduced Connect21, our thinking on advancing America’s natural gas and electricity infrastructure beyond its 20th century limitations, and creating a more customer-centric, resilient, agile, efficient and environmentally sound energy network. We are working with policymakers, customers and stakeholders to transform the energy industry through initiatives such as Grid Mod in Massachusetts, Reforming the Energy Vision (REV) in New York, and Gas and Electric Infrastructure Safety and Reliability (ISR) plans in Rhode Island.

 

 

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Strategic Report

 

 

Principle operations continued

 

  US Regulated continued

 

 

 

    

 

Principal risks

As described in the Internal controls and risk management section (pages 38 to 41), we identify, monitor and manage risks at various levels within our Company. The key risks our US business faces are organised into a US regional risk profile which is regularly reviewed by the US senior leadership. The main risk themes currently featured in this profile are:

 

  our ability to manage data integrity and

    systems improvements required to

    deliver core business processes and

    regulatory requirements;

  our ability to recover costs through

    existing rate-making mechanisms and to

    influence the development of the future

    US utility business model;

  our ability to enhance our US business

    structure and end-to-end processes to

    support an evolved jurisdictional

    performance environment; and

  safety performance and network

    reliability, security and resilience.

 

What we’ve achieved

During 2014/15, we delivered a solid performance and continued with high levels of investment in our networks. As described on pages 18 and 19, we achieved our reliability KPI targets but we still have work to do if we are to improve our customer satisfaction target scores.

 

We finally completed the stabilisation work on our new enterprise resource planning system. This fixed a number of long-standing problems, such as inefficient payroll processing, which had previously required expensive manual interventions. Long term, the data we can produce with the new systems are an essential foundation to the future performance improvements and regulatory filings that we need for profitable growth in the US.

 

In 2010, the Massachusetts Department of Public Utilities (MADPU) approved a power purchase agreement between National Grid and Cape Wind for a proposed large-scale, offshore wind farm in Nantucket Sound. In 2014, Cape Wind did not satisfy certain critical milestone deadlines set out in the power purchase agreement and did not post collateral to extend the deadlines in the power purchase agreement. As a result, the power purchase agreement was terminated in January of 2015. We continue to believe the solution to New England’s energy challenge is a diversity of energy sources, which is why we support renewable projects consistent with our goal of reducing emissions while minimising the cost impact on our customers.

 

In a joint programme with Earth Networks, we purchased 55 Weatherbug stations to donate to our communities in Massachusetts, New York and Rhode Island. These stations provide customers with more localised weather information and we use them to better prepare for and respond to storms. They also contribute to STEM education in giving free real-time local weather data to schools and emergency responders.

 

We continue to invest more in reinforcing the electricity distribution system and also 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.

 

The NYPSC also published the results of the regulatory audit of our New York gas companies. These audits are a regular feature of the New York regulatory process. The audit was broadly supportive of our performance and structure and, as is usual, made some recommendations for further improvement. It specifically recommended stronger local leadership and a number of more cost-effective and customer-focused operational enhancements. We have responded with an implementation plan to provide these benefits on behalf of New York customers.

 

Last year, regulatory audits in New York also identified an unacceptable number of violations of the regulations relating to our gas operations. To improve our regulatory compliance performance, we are investing in compliance monitoring systems, adding compliance personnel, and enhancing our training and safety protocols.

 

Our regulators and customers have heightened expectations around safety and compliance for all gas utilities. We are committed to doing everything we can to meet their expectations and making sure sufficient resources are dedicated to support this priority.

 

Building on performance improvements in 2013/14, we saw a reduction in safety incidents in 2014/15. In the past year, there has been a 7% reduction in the number of injuries requiring medical attention and a 26% reduction in the number of cases requiring employees to stay out of work. These reductions result from programmes and initiatives based on risk areas, improved incident investigations and root cause analysis. There is still much work to do as we strive for zero injuries. Soft tissue injury prevention, safety observations, road traffic collisions and slips, trips and falls will remain a focus for us in 2015/16.

 

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. We have highlighted some of our 2014/15 achievements below.

 

Massachusetts

We are preparing to file a grid modernisation plan – a blueprint for the modernisation of the electric system – with MADPU in August 2015.

 

We have announced plans to build, own, and operate an additional 16 MW of solar generation, bringing total solar capabilities in the state to 21 MW.

 

As of late 2014, we had installed 39.9 miles of new gas mains and added more than 8,400 new natural gas customers.

 

 

 

 

 

  Our Sustainability Hub

  in Worcester, MA.

 

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New York

We are helping to shape new energy policy in the state through our REV filings. REV is aimed at transforming the electricity energy industry and regulatory practices in New York State.

 

We are adding new electricity capacity and infrastructure to RiverBend, Buffalo, a former industrial brownfield that is bringing growth and jobs to the state. Companies including Solar City and Soraa will bring investment, much needed jobs, and new and advanced energy technologies that could make this region a hub for energy development regionally, nationally and internationally.

 

We are negotiating a power purchase agreement with ReEnergy under which we intend to purchase excess energy from a 55 MW biomass generating facility at Fort Drum in Watertown. This will be the largest renewable energy project in the history of the US Army.

 

We have begun a two year plan to replace ageing pipes and expand the use of natural gas on Long Island and the Rockaway Peninsula to more than 20,000 new customers. This accelerates the replacement of ageing pipes from the current 50-mile requirement to 95 miles by 2016.

 

We are partnering with New York City to accelerate the phase out of heavy oils in around 800 buildings. Since the programme’s launch in 2011, we have converted over 500 heavy oil buildings. We continue our efforts to convert the few remaining clean heat eligible buildings on Staten Island.

 

Rhode Island

The $93 million Aquidneck Island Reliability Project, known as OnIsland, will bring more reliable power to the nearly 32,000 homes and businesses in Portsmouth, Middletown, and Newport. The project includes two substations, reconfiguration of two transmission lines, local distribution work, and retirement of five substations on the island.

 

We have been working with Toray Plastics, one of the largest employers in the state, on customised energy solutions. In 2014 the company opened its second cogeneration system at its 70-acre campus in North Kingstown and we supported them with an energy efficiency incentive of $15.9 million.

 

We are building a new state-of-the-art substation to replace the existing ageing infrastructure at the current South Street Substation, which powers downtown Providence. This coincides with a $206 million redevelopment of South Street Landing that will turn the vacant former South Street Power Station into teaching and administrative space for Brown University, Rhode Island College and the University of Rhode Island.

 

FERC

We are part of a joint venture to form New York Transco. This aims to construct, own, and operate incremental electric transmission assets in New York State to improve reliability and reduce congestion.

      

 

It is initially pursuing five projects that support public policy objectives and provide broad-based benefits across the state. New York Transco filed with FERC in December 2014 for rate recovery and cost allocation for proposed transmission projects, estimated at $1.7 billion.

 

We have joined Spectra Energy’s $3 billion proposed Access Northeast pipeline project that aims to significantly increase natural gas capacity to generators in New England. Our three New England electric distribution companies have established memoranda of understanding with project developers to explore the development of an innovative tariff that would enable them to take capacity from the pipeline and release it into the market as needed to mitigate wholesale electricity price spikes.

 

In December 2014, we announced we had joined forces with Anbaric Transmission to develop large-scale HVDC transmission projects to deliver a combination of domestic wind energy and Canadian hydropower to New England load centres. We are currently developing a 1,000 MW hybrid land and sea HVDC project from northern Maine to Greater Boston and a 400 MW underground HVDC project from upstate New York to Vermont under Lake Champlain.

 

We are working with Eversource Energy in implementing the Greater Boston and New Hampshire Solution to address critical grid reliability needs. We will be investing approximately $190 million in the Solution for new infrastructure in southern New Hampshire, northern Massachusetts, and the Greater Boston area. We expect the Solution to be in service by 2019.

 

         
    

 

Priorities for the year ahead

We continue our Connect21 journey with these four priorities for 2015/16: Performance Excellence; local operating model; talent and capabilities; and future energy networks.

 

Performance Excellence: We will improve the way we work as teams to become more efficient, innovative, and responsive to our customers’ needs in end-to-end processes that include: meter to cash; emergency response; deliver gas and electric; maintain gas and electric; and operate gas and electric.

         
    

 

Local operating model: We will continue to drive greater accountability and customer service by delivering the services and obligations expected by the 14 operating companies and four jurisdictions that comprise our US business – at a cost and performance level agreed upon by each jurisdiction’s management team.

 

Talent and capabilities: We will provide employees with the tools and resources they need to achieve the performance measures required by our customers and shareholders.

 

Future energy networks: We will update and create new electricity and gas networks through design, operational, and regulatory innovations.

     

 

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  Upgrading the power

  lines in Rhode Island.

 

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Table of Contents

    Strategic Report

  Principal operations continued

  Other activities

 

 

 

 

In focus:

  Grain LNG         timescale). Intraday markets help

 

14.9%

 

Approximate

percentage of UK gas

from LNG imports, up    

from 9.7% in 2013/14.

 

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 in to the national transmission system.

 

This year, we have continued to explore

     

market participants adjust their positions better over short time periods.

 

Metering

National Grid Metering (NGM) provides installation and maintenance services to energy suppliers in the regulated market

    developments to our LNG services to increase       in Great Britain. It maintains an asset
    revenue, including the potential to offer ship       base of around 14.1 million domestic,
    reloading.       industrial and commercial meters.
   

 

We have started a ship cool-down service. This process helps ships that have been out of service or having maintenance to reload full LNG cargo.

 

In 2015/16, we will also commission and launch our LNG road tanker loading facility. This will provide tankered LNG to off-grid customers and operators of heavy goods vehicles.

 

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. The interconnector’s availability continued to improve this year following a significant valve replacement programme. Average availability for 2014/15 was 90.62%, up from 83.84% in 2013/14. A substantial proportion of the flow continues to be in the import direction, from France to Great Britain.

 

BritNed is a joint venture between National Grid and TenneT, the Dutch transmission system operator. It owns and operates a 1,000 MW HVDC link between England and the Netherlands. As with IFA, a substantial proportion of the flow is in the import direction from the Netherlands to Great Britain.

 

Throughout 2014/15, both IFA and BritNed have operated as part of the North West Europe market region. The creation of this region is part of the ongoing development of the EU’s Internal Energy Market. IFA and BritNed have entered this region voluntarily ahead of the introduction of new EU-wide rules for cross-border electricity trading.

 

IFA and BritNed are also involved in the next phase of this regional market that will cover the intraday market timescale (currently it only covers the day ahead

 

     

 

The domestic traditional gas metering business continues to operate in its role as the National Metering Manager, pending the start of the smart metering mass roll-out. This role means customers have a point of contact if they require a meter up until the start of the smart metering roll-out. Tariff caps agreed with Ofgem as part of this role, which took effect on 1 April 2014, will continue to apply until at least the end of the transition to smart metering.

 

Customer satisfaction scores for NGM remain positive for both its domestic, and industrial and commercial businesses, but we continue to work with our customers on areas for improvement. In our industrial and commercial business we have implemented new software that allows remote customer self-serve access for some services and is expected to improve efficiency. We are also responding to the rapidly changing non-domestic sector by exploring additional products and services.

 

UK Property

National Grid Property is responsible in the UK for the management, clean-up and disposal of surplus sites, most of which are former gas works. During 2014/15, we entered into a joint venture with the Berkeley Group, known as ‘St William’, to develop surplus land for residential use in London and the South East. We have also sold 42 sites and exchanged on several high-profile land disposal agreements with joint venture partners. Our holder demolition and contaminated land clean-up programmes are progressing well, and we are in the process of retendering our estate management outsourcing agreement.

 

Xoserve

Xoserve delivers transactional services on behalf of all the major gas network transportation companies in Great Britain, including National Grid. Xoserve is

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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 technologies.

 

Corporate activities

Corporate activities comprise central overheads, Group insurance and expenditure incurred on business development.

 

 

 

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Table of Contents

    Strategic Report

 

  Internal control and risk management

  The Board is committed to protecting and enhancing our reputation and assets,

  while safeguarding the interests of our shareholders. It has overall responsibility

  for the Company’s system of risk management and internal control.

 

 

 

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

 

The Board oversees risk management, and, as part of this role, it reviews the main elements of our process and sets and monitors risk appetite. Risk appetite establishes the amount of uncertainty the Company may seek or accept at any given time when pursuing our strategic objectives.

 

The Board regularly reviews our internal controls and risk management processes. This year specific consideration was given to the guidance in the new UK Corporate Governance Code 2014 (the New Code) which applies to the Company in the next fiscal year and refinements to our processes will be introduced, as appropriate, over the coming year.

 

Risk management approach

Our Company-wide corporate risk management process provides a framework through which we can consistently identify, assess and prioritise, manage, monitor and report risks, as shown in the diagram below. The process is designed to support the delivery of our vision and strategy as described on pages 14 and 15.

 

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 achieving their objectives and the actions being taken to manage and monitor them. They assess each risk by considering the potential ‘worst case credible’ financial and reputational impacts and how likely the risk is to materialise. The risks we identify are collated in risk registers and are reported at functional and regional levels of the Company. The risk registers also describe the adequacy of our existing risk controls.

 

 

 

 

An important feature of our risk management process is that each business function owns and is responsible for managing its particular risks. A central risk management team 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 internal audit and compliance management, to sense check risk information.

 

Regional senior management regularly review and debate the outputs of the bottom-up process and agree the prioritisation of the risks. The main risks for the UK and US businesses are highlighted in regional risk profiles and reported to the Chief Executive through quarterly performance reports. An overview of current risk themes for the UK and US businesses is provided on pages 27 and 34 respectively.

 

Our main strategic uncertainties or ‘principal risks’ for the Company are developed through top-down discussions with the Executive leadership team. These risks are reported and debated with the Executive Committee and Audit Committee every six months.

 

The Board participates in an annual risk workshop to make sure that the principal risks remain closely aligned to our strategic aims and that no important risks (or combination of risks) are being overlooked. In addition, the Board considers emerging risks (uncertainties that are still developing and sit outside the principal risks profile) together with our strategy team’s annual long-term update.

 

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

 

Risk management process

 

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Feedback and reporting

 

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Our principal risks

Accepting that it is not possible to identify, anticipate or eliminate every risk that may arise and that risk is an inherent part of doing business, our risk management process aims to provide reasonable assurance that we understand, monitor and manage the main uncertainties that we face in delivering our objectives.

 

This includes consideration of inherent risks, which exist because of the nature of day-to-day operations in our industry, and financial risks, which exist because of our financing activities. An overview of the key inherent risks we face is provided on pages 173 to 176,

   

 

as well as an overview of our key financial risks, which is incorporated within the Notes to our consolidated financial statements on pages 94 to 158.

 

Our corporate risk profile contains the principal risks that the Board considers to be the main uncertainties currently faced by the Company as we endeavour to achieve our strategic objectives. An overview of these risks is provided below, together with examples of the relevant controls and current mitigating actions we are taking.

 
 
   

Strategic objective

 

 

Risk description

 

      Example of mitigations  
   

 

Drive growth

 

 

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

 

Failure to sufficiently grow our core business and have viable options for new business over the longer term would negatively affect the Group’s credibility and jeopardise the achievement of intended financial returns.

 

Our ability to achieve our ambition for growth is subject to a wide range of external uncertainties, including the availability of potential investment targets and attractive financing and the impact of competition for onshore transmission in both the UK and US; and internal uncertainties, such as the performance of our operating businesses and our business planning model assumptions.

 

         

 

  We regularly monitor and analyse market conditions, competitors and their potential strategies, the advancement and proliferation of new energy technologies, as well as the performance of our Group portfolio. We are also looking to access new sources of finance and capabilities through partnering.

  We have internal processes for reviewing and approving investments in new businesses, disposals of existing ones and organic growth investment opportunities. These processes are reviewed regularly to make sure our approach supports our short- and long-term strategies. We undertake due diligence exercises on investment or partnering opportunities and carry out post-investment reviews to make sure we learn lessons for the future.

   
   

LOGO

 

         
   

 

Engage externally

 

 

Inability to influence future energy policy.

 

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

         

 

  In the UK, we are continuing to work closely with DECC and Ofgem on Electricity Market Reform (EMR) plans. We successfully implemented the first Capacity Market Auction and Contracts for Difference Allocation process and are working with the Regulator to finalise the enduring EMR Business Plan to ensure we continue to deliver value under RIIO. We continue to maintain strong relationships with government, engage in consultations, and develop comprehensive stakeholder communication plans. The Board is also continuing to monitor the increasing public debate around the cost, availability, security and sustainability of UK energy supplies.

   
               In the US, we are engaging our external stakeholders about the role of the utility company of the future, under the banner of Connect21. We believe this conversation will help shape the regulatory and fiscal regime in the US in the future. Regulatory proceedings related to utility of the future have been launched in New York (Reforming the Energy Vision) and Massachusetts (Grid Modernization) and our Connect21 aligns well with them. We are continuing to strengthen our jurisdictional focus and are improving our rate case filing capabilities so our businesses can continue to earn a fair and reasonable rate of return. Our rate filings include structural changes where appropriate, such as revenue decoupling mechanisms, capital trackers, commodity-related bad debt true-ups and pension and other post-employment benefit true-ups, as described on pages 169 and 172.  
   

 

LOGO

 

          

We maintain and monitor a reputation ‘watch list’ at both Company and regional levels to support awareness and proactive management of issues that could cause us reputational harm.

 

 
                            

 

LOGO
 

 

        NATIONAL GRID ANNUAL REPORT AND ACCOUNTS 2014/15    39


Table of Contents

     Strategic Report

   Internal control and risk management continued

 

 

 

 

 

   

 

Strategic objective

 

 

 

Risk description

 

    

 

Example of mitigations

 

 
   

 

Engage our people

 

 

Inability to secure the business capacity, appropriate leadership capability and employee engagement levels required to deliver our vision and strategy.

 

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

 

      

 

  We have identified the core capabilities that align with our strategic ambition and defined our set of leadership standards.

  We have filled key leadership roles with a mix of internal and external hires.

  We are involved in a number of initiatives to help secure the future engineering talent required (see page 24).

  We continue to develop our succession plans for key roles, including leadership.

  We continue to actively promote inclusion and diversity.

  We monitor employee engagement and formally solicit employee opinions via a Company-wide employee survey annually.

   
   

LOGO

 

        
   

 

Deliver operational excellence

 

 

Failure to achieve levels of financial performance required to meet regulatory requirements.

 

The Group operates under a number of regulatory regimes and we must maintain the performance levels required. Failure to achieve the agreed returns could damage our reputation and threaten future growth opportunities and regulatory arrangements.

      

 

  We have a US strategy focused on safety and reliability, customer responsiveness, stewardship and cost competitiveness. Performance measures are tracked and reported monthly. US jurisdictional presidents continue to develop strong relationships with local regulators and communities. A Performance Excellence framework is firmly established to deliver sustainable and innovative performance improvements.

  The UK operating model implemented in 2013 to support our performance under RIIO is now established and we continue to roll out our Performance Excellence framework across the business. We actively engage with local communities and non-governmental actors.

  We monitor network reliability and customer satisfaction as KPIs, as described on pages 18 and 19.

 

   
     

 

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, and to meet our obligations under our regulatory agreements, and comply with agreements with bond holders and other providers of finance.

 

      

 

  We implemented a new US enterprise resource planning system at the end of 2012. After a significant effort to combat programme difficulties, the system is now stabilised and enhancements to drive business value are under way.

  We are undertaking a programme to strengthen identified weaknesses in US controls over financial reporting.

  We are implementing a global information management framework focusing on data integrity and security.

  We completed a data assurance programme last year and actions to improve our data quality and integrity processes based on the results are being managed by the business functions.

 

   
     

 

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.

      

 

  

 

We use industry best practices as part of our cyber security policies, processes and technologies.

   
             

We continually invest in cyber strategies that are commensurate with the changing nature of the security landscape. This includes collaborative working with DECC and the Centre for Protection of National Infrastructure (CPNI) on key cyber risks and development of an enhanced CNI security strategy and our involvement in the US with developing the National Institute of Standards and Technology Cyberspace Security Framework.

 

 
   

LOGO

 

 

 

Failure to prevent a significant process safety event.

 

Safety is paramount. Some of the assets owned and operated by National Grid are inherently hazardous and process safety incidents, whilst extremely unlikely, can 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.

 

   

 

 

 

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Table of Contents

 

 

 

 

 

   

Strategic objective

 

 

Risk description

 

    

Example of mitigations

 

 
   

 

Deliver operational excellence continued

 

LOGO

 

 

Our objective is to be an industry leader in managing the process safety risks from our assets to protect our employees, contractors and the communities in which we operate. We operate in compliance with local legislation and regulation. In addition we identify and adopt good practices for safety management.

 

      

 

  We are developing a suite of risk models to assess the risk of specific asset types and support targeted investment to reduce risk.

  We monitor a mix of leading and lagging process safety indicators and test the effectiveness of our controls with periodic audits.

   
             
   

Our internal control process

We have a number of processes to support our internal control environment. These processes are managed by dedicated specialist teams, including risk management, ethics and compliance management, corporate audit and internal controls, and safety, environment and health. Oversight of these activities is provided through regular review and reporting to the appropriate Board committees as outlined in the Corporate Governance section on pages 42 to 59.

 

Reviewing the effectiveness of our internal control and risk management

Each year the Board reviews the effectiveness of our internal control systems and risk management process covering all material systems, including financial, operational and compliance controls, to make sure they remain robust. The latest review covered the financial year to 31 March 2015 and the period to the approval of this Annual Report and Accounts. It included:

 

  the Certificate of Assurance for noting following consideration by the Audit Committee to provide overall assurance around the effectiveness of our risk management and internal controls systems;

  where appropriate, assurance from our committees, with particular reference to the reports received from the Audit, and Safety, Environment and Health Committees on reviews undertaken at their meetings; and

  assurances about the certifications required under Sarbanes-Oxley as a result of our US reporting obligations.

 

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

 

Our internal control and risk management processes comply with the Turnbull guidance on internal control and the requirements of the UK Corporate Governance Code and the Financial Reporting

    

Council’s Guidance on Risk Management, Internal Control and Related Financial and Business Reporting.

 

They are also the basis of our compliance with obligations set by the Sarbanes-Oxley Act 2002 and other internal assurance activities. The New Code, published in September 2014, contained changes related to risk management. These changes have been reviewed against our risk management and internal control systems and processes. Refinements will be implemented, as appropriate, over the coming year.

 

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 Chief Executive and Finance Director which consider historical results and expected future performance and involve senior management from both operational and financial areas of the business.

 

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

 

As part of our assessment of financial controls in the prior year, we identified a number of weaknesses in our US financial control framework. We are making progress in remediating these weaknesses. For more information, including our opinion on internal control over financial reporting, see page 173.

      
               
   

 

The Strategic Report was approved by the Board of Directors on 20 May 2015 and signed on its behalf by:

 

Alison Kay

Group General Counsel & Company Secretary

20 May 2015

 

      

 

LOGO
 

 

        NATIONAL GRID ANNUAL REPORT AND ACCOUNTS 2014/15    41


Table of Contents
LOGO

 

Corporate Governance contents

 

44 Governance framework 49 Our Board and its committees
44 Our Board 50 Audit Committee
45 Board composition 55 Finance Committee
45 Director induction and development 56 Safety, Environment and Health Committee
46 Board and committee evaluation 57 Nominations Committee
46 Non-executive Director independence 58 Board diversity and the Davies Review
46 Director performance 58 Executive Committee
48 Investor engagement 59 Management committees
48 How our Board operates 59 Index to Directors’ Report and other disclosures
    60

Directors’ Remuneration Report

 

 

 

LOGO

Dear Shareholders,

Our Board is responsible for shaping the culture, values and ethics of National Grid, both within the boardroom and across the organisation, by setting the tone from the top and establishing high standards of behaviour.

 

The changes introduced in 2014 to the UK Corporate Governance Code and the Financial Reporting Council guidance on risk management have highlighted the need for the Board to consider if the current risk management and internal control practices and culture of the Company support the spirit of the changes, not just the letter.

 

The updates to the New Code have been considered by the Board and refinements approved so we can report on compliance next year as required. It is the intention of the Board that any changes to the frequency and level of reporting received by the Board and Audit Committee in relation to risk management, compliance and internal control as a result of these updates, will also add value to the business.

 

A review of our compliance procedures is also underway to make sure that we continue to develop and improve our compliance with external reporting obligations. In order to further develop our internal assurance programme, we formed the Engineering Assurance Committee to promote the application of common, consistent, engineering assurance methodologies across the Company.

 

The Board received an in-depth presentation on security and cyber security which provided a framework for discussion around the threats we face and the effectiveness of our strategy to mitigate the inherent risks. We have made a significant investment over the last five years to improve our capabilities in this area so we can adapt to and address an ever-changing threat landscape. Following this session, we agreed that responsibility for making sure we have an effective process for managing cyber security risk should be delegated to the Audit Committee. You can read more about this on page 50. The Board will continue to receive an annual in-depth presentation on information systems and security, including cyber security.

 

This year, in addition to Nick Winser and Maria Richter stepping down at the 2014 AGM, we have said goodbye to Philip Aiken and Tom King and have welcomed John Pettigrew and Dean Seavers as Executive Directors in the UK and US respectively. In my role as Chairman and leader of the Board I am responsible for ensuring effectiveness in all aspects of its role. This includes promoting effective relationships and open communication between Directors and encouraging active engagement by all members. This is particularly important as the membership of the Board changes and new relationships are formed. I am pleased to report that the positive outcome of the Board and Committee evaluation process reflects this effectiveness. You can read more about this on page 46 and the rigorous selection process prior to Dean’s appointment on page 58.

 

Clear and concise communications with our shareholders remain a focus for the Board and we hope that the overview of our business model on page 12 helps to articulate how we create value for you, our shareholders, as well as our other stakeholders.

 

LOGO

Sir Peter Gershon

Chairman

 

 

    42


Table of Contents
 

Our Board

 

 

 

 

LOGO

 

LOGO

 

 

    NATIONAL GRID ANNUAL REPORT AND ACCOUNTS 2014/15    43                        


Table of Contents
 

Corporate Governance

 

 

Corporate Governance continued

 

 

 

 

 

   

Governance framework

 

   

Compliance statement

The Board considers that it complied in full with the provisions of the UK Corporate Governance Code 2012 (the Code) during the financial year being reported, see page 53 for our explanation in relation to external audit tendering.

   

 

This report explains the main features of the Company’s governance structure to give a greater understanding of how the main principles of the Code have been applied. The report also includes items required by the Disclosure and Transparency Rules. The index on page 59 sets out where to find each of the disclosures required in the Directors’ Report and in respect of Listing Rule 9.8.4, together with the Board’s sign-off on the report.

 

UK Corporate Governance Code 2014

The new UK Corporate Governance Code 2014 (the New Code) applies to the Company for the next financial year, 2015/16. In March, the Board considered the current governance arrangements and approved refinements to support compliance with the New Code. Details will be provided in the 2015/16 Annual Report and Accounts.

 

Fair, balanced and understandable

The requirement for Directors to state that they consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable remains a key consideration in the drafting and review process. The coordination and review of the Annual Report follows a well-established and documented process, which is conducted in parallel with the formal audit process undertaken by the external auditors and the review by the Board and its committees (of relevant sections).

 

This process gives the Board comfort that all material statements are accurate and that the Annual Report gives sufficient prominence to negative as well as positive information. The drafting and assurance process supports the Audit Committee and Board’s assessment of the overall fairness, balance and clarity of the Annual Report and the Directors’ statement on page 78.

 

Our Board

Our current Board membership is set out on the previous page, with biographical details of Directors on pages 178 to 179. The Directors in place during the year are set out on page 49, together with details of Board meeting attendance. Committee membership during the year and attendance at meetings is set out in each of the individual committee reports later in this report. For further details about the Directors’ service contracts and letters of appointment, see page 67 of the Directors’ Remuneration Report.

 

Role of our Board

Our Board is collectively responsible for the effective oversight of the Company and its businesses. It also determines the strategic direction, business plan, objectives and governance structure that will help achieve the long-term success of the Company and deliver sustainable shareholder value.

 

The Board sets the risk appetite for the Company and takes the lead in areas such as safeguarding the reputation of the Company and financial policy, as well as making sure we maintain a sound system of internal control and risk management (see pages 38 to 41).

 

The Board’s full responsibilities are set out in the matters reserved for the Board, which were updated in January 2015. These are available on our website, together with other governance documentation.

 

 

 

   

 

Our Chairman is responsible for the leadership and management of the Board and its governance. He ensures the Board is effective in its role by promoting a culture of openness and debate, facilitating the effective contribution of all Directors and helping to maintain constructive relations between Executive and Non-executive Directors.

 

Our Chief Executive is responsible for the executive leadership and day-to-day management of the Company, to ensure the delivery of the strategy agreed by the Board. Through his leadership of the Executive Committee, he demonstrates commitment to safety, operational and financial performance.

 

Our Senior Independent Director acts as a sounding board for the Chairman and serves as an intermediary for the other Directors, as well as shareholders when required.

 

Independent of management, our Non-executive Directors bring diverse skills and experience, vital to constructive challenge and debate. Exclusively, they form the Audit, Nominations and Remuneration Committees, and have an important role in developing proposals on strategy.

 

   

 

Examples of Board focus during the year:

Board strategy session. In addition to time allocated during the year at Board meetings, in January the Board took part in a half-day interactive strategy session, involving a combination of full Board discussions and breakout groups. The Board considered questions raised by the business plan and recent strategic analysis, future opportunities for the Company including business development, mergers and acquisitions and how our core capabilities could be exploited.

 

The Board found the additional session extremely useful and suggested that further regular updates and discussions would help consolidate its thinking, in particular in relation to the development of a longer-term perspective on potential growth in other geographical areas.

 

European energy policy. The Board received updates on how changes in the EU will affect and influence the UK energy policy, including Electricity Market Reform, support for interconnectors and Carbon Capture and Storage.

 

The 2014 UK Winter Outlook. This annual publication confirmed that the Company was in a strong position in respect of gas in the UK, with no heightened concerns, but for electricity, margins were expected to be tight. Updates to the Board confirmed that the UK business had a good understanding of the issues and risks. A robust mitigation strategy, agreed with the UK Government, was approved and implemented.

 

Interconnector projects. In January, the Board received a presentation on Great Britain’s interconnector market and our pipeline of opportunities, including an overview of our two most advanced projects; potential new links to Belgium and Norway. Following feedback provided, the Board approved the final investment decision in relation to the Belgium interconnector in February 2015 and the interconnector with Norway in March 2015.

 

Emerging risks. The Board received a risk update paper including an overview of the framework that has been developed to track emerging risks and the resulting opportunities and/or threats. Additionally, the Board received an update on three themes that had emerged from the 2014 risk workshop to make sure that we were sufficiently prepared for ‘black swan’ events (catastrophic events of extremely high impact and extremely low likelihood).

 

 

    

 

 

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Table of Contents
 
 
 

 

 

 

Updates will continue to be provided to the Board on a regular basis, as appropriate.

 

Risk workshop. The Board participated in a risk workshop that included an update on the changes introduced by the New Code, the annual risk appetite review and an in-depth review of the current risk profile of the Company. At the workshop, it was agreed that the evaluation of risk appetite should permeate through to the evaluation of all new projects and further work was required in relation to the risk appetite definitions and the Company’s risk profile.

 

Safety updates. Safety is discussed at every Board meeting. The Board receives safety updates in the Chief Executive’s report and supplementary to this, the Safety, Environment and Health (SEH) Committee chairman provides an oral summary of matters considered at Committee meetings.

 

Annual talent management review. The Board noted the progress of the development of capacity, capability and the talent pipeline and the accelerated development programme, which had resulted in long-term career plans being put in place and graduates moving through the Company more speedily than in the past.

 

Examples of expected Board focus for next year:

 regular reviews of safety activities;

 mid-term review of our progress and performance under

    RIIO;

 continued detailed review of strategy and financing;

 key US rate case filings;

 regulatory compliance;

 implications of the Integrated Transmission Planning and

    Regulation project on our activities;

 review of the political situation following the UK general

    election and the impact on energy policy in the UK and EU;

 refined reporting to strengthen our assessment and

    monitoring of internal control and risk management

    following the updates to the New Code;

 reviews into UK and US regulation and the major projects

    in the UK;

 the 2015 UK Winter Outlook; and

 results of the 2015 employee opinion survey.

 

Board composition

The successful delivery of our strategy depends upon attracting and retaining the right talent. This starts with having a high-quality Board. Balance is an important requirement for the composition of the Board, not only in terms of the number of Executive and Non-executive Directors, but also in terms of expertise 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 58.

 

Following the conclusion of the 2014 AGM we said goodbye to Maria Richter and Nick Winser from the Board. Additionally, Philip Aiken stepped down with effect from 25 February 2015 and Tom King from 31 March 2015. We welcomed John Pettigrew as Executive Director, UK on 1 April 2014 and Dean Seavers as Executive Director, US with effect from 1 April 2015.

 

Director induction and development

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. In January the Board participated in a strategy session; see the previous page.

 

Updates on corporate governance and regulatory matters are also provided at Board meetings, with details of development and training opportunities for Directors available in our online document library.

 

Additionally, the Non-executive Directors are expected to visit at least one operational site annually. In 2014 this included visits in the UK to the LNG terminal on the Isle of Grain, the gas distribution control centre, and the customer centre and emergency dispatch based in Hinckley. And in the US, the Directors met with management of the Independent System Operator New England and visited the Brooklyn Queens Interconnect project, a Long Island power station, and other major projects and stakeholders in New York City. Visits to the Long Island power plants and the Western Link project are among those planned for 2015. These visits provide the opportunity for Directors to meet local management teams and discuss aspects of the business with employees.

 

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. See page 67 for more details.

      

The Board in action

Thinking styles session

Following on from the thinking styles session supported by an external consultant held in 2014, the Board undertook a second session in February 2015.

 

The session was specifically designed to encourage diverse thinking within the boardroom. New Board members were invited to give their thoughts on how the Company operates. The session covered the benefits of thinking styles for different types of discussion and ways in which the diverse capability that exists within the Board could be harnessed to maximise its effectiveness. The session also reviewed the progress made since the 2014 session.

 

A thinking styles action has been included in the action plan resulting from this year’s Board evaluation; see page 47.

      

 

Directors’ induction programme

Following Dean’s appointment to the Board, the Chairman, Chief Executive and Group General Counsel & Company Secretary arranged a comprehensive induction programme. The programme has been tailored based on his experience and background and the requirements of his role.

 

Dean’s induction programme has included a meeting with our external legal advisors to discuss the duties and requirements of being a listed company director in the UK. He has also held one-to-one meetings with his fellow Directors and senior management, and attended visits to operational sites to build his understanding of the Company and its businesses in the UK and US. His induction will continue over the coming months and will include further operational site visits.

 

Details of Therese and John’s induction programmes were provided in last year’s Annual Report and Accounts. These programmes have continued over the year.

 

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      NATIONAL GRID ANNUAL REPORT AND ACCOUNTS 2014/15    45                        


Table of Contents

Corporate Governance

 

Corporate Governance continued

 

 

 

 

 

Board and committee evaluation

As shown in the diagram below, we are in the third year of our evaluation cycle. This year an internal Board performance evaluation was conducted. The evaluation was ‘upward facing’ with questionnaires completed by non-Board members on the Executive Committee and regular attendees and presenters at Board meetings.

 

LOGO

 

The questions asked covered the following areas:

 time and focus for agenda items;

 the direction/guidance received to support the preparation

    of papers and presentations;

 coverage by presenters on key topics;

 values and behaviours displayed by the Board and the

    experience of attending Board meetings;

 level of challenge and questioning by the Directors; and

 diversity of thinking styles present on the Board.

 

The responses were collated into a confidential and non-attributable report which was presented to the Board in February. At this meeting, the Board considered the report and discussed its performance generally over the past year. The Board confirmed that it had worked well together as a unit, discharged its duties and responsibilities effectively over the year; and worked effectively with the Board committees.

 

Following this meeting, a draft action plan was prepared and considered by the Board in March. At this meeting, the Board agreed a number of actions for the forthcoming year, as set out below. Progress against these actions will be monitored throughout the year by the Board.

 

Environment

Optimise the boardroom layout to create a more inclusive environment for members and presenters.

Responsibility: Board members/Group General Counsel & Company Secretary

Continue to create a more open boardroom atmosphere and culture.

Responsibility: Chairman/Board members

 

Board discussions

Maximise the effectiveness of Board discussions.

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

Use a diversity of thinking styles.

Responsibility: Chairman/Board members

 

Board focus

Continue to manage the strategy agenda.

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

 

Progress against last year’s actions has been monitored through the year and a commentary against each action is set out opposite.

 

Committee evaluation

An evaluation of committee performance was also conducted by the chairman of each of the Board committees, as well as the Executive Committee. The process broadly followed that conducted by the Board with questionnaires being completed by regular attendees and presenters at the respective committee meetings. The process followed by the Nominations Committee was slightly different; see ‘The Committee in action’ box on page 57 for more details.

 

Following consideration of the results of the evaluation, each committee concluded that it had operated effectively throughout the year and agreed an action plan to further improve performance. Copies of each committee’s action plan were provided to the Board and it confirmed that it agreed that each committee had operated effectively.

 

Progress against the action plans will be monitored through the year by the respective committee and the Board.

 

Non-executive Director independence

The independence of the Non-executive Directors is considered at least annually along with their character, judgement, commitment and performance on the Board and relevant committees. The Board took into consideration the Code and indicators of potential non-independence, including length of service.

 

At year end, all of the Non-executive Directors, with the exception of the Chairman, have been determined by the Board to be independent.

 

Director performance

At a private meeting of the Non-executive Directors, Mark Williamson, as Senior Independent Director, led a review of Sir Peter’s performance. The Non-executive Directors, with input from the Executive Directors, assessed his ability to fulfil his role as Chairman and the arrangements he has in place, given he is also chairman of a FTSE 250 company and the Aircraft Carrier Alliance. They concluded that Sir Peter’s performance continued to be effective.

 

Sir Peter 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.

 

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, all Directors will seek election or re-election at the 2015 AGM as set out in the Notice of Meeting.

 

    
 

 

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Table of Contents
 
 
 

 

 

 

    Area    Actions from last year’s review    Commentary    
   

 

Decision making

  

 

All important matters requiring approval are to be brought to the Board for early input before a decision is needed.

Responsibility: Chairman and Chief Executive

  

 

Sir Peter Gershon and Steve Holliday have regularly reviewed the forward business schedule with the Group General Counsel & Company Secretary over the year. The schedule is also included with the papers for each Board meeting to ensure Directors are aware of forthcoming topics for discussion. Following the thinking styles session in February 2015, the schedule was also reviewed to consider if any items could be brought forward early to allow Directors to contribute to thinking and direction at a preliminary stage of the debate.

 

   
   

 

Board discussions

  

 

Greater clarity about the scope of Board discussions to be provided in advance and Board members to be encouraged to question if not clear.

Responsibility: Chairman

  

 

The Company Secretariat team engaged with external specialists in effective reporting to support the development of the information that goes to the Board. The new reporting framework has resulted in clearer, more concise papers, which has supported improved Board discussion and decision making. Following the successful implementation of the new reporting framework at Board level it has also been rolled out to the Board committees and the Executive Committee.

 

   
   

 

Degree of challenge

  

 

The Executive Directors to speak to the Chairman about what would make them feel more comfortable to challenge and debate, both with the Non-executive Directors and with their fellow Executive Directors at Board meetings.

Responsibility: Executive Directors

 

  

 

In February, the Board reviewed progress against the 2013/14 action plan and noted that all Executive Directors felt empowered to input freely at Board meetings and that there was open and honest dialogue. The Chairman will continue to monitor this on an ongoing basis.

   
   

 

Board focus

  

 

A number of topics were identified that Directors felt needed additional focus by the Board at its meetings, for example cyber risk and the UK political landscape. Ways to improve the focus on each of these topics were discussed at the March 2014 Board meeting and specific actions were agreed and allocated.

Responsibility: various Board members

  

 

The Board has taken into account the need for additional focus in certain areas and this has been reflected in the meeting agendas.

 

Strategy: several papers focusing on strategy and growth have been received by the Board over the year in addition to the Board strategy session. Topics included: review of the UK gas market; US and other market opportunities; exploitation of core capabilities; expansion in and outside our core geographies; and a general update on the interconnectors.

 

Political risk: political updates are provided in the Chief Executive’s report to the Board as appropriate. Additional papers on the politics of UK and US energy and a general update on politics in Europe have been presented to the Board and updates will continue to be provided as appropriate.

 

Cyber risk: an update on cyber risk and security went to the Board and Audit Committee in September. At this meeting, the Board decided that responsibility for making sure there is an effective process for managing cyber security risk should be undertaken by the Audit Committee. The Board is scheduled to receive an in-depth presentation in November 2015.

 

Relationship with UK and US regulators: updates on the meetings that take place between our Chairman and the Chairman of Ofgem are provided to the Board. Updates on US regulation and the meetings that take place with the US regulators are also provided to the Board in the Chief Executive’s report.

 

   
   

 

Effectiveness of the Board

  

 

Actions to improve Board effectiveness were proposed, for example: continue to improve the quality of Board papers; make sure in-depth items for Board consideration highlight the important issues to be discussed; and encourage reporting from management that incorporates more input from the Executive Directors.

Responsibility: Chairman, Chief Executive and Group General Counsel & Company Secretary as appropriate

 

  

 

The new reporting framework described above will also help improve the effectiveness of the Board. As part of the new framework, executive owners of papers on the Board agenda have a greater input in to and ownership for the preparation of papers. Management are encouraged to meet with the executive owner at the start of the drafting process to discuss the framework for the paper and owners are required to review and sign off on the final paper prior to submission to the Board or committee.

   

 

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Corporate Governance

 

 

Corporate Governance continued

 

 

 

 

 

 

Investor engagement

We believe it is important to maintain effective channels of communication with our debt and equity institutional investors and individual shareholders. This 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. This includes meetings, presentations, webinars, attendance at investor conferences across the UK and US, and holding road shows in major investor centres across Europe, the US and Asia Pacific.

 

The programme provides the opportunity for our current and potential investors to meet with executive and operational management.

 

In the past year, our engagement programme has focused on clarifying our Group growth expectations and explaining to investors how we expect the Company to continue to perform under the RIIO price controls in the UK. These areas of focus have been reflected in our regular results presentations as well as in more detail during an investor seminar at our Castle Donington site.

 

In addition to these engagement activities, we also held a stewardship meeting in July last year. The event provided major investors with an understanding of our performance and an insight into the operation of our Board with a particular focus on the work of our Remuneration and Audit Committees. The event also provided the opportunity for attendees to ask questions and meet members of the Board and for our Non-executive Directors to further develop their understanding of our shareholders’ views and concerns. A copy of the presentation given on the day is available in the Investors section of our website.

 

Sir Peter also contacted our major shareholders in April 2015 to offer them the opportunity to meet him or the chairman of the Remuneration Committee, Jonathan Dawson, to discuss the Board changes that have taken place during the year and the associated remuneration arrangements.

 

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.

 

Each year, the Board receives the results of an independent audit of investor perceptions. Interviews with key investors were carried out to establish their views on the performance of the business and management. The findings and recommendations of the audit were discussed in depth by the Board.

    

 

Debt investors

Over the last year representatives from our treasury team, together with other senior managers from across the business, have met with debt investors in Europe, Canada and the US to discuss various topics such as the full-year results.

 

We also communicate with our debt investors through regular announcements and the debt investor section of our website. This contains bond prospectuses, credit ratings, materials relating to the retail bond issued in 2011 and subsidiary year-end reports. The website also contains information about the 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 the exhibits at our AGM and the shareholder networking programme.

 

The shareholder networking 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 online via the Investors section of our website.

 

Annual General Meeting (AGM)

Our AGM will be held on Tuesday 21 July 2015 at The International Convention Centre in Birmingham and broadcast via our website. The Notice of Meeting for the 2015 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.

 

How our Board operates

The Chairman sets the Board’s agenda in line with its responsibilities as set out in the matters reserved for the Board. Consideration is also given to the main challenges and opportunities facing the Company, making sure adequate time is available to discuss all items, including strategic issues.

 

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 and discuss the dynamics of the meeting. Similarly, the Chief Executive holds a short meeting with the Executive Directors and other senior management in attendance and shares the feedback from these meetings with the Chairman.

 

As set out in the table of actions from last year’s Board and committee evaluation process, during the year we engaged external specialists to review our current papers and develop a new reporting framework for the Board and its committees. This has resulted in clearer more concise reports, allowing more time for discussion and questions.

 

 

 

 

 

 

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Board membership and attendance

Attendance is expressed as the number of meetings attended out of the number possible or applicable for the individual Director during the year to 31 March 2015.

 

  

    

       

Our Board and its committees

The Board delegates authority to its 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 role and responsibilities of the committees are set out in their respective terms of reference, available on our website. The committee structure, delegation and reporting lines are set out in the diagram below.

 

In addition to the vertical lines of responsibility and reporting, the committees communicate and work together where required. For example, on some risk matters the SEH Committee collaborates with the Audit Committee. These lines of communication are shown in the diagram below.

 

Committee agendas and schedules of items to be discussed at future meetings are prepared in line with the terms of reference of each committee and take account of other topical matters.

 

At committee meetings, items are discussed and, as appropriate, matters are endorsed, approved or recommended to the Board by the committee. Following 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.

 

Below the Board committees are a number of management committees, including the Executive Committee.

 

The Executive Committee has responsibility for making management and operational decisions about the day-to-day running of the Company. Further information on some of the management committees, including the membership and operation of the Executive Committee, is set out on pages 58 and 59.

 

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

 
  Name   Attendance                 
   

 

           
 

Sir Peter Gershon

  10 of 10       
 

Steve Holliday

  10 of 10       
 

Andrew Bonfield

  10 of 10       
 

Tom King1

  10 of 10       
 

John Pettigrew

  10 of 10       
 

Nora Mead Brownell

  10 of 10       
 

Jonathan Dawson

  10 of 10       
 

Therese Esperdy

  10 of 10       
 

Paul Golby

  10 of 10       
 

Ruth Kelly

  10 of 10       
 

Mark Williamson

  10 of 10       
   

 

           
 

Nick Winser2

  3 of 3       
 

Philip Aiken3

  9 of 9       
 

Maria Richter2

  3 of 3       
   

 

           
 

1.  Tom King stepped down from the Board with effect from 31 March 2015.

2.  Nick Winser and Maria Richter stepped down from the Board with effect from

28 July 2014.

3.  Philip Aiken stepped down from the Board on 25 February 2015.

Dean Seavers was appointed to the Board with effect from 1 April 2015.

 

Committee membership during the year and attendance at meetings is set out in each of the individual committee reports later in this report.

 

Should any Director not be able to attend a Board or committee meeting, the Chairman and committee chairman are informed and the absent Director is encouraged to communicate opinions and comments on the matters to be considered.

  

  

  

  

  

    

     

 
        
        
        
        
        
        
        
        
        
        
        
      
      
      
      
 
 
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Corporate Governance continued

 

 

 

 

 

 

Audit Committee

 

LOGO

 

Role

Oversees the Company’s financial reporting, and internal controls and their effectiveness, together with the procedures for identifying, assessing and reporting risks. It also oversees the services provided by the external auditors and their remuneration.

 

Review of the year

Challenging management on the action they are taking to continue to improve the US financial controls environment has remained a focus for the Committee over the past 12 months. Although there is work still to do, I am pleased to report we are now seeing steady progress in this area.

 

The US leadership team has been strengthened with the appointment of a new US Chief Financial Officer (CFO). The Finance Director and the US CFO have continued to keep the Committee up to date on progress with regular reports throughout the year on further proposed improvements and priorities.

 

The past year has also seen two other key appointments – a new Head of Corporate Audit (approved by the Committee in accordance with its terms of reference) and a new Head of Assurance. The Committee has received reports from both individuals on their initial observations of their respective functions and proposed changes and priorities for the year.

 

Following the delegation by the Board for oversight of risk management in relation to cyber security, the Committee received its first update from internal (corporate) audit on the process for identifying, mitigating, monitoring and responding to cyber security risks in March.

 

The Committee has been briefed on the changes to the regulatory environment, in particular the audit tender regulations published by the Financial Reporting Council, the implications of the Competition and Market Authority Order and the final European Commission regulations. We discussed and considered the timing of a tender for the external audit and agreed that an audit tender process should be run later this year. See page 53 for further details.

 

Committee membership has also undergone some changes. Maria Richter stepped down from the Board at the 2014 AGM. In 2015 we have said goodbye to Philip Aiken and welcomed Paul Golby and Therese Esperdy to the Committee in February and April respectively. I would like to thank Phil for his contribution and support to the Committee over the last six years. We are looking forward to working with Paul and Therese over what will be another busy year.

       

 

Significant issues

The most significant issue the Audit Committee considered in relation to the financial statements during the year were the US financial controls. The Committee also considered the presentation of exceptional items, the treatment of the liability management programme costs and accounting for agreed legal settlements. More detail is provided later in the report.

 

Other matters reviewed

Examples of other matters the Audit Committee reviewed:

 

The new Group consolidation system. Regular progress updates on the implementation which is expected to go live later this year.

 

Lessons learnt from the March 2014 year-end audit. The Committee noted the detailed plans produced by management and the external auditors to deliver a more efficient March 2015 year-end process, including the timing of certain audit testing and the approach to subsidiary statutory and regulatory accounts.

 

Sarbanes-Oxley Act 2002 testing and attestations. The Committee received regular updates on the status of testing and considered the impact of deficiencies reported at the May 2014 meeting. During the year, the Company adopted the revised framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Subsequently, a review of all internal controls of financial reporting was undertaken to ensure compliance with the updated framework. See page 41 for the Company’s statement on the effectiveness of internal control over financial reporting.

 

Accounting for rate regulated activities. The Committee endorsed management’s response to the discussion paper issued by the International Accounting Standards Board in September 2014 and believe that guidance should be introduced that results in the IFRS financial statements of the Company more closely reflecting its economic performance and position.

 

Fair, balanced and understandable. 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.

 

Interim Management Statements (IMS). The Board’s decision to cease the publication of an IMS and the impact on the traditional role of the Committee. Depending on the content of future market updates, the Committee will review these prior to publication.

 

Cyber security risk management. A paper from internal

(corporate) audit on the status of our cyber security risk management and external good practice in September 2014. In setting the scope of its new responsibilities, the Committee considered the level of assurance currently provided by internal (corporate) audit and other assurance providers and the frequency and extent of information received. Subsequently, the Committee’s terms of reference were amended to include this additional responsibility in relation to the review of the governance processes over cyber security risk and the Committee now receives a regular update from the Head of Corporate Audit.

 

Risk management. Half-yearly updates on the management of key risks faced by the Company including changes to the corporate risk profile to reflect Executive Committee risk management discussions.

 

 

 

 

 

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Committee membership and attendance table

Attendance is expressed as the number of meetings attended out of the number possible or applicable for the individual Director during the year to 31 March 2015. Biographical details and experience of Committee members are set out on pages 178 and 179.

 

     

Summarised below are the issues which attracted the most focus, and time, of the Committee in relation to the financial statements during the year.

 

US financial controls. The Committee has continued to devote a significant amount of time challenging management on the action they are taking to continue to improve the US finance control environment. There has been continued focus on embedding the enterprise resource planning system in the US and the benefits this system now brings. The Committee has received regular updates from management on progress against the measures taken to remediate US financial control deficiencies.

 

In October, a new US CFO was appointed to lead the US finance team. She initiated a granular review of the US finance function to understand the current service levels and key learnings from prior initiatives, including the successes as well as initiatives that did not fully achieve their goals.

 

The outputs from this review were incorporated into a new US finance function initiative which is intended to address the root cause of issues identified by the review and simplify and standardise processes.

 

In January 2015, the Committee received a presentation on the initiative to understand the approach being taken, the stages involved and the underlying issues that the initiative was aiming to resolve. Management sought input and feedback from the Committee on the direction, focus and timing of the proposed initiative. The Committee discussed the proposal and asked questions about the initiative before approving the approach. Regular updates will be provided to the Committee through the year so that progress can be monitored.

 

During the year, the Committee challenged management in the US on its regulatory filing obligations, noting that due to the system implementation issues, not all filings were made on time. Management presented and, during the course of the year, delivered on a detailed plan to complete the filings and remediate the process. All regulatory filings are now up to date and management communicated with the regulators throughout the process.

 

Presentation of exceptional items. At the half year and year end, the Committee examined an analysis of items to be classified as exceptional to make sure the items did not include income or costs relating to the underlying business performance.

 

In particular, the Committee considered the treatment of the liability management programme costs at the year end. Management proposed that the costs associated with the debt redemptions should be treated as exceptional as they were one-off, significant and outside the ordinary course of business. To include this cost in underlying finance costs would otherwise distort users’ understanding of the business performance. This proposal was in line with the exceptional items accounting policy in the Annual Report and Accounts and the historical treatment of debt redemption costs.

 

The Committee agreed that the classification of this item was appropriate. See note 4 footnote 8 on page 104.

 

 

    Name    Attendance        
   

 

     
 

Mark Williamson (chairman)

8 of 8  
 

Paul Golby1

1 of 1  
 

Ruth Kelly

8 of 8  
   

 

     
 

Philip Aiken2

7 of 7  
 

Maria Richter3

4 of 4  
   

 

     
 

1. Paul Golby joined the Committee on 25 February 2015.

2. Philip Aiken stepped down from the Board with effect from 25 February 2015.

3. Maria Richter stepped down from the Board with effect from 28 July 2014.

Therese Esperdy was appointed to the Committee with effect from 22 April 2015.

 

Experience

The Board has determined that Mark:

    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.

 

Financial reporting

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

 

An important factor in the integrity of financial statements is making sure that suitable and compliant accounting policies are adopted and applied consistently on a year-on-year basis and across the Company. In this respect, the Committee also considers the estimates and judgements made by management when accounting for non-standard transactions, including the treatment of exceptional items. Two examples of these are set out below.

 

These considerations are supported by input from other assurance providers such as the group controls, risk management and ethics and compliance teams, the business separation compliance officer, internal (corporate) audit and the SEH Committee, as well as our external auditors. In addition, the Committee also considers reports of the Disclosure Committee. See page 59 for more information on the role of the Disclosure Committee.

 

The Committee reviews and approves the external audit plan annually (see page 53) and, as part of this, considers the significant risks upon which the external auditors will focus their audit. The independent auditors’ report (pages 79 to 84) highlights areas of focus, including some of the issues that the Committee discussed during the year.

 

Other risks, including the accuracy and valuation of treasury derivative transactions, accounting for pension obligations, accuracy of capital expenditure, revenue recognition and valuation of environmental provisions were not considered in detail by the Committee during the year as nothing significant arose that warranted Committee attention.

 
 
 
 
 
 
 
 
 
 

 

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Corporate Governance continued

 

 

 

 

     

Accounting for agreed legal settlements. During the year, the Company reached negotiated settlement agreements in a legal case. The Company was awarded a total of £113 million (including allowance for legal costs incurred). Due to the size of the impact on the income statement, the Committee agreed with management’s decision that this was not considered to be exceptional for the year. The Committee reviewed and challenged the classification of the settlements and agreed that £56 million be recognised in the income statement in the year, with the remainder credited to property, plant and equipment. Management is waiting for confirmation from Ofgem of the regulatory treatment of these awards under RIIO.

 

Confidential reporting procedures and whistleblowing

The integrity of the financial statements is further supported by the confidential reporting and whistleblowing procedures we have in place. The Committee reviews these procedures once a year to make sure that complaints are treated confidentially and that a proportionate, independent investigation is carried out in all cases.

 

Internal (corporate) audit

The corporate audit function provides independent, objective assurance to the Audit, SEH 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 Institute of Internal Auditor’s 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 the 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 a commentary around the actions they are taking to improve the control environment within their area of responsibility.

 

In order to meet the responsibility and objectives set out in the Corporate Audit Charter, audits of varying types and scopes are performed 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 ensure that the plan aligns with the Committee and Company’s view of risk. The audit plan is considered and approved by the Committee annually.

       

External audit

The Committee is responsible for overseeing relations with the external auditors, including the approval of fees, and makes recommendations to the Board on their appointment and reappointment. Details of total remuneration 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 102.

 

Auditor independence and objectivity

The independence of the external auditors is essential to the provision of an objective opinion on the true and fair view presented in the financial statements.

 

Auditor independence and objectivity is safeguarded by a number of control measures, including:

 

                limiting the nature and value of non-audit services performed by the external auditors;
                ensuring that employees of the external auditors who have worked on the audit in the past 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 years;
                PwC’s internal independence rules and processes which have been designed to exceed professional standards and focus on both personal independence and scope of services;
                independent reporting lines from PwC to the Committee and the opportunity to meet with the Committee independently; and
                an annual review by the Committee of the structures, policies and practices in place to make sure the external auditors’ objectivity and independence is maintained.
             

 

A new lead engagement partner will be appointed for the 2015/16 financial year following the completion of the current lead audit partner’s tenure.

               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               

 

 

 

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Non-audit services provided by the external auditors

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

 

Below this threshold, all requests are approved in advance by the Finance Director and 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 Sarbanes-Oxley Act 2002.

 

Total non-audit services provided by PwC during the year ended 31 March 2015 were £0.9 million (2014: £1.7 million), which comprised 7% (2014: 13%) of total audit and audit-related fees (see note 3(e)).

 

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, for example regulatory audits and Sarbanes-Oxley Act attestation. Non-audit fees represent all other services provided by PwC not included in the above.

 

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

 

The Committee considered that tax compliance services were most efficiently provided by the external auditors, as much of the information used in preparing computations and returns is derived from audited financial information. In order to maintain the external auditors’ independence and objectivity, management reviewed and considered PwC’s findings and PwC did not make any decisions on behalf of management.

 

       

 

Auditor appointment

An annual review is conducted by the Committee of the level and constitution of the external audit and non-audit fees and the effectiveness, independence and objectivity of the external auditors.

 

The annual review includes consideration of:

 

  audit quality and the external audit process globally;

  the auditors’ performance and delivery against the audit

    plan;

  the expertise of the firm and our relationship with them

    including the level of challenge; and

  the results of online questionnaires completed by the

Chairman, Committee members, Executive Directors and senior representatives from the finance team. The questions focused on: the quality of service; sufficiency of resources; planning and execution of the audit; communication and interaction; and overall satisfaction. No material issues were identified.

 

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 2015 AGM.

 

Audit tender

PwC 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.

 

The Committee discussed the implications of the Competition and Market Authority Order requiring FTSE 350 companies to hold an audit tender every 10 years as well as the final European Commission (EC) regulations, which came into EU legislation in June 2014. The Committee noted that based on the EC transitional arrangements, the final year in which PwC can be appointed as the Group’s auditors is for the year ended 31 March 2020.

 

At its meeting in May 2015, the Committee considered the timing of a potential tender for the external audit. The Committee considered the continued US financial controls improvement programme and the services we currently receive from other external audit firms that may be considered in a tender process. It concluded that, firstly, in order to ensure an orderly transition and secondly, to ensure compliance with the EC regulations on the provision of prohibited services, an audit tender process will be run later this year for the audit of the year ending 31 March 2018. PwC will not be invited to tender.

 

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.

     

 

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 the scope and materiality to make sure that PwC have 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.

       
             
             
             
             
             
             

 

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Corporate Governance

 

Corporate Governance continued

 

 

 

     

 

Risk management and internal control

The Audit Committee monitors the effectiveness of the risk management and internal control processes during the year through the biannual reports it receives and reports to the Board on the outcome. The review covers all material controls, including financial, operational and compliance controls. Please see page 41 for further details about the review of effectiveness.

 

In support of our compliance with the New Code, reporting to the Audit Committee on risk management and internal control has been reviewed by the Board and refinements will be adopted for the financial year 2015/16.

 

Details of our internal control systems, including those relating to the financial reporting process, can be found on pages 38 to 41 and page 173.

 

Risk management

The Executive Committee discusses the principal risks faced by the Company and updates the corporate risk profile every six months. The approved profile is subsequently shared with the Audit Committee, along with US and UK regional risk profiles, as part of our continuous risk management process.

 

To continuously improve and remain at best practice levels, the risk management team reviews risk process standards, emerging trends and concepts being driven by the main consultancy firms and seeks to apply these as appropriate. The standards issued by the COSO and the international risk standard ISO 31000 continue to inform the principles of our risk management process.

 

During the year, we adopted the revised framework issued by the COSO for our internal controls over financial reporting. This introduced specific principles to cover fraud risk assessment and information technology. We also reviewed the procedures for the identification, assessment, mitigation and reporting of risks.

 

Further details of our risk management systems can be found on pages 38 to 41 and our risk factors are described in full on pages 173 to 176.

 

Compliance management

Compliance management has been integrated into a new Global Assurance team which incorporates ethics, risk management, licence management and records management with a view to improving visibility and reporting in all areas.

 

Biannual reports to the Committee focus on compliance with external legal obligations and regulatory commitments. During the year, the Committee requested that additional detail be added to the reports against each of the actual or potential non-compliance items identified to show the person responsible and provide a summary of the actions being taken to resolve the actual or potential non-compliance.

 

The Committee also received annual reports on the Company’s anti-bribery procedures and whistleblowing procedures and reviewed their adequacy. It noted that no material instances of non-compliance had been identified.

         

 

Going concern

Our going concern process is an extension of our business planning process, and is further supplemented by our annual budget and other liquidity risk management controls. Our five year business plan and one year budget were reviewed and approved by the Board at its meetings in November 2014 and March 2015 respectively. The Finance Committee provides ongoing oversight of our liquidity policy, which requires us to maintain sufficient liquidity for a rolling 12 month period.

 

Given our business model, current regulatory clarity and other factors impacting our operating environment, and the robustness of our business planning process and scenario analysis, we have concluded the going concern assessment period is the five years ending 31 March 2019, in line with our business plan. We will reassess this period annually in light of developments in our operating environment, business model and strategic priorities.

 

Our business plan considers the significant solvency and liquidity risks involved in delivering our business model in light of our strategic priorities. The business plan models a number of upside and downside scenarios, derived from the risks and opportunities identified, and determines the impact these would have on our results and financial position over the five year period. In addition, we have reviewed and challenged a number of worst case scenarios and their possible remediation.

 

Our business model calls for significant capital investment to maintain and expand our network infrastructure. To deliver this, our business plan highlights that we will need to access capital markets to raise additional funds from time to time. We have a long and successful history in this regard. Our business plan also models various KPIs used by lenders and credit rating agencies in assessing a company’s credit worthiness. These models indicate that we should continue to have access to capital markets at commercially acceptable interest rates throughout the five year period. To monitor and control risks around access to capital markets, we have policies and procedures in place to help mitigate, as far as possible, any risk of a change in our credit ratings and other credit metrics.

 

Having made enquiries and reviewed management’s assessment of the going concern assumption, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the period of the going concern assessment. For this reason, the Directors are satisfied that, at the time of approving the financial statements, it is appropriate to continue to adopt the going concern basis in preparing the consolidated and individual financial statements of the Company.

 

More detail on our financial risks, including liquidity and solvency, is provided in note 30 to the consolidated financial statements. There have been no major changes to the Group’s significant liquidity and solvency risks in the year.

 

 
                 
                 
                 
                 
                 
                 
                 

 

 

 

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Table of Contents

 

 

 

 

 

    

 

     
   

Finance Committee

        Matters considered   
   

 

LOGO

 

Role

Sets policy and grants authority for financing decisions, credit exposure, hedging and foreign exchange transactions, guarantees and indemnities subject to the risk appetite approved by the Board. It also approves other treasury, tax, pension funding and insurance strategies and, if appropriate, recommends these to the Board.

 

Review of the year

My first eight months as chairman have been busy but enjoyable. In July, we said goodbye to Maria Richter who stepped down from the Board. I would like to thank her for her contribution to the Committee and for her guidance and support during the handover period.

 

As part of my induction to the Board and before taking over as chairman of the Committee, I met employees involved in the work of the Committee from finance, treasury, tax, pensions and insurance in the UK and US. I also had several opportunities to meet the wider UK and US tax, insurance and treasury teams which has furthered my understanding of our treasury operations.

 

This year, we continued to focus on funding plans to take into account international debt market conditions. The Committee reviewed and agreed a liability management programme which resulted in the repurchase of £0.9 billion of bonds.

 

The Committee also received regular updates on negotiations in relation to the European Investment Bank (EIB) loan before agreeing the £1.5 billion loan agreement with the EIB in November 2014.

 

We also considered the financial headroom policy. During the financial crisis, the Committee approved a policy to hold 12 months of liquidity and a minimum sum as cash or liquid assets. The Committee noted that the Group’s liquidity was monitored on a regular basis both internally and externally and took into consideration the sources of liquidity. In light of the improved access to liquidity the Committee approved a simplification of the policy.

 

External advisors have presented to the Committee throughout the year, including a credit rating agency on their methodology and an update from insurance brokers on the global property insurance market, including the current trading environment, market selection, new risks, client trends and the future outlook for insurance.

 

For the year ahead, we will focus on our funding needs, liquidity management, alternative sources of funding and pensions investment strategy.

       

Examples of matters the Committee considered during the year include:

 

   

           

    funding requirements and financing for the

      business plan;

      

       

           

    setting and reviewing treasury policies;

      

           

    treasury performance updates provided at each

      meeting;

      

       

           

    UK and US tax updates;

      

           

    US energy procurement activities;

      

           

    annual update on the electricity and gas trading

      activities in the UK;

      

       

           

    credit rating agencies’ view on the Company;

      

           

    foreign exchange policy;

      

           

    interest rate risk management;

      

           

    the draft going concern statement for the half

      and full-year results prior to consideration by the

      Audit Committee and Board;

      

       

       

           

    pensions updates, including funding of the

      Company’s pension deficits; and

      

       

           

    insurance renewal strategy.

      

           

 

Committee membership and attendance

  

           

Attendance is expressed as the number of meetings attended out of the number possible or applicable for the individual Director during the year to 31 March 2015.

 

    

            Name     Attendance     
         

 

 
 

 

Therese Esperdy¹ (chairman)

 

 

 

4 of 4  

 

  

 

 

Steve Holliday

 

 

 

4 of 4  

 

  

 

 

Andrew Bonfield

 

 

 

4 of 4  

 

  

 

 

Jonathan Dawson

 

 

 

4 of 4  

 

  

 

 

Ruth Kelly

 

 

 

4 of 4  

 

  

         

 

 
 

 

Maria Richter²

 

 

 

2 of 2  

 

  

         

 

 
 

 

1.  Chairman from 28 July 2014.

  

 

2.  Maria Richter stepped down from the Board with effect from 28 July

     2014.

 

  

  

 

 

The Committee in action

Evaluation of Committee performance

The Committee performance evaluation process this year was an upward facing process undertaken by non-Committee members and regular attendees/presenters. This was in line with the process adopted by the other committees (except the Nominations Committee).

 

The Committee concluded that it had operated effectively throughout the year and agreed an action plan for 2015/16 to further improve performance.

 

An update on the evaluation including the draft Committee action plan was reported to the Board in May 2015. Progress against the action plan will be monitored through the year by the Committee and the Board.

  

  

      

    

     

 

LOGO
 

 

        NATIONAL GRID ANNUAL REPORT AND ACCOUNTS 2014/15    55                                


Table of Contents
 

Corporate Governance

 

 

Corporate Governance continued

 

 

 

 

 

    

 

     
   

Safety, Environment and Health Committee

        Matters considered   
   

 

LOGO

 

Role

The Committee reviews the strategies, policies, initiatives, risk exposure, targets and performance of the Company and, where appropriate, of its suppliers and contractors in relation to safety, environment and health. It monitors the resources we use for compliance and driving improvement in these areas and reviews investigations into major incidents.

 

Review of the year

Following Philip Aiken’s departure from the Board at the end of February, I have taken over as chairman of the Committee. I have been a member of the Committee for the last three years and over this time we have seen the Company make significant progress in process safety management and the safety performance of both the UK and US businesses, with the US closing the gap on the UK in terms of employee and contractor LTIs. I hope to see further progress in these areas going forwards.

 

We welcomed Andrew Bonfield to the Committee at the beginning of the year. Andrew is a member of the Chief Financial Officers Leader Group of the Accounting for Sustainability (A4S) project, which challenges organisations to demonstrate the commercial rationale for incorporating sustainability into decision making and to manage the related risks and opportunities. He also chairs the Company’s Engineering Assurance Committee, which now reports on a six monthly basis to the Committee.

 

We have continued to focus on process safety and establishing a safety management system across both our UK and US businesses. We have spent time looking at the risks relating to our US LNG assets and the measures being introduced to address these (see ‘The Committee in action’ below).

 

Following a fatality involving a contractor at our Rhode Island gas distribution business, we spent time with senior local management considering the causes of the incident and how best to ensure that safety procedures are understood and complied with at all times, by both employees and contractors.

 

In terms of environmental matters, we have continued to monito