Annual Report and Accounts 2019/20 Bring Energy to Life
National Grid plc Annual Report and Accounts 2019/20 Bring Energy to Life National Grid operates at the heart of the energy system, connecting millions of people safely, reliably and efficiently to the energy they use every day.
Highlights Contents We have continued to make strategic and 1. Strategic Report operational progress while maintaining Business model 2 excellent safety levels across all our Chairman’s Statement 8 networks. We have retained a focus Chief Executive’s review 10 Evolving our strategy for the future 12 on our environmental sustainability Our business environment 13 record and employee engagement. Delivering against our strategy 16 Progress against our strategy 18 Innovation 21 Group financial highlights Internal control and risk management 22 Group Return on Viability statement 26 Statutory EPS (p)* Underlying EPS (p)* Equity (RoE) % Financial review 28 102.� ��.� 12.3 Principal operations – UK 38 ��.2 ��.2 11.� 11.� Principal operations – US 40 National Grid Ventures and other activities 42 Our stakeholders 44.3 3�.� – Section 172(1) statement 44 Our commitment to being a responsible business 48 Task Force on Climate-related 19/20 18/19 17/18 19/20 18/19 17/18 19/20 18/19 17/18 Financial Disclosures (TCFD) 57 * From continuing operations 2. Corporate Governance Letter from the Chairman 64 Group operational highlights Performance evaluation 74 Audit Committee 76 Group safety Scope 1 and 2 Finance Committee 82 performance (lost greenhouse Safety, Environment and time injuries per gas emissions Health Committee 83 100,000 hours worked (CO2 equivalent, Employee in 12-month period) m tonnes) engagement (%) Nominations Committee 84 Diversity 85 0.12 �� �� 0.10 0.10 �3 Statement of application of and �.0 �.� �.� compliance with the UK Corporate Governance Code 2018 86 Index to the Directors’ Report and other disclosures 87 Directors’ Remuneration Report 88 3. Financial Statements 19/20 18/19 17/18 19/20 18/19 17/18 19/20 18/19 17/18 Statement of Directors’ responsibilities 109 Independent auditor’s report 110 4. Additional Information Scan here to view the story Further reading The business in detail 217 Internal control and risk factors 227 Shareholder information 231 Online report Other disclosures 236 The PDF of our Annual Report and Other unaudited financial information 240 Accounts 2019/20 includes a full search facility. You can find the Commentary on consolidated document by visiting the ‘About us’ financial statements 250 section at www.nationalgrid.com/ Definitions and glossary of terms 254 about-us/annual-report-and- accounts. Want more information or help? 258 Cautionary statement 259 QR codes Throughout the report there are QR codes that you can scan to easily view content online. Simply open your camera app on your smartphone The job that can’t wait device to scan the code. Reporting currency We believe that people are the key Our financial results are reported in sterling. We to unlocking a clean energy future, convert our US business results at the weighted and we ran a recruitment campaign average exchange rate during the year, which for in the UK to attract talent to ‘the More detail 2019/20 was $1.29 to £1 (2018/19: $1.31 to £1). Throughout this report you can job that can’t wait’. We were Alternative performance measures delighted with the response to the find links to further detail within this document. In addition to IFRS figures, management also campaign, which saw a sevenfold use a number of ‘alternative measures’ to assess increase in applications to our performance. Definitions and reconciliations to Advanced Apprenticeship scheme statutory financial information can be found on and started a national conversation pages 240 – 249. These measures are highlighted about the importance of STEM at with the symbol above. all stages of education. 1
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Business model What we do National Grid plc is one of the world’s largest investor-owned energy utilities, committed to delivering electricity and gas safely, reliably and efficiently to the customers and communities we serve. Our core regulated businesses Core regulated National Grid owns a range of high-quality, long-term assets. All our assets share low commercial risk profiles and are typically UK Electricity US Regulated supported by long-term contracts or stable regulatory arrangements. Our core regulated businesses in the UK and US generated over Electricity Electricity 90% of our operating profits this year. Our UK electricity business comprises both We own and operate transmission facilities the electricity transmission network (ET) and across upstate New York, Massachusetts, Our other energy businesses a separate Electricity System Operator (ESO). New Hampshire, Rhode Island and Vermont. Supporting the core regulated businesses, we also own a diverse and growing portfolio of We own the high-voltage transmission Our electric locations by state: commercial energy businesses also operating network in England and Wales. We are • New York; across the UK and US. These include our Grain responsible for ensuring electricity is • Massachusetts; and LNG terminal and electricity interconnectors transported safely and efficiently from between the UK and continental Europe, which where it is produced; reaching homes and • Rhode Island. generate revenue by selling capacity to store businesses safely, reliably and efficiently. or transmit energy. Our UK metering business We also facilitate the connection of assets generates revenue primarily through meter to the transmission system. 9,109 rentals. We also own a commercial property miles (14,659 kilometres) of overhead lines business which develops and sells surplus land. 4,481 (2018/19: 8,881 miles; 14,293 kilometres) Our business is organised into segments, miles (7,212 kilometres) of overhead lines based upon activity and location (2018/19: 4,481 miles; 7,212 kilometres) Gas We own and operate gas distribution Key: UK Electricity Transmission networks across the northeastern US UK Gas Transmission 1,391 and are responsible for connecting millions miles (2,239 kilometres) of underground cable US Regulated of customers to the energy they use. (2018/19: 1,437 miles; 2,312 kilometres) National Grid Ventures and other activities Our gas locations by state: Our role as ESO • New York; The ESO now operates as a separate company • Massachusetts; and within National Grid effective from 1 April 2019. We are responsible for making sure • Rhode Island. Statutory operating profit (%) supply and demand of electricity is balanced in real time across Great Britain (GB). While 35,682 47% we operate as the ESO across GB, we do miles (57,425 kilometres) of gas pipelines 12% not own the transmission assets in Scotland. (2018/19: 35,560 miles; 57,228 kilometres) 32% 9% Although the ESO is legally separate from ET, its results are still presented to the Board as part of the UK segment, and therefore no change has been made to our reportable operating segments. Underlying operating profit (%) UK Gas Transmission 34% 12% Our UK Gas Transmission (GT) business 47% comprises both the gas transmission assets 7% and an integrated gas system operator. We also own and operate the high-pressure gas transmission network in Great Britain. We are responsible for making sure GB’s RAV, rate base and other assets (%) gas is transported safely and efficiently from where it is produced to where it is 31% consumed. 14% 46% As the Gas System Operator we are 9% responsible for ensuring that supply and demand are balanced in real time on a day-to-day basis. 4,740 miles (7,630 kilometres) of high-pressure pipe (2018/19: 4,760 miles; 7,660 kilometres) 2
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Business Model: What we do National Grid Ventures and other activities National Grid Ventures (NGV) manages our diverse portfolio of energy businesses that are similar to our core regulated operations. This operating segment represents our main strategic growth area outside our regulated core business, in competitive markets across the US and the UK. The business comprises commercial operations in energy metering, electricity interconnectors, renewables development and the storage of liquefied natural gas (LNG) in the UK. In July 2019, we completed the acquisition of Geronimo, a leading wind and solar developer in North America. In December, we announced the start of commercial operations at the 200 MW Crocker Wind Farm in Clark County, South Dakota. Our other activities that do not form part of any of the segments over the page or NGV, primarily relate to our UK property business together with insurance and corporate activities in the UK and US, and the Group’s investments in technology and innovation companies through National Grid Partners (NGP). 8.8 million metering: gas meters (2018/19: 9.9 million) 1,000,000 m3 liquefied natural gas tank space (2018/19: 1,000,000 m3) 7.8 GW GW capacity of interconnectors in operation or under construction (2018/19: 7.8 GW) 3
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Business model How we operate Our operating model creates a stable, reliable and sustainable business that benefits our What we rely on The key internal resources that we rely on to do business are: • our physical assets that move the energy; • appropriate funding that allows us to invest in our workforce and assets; and • our talented workforce that ensures energy is moved efficiently and reliably. We also rely on maintaining strong relationships with a number of key external stakeholder groups to ensure we best meet their needs and maintain our licence to operate (see pages 44 – 47). How we do business We combine these input factors with our technical expertise to achieve our purpose and vision. We do all of this in accordance with our culture and values, which guide everything that we do. Our strategy is designed to maintain and develop our business model and is supported by robust governance and risk management processes. The value we create We deliver value for our stakeholders, which include our customers, as well as financial value for shareholders, by: • operating within our regulatory frameworks thereby being efficient and compliant; • performing well against our regulatory incentives, delivering customer benefits and good returns; • managing our cash flow requirements and securing low-cost funding; and • maintaining a disciplined approach to investment in our networks. 4
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Business Model: How we operate What we rely on Internal resources Strong relationships Physical assets Customers We own electricity and gas networks that In the UK we do not own the energy that flows transmit energy over long distances from through our electricity cables and gas pipes. where it is produced. In the US, we also This energy is owned by our customers, such distribute it locally to where it is consumed. as electricity generators and gas shippers. These networks are built to last for many These industrial customers, together with decades. Such networks account for the vast domestic consumers through a small portion majority of our asset base. We also own three of their energy bills, pay to use our networks. subsea electricity interconnectors, with three In the US, we have nearly seven million further subsea cables under construction as residential and commercial accounts. well as LNG importation facilities. Contractors and suppliers We work in partnership with our supply chain, c.£4.8bn p.a. which has complementary experience, skillsets average investment in our assets over the past and resources. We agree mutually beneficial three years (on a constant currency basis) contractual arrangements and, wherever possible, leverage economies of scale and use Funding sustainable and global sourcing opportunities. We fund our business through a combination of shareholder equity and long and short-term Communities and governments debt. We maintain an appropriate mix of the The societal impact of our activities means two and manage financial risks prudently. that a range of stakeholders have a legitimate interest in and influence on the work we do. These include national and regional 63% governments, local communities, our supply regulatory gearing (net debt as a proportion chain, and business and domestic consumers of the value of regulatory assets and other of the energy we transport. invested capital) Economic, health, safety and Employees environmental regulators Our highly skilled, dedicated employees have We are subject to economic regulation by a strong public service ethos. They manage bodies that are entirely independent of the and maintain the physical energy infrastructure, Company. These economic regulators set and assist and develop the many stakeholder the prices we can charge for providing an relationships that are crucial to the Company’s economic, efficient and non-discriminatory success. service. Our regulated revenue therefore covers day-to-day running costs, financing As we support the changes needed to build capital expenditures to renew and extend our a net zero energy system, we are providing networks, and incentives or penalties relative employment opportunities and supporting to performance targets. It also affords our our workforce to build the skills necessary shareholders a fair return on their investment. to support these changes. By attracting and retaining the people capable of supporting The energy we transport and the activities we the journey to net zero in the energy sector undertake are intrinsically hazardous; therefore we can help the places we operate reach our operations have to comply with laws and their emissions targets. regulations set by government agencies responsible for health, safety and 23,069 environmental standards. employees worldwide 5
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Business model How we operate continued How we do business Our technical expertise Our culture Over the many decades in which we have National Grid’s culture is the values, beliefs played a vital role connecting people to the and behaviours that characterise our energy they use, National Grid has built safe Company and guide our practices. and reliable networks. We continue in our efforts to develop a well-respected and trusted We are working hard to progress as an reputation for engineering excellence. inclusive employer that values diversity. The knowledge and expertise of our employees We combine our extensive skills, knowledge is fundamental to our business success. and capabilities with innovation to ensure our To enable our employees to reach their full core competencies continuously create value potential, we are investing in building the for shareholders and wider stakeholders alike. skills and capabilities of our workforce. We are recognised for our excellence in: We maintain high standards of ethical business. We also promote the right Asset management behaviours that are aligned with our values and We invest in and maintain our assets across culture by recognising our employees through their life as cost-effectively as possible. a company-wide reward system that supports both what they achieve and how they have Our focus ensures efficient management delivered their achievements. of our assets across their lifetime. 9.0% Strategy and risk Asset growth 2019/20 management Engineering Our strategy places the customer at the heart The skills of our engineers are vital in delivering of our decision-making and consists of three safe, efficient, reliable and sustainable long-term priorities: performance for all our businesses. Our workforce strives to: • optimising our operational performance; • find practical and innovative solutions • growing our core business; and to complex problems; • evolving for the future. • employ risk-based decision-making; and As the energy industry continues its transition • adopt common approaches and to a cleaner future, we have evolved our strategy continuous improvements. so that it clearly articulates our priorities, while positioning our business to continue to deliver Our engineering expertise supports the long-term economic benefits in the regions in delivery of a reliable network. which we operate. Capital delivery The evolved strategy is founded on four We add value for our stakeholders by strategic pillars which are to: ensuring safe and effective delivery of large • enable the energy transition for all; and complex infrastructure projects, ranging from large portfolios of smaller works to • deliver for our customers efficiently; stand-alone mega projects. • grow our organisational capability; and • empower our people for great performance. £5.4bn We have well-established governance structures Capital investment in 2019/20 that include comprehensive risk management, strong controls and financial discipline. Innovation Our innovation activities are focused on future-proofing the business for our customers Further reading as the energy landscape changes. Collaboration About our strategy on pages 16 – 17 and is crucial as we search for new technologies and how it is evolving on page 12. techniques that will support this transformation. Internal control and risk management on We are therefore investing in technologies pages 22 – 25. through our venture capital and innovation arm, Our commitment to being a responsible NGP, while continuing to partner with industry, business on pages 48 – 56. academia, and policymakers. £134m Fair value of NGP portfolio at 31 March 2020 6
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Business model: How we operate The value we create For stakeholders and wider society Society Economic, health, safety and We provide the energy systems that help environmental regulators economies grow in a sustainable, affordable Through constructive, transparent engagement and reliable way. We continue to work with and consistent, reliable delivery of our partners and customers on the technologies commitments, we build trust with our regulators. required to make net zero a reality. 0.12 LTIs 70% (per 100,000 hours worked in a 12-month period) Current reduction in greenhouse emissions Group safety performance 2019/20 Investors Contractors and suppliers We aim to be a low-risk investment proposition, We maintain responsible and efficient supply focused on generating shareholder value chains in which our interests and those of through dividends, supported by asset growth our suppliers are aligned with the interests from investing in essential assets under primarily of customers. regulated market conditions, to servicing long-term sustainable consumer-led demands. £6.0bn 11.7% Group supply chain spend 2019/20 Group Return on Equity 2019/20 Communities and governments We help national and regional governments Our employees formulate and deliver their energy policies We seek to create an environment in which our and commitments. The taxes we pay help workforce can make a positive contribution, fund essential public services. We have an develop their careers and reach their full potential. important role to play in sustainability, enabling the transition to a low-carbon future. 77% Employee engagement score 2019/20 £47m Contribution to communities 2019/20 Customers By delivering the energy they need and dealing with them in a transparent and responsive Further reading manner, we seek to build trusted relationships Our Key Performance Indicators (KPIs) on pages 18 – 20 with our customers as we deliver services Our stakeholders on pages 44-47 to them. Our commitment to being a responsible business on pages 48 – 56 Financial value The chart below describes how our businesses create financial value. Further detail can be found in our financial review on pages 28 – 37. Revenue and profits The vast majority of our revenues are set in accordance with our regulatory agreements (see pages 28 – 37), and are calculated based 1 on a number of factors including investment in network assets; performance against incentives; allowed returns on equity and cost of debt; and customer satisfaction. Cash flows Our ability to convert revenue to profit and cash is important. By managing our operations efficiently, safely and for the long term, we generate 2 substantial cash flows. Coupled with long term debt financing, as well as additional capital generated through the take up of the shareholder scrip dividend option during periods of higher investment, we are able to invest in growing our asset base and finance returns through dividends. Investment We invest efficiently in our networks to deliver strong and sustainable growth in our regulated asset base over the long term. We continually 3 assess, monitor and challenge investment decisions so we can continue to deliver safe, reliable and cost-effective networks. Capital allocation Our capital allocation is determined by the need to fund our businesses to deliver the investment and outputs required under our regulatory frameworks in the UK and US. The investments we make in our business seek a balance between growth and cash flow. 7
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Chairman’s Statement “National Grid evolved its vision to reflect our belief that a responsible business needs to stand for something beyond profit.” Sir Peter Gershon Chairman Final dividend of As we all continue to face the unprecedented challenge of COVID-19 around the world, 32.00 National Grid remains committed to doing the p per share proposed to be paid on 19 August 2020 right thing for our employees, our customers, our communities and our suppliers. Full year dividend (pence per share) 48.57 47.34 45.93 44.27* 43.34 Our priority throughout this period continues to be keeping our key workers safe. We have well-developed procedures in place to manage the effect of a pandemic, and we swiftly and successfully implemented our business continuity plans which allowed us to maintain safe working environments for our workforce. That ensured they could play their part in this time of global crisis by keeping our networks running and the energy flowing to hospitals, care homes, businesses and homes. I would like to thank them for their dedication and resilience. 19/20 18/19 17/18 16/17 15/16 In mid-April, after our financial year end, the extraordinary resilience of our US employees also enabled power to be quickly restored to over *excludes a special dividend of 84.375p. 200,000 customers across New York, Rhode Island and Massachusetts following extensive storm damage, despite the additional constraints arising from COVID-19. The Annual General Meeting will be held on Some short-term delay to our capital programmes was inevitable given 27 July 2020. This year, it will be held behind the lockdown measures put in place by governments to control the closed doors as a result of the COVID-19 spread of COVID-19. However, work on our capital programmes has pandemic. More details on how to watch a now resumed. In the US, the suspension of debt collection and customer presentation following the AGM can be found termination activities across our jurisdictions resulted in lower customer on our website: www.nationalgrid.com. collections and additional provisioning for bad and doubtful debts. We are now working diligently to prepare for the future, in which the safety of our employees and customers will remain of paramount importance. The Board’s ongoing priorities are our societal responsibilities, the balance sheet and liquidity. In support of these and in recognition of the uncertainty surrounding the evolution of the pandemic, we are keeping a number of scenarios under regular review. Our current base case assumes a scenario of continued gradual easing of restrictions in all our operating territories, to keep the spread of the pandemic under control. Against that backdrop, I am pleased that we are able to use our extensive resources to help support the communities we serve to get through and recover from the pandemic. Although the Company has implemented a number of measures to limit discretionary external spending, it has not implemented pay reductions, furlough or compulsory redundancy schemes. 8
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Chairman’s Statement Nationalisation We completed the sale of our remaining stake in Cadent in June 2019 The Board spent a lot of time in 2019 considering our response to the for £1,965 million, and the proceeds were reinvested in the business to Labour Party’s proposal to nationalise nearly all of National Grid’s UK support the significant capital investment programme and asset growth assets. We implemented some measures which would have strengthened across the Group over the medium term. our ability to secure a fair price for these assets, should the Labour Party have won the General Election. Although the Conservative Party secured Regulatory issues a majority at this election, we note that the new Labour leader pledged We continue an open dialogue with our regulators. In the UK, we submitted his support for common ownership in a range of sectors, including our final business plans for RIIO-2 in December 2019. energy, in his leadership campaign. We are resuming settlement negotiations in the KEDNY/KEDLI rate The path to net zero cases in the interest of agreeing on a multi-year rate plan that mitigates Our focus for the future is to lead the way in the delivery of a clean bill impacts for our customers while allowing us to maintain safe and energy transition. During the year, National Grid committed to reduce reliable service, advance our clean energy goals, and earn a reasonable its own emissions to net zero by 2050, and we also saw significant return. If we are unable to reach a negotiated settlement, the rate cases legislative action towards a net zero ambition. will continue to a litigated outcome at which time we would then plan to file a new multi-year rate case proposal. The UK and States of New York and Massachusetts each established legally-binding targets to achieve net zero emissions by 2050, while In light of the financial hardships that our customers have experienced Rhode Island maintained its legally-binding target of 80% emission from the COVID-19 pandemic, Niagara Mohawk Power Corporation reductions by 2050. We welcome this progress as it is clear that (NMPC) delayed the implementation of certain previously approved rate decarbonisation and the pathway to reach net zero will remain one of the increases. NMPC also delayed the filing of a rate case this spring and major long-term issues facing our economies. are exploring options including an extension of the current rate plan or a rate case filing later this summer. While the pathway to decarbonisation of electricity has been identified, there is no obvious solution for the decarbonisation of heat. We continue Appointments and Board changes to work with governments and others in the industry to identify solutions, US Executive Director Dean Seavers stood down from the Board for but it is clear that the right regulatory and policy frameworks will be personal reasons in November 2019. The Board appointed Badar Khan, critical to enable a fair and affordable transition to a clean energy future. who was already a member of the Executive Committee, as interim President of the US business. Following a thorough process to identify Reviews a permanent successor, which included both internal and external Although the power outage in Great Britain on 9 August 2019 caused candidates, I’m pleased that Badar was confirmed as President of the significant disruption, the Board is pleased that the subsequent internal US business in April 2020. and external reviews confirmed our systems operated correctly and identified the failure of certain generators and railway assets as the cause. The Board was pleased to welcome two new Non-executive Directors The external reviews highlighted a number of recommendations which during the year – Jonathan Silver, who has a strong background in we hope are implemented to improve the resilience of the overall GB finance and US government policy, and Liz Hewitt, who brings extensive infrastructure in future. The Board believes it is important that the current business, financial and investment experience from international external review of the structure of the ESO results in a stable outcome companies across a range of sectors. which best enables the UK to meet its 2050 net zero commitment. You can read more details of all our Board members’ experience The Board was deeply concerned that the actions taken to implement and the Committees they support in the Corporate Governance review a moratorium on new gas connections in downstate New York resulted in on pages 63 – 107. strong public criticism of the Company by Governor Cuomo, significant reputational damage, difficulties for customers, and a settlement with Culture and Responsible Business the New York Public Services Commission. The Board commissioned The recent tragic death of George Floyd and the subsequent widespread two external reviews which have provided valuable insights into how our expressions of public support for the Black Lives Matter movement have US business got into this situation and a number of recommendations, reinforced the right of everyone to equal opportunities, to have their voice which are being implemented at pace by our new President of the US heard, and to feel safe as they go about their daily life. These recent business. As we continue working with the Public Services Commission events highlight that companies have a vital role to play in addressing to find a long-term solution, we will ensure our approach to meeting inequality and injustice wherever we see it, encouraging our employees increasing demand for energy in New York State takes account of all to speak up, challenge and act where something does not feel right. key stakeholders. We will not condone intolerance of any kind at National Grid. Financial reporting The Board hosted several meetings throughout the year with a The International Financial Reporting Standard (IFRS) technical cross‑section of employees to ensure the voice of the employee requirements make reporting some of the performance measures that was heard by the Board, and was pleased with the effectiveness we use as a regulated business challenging. We provide additional of these sessions. information, on page 32, about both our significant assets and liabilities that do not form part of our audited accounts, to help our investors During the year, National Grid evolved its vision to reflect our belief that gain a fair, balanced and understandable view of our business. a responsible business needs to stand for something beyond profit. Where practicable we reconcile these with our statutory measures We have a responsibility to demonstrate our commitment to society in ‘Other unaudited financial information’ on pages 240 – 249. more broadly, and that’s why our vision is to be at the heart of a clean, fair and affordable energy future. How we generate and preserve value Our purpose and values are key to our Company’s DNA. In particular, Our dividend policy aims to grow the ordinary dividend per share at least they have enabled all our employees to respond with huge commitment, in line with the rate of RPI inflation each year for the foreseeable future. agility and flexibility to the challenges of COVID-19. I am immensely As is usual practice, the Board reviews this policy regularly, taking into grateful to them. account a range of factors including expected business performance and regulatory developments. Following stress testing of the finances of the Company against a number of potential COVID-19 scenarios, the Board has decided to recommend a final dividend in line with this policy. Accordingly, the Board has recommended an increase in the final dividend to 32.00p per ordinary share ($2.0126 per American Depository Share). Sir Peter Gershon If approved, this will be paid on 19 August 2020 bringing the full year Chairman dividend to 48.57p per share ($3.0799 per American Depository Share), an increase of 2.60% over the 47.34p per share for the financial year ended 31 March 2019. 9
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Chief Executive’s review “ National Grid has a leading role to play in ensuring a cleaner energy future in all our regions.” by 2040. Rhode Island maintained a legally binding target to reduce carbon emissions by 80% by 2050 and the Governor signed an executive order targeting 100% renewable electricity by 2030. At National Grid, we have evolved our strategy and vision to reflect our belief that we have a responsibility to ensure that the energy future we help to shape is one where everyone shares the benefits and where we enable the communities we serve to deliver a clean transition. John Pettigrew That’s why our vision is to be at the heart of a clean, fair and Chief Executive affordable energy future. You can read more about our new strategy on page 12. Throughout this report, we have reported our performance We’ve made strong progress against our against the strategy that was effective until 31 March 2020, and which strategic priorities despite a challenging year. is set out on pages 16 – 17. During the year, we committed to reducing our own emissions to net zero by 2050 and to continue to facilitate the industry-wide transition The far-reaching and devastating global consequences of COVID-19 to a low-carbon future. cannot be underestimated and we all owe a debt of gratitude to those who have been on the frontline fighting this virus across the world. We worked with the UK government to accelerate the transition to electric vehicles to cut carbon emissions and improve air quality for At National Grid, our role throughout this crisis has been to play our part communities the length and breadth of the country. We were pleased to in keeping the lights on and the gas flowing. Keeping the networks see a £500 million commitment in the 2020 Budget to support the rollout running, keeping our customers connected to the power they rely on of new rapid-charging hubs so drivers are never more than 30 miles and expect, and protecting the communities where we live and serve from a charging point. has never been more important. We are developing the world’s first zero-carbon industrial cluster in the I’m immensely proud of the way all our workforce have responded to this UK’s Humber region in partnership with Drax and Equinor. The Zero pandemic, and particularly those who go out to work every day in the Carbon Humber consortium will use carbon capture and storage to field and in our control rooms to ensure we continue to power hospitals, create a zero-carbon region by 2040. homes and society during such a challenging period. We are developing hydrogen trials and investing to understand the impact We took immediate action to lessen any financial hardship our of hydrogen on our existing gas assets to address the decarbonisation customers may have faced, suspending debt collection and customer of heat. While gas clearly has a role to play for many years to come, we termination activities across our US jurisdictions, and delaying planned understand the urgency of finding a solution to decarbonise heat in a bill increases in New York State. We have also strengthened customer way that is fair, affordable and not overly disruptive to consumers. support activities to help lower-income customers manage their energy bills during the crisis and beyond. We’ve started construction work on our Viking Link interconnector, connecting Great Britain and Denmark, and continue construction on We donated a total of £600,000 to the National Emergencies Trust, the IFA2 and North Sea Link. Our interconnectors have a key role to play Trussell Trust and University Hospitals Birmingham Charity in the UK, in a decarbonised energy sector, enabling the most efficient use of and $1 million to community-based charities across our US jurisdictions renewable energy across Europe. to provide help and support to the people that needed it most. We also introduced a programme of practical help, encouraging our thousands Delivering for investors of UK employees to volunteer for half a day per week with charities During the year, we spent more than £5 billion growing and enhancing working on the COVID-19 response. our US and UK energy networks, through a combination of organic growth, reinvesting the proceeds from the Cadent sale and innovative We are planning additional support activities for the communities we financing methods such as our green bond. We achieved this strong serve for the post COVID-19 environment, including employability skills performance while also delivering a high level of asset growth of 9%. support and helping small and local businesses in our supply chain. The proposed final dividend of 32.00p, which is still subject to shareholder We recognise that the impact of COVID-19 will be felt over the long term, approval, brings our full year dividend to 48.57p, an increase of 2.60% and we are committed to applying our Responsible Business principles and in line with our policy. This is covered 1.2 times by our underlying for our workforce, our communities and the economy in our response. earnings per share of 58.2p. While the end of the financial year was dominated by responding to the Safety COVID-19 pandemic, 2019 saw uncertainties particularly in the UK where the external environment was dominated by Brexit and a General Election. In the UK and NGV businesses, we’ve seen a strong safety performance this year. We continue to focus our efforts on developing a generative Leading the clean energy transition safety culture, and in the UK we’ve seen our lowest ever number of lost time injuries. It’s been a year of significant progress in the clean energy transition with climate change rising up the agenda for the public and politicians In the US, we’re focused on improving safety and ensuring it is front alike. We’ve seen climate change protests across the world, and an of mind for all our workforce after seeing a deterioration in performance increased commitment from governments to take action, including in over the last 12 months. Tragically, we also had a fatality in the US where the geographies in which we operate. The UK legislated for net zero one of our colleagues was struck by a vehicle which had driven into a emissions by 2050, and New York and Massachusetts each set an clearly marked out area where he was working. economy-wide limit of net zero carbon emissions by 2050, with New York additionally legislating the target of 100% carbon-free electricity 10
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Chief Executive’s review Delivering for our customers IFA2, the 149-mile (240-kilometre) subsea cable between Great Britain Customer performance remains a key metric and I’m pleased we’ve and France is on track to become operational later this year, and work seen a steady increase in our customer satisfaction scores for GT and also continues on our North Sea Link to Norway which is expected to ET. However, our scores were below target in the US, our metering be operational in 2021/22. Construction is now underway on Viking business and the ESO. We have identified areas of improvement and Link, the 472-mile (760-kilometre) subsea cable between Great Britain action has already started to address some of these. and Denmark. Optimising performance Evolving to a low-carbon future We set out our ambition last year to increase efficiency in our UK and US In our role at the heart of the clean energy transition, we have continued regulated businesses, becoming more responsive to customers’ needs, to take action to enable decarbonisation across our business. while also delivering sustainable cost savings. This year we reduced our costs in both regions by significantly more than our £50 million UK target We completed our acquisition of Geronimo, a leading wind and solar and the $30 million US target through a variety of measures including developer in North America, in July 2019. Since the acquisition, careful contract management and negotiation and improving workforce Geronimo has announced the commercial operation of its 200 MW productivity. Removing these costs from our business will help to Crocker Wind Farm in South Dakota, along with the signing of a power minimise future increases to customer bills. purchase agreement with Basin Electric Power Cooperative for its 128 MW Wild Springs solar project, also in South Dakota. In the UK Transmission businesses, the weighted average Return on Equity of 12.4% was maintained and within the 200 to 300 basis points The ESO is also preparing to enable a green energy future and by 2025, outperformance that we committed to under RIIO-T1. In the US, Return aims to have transformed the operation of Great Britain’s electricity on Equity of 9.3% represented 99% of our allowed return, benefiting system so it can operate with zero carbon. from revenues from rate case increases in addition to control of our costs and was up 50 basis points on last year. Our Group Return on I was pleased to note that 2019 was the cleanest year on record for the Equity was marginally lower at 11.7%, down 10 basis points from last UK as, for the first time, the amount of zero carbon electricity used by year, partly due to lower income from our other businesses. the UK’s homes and businesses outstripped that from fossil fuels for a full 12 months. National Grid has continued to deliver world-class reliability and responded well to storms in the US. We were recognised with the EEI’s Emergency As the UK energy industry continues to evolve, we are working closely Assistance Award and the Emergency Recovery Award for our fast and with the government and regulator to review the most appropriate effective response to storms in 2019. In the UK, we regret the disruption structure for the ESO following legal separation last year. caused by the power outage on 9 August 2019 but welcomed the Ofgem and government reports into the incident which confirmed that Unlocking future potential the outage was not caused by National Grid infrastructure. We were I was pleased that our focus on diversity was recognised with Forbes pleased that they agreed with our view that, given an increasingly complex naming us one of the Best Employers for Diversity 2020, and the US and challenging energy network, it is appropriate to carry out a review of Human Rights Company Foundation awarding us Best Place to Work the Security and Quality of Supply Standards. LGBTQ Equality. Our environmental commitments were also recognised with a place for the fourth consecutive year on the CDP A list, which We were pleased with the stakeholder group support we received for names the world’s most pioneering companies leading on environmental the RIIO-2 business plans we submitted in December 2019. The Open transparency and performance. Hearings expected in April 2020 were delayed due to COVID-19, but we continue to work with Ofgem and all our stakeholders to find the most National Grid continues to focus on being a responsible business and appropriate framework to balance the needs of our customers and increasing our positive impact on society. The unprecedented global investors. You can read more about the composition of the stakeholder challenge of COVID-19 demonstrated more than ever the importance of group on pages 45 – 47. being a responsible business, and we concentrated our efforts on how best to support our workforce and our communities through this difficult time. We welcomed Ofgem’s decision to apply the Strategic Wider Works model as part of the RIIO-T1 framework to the Hinkley Seabank Connection In addition to the immediate volunteering programme we set up to Project, which we believe is in the best interests of consumers. support those who needed it most during the COVID-19 pandemic, we partner with charity organisations to encourage and enable our In the US, we secured our Massachusetts Electric rate order with a employees to volunteer with them. In early 2020, we launched a five-year performance-based mechanism and an allowed Return on community investment strategy which will provide access to skills Equity of 9.6%. development for 45,000 people across the US and the UK, as we help to equip future generations to be part of the clean energy transition. In New York, we enforced a temporary gas moratorium in May 2019, which led to a very challenging period for all our stakeholders. We found We invest millions every year in training to ensure our workforce have operational solutions to resolve the issue for the short term and have the skills to meet the changing needs of a net zero economy, as well now submitted our report into long-term solutions to the State of New as supporting STEM-related activities for tens of thousands of York Public Services Commission (NYPSC). We are listening to our schoolchildren around our key infrastructure projects. stakeholders’ concerns and will continue to work with the NYPSC as we try to resolve the issue in the coming months. Looking ahead I’d like to end by expressing my gratitude to all our workforce who have Growing our assets worked tirelessly to achieve the performance we have delivered this We completed the sale of our remaining stake in Cadent for £1,965 million year, and to ensure the networks keep running as efficiently and safely and reinvested the proceeds in our capital investment programme. as ever through unprecedented times. In the US, we invested £3.2 billion in the year on projects including the completion of the Gardenville substation upgrade in West Seneca, New York, which will supply an affordable and reliable source of renewable power for decades to come. We delivered asset growth in the US of 12.2%, up 300 basis points on the prior year. John Pettigrew Chief Executive In the UK, we awarded the £400 million tunnelling contract for our London Power Tunnels 2 project in December 2019. This 20.85-mile (33.5-kilometre), £1 billion link will provide resilience across South London from Wimbledon to Crayford and is due to complete in 2028. Another Scan here to view our video highlight has been the completion of the tunnelling for our Feeder 9 project under the Humber, which has been a critical investment in our gas infrastructure. These are just two of the projects which contributed to capital investment during the year of £1.3 billion and asset growth of 4%. Our interconnector portfolio continues to grow with new subsea power links to France, Norway and Denmark planned over the next four years. 11
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Evolving our strategy for the future We have evolved our strategy in order to better reflect our purpose and Our purpose in response to our business environment. Our purpose remains to Bring Energy to Life, providing the heat, light and power people and businesses rely on and supporting local The evolved strategy reflects a belief that we have a responsibility to communities to prosper. ensure that the energy future we help to shape is one where everyone shares its benefits. We will continue to connect people to the energy they need for the lives they lead, safely, reliably and securely. Vision Values To be at the heart of a clean, Every day we…do the right thing, fair and affordable energy future find a better way and make it happen Bring Energy Strategy to Life Priorities National Grid builds, owns and Enable the energy transition for all operates large-scale, long-life energy assets primarily in networks and Deliver for customers efficiently renewables that deliver fair returns and high societal value. The Company’s Grow organisational capability portfolio of largely regulated assets in stable geographies is underpinned by Empower colleagues for great performance a strong and efficient balance sheet. Our vision Deliver for customers efficiently National Grid stands for more than profit. The Company is committed Providing safe, reliable and affordable energy for customers around the to making a positive contribution to society, whether that’s helping clock, ensuring operational excellence and fiscal discipline in everything the young people of today to become the energy problem-solvers National Grid does, building productive partnerships with regulators and of tomorrow, supporting customers to use energy more efficiently, policymakers, and unlocking real value for customers and the or tackling climate change. communities they live and work in. That’s why the Company’s vision is to be at the heart of a clean, fair Grow organisational capability and affordable energy future, ensuring everyone benefits from the Anticipating and adapting to changes in the energy sector in faster and energy transition, that bills are not a burden for individuals or families, smarter ways, remaining at the cutting edge of engineering and asset and that no one gets left behind. management, and innovating more sustainable energy solutions. Our strategy Empower colleagues for great performance Building diverse and inclusive teams that reflect the communities the National Grid’s strategy is to build, own and operate large-scale, long-life Company serves, attracting the best talent, prioritising learning and energy assets primarily in networks and renewables that deliver fair developing the skills needed now and in the future to accelerate the returns and high societal value. The Company’s portfolio of high-quality, energy transition. low-risk assets in stable geographies is underpinned by a strong and efficient balance sheet. Our values This strategy sets the bounds of National Grid’s business and will ensure As a purpose-led, responsible business, how National Grid delivers for it is set up to play a leading role in the energy future. It will be delivered its customers and communities is as important as what is delivered. through four priorities. Colleagues right across the Company, in the United Kingdom and the United States, are committed to: Our priorities Doing the right thing, keeping customers, communities and the wider We have four strategic priorities to make our purpose possible and public safe. achieve our vision. Finding a better way, delivering excellent performance at best value Enable the energy transition for all and innovating new energy solutions. Fully decarbonising the electricity grid through modernisation, increased flexibility and by connecting renewables quickly and efficiently. Leading Making it happen, with a strong focus on excellence, efficiency the way in the decarbonisation of gas, investing in a range of solutions and results. like renewable natural gas, blending hydrogen in networks and carbon offsetting. Decarbonising transport by building electricity network flexibility and supporting charging infrastructure. 12
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Our business environment As well as managing through the COVID-19 pandemic, our societal ambition remains to achieve net zero, with emphasis on fairness and affordability, digitalisation and decentralisation during the transition. 2019/20 developments Our response Climate risk continues to rise up the • In both the UK and US, we are taking important steps to address the future corporate agenda, against the rapidly of heat, engaging across the industry and with government and regulatory evolving societal attitudes to climate bodies. In the US, we collaborated with industry partners to develop change and the role of energy companies interconnection guidelines for renewable natural gas (RNG) in New York in leading and meeting net zero State that seek to facilitate growth of this clean energy resource. In the UK, commitments. we have conducted three feasibility studies on the potential role of Net zero hydrogen and how our networks could facilitate its uptake. 2019 was a turning point for climate At least 9 countries have legislated or • For our UK regulated business, the single biggest contributor towards action, from protests on the street to are in the process of legislating, and our net zero target to reduce is Sulphur Hexaflouoride (SF6), and we will be legislative action. Governments at least 112 countries are discussing around the globe are considering leaders here. In the US, through our gas pipeline replacement programme, legislating, net zero targets by 2050 we replaced 460 miles (740 kilometres) of pipe in 2019/20, reducing and acting on ambitious carbon or sooner. reduction targets. greenhouse gas emissions from the unintended release of natural gas. UK • The ESO has agreed contracts with five parties, worth £328 million over a six-year period, in a world-first approach to managing the stability of the The UK became the first major electricity system. This aids our ambition to be able to operate GB’s economy to commit to a legally electricity system carbon free by 2025. binding target of net zero emissions 70% • The world’s largest offshore wind farm, the 1.2 GW Hornsea Project One by 2050. National Grid’s reduction in carbon wind farm, is connected to our electricity transmission network and first emissions since 1990. 2019 was the cleanest year on record generated power in 2019. for the UK as, for the first time, the • In January 2020, we announced the launch of our first ever green bond. amount of zero carbon electricity used Raising approximately €500 million, the bond’s proceeds will finance or by the UK’s homes and businesses refinance UK electricity transmission projects with environmental benefits. Net zero outstripped that from fossil fuels for • We have partnered with Drax Group and Equinor to explore how large-scale a full 12 months. by 2050 carbon capture usage and storage and hydrogen could convert the UK’s Humber region into the world’s first net zero carbon industrial cluster. Our net zero commitment is to reduce US our own greenhouse gas emissions to • New York Transco, a joint venture in which NGV is a partner, was selected The states of New York and to develop the New York Energy Solution transmission project, unlocking net zero by 2050. Massachusetts each set an renewable energy upstate for customers downstate. economy-wide limit of net zero carbon The future of heat • NGV completed its acquisition of Geronimo, a leading US onshore wind and emissions by 2050, with at least 85% solar developer, to establish a foundation on which to grow a large-scale In the absence of both clear of reductions from their states’ own renewables business, such as the 200 MW Crocker Wind Farm in South technology roadmaps and public energy and industrial emissions (and Dakota. The £209 million deal also secured a controlling share of a 379 MW policy frameworks that underpin the the remainder possible via carbon solar and wind generation joint venture, Emerald Energy Venture LLC decarbonisation of heat by 2050, we offsets). New York additionally (‘Emerald’), with Washington State Investment Board. currently continue to believe that our legislated the target of 100% gas assets will have useful purposes carbon-free electricity by 2040. • Interconnectors played an important role in helping the UK use more zero beyond 2050. In common with the carbon electricity than that from fossil fuels, and we are currently Committee on Climate Change’s Net Rhode Island maintained a legally constructing three additional interconnectors: IFA2 to France, North Sea Zero report in May 2019, we believe binding target to reduce carbon Link to Norway and Viking Link to Denmark. that the future of heat is one reliant on emissions by 80% below 1990 levels • We believe our gas businesses can facilitate the transition to a multiple technologies and fuels, with by 2050, and Governor Raimondo decarbonised gas system and are investing in solutions such as renewable an enduring role for natural gas. signed an executive order targeting natural gas and blending hydrogen in our network. However, the scale and purpose 100% renewable electricity by 2030. • We have committed to meeting the Task Force on Climate-related Financial for which the networks will be used Disclosures (TCFD) recommendations in full (see pages 57 – 62). is dependent on technological Across the wider US, one in three developments and, crucially, Americans – more than 110 million policy choices of governments people – live in a community which and regulators. has committed to or achieved a 100% clean electricity target. The future of heat is uncertain, and its decarbonisation is reliant on relatively nascent technologies, such as hydrogen and carbon capture usage and storage, as well as biogas and heat pumps. These new and evolving technologies will need to be used in new contexts and on a scale that has not yet been demonstrated. We do not believe that any of these technologies can, in the next 30 years, reach sufficient scale to represent an existential threat to our gas businesses. 13
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Our business environment continued 2019/20 developments Our response UK • Our US and UK regulated businesses are pushing for greater affordability Cost of energy remains a key priority, and innovative ways to minimise the total cost of energy to consumers. evidenced by 2019’s implementation • In the UK, we have generated £603 million of savings for consumers of the energy price cap, and two of in the first seven years of the RIIO arrangements, excluding any share Ofgem’s key priorities: to ‘drive down from Cadent. Fairness and prices’ and ‘decarbonise to deliver a • Our £150 million Warm Homes Fund has helped over 42,000 households Affordability net zero economy at the lowest cost suffering from fuel poverty access heating systems and become more to consumers’. energy efficient. This is the largest private sector investment in energy National Grid delivers energy safely, efficiency ever made in the UK. reliably and affordably to the With the government’s recent • Our utility energy efficiency programmes continued to deliver excellent communities we serve. As well as commitment to net zero, industry affordability, we will play our role results for US customers, achieving annual electricity savings equal to 3.7% participants and advisors, such as of sales in Massachusetts and 1.1% in New York. All three states that we in ensuring that no one is left behind the Committee on Climate Change, in the short term during the COVID-19 serve rank in the top five in energy efficiency performance nationally have stressed the importance that according to the ACEEE. crisis, or in the longer-term transition net zero is delivered in a fair way as to clean energy. a ‘just transition’ across society, with • In response to the COVID-19 crisis, we have expanded customer support, vulnerable consumers protected. paused late payment collections activities, and placed a freeze on related service cutoffs. US • In our Massachusetts Electric Company rate order, we gained approval #1 Energy costs remain a priority for for our proposed five-year forward-looking ratemaking mechanism that consumers and regulators, and includes a consumer dividend and earnings sharing mechanism that The US national ranking of our rewards efficient company performance. Massachusetts Electric utility energy fairness is high on the agenda in the discussion about decarbonisation • In upstate New York, we delivered an estimated $200 million in net societal efficiency programme by the pathways and their associated costs. benefits in our second year of performance incentives. Such benefits American Council for an Energy- increase the affordability of energy and were achieved by reducing electric Efficient Economy (ACEEE). State regulators continue to explore system peak to mitigate supply costs, increasing adoption of energy innovative regulatory frameworks efficiency and facilitating uptake of heat pumps for beneficial electrification, that reward utilities for managing among other initiatives. customer bill impacts, while delivering • In Albany, New York, we worked with the public transit authority to launch 3% desired regulatory and policy four electric buses to test customer experience with the technology and outcomes. This includes adjustments enable expansion to other fleets across our territory. This is an example of UK transmission network costs per to the cost‑of‑service model that our efforts to make electric transport options more widely accessible to all. average household dual fuel bill. are more forward-looking, and which establish new shareholder incentives for cost efficiency. UK • We are supporting growth in distributed energy resources (DERs) in our US Last year 29% of generation was service territories, where our US regulated business connected 314 MW of connected at the distribution network generation in calendar year 2019. We also made investments in the grid to level or behind-the-meter. The July enable future growth, including to increase distribution system capacity and 2019 Future Energy Scenarios (FES) to deploy advanced communications, monitoring and controls technologies Decentralisation document suggested that by 2050 essential to enhanced DER integration. The energy system continues its this could rise to 58%. This is driven • We continued our partnership with leading home solar panel and battery transition from high to low carbon. by new technology and business storage company, Sunrun, securing new contracts for grid services from This change coincides with a shift models enabling solutions such as rooftop solar and storage across the US, with nearly 40 MW capacity and to more decentralised generation, solar panels, electric vehicles and ancillary services in calendar year 2019. including renewables and battery battery storage to be more accessible • Our ‘bring-your-own’ device demand response programme expanded in storage. As the volume of this to all consumers. Massachusetts and Rhode Island and received the Energy Storage North intermittent and distributed generation America (ESNA) Innovation Award and the Peak Load Management Alliance increases, a more resilient and flexible US (PLMA) Program Pacesetter Award. It enables residential customers to system will be required; one that Distributed energy resource receive a financial incentive for enrolling their devices to be managed by us makes best use of available energy investments and installations to create grid flexibility. resources to meet consumers’ needs continue to grow across the US. • Since the start of financial year 2019/20, ET continues to process or has in a balanced, efficient and This includes not only small-scale processed 207 connection applications, of which 20% have been made for economical way. solar photovoltaics, but also electric transmission connected batteries, and a further 14% have been made up of vehicles, distributed storage and a new customer type, where the customer mixes their generation make-up, demand-side resources. Utilities for example solar with batteries. across the country are exploring • The ESO is working on a £10.3 million innovation project to explore how 6 MW how to integrate these resources DERs can be used to restore power in the highly unlikely event of a total or into the grid, ensuring their utilisation partial blackout of the UK electricity transmission network. 48 MWh is effective, safe and reliable. The largest battery storage facility in northeastern US was installed by National Grid on the island of Nantucket in 2019 as a flexible and reliable alternative to undersea cables. 14
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Our business environment 2019/20 developments Our response In 2019, the application of digital • For our digital transformation, we are adopting a Group-wide centralised technologies across the energy hub model supported by regional delivery. Strategy for the transformation industry continued at pace globally. is formed centrally with regional autonomy. Bloomberg New Energy Finance • We expanded a personalisation platform to serve more than two million tracked 379 applications, projects, customers in Massachusetts and Rhode Island. Advanced data and Digitalisation partnerships and product developments analytics proactively identify eligible customers and present the next best Businesses and lives are being for industrial digitalisation. This is 78% offer to individuals, increasing offer enrolment and reducing bad debt. transformed by innovations such as more than in 2018, and they expect a further increase in activity in 2020, as • ConnectNow, our ET network connections project, will improve the artificial intelligence and virtual reality. customer experience of connecting to the network. Focusing on small The energy landscape has seen many positive results of digitalisation drive its increased use. scale connections such as solar, storage, electric vehicle charging and data changes as companies look to create centres, this digital platform assists customers through the application new business models and reduce energy process, providing transparency and facilitating communication. Utility networks in all geographies prices through digital technologies. • We are harnessing advances in digital technology and innovation to Technology commercialisation, consumer are identifying significant potential for their businesses through digital improve business performance. For example, the ESO in collaboration with demand and regulatory stimulus will the Alan Turing Institute has used data science and machine learning to continue to drive these trends. transformations. Advances in technologies to operate systems, deliver a 33% improvement in solar forecasting. This will help the ESO run manage assets and engage with the system more efficiently, and enable more solar capacity to be customers will be a key facet of our connected and utilised. business going forward. • In 2020, the ESO launched a free Carbon Intensity application, aimed at >80% empowering people to make conscious decisions about how they consume The reduction in the US call centre energy by showing them the greenest times of day to use electricity. volume during major storms, after • NGP invested in Dragos, a leading cybersecurity provider of industrial implementing proactive two-way control systems and operational technology. Our cybersecurity team outage texting to improve conducted a pilot of Dragos’ asset identification, threat detection and response software platform to help secure National Grid’s critical communications with customers infrastructure in the UK and US. about service outages and • Dragos was among eight new investments and six follow-on investments restoration. made by NGP, whose portfolio at the close of the fiscal year comprised 21 investments at a fair value of £134 million ($167 million). Our response to COVID-19 Case study – NGV COVID-19 is affecting countries, communities, supply chains and Our response to COVID-19 in our communities markets, including the UK and our service territory in the US. Since the NGV has helped the University Hospitals Birmingham (UHB) Charity to World Health Organisation declared the outbreak as a pandemic on launch a special appeal, to raise £1 million to support patients and staff 11 March 2020, National Grid has applied UK and US Federal and State through the COVID-19 pandemic. government advice and guidance on dealing with the potential and actual spread and impact on our business and our customers. The donation has been used to purchase almost 400 tablet computers that will be used by patients to help them speak to their loved ones while The Company has successfully activated its crisis management they are in isolation. The tablets will be distributed across the UHB Charity’s framework which includes identifying the areas that are deemed critical five hospitals, including the Nightingale Hospital, which has recently been and the corresponding level of reliability and service continuity needed established at the National Exhibition Centre in Birmingham, UK. to deliver normal services during the pandemic. Our plans include continued safe and reliable service during large numbers of workforce absence due to illness. Under government guidelines in both the UK Scan here for the full story. and the US, utility workers are identified as key/essential workers and have been subject to specific guidance and permissions on family arrangements and movements. We have moved to working from home arrangements, where possible, and have also identified critical areas including control rooms, call centres, dispatch and key sites including generation and LNG facilities, terminals, substations and compressor stations. For all these activities plans are in place to maintain critical safety and maintenance activities, which includes sequestering some employees. Some of our work, especially in the US, requires contact with members of the public. To safeguard our employees and the public we are following government requirements and recommendations for social distancing. This includes our collections, meter installations and shut-off arrangements while continuing to provide a safe and reliable network. We have also made arrangements to ensure that those customers with financial difficulties who cannot make payments do not have services cut off. Finally, we are also working with our supply chains so that our systems and networks have the necessary materials and parts. Our regular engagement with government agencies and our regulators, as well as following all advisory services regarding management of the spread of COVID-19, is expected to continue for the foreseeable future. 15
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Delivering against our strategy Our strategy in 2019/20 focused on three strategic priorities for our business, delivering for customers safely and efficiently today while setting a growth pathway for the future. Customer first We have a vital role to play in enabling customers to benefit from the changes in our industry. The clean energy transition and associated technological advancements mean we can provide our customers with a more cost-effective service, while leaving no-one behind. We measure customer satisfaction as a KPI within each of our business segments. 16
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Delivering against our strategy Our three strategic priorities Examples of progress in 2019/20 1. Optimise performance • Continued the transition begun through our UK and US programmes Our customers want us to be more efficient to make their to leaner and more efficient operating models in the UK and US core energy more affordable, so we must find ways to improve businesses; how we run our business. • Submitted price controls for the UK electricity, gas and system operator business as part of RIIO-2; We need to enhance the customer experience and our productivity through • Received authorisation of a new five-year rate plan for our electric more efficient and customer-focused processes. Given the scale of our distribution companies in Massachusetts; and core business in the UK and US, even small improvements will have a • Continued embedding our Business Management System (BMS) huge impact on our overall performance. Finding new ways of optimising across the Group by publishing BMS standards through the operations will be an important factor in our ability to compete and grow. employee handbook, the National Grid Book, in order to increase standardisation across business activities. 2. Grow core business • Grew our UK and US regulated businesses capex to £5.4 billion ; Delivering strong operational performance provides a • In January 2020 we celebrated the completion of the new, three-mile foundation from which we can invest in our core business (five-kilometre) Humber Tunnel that will house a key gas pipeline and pursue other opportunities. between Yorkshire and North Lincolnshire; • Interconnectors IFA2, Viking Link and North Sea Link are under In the US and UK, we continue to look for business development construction and are on track to be delivered to plan; and opportunities that are close to our core business. • Delivered the largest battery storage facility in the northeastern US on Nantucket as a flexible alternative to undersea cables. In NGV, we will build on our successful efforts to pursue opportunities in interconnectors and large-scale renewables. 3. Evolve for the future • Following legal separation on 1 April 2019, this is the first year We need to future-proof our business against the effects the ESO operated as a separate entity from the UK electricity of a changing energy landscape. Our networks are already transmission company, evolving for its customers and stakeholders; managing changes to the generation mix, while the needs • We are expanding a software platform using advanced data and analytics to proactively identify and present offers to customers and expectations of our customers are evolving. in Massachusetts and Rhode Island; Our preparations for the future are underway. For example, at NGV this • NGP, launched in 2018, growing with a portfolio fair value of £134m collaboration brings together our non-network businesses to focus on at 31 March 2020; and targeted investment in the energy sector outside of our core business. • NGV completed the acquisition of Geronimo, a developer of wind and solar generation. We are also looking to develop new capabilities that are essential for long-term success. For example, NGP is increasing our capability in new Further reading and disruptive energy technologies to meet the changing needs of our See more on these in the Principal customers and communities. Operations sections on pages 38 – 43 17
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Progress against our strategy The Board uses a range of metrics, reported periodically, against which we measure Group performance. These metrics are aligned to our strategic priorities. Performance reported in this section is based on the strategy that is outlined on pages 16 – 17. We report our performance measures Link to strategy as follows: Optimise Grow core KPIs performance business • Principal measures that track individual progress against each of our three strategic priorities. See below. • Non-financial measures that underpin delivery of all Evolve for Indicates an alternative three strategic priorities. See below. the future performance measure Other performance indicators • Financial measures that result from the delivery of our strategic Link to remuneration priorities are set out in our financial review, on pages 28 – 37. Remuneration of our Executive Directors, and our employees, is aligned to • Business-unit-level measures that are specific to our three strategic successful delivery of our strategy. We use a number of our KPIs as specific priorities. These are set out within our Principal Operations review, measures in determining the Annual Performance Plan (APP) and Long on pages 38 – 43. Term Performance Plan (LTPP) outcomes for Executive Directors. While not explicitly linked to APP and LTPP performance outcomes, the remaining KPIs and wider business performance are considered. For further detail, please see our Directors’ Remuneration Report, on pages 88 – 107. Principal measures Strategy link KPI and performance Progress in 2019/20 Group Return on Equity (RoE, %) 12.3 The UK regulated businesses delivered a weighted average RoE 11.7 11.8 We measure our performance in generating value of 12.4%, consistent with the return achieved in the prior year. for shareholders by dividing our annual return by our US RoE increased to 9.3% (2018/19: 8.8%), with increased equity base. This calculation provides a measure of revenues from new rates driving improved US regulatory whole Group performance compared with the performance. Group RoE of 11.7% was marginally lower than amounts invested in assets attributable to equity 2018/19 (11.8%), with benefits arising in the prior year from the shareholders. Fulham property sale and US legal settlements. Target: 11–12.5% each year 19/20 18/19 17/18 Customer satisfaction Our UK customer satisfaction (CSAT) KPI comprises Ofgem’s We measure customer and stakeholder satisfaction, while also maintaining electricity and gas transmission customer satisfaction scores. engagement with these groups and improving service levels. Figures represent our baseline targets set by Ofgem for reward or penalty under RIIO (maximum score is 10). We have seen a steady increase in CSAT for GT, through our efforts to 2019/20 2018/19 2017/18 Target understand the impact that our actions have with a particular UK Electricity Transmission (/10) 8.2 7.9 7.7 6.9 focus on responding to their queries. In the first year post separation from ESO, we have also focused on building direct UK Electricity System Operator (/10) 7.6 – – 8.1 relationships with our ET customers, to understand the experience they need us to deliver and redesigning our service UK Gas Transmission (/10) 8.0 7.8 7.6 6.9 accordingly. Due to legal separation in April 2019, the scores also reflect the independent ESO result. The ESO CSAT score US Residential – Customer was below target for the year 2019/20 and we have identified Trust Advice survey (%) 59.8 58.7 56.6 61.6 query response times and tailoring communications as improvement areas for the next 12 months. Action has already Metering NPS score (index) +40 +44 +39 – begun to take place within the value streams to address these areas and they will form part of new insight plans for the ESO in 2020/21. The US metric measures customers’ sentiment with National Grid by asking customers their level of trust in our advice to make good energy decisions. The metric, which is tied to the value customers feel they receive from National Grid, has improved over the past few years yet was below target in 2019/20. NPS scores reported represent the Metering business. Although the score has dropped since 2018/19, we have identified areas of improvement, for example, making sure metering queries raised by our customers are progressed more efficiently. 18
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Progress against our strategy Principal measures continued Strategy link KPI and performance Progress in 2019/20 Network reliability In both the UK and US, we continued to maintain high levels of We aim to deliver reliability by planning our capital investments to meet challenging reliability on all our networks. demand and supply patterns, designing and building robust networks, having risk-based maintenance and replacement programmes, and detailed and tested IFA interconnector availability was lower in 2019/20 as this was incident response plans. We measure network reliability separately for each of the first year of a major refurbishment project at IFA, where we are our business areas. The table below represents our performance across all our rebuilding the site to remain operational for the next 30 years. networks in terms of availability. For both our UK and US networks we continued to maintain excellent reliability. % 2019/20 2018/19 2017/18 UK Electricity Transmission 99.999974 99.999984 99.999984 UK Gas Transmission 99.999589 99.989632 99.996151 US Electricity Transmission 99.955 99.952 99.953 US Electricity Distribution 99.994 99.995 99.995 IFA interconnector 91.4 93.9 92.6 BritNed interconnector 98.6 98.2 97.8 NEMO Link interconnector 96.1 – – Total regulated asset growth (%) 9.0 Asset growth during the year was 9.0% (2018/19: 7.2%). This was primarily driven by the accelerated US rate base growth of 12.2% Maintaining efficient growth in our regulated assets 7.2 ensures we are well positioned to provide (2018/19: 9.2%) and higher levels of investment in other assets, 5.9 consistently high levels of service to our customers such as in NGP. This is combined with increased UK RAV growth and increases our future revenue allowances. of 3.8% (2018/19: 3.6%). Target: 5–7% growth each year 19/20 18/19 17/18 Cumulative investment in delivering new 1,440 Investment in delivering new low-carbon energy sources increased low-carbon energy sources (£m) in the year by £738 million (105%). Principally from increased We invest in new low-carbon energy sources investment in our interconnector projects under construction, with primarily through our interconnector businesses IFA2 nearing completion, further progress made on North Sea Link (North Sea Link, IFA2 and Viking Link), investments 702 and the commencement of construction on Viking Link. In addition, in companies delivering low-carbon energy the acquisition of Geronimo was made in July 2019, a leading wind sources (for example, our investment in Sunrun) 395 and solar developer in North America. and investments into large-scale renewables (for example, our new investment in Geronimo). 19/20 18/19 17/18 18 Cumulative low-carbon generation connected 17 A total of 18.3 GW of low‑carbon generation is currently connected to our UK network (GW) 16 to our network, following additional offshore wind capacity Low-carbon generation supported by our network connecting at Hornsea 1 (+800 MW) and East Anglia 1 (+680 MW). to date. The government’s offshore wind sector deal and continued cost reductions observed in the latest Contracts for Difference (CfD) allocation round, indicates further increases in capacity over the coming years. 19/20 18/19 17/18 Connections of renewable schemes to US 381 There has been a 17% increase in the installed capacity compared electric distribution network (MW) 329 to the previous year. Rhode Island installed a record amount of The table represents the amount of customer- 281 capacity (100 MW) while the installed capacity in Massachusetts owned renewable energy capacity installed on our was on par with 2018/19. Although New York experienced a distribution network across our US footprint. Given decline in customer-ready projects to interconnect, it received a the variability and unpredictability of customer- record amount of capacity (3,000 MW). The Company continues driven projects, the Company does not presently to make progress in Massachusetts and Rhode Island to enable have a MW target. Current targets primarily focus greater renewable energy integration by completing area-wide on regulatory compliance and customer need transmission and distribution studies. While non-residential date attainment. systems have represented less than 7% of connected applications, 19/20 18/19 17/18 they have accounted for 78% of the installed capacity over the last three years. NGV capital investment (£m) 815 Excluding NGP, NGV capital investment has increased in the year NGV is focused on investment in a broad range of by £371 million (84%). There has been increased investment in our energy businesses across the UK and US, including interconnector projects under construction, with IFA2 nearing our interconnector business, large-scale renewable completion, further progress made on North Sea Link and the 444 commencement of construction on Viking Link. In addition, an generation, LNG storage and regasification, and 363 energy metering. acquisition of Geronimo was made in July 2019, a leading wind and solar developer in North America. 19/20 18/19 17/18 19
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Progress against our strategy continued Non-financial measures KPI Performance Progress in 2019/20 Group lost time injury frequency rate 0.12 As at 31 March 2020, our Group lost time injury frequency rate (LTIFR) was 0.12, which is 0.10 0.10 (LTIs per 100,000 hours worked) higher than the Group target of 0.10. This is a combined employee and contractor LTI rate, This is the number of worker lost time injuries which reflects our continued focus on encouraging good safety behaviours across the per 100,000 hours worked in a 12-month entire workforce. period (including fatalities) and includes our employee and contractor population. The majority of lost time injuries are a result of individual issues such as slips, trips and falls, and soft tissue injuries from inappropriate tooling, lifting and carrying. We continue Target: < 0.1 LTIs to address these and other incidents by implementing best practice injury prevention techniques that mitigate potential for harm factors. Although this fiscal year saw injury challenges in our US business, where, tragically, we lost a colleague in a road traffic 19/20 18/19 17/18 accident, we will continue to focus on improving our generative safety culture. 77 77 Employee engagement index (%) 73 We measure employee engagement through our employee engagement survey (EES). This is a measure of how engaged our The results of our 2019/20 survey, which was completed by 82% of our employees, have employees feel, based on the percentage of helped us identify specific areas where we are performing well and those areas we need favourable responses to questions repeated to improve. At Group level, the overall results of the 2019/20 EES showed a positive trend annually in our employee engagement survey. from the 2018/19 survey, with 26 questions significantly improving and just seven questions Our target is to increase engagement showing a significant decline. compared with the previous year. Our engagement score was 77%, which is four points ahead of the 2018/19 results. 19/20 18/19 17/18 Workforce diversity Ethnic minorities During 2019/20, the representation of our female and ethnic minority groups has increased We measure the percentage of women and Women as we continue to build our diverse talent pipeline. ethnic minorities in our workforce. We aim to 18.3 18.1 17.9 develop and operate a business that has an inclusive and diverse culture (see page 53). 24.7 24.3 24.6 19/20 18/19 17/18 Contribution of our corporate 73 We use the London Benchmarking Group measurement framework to provide an overall responsibility work (£m) community investment figure which includes education (but excludes investment in Working with communities is important for 54 university research projects). While we have no specific target, our overall aim is to ensure creating shared value. 47 we add value to society to enable communities to thrive. In the UK, the overall contribution of our activities was valued at nearly £39 million. In the US, our contribution was just over £7.5 million. This gives us a combined Group-wide contribution of nearly £47 million. This was lower than prior years because some events were cancelled due to COVID-19. 19/20 18/19 17/18 Education, skills and capabilities 53,226 We measure quality (>1 hour) interactions with young people on STEM subjects. In the UK, We support the development of young in 2019/20, we have had 1,707 quality interactions with young people on STEM subjects. 41,461 We had 51,519 interactions in the US. Overall we have seen a total of 53,226 interactions people’s skills and capabilities through 35,425 skills-sharing employee volunteering. In with young people on STEM, an increase of 11,765. particular, we focus on STEM subjects as these support our future talent recruitment and our desire to see young people gain meaningful employment. 19/20 18/19 17/18 7.0 6.9 Climate change - Scope 1 and 2 6.5 Our Scope 1 greenhouse gas emissions for 2019/20 equate to 3.9 million tonnes of carbon emissions dioxide equivalent (2018/19: 4.5 million tonnes) and our Scope 2 emissions (including This is a measure of our reduction of Scope 1 electricity line losses) equate to 2.6 million tonnes (2018/19: 2.5 million tonnes). This is a total of 6.5 million tonnes of carbon dioxide equivalent for Scope 1 and 2 emissions. and Scope 2 emissions of the six primary 70% Kyoto greenhouse gases. Our target is to 68% 68% These figures include line losses and are equivalent to an intensity of around 447 tonnes reduce our greenhouse gas emissions by per £1 million of revenue (2018/19: 469 tonnes). 80% by 2030, 90% by 2040 and net zero by 2050, compared with our 1990 emissions Our Scope 3 emissions for 2019/20 were 29.8 million tonnes (2018/19: 32.3 million tonnes). of 21.6 million tonnes. The percentages in the adjacent chart reflect a reduction in our Our global underlying energy use is 28,223 GWh where the UK and US are responsible for emissions from a 1990 baseline. 19/20 18/19 17/18 8,112 GWh and 20,111 GWh respectively. This includes gas and electricity network losses and fuel used for US power generation. We seek to continuously improve our environmental performance, in instances We measure and report in accordance with the World Resources Institute and World going beyond regulatory requirements, Business Council on Sustainable Development Greenhouse Gas Protocol. 100% of our through implementation of our ISO 14001- Scope 1, 2 and 3 emissions, are independently assured against ISO 14065 Greenhouse certified Environmental Management System Gas assurance protocol. This data complies with the UK government’s Streamlined Energy and Environmental Sustainability Standard. and Carbon Reporting (SECR) requirements and is our first disclosure to comply with SECR. Further reading You can read more about the Task Force on Climate-related Financial Disclosures and our wider sustainability activities and performance on pages 57 – 62. 20
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Innovation Our innovation activities are focused In our US gas businesses, our innovation continues to prioritise increasing public safety, protecting our workforce, reducing the cost on future-proofing the business for our of the work we perform and reducing our impact on the environment. customers as the energy landscape For example, we are testing robotics to enhance existing pipelines and reduce gas emissions and have several programmes exploring the changes. Collaboration is a key part introduction of renewable natural gas and alternative low-carbon of our approach to innovation. heating solutions for our customers. National Grid Partners Innovation in our UK principal operations NGP, our dedicated corporate innovation and investment function, has had a strong second year of operation delivering value to the Group. In Our commitment to net zero continues to shape our innovation strategy. 2019, we established and built our central disruptive innovation capability Our innovation portfolio enables us to identify and target carbon savings while continuing to make strategic investments in our incubation and for our own operations and we are also developing innovation projects to corporate venture capital portfolios. NGP also expanded its programming ensure we are prepared and play a pivotal role in the decarbonisation of to include culture and entrepreneurial programming and founded a global energy for power and heat, transport and industry. We also search for utility council branded as the ‘Next Grid Alliance’ to encourage collaboration new technologies and techniques to improve the way we work. within our peer group on solutions for the industry. This forum of peers allows National Grid to tap into the wealth of innovation and investment We place a high value on collaboration to inform, generate ideas and learnings from across the industry and share our own best practices. solve the challenges we see ahead of us. We work in collaboration with technical organisations, academia and suppliers in the energy sector Our investment portfolio includes direct investments in seventeen start-up that align with our goals and objectives. companies and four venture funds to date with a fair value of £134m at 31 March 2020. The venture fund investments are focused on expanding The ESO has been innovating to ensure we continue to provide secure, access to start-ups in key innovation regions including Israel and the affordable and sustainable supplies of energy in a fast-changing world. United Kingdom. We also successfully exited our positions in Pixeom Our innovation programme is used to learn and then accelerate market and Aporeto during 2019, providing financial returns from those investments. development. The year ahead will see even more projects generated by the ESO, including the world’s first Black Start from Distributed Energy NGP’s investments provide valuable insights, collaborations and Resources (DERs). This is a £10 million Network Innovation Competition deployment opportunities that strengthen and future-proof our core (NIC) project with SP Energy Networks. It will develop and demonstrate business activities. For example, we have deployed cyber detection and coordination of DERs to provide a safe and effective Black Start service response solutions from Dragos, asset management decision software and lower cost to consumers. from Copperleaf, and demand response management services from Autogrid. Several portfolio companies are in pilot on areas such as gas The UK electricity transmission network is continuing with innovation infrastructure risk prevention and manhole explosion prevention. investments. We are focused on reducing our carbon footprint from our construction activities and seeking ways to reduce the greenhouse gas In April 2019, we created a central innovation team, targeting disruptive impact from gas-insulated assets. We have engaged extensively with innovations and introduced design thinking, agile delivery, and lean regional stakeholders in our Zero 2050 South Wales project to better start-up methods to our organisation. While in its infancy the team understand the changes in decarbonising society and our role as a has explored innovation opportunities in collaboration with our core transmission business as our energy landscape evolves. We have made businesses with several projects progressing into prototype stages progress in the construction of our transmission accelerator at Deeside, during 2020. This organisation is also tasked with creating centralised recognising the need to test and adopt new technologies faster, and we innovation reporting to allow National Grid to track the value created continue to research technologies to enhance our cyber security and through its sustaining innovation efforts across the Group. further digitise our grid infrastructure. NGP has launched a series of initiatives designed to provide our employees Similarly, our UK gas transmission business has led our research to better with the types of experiences to further foster an entrepreneurial culture understand the role of transitioning to a hydrogen future. Our Hydrogen and skill set. These activities include an apprenticeship programme, Portfolio of projects aims to identify the opportunities and potential entrepreneur-led speaker series, employee immersions and sprints in challenges to hydrogen injection into the National Transmission System Silicon Valley, and secondments and advisory board positions within (NTS). Working in collaboration with industry we aim to fill the gaps in the NGP’s portfolio. These initiatives aim to provide strong training and vision for a national hydrogen deployment. The portfolio includes safety retention programmes to develop the next generation of entrepreneurial and integrity reviews, demonstrating how existing networks can leaders within the Group. transition from gas to hydrogen. NGP has delivered strategic and financial value to the core businesses Additionally in the UK, NGV has been active in establishing consortia and looks forward to delivering on our mandate to invest in valuable to better integrate offshore renewables, and to commercially deploy start-ups, to tackle innovation and business development projects that hydrogen and Carbon Capture and Storage technologies targeting can improve our business, and to act as a catalyst for change across industrial decarbonisation in the Humber and London regions. the broader Group. Innovation in our US principal operations More details can be found at www.ngpartners.com including details of each Similar to the UK, our US innovation approach is designed to enable our of our portfolio investments. networks and customer services to adapt to a low-carbon, distributed and digitised future. We focus innovation and Research and Development Further reading (R&D) on the advancement of products, systems and work methods that Further details about our R&D and innovation activities can be found in prepare the way for more efficient and safer networks that further Additional Information on pages 237 – 239. proliferate the integration of renewables. In Massachusetts, we continue to explore how best to integrate solar energy, storage and electric vehicle charging into the distribution network. Our Solar Phase III programme comprises an additional 14 MW of photovoltaics (PV) and 5.8 MW of energy storage. The aim is to analyse the impact of future high levels of distributed renewables on distribution systems and in this stage the programme will also test the economic and technical benefits of localised balancing from energy storage. Several New York Reforming the Energy Vision (REV) pilots are also underway, testing market solutions in support of Distribution System Operation (DSO) developments, smart city opportunities and renewable heating technologies. These projects are providing the knowledge and experience to evolve our systems for the grid of the future. 21
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Internal control and risk management The Board is committed to protecting and Continuous cycle to identify and manage emerging risks: enhancing our reputation and assets, while safeguarding the interests of our shareholders. 1 2 3 Managing our risks National Grid is exposed to a variety of uncertainties that could have External Criteria Scenario Analysis Source and a material adverse effect on the Group’s financial condition, our • Determine priority • Perform scenario Accountability operational results, our reputation and the value of our shares. indicators analysis on • Determine what • Update watch list emerging risks areas of the organisation are The Board oversees the Company’s risk management and internal of emerging risks • Assess cumulative impact of risk impacted by control systems. As part of this role, the Board sets and monitors the emerging risks amount of risk the Company is prepared to seek or accept in pursuing clusters • Identify gaps in • Assign our strategic objectives – our risk appetite. The Board assesses the accountability Company’s principal risks and monitors the risk management process capability to manage/monitor for monitoring and through risk review and challenge sessions twice a year. risks reporting these emerging risks Risk management process Overall risk strategy, policy and process are set at Group level with implementation owned by the business. Our enterprise risk management 5 4 process provides a framework through which we can consistently identify, assess, prioritise, manage, monitor and report risks. The Prioritise Identification process is designed to support the delivery of our vision, strategy and • Preliminary • External vs. business model as described on pages 2 – 7. assessment internal analysis • Velocity of onset • Periodic vs. Our corporate risk profile contains the principal risks that the Board and time frame continuous considers to be the main uncertainties currently facing the Group as occurrence assessment we endeavour to achieve our strategic objectives. These top risks are agreed through discussions about the Group’s risk profile with the Executive Committee and the Board. The risks are reported and Changes during the year debated with the Executive Committee and the Board every six months. The Company’s risk profile has been developed drawing upon the most significant risks across our business profiles. With the addition When determining what our principal risks should be, a broad range of principal risks addressing climate change and our response to the of factors are considered. We test principal risks annually to establish COVID-19 pandemic, 10 principal risks are now carried at Executive their impact on the Group’s ability to continue operating and to meet its Committee and Board level as detailed below. All of our principal risks liabilities over the assessment period. We test the impact of these risks were reviewed at least twice across the year, including Key Risk Indicators on a reasonable worst-case basis, alone and in clusters, over a five-year (KRIs), developed last year to help embed the risk appetite framework assessment period. This work informs our viability statement (see pages in the business and enhance the monitoring and mitigation of risks. 26 – 27). The five-year period was carefully considered in light of the current COVID‑19 pandemic. The Board considered, with appropriate Principal risks assumptions, that this period remained appropriate for our stable In 2019/20, we reviewed our assessment of the potential threats, regulated business model. The Board, Executive Committee and other opportunities and impacts from climate change. This included the leadership teams discuss the results of the annual principal risk testing impact of both our operations on climate change and of climate change at the end of the year. on our operations, as well as the transitional risk during the journey to a net zero economy in developing a new climate change principal risk Top-down, bottom-up assessment (see case study on page 23). Risk management activities take place through all levels of our organisation. Through a ‘top-down, bottom-up’ approach, all business Since the onset of the COVID-19 pandemic, we have continually areas identify the main risks to our business model and our business assessed its impact on our workforce, finances and all aspects of our objectives. Each risk is assessed by considering the financial, operations, including the impact on the Electricity System Operator on operational and reputational impacts, and how likely the risk is to managing the rapid decrease in energy demand across all UK networks, materialise. The business area identifies and implements actions to with regular reports provided to the Board. The Board has agreed that a manage and monitor the risks. These are collated and reported at new principal risk is included (see page 25). A negative outcome from functional and regional levels on a regular cadence. The most RIIO-2 and the continuing possibility of a hard Brexit remain our most significant risks for the UK, US and NGV businesses are highlighted important emerging threats in the UK business. However, the Board in regional risk profiles and reported to the Executive Committee and considers, after testing with management, that these events do not need the Board through a formal process twice a year. Additionally, the to be classified as principal risks as they are well covered below this level Executive Committee and the Board may also identify and assess of risk and are regularly reviewed by the Directors. other principal risks. These risks and any associated management actions are cascaded through the organisation as appropriate. More recently, political escalations have been considered as a threat against the Company’s ability to operate in New York. Following the failure to obtain necessary permits to build a new pipeline, and the Emerging risks Company’s associated decision to enact a moratorium, various actions We have an established process to identify and monitor emerging risks, have been taken to address the threat of loss of licence in New York. which is designed to provide sufficient warning of concerns which may During November 2019, a settlement was agreed to immediately resume impact the business. The process is designed to ensure adequate steps connecting gas services in Brooklyn, Queens and Long Island for are taken to prevent the occurrence or manage the impact of surprises. applications that had been put on hold. A total of $36 million in customer assistance, gas conservation measures and clean energy investments The Enterprise Risk Management (ERM) process monitors management has been committed by the Company along with the appointment of an information from a wide variety of sources to take into account external monitor and the requirement to deliver a plan to address service consideration of emerging risks. This includes: to customers through winter 2020/21. The settlement agreement also • Top-down analysis which is performed through the annual risk provides a framework for identifying longer-term solutions to address management process of broad thinking to consider the biggest the supply constraints in downstate New York. In considering this impacts for the Company. emerging threat, we have supported the Company’s other jurisdictions to take into consideration the possibility of New York governmental • Facilitation of risk discussions across our various businesses. Most decisions influencing other states in the area. Both our Rhode Island importantly, we review various sources of management information, and Massachusetts businesses have been working to lay solid internal and external factors to identify potential emerging risks. foundations regarding clean energy strategies, investments and close • Monitoring the external market to consider other emerging risks monitoring of pipeline operations to help address these issues. within the regions we operate in. The following diagram shows our approach and inputs used to analyse the emerging risks. 22
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Internal control and risk management Case study on climate change moving from an emerging risk to a principal risk Our risk registers typically include risks likely to manifest within the short to medium, rather than longer term. In the case of climate change, weather-related event risks previously featured, as did transition risks associated with the decarbonisation of heat and electricity and these were included as a threat in several of our existing principal risks (e.g. energy interruption, disruptive forces). Over the last 12 to 18 months, facilitated workshops were held with each of the core businesses to ensure completeness of risk capture specifically relating to climate change and our net zero commitment, considering both physical and transitional risks. Consideration was given to whether the individual or combined risks arising from increased variability in temperature, and/or greater wear and tear on assets under more extreme weather conditions such as flooding and higher temperatures, should feature more prominently. This was especially pertinent in the light of updates in climate science, observations of the changing weather such as increased intensity and frequency of storms on the US east coast, and wildfire ferocity in locations such as South America, California and Australia. We also understand the growing urgency to find a solution to decarbonise heat and the future of gas in a way that is fair, affordable and not overly disruptive to consumers. As a result, a recommendation to develop a bespoke climate change risk was considered by the Executive Committee and Board, and discussed with US, UK and NGV executives and subject matter experts. The addition of a bespoke climate change principal risk was finalised in autumn 2019. Our principal risks and uncertainties Accepting that it is not possible to identify, anticipate or eliminate every risk that may arise, and that risk is an inherent part of doing business, our risk management process aims to provide reasonable assurance that we understand, monitor and manage the main uncertainties that we face in delivering our objectives. This aim includes considering inherent risks, which in turn exist because of the nature of day-to-day operations in our industry, and financial risks, which exist because of our financing activities. Our principal risks, and a summary of actions taken by management, are provided in the table below. We have provided an overview of the key inherent risks we face on pages 227 – 230, as well as our key financial risks, which are incorporated within note 32 to our consolidated financial statements on pages 182 – 194. Risk trends reported below take into account controls, any additional mitigation actions and may be influenced by internal or external developments. People risks It is through the high-quality work of our employees that we will achieve our vision, respond to the changing needs of our stakeholders and create a competitive advantage. Building and fostering an engaged and talented team that has the knowledge, training, skills and experience to deliver our strategic objectives is vital to our success. We must attract, integrate and retain the talent we need at all levels of the business. Risks Actions taken by management Failure to build sufficient capability and leadership We have embedded strategic workforce planning in our US and UK organisations. This process helps to capacity (including effective succession planning) effectively inform financial and business planning, as well as human resourcing needs. required to deliver our vision and strategy. Our entry-level talent development schemes (graduate training and apprenticeships) are a potential source of competitive advantage in the market place. We are involved in a number of initiatives to help secure the future engineering talent we require, including the UK annual residential work experience week and the *Risk trend: Neutral (18/19 Neutral) US Pipeline and Graduate Development Programmes. *Risk trends are assessed to include any external factors We also continue to develop the rigour of our succession planning and development planning process, outside our control as well as the strength and particularly at senior levels. It is now being applied deeper into the organisation as well as continued effectiveness of our controls and additional mitigations as attention in relation to the ethnic diversity of both our management and field force population. reviewed by management up to 31 March 2020. There are multiple activities underway to drive this agenda, including ‘neutral’ talent and selection processes, development interventions and a global review of our inclusion and diversity strategy and resources. During the year, in the UK, a three-year labour agreement was reached with our trade unions, introducing revised terms and conditions. Financial risks While all risks have a financial liability, financial risks are those which relate to financial controls and performance. Financial risk management is a critical process used to make investment decisions and aims to maximise investment returns and earnings for a given level of risk. Our key financial risks are described in note 32 to our financial statements on pages 182 – 194. 23
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Internal control and risk management continued Strategic and regulatory risks Strategic risk is the risk of failing to achieve the Company’s overall strategic business plans and objectives, as well as failing to have the ‘right’ strategic plan. We voluntarily accept some risk so we can generate the desired returns from our strategy. Management of strategic risks focuses on reducing the probability that the assumed risk would materialise, while improving the Company’s ability to effectively respond to the risk should it occur. The risk owners, executive leaders, and their teams develop and monitor actions to control the risks. These risks link to our strategic priorities of ‘Grow our core business’ and ‘Evolve for the future’. The political climate and policy decisions of our regulators in 2019/20 were key considerations in assessing our risks. As referred to above, the new climate change related risk is classed as a strategic and regulatory risk but is also an operational risk, in particular as regards weather-related events in the northeastern US (where storm planning and preparation are key to what we do), flood defence in both the UK (where flood resilience works are being developed) and the US (where flood contingency plans are in place) and the investigation of the impact of rising temperatures and widening temperature ranges on the performance and operation of our networks. Risks Actions taken by management Failure to identify and/or deliver upon actions Putting in place measures to develop: necessary to ensure our business model, strategy, • evolution of our environmental sustainability metrics to better reflect our strategy, measure our impact asset management and operations respond to and track our progress; the physical and transitional impacts of climate change and demonstrate our leadership of climate • organisational design changes appropriate to meet this challenge with a single point of contact for all change within the energy sector. climate change actions and activities; • approval of a revised environmental sustainability strategy, including our strategy for heating and gas, with granular actions identified to achieve net zero; and • working with regulators and industry parties in the UK and the US on the future of heat and the role *Risk trend: Increasing of gas in the long term. (New Principal Risk) Note that a number of the above measures also address the physical impacts of climate change on *Risk trends are assessed to include any external factors our operations. outside our control as well as the strength and effectiveness of our controls and additional mitigations as reviewed by management up to 31 March 2020. We have committed to full compliance with the Task Force on Climate-related Financial Disclosures (TCFD) requirements including physical and transitional scenario analysis (see pages 57 – 62). Ongoing work to address transition risks and opportunities includes: • ensuring our electricity network is reliable and able to actively support and contribute to a future where renewables and intermittency of supply are increasing; • supporting the charging infrastructure required for increased use of electric vehicles; • promoting energy efficiency programmes for customers in the US; • facilitating decarbonisation in the US and UK including zero carbon operation of the GB electricity system through ESO in the UK; and • continuing work on programmes to develop skills in our current and future workforce. Failure to influence future energy policy and secure In both the UK and the US, we strive to maintain a good understanding of the regulatory agenda and satisfactory regulatory agreements. emerging issues, so that robust, public interest aligned responses can be selected and developed in good time. Our reputation as a competent operator of important national infrastructure is critical to our ability to do this. We have plans and governance structures in place to address specific issues such as RIIO-2 and US rate case filings. Risk trend: Increasing due to energy regulatory environment Ongoing work to support our regulatory relationships includes: (18/19 Increasing Risk) • our internal teams focused on messaging around gas capacity, large-scale renewables, utilities of the future and electric vehicles; • establishment of US and UK Regulatory Steering Committees; and • increased focus on understanding the needs and expectations of all our stakeholders through regulatory relationship surveys, investor surveys and review of media sentiment. Failure to respond to shifts in societal and political Processes and resources are in place to review, monitor and influence perceptions of our business and expectations and perceptions leads to threats to our reputation by: the Company’s licence to operate and ability to • enhancing and consolidating our digital roadmap and social channels; achieve its objectives. • developing an internal forum to increase management of stakeholder and media reputational issues; • delivering on our commitment to be a responsible business (see pages 48 – 56); • implementing campaigns to recruit for the future – e.g. ‘the job that can’t wait’, (see page 1); and Risk trend: Increasing due to current political environment • promoting partnerships and discussions of decarbonisation across the jurisdictions where we operate. (18/19 Increasing Risk) These processes, along with twice-yearly Board strategy discussions, are reviewed regularly to ensure they continue to support our short- and long-term strategy. We regularly monitor and analyse market conditions, competitors and their potential. Failure to adequately anticipate and minimise the NGP, our central innovation function, is developing our strategy with regards to new technology and adverse impact from disruptive forces such as monitoring disruptive technology and business model trends, acting as a bridge for emerging technology technology and innovation on our business model. into the core regulated businesses and business development teams. In addition, NGP is investing in emerging start-up companies and in venture funds and the NGV function will further the focus on new strategies, business development and technology and innovation. Risk trend: Neutral (18/19 Neutral) 24
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Internal control and risk management Operational risks Operational risks relate to the losses resulting from inadequate or failed internal processes, people and systems, or due to external events. These risks normally fall within our low-risk appetite level as there is no strategic benefit from accepting the risk, as it will not be in line with our vision and values. Our operational principal risks have a low likelihood of occurring. However, should an event occur, without effective prevention or mitigation controls, it would be likely to have a high level of impact. The risk owners, executive leaders, and their teams develop and monitor actions to control the risks. Operational risks are managed through policy, standards, procedure-based controls, active prevention and monitoring. The operational risks link to our strategic priority to ‘Optimise Performance’. Principal risk assessment includes reasonable worst-case scenario testing i.e. gas transmission pipeline failure, loss of licence to operate, cyber security attack – and the financial and reputational impact should a single risk or multiple risks materialise. Risks Actions taken by management Failure to prepare and respond to significant The COVID‑19 pandemic impacts multiple areas of our business, therefore our response to this risk disruptive factors caused by the COVID-19 involves a comprehensive plan, to support the safety of our workforce and customers, that is frequently pandemic because of poor development and revised and adjusted due to the dynamic profile of this risk. This includes: execution of our response plans resulting in an • people: monitoring of absence and wellbeing, and monitoring of current working practices; employee impact on our ability to maintain our networks, 360 degree communications planning; provide service, support our people and meet our liquidity/financial targets, as well as reputational • operations: prioritisation of critical processes, sequestering of essential staff and redeployment of and regulatory obligations. workforce, assessment of our supply chain resilience and analysis of network availability and reliability; • stakeholders: frequent engagement with internal and external stakeholders, including customers, shareholders and regulators; • safety procedures: customer and workforce engagement for essential repairs, monitoring of agreed *Risk trend: Increasing regulatory deviations; and (New Principal Risk) • finance: monitoring of cash flow levels, review and where necessary suspension of customer collection *Risk trend for COVID-19 was assessed outside our standard arrangements; access to short and long-term debt facilities. assessment period due to the risk being added as a principal risk after 31 March 2020. Catastrophic cyber security incident caused by We continue to commit significant resources and financial investment to maintain the integrity and security the abuse of digital systems leading to the loss of of our systems and our data by continually investing in strategies that are commensurate with the confidentiality, availability and integrity. changing nature of the security landscape. This includes: • collaborative working with UK and US government agencies including the Department for Business, Energy and Industrial Strategy (BEIS), the Centre for Protection of National Infrastructure (CPNI) and the Department for Homeland Security on key cyber risks; Risk trend: Increasing due to the dynamic nature of the cyber • development of an enhanced critical national infrastructure security strategy; security threat • our involvement in the US with developing the National Institute of Standards and Technology (18/19 Increasing Risk) Cyberspace Security Framework; • awareness, training and self-assessments; and • cyber response incident procedures and contingency planning. Catastrophic asset failure results in a significant This year, we continued to focus on risk mitigation actions designed to reduce the risk and help meet our safety and/or environmental event. business objectives. We incorporated monitoring action status into various business processes and senior leadership including: • putting a Group-wide process safety management system in place to make sure a robust and consistent framework of risk management exists across our higher hazard asset portfolio, with Risk trend: Neutral safety‑critical assets clearly identified on the asset register; (18/19 Neutral) • implementing asset management and data management standards with supporting guidelines to provide clarity around what is expected, with a strong focus on what we need in place to keep us safe, secure and legally compliant; and • in support of this, we developed a capability framework to make sure our workforce have the appropriate skills and expertise to meet the performance requirements in these standards. Failure to predict and respond to a significant We continue to apply a holistic approach encompassing preventative and mitigating actions including disruption of energy that adversely affects our pre-emptive measures to maintain network reliability such as: customers and/or the public. • flood contingency plans for substations; • system operator supply and demand forecasting; • our UK GT Winter Preparedness Plan; Risk trend: Increasing • US gas mains replacement programmes; (18/19 Neutral) • US storm hardening programme; and • diversity of suppliers in our US gas procurement. Should energy flow disruptions occur: • business continuity and emergency plans are in place and practised, including Black Start testing; and • critical spares are maintained to ensure we can quickly and effectively respond to a variety of incidents – storms, physical and cyber-related attacks, environmental incidents and asset failures. The ESO considered the significant impact on the UK power networks on responding to the unprecedented decrease in energy consumption and demand during the COVID-19 restrictions. Failure to adequately identify, collect, use and keep Controls for our IT processes have been redefined and are aligned to the National Institute of Standards private the physical and digital data required to and Technology (US) and the Network Information and System Regulations (UK). support the Company’s operations and future growth. We continue to progress and improve our data management processes including: • implementation of our data and other related business management standards; Risk trend: Decreasing • data governance councils for UK and US regions; and (18/19 Decreasing Risk) • increased levels of data leadership and capability with the recruitment of a Chief Data Officer and establishment of an associated function. 25
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Viability statement The Board’s consideration of the longer-term viability of the Company The following factors have been taken into account in making this decision: is an extension of our business planning process. The process includes • we have reasonable clarity over a five-year period, allowing an financial forecasting, a robust risk management assessment, regular appropriate assessment of our principal risks to be made; budget reviews as well as scenario planning incorporating industry • in order to test the five-year period, the Board considered whether trends, considering any emerging issues and economic conditions. there are specific, foreseeable risk events relating to the principal Our business strategy aims to enhance our long-term prospects by risks that are likely to materialise within a five to ten-year period, and making sure our operations and finances are sustainable. which might be substantial enough to affect the Company’s viability and therefore should be taken into account when setting the Utilising our established top-down/bottom-up risk management assessment period; and process, the principal risks facing the Company as described on pages 23 – 25 are identified, monitored and challenged. Over the course of the • each principal risk was considered for inclusion within the testing and, year, the Board has considered the principal risks shown in the table where appropriate, a reasonable worst-case scenario was identified below in detail. The Board considered the preventative and mitigating and assessed for impacts on operations and/or financial performance controls and risk management actions in place and discussed the over the five-year assessment time period as detailed below. potential financial and reputational impact of the principal risks against our ability to deliver the Company’s business plan. These factors were In addition to testing individual principal risks, the impact of a cluster also carefully reassessed in light of the COVID-19 factors. of the principal risks materialising over the assessment period was also considered. COVID-19 and our management of the issues the The assessment of the potential impact of our principal risks on the business faces during the pandemic, was also noted as an emerging longer-term viability of the Company tests the significant solvency and risk that resulted in the addition of a new principal risk. Recent external liquidity risks involved in delivering our business objectives and priorities. developments such as the Northeast Supply Enhancement (NESE) After careful consideration of the uncertain and dynamic COVID‑19 Pipeline and events in the downstate NY gas business regarding National events, including reviewing the fast-changing external factors and Grid’s licence and the ability to provide continuing supply to our customers their cumulative impact in the medium and long term, and other were also considered along with the ongoing regulatory environment in considerations including: our long-term business model, high-quality, our operating jurisdictions. We also carefully considered the impact of long-term assets and stable regulatory arrangements; the Board’s our response to COVID-19 on our business plans and financial models. stewardship responsibilities; and the Company’s ability to model a range In the opinion of the Board, the reasonable worst‑case scenarios of severe but plausible reasonable worst-case scenarios, the Board represent the estimated cumulative impact with principal risk clusters. concluded that it remains appropriate to consider a five-year timeframe over which we should assess the long-term viability of the Company. The reputational and financial impacts for each scenario were considered (to the nearest £500 million). The principal risk relating to leadership capacity was not tested as the Board did not feel this would threaten the viability of the Company within the five-year assessment Operational impacts period. Further, considering the breadth of ramifications COVID-19 may have across different areas of the Company and its consequential power Scenario 1 – A significant cyber-attack. to exacerbate the negative consequences of other principal risks, any potential undesired outcome of COVID-19 was considered in Scenario 2 – Significant supply disruption event occurring in the aggregation with other principal risks in the scenarios. US leading to loss of licence. The Board assessed our reputational and financial headroom and Scenario 3 – A catastrophic gas pipeline failure in the US. reviewed principal risk testing results against that headroom. The testing of risk groups and clusters also included an assessment of the impact Scenario 4 – Emerging technology leads to significant numbers of upon the business plan, as adjusted for expected impacts of COVID-19. people going ‘off grid’. No principal risk or cluster of principal risks was found to have an impact on the viability of the Company over the five-year assessment period. Scenario 5 – Significant physical damage due to climate change Preventative and mitigating controls in place to minimise the likelihood of events in the US and the UK along with reputational damage occurrence and/or financial and reputational impact are contained within through failure to adjust our business model to meet customer our assurance system. expectations. In assessing the impact of the principal risks on the Company, including Performance impacts our two new principal risks of Climate Change and Response to Scenario 6 – The breach of personal data information. COVID-19, the Board has considered the fact that we operate in stable markets and the robust financial position of the Group, including the Scenario 7 – The result of a ‘Hard Brexit’ in the UK. ability to sell assets, raise capital and suspend or reduce the payment of dividends. It has also considered Ofgem’s legal duty to have regard to Scenario 8 – A poor outcome to RIIO-2 negotiations. the need to fund the licensed activities of National Grid Gas plc, National Grid Electricity System Operator Limited and National Grid Electricity Cluster impacts Transmission plc. Scenario 9 – A significant supply disruption event in the US leading to loss of licence coupled with a ‘Hard Brexit’ and challenging Each Director was satisfied that they had sufficient information to judge RIIO-2 results in the UK. the viability of the Company. Based on the assessment described above and on pages 22 – 25 the Directors have a reasonable expectation that Scenario 10 – Failure to adequately respond to the COVID-19 the Company will be able to continue operating and meet its liabilities pandemic including triggering a gas pipeline failure and supply over the period to May 2025. disruption in the US leading to loss of licence coupled with challenging RIIO-2 results in the UK. 26
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Viability statement Principal risk Viability scenario Matters considered by the Board Major cyber security breach Scenario 1 – A significant cyber attack. The Board received updates on cyber security in: of business, operational • March 2019; technology and/or CNI systems/data. • July 2019; • December 2019; and • March 2020. Failure to predict and respond Scenario 2 – An extended outage in the US. Two Board Strategy sessions held during the year: to a significant disruption of • bi-annual overviews; energy that adversely affects Included in the cluster testing of Scenario 9 our customers and/or and 10. • review of the gas business strategies; the public. • external reviews of operational issues within the US gas business; and • review of the sequence of events on Friday 9 August. Catastrophic asset failure Scenario 3 – A gas transmission pipeline • the Board reviews the current safety performance of the Company at resulting in a significant safety failure in the US. each meeting; and/or environmental event. • safety is a fundamental priority and is looked at in detail by the Safety, Included in the cluster testing of Scenario 10. Environment and Health Committee (SEH Committee) who have delegated authority from the Board; and • our Electricity and Gas Engineering Reports to the SEH Committee also provide progress updates on our asset management improvements. Failure to adequately identify, Scenario 5 – The breach of personal • annual updates on the Company’s information systems. collect, use and keep private data information. the physical and digital data required to support Company operations and future growth. Failure to build sufficient N/A • bi-annual updates on people matters; leadership capability and • considered capabilities to support the delivery of strategic priorities; capacity (including succession and planning) required to deliver our vision and strategy. • Nominations Committee: considers the structure, size and composition of the Board and committees and succession planning. It identifies and proposes individuals to be Directors and establishes the criteria for any new position. Failure to deliver any Scenario 6 – The state ownership of The Board received updates and reviews of: customer, investor and wider the energy sector in the UK. • the impact of Hard Brexit and access to the Internal Energy Market; stakeholder propositions due to increased political • proposed response to the Labour Party’s proposal to nationalise and economic uncertainty. UK’s assets; • implementation of measures to strengthen ability to obtain fair price for UK assets if potential threat of state ownership materialised; and • UK and US regulatory strategies. Failure to influence Scenario 7 – A poor outcome of The Board received updates and reviews of: future energy policy and RIIO‑2 negotiations. • US regulatory strategy; secure satisfactory regulatory agreements. Included in the cluster testing of Scenario 9 • UK regulatory strategy; and 10. • UK ESO regulatory strategy; • key regulatory policy issues for 2019/20; and • RIIO-2. Failure to respond to the Scenario 4 – Emerging technology leading to • bi-annual updates from National Grid Partners; and asset failure resulting in a significant numbers of people going ‘off grid’. • during the year, Board strategy sessions considered digital strategy significant safety and/or as well as technology and innovation. environmental event. Failure to respond to Included in the cluster testing of Scenario 9 • Board briefings including a weekly update from the CEO and CFO on disruptive factors caused and 10. our crisis management response; by the COVID-19 pandemic • COVID-19 updates on operational issues, people absences and resulting in an impact on our wellbeing to the Board; and Finance Committee consideration networks, our people and of liquidity; our financial targets. • review of our Business Continuity Planning response and effectiveness of the Crisis Management controls to the SEH Committee; and • briefings from the CFO and finance team on possible financial impacts including a range of scenario modelling and planning. Failure to respond to physical N/A • Board briefings reviewing our sustainability metrics to reflect and and transitional impacts of track our impact and progress; and climate change and • disclosures with the TCFD including physical and transitional demonstrate our leadership scenario analysis. within the energy sector. 27
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Financial review Summary of Group financial performance Summary of Group financial performance for the year ended Performance management framework 31 March 2020 In managing the business, we focus on various non-IFRS measures Financial summary for continuing operations which provide meaningful comparisons of performance between years, monitor the strength of the Group’s balance sheet as well as profitability and reflect the Group’s regulatory economic arrangements. Such £m 2019/20 2018/19 Change alternative and regulatory performance measures are supplementary to, Statutory results: and should not be regarded as a substitute for, IFRS measures, which we refer to as statutory results. We explain the basis of these measures Operating profit 2,780 2,870 (3)% and, where practicable, reconcile these to statutory results in ‘Other unaudited financial information’ on pages 240 – 249. Profit after tax 1,274 1,502 (15)% Earnings per share (pence) 36.8p 44.3p (17)% Specifically, we measure the financial performance of the Group from different perspectives: Dividend per share (pence), including proposed final dividend 48.57p 47.34p 3% • Capital investment and asset growth: Currently we expect to invest Capital expenditure 5,079 4,321 18% c. £5 billion per year. Alternative performance • Accounting profit: In addition to statutory IFRS measures we measures: distinguish between adjusted results, which exclude exceptional items and remeasurements, and underlying results, which further Underlying operating profit 3,454 3,427 1% take account of: (i) volumetric and other revenue timing differences Underlying profit after tax 2,015 1,998 1% arising from our regulatory contracts, and (ii) major storm costs, which are recoverable in future periods, neither of which give rise Adjusted earnings per share (pence) 55.2p 59.0p (6)% to economic gains or losses. In doing so, we intend to make the Underlying earnings per share (pence) 58.2p 58.9p (1)% impact of such items clear to users of the financial information in this Annual Report. Underlying dividend cover 1.2 1.2 – • Economic profit: Measures such as Return on Equity and Value Capital investment 5,405 4,506 20% Added take account of the regulated value of our assets and of our regulatory economic arrangements to illustrate the returns Retained cash flow/adjusted net debt 9.2% 9.4% 20bps generated on shareholder equity. Regulatory performance • Balance sheet strength: Maintaining a strong investment grade measures: credit rating allows us to finance our growth ambitions at a competitive rate. Hence, we monitor credit metrics used by the Asset growth 9.0% 7.2% 180bps major rating agencies to ensure we are generating sufficient cash Group Return on Equity 11.7% 11.8% (10)bps flow to service our debts. Value Added 2,040 2,071 (1)% This balanced range of measures of financial well-being informs our Regulatory gearing 63% 66% (300)bps dividend policy, which is to grow the dividend per share at least in line with UK Retail Price Index inflation for the foreseeable future. We explain the basis of these alternative performance measures and regulatory performance measures and, where practicable, reconcile them to statutory results on pages 240 – 249. Initial assessment of the potential impact of the COVID-19 pandemic on the Group’s position and results The Group’s statutory results for the year were adversely impacted by The COVID-19 pandemic has affected our reported results in the year. exceptional charges. The impact on statutory EPS as a result of these To date, we have experienced a more significant impact in our US charges is presented after each item. These included additional businesses than in our UK businesses, mainly due to our large US environmental provisions and a reduction in the discount rate applied customer base. The most significant impact on our results for 2019/20 to certain provisions across the Group (8.6p)and a deferred tax charge is the increase in the bad debt charge, which rose from £181 million last due to the reversal of the expected reduction in the UK corporation year to £234 million this year for the Group as a whole, and increased in tax rate originally enacted by the Finance Act 2016 (5.6p). Last year’s the US from £146 million last year to £231 million this year. The increase statutory results were adversely impacted by exceptional charges in the US charge reflects the impact of moratoriums in response to incurred in respect of the Massachusetts Gas labour dispute (6.2p), regulatory instructions as requested by regulatory authorities in the US our UK and US cost efficiency and restructuring programme (4.7p) and states in which we operate, which restrict our ability to collect debts due. the impairment of development costs in respect of the termination of However, we remain committed to continuing to supply our customers the NuGen and Horizon nuclear connection projects (3.3p). and termination of customer connections has been cancelled. Statutory operating profit was also adversely impacted by commodity Additionally, in the US, lower gas volumes (reduced customer demand) remeasurement losses of £125 million in 2019/20 (2018/19: £52 million increased timing outflows in March 2020, with warm weather also a factor gains) from mark-to-market movements on derivatives which are used in this increase. In our UK Transmission businesses, the disruption has to hedge the cost of buying wholesale gas and electricity on behalf of resulted in a pause to some capex work and although some adaptations to our US customers. the new environment have been required, there has been no significant cost increase in 2019/20. COVID-19 has not caused a significant disruption to Underlying operating profit was up 1% as higher rate case revenues our NGV businesses. In total, other than the US bad debt charge, there has in our US Regulated businesses and lower operating costs more than been a relatively small impact on our underlying results for 2019/20 and offset higher deferrable storm costs, higher bad debts costs, increased incremental operating costs of around £10 million have been incurred as depreciation, the non-recurrence of favourable US legal settlements a direct consequence of the disruption caused by the pandemic. and sale of our Fulham property site in 2018/19. The combination of these factors was partly offset by higher net financing costs, driven by For 2020/21, we expect some continuing impact, driven largely by our the implementation of IFRS 16 and higher average net debt. Underlying US operations where we are expecting (i) higher levels of bad debt, profit after tax increased by 1% and, combined with a higher share (ii) additional direct COVID-19 costs, and (iii) deferral of rate increases. count, resulted in a 1% decrease in underlying EPS to 58.2p. However, given regulatory mechanisms and precedents, we expect to recover a large part of this. In the UK, we do expect to see some limited Capital investment of £5.4 billion increased our asset growth to 9%. cost impact from COVID-19. We are also currently working with regulators We delivered Value Added (our measure of economic profit) of £2.0 on support mechanisms for our customers, which may lead to cash flow billion in 2019/20, slightly lower than in 2018/19. Group RoE of 11.7% impacts in 2020/21, but we would ultimately expect to be recoverable. was comparable to 11.8% in 2018/19, reflecting the higher new rate Therefore whilst COVID-19 will impact earnings and cash flow in the short allowances in our US businesses, while 2018/19 benefited from the term, we currently anticipate limited economic impact longer term. Fulham sale and legal settlements. RCF/net debt at 9.2% remained However, there could be a range of impacts on cash flows and earnings, consistent with the Company’s strong investment grade credit rating. which could be different from our current assessment. The recommended full-year dividend per share of 48.57p is in line with policy and is covered 1.2 times by underlying EPS. 28
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Financial Review The adoption of IFRS 16 ‘Leases’ during the year increased our net debt by £474 million, with a corresponding increase in right-of-use assets recorded on the balance sheet. This standard has resulted in lower operating costs within our businesses, offset by a higher depreciation charge and a higher interest cost. Profitability and earnings The table below reconciles our statutory profit measures for continuing operations, at actual exchange rates, to adjusted and underlying versions. Reconciliation of profit and earnings from continuing operations Operating profit Profit after tax Earnings per share £m 2019/20 2018/19 Change 2019/20 2018/19 Change 2019/20 2018/19 Change Statutory results 2,780 2,870 (3)% 1,274 1,502 (15)% 36.8p 44.3p (17)% Exceptional items 402 624 491 480 14.2p 14.2p Remeasurements 125 (52) 148 19 4.2p 0.5p Adjusted results 3,307 3,442 (4)% 1,913 2,001 (4)% 55.2p 59.0p (6)% Timing 147 (108) 102 (72) 3.0p (2.1)p Major storm costs – 93 – 69 –p 2.0p Underlying results 3,454 3,427 1% 2,015 1,998 1% 58.2p 58.9p (1)% Exceptional income/(expense) from continuing operations Impact on Impact on Impact on operating profit profit after tax EPS £m 2019/20 2018/19 2019/20 2018/19 2019/20 2018/19 Changes in environmental provision (402) – (299) – (8.6)p – Massachusetts Gas labour dispute – (283) – (209) – (6.2)p UK and US cost efficiency and restructuring programme – (204) – (160) – (4.7)p Impairment of nuclear connections development costs – (137) – (111) – (3.3)p Deferred tax arising on the reversal of the reduction in UK corporation tax rate – – (192) – (5.6)p – Total (402) (624) (491) (480) (14.2)p (14.2)p This year we have classified the following items as exceptional: • Changes in environmental provisions: a £326 million net increase in the provision for estimated costs and cost sharing allocations borne by the Company associated with environmental clean-up related to former manufacturing gas plant facilities, formerly owned or operated by the Group or its predecessor companies and additionally, £76 million for the impact of a reduction of 0.5% in the real discount rate applied to the environmental provisions across the Group; and • Deferred tax arising on the reversal of the reduction in UK corporation tax rate: The Finance Act 2016 reduced the UK corporation tax rate to 17% with effect from April 2020. A £192 million deferred tax charge has been made, following the reversal of this legislation, which retains the UK corporation tax rate at 19%, resulting in an increase in deferred tax liabilities. In the prior year we classified the £283 million cost arising as a result of the Massachusetts Gas labour dispute as exceptional, along with the £204 million charge relating to the UK and US cost efficiency and restructuring programme and the £137 million impairment charge relating to nuclear connection development costs. We also exclude certain unrealised gains and losses on mark-to-market financial instruments from adjusted profit; see notes 5 and 6 to the financial statements for further information. Net remeasurement losses of £125 million on commodity contract derivatives were incurred in addition to net remeasurement losses of £64 million on financing-related instruments and a further £1 million of remeasurement losses related to our share of post-tax results of joint ventures. 29
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Financial review continued Timing over/(under-recoveries) UK Electricity Transmission In calculating underlying profit, we exclude regulatory revenue timing over- and under-recoveries and major storm costs. Under the Group’s regulatory £m 2019/20 2018/19 Change frameworks, most of the revenues we are allowed to collect each year are governed by regulatory price controls in the UK and rate plans in the US. Revenue 3,702 3,351 10% If more than this allowed level of revenue is collected, the balance must be Operating costs (2,386) (2,573) (7)% returned to customers in subsequent years; likewise, if less than this level of revenue is collected, the balance will be recovered from customers in Statutory operating profit 1,316 778 69% subsequent years. We also collect revenues from customers and pass Exceptional items 4 237 (98)% these on to third parties (e.g. NYSERDA). These variances between allowed and collected revenues and timing of revenue collections for pass-through Adjusted operating profit 1,320 1,015 30% costs give rise to over- and under-recoveries. Timing (146) 77 (290)% The following table summarises management’s estimates of such Underlying operating profit 1,174 1,092 8% amounts for the two years ended 31 March 2020. All amounts are Analysed as follows: shown on a pre-tax basis and, where appropriate, opening balances are restated for exchange adjustments and to correspond with Net revenue 2,174 1,954 11% subsequent regulatory filings and calculations. All amounts are translated at the current year average exchange rate of $1.29:£1. Regulated controllable costs (306) (332) (8)% Post-retirement benefits (48) (49) (2)% £m 2019/20 2018/19 Other operating costs (31) (65) (52)% Balance at start of year (restated) 403 301 Depreciation and amortisation (469) (493) (5)% In-year (under)/over-recovery (147) 111 Adjusted operating profit 1,320 1,015 30% Balance at end of year 256 412 Timing (146) 77 (290)% Timing over-recoveries of £146 million in UK Electricity Transmission Underlying operating profit 1,174 1,092 8% were more than offset by timing under-recoveries of £54 million in UK Gas Transmission and timing under-recoveries of £239 million in US Although we legally separated our NG ESO plc business from NGET plc Regulated in 2019/20. In calculating the post-tax effect of these timing during the year, we continue to report these two businesses in aggregate, recoveries, we impute a tax rate, based on the regional marginal tax within our UK Electricity Transmission segment. rates, consistent with the relative mix of UK and US balances. For the year ended 31 March 2020 this tax rate was 31%. UK Electricity Transmission statutory operating profit increased by £538 million in the year. In 2018/19, there were £137 million of exceptional Major storm costs costs related to the cancellation of nuclear connections (net of termination We also take account of the impact of major storm costs in the US income) and £100 million in relation to our cost-efficiency and restructuring where the aggregate amount is sufficiently material in any given year. programme. Timing over-recoveries of £146 million in 2019/20 compared Such costs (net of certain deductibles) are recoverable under our rate to under-recoveries of £77 million in the prior year primarily due to the plans but are expensed as incurred under IFRS. Accordingly, where the collection of prior year balances. total incurred cost (after deductibles) exceeds $100 million in any given year, we exclude the net costs from underlying earnings. In 2019/20, Adjusted operating profit increased by £305 million (30%), driven by although we experienced a number of storms, the $98 million of £223 million favourable year-on-year timing over-recoveries. Underlying deferrable storm costs we incurred (in aggregate) fell just below this operating profit increased by 8%. Net revenues (excluding timing) were threshold. During 2018/19 we experienced bad weather events across relatively flat, with higher re-opener allowances for cyber and data centres, the year, with storms unusually occurring during April and May as well funding for ESO legal separation and the RPI uplift, being fully offset by as in the winter months. In that year the total net costs exceeded the output and allowances true-up in the annual iteration, along with lower ESO $100 million threshold and were excluded from our underlying results. incentive income. Regulated controllable costs were lower, with efficiency savings and lower Electricity System Operator separation costs, partly offset Segmental operating profit by higher IT costs and inflation. Post-retirement benefit costs were little changed year-on-year. Other costs were lower, mainly relating to 2018/19’s The tables below set out operating profit on adjusted and underlying bases. provisions against income recognised on early termination of connections. Adjusted operating profit The decrease in depreciation and amortisation charges reflects a benefit from the release of provisions related to prior years. £m 2019/20 2018/19 Change UK Gas Transmission UK Electricity Transmission 1,320 1,015 30% UK Gas Transmission 348 303 15% £m 2019/20 2018/19 Change US Regulated 1,397 1,724 (19)% Revenue 927 896 3% NGV and Other activities 242 400 (40)% Operating costs (580) (629) (8)% Total 3,307 3,442 (4)% Statutory operating profit 347 267 30% Exceptional items 1 36 (97)% Underlying operating profit Adjusted operating profit 348 303 15% £m 2019/20 2018/19 Change Timing 54 38 42% UK Electricity Transmission 1,174 1,092 8% Underlying operating profit 402 341 18% UK Gas Transmission 402 341 18% Analysed as follows: US Regulated 1,636 1,594 3% Net revenue 685 669 2% NGV and Other activities 242 400 (40)% Regulated controllable costs (127) (144) (12)% Total 3,454 3,427 1% Post-retirement benefits (19) (27) (30)% Other operating costs (20) (14) 43% The statutory operating profit for all three reportable segments fell in the year primarily as a result of the £402 million exceptional charges referred Depreciation and amortisation (171) (181) (6)% to earlier. The reasons for the movements in underlying operating profit Adjusted operating profit 348 303 15% are described in the segmental commentaries below. Unless otherwise stated, the discussion of performance in the remainder of this financial Timing 54 38 42% review focuses on underlying results. Underlying operating profit 402 341 18% 30
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Financial Review UK Gas Transmission statutory operating profit increased £80 million in NGV and Other activities the year. In 2018/19, £36 million of costs in relation to our efficiency and restructuring programme were treated as exceptional. Timing under- recoveries of £54 million in 2019/20 compared to £38 million in the prior £m 2019/20 2018/19 Change year reflecting lower than expected volumes and higher shrinkage costs. Statutory operating profit 237 400 (41)% Adjusted operating profit increased by £45 million (15%), including Exceptional items 5 – n/a £16 million year-on-year adverse timing under-recoveries. Underlying Adjusted operating profit 242 400 (40)% operating profit increased by 18%. Net revenue (excluding timing) was higher, reflecting the re-opener allowances for cyber and data centres, Timing – – n/a the RPI uplift and the impact of 2018/19’s Avonmouth pipeline project Underlying operating profit 242 400 (40)% revenue allowance clawback. Regulated controllable costs were £17 million lower, driven by efficiency savings. Post-retirement costs were Analysed as follows: lower, mainly related to the 2018/19 Guaranteed Minimum Pension (GMP) ruling. Other costs were higher principally due to the non- NGV 269 263 2% recurrence of provision releases in 2018/19. Property 63 181 (65)% The depreciation charge was lower than in 2018/19 as a result of an Corporate and Other activities (90) (44) 105% additional charge in the prior period following a detailed review of asset lives. Underlying operating profit 242 400 (40)% US Regulated National Grid Ventures’ statutory operating profits were broadly in line with 2018/19, with higher use of our LNG import terminal at Grain and £m 2019/20 2018/19 Change lower business development costs, offset by lower revenues from our declining meter population and costs related to the Geronimo business. Revenue 9,205 9,846 (7)% In ‘other’ activities, we incurred net costs of £27 million, compared to Operating costs (8,325) (8,421) (1)% a net profit of £137 million in 2019/20. The performance of the Property Statutory operating profit 880 1,425 (38)% business was lower than prior year reflecting the sale of the Fulham site to the St William joint venture in 2018/19. Corporate and other activities Exceptional items 392 351 12% did not include last year’s benefit of £95 million of legal settlements Remeasurements 125 (52) (340)% to recover costs associated with a US systems implementation. The National Grid Partners operating loss of £11 million was £3 million higher Adjusted operating profit 1,397 1,724 (19)% than in 2018/19. Timing 239 (223) (207)% Financing costs and taxation Major storm costs 93 (100)% – Net finance costs Underlying operating profit 1,636 1,594 3% Net finance costs (excluding remeasurements) for the year were 6% higher than last year at £1,049 million, with the £56 million increase Analysed as follows: mostly driven by the impact of IFRS 16, lower capitalised interest and Net revenue 5,745 5,868 (2)% adverse foreign exchange movements, partly offset by interest on tax settlements. The effective interest rate of 4.1% on net debt was 20bps Regulated controllable costs (1,871) (1,895) (1)% lower than the prior year rate of 4.3%. Post-retirement benefits (95) (94) 1% Joint ventures and associates Bad debt expense (231) (146) 58% The Group’s share of net profits from joint ventures and associates increased as a result of St William’s first year of profits. Our Minnesota- Other operating costs (1,296) (1,309) (1)% based joint venture, Emerald Energy Ventures LLC, which we acquired Depreciation and amortisation (855) (700) 22% in July also contributed £1 million of post-tax earnings in 2019/20. Adjusted operating profit 1,397 1,724 (19)% Tax Timing 239 (223) (207)% The underlying effective tax rate of 19.9% was 30bps higher than last year. The tax charge for the year benefited from the release of reserves Major storm costs – 93 (100)% following settlement of tax audits relating to earlier years and gains Underlying operating profit 1,636 1,594 3% on chargeable disposals which are offset by previously unrecognised capital losses. In the prior year, significantly higher gains on property US Regulated statutory operating profit fell partly as a result of disposals that were offset by previously unrecognised capital losses the £177 million year-on-year adverse swing in commodity contract resulted in a lower underlying effective tax rate. The Group’s tax strategy remeasurements. Exceptional charges also increased reflecting is detailed later in this review. £392 million environmental costs detailed above. In 2018/19, £283 million of exceptional costs were incurred for the Massachusetts Discontinued operations Gas labour dispute in addition to £68 million of restructuring costs. We completed the sale of our remaining 39% interest in Quadgas Timing under-recoveries of £239 million in 2019/20 compared to timing HoldCo Limited, the holding company for the Cadent gas networks, over-recoveries of £223 million in 2018/19, driven by revenue decoupling, in June 2019 for approximately £2 billion. As described further in commodity recoveries and lower net energy efficiency collections note 10 to the financial statements, we have treated all items of contributed to a reduction in statutory and adjusted operating profit. income and expense relating to the disposal of Quadgas HoldCo Limited within discontinued operations. Adjusted operating profit decreased by £327 million (19%), including £462 million year-on-year adverse timing under-recoveries, partly offset by £93 million of deferrable storm costs qualifying as major (in aggregate) in 2018/19. Underlying operating profit increased by 3%. Net revenues (excluding timing) increased by £257 million as the benefits of rate case increments (including KEDNY, KEDLI and Niagara Mohawk) and £82 million from foreign exchange movements. A stronger US dollar increased underlying operating profit by £23 million in the year. US Regulated controllable costs decreased as a result of cost efficiencies (principally from benefit of restructurings and contract management), partly offset by workload increases and inflation. Bad debt related costs increased by £85 million, driven by £117 million additional provision for receivables related to the impact of COVID-19. Depreciation and amortisation increased due to the growth in assets. Other costs were higher due to increased property taxes and higher storm costs partly offset by lower cost of removal. Deferrable storm costs were removed from underlying results last year. 31
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Financial review continued Capital investment, asset growth and value added Value added is a measure that reflects the value to shareholders of our dividend and the growth in National Grid’s regulated and non-regulated assets (as measured in our regulated asset base, for regulated entities), net of the growth in overall debt. It is a key metric used to measure our performance and underpins our approach to sustainable decision-making and long-term management incentive arrangements. A key part of our investor proposition is growth in our regulated asset base. The regulated asset base is a regulatory construct, representing the invested capital on which we are authorised to earn a cash return. By investing efficiently in our networks, we add to our regulatory asset base over the long-term and this in turn contributes to delivering shareholder value. Our regulated asset base comprises our regulatory asset value in the UK, plus our rate base in the US. We also invest in related activities that are not subject to network regulation and this further contributes to asset growth. Capital investment Capital investment comprises capital expenditure in critical energy infrastructure, equity investments, funding contributions and loans to joint ventures and associates, the acquisition of Geronimo during 2019/20 and, in the case of National Grid Partners, investments in financial assets. At actual exchange rates At constant currency £m 2019/20 2018/19 Change 2019/20 2018/19 Change UK Electricity Transmission 1,043 925 13% 1,043 925 13% UK Gas Transmission 249 308 (19)% 249 308 (19)% US Regulated 3,228 2,650 22% 3,228 2,688 20% NGV and Other activities 885 623 42% 885 626 41% Total 5,405 4,506 20% 5,405 4,547 19% Investment in UK Electricity Transmission increased primarily due to Hinkley-Seabank and London Power Tunnels 2 spend. In UK Gas Transmission, investment reduced due to completion of the Feeder 9 gas pipeline replacement project and lower asset health spend. In the US, investment was up 20% on a constant currency basis, reflecting increased capital expenditure in New York (gas pipe replacement and mandated gas works) and higher spend in Massachusetts due to 2018/19’s disruption to capex spend caused by the labour dispute. Investment in National Grid Ventures continued to increase with ongoing construction on three new subsea interconnectors, IFA 2 (France), North Sea Link (Norway) and Viking Link (Denmark) and the acquisition of Geronimo, a renewable energy business based in Minneapolis, Minnesota in July 2019 for total consideration of £209 million. In addition, a total amount of £61 million (including joint ventures) was invested by National Grid Partners in the year. Asset growth and value added To help readers’ assessment of the financial position of the Group, the table below shows an aggregated position for the Group, as viewed from a regulatory perspective. The measures included in the table below are calculated in part from financial information used to derive measures sent to and used by our regulators in the UK and US, and accordingly inform certain of the Group’s regulatory performance measures, but are not derived from, and cannot be reconciled to, IFRS. There are certain significant assets and liabilities included in our IFRS balance sheet, which are treated differently in the analysis below, and to which we draw readers’ attention. These include the £1.5 billion reduction in IFRS deferred tax liabilities we recognised in relation to US tax reform in 2017/18, which, from a regulatory perspective, remains as a future obligation. The UK RAV is higher than the IFRS value of property, plant and equipment and intangibles, principally because of the annual indexation (inflationary uplift) adjustment applied to RAV, compared to the IFRS value of these assets (held at amortised cost). In addition, under IFRS we recognise liabilities in respect of US environmental remediation costs, and pension and OPEB costs. For regulatory purposes, these are not shown as obligations because we are entitled to full recovery of costs through our existing rate plans. In our Value Added calculation, we have recognised an asset to reflect expected future recovery of the £117 million COVID-19 related provision for bad and doubtful debts that we have included in 2019/20. Regulatory IOUs which reflect refunds due to customers in future periods are treated within this table as obligations but do not qualify for recognition as liabilities under IFRS. Adjusted net debt movements exclude proceeds from the Cadent disposal and, in 2019/20, exclude movements on derivatives which are designated in cash flow hedging arrangements and for which there is no corresponding movement in total assets and other balances. 2019/20 2018/19 31 March 31 March 31 March 31 March £m 2020 2019 Change 2019 2018 Change UK RAV 20,431 19,692 4% 19,692 19,005 4% US rate base 20,644 18,407 12% 17,56 5 16,087 9% Total RAV and rate base 41,075 38,099 8% 37,257 35,092 6% NGV and Other 4,105 3,351 23% 2,815 2,300 22% Total assets 45,180 41,450 9% 40,072 37,392 7% UK other regulated balances¹ (357) (302) (278) (474) US other regulated balances² 1,791 1,987 1,898 1,920 Other balances (514) (679) (158) (343) Total assets and other balances 46,100 42,456 3,644 41,534 38,495 3,039 Increase in goodwill 81 – Cash dividends 892 1,160 Adjusted net debt movement (2,577) (2,128) Value added 2,040 2,071 1. Includes totex-related regulatory IOUs of £411 million (2019: £519 million), over-recovered timing balances of £24 million (2019: £68 million under-recovered) and under-recovered legacy balances related to previous price controls of £78 million (2019: £149 million). 2. Includes assets for construction work-in-progress of £1,510 million (2019: £1,813 million), other regulatory assets related to timing and other cost deferrals of £642 million (2019: £189 million) and net working capital liabilities of £361 million (2019: £15 million). 32
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Financial Review Figures relating to prior periods have, where appropriate, been Cash flow generated from continuing operations was £4.9 billion, re-presented at constant currency, for opening balance adjustments £450 million higher than last year, principally due to exceptional items following the completion of the UK regulatory reporting pack process in 2018/19 and favourable working capital (mainly higher inflows from in 2019, finalisation of US balances, to reflect the impact of IFRS 16 collection of prior year winter receivables), partly offset by adverse timing and to remove the investment in Cadent. on revenues and provisions. Cash expended on investment activities increased for the reasons described above. Net interest paid increased During 2019/20, our combined regulated asset base and NGV and Other due to the growth in net debt and also higher interest income received businesses’ assets grew by £3.7 billion or 9% on a constant currency in 2018/19. The Group made net tax payments of £199 million during basis compared to an increase of 7.2% in the prior year. UK RAV growth 2019/20. A 46% scrip take-up in the year reduced the cash dividend to was 3.8% including RPI indexation of 2.6% while US rate base grew £892 million, £268 million lower than in 2018/19, when the scrip take-up strongly by 12%. was 26%. Proceeds of £1,965 million (plus £6 million of interest) from the Quadgas HoldCo Limited disposal, were partly offset by outflows for Value added, which reflects the key components of value delivery to residual provisions and accruals classified within discontinued operations. shareholders (i.e. dividend and growth in the economic value of the In 2018/19, discontinued operations included dividend and interest income Group’s assets, net of growth in net debt) was £2.0 billion in 2019/20. of £156 million from our investment in Quadgas. Non-cash movements This was slightly lower than last year’s £2.1 billion, with improved US primarily reflect changes in the sterling-dollar exchange rate, the impact returns and the impact of asset growth, offset by the loss of interest and of adopting IFRS 16 ‘Leases’, accretions on index-linked debt, finance dividend income from Cadent and higher cash tax. Of the £2.0 billion lease additions and other derivative fair value movements. value added, £0.9 billion was paid to shareholders as cash dividends and £1.1 billion was retained in the business. This measure excludes Overall, the increase in net debt was driven by continuing high levels any benefit arising from the sale of our 39% interest in Quadgas Holdco of capital investment and the impact of a stronger US dollar on the Limited. Value added per share was 58.9p compared with 61.2p translation of US dollar-denominated debt. As at 31 March 2020 in 2018/19. the Group reduced its total financial liabilities denominated in US dollars from $21 billion at the start of the year to $20 billion at 31 March 2020, as Cash flow, net debt and funding a hedge of foreign exchange movements in the value of its US businesses. Net debt is the aggregate of cash and cash equivalents, borrowings, current financial and other investments and derivatives (excluding During the year we raised over £2.9 billion of new long-term senior commodity contract derivatives) as disclosed in note 29 to the financial debt including 13 bond issues, and £1.1 billion of hybrid debt refinancing. statements. ‘Adjusted net debt’ used for the RCF/adjusted net debt The Board has considered the Group’s ability to finance normal calculation is principally adjusted for pension deficits and hybrid debt operations at the same time as funding a significant capital programme, instruments. For a full reconciliation see page 245. in light of the potential impacts of COVID-19. This includes stress-testing of the Group’s finances under a ‘reasonable worst case’ scenario and The following table summarises the Group’s cash flow for the year, consideration of levers available to ensure our businesses are adequately reconciling this to the change in net debt. financed. As a result, the Board has concluded that the Group will have adequate resources to do so. In April, we issued £0.9 billion of debt Summary cash flow statement through 2 bonds, evidencing our ability to raise new finance. In addition, as at 17 June 2020, we have £5.8 billion of undrawn committed facilities, all of which have expiry dates beyond June 2021. The three major credit £m 2019/20 2018/19 Change rating agencies – Moody’s, Standard & Poor’s (S&P) and Fitch – have all Cash generated from continuing maintained their strong investment grade ratings of National Grid plc on operations 4,914 4,464 10% stable outlook. Cash capital expenditure and Financial position acquisition of investments (5,098) (4,148) 23% The following table sets out a condensed version of the Group’s IFRS Dividends from joint ventures and balance sheet. associates 75 68 10% Business net cash flow from Summary balance sheet continuing operations (109) 384 (128)% Net interest paid (884) (846) 4% 31 March 31 March £m 2020 2019 Change Net tax (paid)/received (199) (75) 165% Goodwill and intangibles 7,528 6,953 8% Ordinary dividends (892) (1,160) (23)% Property, plant and equipment 48,770 43,913 11% Other cash movements 10 15 (33)% Assets held for sale – 1,956 n/a Net cash flow from continuing operations (2,074) (1,682) 23% Other (liabilities)/assets (349) (507) (31)% Quadgas sale proceeds 1,965 – n/a Tax balances (4,168) (4,000) 4% Discontinued operations (91) 85 (207)% Pension liabilities (953) (218) 338% Non-cash movements (1,387) (1,930) (28)% Provisions (2,654) (2,199) 21% Increase in net debt (1,587) (3,527) (55)% Net debt (28,590) (26,529) 7.8% Net debt at start of year (26,529) (23,002) 15% Net assets 19,584 19,369 1% Impact of adoption of IFRS 16 (474) – n/a Net debt at end of year (28,590) (26,529) 7.8% 33
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Financial review continued Property, plant and equipment increased as a result of the continuing Return on Equity capital investment programme, foreign exchange gains and the impact of adopting IFRS 16 ‘Leases’. Assets held for sale comprised our 39% interest in Quadgas, which was sold in June 2019. Pension liabilities £m 2019/20 2018/19 Change increased in the US, as a result of lower asset valuations and foreign UK Electricity Transmission 13.5% 13.7% -20bps exchange movements, partly offset by a lower discount rate. Provisions increased principally as a result of additional environmental provisions UK Gas Transmission 9.8% 9.5% 30bps recognised in the year and foreign exchange movements. Other UK weighted average 12.4% 12.4% –bps movements are largely explained by net working capital inflows and changes in the sterling-dollar exchange rate. US Regulated 9.3% 8.8% 50bps Group Return on Equity 11.7% 11.8% -10bps Regulatory gearing, measured as net debt as a proportion of total regulatory asset value and other business invested capital, was 63% as The overall weighted average RoE for the two UK transmission at 31 March 2020. This was down from 66% at the previous year-end businesses was 12.4%, representing 230 basis points outperformance and remains appropriate for the current Group credit rating of A-/A3 of the base allowed return. Electricity Transmission performance (S&P/Moody’s). reduced in the year with improved totex incentive performance offset by lower SO incentives including a reversal of profits recognised in 2018/19. Retained cash flow as a proportion of adjusted net debt was 9.2%, Gas Transmission return increased due to improved totex performance which is above the long-term average 9% level currently indicated by in 2019/20. Moody’s as consistent with maintaining our current Group rating. RoE for the US Regulated business of 9.3% was 50bps higher in Off-balance sheet items 2019/20, with improved performances in KEDNY, across Massachusetts There were no significant off-balance sheet items other than and in Rhode Island all contributing to this increase. The achieved the commitments and contingencies detailed in note 30 of the RoE represents 99% of the weighted average allowed return across financial statements. all jurisdictions. US returns exclude the impact of the Massachusetts Gas labour dispute in 2018/19. They are also not impacted by the Economic returns COVID-19 related bad debt provision recognised in 2019/20 and include In addition to value added, one of the principal ways in which we an adjustment reflecting our expectation for future recovery of these measure our performance in generating value for shareholders is bad debt costs. to divide regulated financial performance by regulatory equity, to produce Return on Equity (RoE). Overall Group RoE, which incorporates Property, Corporate and Other, and financing performance was 11.7%, slightly lower than 2018/19. As explained on page 245, regulated financial performance adjusts reported operating profit to reflect the impact of the Group’s various Tax transparency regulatory economic arrangements in the UK and US. In order to As a responsible tax payer, we have voluntarily increased our tax show underlying performance, we calculate RoE measures excluding disclosures, which continue to be an area of significant interest to exceptional items of income or expenditure. many of our stakeholders. Group RoE is used to measure our performance in generating Tax strategy value for our shareholders by dividing regulated and non-regulated National Grid is a responsible tax payer. Our approach to tax is consistent financial performance, after interest and tax, by our measure of equity with the Group’s broader commitments to doing business responsibly and investment in all our businesses, including the regulated businesses, upholding the highest ethical standards. This includes managing our tax NGV and Other activities and joint ventures. affairs, as we recognise that our tax contribution supports public services and the wider economy. We endeavour to manage our tax affairs so that Regulated RoEs are measures of how the businesses are performing we pay and collect the right amount of tax, at the right time, in accordance compared to the assumptions and allowances set by our regulators. with the tax laws in all the territories in which we operate. We will claim US and UK regulated returns are calculated using the capital structure valid tax reliefs and incentives where these are applicable to our business assumed within their respective regulatory arrangements and, in the operations, but only where they are widely accepted through the relevant case of the UK, assuming 3% RPI inflation. As these assumptions tax legislation such as those established by government to promote differ between the UK and the US, RoE measures are not directly investment, employment and economic growth. We do not have comparable between the two geographies. In our performance operations in tax havens or low tax jurisdictions without commercial measures, we compare achieved RoEs to the level assumed when purpose. setting base rate and revenue allowances in each jurisdiction. We have a strong governance framework and our internal control and risk management framework helps us manage risks, including tax risk, appropriately. We take a conservative approach to tax risk. However, there is no prescriptive level or pre-defined limit to the amount of acceptable tax risk. We act with openness and honesty when engaging with relevant tax authorities and seek to work with tax authorities on a real-time basis. We engage proactively in developments of external tax policy and engage with relevant bodies where appropriate. Ultimate responsibility and oversight of our tax strategy and governance rests with the Finance Committee, with executive management delegated to our CFO. For more detailed information, please refer to our published global tax strategy on our website. 34
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Financial Review Country-by-country reporting summary Reconciliation of Group’s total tax charge to tax paid In the current year for the first time we have disclosed in the table below data showing the scale of our activities in each of the countries we operate in. This allows our stakeholders to see the profits earned, £m 2019/20 2018/19 taxes paid and the context of those payments. Total Group tax charge/(credit) 480 339 Adjustment for Group non-cash deferred tax (348) (251) Revenue Adjustments for Group current tax (charge)/credit Profit/(loss) Income in respect of prior years 45 52 before tax accrued Unrelated Related income – current Group current tax charge/(credit) 177 140 1 2 3 party party Total tax year Group tax instalment payments payable/ Tax jurisdiction £m £m £m £m £m (repayable) in respect of the prior year 78 92 United Kingdom 5,282 113 5,395 1,821 179 Group tax instalment payments payable/ (repayable) in the following year 5 (69) United States 9,258 82 9,340 (82) (2) Repayment due to the Group in respect of current Ireland – – – – – year estimated payments 47 – Isle of Man – 16 16 3 – Group tax payments/(refunds) in respect of prior years paid in the current year¹ (113) (93) Luxembourg – – – – – Group tax payments relating to tax disclosed Netherlands – 55 55 12 – elsewhere in the income statement 5 5 Total 14,540 266 14,806 1,754 177 Group tax paid/(repaid) 199 75 1. Related party revenue only includes cross-border transactions. 2. Profit/(loss) before income tax from continuing operations after exceptionals. Profit/(loss) before income tax² 1,754 1,841 3. See the tax charge to tax paid reconciliation below for further information. % % Our Hong Kong entity is UK tax resident and our entities in Australia and Canada are dormant. Therefore, those jurisdictions have not been Effective cash tax rate 11.3 4.1 included in the table above. Effective tax rate (see note 7) 27.4 18.4 Our Isle of Man company is a captive insurance company which 1. Tax refunds in respect of prior years are primarily driven by a refund received in respect of tax is treated as a controlled foreign company for UK tax purposes and losses carried back to earlier years following agreement of historical US Federal tax audits. as such UK corporation tax is paid on its profits by National Grid. In 2. Profit/(loss) before income tax from continuing operations after exceptionals. the Netherlands, we have a finance company which raised external finance for the Group and an old holding company which held trading Effective cash tax rate investments which were sold many years ago, which is in the process The effective cash tax rate for the Group is 11.3%. The difference of being liquidated. The finance company is taxed on its profits in between this and the accounting effective rate of 27.4% (see note 7 the Netherlands at the corporate tax rate of 25%, whilst the holding on page 143) is due to the following factors. company’s profits are offset by tax losses on which deferred tax has not previously been recognised. National Grid is a capital-intensive business, across both the UK and the US, and as such invests significant sums each year in its networks. Transfer pricing is not a significant issue for the Group since there are In 2019/20 the total capital expenditure was £5,079 million. To promote limited transactions between Group companies, but any transactions investment, tax legislation allows a deduction for qualifying capital between related parties are made on an arm’s-length basis and aligned expenditure at a faster rate than the associated depreciation in the to OECD principles. statutory accounts. The impact of this is to defer cash tax payments into future years. Group’s total tax charge to tax paid The total tax charge for the year disclosed in the financial statements Given the substantial amounts of expenditure qualifying for deduction in accordance with accounting standards and the equivalent total incurred by National Grid this has left us in a net tax loss position in the corporate income tax paid during the year will differ. US in the year ended 31 March 2020. Consequently, in the current period we made no significant federal tax payments. The principal differences between these two measures are as follows: In the current year we made significant cash tax payments in the UK (£306 million). This was offset by the receipt of cash for tax losses carried back to earlier years in the US as a result of settlement of prior year audits. These receipts in the US also contributed to a lower overall effective rate of cash tax for the Group. The Group continues to fund deficit payments into its defined benefit pension schemes and has made significant payments into the Gas and Electricity schemes during the course of the year. These payments have further reduced the overall cash tax paid in the UK. 35
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Financial review continued Group’s total tax contribution For 2019/20 our total tax contribution globally was £2,794 million In the current year we have expanded this disclosure to cover our global (2018/19: £2,620 million), taxes borne were £1,635 million (2018/19: total tax contribution. The total amount of taxes we pay and collect £1,422 million) and taxes collected were £1,159 million (2018/19: globally year-on-year is significantly more than just the tax which we pay £1,198 million). Whilst total tax collected in 2019/20 has remained on our global profits. consistent with the prior year, the total taxes borne by the Group has increased from the prior year primarily as a result of higher property Group’s total tax contribution 2019/20 (taxes paid/collected) and profit taxes being paid. Taxes borne Two thirds of the tax borne by the Group is in relation to property taxes of which c. £850 million are paid in the US across over 1,100 cities and towns in Massachusetts, New Hampshire, New York, Rhode Island and Key: £m Vermont. These taxes are the municipalities principal source of revenue People 164 to fund school districts, police and fire departments, road construction Product 185 and other local services. Profit 199 In the UK we participate in the 100 Group’s Total Tax Contribution Property 1,076 Survey. The survey ranks the UK’s biggest listed companies in terms Miscellaneous 11 of their contribution to the total UK government’s tax receipts. The Total 1,635 most recent results of the survey for 2018/19 ranks National Grid as 21st highest contributor of UK taxes (2017/18: 25th), 18th in respect of taxes borne (2017/18: 23rd) and 5th in respect of capital expenditure (£1,200 million) on fixed assets (2017/18: 4th). Our ranking in the survey Taxes collected is proportionate to the size of our business and capitalisation relative to the other contributors to the survey. Key: £m People 533 However, National Grid’s contribution to the UK and US economies is Product 625 broader than just the taxes it pays over to and collects on behalf of the tax authorities. Miscellaneous 1 Total 1,159 Both in the UK and the US we employ thousands of individuals directly. We also support jobs in the construction industry through our capital expenditure, which in 2019/20 was £5,079 million, as well as supporting a significant number of jobs in our supply chain. Furthermore, as a utility we provide a core essential service which allows Tax contribution the infrastructure of the country/states we operate in to run smoothly. Income This enables individuals and businesses to flourish and contribute to tax paid/ Number of the economy and society. (repaid) Other employees on cash Property taxes Taxes Total tax as at Development of future tax policy basis1 taxes borne collected contribution 31 March Tax jurisdiction £m £m £m £m £m 2020 We believe that the continued development of a coherent and transparent tax policy across the Group is critical to help drive growth United Kingdom 306 226 57 586 1,175 6,321 in the economy. In the UK we continue to contribute to research into the structure of business tax and its economic impact by contributing United States (107) 850 303 573 1,619 16,748 to the funding of the Oxford University Centre for Business Tax at the Ireland – – – – – – Saïd Business School. Isle of Man – – – – – – We are a member of a number of industry groups which participate in the development of future tax policy, such as the Electricity Tax Forum Luxembourg – – – – – – and CBI Employment Taxes Working Group, together with the 100 Netherlands – – – – – – Group in the UK, which represents the views of Finance Directors of FTSE 100 companies and several other large UK companies. We Total 199 1,076 360 1,159 2,794 23,069 undertake similar activities in the US, where the Company is an active member in the Edison Electric Institute, the American Gas Association 1. See the tax charge to tax paid reconciliation above for further information. and the Global Business Alliance. This helps to ensure that we are engaged at the earliest opportunity on tax issues which affect our business. We continue to engage on consultations where the subject matter of which directly impacts taxes borne or collected by our business, with the aim of openly contributing to the debate and development of tax legislation. 36
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Financial Review Pensions Brexit In 2019/20, the defined benefits pensions and other post-retirement As described elsewhere in the Strategic Report, our Brexit working benefits operating costs decreased by £97 million to £197 million, group considered the issues and consequences of the UK’s decision principally as a result of our UK restructuring programme and the to leave the EU. In the last month of 2018/19, and in anticipation of the GMP equalisation ruling. Employer contributions during the year original 29 March 2019 deadline for the UK to exit the EU, we executed were £327 million (2018/19: £418 million), including £86 million our plan to bring forward the procurement of key items for capital (2018/19: £84 million) of deficit contributions. delivery and operations in case of delays at ports. In the context of the Group financial statements, however, these actions did not have a As at 31 March 2020, the total UK and US assets and liabilities and the material effect. overall net IAS 19 (revised) accounting deficit is shown below. Further information can be found in note 25 to the financial statements. New accounting standards As of 1 April 2019, we adopted IFRS 16 ‘Leases’. This did not have a Net pension and other post-retirement obligations material impact on the Group’s results or financial position, although as described in note 37 to the financial statements, on transition our UK US Total property, plant and equipment and net debt each increased by £0.5 billion to take account of the additional lease obligations. We Plan assets 14,364 9,384 23,748 note that the rating agencies already made adjustments to impute Plan liabilities (12,844) (11,857) (24,701) this and accordingly, adoption of the new standard does not impact our credit ratings. Net surplus/(deficit) 1,520 (2,473) (953) Post balance sheet events As at 31 March 2020, pension assets of £1,589 million in the UK pension In the period between 31 March 2020 and 17 June 2020, there schemes and £260 million in the US Niagara Mohawk Plan were have continued to be substantial environmental, economic and recognised on the basis that these plans were in a surplus position. social changes in both the UK and US. As described further in the Strategic Report, these have had, and will continue to have, significant Dividend ramifications for the Group. Other than as disclosed in respect of those The Board has recommended an increase in the final dividend to 32.00p areas where forward-looking forecasts are relevant (notably goodwill per ordinary share ($2.0126 per American Depository Share) which will impairment reviews (note 11 to the financial statements), expected credit be paid on 19 August 2020 to shareholders on the register of members losses on financial instruments including trade receivables (notes 19 as at 3 July 2020. If approved, this will bring the full year dividend to and 32) and the presumption of the going concern basis generally 48.57p per ordinary share, an increase of 2.6% over the 47.34p per (note 1)), none of these developments have impacted or caused ordinary share in respect of the financial year ended 31 March 2019. adjustment to the financial statements. This is in line with the increase in average UK RPI inflation for the year ended 31 March 2020 as set out in the announcement of 28 March 2013, in which we stated that our dividend policy aims to grow the ordinary dividend per share at least in line with the rate of RPI inflation each year for the foreseeable future. At 31 March 2020, National Grid plc had in excess of £5 billion of distributable reserves, which is sufficient to cover more than two years of forecast Group dividends. If approved, the final dividend will absorb approximately £1,123 million of shareholders’ funds. This year’s dividend is covered approximately 1.2x by underlying earnings. The Directors consider the Group’s capital structure and dividend policy at least twice a year when proposing an interim and final dividend and aim to maintain distributable reserves that provide adequate cover for dividend payments. 37
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Principal operations – UK Our UK business performed well in We delivered a good year of returns, with a Return on Equity of 12.4%. Statutory operating profit and underlying operating profit were higher 2019/20. We maintained our focus on at £1,663 million and £1,576 million respectively. safe, reliable, customer-led, innovative We have committed to reduce our direct emissions to net zero by 2050 and efficient operations. and to increase our influence to support the overall industry-wide transition to a low-carbon future. We have developed solutions to enable the rollout of a strategic backbone for electric vehicles throughout the Our UK performance UK and are working in partnership with industry to develop Carbon Capture and Storage (CCS) solutions. We continue to engage with stakeholders to shape and define the delivery of the £500 million funding Optimise performance commitments to help grow the UK’s rapid charging network made in the Chancellor’s March 2020 Budget. In addition, the Chancellor announced at least £800 million for a CCS Infrastructure Fund which will support Measure 2019/20 2018/19 2017/18 CCS in at least two sites. Return on Equity (£m) 12.4 12.4 12.1 Following the floods of 2007, we instigated an investment programme Statutory operating profit (£m) 1,663 1,045 1,528 to protect assets against future flooding. The programme ensures overall resilience of the network to threats, focusing on protection of specific Underlying operating profit (£m) 1,576 1,433 1,560 sites against the threat of flooding and reducing the likelihood of Adjusted operating profit (£m) 1,668 1,318 1,528 consumers being affected by a flooding incident on the ET system. Following detailed modelling and consultation with the Environment RIIO-T1 customer savings (£m) 128 101 78 Agency, permanent flood defences were installed at Thorpe Marsh 400 kV substation in 2014 and a demountable barrier was procured to protect the 275 kV substation which is located on higher ground. Neither of the substations were jeopardised during the flooding event. The ET Grow core business network remained resilient during Storm Ciara in February 2020. Customer first Capital expenditure (£m) 1,292 1,233 1,309 As noted in the Chief Executive’s review, at the end of 2019/20, we found new ways to put the customer first in the face of the COVID-19 pandemic. Asset growth (%) 3.8 3.6 4.5 We work with our customers to meet their needs and deliver successful outcomes for all parties. We were pleased to see continued improvement in our CSAT scores in our ET and GT businesses, achieving scores of Customer first 8.2 (2018/19: 7.9) and 8.0 (2018/19: 7.8) respectively. For the ESO, our CSAT score in 2019/20 was 7.6. Customer satisfaction: ET Customer satisfaction: ESO In October 2019, we welcomed Ofgem’s ‘minded-to’ position on (out of 10) (out of 10) Hinkley‑Seabank connection to use the existing Strategic Wider Works (SWW) mechanism for this vital project. In May 2020, we reached agreement on the final cost and the regulatory funding model. The 8.2 7.6 allowance for the project is £656 million and will be funded through (2018/19: 7.9) (2018/19: N/A) the existing SWW mechanism rather than the Competition Proxy Model (CPM). The project remains on target to be ready for connection in 2025. Customer satisfaction: GT (out of 10) Grow core business In December we awarded the £400 million tunnelling contract associated with our London Power Tunnels 2 project, a 20.8 mile 8.0 (33.5 kilometre), £1 billion link from Wimbledon to Crayford which will (2018/19: 7.8) provide significant resilience across South London when completed in 2028. We have embarked on a partnership with a social enterprise, My Kinda Future, to inspire the next generation of engineers in South London and to help us with local recruitment and upskilling required around our Highlights key sites. The team will work on designs and set up across key sites this Our UK business performed well in 2019/20 as we maintained our year, launching four different tunnel-boring machines in 2021. Four other focus on safe, customer-led, reliable, innovative and efficient operations. major contracts associated with the cable and substation works will be On 1 April 2019, we completed the legal separation of the ESO within let this year. These partners will form an enterprise, focused on innovation a newly formed subsidiary company which holds the ESO licence. and collaboration to successfully deliver the project outcome, rewiring To ensure appropriate ring-fencing between itself and the rest of the London and connecting with the capital. National Grid Group, the company is governed by its own Board of Directors including three independent directors. Following separation, We took over the Western Link HVDC cable with our Joint Venture we moved the Gas System Operator (GSO) function to become part partner Scottish Power Transmission on 23 November 2019. The link is of the Gas Transmission business to further simplify our structure. a submarine HVDC link between Scotland and England and Wales which delivers up to 2,250 MW. We are working with Ofgem after they opened an Optimise performance investigation into the delivery and operation of the cable in January 2020. Our safety ambition is to have a culture where we always do the right thing regarding safety. Our strategy is to be proactive in our safety A particular highlight has been the completion of the tunnelling for Feeder 9 management by engaging our leaders and employees and implementing under the Humber estuary, a critical reinforcement of the gas network. a consistent and simple risk-based approach. This strategy will enable us to develop the highest level of safety culture maturity. To support this Evolve for the future ambition, we are focusing more on leading indicators that measure our We published and submitted our business plans to Ofgem in December positive efforts on safety management to help prevent incidents, while 2019 for our ET, GT and ESO businesses for the 2021–2026 RIIO-2 price continuing to track more traditional lagging indicators. control period. These plans have been developed following our largest ever engagement exercise to date, with customers, industry stakeholders, As at 31 March 2020, our LTIFR was 0.06. This is better than our UK businesses and households across the country. target of <0.08, and is our best ever LTIFR performance. Our Electricity Capital Delivery business has worked more than a year without having any LTIs in approaching five million person hours of complex construction activity. This outstanding result was driven by a relentless focus on the work we do and commitment to keeping one another safe. 38
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Principal operations – UK Our plans include investment to maintain network reliability and provide flexibility and optionality for the UK to achieve net zero greenhouse gas Get to know our emissions by 2050, while being protected against new threats: net zero workforce • Our ET plan has a baseline total expenditure spend of £7.1 billion over Sarah Woolham-Jaffier the five-year period. Our ET business assumes connection of 15.3 GW Civil Engineer of customer capacity, providing the UK with clean power and flexible 25-year-old Sarah Woolham- storage, as well as increased investment to maintain reliability and Jaffier undertook a Masters resilience. The baseline spend for ET, under our proposed financial in Civil Engineering and now plan, would see consumer bills reduce slightly in real terms. works as part of the London • Our GT plan has a baseline total expenditure spend of £2.8 billion Power Tunnels project team, over the five-year period. Our GT business, which comprises GB gas helping to improve the capital’s system operator and gas transmission, includes an increase in asset electricity infrastructure. health and cyber resilience investment, as well as a programme of work to test and prove hydrogen conversion options. The baseline spend for GT, under our proposed financial plan, would see consumer bills reduce slightly in real terms. These plans will deliver a safer, cleaner, greener and more affordable energy system. We have challenged ourselves to ensure our business plans deliver at the lowest cost and create optionality as we develop the pathway to net zero. We continue to constructively work with our regulator, Ofgem, ahead of draft determinations in the summer and final determinations in November 2020. Scan here to view the story The wellbeing of our workforce is important to us. 38% of our UK employees have undertaken mental-health-related training courses section of overhead line which goes through Snowdonia National Park during the year, an increase of 30% compared to last year. with cables in a 2.1 mile (3.4 kilometre) tunnel. Engineering and consenting activities have also commenced on the first of our RIIO-2 The UK cost efficiency programme that we announced in 2018 portfolio of VIP projects: the undergrounding of 2.7 miles (4.4 kilometres) continues to deliver a more efficient and agile business ahead of RIIO-2. of overhead line through the North Wessex Downs AONB. Through this initiative we have simplified ways of working with a leaner organisation and more efficient IT and back office activities. In 2019/20, Our GSO became part of the GT business with effect from 1 January the programme enabled us to deliver efficiency savings of £54 million 2020, providing even greater transparency and clarity around the in ET, and £19 million in GT. management of Great Britain’s gas and electricity networks. A unified GSO and GT structure is a better way to be organised, offering greater We have made good progress on the £116 million Dorset Visual Impact alignment, simplified governance, clearer accountability, and better Provision (VIP) project, with site establishment and preliminary civil works coordination between system operator and gas asset management. well underway. We are on track to underground 5.5 miles (8.8 kilometres) It makes the legal separation of the ESO even clearer. of overhead line and remove 22 pylons in the Dorset Area of Outstanding Natural Beauty (AONB) by 2022. Funding and planning applications have In our GT business we are reviewing the potential to decarbonise the gas been submitted for the Peak District East VIP project. This £43 million network through a transition to carbon-free hydrogen. Working with the project will remove six pylons and 1.2 miles (2 kilometres) of overhead UK gas networks on the Gas Goes Green programme, we are identifying line in the Peak District National Park. The planning application for the steps required to repurpose our assets to carry hydrogen either as a Snowdonia VIP project has been submitted. This project will replace a blend or up to 100%. ruled on the validity of the Capacity Market state aid challenge, confirming their original decision in 2015 to grant state aid approval. Following the announcement, we have resumed our role as the System Operator Electricity Market Delivery Body and ran auctions in early 2020. As the ESO, we continue to help facilitate the move to a lower-carbon economy while simultaneously delivering safe, reliable and affordable On 15 May 2018, Ofgem opened an investigation into the ESO (when energy to the end consumer. We operate an electricity system that is it still formed part of National Grid Electricity Transmission plc) transitioning towards net zero and have seen several new energy pertaining to an alleged breach of its licence condition to operate the records set, as greater levels of renewables continue to connect to system in an economic and efficient manner, including the production the network and coal power stations close. During the spring of 2019 and publication of forecasts of demand on the electricity transmission there were 18 consecutive days where coal-fired generation was not network. The investigation is ongoing. part of the generation mix; solar output peaked in May 2019 at around 9.5 GW and the maximum wind output of 16.86 GW was On 9 August 2019, following the near simultaneous tripping of two recorded in December 2019. In combination, these changes to the large power generators, we experienced power outages in various generation mix have led to 2019 being the first year on record in parts of England and Wales. The frequency on our network dropped which low-carbon sources generated more electricity than fossil fuel resulting in low frequency demand disconnections, preventing further sources. In 2020, we have continued to see further records set. issues. Service was restored within 45 minutes to all customers. In Further details about the ESO power generation mix can be found at: September 2019, we published the technical report into the event. In www.nationalgrideso.com/great-britains-electricity-explained January 2020 Ofgem published its findings which supported many of the recommendations we included in our report. We operate one of Our ESO RIIO-2 plan proposes new activities that will generate net the safest and most resilient power networks in the world and, while benefits of around £2 billion for consumers over the five-year RIIO-2 we recognise the disruption that the outage caused, our systems period and spend over its two-year price control (2021–2023) of £514 performed as they should. We have worked closely with Ofgem, million. The ambitious ESO plan focuses on how the ESO must the government, the wider energy industry and other sectors like evolve to meet the challenges of the changing energy landscape. transport to learn the lessons from this incident. Supported by a new, bespoke regulatory model designed to drive the right behaviours and outcomes, the ESO will facilitate the transition to On 1 April 2019, National Grid ESO became a separate legal entity a zero-carbon power system. Under RIIO-2, the ESO will lower within the National Grid Group. The major programme to achieve this average annual consumer bills by around £3. saw the creation of the NGESO Board, which includes three Non-executive Directors and the creation of a new office space, Following the cessation of the UK’s Capacity Market scheme in physically separate from other parts of National Grid. Following November 2018 due to the ruling of the European Court of Justice, separation, we moved the GSO function to become part of the GT we worked closely with BEIS and Ofgem to initiate contingency plans business to further simplify our structure and to provide greater clarity. making sure that security of supply could be maintained during the We will continue to regularly review the way we are structured to make 2019/20 winter period. On 24 October 2019, the EU Commission sure we are delivering the best possible service for our customers. 39
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Principal operations – US Our US business performed well We were pleased to accept a number of awards that demonstrate our commitment to our workforce and customers in 2019/20. National Grid operationally and financially in 2019/20, was listed in the top ten of DiversityInc Top Utility and we earned a despite challenges across our jurisdictions. designation as a “Best Place to Work for LGBTQ Equality” by the Human We maintained our focus on safe, reliable, Rights Campaign Foundation in the Corporate Equality Index 2020. customer-led, innovative and efficient Forbes named National Grid one of the Best Employers for Diversity in 2020. Edison Electric Institute honoured National Grid in 2019 with an operations. We continued to optimise Emergency Assistance Award and Emergency Recovery Award for our operational performance. restoration efforts during hard-hitting storms. Safety continues to be a critical pillar of our daily operations. The Company Our US performance is fully committed to the well-being and safety of our workforce and customers alike. This year, a tragic event took the life of one of our employees and reminded us to continue striving to ‘find a better way’ Optimise performance to improve our safety culture. As at 31 March 2020, our LTIFR was 0.16. We have focused safety culture transformation programmes to engage our workers on hazard and risk awareness, and required controls to Measure 2019/20 2018/19 2017/18 prevent safety incidents. We have asked our workforce to direct their attention to the safety of themselves and their colleagues every day. Return on Equity (£m) 9.3 8.8 8.9 Optimise performance Statutory operating profit (£m) 880 1,425 1,734 During 2019/20, the US business focused on growth, customer value, Underlying operating profit (£m) 1,636 1,594 1,704 and deep decarbonisation. Our US Regulated net revenue was £123 million (2%) lower, with £257 million of incremental rate cases and Adjusted operating profit (£m) 1,397 1,724 1,698 £85 million of exchange rate benefit, more than offset by £465 million adverse timing (lower volumes and commodity recoveries). We invested £3.2 billion in energy infrastructure and technology solutions during the year. We also added 41,043 active new customer accounts across gas, Grow core business electric and DG combined. Our energy infrastructure investments are designed to bring cleaner Capital expenditure (£m) 3,228 2,650 2,424 energy to our customers and enhance reliability. One of our larger investments, The Metropolitan Reliability Infrastructure Project, will Asset growth (%) 12.2 9.2 7.4 increase system reliability and operational flexibility of the existing Rate base* (£m) 20,644 17,56 5 14,762 transmission system in Brooklyn, New York. It will also increase supply diversity options and provide capacity for operation in case there is an * US rate base is as previously reported at historical exchange rates outage. The project consists of roughly 40,000 feet of transmission main that will connect the Southern line to the Brooklyn Backbone and our Greenpoint Facility by autumn 2021. Customer first Through our gas pipeline replacement programme, we have successfully replaced 460 miles (740 kilometres) of pipe in 2019/20, compared to 400 miles (644 kilometres) in 2018/19. By replacing US Residential – leak-prone pipe, we are significantly reducing unintended release of Customer Trust Advice natural gas, reducing methane emissions and keeping our customers and communities safe. An innovative robotic sealing technique has helped us to seal cast iron pipes in congested urban areas like Boston 59.8% and New York City. We are on schedule to replace our leak-prone pipe (2018/19: 58.7%) inventory across the US enterprise within the next 20 years. A challenge we are currently facing that came to the forefront in 2019/20, is significant growth in demand for natural gas across our service area Highlights in New York City and Long Island. That growth is expected to continue In the US, in 2019/20 we improved our storm restoration efforts, over the next 10 years due to increased demand from new construction successfully replaced hundreds of miles of leak-prone pipe in our gas and conversion of oil to natural gas. As a solution to the gas supply network, exceeded our electric vehicle charging deployment goals issue, we supported the NESE Pipeline project to meet increased ahead of schedule, reached record-setting Distributed Generation (DG) demand. When NESE was not approved by New York State, we ceased in Rhode Island, and renewed our focus on safety culture. to connect new customers to gas in order to ensure we could continue to deliver gas to our existing customers safely and reliably. The New York The clean energy future continues to be a focus in the US. The Public Service Commission ultimately ordered us to connect some of Company’s net zero by 2050 announcement was in line with the those new customers, which we accomplished by increasing use of ambitious targets and important steps being taken by governments, temporary supply solutions. We are now working with New York State, regulators and across our communities, to deeply decarbonise our stakeholders and our customers to find long-term solutions to gas economy-wide. The US business is currently building a plan to achieve supply constraints in the region. this new target, which will impact our fleet, building stock, and pipeline replacement efforts. At the end of March 2019, we had already reduced In 2019, we experienced an unprecedented gas supply disruption on emissions by 71% below 1990 levels in the US, exceeding our interim Aquidneck Island that required temporarily stopping service to about target of 45% by 2020 group wide. We achieved this by focusing on a 7,500 customers. This was caused by a reduction in transmission flow range of activities, which include a major pipeline replacement coming into our system in Rhode Island. Since then, we have been programme to minimise gas losses through leakage and the reduction working hard to learn from the event and have cooperated with a federal of a high-emission greenhouse gas called SF6 in our electricity networks. investigation and the Division of Public Utilities and Carriers in a summary investigation. The Division’s report, released in autumn 2019, reflected An important milestone we reached, contributing to decarbonisation, National Grid’s fundamental commitment to safety and exemplary was exceeding our electric vehicle charging station deployment goals emergency response. We have already addressed many of the proposed ahead of schedule in New York. We enabled over 1,405 ports at roughly recommendations included in their report, securing additional winter 184 customer sites and have a number of customers who are eagerly gas supply, expanding our energy efficiency and demand response awaiting an extension of the programme, which will be proposed to our programmes and improving long-range planning. We now remain New York State regulator in a future rate case. focused on securing the ongoing needs of Aquidneck Island and Rhode Island’s energy future. In the renewable space, we interconnected a record number of DG projects for our customers in Rhode Island, totalling 99.8 MW and connecting 1,938 applications. 40
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Principal operations – US Customer first As noted in the CEO review, at the end of 2019/20, we identified new Get to know our ways to put the customer first in the face of the COVID-19 pandemic. net zero workforce Emma Burke Our unwavering commitment to our customers was demonstrated (Associate Engineer, by a few initiatives designed to make it easier for our customers to Transmission Network do business with us. We converted more customers to paperless Technology Deployment) billing by improving our paperless capabilities, strengthened our online What attracted Emma Burke to marketplace where customers can purchase energy efficiency and National Grid was the opportunity smart home products, increased the speed at which we verify our to work with new technologies in customers’ identity who call into the customer service line, and energy efficiency and storage. improved estimated time of restoration calculations during storms. She began in the Graduate Development Programme (GDP), Our proactive outage communications and our Interactive Voice which introduced her to the Recording upgrades increased our customer satisfaction scores, energy industry and the while storms and challenges with gas shortages in Rhode Island and technologies that improve the downstate New York have caused some headwinds. As a result, electric grid, and then moved customer ease has remained relatively flat and improvements in trust onto the Technology Deployment have increased slightly. programme. Alongside a network of supportive colleagues she We continue to work towards quick and efficient storm response to met while participating in the improve these scores. We have improved our restoration efforts over programme, she strives to make the past decade by developing an emergency response team that a positive impact on energy works hard to service our customers. The team focuses on forestry, technology and evolve with a staging crews, materials, advanced analytics and reporting tools, changing industry. while employing a classification index that anticipates restoration times based on storm types. We demonstrated efficient and successful storm response in April 2020 when 70 mph+ winds caused power outages for over 200,000 customers across all of our jurisdictions. Scan here to view the story National Grid has a long history as a leader in economic development, investing in the communities across our territory. We have seen Evolve for the future record-breaking economic development grant activity in New York over Over the past few years, the Company has been hard at work the past five years. We help our customers evaluate infrastructure needs decarbonising the transportation sector. and improve productivity, efficiency and profitability so that they remain and grow in the region. In partnership with the Capital District Transportation Authority, National Grid deployed four electric public buses in Albany, New York. National The town of Lima, New York, recently experienced a significant Grid and the transportation authority will monitor the range, charging economic boost with the expansion of Bristol ID Technologies creating timelines, electricity usage and performance of the vehicles throughout new jobs within this rural community. The Company’s electric capital its route network. If the demonstration proves to be successful, the investment grant provided $118,000 to help offset the new electric Company will work with other transportation authorities to deploy more infrastructure required for this impactful business expansion, resulting electric buses across the region. in higher-volume production at a reduced cost and more clients. In upstate New York, National Grid’s EV charging programme surpassed Grow core business its EV charging installation goal. The Company originally planned to In September, the Massachusetts Department of Public Utilities (MADPU) complete 56 projects through this programme with an approximate approved an electric rate case, which enables us to deliver on important $3 million allocation. However, we have more than tripled that goal with investments in reliability and storm response, provide greater assistance the completion of over 184 projects. Over 40 of the programme’s site to income-eligible customers and support electric transportation and hosts serve disadvantaged communities. energy storage policies that are helping drive us towards a clean energy future. The Company had not updated its rates since 2016 and will not Looking ahead file a new rate case for Massachusetts Electric until 2023. In 2018/19, the Company announced the Accelerate Programme, an ambitious, three-year efficiency challenge that set out an aspirational In December, our Rhode Island Gas and Electric Infrastructure, Safety, target of a 20% efficiency improvement in operational and capital and Reliability (ISR) plans were filed with the Rhode Island Public Utilities expenses across the US business by 2020/21. The Accelerate Programme Commission (RIPUC). The plans provide mechanisms to fund maintaining is aimed at improving both the quality and cost‑effectiveness of our and upgrading the gas and electric distribution systems by replacing aging services to customers. This programme will continue to allow us to find equipment, addressing load growth, and responding to emergencies. a better way, so we can grow and serve customers long into the future. In addition, the Gas ISR plan allows for proactive replacement of As we forge ahead into our clean energy future, we continue to identify leak-prone pipe. Both of these plans were approved by the RIPUC in pathways for deep decarbonisation along with the states we serve, March 2020. focusing on the power, heat and transportation sectors. As one of the world’s largest investor-owned utilities, we will work alongside In the latest gas rate case, filed April 2019 for KEDNY/KEDLI, the policymakers to ensure we can deliver clean, safe, reliable and Company proposed a suite of demonstration projects to explore affordable energy to customers today and tomorrow. low-carbon heating solutions. The solutions are divided into programmes or technologies. The rate case is still underway. Over the past year, we have taken meaningful steps to develop low-carbon heating solutions. In coordination with all New York’s gas utilities, we have developed the RNG Interconnection Guideline. RNG is pipeline-compatible, gaseous fuel with lower lifecycle carbon dioxide equivalent emissions than geologic natural gas. The purpose of the guideline is to provide a necessary technical framework that can incorporate RNG into the natural gas distribution network. 41
National Grid plc Annual Report and Accounts 2019/20 Strategic Report National Grid Ventures and other activities Our NGV and other activities business Highlights performed well in 2019/20. We maintained This section relates to NGV, non-regulated businesses and other our focus on safety and reliability while commercial operations not included within the business segments. developing new projects to support the NGV, which operates separately from our core regulated units, is focused on investment in a broad range of energy businesses that operate in energy transition. competitive markets across the UK and US. Its portfolio includes electricity interconnectors, LNG storage and regasification, energy metering, large-scale renewable generation and competitive transmission. Customer first Our ‘other’ activities comprise NGP, the venture investment and innovation arm of National Grid plc, as well as UK property and US non-regulated businesses, which include LNG operations and BritNed availability Nemo Link availability corporate costs. In aggregate, the NGV and other segment delivered £237 million of 98.6% 96.1% statutory operating profit, £242 million underlying operating profit and (2018/19: 98.2%) (2018/19: NA) accounted for £885 million of continuing investment in 2019/20. IFA availability Interconnector capacity by 2024 As at 31 March 2020, our LTIFR was 0.05. This is better than our NGV target of 0.08. 91.4% 7.8 GW Operational performance (2018/19: 93.9%) Electricity interconnectors: NGV is the leading developer and operator of electricity interconnectors to and from the UK. NGV’s operational portfolio currently comprises 4 GW of interconnector capacity. Optimise performance BritNed is an independent joint venture between National Grid and TenneT, the Dutch transmission system operator. It owns and operates a 1 GW HVDC link between GB and the Netherlands. In 2019/20 BritNed’s Statutory operating profit Underlying operating profit availability was 98.6%. The England-France interconnector (IFA) is a 2 GW HVDC link between £237m £242m the French and British transmission systems, with ownership shared (2018/19: £400m) (2018/19: £400m) between National Grid and Réseau de Transport d’Electricité (RTE). In 2019/20, IFA’s availability was 91.4%. Adjusted operating profit Nemo Link is an independent joint venture between National Grid and Elia, the Belgian transmission system operator. It owns and operates a 1 GW HVDC link between GB and Belgium. Nemo Link’s availability £242m was 96.1% in 2019/20. (2018/19: £400m) LNG storage and regasification: Grain LNG is one of three LNG importation facilities in the UK. It operates under long-term take or pay contracts with customers and provides importation services of ship Grow core business berthing, temporary storage, ship reloading and regasification into the NTS. Utilisation of terminal capacity was 30.8% in 2019/20, up from 18.8% in 2018/19. Grain LNG set a record for the highest single-day Capital investment gas send‑out from a European terminal in November 2019. Grain LNG’s road tanker loading also offers the UK’s transport and £885m off-grid industrial sector a more environmentally friendly alternative to (2018/19: £623m) diesel or heavy fuel oil. The facility allows tanker operators to load and transport LNG in bulk across the UK via road or rail. UK metering: National Grid Metering (NGM) provides installation and maintenance services to energy suppliers in the UK’s regulated market. It maintains an asset base of around 8.8 million domestic, industrial and commercial meters, down from 9.9 million in 2018/19. US competitive transmission: NGV is a part-owner of Millennium Pipeline, which provides consumers in the northeastern US with additional natural gas infrastructure to meet growing demand for cleaner and more reliable energy. It is strategically positioned to serve utility and power plant loads across New York State and into New England. NGV is also a part-owner of New York Transco, which energised three new transmission upgrade projects in New York in 2016 that provide several ongoing benefits, including reducing upstate to downstate transmission congestion to save money for electricity consumers and offering better access to clean energy, and supporting the retirement of traditional power generation. The assets include the Ramapo to Rock Tavern 345 kV Line, Frasers-Coopers Corner 345 kV Line and Staten Island Unbottling. 42
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | National Grid Ventures and other activities US battery storage: NGV is a 50-50 joint venture partner with NextEra Energy Resources in two battery energy storage systems on Long Get to know our net zero Island. These include two 5 MW, 40 MWh battery energy storage workforce systems in East Hampton and Montauk, New York. The batteries have Erinn Sapsford, helped decrease emissions and enabled energy peak-shaving during Business Readiness the busy summer months on the eastern end of Long Island. Engineer 27-year-old Erinn Sapsford was UK property: National Grid Property deals with the management and tempted away from her original regeneration of our brownfield surplus estate in the UK. Our specialist career plans after enjoying an team works with our communities to return these redundant sites back ‘industry year’ at National Grid into beneficial use to provide new homes and employment opportunities during her Mechanical across the UK. Engineering degree. As a Business Readiness In 2019/20, we disposed of 34 sites and exchanged contracts on a Engineer, she applies her further five land sales, to facilitate the delivery of thousands of new skills to one of our key homes across the UK. Our joint venture with Berkeley Group, called projects, enabling St William Homes, has entered its sixth year and recorded its first profit the UK to import in 2019/20. Around 7,600 homes are already under construction more green across London and the South East. energy from Norway. Grow core business Electricity interconnectors: NGV will grow its interconnector portfolio by 3.8 GW in the next four years, with new subsea power links to France, Norway and Denmark. Construction continues on the 149-mile (240-kilometre) IFA 2 interconnector. Developed with RTE, the 1 GW subsea cable will connect Great Britain and France. The link is expected to be operational in 2020. North Sea Link (NSL) will connect Great Britain and Norway. Developed between National Grid and the Norwegian transmission system operator Statnett, NSL will be 447 miles (720 kilometres). The 1.4 GW link is Scan here to view the story expected to be operational in 2021/22. Preliminary construction works have now also commenced on the National Grid Property entered into a new joint venture agreement with Viking Link interconnector. Developed together with Danish transmission Places for People, one of the largest regeneration, development and system operator Energinet, Viking Link will be a 1.4 GW 472-mile property management companies in the UK and a registered provider (760-kilometre) long subsea link connecting Great Britain and Denmark. of affordable housing. As part of the venture, we aim to build up to 500 new homes on the first three sites, and delivering 10 sites into the joint NGV will have 7.8 GW of operational interconnector capacity when venture over the next three years. Viking Link becomes operational in 2023/24. Evolve for the future US large-scale renewables: NGV completed its acquisition of UK Carbon Capture, Utilisation & Storage (CCUS): In 2019 NGV Geronimo, a leading wind and solar developer in North America based launched Zero Carbon Humber, a consortium looking to develop the in Minneapolis, in July 2019. Since the acquisition, National Grid has world’s first zero-carbon industrial cluster in the UK’s Humber region announced the commercial operation of its 200 MW Crocker Wind Farm by 2040. Such a project would protect 55,000 jobs in the region and in South Dakota, along with the signing of a Power Purchase Agreement establish the UK as a world leader in CCUS technology. with Basin Electric Power Cooperative for its 128 MW Wild Springs solar project, also in South Dakota. These developments, together with further US offshore wind: Ørsted and Eversource, with support from NGV, are activities that build on their strong pipeline of future renewable energy developing the Revolution Wind offshore wind farm which was awarded projects, complement the 379 MW portfolio of operational wind and competitive tenders to supply electricity to distribution utilities in Rhode solar assets which are held in joint venture with Washington State Island and Connecticut. The proposed 704 MW wind farm will be Investment Board and operated by National Grid. located over 15 miles (24 kilometres) south of the Rhode Island and Massachusetts coasts. The project is expected to be operational by US competitive transmission: In April 2019, New York Transco’s 2023, pending permits and final investment decisions. NGV has the New York Energy Solution (NYES) was selected by the New York option to acquire the transmission connection between Revolution Wind Independent System Operator to provide transmission upgrades that and the onshore electric transmission network. will relieve congestion of New York’s bulk electric power system, while enhancing reliability and facilitating upstate clean energy resources to National Grid Partners: NGP is the venture investment and innovation the downstate demand centers. The upgrades will be taking place on an arm of National Grid. NGP’s portfolio at the close of the fiscal year existing 54.5-mile (88-kilometre) utility corridor and on utility-owned land. comprises 21 companies at a fair value of £134 million. New York Transco is well into the consenting and permitting process for the NYES project, which remains on track for a late 2023 service date. NGV expects to participate in additional public policy electric transmission projects in New York that will be necessary to accommodate increasing amounts of renewable energy, in particular offshore wind. UK property: St William continues to grow and we now expect the joint venture to deliver around 20,000 new homes across London and the South East. A further four sites have been negotiated into the joint venture during 2019/20 with further sites expected to be negotiated into the joint venture during 2020/21. In the next 12 months, we expect our St William Homes joint venture to complete construction of over 100 new homes across London. 43
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Our stakeholders As the Board of Directors, we prioritise our responsibilities to our different but interrelated stakeholder groups and wider society. We endeavour to ascertain the interests of our stakeholders and reflect them in the decisions that we make. We recognise that in balancing those different perspectives, it isn’t always possible to achieve each stakeholder’s preferred outcome. You can find out more about our key stakeholders and their interests, how we engaged with them and how this influenced decision-making in our ‘Section 172(1) Statement’ that follows. For more details on how our Board operates, including the matters it discussed and debated during the year, see pages 64 – 87. Communities and Our governments customers Our Society Our suppliers investors Our Our regulators colleagues 44
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Our stakeholders How we create value for our stakeholders The long-term success of our business is critically dependent on the We have provided some examples of how particular engagement way we work with a large number of important stakeholders. We aim outcomes were considered by the Board below, noting that these to create value for our stakeholders every day by maintaining levels of examples are not exhaustive in summarising all our stakeholder business conduct that are governed by our values. We continue doing considerations. Within each example, when outlining how the Board so as the energy landscape changes. considered the impact on a particular stakeholder group, we also list the broader range of stakeholders the Board considered as part of How our Board keeps up to date with stakeholder interests its discussions. Reporting and monitoring: Our Company-wide engagement collates information on stakeholder interests that informs business-level We considered the interests of our stakeholders in reviewing matters decisions, with an overview of developments being reported on a such as our liquidity and financial arrangements, our dividend, regular basis to the Board or a Board Committee. In some cases, this operational matters, for example resolving the gas supply issues in will be through an annual or more frequent round-up for the business New York City and Long Island and developing our business plans. area interfacing with the relevant stakeholder (this is generally the case You can also read more about how the Board showed regard for the for customers and suppliers). interests of various stakeholder groups through a worked example of its response to the COVID-19 pandemic on page 65. Direct engagement: In other instances, one or more members of the Board may be involved directly in the engagement (such as shareholder This section, How we create value for our stakeholders, serves as our or other investor networking). In each case, it is important for all members section 172 (1) statement. of the Board to gain sufficient understanding of the issues relating to every stakeholder, so their views are taken into account in Board discussions. The table below sets out our focus on the key relationships and shows how the relevant stakeholder engagement is reported up to the Board or Board Committees to help inform decisions made by Directors. Stakeholder How stakeholder interests have influenced decision-making group How we engage and communicate and the execution of our strategy Company engagement We recognise the importance of keeping an engaged shareholder The Company Secretariat team, together with the Company’s base so that we can closely monitor their interests. As such, the Registrar, engage with our retail shareholders throughout the year Company Secretariat team, in collaboration with our Registrar, to deal with enquiries relating to shareholdings. implemented an asset reunification programme in January 2020. Our investors This exercise provided us with an opportunity to re-unite as many – individual Board-level engagement shareholders as possible with their unclaimed assets. The shareholders programme will continue throughout 2020 and so far, as at 30 May Updates from Company-level engagement with shareholders 2020, £13 million was reunited with the respective shareholders are provided to the Board as appropriate. and we have re-engaged 8,372 shareholders on the register. The AGM and shareholder networking programme provide the Ongoing engagement between our investors and the political Board with valuable opportunities to engage with our shareholders. sub-group of our Executive Committee highlighted concerns All members of the Board attended the 2019 AGM to discuss around the UK Labour Party’s policy for state ownership of the UK proposals and answer shareholder questions as necessary. The operating companies. The Board, in line with its fiduciary duty to shareholder networking programme in 2019 included presentations, its shareholders, took steps to protect the value of shareholdings and a visit to our Gas National Control Centre in Warwick where in the event of UK state ownership. shareholder attendees had direct one-to-one contact with senior management, Board members and engineers across a two-day period. Views of other stakeholder groups considered Customers, Regulators, Communities and governments, Our During the shareholder networking programme and 2019 AGM, the colleagues, Suppliers Board members listened and responded to views of our shareholders. Any resulting actions were fed back to the businesses as necessary. Company engagement The investor perception study highlighted that senior management Over the year, the Investor Relations team held 436 investor was held in high regard and that the ability to maintain operational meetings across 10 countries and 26 cities: met with over 400 excellence is taken for granted. The survey further noted that there institutions, representing 49.9% of our share register; and hosted was an opportunity for the Company to raise the profile of the role it Our investors three site visits, offering investors the opportunity to meet divisional is playing in the energy transition and also emphasised the strategic – institutional management and view our assets. benefits of the combination of the Company’s UK and US assets. (equity investors and Our engagement programme focuses on updating investors on Our investors also expect that we stand for something far more than debt investors) the regulatory and operational progress in our UK, US and NGV providing economic returns. To facilitate the change towards net businesses, as well as the growth opportunities available to us. zero, in January 2020, we also announced the launch of our first green bond, issued by National Grid Electricity Transmission plc. During the year, the Debt Investor Relations team in Treasury held The €500 million proceeds from the bond issuance will finance meetings between senior Group Treasury representatives and debt electricity transmission projects with environmental benefits. investors in the UK, Continental Europe and the US. Topics covered included our financial results, US rate case filings and An ESG data book was published in the year to measure the overall bond issuance. The team also met with debt investors at various performance of the Company in operating responsibly, while conferences over the course of the year. creating positive social impact. In preparing this data book, we held discussions with investors to identify the most commonly used ESG Board-level engagement data providers, and reviewed these questionnaires to determine the most relevant data to communicate to investors. During this process The Board received regular feedback on investor perceptions over 400 questions were reviewed. Subsequently, these were and opinions about the Company and as part of our engagement consolidated and refined down to those included in this document. programme we provide the opportunity for our current and potential investors to meet with the Chairman, the Executive Views of other stakeholder groups considered Committee and operational management. Regulators, Communities and governments, Our colleagues Additionally, the Board received the results of an independent audit of investor perceptions where interviews were carried out with investors to establish their views on the performance of the business and management. The findings and recommendations of the audit were then reviewed by the Board. 45
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Our stakeholders continued How we create value for our stakeholders continued Stakeholder How stakeholder interests have influenced decision-making group How we engage and communicate and the execution of our strategy Company engagement The topics discussed and actions from Board and Executive Engagement with our people takes many forms, including Committee’s engagement with our people can be found on page 73. reviewing and implementing actions from the EES results; Employee Resource Group (ERG) sessions, which provide the The Board was pleased to see a continued improving trend in Our colleagues opportunity for ERG chairs and leads to discuss the importance overall employee engagement through the 2020 EES results. The and impact of their group and provide valuable feedback on introduction of the Leadership Index has allowed leaders to gain inclusion and diversity related topics; meetings with trade union feedback from their direct reports on areas where their personal representatives, and leadership offsites located at a range of actions, style and behaviours can have an immediate impact on different business locations in the UK and US. enablement and engagement. The Leadership Index will be a key focus area for 2019/20. Board-level engagement The annual EES provides senior leaders and the Executive Committee and Board with an insight into how our employees are feeling about the Company and its direction. Action plans are developed to progress any areas of improvements that are identified. The Board also conducts site visits and meets with a wide range of employees through our employee engagement programme: you can read more on this on page 73. The Executive Committee also received regular talent updates and considered the remuneration structure for senior management. Company engagement In the UK, discussions with our regulators have contributed to the UK – regular interactions with Ofgem and the Health and Safety productive outcome of key business issues such as: Executive. The Company also organises stakeholder fora and • the 9 August 2019 power outage: the Company had regular consultations with stakeholders, including members of the public, engagement with Ofgem and the UK government, and the Board Our regulators our suppliers and customers around specific projects and regularly discussed the outcome of investigations and reports proposed business plan submissions for RIIO-2. focused on this, including the response to Ofgem on the findings from the investigation. In January 2020, the Board welcomed We work with other networks and organisations outside of the Ofgem’s report on this incident which confirmed that our actions energy industry to identify good practice. did not cause the outage. • the future of our ESO business, which will be reviewed by Ofgem US – regular interface with both federal and state regulators and following legal separation last year. customers on an ongoing basis, as well as the pre-filing stakeholder engagement programme in the build-up to and during • RIIO-2 business plans: for the development of the RIIO-2 any rate case process. Specific engagement was undertaken business plans, we have followed Ofgem’s enhanced stakeholder regarding the decarbonisation pathways and the Niagara Mohawk engagement process, which is based on greater engagement Power Corporation advanced metering infrastructure. with our industry and end consumers to prioritise their needs in our RIIO-2 business plans. Three independent groups were Board-level engagement established to provide challenge throughout this process – two independently Chaired User Groups, (one for the ESO and one for The Board met with the Chair, CEO and incoming CEO of Ofgem in the transmission businesses) and an Ofgem Challenge Group. November 2019. The topics of conversation included our net zero Regular discussions were held at the Executive Committee and ambition, with a focus on practical solutions to move the agenda the Board on progress with stakeholder engagement, the forward. The discussions also covered RIIO-2. development of the RIIO-2 business plans and on interactions with the challenge groups. On invitation, the Chairs of the Chaired The outcomes of engagement activities are reported to the Independent User Groups met with the Board in 2019. appropriate forum and ultimately to the Executive Committee and Board. In the US, any rate case engagement is reported up to the Following a period of engagement with Ofgem, we submitted Executive Committee and the ordering of Executive Committee and our final business plans for RIIO-2 in December 2019. Thereafter, Board as appropriate. engagement has continued with Ofgem evidencing various aspects of the Company’s RIIO-2 business plans such as the formal The Board met with the Governor of Massachusetts and a member question and answer process to explore our RIIO-2 business plan of the Governor’s office in March 2019. Recognising the severity of submission ahead of its draft and final determinations later in 2020. the adverse reaction of various stakeholders to the gas moratorium that was enforced by the Company in downstate New York, the In the US we refined the Company’s regulatory strategy and Board commissioned two external reviews to understand how the business planning for rate cases and other US regulatory priorities. US business had made the original decision. Long-term solutions The Company’s rate case pre-filing stakeholder engagement are being implemented. programme has become a major contributor to the Company’s successful rate case outcomes. The external reviews conducted on the gas moratorium have highlighted lessons and recommendations which are already being implemented. In the short term, all affected customers have been contacted and plans are in place to make sure that they are connected to a gas supply in the near future. Medium- to long-term solutions that are in the best interests of our customers and regulators continue to be progressed. The Board is closely monitoring the output of these developments. Views of other stakeholder groups considered Customers, Investors, Communities and governments, Suppliers, Our colleagues. 46
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Our stakeholders Stakeholder How stakeholder interests have influenced decision-making group How we engage and communicate and the execution of our strategy Company engagement The Board agenda continued to be strongly focused on community Regular discussions and satisfaction surveys to journalists and governmental issues this year such as: and government. • the December 2019 UK General Election and the resulting exit from the European Union on 31 January 2020. We have continued Communities Policy and public affairs and in house US government relations teams to work with our UK regulators and the UK government to ensure and develop, grow and leverage the Company’s relationships with key that free trade agreements are negotiated for our interconnectors governments politicians, officials, wider stakeholders and influencers to ensure the so that consumers continue to reap their benefits. We have also Company is connected with legislation and government policy. looked after the interests of our European staff and sought to ensure continued co-operation in energy balancing across Engagement with local communities in the form of consultations Europe in the future. during construction phases of projects and work with • in the US, the impact on communities following the gas environmental education centres. moratorium in downstate New York was considered in depth by the Board and the Safety, Environment and Health Committee. We liaise with land owners and wider communities where the We progressed dialogue with the New York State Governor and Company has assets and we have established dedicated teams enacted settlement agreements and are now developing to manage relationships. long-term solutions. Board-level engagement • the clean energy agenda: UK and US governments and communities are strongly focused on carbon reduction activities. During the year, the Board received regular updates on the To focus on meeting our net zero commitment and embedding potential impact of renationalisation which had been included as a sustainability into our culture, we applied a sustainability lens policy in the Labour Party manifesto ahead of the December 2019 across our operations and challenged our businesses to commit UK General Election. Regular updates were also received in relation to challenging targets. In the US, at the state level, we have strong to Brexit. alignment with policymakers and regulators who, like us, are committed to a cleaner energy agenda. In the UK, we continue The downstate New York gas moratorium and feedback from to work to maintain access for customers to european energy engagement with the Governor of New York formed an important that is affordable and renewable, and the Board also approved part of the Board’s agenda for the US business. the Company’s announcement of its target to become carbon neutral by 2050. Views of other stakeholder groups considered Customers, Investors, Regulators, Suppliers, Our colleagues Company engagement In the UK, feedback received through our stakeholder-led RIIO-2 UK customer programme – we use several channels such as business plan provided an understanding on how satisfied our operational fora, liaison meetings, market research, stakeholder customers are with the service we provide. Their views on the events and interactive customer listening sessions to engage with outputs we should provide during RIIO-2, how these should be Our customers our customers. We have in place a robust governance structure delivered and the effect on their bills, were considered by the Board. to ensure our engagements and insights are shared at all levels. This includes a strategic meeting accountable for customer and In the US, we have incorporated ‘voice of the customer’ in Executive stakeholder experience across the UK core business. It is chaired Committee and Board papers and received feedback to support our by our UK Executive Director and attended by the UK Executive five new strategic imperatives which will guide our customer focus. Committee members on a quarterly basis. To support this, we have a committee made up of senior leaders from across the UK The Executive Committee and Board also received updates on the business. This governance is designed to ensure our pipeline of US KEDNY/KEDLI and Niagara Mohawk rate case filings. work addresses customer needs and continuously raises the bar. We also ensure customer experience remains one of our top Views of other stakeholder groups considered priorities by measuring and tracking progress against our customer Investors, Regulators, Our colleagues, Communities and experience strategy throughout the Company. government US customer team – collects and communicates ‘voice of customer’ feedback throughout the business, gathered via customer surveys on a tracking and ad hoc basis to measure customer sentiment of residential, commercial and wholesale customers. An online community of 6,000 residential customers enhances insight with fast and continuous feedback. We are also leveraging design to inform customer experience solutions, process changes and product development. Board-level engagement In the year, the Board received updates on both the UK and US customer strategies. Bi-annual reports were also submitted to the Board from the UK, US and NGV businesses. Company engagement In collaboration with our suppliers, our focus is on delivering Strategic relationship meetings are conducted regularly between low-carbon and sustainable schemes for our projects. We suppliers and the procurement team. established major contracts that will support our role in accelerating the clean energy transition. For example: Our suppliers We work closely with our suppliers and peers to build on our • the Board were updated on the six-year, £400 million contract knowledge and promote best practice in the industry to combat with Hochtief-Murphy Joint Venture, who will deliver the tunnelling issues such as climate change. and shaft work for the London Power Tunnels 2 project; and • the Board received an update on the chosen supplier, Balfour Board-level engagement Beatty, who had been chosen to be the civil works supplier for the Bi-annual reports relating to our suppliers were submitted to the Company’s interconnector to Denmark. The four-year, £90 million Executive Committee and annual reports to the Board. contract will deliver the British onshore civils works for the project. Views of other stakeholder groups considered Investors, Regulators, Communities and government, Customers 47
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Our commitment to being a responsible business In 2019, National Grid conducted a processes and policies. This brings together, and enhances, our focus on the environment, people and communities that have been at the core comprehensive review of where we can of our approach to responsible business for many years. create the most positive impact on society. We have committed to embedding the following five key elements of The resulting principles of responsibility being a responsible business into our strategy and goals. These are are being embedded to inform everything areas where the Company can create maximum total societal impact: the environment, our governance, our colleagues, the communities we do as a business. we serve and operate within, and the economy. This approach has informed and guided our response to the COVID-19 Responsibility at National Grid crisis, with a focus on caring for our colleagues, supporting the Our purpose is to “Bring Energy to Life” and we do this through the communities and customers we serve, and helping protect and delivery of the electricity and gas that powers our customers and restore the economies we operate within. communities; safely, reliably, and efficiently. But we also have an important role as a responsible citizen in society as a whole, in our Our approach to reporting communities, and as a responsible employer. This section contains information relating to the key focus areas that are considered material to shareholders, as identified by our internal review To further this ambition, during 2019/20 we applied the lens of being a of total societal impact. purpose-led organisation, including the principles of an ESG (Environmental, Social and Governance) framework, to review and adapt the way we We have rigorous policies in place that support our approach to manage our business responsibly, looking at everything from our strategic corporate responsibility and we report on a number of non-financial investment process, to our role in the community, to our procurement performance measures relating to these policies. Our principles of responsible business Governance Our communities Ensuring that our governance Delivering sustainable mechanisms reflect our energy safely, reliably, commitments and ensure that and affordably; ensuring the principles of responsibility they get the benefits. guide us in everything we do as a business. Our purpose To Bring Energy to Life Our vision To be at the heart of a clean, fair and The economy affordable energy Environmental Powering society, future Enabling a fair and partnering with affordable transition regulators, our business to a clean energy partners and suppliers. economy. Our colleagues Delivering sustainable energy safely, developing the right skills to enable and accelerate the energy transition. 48
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Our commitment to being a responsible business “In early 2020 we launched a Company-wide community investment strategy to Our communities ensure that our programmes We are committed to delivering sustainable energy safely, reliably and affordably for the communities we serve. In 2019 we recognised the enable skills development importance of ensuring that our communities enjoy the benefits of the clean energy transition and that no one should be left behind in with a focus on lower-income delivering those benefits. communities.” These shifts in our sector will require investment. We are committed to working with the communities we serve to help them meet, or exceed, their overall climate and carbon ambitions, and we will look to do so in an affordable way. As we develop long-term affordability targets, we will ensure that National Grid’s cost to our customers is reported 45,000 £47m transparently on an annual basis. (2018/19: £54m) Jobs to be created across As well as affordability, the principle of fairness is also important. We the UK and US to support Contribution of our corporate will play our role in ensuring that no-one is left behind in the transition to lower-income communities responsibility work clean energy, and that the associated benefits are enjoyed by all. A fully decarbonised transportation infrastructure, for example, should be accessible by everyone across the communities we serve. Finally, we embrace our responsibility to maintaining the delivery of energy Part of our responsibility is to serve society fairly and affordably. In the US to the communities we serve, safely and reliably. we already care for vulnerable customers with low-income programmes, bill discounts and free energy efficiency advice. In response to the COVID-19 Engaging with our communities crisis, we have expanded customer support, paused late payment collections activities, and placed a freeze on related service cutoffs. We regularly seek feedback from our customers to find out what they think of us and the services we provide, and take the appropriate action In the UK, National Grid established a £150 million Warm Homes Fund. to improve and exceed customer satisfaction. You can read more about This is the largest private sector investment in energy efficiency ever our customer satisfaction performance on page 18. made in the UK, and is designed to support local authorities, registered social landlords and partnerships to help approximately 50,000 Supporting communities to thrive households suffering from fuel poverty. Protecting vulnerable customers Responsibility in our communities means safely maintaining the resilient remains a key priority as we seek to ensure that no-one gets left behind energy systems society expects and has become accustomed to, as in the transition. And by engaging with customers to reduce their energy well as ensuring that our economic and social role in the community has usage, we can also help them reduce their carbon emissions, the greatest possible positive impact. That’s why we partner with charity contributing to the overall decarbonisation of the economy. organisations and encourage and enable our employees to volunteer to work with them. In early 2020 we launched a Company-wide community Reliability and resilience are part of our regulatory duty, but also our social investment strategy to ensure that our programmes enable skills development contract. There isn’t a choice between a clean energy system and a with a focus on lower-income communities. These programmes are reliable one. Due to the effects of climate change, we expect our network intended to create employment opportunities in the energy sector, related will need to be more prepared to recover from extreme weather events, to the clean energy transition. We are committed to tracking programme and we are committed to ensuring the reliability of supply, as well as participants from initial interaction all the way through to eventual playing a leading role in disaster recovery. employment either at National Grid, our partners, suppliers or other organisations involved in the challenge of meeting net zero. Our goal is to create 45,000 jobs across the US and UK through this new initiative. Case study – UK Case study – US The Hinkley Connection Project Ideal Dairy Farm, New York Our project will connect the UK’s first nuclear power station for a The New York State Energy Research and Development Authority and generation; introduce T-pylons to our network; and release low-carbon National Grid work collaboratively to deliver technical and financial and renewable energy from the south west. It’s a positive and exciting resources to the agriculture community across New York State. We are future. Getting there, however, means impacting communities with pleased Ideal Dairy, LLC has been a beneficiary of this scheme. construction for seven years. Energy costs are a significant expense for a farm. Expansion has always In return, we’re helping local people create a future of their own and are been part of Ideal Dairy farm. Recognising the importance of greater investing in the local economy via adult skills and employment. Working economies of scale, Ideal Dairy decided to proceed with a multi-million with stakeholders we have created bespoke training and support for the dollar expansion project. National Grid provided financial incentives for long-term unemployed. Our aim is to help more than 300 long-term the energy-efficient equipment as well as an economic development unemployed into work; so far, 49% of those under training have gained grant for a new commercial underground three-phase 1,600 amp service employment. to support this expansion. The new well-lit parlour and barns with efficient ventilation systems keep the areas bright and comfortable for We listened to government agencies, local authorities, job centres and the cows and workers. This optimises production. charities – as well as our customer, EDF. Their feedback helped us design a course that responds to local labour markets and, with retention Ideal Dairy has grown from 1,230 cows in 2016 to 2,300 cows while a key challenge, encourages trainees to complete it. Based on doubling production to 22,000 gallons of milk a day through efficiencies. stakeholder feedback, we emphasised traffic management training. With the success of this project, they added a freestall barn in 2019 and plan for another one in 2021. They anticipate this will enable them to grow Stakeholders challenged us to focus training in areas most affected by to 3,000 cows. Through this expansion, Ideal Dairy is improving the construction and we are now revisiting our approach. environment by reducing their energy consumption, and keeping their workers satisfied, whilst serving their community. Through our commitment to benefit the communities in which we operate, we are connecting with people, as well as low-carbon generation, leaving a legacy of job creation and upskilling. 49
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Our commitment to being a responsible business continued Environmental: The path to net zero We are embracing our role at the heart of the energy system and “In 2019 we furthered our understand the critical role we play in tackling climate change. The markets in which we operate have announced ambitious carbon commitment to combating reduction targets and further legislative actions are anticipated in all our markets. These targets will be challenging and we embrace climate change with the the opportunity to support the delivery of these goals. announcement that we will While the biggest impact we can have is supporting the economy-wide clean energy transition, it is important we also reduce our own direct aim to achieve net zero for impact on the environment. our direct emissions by 2050.” In 2012, we developed our environmental sustainability strategy, “Our Contribution”, to set a framework for embedding sustainable decision- making into our business operations. We focused on three key areas – Our Contribution Progress Highlights climate change, responsible use of natural resources and caring for the natural environment – and set targets to deliver progress through the End of Calendar Progress through end of 2020. In 2019/20, we have continued to advance our work. Metric Year 2020 Target 2019/20 Reduce Scope 1 and 2 45% reduction 70% reduction We continue to focus on carbon reduction being factored into both GHG Emissions our major investment decisions and our tender process for major construction projects. These actions encourage not only our teams, Send zero office waste 100% from major sites 95% but also our supply chain to deliver lower-carbon solutions. Supply chain to landfill emissions are classified as Scope 3 emissions and, as such, the tender Reuse or recycle 100% by 2020 100% carbon weighting will help us reduce our Scope 3 emissions. recovered assets We also have programmes in place to ensure that we are making Recognise and 50 sites 50 sites with 8 improvements to the natural environment. One such programme focuses enhance the value of additional sites us on finding better ways to deliver an increase in environmental benefits our natural assets in progress on non-operational land, while working with local partners and communities. Carbon pricing Implement carbon On track to complete Work under this programme prioritises local environmental benefits, for pricing in major in major business example increasing pollination, community access to green space and investment decisions areas by end of 2020 bio-diversity (see the Pollinator Meadow Project case study below). Case study – US Case study – UK Pollinator Meadow Project – Pawtucket, Rhode Island Chairman’s Awards: Save Evie’s Whale Our electric transmission corridors must be regularly maintained to The annual Chairman’s Awards are a demonstration of how we use prevent vegetation from endangering the wires. We see this as an governance to bring our purpose, vision and values and the role we play opportunity to practise environmental stewardship. in society to life. Every year more than 150 teams submit entries that show how the work we do at National Grid contributes positively to our As meadows are becoming rare as more New England pastures grow people, our customers and communities now and in the future. back into forests, transmission line corridors are increasingly important as low growing-shrub and meadow habitat. To assess the viability and In 2019 the “Save Evie’s Whale” campaign was chosen as the winner practicality of incorporating wildflower plantings into our vegetation of the Chairman’s Awards at an event in New York. The campaign was management program, we implemented a pollinator pilot project in inspired by Evie O’Grady, the seven-year-old daughter of one of our Pawtucket, Rhode Island. During this pilot, we converted almost two employees, who made a drawing of a whale – because she was so upset acres of transmission line corridor to wildflower meadow. The project about the number of whales dying due to plastic pollution in our oceans. was a success and the flowers continue to flourish. We will continue to Evie’s drawing and her story became an inspiration to encourage monitor the project and are committed to creating at least one new employees to think about the environmental impact of single-use plastics. pollinator site in the US per year, over the next five years. In June 2019 we made a commitment to remove single-use plastics from sale at our UK offices by 2020. Projects like these not only help the environment, but also allow us to build connections with local environmental organisations and customers and The “Save Evie’s Whale” campaign brought that commitment to life and increase public understanding of our vegetation management programmes. provided a platform to engage with employees and suppliers about reusable cups and other materials, and effective recycling behaviours. Piloted in our Warwick UK offices, with the campaign we have successfully eliminated plastic straws and plastic cutlery and eliminated over 46,000 polystyrene containers and 22,000 plastic containers going into general waste annually. The programme also created significant cost savings by reducing the use of consumables, improving recycling rates, and cutting the volume of waste generated. “Save Evie’s Whale” has since been rolled out in offices across the UK, and also at local schools and community groups, inspiring behaviour change in society. Over 4 million pieces of single-use plastic have so far been eliminated. 4 million+ pieces of single-use plastic eliminated 50
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Our commitment to being a responsible business Building on earlier actions to manage office waste, we launched waste To achieve these targets, we will also progress our emission reductions reduction campaigns across our offices in the UK and the US. In the UK by continuing, and accelerating, current emissions reduction we have eliminated over four million items of single-use plastics, mainly programmes, and by looking for new, innovative ways to reduce our related to food and beverages (see the Save Evie’s Whale case study emissions. We are reducing leakage from our gas pipelines through our on the previous page). In 2019, we also diverted 95% of office waste gas mains replacement programmes and through innovative robotic from our targeted sites away from landfill, and are aiming to complete pipe sealing techniques. We are piloting the use of parts of our gas work at the remaining sites in 2020. network for the distribution of hydrogen and RNG. We are working with suppliers to evaluate potential alternatives to SF6. Our Further Commitments to Reducing our Impact and Achieving Net Zero Energy efficiency is one of our key focus areas. We have ongoing energy reduction targets in our US and UK core office facilities. As an example As we work to meet our 2020 ‘Our Contribution’ commitments, we of our progress, in the UK, we have exceeded our target by reducing will continue to reduce our carbon footprint, maximise the value of energy consumption by 11% from a 2015/16 baseline. In the US, we our resources and enhance the environment; however, we recognise performed whole-building LED replacements at two of our key locations that we can do more to combat climate change and improve the and expect to yield annual site electricity savings of 6% and 17%. We are environment. To accomplish this, as part of our Responsible Business also working to reduce our transport energy use through the purchase review, we are developing new metrics and targets to further challenge of alternative fuel fleet vehicles and employee programmes promoting us and allow for monitoring and evaluating our performance. These will the purchase/lease of electric vehicles. be announced later this year. For the US and UK, our operational energy use is 2,330 GWh, our The cornerstone of our revised targets is our commitment to achieve net facilities energy use is 285 GWh, our transport energy use is 405 GWh zero for our scope 1 and 2 greenhouse gas emissions by 2050 that was and electricity energy losses from our networks are 12,311 GWh. US announced in November 2019. This replaces our previous target of an generation is also responsible for 12,892 GWh. In these figures, facilities 80% reduction by 2050 to better align with our ambitions. We also set energy use is defined as the energy used in powering and heating our more ambitious interim targets for our emissions reductions of 80% by offices, whilst operational energy accounts for energy used in fulfilling 2030 and 90% by 2040. our primary business. Transport covers business travel, including our own fleet, hire cars and personal car use for business. Understanding National Grid’s greenhouse gas emissions We have committed to achieving net zero We monitor and report our greenhouse gas emissions in accordance with emissions for our Scope 1 and 2 emissions the World Resources Institute and World Business Council on Sustainable by 2050. Most of our Scope 3 emissions are Development Greenhouse Gas Protocol. emitted from two key business activities: the sale of gas and electricity to customers Scope 1: Direct Emissions from the operational activities of National Grid. in the US (82%) and the purchase of goods Scope 2: Indirect Emissions from gas and electricity purchased and used and services (18%). We are working with by National Grid. our customers and our supply chain to reduce Scope 3 emissions and assessing Scope 3: Other Indirect Emissions from activities occurring from appropriate targets for our Scope 3 sources that National Grid does not own or control. emissions to align with pathways to 2050 targets. Our main sources of greenhouse gas emissions are shown below. Key: Greenhouse gas emissions included in our net zero target Scope 2: Indirect Scope 3: Indirect Scope 1: Direct Scope 3: Indirect Upstream Our operations Downstream Scope 2 Scope 3 Scope 1 Scope 3 • Line losses from • Purchased goods • LIPA electricity • Use of ‘sold product’ • Waste management our electricity and services generation or emissions from transmission and • Business travel • Leaks and venting our customers’ distribution lines from our gas use of the gas • Employee and electricity we • Energy purchased for commuting transmission and use at our facilities distribution systems purchase on their behalf • Use of electric drive • SF6 leaks from our compressors in our electric equipment gas business • Fleet vehicle use • Gas-fired compressor use 51
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Our commitment to being a responsible business continued Our colleagues We employ around 23,000 people, located both in the UK and the US. “We create an environment Our people are the lifeblood of National Grid. Their safety and wellbeing are our primary concern and a priority for every one of us at National Grid in which our employees can – they underpin everything we do. Any safety incident is one too many and we continually strive to improve safety for our employees. Our make a positive contribution, ambition is to ensure that all of our employees and contractors are able to go home safely at the end of each and every day. develop their careers and Our COVID-19 response started with supporting our people to work reach their full potential.” safely from home or as required in the field for essential activity, and to support their physical and mental health needs wherever they are. We have also facilitated volunteering opportunities during the crisis, and Employee engagement score The Times increased paid-time available for volunteerism. Preparing our colleagues for the clean energy transition 77 Top 50 Responsibility towards our people also means training them and (2018/19: 73) Employers for women (re)skilling them for the evolving needs of our businesses. The necessary skills and profiles of our employees and those at our partners and competitors are changing. We need forward-thinking, creative minds to help meet the challenges we face in connecting people to the energy Living wage they use. We anticipate a number of areas of increased focus in the future, such as data analytics to manage more complex grid flows and In the UK, we are accredited by the Living Wage Foundation. Our the customer interactions needed to balance supply and demand. We commitment to our direct employees extends to our contractors and will also need skills to design and implement new energy technologies, the work they do on behalf of National Grid. We believe that everyone such as renewables and heat pumps. Technicians will have skills to should be appropriately rewarded for their time and effort. We also go install and maintain energy efficiency measures and technologies as above the Living Wage requirements and voluntarily pay our trainees well as skills to support the deployment and enablement of new the Living Wage. heating technologies such as hydrogen and change management skills to bring society along in the green transition. In 2019 National Grid We undertake a Living Wage review each year to ensure continued commissioned a “Net Zero Skills Report” to identify the jobs needed alignment. We also increase individual salaries as required. to help society achieve net zero and provide a basis for engagement with stakeholders working on the challenge alongside us. Our culture The culture we strive for stems from embracing our values: every day we Investing in our colleagues do the right thing, find a better way and make it happen. You can read Our people and our communities will benefit from the time and financial more about our values on page 12. We also know that building sufficient investments we are making in ensuring that the future skills needed for capability and leadership capacity (including effective succession planning) National Grid, and the broader energy industry, are available. We are is an important factor in delivering our vision and strategy. You can read developing national and local skills development partnerships and more about how we are mitigating the risks in this area on pages 22 – 25. initiatives, with a focus on the lower-income communities we serve. We aim to give access to 45,000 young people from these communities Health and wellbeing over the next five years, tracking their progress from first interaction right We take a proactive, risk-based approach to managing health and through to employment at National Grid, our partners and suppliers, wellbeing at National Grid. We continue to focus our efforts on creating or adjacent companies and industries. Our employees are expected sustainable wellbeing behaviour change within our workforce. We do to play a critical role in these programmes. this mainly through education and training and by managing our key wellbeing risks. Keeping our colleagues safe The safety of all our employees, contractors and the general public is Our wellbeing programme focuses on musculoskeletal injury prevention of prime importance to us. We measure the safety of our employees and mitigation, chronic disease prevention, support for a healthy lifestyle and contractors and this is reflected in our KPIs, shown on page 20. and mental wellbeing. We engaged in mental health awareness week To ensure we maintain our high standards of safety performance, we focusing on tools to support managers and employees dealing with have effective policies, procedures and training in place so we can mental health and wellbeing. The training has been well attended. continue to perform at the level we and our stakeholders expect. We supported World Mental Health Day to focus on suicide prevention and encouraging employees to talk and help remove stigma. In 2019, Delivering energy every second of every day is critical to the functioning the UK and NGV businesses signed up to the Mental Health at Work of the economies and communities we serve. The reliability of our energy Commitment focusing on six key commitments which are implemented networks is one of the highest priorities after safety. Our networks and monitored through the Thriving at Work standard. In the US, we are continue to provide reliability running at more than 99.9% availability tackling musculoskeletal and soft tissue injuries through preventive in both the UK and US. You can read more about this on page 19, athletic training programmes to encourage stretching and flexing and find out how we manage our operational risks on pages 22 – 25. before undertaking manual tasks. In 2019, the US launched a Fatigue Risk Management System, with essential training for employees and Engaging with our colleagues supervisors to identify and mitigate fatigue risk in each area of Operations. Through a third-party partner, we carry out an annual EES to measure Gender pay gap engagement levels and to help us address areas employees believe we need to improve. Employee engagement forms one of our KPIs – you We review gender and ethnicity pay gaps annually in both the UK and can read more about this and our performance on page 20. US and although we are broadly comfortable with our performance, we continue to strive to recruit and develop more women and ethnic minorities. For more information about our UK gender pay, visit our website at: www.nationalgrid.com/careers/understanding-our-uk- gender-pay-gap 52
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Our commitment to being a responsible business Promoting an inclusive and diverse workforce We continue to participate in numerous awards and benchmarks National Grid is dedicated to building a workforce which is representative to recognise the great work of our colleagues (including Disability of the communities we serve, in all aspects of diversity. We also continue Confident, The Times Top 50 Employers for Women, Best Places to provide an inclusive culture across each stage of our colleague journey. to Work for LGBT Equality and Forbes 2019 Best in State Employer; we were also shortlisted in the Top 10 Outstanding Employers at The Our inclusion and diversity policies demonstrate our commitment to Ethnicity Awards for 2019). These also offer us the opportunity to learn, providing an inclusive, equal and fair working environment by: focus our strategy and continually improve our approach to inclusion and diversity. We have close partnerships with external best practice • driving inclusion and promoting equal opportunities for all; organisations and are active members of sector- and industry‑wide • ensuring our workforce, whether part-time, full-time or temporary, groups which ensure we are sharing best practice and campaigning is treated fairly and with respect; at a sector-wide level for greater inclusion for all. • eliminating discrimination; and • ensuring that selection for employment, promotion, training, Our policy is that people with disabilities should be given fair development, benefit and reward is based on merit and in line consideration for all vacancies against the requirements for the role. with relevant legislation. Where possible, we make reasonable adjustments in job design and provide appropriate training for existing employees who become We are committed to transparency and reporting annually on our progress disabled. We are committed to equal opportunity in recruitment, on BAME and female representation on our Board, at manager level, promotion and career development for all employees, including those among new joiners and our workforce as a whole. We remain focused with disabilities. Our policy recognises the right for all people to work on bringing the best diverse talent into our organisation and supporting in an environment that is free from discrimination. them to reach their full potential. The gender demographic table that follows shows the breakdown in We also adopt this approach to our future talent, with our Apprenticeship numbers of employees by gender at different levels of the organisation. and Graduate programmes actively encouraging applications from diverse We have included information relating to subsidiary directors, as this is candidates. During 2019/20, in the US we attracted 31% female applicants required by the Companies Act 2006 (Strategic Report and Directors’ and 51% ethnically and racially diverse applicants to our graduate Reports) Regulations 2013. development roles. We also took 36% female applicants and 52% ethnically and racially diverse applicants into our internship programmes. We define ‘senior management’ as those managers who are at the Our UK Graduate Programme attracted 25% female applicants and 57% same level, or one level below, the Executive Committee. Our definition ethnically and racially diverse applicants. Our UK Industrial Placement also includes those who are directors of subsidiaries, or who have and Student Internship programmes attracted 28% female applicants responsibility for planning, directing or controlling the activities of the and 45% ethnically and racially diverse applicants. Group, or a strategically significant part of the Group, and are employees of the Group. A total of 18.3% of our workforce have declared themselves to be of ‘minority’ racial or ethnic heritage and we currently have 24.7% Gender demographic as at 31 March 2020 females across our total workforce. We are very much aware, however, Our Senior Whole of the number of ‘declined to state’ responses we have across all diverse 1 2 3 characteristics and as a result in 2019/20 we launched our #thisisme Board management company campaign, not only to increase our disclosure rates, but also to demonstrate number number number our commitment to a culture of openness and security for colleagues to share who they are. This year also saw a number of our most senior leaders Male 8 165 17,379 participate in reverse mentoring. This allowed them to get a different Female 4 82 5,690 perspective on life, not only at National Grid but also more generally. This has provided a mutual knowledge share and dialogue between Total 6 12 247 23,069 senior individuals from our organisation and more junior individuals from a diverse range of background with fantastic feedback from all parties. Male (%) 66.7 66.8 75.3 Female (%) 33.3 33.2 24.7 We continually work to ensure our application, assessment, development and training provisions more broadly, are all inclusive 1. ‘Board’ refers to members as defined on the Company website. and accessible. We offer our current colleagues training and 2. ‘Senior management’ refers to Band A/B employees as well as subsidiary directors. development programmes which ensure they are aware of acting 3. This measure is also one of our Company KPIs. For more information, see page 20. on bias, while providing specific development programmes for our diverse colleagues in both the UK and US. We have 17 Employee Resource Groups (ERG) (11 in the US; 6 in the UK), which are all highly active and visible across the business, with events and awareness-raising campaigns throughout the year (including a strong presence at WorldPride in New York this year). Our ERGs also provide a crucial support network to our diverse colleagues. 53
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Our commitment to being a responsible business continued Total headcount as at 31 March 20204 Employee turnover The tables below show the breakdown of employees by work pattern Turnover is defined as employees who have left in the last 12 months and diversity. as a percentage of headcount last year. Voluntary turnover relates to employees who have left through either resignation or retirement. Work pattern Non-voluntary attrition includes any other leave reasons – including dismissal and severance. Full-time Part-time5 number % number % Voluntary Non-voluntary Total UK 6,027 95.3 294 4.7 % % % US 16,629 99.3 119 0.7 UK 6.4 4.8 11.2 Total 6 22,656 98.2 413 1.8 US 7.7 1.6 9.3 6 4. In scope are active, permanent employees. Out of scope are temporary employees. Total 7.4 2.4 9.8 5. Employees recorded in our system as part time, or have <1 full time equivalent. 6. Included in ‘Total’ are Non-executive Directors and Executive Directors. Gender Male Female National Grid traditionally has low voluntary turnover and high employee tenure, driven by high engagement and good career opportunities as number % number % evidenced by our high internal churn rates. Non-voluntary attrition is in the majority comprised of severance. UK 4,548 72.0 1,773 28.0 US 12,831 76.6 3,917 23.4 Training days per employee From 1 April 2019 to 31 March 2020, the total number of training days Total 6 17,379 75.3 5,690 24.7 delivered per employee (as recorded in our HR systems), across the whole Company was 6.0 days (2018/19: 5.3). There was also a reduction in Ethnicity demographic as at 31 March 2020 training activity towards the tail-end of March as a result of the COVID-19 ‘Minority’ refers to racial/ethnic heritage declarations as recorded in our lockdown in both our UK and US businesses. system. Those who have not stated their ethnicity are excluded from the baseline. Promotion rate The table below shows the rate of promotion within the business. White 17,482 Promotion rate is defined as the number of employees who were promoted to a higher grade as a percentage of headcount last year. Minority 3,918 Declined to state 1,669 Promotion rate % White (%) 81.7 UK 14.1 Minority (%) 18.3 US 16.1 Total 15.5 The economy Our economic contribution to society comes primarily through the “We are fair to our suppliers delivery of safe and reliable energy. Crucially, we make sure energy reaches homes and businesses safely, reliably and efficiently. But our and committed to paying contribution as a responsible, purpose-led business also comes as an employer, a tax contributor, a business partner, and community partner. them promptly.” We help national and regional governments formulate and deliver their energy policies and commitments. Our approach to regulatory consultation is to seek a framework that puts consumers at the centre We are fair to our suppliers and committed to paying them promptly. of our price control, while enabling the clean energy transition. Evolving We also influence our supply chain to operate as responsible businesses, that partnership to help enable the clean energy transition and slow the requiring all suppliers to share our commitment to respecting, protecting pace of climate change before it cannot be reversed, will also be key in and promoting human rights. protecting future economic growth, and safety and wellbeing in society. This includes alignment to the United Nations Compact Guiding Our geographic footprint means that our economic contribution is felt Principles, the International Labour Organisation standards and the in lower-income communities that can truly benefit from the ripple effect Ethical Trade Initiative Base Code as a reference standard. of our local presence, from rural communities in New England, to the UK where most of our economic contributions are made outside London. Our tax contribution helps to fund services and we are committed to a coherent and transparent tax policy and recognise our economic role in society in doing this (more information on tax can be found on pages 28 – 37). 54
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Our commitment to being a responsible business Governance Our approach to corporate governance plays an important role in “Our Code of Ethical helping us develop our culture at National Grid – a culture that embraces diversity and inclusion, and an environment where everyone can fulfil Business Conduct sets their potential. Our Board will continue to play a vital role in setting the tone right from the top. We apply a robust framework to ensure that out the standards and stakeholder considerations are suitably captured and enhancements made to strengthen the views of stakeholders in the boardroom. behaviours we expect from Human rights all employees to meet our Respect for human rights is incorporated into our employment practices and our values, which are integral to our Code of Ethical Business values of Do the Right Conduct – the way in which we conduct ourselves allows us to build trust with the people we work with. We earn this trust by doing things Thing, Find a Better Way in the right way, building our reputation as an ethical company that our stakeholders want to do business with, and that our employees want to and Make it Happen.” work for. We were recently recognised by Ethisphere as one of 2020’s World’s Most Ethical Companies. Although we do not have specific policies relating to human rights, slavery or human trafficking, our Global Ethical business conduct Supplier Code of Conduct (GSCoC) integrates human rights into the way we do business. Throughout our supply chain alongside other areas of Our Code of Ethical Business Conduct sets out the standards and sustainability we create value, preserve natural resources and respect behaviours we expect from all employees to meet our values of Do the the interests of the communities we serve and from which we procure Right Thing, Find a Better Way and Make it Happen. The document is goods and services. Through our GSCoC, we expect our suppliers to issued to all employees and is supported by a global communication comply with all legislation relating to their business, as well as adhering and training programme to promote a strong ethical culture. Additionally, to the principles of the United Nations Global Compact, the International we provide briefings for high-risk areas of the business, such as Labour Organisation (ILO) minimum standards, the Ethical Trading Procurement. Our Code is updated every three years and is currently Initiative (ETI) Base Code, the UK Modern Slavery Act 2015, the US being updated with a release date later in 2020. In addition, we have Trafficking and Violence Protection Act 2000 and, for our UK suppliers, a new Ethics Business Management Standard which provides a the requirements of the Living Wage Foundation. framework around our ethics programme and describes what is expected of the business. Anti-bribery and corruption Compliance framework We have policies and governance in place that set and monitor our approach to preventing financial crimes, fraud, bribery and corruption, Each of our business areas is required to consider its specific risks and including our Code of Ethical Business Conduct (covering bribery and maintain a compliance framework, setting out the controls it has in place corruption). We have a Company-wide framework of controls designed to detect and prevent bribery. As part of our compliance procedure, the to prevent and detect bribery. business is asked to self-assess the effectiveness of its controls and provide evidence that supports its compliance. We investigate all allegations of ethical misconduct thoroughly and, where appropriate, we take corrective action and share learnings. We Each year, all function heads are asked to certify the compliance in also record trends and metrics relating to such allegations – only a small their area, and to provide details of any exceptions. This culminates percentage of these relate to bribery or corrupt practices, so we do not in presentation of a Certificate of Assurance from the Chief Executive consider them to be material for reporting purposes. to the Board (following consideration by the Audit Committee). Governance and oversight Working with our supply chain We review and update our framework regularly so we can make sure our Our GSCoC is issued to our suppliers annually and sets out our procedures remain proportionate to the principal risks we have identified. expectations and fundamental principles, including preventing and detecting bribery and corruption, which should extend into the supply Our UK and US Ethics and Compliance Committees (ECC) oversee the chain. All our suppliers must comply with all laws relating to their Code of Ethical Business Conduct and associated awareness programmes. business which includes human rights, business ethics, resilience, Any cases alleging bribery are required to be referred immediately to the supplier diversity, skills development and environmental sustainability, relevant ECC so the members can satisfy themselves that cases are as well as adherence to the principles of the United Nations Global investigated promptly and, where appropriate, acted upon, including Compact, in accordance with all applicable local, state, federal, national ensuring any lessons learnt are communicated across the business. and international laws or regulations including the UK Bribery Act 2010 and the US Foreign Corrupt Practices Act 1977. We provide specific The Audit Committee receives an annual report on the procedures currently guidance and briefings for high-risk areas, so contractors, agents and in place to prevent and detect fraud and bribery. You can read more about others who are acting on behalf of National Grid do not engage in any the Audit Committee’s role on pages 76 – 81. None of our investigations illegal or improper conduct. over the last 12 months have identified cases of bribery. Whistleblowing Anti-financial crimes policy We have confidential external speak-up helplines available 24/7 in all the We have launched a new Anti-Financial Crimes policy which applies regions where we operate. We publicise the contact information to our to all employees and those working on our behalf. It sets out our employees and on our external website so concerns can be reported zero‑tolerance approach to bribery, fraud, money laundering, tax anonymously. Our policies make it clear that we will support and protect evasion and other corrupt business practices. whistleblowers and any form of retaliation will not be tolerated. To ensure compliance with the UK Bribery Act 2010 and other relevant legislation, we operate an anti-financial crime risk assessment process across the Company to identify higher-risk areas and make sure adequate procedures are in place to address them. Fraud and bribery risk assessments are conducted annually across the business. As part of our global training strategy, we introduced an e-learning course for all employees so they can adequately understand the Company’s zero-tolerance approach to fraud, bribery or corruption of any kind. 55
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Our commitment to being a responsible business continued Preventing modern slavery We also facilitated an industry masterclass to discuss common issues We strive to prevent modern slavery from taking place anywhere in our in the sector and work more closely together to increase awareness and business or in our supply chain. drive positive change. We expect all our suppliers to be compliant with the Modern Slavery Act We are an active member of the United Nations Global Compact and to publish a Statement if required. Each year, we update our own Modern Slavery Working Group, signatories to the Construction Statement and publish this on our Company website in line with the Protocol, and are working with Achilles to develop a community Modern Slavery Act’s requirements. In 2019, our Statement was approach to address the issue. We are also revising our procurement independently assessed by Development International, a new ranking process, so that modern slavery criteria and identifying human rights of the nation’s largest publicly listed organisations, and we were listed risks form part of our sourcing process. in the top quartile for FTSE 100 listed companies. In 2018, we were also assessed by the Business & Human Rights Resource Centre (BHRRC) In 2019 we signed up to the People Matter Charter which has been and were positioned 12th in the FTSE 100 ranking and recognised as one created by the Supply Chain Sustainability School, of which we are of a ‘small cluster of leaders standing out’ in this space. BHRRC did not a partner member, to develop and implement consistent workforce publish a ranking in 2019. standards throughout our industry. We work closely with our suppliers and peers to build on our knowledge and promote best practice in the industry to combat modern slavery. During 2019, we continued to engage with suppliers identified as being within potentially high-risk categories. Through this engagement, which included a US workshop following on from the UK workshop in 2018, we encouraged our suppliers to conduct similar risk assessments with their own supply chain. Non-financial information Some of the BMS standards that we pursue to ensure consistent This section provides information as required by regulation in relation to: governance on a range of non-financial matters, can be seen below. They are not limited to this selection. These have been summarised • environmental matters; for the purpose of the Non-Financial Information Statement. • our employees; • social matters; Policies and documentation • human rights; and • anti-corruption and anti-bribery. People • Our Code of Ethical Business Conduct for employees: helps our ethical reputation while ensuring we maintain stakeholder confidence in our ability In addition, other information describing the business relationships, to deliver on our ethical commitments. products and services which are likely to cause adverse impacts in • The Wellbeing and Health BMS Standard: enables our business to relation to the matters above, can be found as follows: proactively manage our health risks and controls by fostering a proactive • business model – pages 2 – 7; approach to wellbeing that can measure and target areas of greatest impact • KPIs – pages 18 – 20; for the business. • The Occupational Safety BMS Standard: ensures that no matter where in • principal risks – pages 22 – 25; and the world our employees or contractors work, they can expect to receive the • Audit Committee Report (our due diligence) – pages 76 – 81. same consistent and high level of protection for their own safety. • The Process Safety BMS Standard: helps to protect people and the Our policies and related governance environment from the risk of major accidents by establishing a safety- Descriptions of the policies and the outcomes pursued in relation focused culture. Process safety is an important commitment at National Grid. Our aim is to be recognised as a high performer in process safety to the above matters are discussed, where material, throughout through the demonstration of industry-leading risk controls, performance this section. A full list of our policies can be found online, at and cultural maturity across the management of all of National Grid’s major www.nationalgrid.com/about-us/corporate-governance hazard assets. • The Human Resources BMS Standard: sets out what is expected of our In addition to our policies, we have a suite of Business Management leaders when managing their employees throughout the employment System (BMS) standards. These standards provide the foundation for lifecycle. bringing energy to life for our stakeholders. They act as our guiderails • The Performance Excellence BMS Standard: sets out how we at National by defining the minimum requirements for the high value and risk Grid ‘find a better way’. It provides the basis for continuous improvement activities most important to our business – allowing our leaders to across everything we do. effectively drive change instead of responding to it. Environment The BMS delivers benefit in four key ways: • The Environmental Sustainability BMS Standard: establishes environmental Risk Mitigation: The BMS defines and sets minimum requirements compliance and environmental sustainability performance requirements for for our principal and other risks so they can be effectively and all operational and non-operational activities. consistently managed across our businesses. Society Best Practice: The BMS establishes a common language and • The Stakeholder Engagement BMS Standard: defines performance framework for what constitutes best practice and provides the requirements for digital and physical external stakeholder engagement by opportunity for Communities of Practice (CoP) to share across creating a consistent approach towards addressing the most important the organisation. stakeholder issues and opportunities. Standardisation: The BMS helps us build efficient processes and Human rights and anti-corruption and anti-bribery matters lean functions in our business areas with global responsibilities – HR, • Procurement Standard: defines how to improve efficiency within our supply IT, Procurement, Finance and Corporate Affairs. By building one way chain expenditure. of doing things, we can capture the maximum benefit from our work. • Global Supplier Code of Conduct. • Modern Slavery Act. Simplification: The BMS acts as a catalyst to challenge and remove • Human rights. documentation and rules that don’t deliver value. The standards will also increase the freedom of leaders to act, knowing the boundaries which can’t be compromised as they strive to work in new and innovative ways. 56
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Task Force on Climate-related Financial Disclosures (TCFD) Task Force on Climate-related Financial Disclosures (TCFD) National Grid has committed to Key Milestones in 2019/20 implementing the recommendations of the TCFD in full, and below is our third disclosure which builds on our previous two. June/July September November 2019 2019 2019 This year we have continued to make good progress on the recommendations, aided by developments in the markets we operate in, with aggressive ‘net zero emissions’ and renewable targets set in the UK, New York State, Rhode Island and Massachusetts in the last UK Net Zero Climate change Commitment to 12 months, as well as increasing public scrutiny and focus across the Legislation passes; becomes a principal reduce our Scope 1 New York Net Zero by risk for National Grid and 2 emissions to sector and in corporate boardrooms. This year, we have progressed our 2050 Legislation net zero by 2050 scenario planning work, elevated climate change as a principal risk to signed by Governor our Group risk register, issued our first green bond, and evolved our greenhouse gas emission reduction targets. Our work was recognised by CDP as we were named on its climate change A List for the fourth year in a row. In our 2018/19 disclosure, we outlined the areas we planned to focus our attention on during 2019/20. The table below outlines those actions, the January June progress we have made against each during this financial year, and our 2020 2020 areas of focus for the upcoming financial year. Earned a CDP Published our A rating; issued green 2019/20 Annual bond; Report including our Massachusetts third TCFD disclosure Governor and Rhode Island set their 2050 commitments Focus Area Actions outlined in 2018/19 Progress made in 2019/20 Actions to progress in 2020/21 Governance Ensuring senior leadership has an The Board and Executive Committee have Continue to increase knowledge and appropriate understanding and responsibility discussed climate change throughout the skills among senior leadership in this for the risks and opportunities associated year and taken actions as follows: area and include climate change expertise with climate change. • engaged with key stakeholders on aspects as a factor to consider in our Board of the net zero transition, for example, succession planning. bringing in the UK Committee for Climate Change to speak to Electricity Transmission executives; • senior leadership devoted a day to responsible business and our total societal impact, including climate change; and • committed National Grid to reduce our Scope 1 and 2 emissions to net zero by 2050. Strategy The use of climate-related scenarios to inform We have undertaken an analysis of the impact Assess the physical risk to our assets using our business strategy (and disclosure of the to our business model of transitional scenarios updated climate scenarios and quantify the possible outcomes under those scenarios). where decarbonisation goals are, or are not, met. potential impacts. Incorporate this work into The details of this are presented in the scenarios the transition scenario analysis. Build on the section of this disclosure. transitional scenarios we have developed. Risk Embedding climate change into our risk After a full review of our risks, climate change Deliver identified control actions to mitigate Management management process. is now a principal risk for the Group, from its climate change risk. Continue to review the previous status as an emerging risk. See risk and controls as further information is page 23. We also developed ‘business unit developed, including through scenario specific risks’ to ensure that each part of the planning work. business has specific climate change risks. Metrics The development of metrics and targets We announced our commitment to be net zero Personal objectives will be set throughout and Targets to assess performance, and influence for Scope 1 and 2 emissions by 2050 in the business to ensure delivery against our decision‑making and remuneration. November 2019. We revised our interim Scope commitments. Continue monitoring our 1 and 2 targets to an 80% reduction by 2030 metrics and targets and develop and/or and a 90% reduction by 2040. evolve metrics, as needed. In addition, our NGESO published an update to their operability strategy showing the milestones to deliver zero carbon operation of the Great Britain Transmission network by 2025. See page 39. 57
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Task Force on Climate-related Financial Disclosures (TCFD) continued How do we approach the governance of climate-related risks What is our strategy for responding to climate change? and opportunities? Our strategy focus is three-fold: tackle the climate crisis by helping the The Board of Directors is responsible for the oversight of climate- markets we operate in transition to a net zero economy, while reducing related risks and opportunities impacting the Group. During the year, our own impact on the environment and ensuring our networks operate there has been an increased focus on climate-related matters as the reliably under changing conditions. Our strategy is informed by the landscape evolved with regulatory developments and changes in evolving climate change policy and ambitions of the states and countries stakeholder expectations. The Board was involved in the following in which we operate, by the risks and opportunities identified during our discussions relevant to climate change: continuing climate change scenario testing and by our ambition to have • Approving the Group’s commitment to achieve net zero for our a positive impact. Scope 1 and 2 greenhouse gas emissions by 2050 replacing our previous target of 80% reduction by 2050. In addition, we Our financing strategy, which includes us issuing debt from our have set the following interim targets: 80% reductions by 2030 operating companies, is focused on aligning the debt issuances to and 90% by 2040. the business purpose of each of our regulatory deals. As part of this strategy, we launched a Green Financing Framework to enable us to • Climate change was elevated to a principal risk during the year, issue green bonds, loans or other financial instruments in November with the risk now being owned by Alison Kay, a member of the 2019. Green bonds allow us to access new capital pools and engage Executive Committee who has responsibility for Group Safety, with investors who are keen to work with asset owners to facilitate the Health and Environment. The governance process that was clean energy transition. In January 2020, we issued our first green bond undertaken to upgrade the risk from an emerging risk to a in the UK, with the €500 million proceeds being used to finance projects principal risk is described in the case study on page 23. with an environmental benefit across our UK electricity business. We are • Strategy sessions were held, which included discussions related to currently evaluating issuing a green bond in the US in 2020. climate change and considered the scenario testing performed this year (discussed on page 26). Topics discussed included the clean Regulatory Framework energy transition, the future of heat, as well as our strategy for The next 10 years are a crucial period with expected rapid change in renewables and electrification of vehicles. In addition, the Board the energy system, and therefore it is vital that the funding and regulatory held four sessions to consider our role as a responsible business framework is in place to deliver against these targets. Across our business, and our role as a key facilitator of the energy transition featured. we are developing proposals for our regulatory rate filings that support • Approving the RIIO-2 submissions which reflect our investment our strategy to enable the transition and reduce our own impact. proposition for supporting the UK energy transition. • Quarterly review of performance on our environmental sustainability UK RIIO-2 Business Plans metrics and targets. Our RIIO-2 Business Plans were developed through a comprehensive stakeholder engagement programme throughout the RIIO-2 process Responsibility for asset investment and maintenance planning is and have also evolved to reflect the UK government target, announced delegated by the Board to the Executive Committee who then further in June 2019, to achieve net zero emissions by 2050. Our plans cover a delegates the responsibility to the core operational businesses. crucial period (2021 – 2026) for investment to help deliver the UK’s net zero target. The route to net zero emissions is not yet clear but our plans What is the oversight process for climate change related risks are flexible enough to deliver the investment needed in the 2020s. We and opportunities? have built a plan to align with the pathway to net zero by 2050. The Safety, Environment and Health Committee (SEH Committee) is responsible for assessing the Group environmental sustainability In our Electricity Transmission business, we propose £1.35 billion of strategy and performance, as well as how the Company adapts its expenditure to connect new generation and transport electricity across business strategy considering potential climate change risks and the country to where it is consumed, connect us to neighbouring opportunities. As part of this, the SEH Committee tracks, challenges electricity markets and support the Electricity System Operator in being and seeks assurance for the delivery of the plans approved by the able to operate a zero-carbon electricity system by 2025. Whilst Executive Committee. consistent with Ofgem’s business plan criteria, we recognise that these investments alone are insufficient to deliver net zero targets and have The Audit Committee remains responsible for reviewing and approving therefore proposed whole system options to accelerate progress the content of our TCFD disclosures and is taking an increasingly active towards net zero, for example through ultra-rapid vehicle charging at role in overseeing disclosures around metrics and targets. The motorway service areas. As the optimal path to achieving net zero is Committee considered papers in September 2019, November 2019, unclear, we developed a series of uncertainty mechanisms that allow March 2020 and May 2020 summarising the financial reporting and our plans to flex to deliver against the range of low-carbon system disclosure considerations in respect of climate change. developments our customers could bring forward. The Finance Committee is responsible for overseeing our financing In our Gas Transmission business, we recognise that natural gas has an strategy. This year, the Committee reviewed and approved our Green important role to play in supporting the transition to a low-carbon future. Financing Framework. This framework, published in November 2019, Natural gas, hydrogen and biomethane can help to decarbonise heat, aims to facilitate the disclosure, transparency and integrity of our Green the biggest source of UK carbon emissions. Our business plans cover Financing for our stakeholders. a period where developing options and understanding choices is key. We will focus on leading the development of options associated with A TCFD steering group oversees progress against the TCFD gas transmission, specifically hydrogen, to facilitate the decarbonisation recommendations and the publication of our annual disclosure. of heat, industry and transport. The group reports to the Chief Financial Officer, Andy Agg. In our ESO business, our business plans focus on facilitating the Future Intent transition to net zero. For example, our business plans aim to deliver new As the climate change landscape is evolving, we will continue to build architecture and systems in our control centres to be able to operate a upon the good base level of experience and knowledge within senior zero carbon network by 2025, and new monitoring and control systems management (including at Board and Executive levels), as well as to ensure power system stability in a low-carbon world. consider climate change expertise in our Board succession planning. The SEH Committee will continue to monitor our environmental Across all our businesses our plans include targets and commitments to sustainability performance quarterly and approve updates to our manage our own environmental impact, with £530 million of investment environmental sustainability strategy and targets annually. The Audit planned across Electricity and Gas Transmission. We have committed to Committee will continue to oversee the programme to evolve the reducing NOx emissions from our gas compressors, and achieving net assurance model for our responsible business reporting. The Finance zero construction emissions by 2025/26. We are targeting investments Committee will consider the financial impact of environmental factors on to replace leaking SF6 (an insulating gas and source of GHG emissions) our credit metrics and relevant considerations with regards to debt investors. equipment to reduce emissions by 50% by 2030, phasing out the procurement of new assets containing SF6 and introducing SF6 free technologies. 58
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Task Force on Climate-related Financial Disclosures (TCFD) In the UK, there is uncertainty on what further measures will be low-carbon solutions. We have assumed that transition impacts needed to adapt to climate change and meet the UK goal of net zero in this scenario would be focused around technological shifts to by 2050. We welcome Ofgem’s Decarbonisation Action Plan and the support decarbonisation. shift to a more flexible, adaptive regulatory price control regime with • In the 4ºC scenario, changes are less rapid and less comprehensive, a system-wide net zero re-opening mechanism. and emissions remain high, so that the physical ramifications of climate change are more apparent by 2030. In rationalising this US Rate Cases slower global progress, our 4ºC scenario assumed fragmented and In the US, we have ongoing and upcoming regulatory rate case ad hoc policy (within the Group’s operating territories and globally). proceedings. In all proceedings, gas and electric, we are focused on including proposals to support our climate change strategy and enable The main transition impacts of the 1.5ºC scenario were: the net zero transition of the states in which we operate. • A trend towards more large-scale renewables in the generation mix: this would be a positive development for In the US gas distribution businesses, we are focused on decarbonising the Group, but for our electric network businesses the rate our gas networks and the heating sector. We are doing this by reducing of new connections could increase beyond today’s levels: emissions related to natural gas through energy efficiency and demand this could increase costs or, without investment ahead of need, response, continued investment in our leaking pipe replacement lead to a backlog. programmes and advancement of the future of heat. For example, we included a $90 million future of heat proposal in our April 2019 KEDNY/ • A trend towards electrification: increases in electricity demand KEDLI filing which combined expanded energy efficiency and demand would likely trigger electricity network upgrades and investment. response programmes, renewable natural gas interconnection Although network costs are a very small proportion of the customer investments, geothermal investments, and a hydrogen blending study. bill, spikes in spending would need to be managed in conjunction We plan to include future of heat proposals and continued pipe with our regulators to ensure that customers, especially lower-income replacement programmes in our next Niagara Mohawk and customers, are not unduly adversely affected. Massachusetts gas rate filings. This work aligns with the Rhode Island • Public pressure on gas: in line with the Committee on Climate Heating Sector Transformation, launched by the Governor in July 2019 to Change and other external sources, we do not believe substitutes to identify how the heating sector needs to change to meet the state’s methane gas for space heating can reach scale in our territories by climate objectives. This initiative concluded in April 2020 with 2030 (or even 2040, unless extensive new policy is rapidly deployed). recommendations provided to the Governor. Those recommendations However, in this scenario we anticipate that, without mitigating action included increased energy efficiency, electrification through air and to reduce and offset emissions, there is a risk of pushback against ground source heat pumps, and fuel decarbonisation through renewable the use of gas by environmental groups or concerned citizens. natural gas and renewable oil. We are already experiencing growing resistance to building new gas infrastructure in our US business from politicians, concerned citizens In the US electric distribution businesses, we are focused on climate and environmental groups. change and the new energy landscape. For our next Niagara Mohawk rate case filing, we will submit a proposal that focuses on three key areas: The main impacts of the 4ºC scenario were: grid modernisation, customer engagement and supporting the state to • Physical ramifications of climate change: in this scenario achieve its clean energy goals outlined in the Climate Leadership and we expect extreme weather events of escalating severity and Community Protection Act (CLCPA). We will also leverage these grid frequency, which could increase disruption to our assets and our modernisation investments to enable customers to engage with their customers. This would require investment to ‘harden’ assets and energy consumption in an informed and seamless manner. Enabling would heighten the safety risk to our field employees. Our approach New York State’s clean energy transition is a common theme across all to physical climate risk is discussed in more detail below. the above-described proposals and will be further enabled by our work • Lower system visibility: as this scenario sees less coordinated in the electrification of transportation. The Massachusetts rate filing, policy and regulation in pursuit of decarbonisation, we would approved in October 2019, includes work to advance Massachusetts’s anticipate a greater variety of solutions being deployed across our climate objectives including a climate change mitigation and adaptation networks. This could increase overall system costs and reduce plan, an off-peak rebate programme for electric vehicle owners, visibility over the network, potentially slowing our responsiveness approval to include up to $50 million in energy storage in our 2021 grid to disruptive events. We do note, however, that a greater number modernisation plan filing, and a path forward for a significant investment of distributed assets would increase the potential for local balancing, in electric vehicle charging infrastructure in 2021. In Rhode Island, we which could mitigate this. launched an electric vehicle infrastructure and off-peak rebate programme and will be filing a Grid Modernisation and Advanced • Inequality of access: without carefully designed policy, we believe Metering Functionality proposal in the second half of 2020/21. decarbonisation activities have the potential to leave some sectors of society behind: for example, heat pumps and the energy efficiency Future Intent upgrades they typically require are currently cost-prohibitive for many. We are in the process of updating our budgets and forecasts to reflect As well as the ethical implications of this, there is a risk to the Group, the detailed financial impacts of our net zero strategy. especially for our US businesses, that a proportion of our customers would struggle to pay their bills. How have we advanced our climate change scenario analysis? Analysis shows that, without action, both scenarios present risks to us. This year, we have advanced our scenario analysis work that considered However, while these would need to be managed, we would not need both the transition and physical risks to our business. This work is and to materially change our business model. We also note that for a group will continue to inform our strategy and investment plans. in our position, some of these changes represent material opportunities. Transition Risk Analysis Physical Risk Scenario Analysis To further understand the risk that climate change could have on our We recognise that, due to the amount of carbon already in the atmosphere, business, we have undertaken a high-level scenario analysis. We used some escalation of extreme weather events is likely in both the ‘1.5ºC’ two scenarios: the first assumes that the global response to the threat of and ‘4ºC’ scenarios, especially under a longer-term view. This year, we climate change is enough to limit global average temperature increases began Group-level work to assess our physical risks to ensure that any to no more than 1.5ºC above pre-industrial levels (as set out in the Paris necessary measures to defend our assets are identified. We ran an initial Agreement) by 2100 (the 1.5ºC scenario). The second scenario assumes workshop with the US, UK and NGV teams and the UK Meteorological that the 1.5ºC target is missed by some margin, comparable to a 4ºC Office (Met Office) consultancy team to define the key areas of focus global average temperature increase (the 4ºC scenario). (e.g. flooding, icing and hurricane frequency for the US and UK regions) and define how the climate science can answer the questions we have To facilitate business planning, we have considered scenarios out to on the weather conditions our assets will have to operate in up until 2030. In this analysis, we assessed the impacts of the scenarios without 2100. Using the output of this work, we will develop and progress a factoring in activities we might take to adapt to the threats of climate scope to analyse weather data specific to the regions we operate in and change, or the opportunities of decarbonisation. assist in developing an understanding of the vulnerability of our assets as well as the mitigating measures that will be needed to protect them. We made the following simplifying assumptions: We are also undertaking work with a team from the Massachusetts • In the 1.5ºC scenario, rapid changes are made to progress Institute of Technology (MIT) to study the impacts of weather changes decarbonisation goals: coordinated policy, regulation and customer related to climate change in the northeastern US. behaviour favours bans on polluting technologies, and support for 59
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Task Force on Climate-related Financial Disclosures (TCFD) continued What are the risks and opportunities from climate change? The rapid changes in the energy market and demands to meet net zero emission targets present several challenges that are both a risk and opportunity for us. In addition, the changes in temperature and weather patterns have and continue to present challenges and risks. These risks and opportunities, along with a summary of the work we are doing to address them, are presented in the table below. Risk/ opportunity type Description Our response Transition Markets The operating environment and regulatory Facilitating the transition to a low-carbon economy is central to our purpose as a business, framework are rapidly changing in line and certain key actions we are taking in relation to decarbonisation and decentralisation are with the decarbonisation of the electricity set out on pages 12 – 15. and gas networks in the UK and US. Markets Commercial opportunities from the Development of a strategy to enable the building of charging stations across our transition towards net zero (short/medium US jurisdictions and UK highways and to meet demand for electric vehicles. and long-term). We have developed a dedicated programme to understand what is required to incorporate hydrogen and renewable natural gas into the gas supply. Acquisition of Geronimo, a leading developer of wind and solar generation assets based in Minneapolis, Minnesota, to help position us to develop and grow a large-scale renewable business in the US. Our interconnectors form an important part of the UK decarbonisation, by allowing us to exchange surplus renewable electricity with neighbouring countries. We are leading the development of Carbon Capture Utilisation and Storage (CCUS) technology in the Humber, UK, to support this area to become the first zero carbon region in the world. Our continuing energy-efficiency programmes across Massachusetts, Rhode Island and New York have reduced CO2 emissions by more than 725,000 metric tonnes over the past year which is equivalent to the GHG emissions from over 156,000 passenger vehicles driven for one year. Markets Changes in supply and demand for Our analysis, underpinned by the ESO Future Energy Scenarios (FES) shows that, even with existing and new technologies. increased decentralisation of electricity, there is a key role for Electricity Transmission in the UK under a range of scenarios that meet the UK’s 2050 climate change goals. As the transition to renewable generation continues, we will work with the Long Island Power Authority (LIPA) to transform our generation fleet by responding to future RFPs. Under our existing contracts which extend through 2028, LIPA determines their reliability and sustainability needs and which units are operated, retired or transformed. Our FES will be aligned to not meeting, meeting or exceeding the 2050 net zero target. Security and Electricity grid reliability and Our principal focus is around ensuring that our electricity network is able to actively support reliability peak capacity. and contribute to a future where demand for and supply of electricity are ever changing. With growth in renewables increasing intermittency on the network, and electrification of transport and heat likely, we are working with our stakeholders to ensure that grid reliability is understood, managed and planned at appropriate levels. Security and Facilitating zero carbon operation In April 2019, the ESO announced its ambition to transform the operation of the electricity reliability of the Great Britain electricity system. system by 2025. Our goal is to be able to operate the system safely and securely at zero carbon whenever there is sufficient renewable generation online and available to meet the total national load. To facilitate this, the ESO has agreed contracts with five parties, worth £328 million over a six-year period, in a world-first approach to managing the stability of the electricity system. Physical risks Extreme weather Physical impacts from extreme weather We continue to address the physical risks from extreme weather-related events, with a focus events such as storms and flooding. on flooding events (in both the UK and US) and storm hardening (in the US). See case study on page 61. As this work continues, it will be informed by not only the weather patterns we are experiencing, but also the results of the ongoing scenario testing. Changing weather Increased frequency of weather incidents We will undertake a review of resilience from weather impacts to date. Work is ongoing conditions leading to asset damage/compromise and to update standards with updated information. As an example, our US engineering team operational risks. is updating standards for new and rebuilt substations to address changes in inland and coastal flooding projections. The ongoing scenario testing will consider whether our design standards are still appropriate under different scenarios, for example, a wider temperature range. Changing weather Changes in supply of and demand for The ESO is undertaking a project, Mapping Impacts and Visualisation of Risks of extreme conditions gas and electricity as a result of changing weather on system operation (MIVOR), to evaluate the impacts of extreme weather events weather conditions. on system operation up to 2050. 60
National Grid plc Annual Report and Accounts 2019/20 Strategic Report | Task Force on Climate-related Financial Disclosures (TCFD) Future intent We will continue our physical risk analysis in 2020/21, including a review Case study: extreme weather-related planning of the effectiveness of adaptation measures to date, identification of future Ensuring network reliability is core to our business and we areas of vulnerability, and assessment of these against future weather are constantly undertaking actions, often referred to as storm conditions and the likelihood of that happening. We will complete the hardening, to improve our networks’ resilience to the increasing scenario testing and determine any further adaptation measures that frequency of strong weather events, given the significant impact need to be undertaken. While financial provision has been made in the this can have on our customers. These activities have focused UK business plans for flood measures based on 2019 climate science on both our electric and gas businesses. As noted in the financial data, additional adaptation measures can only be determined after this review (see page 30), this year we incurred $98 million of major exercise has been completed and will be considered under the storm costs, the majority of which are recoverable under our rate uncertainty mechanism provisions in the RIIO-2 business plans. The US plans. Examples of ongoing efforts in 2020/21 include hardening business plans also include actions to harden our networks against efforts for our gas assets in Long Island and New York City. expected weather conditions in the nearer term, but this work will help We worked with a collaboration of New York State and New us better plan for future conditions. York City representatives and other key stakeholders, to develop recommendations for future storm hardening and resiliency What is the process for identifying and managing projects for our gas network, strategies for addressing climate climate-related risks? risk factors, and guidelines for incorporating climate change Our approach to identifying and managing the risks in our business projections in long-term capital planning. Another example is is set out on page 22. During the year, a Group-level bespoke climate our annual investment in our electric distribution infrastructure change principal risk was developed and added to our Group risk to improve resilience and grid modernisation work to increase register, as described in the case study on page 23. The newly added speed in knowing outage locations and improving our ability to climate change principal risk is underpinned by a series of Group restore supply. controls and actions to mitigate the risk (this is further described on page 24). Several of the Group-level controls have been implemented In the UK, flood defence has been a keen focus for the business. while others are in progress. Ongoing work includes establishing Our target is resilience to 1 in 1000-year flooding events in the programmes to develop the skills in our current and future workforce. UK or a 0.1% chance in any given year. This resilience level was Our recent report, Building the Net Zero Energy Workforce, looks at the developed through consultation with Ofgem and BEIS via the ENA skills and expertise the energy sector will need to help the UK reach its Flood Working Group and recognised in the National Flood emissions target. It also identifies the need to recruit for 400,000 jobs Resilience Review 2016 as being best practice for critical local in the sector between 2020 and 2050 to meet the target. Supported and national infrastructure. As of 31 March 2020, we had invested by the #jobthatcantwait campaign, we will be recruiting new talent £71 million in flood defences with work completed or in progress who can help deliver the transition to net zero and adapt our networks at 37 sites and expected to be completed at a further 12 sites in accordingly. We have seen a marked increase in applicants in response 2020 and 2021. Our RIIO-2 (2021 – 2026) plans aim to protect to this campaign. a further 100 sites from surface-level flooding and recommend further investments to manage the risks posed from the secondary Following the adoption of the Group-level climate change principal risk, impacts of flooding, such as erosion and subsidence to our tower the US and UK businesses developed bespoke climate change risks and cable routes. on their respective risk profiles. These risks are being cascaded to the underlying operating business units to develop to ensure their risks and control actions are specific to them. Future intent The Executive Committee will review the results as part of the regular semi-annual review of Group risks in early 2020/21 and as part of that discussion will specifically consider whether changes need to be made to the Group climate change risk. 61
National Grid plc Annual Report and Accounts 2019/20 Strategic Report Task Force on Climate-related Financial Disclosures (TCFD) continued Case study: the future of heat The transition to a low-carbon economy is and will continue to change the sources of energy used (e.g. heat pumps and hybrid solutions), and the way energy is supplied and consumed (e.g. building retrofits to improve energy efficiency). Gas distribution in the US and gas transmission in the UK and US remain core to our business strategy, and we believe it will remain central to the energy mix in both countries. There is likely to be a mosaic of solutions, including reducing emissions from the natural gas transmission and distribution networks, as well as conversions to both electric and lower carbon gas heating (renewable natural gas or gas blended with hydrogen), focusing on cost-effective solutions and meeting different consumer needs. In conjunction with government agencies, other utilities and key stakeholders and other gas networks, we have developed a programme of work to gather evidence and help us understand what is required to incorporate hydrogen and renewable natural gas into the gas supply. We are also working with industry to consider what improvements and changes are needed to maintain well-functioning, liquid gas markets throughout the transition, and ensure security of supply and delivery of natural gas, renewable natural gas and hydrogen. Refer to page 13 for further details on the future of heat. Image: Newtown Creek, a renewable gas project What metrics are used to assess these risks and opportunities? Future intent We have continued to advance our environmental sustainability We continually review our metrics and targets, as needed, to ensure strategy, focusing on three key areas: climate change, responsible that the data we are measuring is meaningful, aligns with our strategy, use of natural resources and caring for the natural environment. and is providing the information the business and our stakeholders need We have metrics and targets that allow us to measure our impact to effectively monitor our performance and demonstrate our progress. on the environment, demonstrate our commitment and monitor our In 2020/21, we will be laying out our pathway to achieve our net zero by performance. As previously discussed, the cornerstone of our suite 2050 emission reductions and setting targets to align our ambitions and of metrics is our commitment to reducing our impact by achieving provide better visibility to our progress. net zero for our Scope 1 and 2 emissions by 2050, with interim targets of an 80% reduction by 2030 and a 90% reduction by 2040. Numerous We are also evaluating development of a meaningful Scope 3 target that underlying metrics support this goal and our broader sustainability enables us to align to Science Based Targets Initiative (SBTI) criteria, ambition, including reducing the carbon footprint of our operating specifically focusing on our customers. facilities, enhancing the natural value of our properties, recycling and/or reusing our recovered assets and reducing our office waste. These are discussed in more detail on pages 50 and 51. We have also included enhanced disclosures in the financial statements prepared under IFRS to explain how we have considered the financial impacts of climate change, in particular evaluating the impact of new net zero commitments in our territories, and the effect this has had on judgements and estimates such as the useful economic life of our assets. See notes 1 and 13 to the financial statements for details. This remains a recurring area of focus for the Audit Committee. 62
National Grid plc Annual Report and Accounts 2019/20 2. Corporate Governance Letter from the Chairman 64 Board and Committee evaluation 74 Audit Committee 76 Finance Committee 82 Safety, Environment and Health Committee 83 Nominations Committee 84 Diversity 85 Statement of compliance with the UK Corporate Governance Code 2018 86 Index to the Directors’ Report and other disclosures 87 Directors’ Remuneration Report 88 63
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Letter from the Chairman During the year, our discussions around RIIO-2, Board evaluation results with the culture survey gas supply contingency planning in the US, the results of the Company’s senior management. brief power outage on 9 August 2019 in the UK Unfortunately, due to the COVID-19 pandemic, and payment of the final dividend are examples this session has been postponed as it would of how the Board has had regard to section not have been effective to do this when Board 172 of the Companies Act 2006. We have members were not physically in the same considered the broader implications of our location. The evaluation process and associated decisions, not just for shareholders but for a outcomes can be found on page 74. wider group of stakeholders and the likely consequences of our decisions in the longer Board succession and diversity term. On page 44 we set out our key In November 2019 Dean Seavers, US stakeholders and how we have engaged with Executive Director stepped down and in them to ensure that their views are being May 2019 and January 2020 we appointed captured in the boardroom, to assist us in Jonathan Silver and Liz Hewitt as Non- maintaining focus on creating the right culture executive Directors respectively. On Sir Peter Gershon for the Company. We continue to provide appointment Jonathan joined the Finance Chairman details throughout the Directors’ Report of the Committee, Remuneration Committee and stakeholder matters that are considered in our Nominations Committee and his US regulatory decision-making. We will continue to engage experience alongside his strong financial Dear shareholders, with our stakeholders in a way that is guided by background has provided valuable insight I am pleased to present to you our Corporate our purpose to Bring Energy to Life, our vision into Board and Committee discussions. Liz Governance Report for 2019/20. The report and values and the Company’s culture. became a member of the Audit Committee, provides an insight into the activities of the Safety, Environment and Health (SEH) Board and its Committees over the year This year the Board has continued with its Committee and Nominations Committee on including how it has evaluated its effectiveness chosen approach to workforce engagement appointment. Liz’s diverse and extensive and how it provides appropriate and effective under the Code: to build on and enhance experience has served to strengthen the stewardship to the Company to ensure it the extensive existing range of engagement Code’s requirement in relation to the Audit achieves its strategic priorities. It also discusses activities and employee communication Committee’s competence, as a whole, to be how we create value for shareholders and channels to properly consider workforce relevant to the sector in which the Company wider stakeholders during an ongoing period views in relevant decision-making processes; operates. Her input to Board and Committee of external economic, regulatory and see page 73 for further information. Following discussions is already very helpful. The political uncertainty. the success of our employee engagement Nominations Committee oversaw the rigorous sessions with Non-executive Directors in selection process for these appointments. Towards the end of the year we have seen 2018/19, we have continued to utilise and See page 84 for more information. the acceleration of the COVID-19 pandemic. evolve these sessions throughout the year to This is having a profound effect on how ensure key topics, discussions and potential Last year Mark Williamson, the Board’s Senior companies around the world operate during areas of concern amongst the workforce are Independent Director, reported that in order these unprecedented times and we recognise considered. The Board has been able to to lead the Company through the completion the increased importance of good governance identify key trends and topical issues, such as of the RIIO-2 regulatory process it would be at a time when effective engagement and gender pay, culture, and safety. Where trends in the Company’s best interests for me to stay collaboration with our stakeholders has never have been identified and Board action taken, beyond the nine-year term identified in the been more important. As a Board we are employees have been kept informed through Code. Following on from this, in January 2020 closely monitoring the developments of internal communications. Our chosen approach I formally notified my intention to step down COVID-19 and the impact of this on all areas allows for the sharing of responsibility, and as Chairman of the Board following the of the Company. Please see overleaf for interaction amongst all Board members, which identification of a suitable successor. Mark has information on our response to COVID-19. we believe ultimately drives a greater focus on been leading this process and we plan to have the ‘true employee voice’ in Board decisions. my designated successor in place in time for Over the year there have been a number We will continue to review and adapt our me to step down at the 2021 Annual General of other key events such as the brief power approach to ensure that we are utilising this Meeting (AGM) at the latest. I will be standing outage experienced on 9 August 2019 in the vital engagement both in and out of the for re-election at the Company’s AGM in July UK and the gas connection supply challenges boardroom including considering the facilitation 2020 and, in order to facilitate an effective in downstate New York in the US. Other of virtual engagement sessions to enable the succession, it is intended I remain as Chairman external factors which have influenced the Board to continue with this despite COVID-19 until my successor has been successfully Board agenda include: the regulatory restrictions. onboarded. This crucial succession process environment in the UK and the RIIO-2 business will be set out further in next year’s plan submissions; the increased gas regulation Culture and the internal Board evaluation Nominations Committee Report. in the US, in particular New England; the Promoting a culture of openness and debate in increased political uncertainty leading up to the the boardroom is one of my key responsibilities Ensuring a diverse culture on the Board is December 2019 UK General Election; Brexit; as Chairman, and as a Board we play an crucial to improving effectiveness, encouraging and the impact of the legal separation of the important leadership role in promoting the constructive debate, delivering superior ESO. All of which have had, and some will desired culture throughout the organisation. performance and enhancing the success continue to have, an impact on the way we The Company has spent considerable time of the Company. With the recent appointment work and operate. over the last few years getting the culture right of Liz Hewitt I am pleased to report that we are for the Company and it continues on its again meeting our diversity target of 33.3% of UK Corporate Governance Code 2018 journey; you can read more about this on the Board being women. We also currently and stakeholder engagement page 72 where we explain how culture formed meet the Parker Review target for ethnic We are pleased to report that we are fully part of this year’s Board evaluation. diversity on FTSE 100 boards. You can read compliant with the requirements of the new more on how we strive towards our objectives UK Corporate Governance Code (the Code); During the year, we undertook a formal and in our Board Diversity Policy on page 85. see page 86 for information on how we have rigorous internal evaluation of our Board and adapted our practices to ensure compliance Committees which included some follow‑up and transparent reporting against the Code. areas from our external evaluation last year. The evaluation focused on three areas: Board Our stakeholders are very important to us and effectiveness; Board decision-making; and we remain committed to maintaining regular organisational culture and the individual style open dialogue and effective communication of leaders. During the evaluation process the with them. With the global restrictions in place Board gained insight into the different aspects Sir Peter Gershon due to COVID-19 this is requiring us to consider of culture and the alignment of cultures around Chairman alternative methods to ensure we maintain the the Company. A facilitated session was same level of engagement. arranged to discuss the comparisons of the 64
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Letter from the Chairman Our response to COVID-19 In order for us, as a Board, to be able to effectively monitor the Company’s crisis management we met on a weekly basis throughout April 2020 to monitor the impact of the current COVID-19 pandemic on the Company’s operations and how the Company was responding to the latest developments. These meetings were moved to a fortnightly basis from May 2020 and we will assess the need and frequency of Investors these regular briefings as the pandemic continues. The Board recognises it is imperative to promote the success of the Company on behalf of its members. The Finance Committee has held How we have considered our stakeholders during COVID-19 two ad hoc meetings to consider the short- and longer‑term liquidity of the Company in a range of different COVID-19 related scenarios. Our commitment to being a responsible business is central to the way The Board approved the recommendation to pay a final dividend in in which we operate. This has been the governing principle behind our August 2020 following stress testing of the financials in various response to the COVID-19 pandemic as Directors. We have had to think adverse scenarios. through and debate on the choices and actions we need to consider over the coming months to position us best for success in the medium- to long-term taking account of the impact on our key stakeholders. The Board has continued to monitor its responsibilities to the Company’s different stakeholder groups. Good engagement has been crucial in understanding the views of our stakeholders in order to make informed decisions during this period of crisis. For example, the Company has been seeking feedback from employees that has helped to shape its response to the COVID-19 pandemic. Customers, regulators and suppliers We are very conscious that many of our customers are currently experiencing additional financial challenges and have therefore willingly agreed to moratoriums on debt collection activities in our US regulated businesses. Furthermore, US Niagara Mohawk sought and received permissions from regulators to defer for three months, scheduled rate changes that would have increased customer bills as of 1 April 2020. In addition, we Our colleagues decided to postpone the filing of the US Niagara Mohawk rate case Our colleagues have been critical in making sure that we keep the which could have resulted in bill increases in 2021. lights on. The Board considered both the physical and mental wellbeing of our employees and are regularly briefed on the actions that would be The Board also supported the active and constructive engagement taken to keep them safe and also to equip them to work from home with Ofgem to protect customers by supporting the proposal for the efficiently. The Board has been in support of these initiatives, including: relaxation of network charge payment terms for those suppliers and sequestering critical operations staff on-site in the UK and US to ensure shippers who are facing cash flow challenges as a result of COVID-19. service continuity; senior leaders communicating regularly via virtual Additionally, the Board noted the request made to modify the collection online group calls; webchats and video messages; rolling out mental of forecast additional balancing costs by the ESO for a further year. health training courses; and understanding colleague sentiment to the These costs, estimated at up to £500 million, are required to safely and crisis and the COVID-19 recovery strategy through a pulse survey in securely manage and balance the system given the unprecedented the UK and US. The Company has not implemented pay reductions, reduction in demand levels caused by COVID-19. We recognise that furlough or compulsory redundancy schemes. We continue to monitor the increase is significant and is a material issue for ESO customers. progress of how the Company can accommodate employees to return The Board notes that the ESO is working with Ofgem and the industry safely in the field, and how we can build on some of the positive changes with a view to ensuring that any scheme put in place is in the interests in our culture and ways of working as the restrictions are lifted. of end consumers and our customers. We have also continued the development and tender of future work for our suppliers, giving longer term visibility and greater certainty of income and the Board has been kept informed of any impacts on our suppliers and supply chain. We will continue to work closely with our stakeholders across both sides of the Atlantic in the current environment. The Board continues to be kept updated regularly on our COVID-19 response and on learnings that can be sustained to improve our ways of working and Company culture. Communities Our employees have also been supporting our communities by For information on how we have considered our stakeholders through volunteering and providing their time and expertise to support charities the year see pages 44 – 47. and the most vulnerable. In the UK for example, as well as monetary support to various charities, the Company is operating a food bank and has helped the University Hospitals Birmingham (UHB) Charity to purchase almost 400 tablet computers that will be used by patients to help them speak to their loved ones while in isolation, see page 15 for a case study. In the US, the Company approved cessation of service disconnections for non-payment of outstanding bills. This reflects our commitment to support the communities in which we operate. Looking beyond the short-term, the Board will be kept informed of work to support getting people back into employment and into crucial roles, as well as helping support small- and medium‑sized businesses (SMEs) to drive the local economies we operate in. 65
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Our Board Committee membership key Audit Committee Finance Committee Nominations Committee Sir Peter Gershon CBE FREng (73) John Pettigrew FEI FIET (51) Andy Agg (50) Remuneration Chairman Chief Executive Chief Financial Officer (CFO) Committee Appointed: 1 August 2011 as Deputy Appointed: 1 April 2014 and Chief Appointed: 1 January 2019 Chairman and Chairman with effect Executive with effect from 1 April 2016 Tenure: 1 year Safety, Environment from 1 January 2012 and Health Committee Tenure: 6 years Skills and competencies: Andy trained Tenure: 8 years Skills and competencies: John joined and qualified as a chartered accountant with Executive Skills and competencies: Sir Peter is the Group as a graduate in 1991 and PricewaterhouseCoopers and is a member an experienced leader, having held senior has progressed through many senior of the ICAEW. He has significant financial Committee board-level positions in the computer, defence management roles. Together with his experience, having held a number of senior and telecommunications industries. He has extensive operational experience of the finance leadership roles across the Group, Chair of the served as a Managing Director in several Group, John brings significant know-how including Group Financial Controller, UK Committee high-profile organisations and was previously and commerciality to his leadership of CFO and Group Tax and Treasury Director. Chairman of Tate and Lyle plc. Sir Peter is the executive team and management Andy brings in-depth knowledge of National committed to engaging with employees, of the Group’s business. Grid, both in the UK and US, and his broad for example, through site visits in the UK John continues to lead the implementation experience across operational and Biographies as at 17 June 2020 and US. He annually hosts the Chairman’s and development of the Group’s strategy, corporate finance roles led to a smooth Awards, an excellent opportunity to creating new opportunities for the continued transition into his role. He contributes Other Board members appreciate employees at National Grid; future growth of our core businesses. broadly on a wide range of topics at Board, during the year were: and further engages through the recent He maintains a productive dialogue with Finance and Audit Committee meetings. employee engagement sessions. Sir Peter • Dean Seavers – institutional investors on Group strategy External appointments: None. brings external insight, understanding of and performance. stepped down on diverse issues and the strong corporate 5 November 2019 governance expertise required to create External appointments: • Nora Mead Brownell and lead an effective Board. • Member of the UK government’s Inclusive External appointments: Economy Partnership; – stepped down on • Member of the CBI’s President’s 8 April 2019 • Chairman of the Dreadnought Alliance Committee; Leadership Board; • Member of the Edison Electric Institute • Trustee of the Sutton Trust; Executive Committee; and • Trustee of the Education Endowment • Non-executive Director and Senior Foundation; Independent Director of Rentokil Initial plc. • Chairman of Join Dementia Research (JDR) Partnership Board; and • Board member of the Investor Forum. What we bring to the Board This diagram sets out Energy 4 Engineering the number of Board members with 7 specific skills and experience as a way of demonstrating the different aspects 11 General management the Directors bring to the Board. Technology/innovation Nicola Shaw CBE (51) Alison Kay (56) Executive Director, UK Group General Counsel 5 and Company Secretary Appointed: 1 July 2016 Tenure: 3 years Appointed: 24 January 2013 Digital/cyber challenge 2 Skills and competencies: Nicola’s career, Skills and competencies: Alison has responsibility for the legal, compliance and Compliance/regulation in the UK and overseas, has included several senior operational and commercial governance framework of the Group. She roles in regulated businesses. She has is an experienced commercial lawyer and 9 5 a strong leadership track record, which has brings advice and guidance to her current included Chief Executive Officer of HS1 and role as Group General Counsel and Managing Director of the UK Business Company Secretary. Government/political Division at FirstGroup plc. Alison provides support and advice to the Her broad range of experience working Directors, the Board and its Committees. Finance/audit/banking with the UK government, the European She brings rigour to corporate governance Commission and Parliament and industry and ensures that Board procedures are fit for purpose and adhered to. She also has 7 8 regulators, as well as leading large regulated businesses, enables Nicola to implement expertise in regulatory and contractual Board decisions and lead our UK business law and legal risk management from her International (specifically US) with the requisite experience, knowledge previous experience at National Grid. 5 Safety and leadership expertise. External appointments: External appointments: • Member and Vice-Chair of the GC100 • Non-executive Director of International Group; and Risk management 10 Consolidated Airlines Group, S.A.; • Member of the Marie Curie West Midlands • Director of Major Projects Association; Development Board. • Director of Energy Networks Association Limited; and • Director of Energy UK. 66
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Our Board Jonathan Dawson (68) Therese Esperdy (59) Dr Paul Golby CBE FREng, FIET, Liz Hewitt (63) Non-executive Director; Non-executive Director; FIMechE, FEI, FCGI (69) Non-executive Director; Independent Independent Non-executive Director; Independent Independent Appointed: 4 March 2013 Appointed: 18 March 2014. Appointed Appointed: 1 January 2020 Tenure: 7 years to the Board of National Grid USA from Appointed: 1 February 2012 Tenure: Less than 1 year 1 May 2015 Skills and competencies: Jonathan, Tenure: 8 years Skills and competencies: Liz qualified Tenure: 6 years through his broad range of expertise within Skills and competencies: Paul is a as a chartered accountant with Arthur the finance and pensions sector, brings Skills and competencies: Therese Chartered Engineer and has a lifelong Andersen & Co. and has held a variety significant in-depth understanding in has significant international investment passion for engineering and innovation, of executive positions in private equity remuneration and financial matters to his banking experience, having held a variety having spent his career in the energy and companies including 3i Group plc, role as Chair of the Remuneration of leadership roles spanning 27 years. regulatory sectors. He brings a valuable Gartmore Investment Management Limited Committee. Jonathan previously held Her career began at Lehman Brothers and engineering and industry perspective to and Citicorp Venture Capital Ltd. Liz was positions as Chairman of the Remuneration in 1997 she joined Chase Securities and the Board as well as the attributes of an also Director of Corporate Affairs at Smith & Committee and Senior Independent Director subsequently JPMorgan Chase & Co., experienced Chairman and Chief Executive Nephew plc. Liz brings significant business, of Next plc and Senior Independent where she held a number of senior to his role as a Non-executive Director. financial and investment knowledge to the Director and Chairman of the Audit & positions. With a distinguished career in Paul’s deep understanding and specialised Board, and has wide experience of being a Risk Committee at Jardine Lloyd the investment banking sector, Therese experience in safety and risk management chair and a member of audit, remuneration, Thompson Group plc. brings significant banking, strategic and combined with his deep insight into nominations, disclosure, risk and corporate As a Non-executive Director, Jonathan international financial management expertise regulatory issues faced by the Group, social responsibility committees. Liz’s brings an innovative perspective, scrutiny, and knowledge of financial markets to the particularly in the UK, is crucial to his role diverse knowledge and broad range of constructive challenge and independent Board and to her role as Chair of the as Chair of the Safety, Environment financial expertise is a great addition to oversight to the Board. Finance Committee. and Health Committee. the boardroom bringing a fresh, logical perspective to Board discussions and External appointments: Therese’s specialist knowledge combined External appointments: with her sharp and incisive thinking enables decision-making. • Chairman of Costain Group PLC; and • Chairman of River and Mercantile her to contribute and constructively External appointments: Group PLC; and • Chairman of NATS Holdings Limited. challenge on a wide range of Board • Senior Independent Director and chair of the • Chairman and a founding partner debates. of Penfida Ltd. Audit Committee at Melrose Industries plc; External appointments: • Non-executive Director and chair of the • Chairman of Imperial Brands PLC; and Audit Committee at Novo Nordisk A/S; and • Non-executive Director of Moody’s • External member of the House of Lords Corporation. Commission and chair of its Audit Committee. Amanda Mesler (56) Earl Shipp (62) Jonathan Silver (62) Mark Williamson (62) Non-executive Director; Non-executive Director; Non-executive Director; Non-executive Director and Independent Independent Independent Senior Independent Director Appointed: 17 May 2018 Appointed: 1 January 2019 Appointed: 16 May 2019 Appointed: 3 September 2012 Tenure: 2 years Tenure: 1 year Tenure: 1 year Tenure: 7 years Skills and competencies: Amanda Skills and competencies: With an Skills and competencies: Jonathan has Skills and competencies: As a qualified brings to the Group extensive international extensive career in the chemicals industry considerable knowledge of the US-regulated chartered accountant, Mark brings leadership and general management and having held a senior leadership role energy environment, experience and considerable financial and general experience from the technology and in a safety-critical process environment, understanding of integrating public policy managerial experience to the Company. fintech sectors. She has over 26 years Earl brings significant safety, project and technology into a utility as well as a His previous roles as Chief Financial Officer of experience at senior management and management, environmental, sustainability strong background in finance. Previously, of International Power plc, Non-executive Board level at large international companies. and strategic expertise to the Board and Jonathan was the head of the US Director and Senior Independent Director of She led a $1 billion global practice at Committees. This, along with his innovative government’s $40 billion clean energy Alent plc and Chairman of Imperial Brands Electronic Data Services and has experience way of thinking, enables Earl to contribute investment fund. He is currently the PLC cement his extensive financial sitting on audit, risk and remuneration on a wide range of issues to Board and Managing Partner of Tax Equity Advisors experience and give him a deep committees. Amanda provides an Committee debates, particularly in relation LLC, which manages investment in understanding of the utilities sector. This entrepreneurial perspective to the Board to safety management. large-scale renewable projects and was allows him to bring a financial and strategic and valuable insight into the Company’s External appointments: recognised as one of the ‘Top 10 Green outlook on diverse subjects in support of increasingly important technical evolution. Tech Influencers’ in the US. Jonathan’s the Board and its Committees. Mark acts • Non-executive Director of Olin Corporation; strong background in finance and as an effective board evaluator, provides a External appointments: • Non-executive Director of CHI St. Luke’s government policy along with his long career logical eye, and makes impartial judgements • Chief Executive Officer of CashFlows Health System of Texas; and at the intersection of policy, technology, weighing up options for the Board in a Europe Limited; and • Commissioner of Brazoria-Fort Bend finance, and energy brings innovative and dispassionate way. In his role as Senior • Non-executive Director of Insect Rail District (Texas). positive insight to the Board’s policy discussions Independent Director, Mark brings an Technology Group Holdings Limited. and to its interaction with management. excellent understanding of investor External appointments: expectations as well as providing significant insight into managing relationships • Managing Partner of Tax Equity Advisors LLC; with investor and financial communities. • Director of Plug Power, Inc; and • Director of Intellihot Inc. External appointment: • Chairman of Spectris plc. 67
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Corporate Governance overview Your Board remains committed to the highest standards of Corporate Governance and in 2019/20 continued to embed the new UK Corporate Governance Code into the work that we do. Board Key matters considered by the Board include: Our Board is responsible collectively for the effective oversight of the • the Company’s strategy and long-term strategic objectives; Company and its businesses. It determines the Company’s strategic • risk appetite and determination of principal risks; direction and objectives, business plan, dividend policy, viability and governance structure to help achieve long-term success and deliver • overall corporate governance arrangements, systems of internal sustainable shareholder value. The Board also plays a major role in control and risk management; setting and leading the Company’s culture and wider sustainability goals. • annual business plan and budget; It considers key stakeholders in its decision-making and, in doing so, • significant changes in capital structure; ensures that Directors comply with their duty under section 172 of • succession planning for Board and senior management; the Companies Act 2006. • half-year and full-year results statements, Annual Report and Accounts To operate efficiently and give the right level of attention and consideration and other statutory announcements; to relevant matters, the Board delegates authority to its Board Committees. • oversight of the Company’s response to major crises and other Each Committee Chair reports to the Board on their Committee’s activities significant challenges; and after each meeting. • determination of the framework or policy for the remuneration of the Chairman, Chief Executive, Executive Directors, Group General Counsel and Company Secretary, and direct reports to the Chief Executive, following recommendation from the Remuneration Committee. Board Committees Audit Committee: Nominations Remuneration Finance Committee: Safety, Environment and • Financial reporting. Committee: Committee: • Financing policies and Health (SEH) Committee: • Internal controls. • Board and Committee • Policy. decisions. • SEH strategy and policies. composition. • Processes for risk • Consideration of exercise • Credit exposure. • Performance targets. management. • Succession planning. of discretion. • Hedging. • Sustainability. • Internal audit. • Board appointments. • Implementation of policy. • Foreign exchange • External auditor. • Incentive design and transactions. setting of targets. • Tax strategy and policy. • Guarantees and indemnities. Executive Committee Led by the Chief Executive, the Committee oversees the safety, operational The Committee members have a broad range of skills and expertise that and financial performance of the Company. It is responsible for making are updated through training and development. Some members also hold the day-to-day management and operational decisions it considers external non-executive directorships, giving them valuable board necessary to safeguard the interests of the Company and to further the experience. Those members of the Committee who are not Directors strategy, business objectives and targets established by the Board. regularly attend Board and Committee meetings for specific agenda items. Other management committees Disclosure Committee; Investment Committee; Share Schemes Sub-Committee. Our Executive Committee Governance structure Three Executive Directors are members of the Executive Committee, The schedule of matters reserved for the Board and terms of as well as being on the Board. The Group General Counsel and reference for each Board Committee are available in our Board Company Secretary is also a member of the Executive Committee. Governance Document at: www.nationalgrid.com See their biographies on page 66. Reports from each of the Board Committees, together with details of their activities, are set out on pages 76 – 87. John Pettigrew – Chief Executive and Committee Chair Andy Agg – Chief Financial Officer Full biographies for the Executive Committee are available at: Nicola Shaw – Executive Director, UK www.nationalgrid.com Alison Kay – Group General Counsel and Company Secretary Andy Doyle Badar Khan Barney Wyld Adriana Karaboutis Jon Butterworth Chief Human Resources President, National Grid Group Corporate Chief Information Managing Director, Officer US Affairs Director and Digital Officer National Grid Ventures Badar was previously President of the National Grid Ventures business before stepping into the role of Interim President of the US Business, following Dean Seavers stepping down in November 2019, and was appointed to the role permanently on 2 April 2020. Jon Butterworth was appointed Managing Director of National Grid Ventures and a member of the Executive Committee after fulfilling this role on an interim basis since November 2019. 68
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Corporate Governance overview Matters considered by the Board Board and Committee membership and attendance The table below sets out the Board and Committee attendance during the year to 31 March 2020. Attendance is shown as the number of meetings attended out of the total number of meetings possible for the individual Director during the year. Safety, Environment Director Board Audit Finance Nominations Remuneration and Health Sir Peter Gershon 12 of 12 – – 7 of 7 – – John Pettigrew 12 of 12 – 4 of 4 – – – Andy Agg 12 of 12 – 4 of 4 – – – Nicola Shaw 12 of 12 – – – – – Jonathan Dawson 12 of 12 – 4 of 4 7 of 7 5 of 5 – Therese Esperdy 11 of 121 4 of 4 4 of 4 7 of 7 – – Paul Golby 11 of 121 4 of 4 – 7 of 7 – 6 of 6 Liz Hewitt – Appointed on 1 January 2020 2 of 2 1 of 1 – 2 of 2 – 1 of 1 Amanda Mesler 12 of 12 4 of 4 1 of 1 7 of 7 – 5 of 5 Earl Shipp 12 of 12 – – 6 of 72 4 of 52 6 of 6 Jonathan Silver – Appointed on 16 May 2019 9 of 9 – 3 of 3 6 of 6 2 of 33 – Mark Williamson 11 of 121 4 of 4 – 7 of 7 5 of 5 – Former Directors who served for part of the year Dean Seavers – Stepped down from position of Executive 6 of 84 – – – – – Director, US on 5 November 2019 Nora Mead Brownell – Stepped down from position of – – – – – – Non-executive Director on 8 April 2019 1. Four ad hoc Board meetings were held during the year and all non-attendance was due to short notice. 2. Earl Shipp did not attend the April Nominations and Remuneration Committee meetings due to personal circumstances. 3. A Remuneration Committee meeting was held at short notice in November 2019 and Jonathan Silver was unable to attend. 4. Dean Seavers was unable to attend the October and November 2019 Board meetings. All Board/Committee members who were unable to attend a meeting provided comments in advance. Board/Committee Chair Examples of Board focus during the year include: Views of Key areas key stakeholder of activity Matters considered Key decisions made/link to purpose groups considered Strategy and Strategy remained a key focus throughout the year. The Board • Board approval of the Company’s Business Plan All: performance participated in two interactive strategy sessions in addition to and strategy; Investors the time allocated during Board meetings this year. The offsite • the direction of travel for our digital strategy; sessions in September 2019 and January 2020 provided the Suppliers Board with an opportunity to scrutinise business performance • following consideration of the external energy Customers against the strategic plan and review the key strategic objectives landscape, endorsed the strategic priority areas for management focus for 2020/21; Regulators for the year. In the year, the Board focused on: Communities and • developing a Business Plan that meets the Group’s • reviewed and endorsed the ambition of net zero by 2050 and the interim targets for the Company governments requirements, aligned to the Company’s purpose, vision and Our colleagues values and underpinned by a robust financial strategy; as a whole; • reviewing and scrutinising Group trading performance, budget • received updates on cyber security activities and and consideration of share price; the progress being made in this area. The Board agreed it was acting in accordance with its risk • shareholders’ interests if the Labour Party had won the 2019 appetite in this area; and UK General Election and implemented its manifesto commitment to nationalise National Grid UK regulated business • commissioned an internal investigation report, and interconnectors; along with an ESO technical report to establish the factors that had led to, and the lessons that • growth strategies for NGV, including renewable generation could be learned from, the power outage which strategy; had occurred on Friday 9 August 2019. • performance updates from the UK and US businesses; • the key milestones and progress made by the Company on the energy transition; • climate change and our strategy to further reduce our emissions, to achieve net zero by 2050 and make a wider contribution to the decarbonisation of the economies in which we operate; • innovation and technology – see separate section below; • the increasingly strong performance of the UK and US commercial property portfolio; and • the sequence of events that took place on Friday 9 August 2019 cumulatively resulted in a widespread electricity power outage across the country. 69
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Corporate Governance overview continued Matters considered by the Board continued Views of Key areas key stakeholder of activity Matters considered Key decisions made/link to purpose groups considered Business plan Discussed the ongoing financial strategy and business plan for • Approval of the initial five-year plan and the Investors and dividend the year. Regular updates were received on emerging themes viability and going concern statements; Customers and key external challenges, and particular consideration was • Confirmation that the Group had a financially given to these and the current political environment. Communities and sustainable business model for the foreseeable governments future, defined for this purpose only as the five The Group’s financial capacity under the Business Plan was years from March 2019 to March 2024; Our colleagues stress tested using the current approach to fund the dividend until Financial Year 2026, in the context of current market • The Board considers a range of factors when expectations. The Board also reviewed the suitability of the annually reviewing and setting the dividend, Group’s dividend policy wording considering the key regulatory including expected performance and regulatory processes in the UK and US. developments. No dividend policy changes were recommended and the current policy was In light of the COVID-19 pandemic, the Board discussed the reaffirmed; and issues that had been considered and analysis undertaken in • Approved the payment of the final dividend at its relation to the payment of a dividend, which had included additional June 2020 Board meeting. financial scenarios and resilience testing, and consideration of stakeholders including investors such as pension funds. Employee This year the Board received biannual updates on the • Board input on the approach taken to workforce Our colleagues engagement implementation of employee voice on Board activity and culture. engagement activities and the topics discussed and culture based on employee feedback; and The Board reviewed the existing employee engagement • The Board believes that existing approaches and implementation plan and commented on the overview of activity mechanisms enable comprehensive two-way for the next half of the year. Focus has continued on improving engagement opportunities with the workforce and communication channels between the Board and employees is satisfied that the approach taken is an effective to ensure feedback and updates on actions are shared. alternative to the proposed methods set out in the Code. Discussed the importance of a diverse and engaged workforce to deliver our Group strategy and the continued need to ensure Please see pages 72 and 73 for more information. an open culture where dialogue between the Board, senior management and the workforce is encouraged. Our workforce continued to be a key focus as we navigated the impact of the COVID‑19 pandemic. The health and safety of our employees remained paramount and discussions centred on keeping critical employees safe whilst their work continued. The Board received weekly updates on employee wellbeing and absenteeism. Political and The Board has continued to focus on how to promote the • Board input on, support for and monitoring of All: regulatory success of the Company during further developments to the the UK and US regulatory strategies; Investors environment external environment in the UK and US. • Political sub-group of the Executive Committee Suppliers continued to take a more hands-on approach to In the UK, regular updates were received on risks and the evolving political and regulatory landscape Customers opportunities posed by Brexit proposals and the potential for and its implications for the Company; and Regulators state ownership, and continued engagement activities with our Communities and stakeholders on the issue. • The Board agreed that a lessons learned exercise would be undertaken which would governments In the US, the Board received regular updates on the gas supply include an assessment of the Company Our colleagues constraint in downstate New York. Once an agreement has been stakeholder management at the US state political reached with the Governor of New York, the focus for the US level. The reviews were conducted by external Business will be on executing the longer-term supply strategy and consultants. The Board received a comprehensive undertaking a major change in the way it engages with external assessment of the lessons learned at the March stakeholders in New York. 2020 meeting and the action plan to implement the reviews’ recommendations was approved at the April 2020 meeting. 70
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Corporate Governance overview Views of Key areas key stakeholder of activity Matters considered Key decisions made/link to purpose groups considered RIIO-2 price The Board scrutinised and challenged the Company’s UK • Draft business plans were reviewed, and the Investors control regulatory strategy throughout the year, providing feedback, Board approved the creation of a sub‑committee Customers guidance and support for its ongoing development. of the Board, chaired by the Chairman, to confirm the content for the business plans and Regulators The Board reviewed the financials of the business plans, accompanying assurance statements prior to noting that the majority of spend was associated with asset the final submission to Ofgem; health and increased cyber security requirements. • the sub-committee considered how the comments from the Finance Committee on the A strong stakeholder engagement strategy was adopted Financeability Assurance Statements had been by the Transmission and System Operator Boards. This taken into account; and commitment was demonstrated by signing engagement charters to be stakeholder led and to be part of the User • stakeholder engagement consisting of 2,800 Group process. Our final business plans were submitted to individuals, representing the full cross-section Ofgem in December 2019 following extensive stakeholder of our stakeholder segments, and 13,000+ engagement panels, challenge groups, and consideration consumers, shaped the plans to deliver a safe against the 2050 net zero target. and reliable network while enabling the transition to a low carbon network. The Board reiterated that the plans had inbuilt mechanisms to cope with potential changes to the energy landscape without increasing consumer bills in real terms. Technology The Board reviewed the performance and success of National • The Board reviewed the overview of investment Our colleagues and innovation Grid Partners against the Business Plan and heard about a strategies and endorsed the growing portfolio number of proposed investments. noting the establishment of a positive reputation in the external market. The business continued to perform well and focus remained on disruptive innovation capabilities. Total societal Focus has been on navigating expectations of various • The Board recommended the development and All: impact stakeholder groups as societal expectations have changed. implementation of a new Responsible Business Investors National Grid is at the centre of the energy system in the UK framework for the Company. and US, and we are uniquely positioned to drive societal impact Suppliers in the energy sector and enable a clean, green energy system. Customers Regulators Communities and governments Our colleagues Looking forward, the Board’s focus for next year is expected to include: • management of threats and opportunities posed by the next phase of the COVID-19 pandemic; • ensuring an acceptable outcome for RIIO-2; • strategy, including the future of gas; • organisation, culture, bench strength and talent; • US reputation recovery; • New York rate case filings; and • net zero. 71
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Corporate Governance overview continued Our culture journey We recognise that how we do things is as important as what we do. how we make decisions and our attitude towards risk aligned with the Group’s purpose, vision and values. The Board is responsible for influencing and monitoring culture throughout the organisation to ensure we are emulating desired beliefs The Board has spent considerable time reviewing and determining the and behaviours both in and outside the boardroom, and identifying right culture for the organisation and recognises that there is still work areas where culture is embedded strongly and areas where shifts in to be done; the journey so far is outlined below. culture are required. Our culture determines how we behave, 2016/17 2017/18 Culture‑themed internal Board and Committee evaluation Re-established clear purpose, vision and values and assessed how the Board set the ‘tone from the top’ and how agreed a common definition of culture as ‘Our values, beliefs effectively this was cascaded throughout the Company. and behaviours that characterise our Company and guide our practice.’ The Board agreed culture‑specific actions and a culture scorecard to be reported to the Board at least annually. Agreed areas for increased Board focus including visible leadership and agreed the approach to engaging most effectively with employees. Approved format for culture scorecard to aid the Board in monitoring culture at Group level. 2018/19 Annual employee survey results were considered, and areas A revised culture scorecard was considered against an overall of improvement augmented into the Board’s behaviours status for each of the Company’s values, bringing together including local engagement sessions in the UK and US. data from teams including safety, ethics, compliance, supply chain management and customers. The Company committed The 2018 Corporate Governance Code was considered in to review how to evolve its approach to monitoring and depth by the Board, and key stakeholders were mapped out measuring culture, along with how it could align the activity and discussed. The Board discussed its chosen approach taking place to have a greater combined impact and make to workforce engagement and an implementation plan change happen at a faster pace. was agreed. Looking 2019/20 ahead Board culture evaluation Over the next year the Board will focus on the following During the year the Board considered culture throughout culture‑related activities: its decision-making and the internal Board evaluation • monitor the implementation of the Company’s purpose, incorporated a review of culture. For more information vision and values and the link to the Company’s culture; see page 74. • review and monitor the culture actions of the internal Board evaluation to ensure that the ‘tone from the top’ Board review of culture scorecard is correct and the Board has a clear view of culture both A new set of vision and values was agreed for the Company at Board level and within the organisation; and the Board agreed to evolve its approach to measuring • facilitate a culture session with the Chief Human and monitoring culture across the Company with the aim of Resources Officer and the Board to consider the results having a simplified approach. This would be based on the of the 2019/20 Board evaluation; and Company’s externally benchmarked annual safety survey, • review and monitor the change in culture and ways of external customer feedback and the modification of the working in the Company during the COVID-19 pandemic. Company’s annual engagement survey to align around a more useful cultural diagnostic. Culture diagnostic work throughout the year showed that the current culture was highly consistent across the Company, promoting a common identity across the organisation; areas of focus and change were also identified as part of the exercise and these have been considered. 72
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Corporate Governance overview Workforce engagement Employee engagement sessions Employee Voice engagement sessions with NEDs In response to the Code we have implemented a range of Employee April 2019, Boston, US Voice on Board (EVOB) activities to ensure that there is appropriate Employees took the opportunity to discuss our corporate culture. meaningful engagement between the Board and our workforce. The Board were pleased with the unanimous agreement of how Activities seek to expose Board members to a broad cross section important our safety culture was across the Company and the open of employees and employee experiences across the Company and discussions on wide‑ranging topics which followed. Discussions our locations. Using the employee input through the EVOB activity focused on the requirement to positively reinforce the desired culture to feed Board decision-making is a core part of the Code and a across all areas of the business and to ensure that communication discussion topic and action log has been maintained following each channels and transparency of actions increased. Topics of concern of the relevant activities. were raised around the limitations of the existing processes and systems and the Board noted these challenges as areas for During the year, the Non-executive Directors (NEDs) held three improvement. employee voice engagement sessions, in Boston, New York and London. Unfortunately the session scheduled for March 2020 in September 2019, New York, US California was cancelled due to COVID-19. The employee engagement These sessions focused on the ongoing communication strategy sessions provided an opportunity for employees and all NEDs to being implemented throughout the Company. Discussions centred discuss topical subjects, including how successful employees felt the on sharing information across jurisdictions and individual business Company had been in embedding its values, beliefs and behaviours areas to help ‘find a better way’ and to promote project successes throughout the organisation, and shared their views on the gender and learn from any programme failures. The Board listened to pay gap. The two-way conversations were strongly encouraged and concerns around technology and provided an update on the plan provided a great opportunity for the Directors and employees to going forward. engage more widely in a more informal environment. The Board allocates time directly after the sessions to discuss key outcomes December 2019, London, UK and takeaways. Communications this year have increased to ensure The Board praised the active engagement at these sessions with our employees are kept informed about what was being heard in topics focused on corporate identity, culture, diversity and the gender these sessions as well as progress against the actions taken from pay gap. Conversations highlighted the need to increase ethnic and the meetings. The Board continues to receive updates on the actions gender diversity in senior roles and the NEDs informed the attendees taken from these sessions. of the latest initiatives (see table below). Positive conversations around reducing the gender pay gap also took place, which started Eight non-exec board members hosted: with understanding the reasoning behind the difficulty experienced across meeting with over resulting in in recruiting women for some specific roles within the business. The Board encouraged discussions on ideas for programmes aimed at 44 27 240 27 encouraging and enabling women to return from maternity leave. face-to-face different sites colleagues actions captured Employee Resource Group (ERG) Non-executive sessions Director Dinner November 2019, London, UK Colleagues’ feedback has influenced the board’s thinking in the following areas and actions are currently in progress: In November, a dinner was held to provide the opportunity for 16 UK ERG Chairs and leads to hold informal discussion with NEDs on Inclusion and diversity Safety Company brand Onboarding the importance and impact of the ERG they support and lead. NEDs Change management Silos Line management Culture IT were able to discuss and gain feedback on inclusion and diversity related engagement topics. Following the positive feedback received Talent attraction and retention Decision making Communication from this session we have planned an equivalent US dinner for 2020. What have we heard? What have we done? During the employee engagement sessions, some of the areas that we heard about were: • more needs to be done to create ethnic and • appreciating cultural differences is valued by our ethnically diverse colleagues, so we have refreshed gender diversity within the Company and to and simplified our Reverse Monitoring process to build on cultural awareness by ‘walking in our shoes’; ensure that senior roles are representative and • a new category for Inclusion has been created for the Chairman’s Awards, which can be awarded to any individual or group that has contributed positively towards inclusion at National Grid. Examples include involvement in our employee resource groups and evidence of working towards our Group inclusion and diversity strategy. • more visible support of and advocacy for the • the Executive Committee has joined the Board in supporting and advocating the work of the employee employee resource groups by the Board and resource groups on a regular basis, including attendance at the twice-yearly Inclusion Forums. The full Executive Committee calendar of events has also been circulated. • communication and cascading issues combined • a communications strategy has been developed to ensure stronger alignment between the Group with process and system changes have caused narrative and local communications to create a clear line of sight from Group messages to regional problems entities. • improvements needed in two-way communications • the UK business has implemented a comprehensive leadership communications programme which to ensure priorities and focus areas are aligned includes Q&A sessions, breakfast and lunches with Executive Directors and increased frequency of and that all departments are working towards the Town Halls to engage in conversations about the Company’s direction, priorities and to give the overarching National Grid goal Directors more opportunities to listen to issues and ideas from across the business. • frustrations that there are no obvious changes • the US business is developing a communications plan to address any employee concerns more following the annual employee engagement survey effectively and to ensure updates are communicated and cascaded successfully. • conversations around gender pay and • in response to gender pay gap concerns and that women require encouragement from the Company suggestions that more needs to be done to to return from maternity leave, we have compiled a list of leading senior examples who flex their work engage and enable women returning from pattern. They have been interviewed by our communications team and their ‘work story’ will feature in maternity leave our internal email bulletin every six weeks. • concerns around technology and cyber threats • a key focus for 2020/21 is to implement our updated information technology strategy in response to concerns raised by employees throughout the Group. 73
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Corporate Governance overview continued Performance evaluation 2019/20 Internal Board evaluation The effectiveness of each of the Board Committees was taken into Following the external Board evaluation which was undertaken account in the evaluation. The results confirmed that there were minor last year, this year, we undertook an internally facilitated Board areas for improvement in relation to Board effectiveness. and Committee evaluation. The process of the evaluation and the areas identified for further The evaluation focused on Board development and the purpose of this development are noted below. review was to gain: • insights into how Directors viewed the culture of the Company; • an understanding of what constituted effective decisions made during the year and why; and • a deeper understanding about our culture and how it aligned with the Company’s ambitions. Our internal evaluation process Board received the Board and Board completed a tailored Russell Reynolds Survey on Committee Effectiveness organisational culture diagnostic and how Board members January Surveys – including questions perceived the culture in the Company. on the effectiveness of the Board and its decision‑making Completed Myers-Briggs type indicators (if not known). during the year. Results received from surveys. These were reviewed and analysed to create an aggregated report in relation to organisational culture. February/ March Comments from the effectiveness survey were discussed in the individual Director performance evaluations. Effectiveness action plans Facilitated session with Chief Human Resources Officer analysing created and discussed with results of the organisational culture survey, including a comparison Later in the Board and its Committees. of the findings of the same survey completed by the Company’s 2020 senior management. Actions to enhance the Board’s effectiveness for 2020/21 The Board discussed the results of the evaluation in April 2020 and in May 2020 the following actions were agreed: Action Responsibility More effective discussion and decision-making through streamlined Chief Executive and Group General Counsel and Company Secretary and targeted papers to the Board and its Committees. External perspectives to be brought forward to the Board to bolster Chief Executive and Group General Counsel and Company Secretary management expertise including in the areas of cyber, climate change, customer and developments in energy policy and energy technology. Continue with and enhance the effectiveness of employee engagement Chief Executive, Group General Counsel and Company Secretary and sessions to ensure a clearer alignment between these sessions and Chief Human Resources Officer discussions/decisions made by the Board and its Committees. Devote more time to the discussion of strategic priorities at Chairman, Group General Counsel and Company Secretary and Board meetings. Chief Human Resources Officer 74
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Corporate Governance overview Progress against actions for the Board agreed in 2018/19 external evaluation Action Progress made Invite our customers into the boardroom to understand The Chairs of both our RIIO-2 Transmission and ESO Stakeholder Panels met with the Board in and directly hear their perspectives. May and July 2019 respectively. This brought a valuable insight into how our RIIO teams were focusing on the needs of our customers during the regulatory review. We will keep the current situation under review and aim to invite additional customer groups into the boardroom later this year. Continue to invite external speakers to Board meetings/ The Governor of Massachusetts and a member of the Governor’s office met with the Board in dinners on topical issues. March 2019. The Chair, CEO and incoming CEO of Ofgem met with the Board in November 2019. We had invited Pacific Gas and Electric to meet with the Board in March 2020; however, this has now been postponed due to COVID-19. We continue to monitor the topical issues and will keep under review prospective external attendees who could meet with the Board later in the year. Use market research agencies to bring the voice of the This has been undertaken this year through regular reports from the businesses who use these customer and other stakeholders into the boardroom. agencies to inform their views. Facilitated session to be held to consider how to An all-inclusive facilitated session was due to take place in March 2020 in California which would enhance the collective strengths of the Board in light of have covered culture and the results of this year’s internal Board evaluation. Due to COVID-19 this the individual strengths evidenced as part of the has been postponed. evaluation. Sponsor of each paper to consider why the Board is We have continued to develop our Board and strategic papers with the assistance of a third party being asked to consider a particular paper. On strategic to ensure Board meeting effectiveness. The amendments to our paper templates have been papers, the Chairman to ask the sponsor at the made to encourage and guide the sponsor and the paper author to consider the end aim or beginning of the meeting what they are hoping to action they require from the Board. A focus for this year is to ensure the strategic aim is achieve in the meeting. re-communicated at the beginning of each item before Board discussion and input commences. Add a Corporate Social Responsibility session annually A deep dive into Corporate Social Responsibility took place at the January 2020 Board strategy to the Board agenda. session and will be discussed again later in the year. Directors’ induction and training centres in Boston and learnt more about our approach to Directors’ induction programme personalisation and tailoring our customer experience journeys towards the electrification of vehicles and the clean energy future. Following appointment to the National Grid Board, each new Director receives a comprehensive induction programme tailored to their Jonathan Silver experience, background and the requirements of the role. Consideration is also given to Committee appointments, and the Group General Focus for Jonathan’s induction was given to matters pertinent to his role Counsel and Company Secretary assists the Chairman in designing and on the Finance Committee. facilitating the individual programmes. They are primarily designed with • Jonathan met with the Group Treasurer and the Group Head of Tax the purpose of onboarding and familiarising the new Directors with our who provided a summary of the financing strategy and an overview business, vision, values, governance and people. of the current financial risks faced by the Group, including the current risk appetite and management framework in relation to those Both Earl Shipp and Jonathan Silver were provided with a formal, tailored risks. Discussions also included: treasury controls; processes and induction programme upon joining the Board last year. A detailed systems; National Grid’s tax strategy; the impact of US tax reform; summary can be found below. and an overview of pension schemes and pension strategy. He also met key employees throughout the business to discuss financial The Board has also welcomed Liz Hewitt this year and we will report accounting and control issues, the statutory audit, the annual on progress against her induction plan next year. business planning process and other substantive topics involving pensions and insurance. Non-executive Director induction examples • Jonathan undertook a number of site visits across Rhode Island and Earl and Jonathan both underwent a tailored induction programme Massachusetts. This included a tour of a liquefied natural gas facility, covering a range of areas of the business including governance, as well as visits to renewable energy projects across Rhode Island. remuneration and stakeholder matters. Throughout the year they have He also received in‑depth information briefings and undertook both met with senior management from key business areas and functions control centre tours across the customer, gas distribution and gas as well as employees across the UK, US and NGV businesses. They transmission functions. also both separately received a briefing from our legal advisors which included: company law and directors’ duties; corporate governance; Director development and training the Market Abuse Regulation; and listing and disclosure obligations. The Chairman has overall responsibility for ensuring that our Non‑executive Directors receive suitable ongoing training to enable them Both directors met key employees in our Reward team to understand to remain an effective Board member. Individual training requirements our reward strategy, remuneration policy and current market practice are reviewed and agreed annually on a one-on-one basis. As our internal necessary to assist with their appointment to the Remuneration Committee. and external business environment continues to change, it is important to ensure that Directors’ skills and knowledge are refreshed and updated Earl Shipp regularly. In addition to individual tailored training, updates on corporate Focus was given to matters pertinent to his role on the Safety, governance, legal and regulatory matters are also provided by way of Environment and Health Committee. briefing papers and presentations at Board meetings. Non-executive • Earl met with a number of employees throughout the business Directors receive details of training and development opportunities and in key safety roles including Paul Golby, the Committee Chair, offered by external advisors on various topics including cyber security, to discuss National Grid’s Safety Framework, including carbon operational resilience, climate change and technical updates on a reduction and climate change, wellbeing, sustainability and our regular basis and we encourage and monitor attendance. In light of 2050 net zero ambition. COVID-19, training opportunities have continued virtually via webinars. Additionally, the Non-executive Directors are expected to visit at least • He undertook numerous site visits in both the UK and the US and one operational site annually, a target which is regularly exceeded. attended a thorough and engaging safety roadshow in May 2019. Examples of site visits undertaken this year include a visit to the Feeder This included a visit to our gas, electric and customer business units 9 Project at Goxhill in the UK and South Street Substation Project in in New York and New Jersey where he was provided with a detailed Providence, Rhode Island in the US. end-to-end view of our smart grid approach and our Grid Modernisation Strategy. He also visited control rooms and contact 75
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Audit Committee Review of the year Continued focus on internal control over The Committee met four times during the year financial reporting and IT to undertake its role in providing oversight and The Committee considers these matters at monitoring the integrity of financial reporting, each meeting as a matter of routine. The focus the effectiveness of internal risk management, in the early part of the year was on monitoring control and assurance processes, the progress reported by management to address Company’s governance framework and the IT control deficiencies highlighted in previous external audit. Following the decision to defer years, and in May 2020 we concluded that the Group’s results announcement by a month sufficient additional control activity had been in light of the COVID-19 pandemic, the implemented to allow us to judge the Committee met in May 2020 with an additional ‘significant deficiency’ previously reported in meeting convened in June 2020. respect of US IT infrastructure controls to be remediated and closed. A substantial proportion of the Committee’s time from late March 2020 onwards was During the second half of the year, time was Mark Williamson devoted to focusing on the year-end financial spent understanding management’s progress Committee Chair reporting, internal controls and related impacts on enhancing control environments across all arising from the COVID-19 pandemic in the UK locations. In particular, in March and May 2020, and US. the Committee considered management Key areas of focus in 2019/20: updates on the lessons learnt from the initial • Assessing and responding to the impact Assessing and responding to the impact implementation of SAP S/4 HANA (as part of of COVID-19 on year-end financial of COVID-19 on year-end financial the MyFinance programme) for the ESO prior reporting and internal controls; reporting and internal controls to the planned deployment of the technology as the financial system of record across the UK • Internal controls; The Committee met as scheduled on 25 March, in the week following the stay at regulated business in mid-2021. • Overall framework for risk assurance; home notices being issued in both the UK and • Cyber security and cyber audit; US. The Committee discussed management’s As we do annually, we considered the impact • New UK system of financial record evolving risk assessment relating to the impact of these matters on the year-end attestation (Phase 1); of the pandemic on the year-end reporting and relating to the effectiveness of internal controls over financial reporting required under SOX. • Climate change related financial close process, as well as contingency plans. disclosures; and The Committee sought regular updates from management throughout the year-end close Overall framework for risk assurance • Finance leadership changes. process as continuity plans were implemented. During the year, we discussed the Company’s control framework and its maturity and it was Key areas of focus in 2020/21: As discussed on page 78, the key accounting, agreed that management would come back • Ongoing review of the impact of financial reporting and internal control related to the Committee regularly with updates on a COVID-19; matters were discussed in the May 2020 number of improvements and enhancements • Cyber security and cyber audit; and June 2020 meetings, and throughout to the Company’s risk, control and assurance • Overall framework for risk assurance; this period I remained in close contact with framework that was consistent across the the Chief Financial Officer, receiving regular Group. I was pleased to see the appointment • New UK system of financial record updates as the situation evolved. I am of a new Chief Risk and Compliance Officer (Phase 2); pleased to report that the Group’s close and the establishment of a central team to • Climate change related financial processes and Sarbanes-Oxley Act 2002 drive a more common approach to second line disclosures and Responsible Business (SOX) controls operated as intended without of assurance. In May 2020, we were updated reporting; and significant deviation. on the number of actions that had already • The UK regulatory developments and been executed and the plans that had been impact on the Committee. In light of the rapidly changing regulatory developed, including the appointment of and economic circumstances throughout respective leads in all businesses and functions Composition of the Audit Committee late March and early April 2020, a decision and the creation of implementation plans to The Committee is made up of five was taken to defer the Company’s results push the improvements forward. independent Non-executive Directors: announcement by one month to June 2020. This decision was consistent with those taken Cyber security and cyber audit update • Mark Williamson (Committee Chair); by many other companies, and in keeping with In September 2019, the Group Chief • Therese Esperdy; advice from the Financial Reporting Council Information and Digital Officer and Chief • Paul Golby; (FRC), Financial Conduct Authority (FCA) and Information and Security Officer joined for • Liz Hewitt; and SEC to afford management and the Board the delivery of the cyber-risk-related audit more time to better understand the evolving • Amanda Mesler. update to the Committee. The Committee situation. This has also allowed us to noted the significant work being undertaken appropriately address the key disclosure The Board is satisfied that all members of the to remediate control weaknesses and that it requirements in this Annual Report, in a was proceeding in line with expectations. Committee have recent and relevant financial number of key areas including: experience and that the Chair, as a chartered Following this meeting, an update on digital accountant, and with significant board level • accounting matters – and in particular the was presented to the Board in December 2019 financial and audit experience, is suitably impact of the moratoriums on collections to provide a consistent view of risk within the qualified. The Committee is deemed to have in the US on bad debt reserves and cash Company’s security framework. The Board competence relevant to the sector in which collection forecasts; confirmed it was comfortable with the the Company operates. • going concern – focused on the Company’s current cyber priorities and appropriateness of the Group’s analysis as stressed the importance of engagement The Committee members’ biographies are regards reasonable downside scenarios; with regulators for future cyber upgrades. The Committee will consider cyber assurance on pages 66 and 67 and contain details of • long-term viability statement – concerning again later in the year. each member’s skills and experience. the key assumptions and reassessment of viability from additional perspectives given the uncertainty and dynamic external factors and their cumulative effect in the medium and long term; and • the consideration and assessment of a specific COVID-19 risk scenario or cluster scenario. 76
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Audit Committee Climate change related financial Looking forward Further reading disclosures Impact of COVID-19 S You can view the Committee’s Terms of The Company has continued to make good The Committee expects a significant Reference here: www.nationalgrid.com progress towards providing disclosures proportion of its time will remain focused consistent with the recommendations set on the impact of the pandemic for the Statement of compliance with the Competition and out by the Task Force on Climate-related foreseeable future – across accounting, Markets Authority (CMA) Order – the Company confirms that it has complied with The Statutory Audit Financial Disclosures (TCFD). In the year, the financial reporting and internal control related Services for Large Companies Market Investigation Committee was presented with a roadmap matters. The Committee will continue to (Mandatory Use of Competitive Tender Processes to progress towards full compliance of TCFD monitor developments and adapt its approach and Audit Committee Responsibilities) Order 2014 and the current gap analysis. The Committee to best support the Group’s stakeholders. (Article 7.1), including with respect to the Audit noted progress made in the year, including Committee’s responsibilities for agreeing the audit the identification of a principal risk relating Other matters scope and fees and authorising non-audit services. to the threats and opportunities around Cyber and internal control matters will remain climate change and the Company’s first set high-priority areas as the Company seeks to of disclosures concerning longer-term embed improvements and efficiencies over scenario analysis. the coming months. In the context of the financial statements, In addition, the Committee will continue to the Committee also considered the impact take a close interest in the Company’s evolving of climate change on management’s key ESG-related reporting activities. It will also judgements and estimates, in particular continue to monitor UK regulatory developments regarding gas asset lives as set out on carefully, as the UK government responds to page 78. the findings of the Kingman and Brydon reports later in 2020. New UK system of financial record (MyFinance) – Phase 1 Audit Committee Chair transition MyFinance became the financial system of Liz Hewitt was appointed as Non-executive record for the ESO at the point of legal Director and joined the Audit Committee as separation on 1 April 2019. a member in January 2020. During 2019, Liz was identified as the right candidate to The Committee received updates from take over from me as Audit Committee Chair. management on a regular basis throughout the Over the course of 2020/21 I will be working year, in anticipation of the planned technology closely with the Nominations Committee and roll out across the UK business in early Board, as well as Liz, to ensure there is a 2021/22 (Phase 2). seamless transition plan in place. As part of Liz’s tailored induction she has had meetings The Committee discussed the programme with myself, Deloitte, the Global Head of Audit leadership, governance and assurance model, and other senior members of the Company’s and lessons learnt from Phase 1 that will be finance team and she will continue to work applicable to Phase 2. alongside me this year to ensure a smooth transition. Governance and regulatory changes During the year, we received a detailed report on the outcomes and recommendations of the audit reforms in the UK following the publication of Sir Donald Brydon’s review into the quality and effectiveness of audit in the UK, as well as those of the UK Competition and Markets Authority and the Kingman review Mark Williamson concerning the UK regulatory landscape. Committee Chair We also received a number of updates from Internal Audit in relation to the new Chartered Institute of Internal Auditors (IIA) Code of Practice and later in the year we will review this and make the appropriate changes to the Internal Audit Charter and the Committee’s Terms of Reference. Finance leadership changes The Committee also met privately with the Chief Financial Officer towards the end of his first full year in the role, to discuss succession planning within the Finance function during the coming year. We will continue these conversations in 2020/21. 77
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Audit Committee continued Significant issues/judgements relating to the financial statements The significant issues and judgements considered for the year ending In considering the financial results announcements and the financial 31 March 2020 are set out in the following table. results contained in the Annual Report and Accounts, the Committee reviewed the significant issues and judgements made by management In addition, the Committee and the external auditor discussed the in determining those results. significant issues addressed by the Committee during the year. You can read more in the Independent Auditor’s Report on pages 110 – 120. Matter considered Factors and reasons considered, including financial outcomes COVID-19 related • The Committee considered the accounting, reporting and internal control implications of the COVID-19 pandemic extensively matters throughout the period from late March through to June 2020. • The Committee satisfied itself that management had adequately identified and considered all potentially significant accounting and disclosure matters in May 2020. Particular attention was devoted to understanding the implications of the moratoriums on collections of customer receivables issued by regulators in New York, Massachusetts and Rhode Island in March 2020. These events significantly impacted the business with immediate effect and contributed to a total bad debt charge of £234 million for the year, of which £117 million ($150 million) was considered incremental and due to the moratoriums. • The Committee also noted the other significant matters identified by management, being the additional uncertainty relating to determining the fair value of unquoted assets held by the Company’s pension and other post-employment benefit schemes. The Committee accepted management’s approach to delay finalising the financial statements until early June 2020 to allow for additional asset valuation data to be received and appropriate adjustments reflected over residual elements of specific asset classes. • Concerning internal control, in March 2020, the Committee discussed management’s evolving risk assessment and contingency planning activities. The Committee noted, amongst other things, management’s process to have a back-up individual identified in order to plan for an unforeseen absence by someone involved in a key part of the year-end, close and reporting process. The Committee received regular updates throughout the year-end and close process, and acknowledged that in the vast majority of cases, control-related activities took place on time and by the individual originally assigned. • In May and June 2020, the Committee was kept informed of the impacts of COVID-19 on the Company, including accounting matters, going concern and viability considerations, in light of continuing business developments as well as regulatory pronouncements, including from the UK FRC on the rapidly evolving corporate reporting landscape. • Details of the Committee’s conclusions in relation to going concern and the long-term viability statement are set out on page 80. Application of the • The Committee considered papers from management over the course of the year setting out how the exceptional items Group’s Exceptional framework has been applied to certain events and transactions over the period, as set out in note 5 to the financial statements. Items Framework • For each item, the Committee has considered the judgements made by management, considering both, each item in isolation, and the aggregate view of the impact on adjusted profit and adjusted earnings per share. • The Committee reached the conclusion that additional US environmental provisions, the impact of a 0.5% reduction in the discount rate applied to the Group’s environmental provisions and the reversal of the change in the UK tax rate should all be treated as exceptional. • The Committee concluded in line with management’s view that it was not appropriate to treat the incremental $150 million bad debt charge as an exceptional item this year. In addition, having considered the quantum and nature of the settlement in relation to the downstate New York gas moratorium and the additional COVID-19 related costs, it was deemed appropriate to include the impact of these items within adjusted profit. Gas Transmission and • Consideration was given to whether the developments in the UK and US towards binding carbon reduction targets should trigger Gas Distribution asset any changes to our estimates, judgements or disclosures, especially regarding our gas asset lives. The Committee received lives in the context of various papers from management setting out an overview of the legislative changes in the period, analysis of the future pathways climate change for the energy transition in the UK and US, and evaluation of the possible future use for our networks in these circumstances. • The Committee accepted management’s view that on balance we believe there will be a role for our gas networks post 2050 under a range of possible scenarios, and there is nothing at present to suggest that the asset lives should be shortened at this point. The Committee also accepted management’s view that in light of the evolving legislative developments and increasing investor attention, disclosure of a key judgement in relation to the impact of changes of legislation, disclosure of our gas asset lives as a key estimate, and appropriate sensitivity analysis were appropriate as set out in note 13 to this year’s financial statements. Going Concern • The Committee evaluated papers prepared by management in May and June 2020, setting out management’s analysis under a reasonable but severe ‘worst‑case’ scenario, principally reflecting potential outcomes as regards the length and severity of lockdown conditions, US customer moratoriums and a significant level of employee absenteeism. The Committee evaluated management’s analysis of the mitigating actions available to it to manage through such a situation, including the degree to which plans already existed and the likely challenges associated with implementing them. • The Committee considered the assumptions made by management regarding availability of debt financing, noting recent debt issuances but also contingency plans in the event that debt markets could close. Having considered the available evidence, the Committee considered that the analysis presented, in conjunction with the disclosures included in note 1 to the financial statements, was appropriate to the Company’s circumstances. 78
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Audit Committee Key matters considered by the Committee The key matters considered by the Committee during the course of the year ended 31 March 2020 are set out below: Matter considered Factors and reasons considered, including financial outcomes Financial reporting • On an ongoing basis the Committee considered current IFRS financial reporting issues. In addition to the matters highlighted above assessed against the Group Exceptional Items Framework, we also considered the accounting as regards to the acquisition of Geronimo in accordance with IFRS 3 ‘Business Combinations’, the position at Western Link as regards to liquidated damage claims, and the impact of the 9 August 2019 UK power outage. • Monitored and reviewed the integrity of the Group’s financial information and other formal documents relating to its financial performance, including the appropriateness of accounting policies, going concern and viability. • Recommended to the Board the key accounting judgements and key sources of estimation uncertainty related to pensions and environmental provisions, made by management for the 2019/20 half and full-year financial statements, going concern and other reports filed with the SEC containing financial information. Internal controls • The Committee received regular updates on progress towards the Company’s annual SOX attestation. • In March 2020, the Committee considered management’s progress against its wider financial controls action plan, and further process improvements introduced ahead of the year-end, including relating to governance process and formalisation of documentation around non-IFRS performance measures. Risk and viability • In addition to its regular work monitoring internal control processes, and reviewing and challenging the draft viability statement, statement the Committee specifically focused its attention this year on how the Company had factored the COVID-19 pandemic into its annual risk assessment process and long-term viability testing. External auditor • Received an update report at each meeting, including updates on the status of, and results from the annual audit process. • Considered the external auditor’s report on the 2019/20 half and full-year results. • Received and reviewed the management recommendations letter. • Ongoing consideration of the external audit plan, including monitoring the approach, scope and risk assessments contained therein. • Assessment of the effectiveness and independence of Deloitte, as well as review and update to the Group’s policy on the provision of non-audit services from Deloitte following updated FRC guidance in the year. • Review and approval of all audit fees proposed by management and for non-audit services in the year. • Recommended to the Board the re-appointment of Deloitte at the upcoming AGM. • Received an update from Deloitte on workflows in relation to COVID-19 and received confirmation that the external audit team had been working well in new circumstances. • Discussed the results of the client survey assessment, noting results were broadly consistent with the prior year. Key themes were highlighted and it was ensured that any actions would be incorporated into the 2020 audit. • Continued to hold private meetings with Deloitte and maintained dialogue throughout the year. Corporate audit • The Committee received a review of the Corporate Audit Charter. Minor changes were made to reflect the SOX control testing transition and the Committee approved the updated Corporate Audit Charter. • Received an update on the 2019/20 audit plan and the significant findings, and reviewed the plan for 2020/21. • Received an update on cyber assurance and updates to the IT Risk Framework. • Reviewed PwC’s key messages in the external quality assessment (EQA) of Corporate Audit, noting the improvements made since the last EQA. • Updated the Committee on the new IIA Code of Practice and confirmed a recommendation would be brought back to the Committee later in the year, which would also be reflected in the Corporate Audit Charter and the Committee’s terms of reference. Compliance, • Welcomed Liz Hewitt to her first Audit Committee meeting in March 2020. governance and • Reviewed and approved the updated terms of reference for the Committee. disclosure matters • Received a detailed report on the outcomes and recommendations of the Brydon Review and other UK regulatory changes. • Considered the progress towards implementing the Financial Stability Board’s TCFD recommendations. • Received updates on ethics and business conduct, including whistleblowing to help monitor the management and mitigation of business conduct issues as part of the wider controls framework. The Committee noted that there had not been any significant breaches of the Company’s Code of Ethical Business Conduct; however, noted that some cases had highlighted opportunities for improved controls. The Committee was also pleased to hear that the whistleblowing procedures in place and internal procedures remained effective and a number of employee communications would take place in 2020 to improve the understanding of these procedures. • Received a bi-annual update of compliance with external laws and regulations, including updates on any non-compliance issues and steps being taken to improve compliance across the Company. The Committee discussed the controls and mitigating actions employed to reduce such instances of fraud and compliance breaches in support of the Group’s overall strategy and culture. The Committee noted that the review of enhancements to the Company’s risk, control and assurance framework would incorporate the improvement of assurance activities through culture, technology, organisation and reporting. 79
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Audit Committee continued Financial Reporting As part of its review of the financial statements, the Committee Going Concern and Viability Statement considered, and challenged as appropriate, the accounting policies The Committee, in conjunction with the Finance Committee, reviewed and significant judgements and estimates underpinning the the Group’s going concern and viability statements (as set out on financial statements. pages 26 and 27) and the supporting assessment reports prepared by management. This work enabled the Committee to be satisfied that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable The Finance Committee met in May 2020 to discuss the implications and provides the necessary information for shareholders to assess the of COVID-19 to the Group’s going concern and viability statements. Company’s position and performance, business model and strategy. This was reported to the Board at its meeting in June 2020. The current COVID-19 situation has highlighted the interconnectivity between risks and the speed at which risks may materialise and Risk management and internal control during this uncertainty, significant work was undertaken to consider Risk management the Company’s viability statement from additional perspectives. In May The Committee has delegated responsibility from the Board for the and June 2020, the Committee reviewed and challenged the viability oversight of the Group’s system of internal control and risk management statement and considered the period of assessment used, taking into systems. This includes policies, compliance, legislation including account the COVID-19 events and other external factors in the fast- compliance with SOX and the UK Bribery Act 2010, appropriateness of changing situation including benchmarking the approach adopted by financial disclosures, procedures, business conduct and internal audit. other companies. It also considered individual risk testing, cluster testing As part of the framework across the Group, National Grid’s values – and the impact of the Company’s response to COVID-19 on business “do the right thing”, “find a better way” and “make it happen” – continue plans and financial models. After due consideration, these were to communicate and promote a culture of integrity across the business. recommended to the Board in June 2020. The financial statements are prepared on a going concern basis such that the Company and the During the year, the Board reviewed the principal risks facing the Group Group have adequate resources to remain in operation as per National (as set out on pages 22 – 25). The Committee provided assurance and Grid’s Group Treasury policy. review of the risk management process to ensure that processes are in place to manage risk appropriately. Statutory reporting framework policy The Board has ultimate responsibility for effective management of risk Internal Control and Risk Management effectiveness for the Group including determining its risk appetite, identifying key We continually monitor the effectiveness of our internal controls and strategic and emerging risks, and reviewing the risk management and risk management processes to make sure they continue to be effective internal control framework. The Committee, in supporting the Board and assess them to make sure they remain fit for purpose. Following to assess the effectiveness of risk management and internal control the review over the year the Committee confirmed that the processes processes, relies on a number of Company-specific internal control had the correct authority, expertise and independence and provided mechanisms to support the preparation of the Annual Report and sufficient assurance to the Company. As the business continues to Accounts and the financial reporting process. This includes both the evolve, systems and processes continue to be implemented to support Board and Committees receiving regular management reports to include this such as the recent deployment of new systems across finance, analysis of results, forecasts and comparisons against last year’s results, supported by the cyber team. The Committee was satisfied that the and assurance from the external auditor. Members of the Executive systems and processes are functioning effectively. Committee attend quarterly performance reviews to supplement this. The effectiveness of internal controls and risk management processes is The Committee is kept fully informed of all new legislation, FRC advice regularly monitored and assessed by the Committee and management and best practice and the requirements of the Code and Disclosure to make sure they remain robust. This review includes financial, and Transparency Rules. Regular reviews in the drafting process operational and compliance controls. The Committee also monitors and support the development of an annual report and accounts that addresses any business conduct issues or compliance issues. The meets all requirements. Certificate of Assurance (CoA) process operates via a cascade system and takes place annually in support of the Company’s full-year results. The Board receives, in advance of the full-year results, a periodic SOX report on management’s opinion on the effectiveness of internal Corporate Audit supports the Group’s risk management and internal control over financial reporting. This report concerns the Group-wide controls processes. They deliver an independent and objective approach programme to comply with the requirements of SOX and is received to evaluate and push forward processes. The Global Head of Audit has directly from the Group SOX and Controls Team and through the responsibility for the internal audit function and attends all Committee Audit Committee. meetings, and has access to the Committee Chair when necessary. In relation to the financial statements, the Company has specific internal At each of the Committee’s meetings progress is reviewed including mechanisms that govern the financial reporting process and the significant findings and how previous actions have been completed. preparation of the Annual Report and Accounts. The Committee ensures The Committee notes timelines and where actions are overdue, these that the Company provides accurate, timely financial results and are challenged by the members. Corporate Audit is responsible for implements accounting standards and judgements effectively, including developing the Audit Plan including engaging in major change in relation to going concern and viability. Our financial processes include programmes across the business. The Committee approved the review a range of system, transactional and management oversight controls. of the Corporate Audit Charter in November 2019 following agreement Also, our businesses prepare detailed monthly management reports from the Safety, Environment and Health Committee. that include analysis of their results, along with comparisons to relevant budgets, forecasts and the previous year’s results. Quarterly performance This year, the Committee continued to keep IT controls at the top of its reviews, attended by the Chief Executive and Chief Financial Officer, agenda and focus, following the appointment of a new Chief Information supplement these reviews. Each month, the Chief Financial Officer Security Officer. In May 2020, the Committee was informed that the prior presents a consolidated financial report to the Board. year significant deficiency in respect of IT controls was closed, following work to fully remediate the IT infrastructure environment in the US. Fair, balanced and understandable The Committee undertook a full and formal review of the content in the Audit Committee Chair Transition 2019/20 Annual Report and Accounts and recommended the approval As outlined in the report on page 84, the Nominations Committee of the half and full-year financial statements and the Annual Report and discussed in 2019 the plan to recruit a Non-executive Director with Accounts to the Board. The review is a well-established and documented suitable capabilities to replace Mark Williamson as Audit Committee process involving senior management and the core reporting team. Chair when he retires. Following a thorough process, Liz Hewitt was To enable the Committee to make this recommendation, the Committee appointed to the Board and joined as a member of the Audit Committee. considered whether, taken as a whole, the Annual Report and Accounts is fair, balanced and understandable. The Committee also considered Liz is a Chartered Accountant with significant experience in dealing with the Company’s compliance with relevant regulatory frameworks and complex and challenging audit issues. She has extensive experience the validation of management’s representations to Deloitte. Further, it as chair of an audit committee previously holding the role with Synergy provided oversight of the quality and integrity of the Group’s financial Health plc and Savills plc. Liz currently chairs the Audit Committees of reporting and accounting policies and practices. Melrose Industries plc, Novo Nordisk A/S and the House of Lords. Further details on Liz’s career experience and skills can be found on page 67. 80
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Audit Committee External audit The Committee also meets with Deloitte twice a year without The Committee is responsible for overseeing the relationship with the management present, providing the external auditor with the opportunity external auditor. Mark Williamson meets with the external auditor prior to raise any matters in confidence and have an opportunity for open to each meeting and outside the meeting cycle on a regular basis. dialogue. This meeting also gives the Committee a chance to monitor the performance of the lead Audit Partner both inside and outside • Deloitte is the external auditor to the Company. Committee meetings. • Appointed in 2017 following a formal tender process. • Reappointed at the 2019 AGM for the year ended 31 March 2020. Non-audit services • Audit Committee was authorised by shareholders to set Deloitte’s In line with the FRC’s Ethical Standard and to help protect the external remuneration at the 2019 AGM. auditor’s objectivity and independence, we have a policy governing • Current lead Audit Partner is Doug King and 2019/20 was the third Deloitte’s provision of non-audit services. In March 2020, the Committee year of his term. approved amendments to the policy in line with the mandatory FRC changes outlined in the Revised Ethical Standards, published in Following consideration of the auditor’s independence and objectivity, December 2019. the audit quality, and the auditor’s performance, the Committee was satisfied with the effectiveness, independence and objectivity of Deloitte The cap on the total fees that may be paid to the external auditor for and recommended to the Board its reappointment for the year ended non-audit services in any given year is 70% of the average audit fees 31 March 2021. paid in the last three financial years. Following Deloitte’s appointment in 2017 this is the first year that this is effective on the Company. A resolution to reappoint Deloitte and give authority to the Audit Committee to determine their remuneration will be submitted to To help protect auditor objectivity and independence, the provision of shareholders at the 2020 AGM. any non-audit service by the external auditor requires prior approval. The policy allows for certain specified services to be undertaken under Effectiveness and performance ‘pre-approval’ by the Audit Committee where we believe there is no As part of the Committee’s responsibilities, a review during the year was threat to the auditor’s independence and objectivity, the service has undertaken to consider the effectiveness of the external auditor and been reviewed by the CFO, and where fees do not exceed £50,000. ensure that the quality, challenge and output of the external audit These services are limited to: process is sufficient. • audit, review or attest services. These are services that generally only the external auditor can provide, in connection with statutory National Grid’s management take an active engagement in the external and regulatory filings. They include comfort letters, statutory audits, audit process and recognise the importance of the process. The attest services, consents and assistance with review of filing Committee also regularly receives the views of senior management and documents; and members of the finance team in forming conclusions on effectiveness. • other areas, such as provision of access to technical publications. During the year, the Committee: Our policy requires management to present a list of all non-audit work • reviewed the quality of audit planning including approach, scope, requests to the Committee at each official meeting to ensure the progress and level of fees; Committee is monitoring all non-audit services provided. Non-audit • reviewed the outcome of recommendations from the Deloitte service approvals during 2019/20 principally related to comfort letters Management Letter in 2018/19; associated with debt offerings. Work performed by Deloitte during the • received the Deloitte Management Letter for 2019/20; year (which necessarily also includes engagements approved by the Committee in 2018/19) included pre-implementation governance reviews • held private meetings with Deloitte where management was not associated with the new UK financial record system (MyFinance) and present; and a final element of market-related advisory work with the UK property • confirmed that the external audit process by Deloitte had been division. delivered effectively. External auditor fees Auditor independence and objectivity The amounts payable to the external auditor, Deloitte, in each of the past In addition to the review of effectiveness, the Committee is responsible two years were: for considering the independence and objectivity of Deloitte. The Committee has full oversight of the non-audit services policy and fees Audit and non-audit services (£m) paid and enforces checks to ensure that employees of Deloitte are not appointed to roles in the financial reporting scope within the Company. 18.0 18.6 17.8 16.9 1.1 3.3 1.9 16.9 1.1 The Committee considered the safeguards in place, including the annual 15.3 15.9 review by Corporate Audit, to protect the external auditor’s independence. The external auditor reported to the Committee in June 2020 that it had considered its independence in relation to the audit and confirmed that it complies with UK regulatory and professional requirements, SEC regulations and Public Company Accounting Oversight Board (PCAOB) standards and that its objectivity is not compromised. The Committee took this into account when considering 19/20 18/19 17/18 19/20 the external auditor’s independence and concluded that Deloitte continued to be independent for the purposes of the external audit and Audit services confirmed that this recommendation was free from third-party influence Non-audit services and restrictive contractual clauses. Total billed non-audit services provided by Deloitte during the year The independence of the external auditor is essential to the provision ended 31 March 2020 were £1.1 million, representing 7% of total of an objective opinion on the true and fair view presented in the audit and audit-related fees. In 2018/19, non-audit services totalled financial statements. £3.3 million (22% of total audit and audit-related fees). Audit quality Further information on the fees paid to Deloitte for audit, audit-related Regularly throughout the year, the Committee looks at the quality of and other services is provided in Note 4 to the financial statements on the auditor’s reports and considers its response to accounting, financial page 136. control and audit issues as they arise. To maintain audit quality, the Committee reviews and challenges the proposed external audit plan, Total audit and audit-related fees include the statutory fee and fees including its scope and materiality, before approval, to satisfy itself that paid to Deloitte for other services that the external auditor are required Deloitte has identified all key risks and has developed robust audit to perform, such as regulatory audits and SOX attestation. Non-audit procedures and communication plans. fees represent all other services provided by Deloitte not included in the above. 81
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Finance Committee The Committee will continue to receive regular The Committee monitored the evolution and updates on implications as the pandemic efficiency of cyber insurance as part of our continues to progress. cyber insurance programme. This continues to be a fast-growing area of the global insurance Prior to the emergence of COVID-19 other market and external advisors are due to key focuses for the Committee included the present to the Committee in July 2020 to external regulatory and political environments, provide additional external insight. and significant time was spent considering the implications of Brexit and the resulting market At its meeting in April, the Committee impact following the UK’s exit from the discussed the impact of COVID-19 on the European Union on 31 January 2020. insurance market and will be monitoring the insurance risk appetite closely throughout In January 2020, the Committee members the year. hosted an informal question and answer session with employees from the Tax, Pensions Tax Therese Esperdy and Insurance teams in the UK, to further The Committee has continued to monitor the Committee Chair increase workforce engagement and to potential tax impacts of Brexit and received a encourage a dialogue between the Committee focused update on implications from a tax and employees whom the Committee would perspective throughout the year. An update Key areas of focus in 2019/20: not normally have the opportunity to engage was also received concerning the UK Finance with at meetings. Following the success of the • UK and US pension and investment strategy; Bill 2019/20 and the potential impact on the January session, similar engagement sessions Company, particularly around the impact of the • Financial risk appetite; are planned to take place in 2020 and thought changes to the IR35 rules. The Committee will • Treasury-related activities for the is being given as to how these can take place continue to monitor developments in this area. ESO separation; around COVID-19 restrictions. In January 2020, external advisors presented • Bond issuance and hybrid bond refinancing; to the Committee on the evolving Tax Treasury • Financial implications of RIIO-2; Transparency debate. RIIO-2 was a key focus for the Committee over • Review of external regulatory and political the year and regular updates on the financial The Company also continues to give focus to environments and potential impact on implications of RIIO-2 were received including the changing tax landscape, particularly in credit ratings and any associated financial an additional presentation focused on the relation to the effect of digitisation, in line with risk; and financial aspects of the RIIO-2 business plan. the business-wide digitalisation ambition. The • Green Financing Framework and first Discussions took place on the assumptions Tax team continue to inform the Committee of green bond issuances. and parameters set by Ofgem and proposed external developments in relation to tax authorities financial frameworks, ahead of the RIIO-2 to enable continued best practice and how Key areas of focus in 2020/21: business plan submission in November 2019. technology can be leveraged in this area. • COVID-19 potential market, financial and balance sheet impact; The Committee provided continued oversight Pensions • Going Concern and Viability Statement; over management decision-making and In 2018/19 the Committee commenced plans execution of financial risk. The Company • Financial implications of RIIO-2; to consider de-risking the UK pension plans, reviewed the management of the Group’s to more closely match the assets and liabilities. • Review of management of financial risk financial risk appetite; as a result, the Committee Throughout this year, the Committee against the Company’s financial risk appetite; approved minor policy changes to funding risk, considered these plans further and approved and liquidity risk, counterparty credit risk, credit appropriate solutions to de-risk the Company’s • Continued oversight around Brexit-related rating risk and foreign exchange translation risk. pension arrangements, enabling the National financial risks and market reaction. Grid UK Pensions Scheme to enter into buy-in Management provided regular updates on arrangements with both Legal & General strategy formulation for the future, including and Rothesay, supporting the Company’s investment requirements for the business, long-term strategy to reduce the level of risk credit ratings, dividend policy and LIBOR within its pension arrangements. Review of the year and COVID-19 transition. The Committee was pleased to The Committee met on four scheduled receive details on the execution of new bonds In July 2019, external advisors presented to the occasions during the year to undertake its during the year, approving the year’s financing Committee on the UK pension landscape and responsibility of monitoring the financial risk of strategy and receiving regular updates as trends in the market, including the increased the Group, focusing on key areas such as treasury, financing is executed. Approval was also given decline in the defined benefit schemes across tax, pensions, insurance, investments and to a hybrid refinancing strategy with hybrid the market and the increase in utilisation of commodities. The Committee also convened bonds issued across two tranches in NGG defined contribution schemes. The Committee for an additional presentation in May 2019 Finance plc. received a further presentation from external which focused on the financial impacts of the advisors in April 2020 focusing on the US RIIO-2 business plans. A Green Financing Committee chaired by the pension landscape and trends in the market Group Treasurer was established in December alongside the impact of COVID-19 on the Towards the end of the year the impact to 2019 to support the Company’s sustainability pensions market. global markets of the COVID-19 pandemic strategy and Green Financing Framework became clearer and the Committee held detailed on page 58 as the Group works Looking forward additional COVID-19 focused meetings in April towards its net zero ambition. In January 2020 The Committee will remain focused on and May 2020. Significant consideration was the Company launched its first green bond, ensuring the Company is effectively managing given to the financial implications of the global which was well received by the market. financial risk, working closely with the Audit pandemic on the Company. This included Committee with particular focus on impacts financial scenario planning and risk mitigation. In November, the Committee invited a credit due to the COVID-19 pandemic as it continues At its May meeting the Committee considered rating agency to the Committee to provide an to progress globally. the Going Concern assumption of the insight into methodologies used for ratings, the Company, considering the uncertainties posed credit landscape in the UK and US for regulated by COVID-19 and the additional focus by utilities and the potential impact of Brexit. regulators. This consideration included a range of cash flow outcomes, the Company’s ability Insurance to access existing undrawn facilities alongside The Committee received regular insurance its ability to access long-term debt markets updates which considered the current shape Therese Esperdy and short-term cash positioning. of the insurance market and how the Company Committee Chair was benchmarked against other organisations in relation to the Company’s approach to insurance renewals in April 2020. 82
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Safety, Environment and Health Committee Towards the end of the year we have seen the Gas safety and reliability acceleration of the global COVID-19 pandemic; A significant amount of the Committee’s time the health and wellbeing of all employees and this year has been spent on gas safety and contractors has been of paramount importance reliability in the US. The post-work stoppage during these challenging and unprecedented initiatives following the Massachusetts labour times. The Committee has and will continue to dispute were reviewed, including monitoring focus on ensuring the strategies and policies the closure of open work actions and the being implemented across the business implementation of new processes to ensure adequately protect the health, safety and regulatory compliance. Regular updates were wellbeing of everyone. provided which identified areas of focus and improvement and the Committee discussed Committee member induction and considered risks around these. The Since joining the Committee in 2019, both Committee also reviewed and challenged the Amanda Mesler and Earl Shipp have undertaken proposed plan to improve the safety of US site visits in the UK and US as part of their LNG plants. The Committee will continue to Paul Golby induction. These site visits provided a useful monitor progress of the gas safety and Committee Chair insight into the Company and the opportunity reliability initiatives over the coming year. to gain a wider perspective of National Grid and to meet and engage with a variety of National Grid’s net zero commitment Key areas of focus in 2019/20: employees to discuss their views on safety, Sustainability is a key focus and the Committee • Post‑Massachusetts labour dispute environment and health on site and throughout has been pleased to see the increasing and workforce re-integration; the Company. The site visits are an important prominence of this issue internally and way of demonstrating Company safety, health • US regulatory safety changes; externally. The Company recognises it has and environment leadership and are a way to a critical role to play in the decarbonisation • Liquefied Natural Gas (LNG) and build Committee knowledge, skills and of the energy system and the importance of Compressed Natural Gas (CNG); strengthen discussion around issues. setting a net zero ambition for the Company’s • Monitoring the action plan to achieve own emissions, which aligns with its strategy long-term carbon reduction targets; The Committee also welcomed Liz Hewitt as a of a cleaner future. In November 2019, the • Deep dive into employee wellbeing; and member in January 2020. Liz brings excellent Committee endorsed the Company’s new experience to the Committee and her wealth target to reduce its own direct greenhouse gas • Continued focus on process safety of knowledge in wide areas of business will improvements. emissions to net zero by 2050. The Committee add diversity and value to our discussions. reviewed the Company’s high-level plan to Key areas of focus in 2020/21: achieve this and in January 2020 approved Safety ambitious interim targets to reduce its direct • COVID-19 impact on our customers, In line with the Company’s key values, safety emissions by 80% by 2030 and 90% by 2040. employees and contractors; remains a top priority for the Company and The Committee will continue to closely monitor • Gas safety and reliability; the Committee. We have seen improvement and challenge the Company’s progress against • Group safety performance and safety in the Injury Frequency Rate in the UK, which the action plan and the implementation of the culture; remains world class; however, we must never Company’s wider strategy around sustainability • Sustainability and climate change; become complacent and improvements still to achieve long-term carbon reduction targets. need to be made. The Committee was deeply • Business deep dives and process saddened when in July 2019 a National Grid Employee health and wellbeing improvements; employee in the US was involved in a fatal In January 2020, the Committee received an • SEH risks and mitigation; and traffic accident while working on behalf of the update in relation to the Company’s progress • Mental health and wellbeing. Company. The Committee has been kept up on its health and wellbeing strategy. It was to date on the investigations surrounding this noted that a transition had been made by the tragic incident and has strongly endorsed the Company in its strategy from a disease-based Company’s commitment to ensuring that key campaign towards a more holistic approach, lessons learned have been communicated to with a wider range of health and wellbeing Further reading all our workforce. As a result, the Company S For more information on the Company’s factors facing the workforce being considered. work around Task Force on Climate- rolled out a Group-wide safety intervention to As part of the strategy, the Committee has related Financial Disclosures (TCFD) remind our workforce of the Company’s Safety continued to track the impact of musculoskeletal requirements (see pages 57 – 62). Ambition. The feedback from the intervention injuries (MSK) and its effect on employees. has been positive and has encouraged our The Committee was pleased to see that as a workforce to continue the important result of physiotherapy services being available conversation around safety by discussing Review of the year and COVID-19 to UK employees as well as holding 20 MSK within teams recent safety incidents and ways workshops across 11 locations, the sickness During the year, the Committee met six times to prevent future occurrences. The Committee absence risk, in relation to MSK, had dropped to undertake its oversight responsibilities for will continue to monitor the implementation of from the third to fifth highest days lost over the reviewing the strategies, policies, initiatives, these lessons learned. past calendar year. Progress continues to be risk exposure, targets and performance of the made in relation to mental health awareness Company in relation to safety, environment, Further to my update last year about the and prevention activities. With the ongoing health and wellbeing. Two of these meetings employee safety culture survey, this year the COVID-19 pandemic the Committee will were scheduled specifically to monitor the Committee received an update on the results monitor the implementation of wellbeing potential safety issues surrounding the lifting of the survey including the new plans built policies and the impact on our workforce; this of the downstate New York gas moratorium. from the actions identified, which will help the will be kept under review over the coming year The Committee considered the Company’s Company to continue on its journey from a to ensure that appropriate health and wellbeing contingency proposals to maintain security calculative safety culture to a more proactive campaigns and procedures are implemented. of supply throughout the winter, including safety culture. the potential to add new CNG sites to meet demand, and challenged the associated risks. Paul Golby Committee Chair 83
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Nominations Committee Senior leadership Our Board diversity Following Dean Seavers stepping down from his role as Executive Director in November Board gender 2019, Badar Khan (previously Group Director, Corporate Development and National Grid 8 Ventures) stepped in as Interim President of 4 the US business. Jon Butterworth (previously COO of National Grid Ventures) stepped in as Interim Managing Director of National Grid Ventures. Following success in their interim positions, the Committee approved the permanent appointment of Badar Khan as President of the US business and Jon Butterworth as permanent Managing Director of National Grid Ventures on 2 April 2020. Men Sir Peter Gershon Women Chairman and Committee Chair Non-executive Director – Jonathan Silver The appointment of Jonathan Silver began in Executive and 2018 with the appointment of Korn Ferry, a Non-executive Directors Key areas of focus in 2019/20: search consultancy firm that does not have • Board and Committee composition; any other connection with the Company or • Chairman succession; and individual directors. The Committee reviewed 9 and agreed the Non-executive Director 3 • Senior leadership succession. candidate profile which was formulated taking into account the current skills of the Board Key areas of focus in 2020/21: members and data analysis received from the • Chairman succession and onboarding; 2018 external Board evaluation process. This • Review of senior leadership succession highlighted the additional need to strengthen policy; and the Board’s US regulatory, equity and financial • Board and Committee composition. experience. Having conducted an initial search, a list of potential candidates were selected for Executive the first interview with the Chairman. It was Non-executive (inc. Chairman) agreed that a sub-group of the Committee (Nora Mead Brownell, Therese Esperdy and Mark Williamson), and John Pettigrew would Review of the year Board members interview the final candidates from the short by nationality The Committee met seven times during the year list recommended by the Chairman. The to undertake its responsibilities in reviewing the Committee agreed the preferred candidate and leadership needs of the Company, based on made a recommendation to the Board in April 8 the structure, size and composition of the 2019. On 16 May 2019, following a thorough 4 Board and its Committees. In addition, the and rigorous process, the Board welcomed Committee reviews and oversees succession Jonathan Silver as a Non-executive Director planning for Directors and senior management to the Board and as a member of the Finance, and makes recommendations, as appropriate, Remuneration and Nominations Committees. to the Board. Non-executive Director – Liz Hewitt Succession planning and In April 2019, the Committee discussed Board composition recruiting a further Non-executive Director with A key focus for the Committee this year has British capabilities to succeed Mark Williamson as American been succession planning. The Committee is Audit Committee Chair once he retired. The responsible for ensuring that the Company is Inzito Partnership, who do not have any other headed by a high-quality Board and senior connection with the Company or individual Tenure management team and recognises that the directors, was appointed to support the process of building a strong and effective Board recruitment of this role. The Committee agreed and senior management team requires a good the Non-executive Director candidate profile 5 balance of continuity and refreshment. During and a short list of potential candidates was 3 the year, Board members assessed the skills then drawn up. First-stage interviews were 4 and areas of expertise that they brought to the conducted by the Chairman and final interviews boardroom to ensure effectiveness in providing were conducted by a sub-group of the good corporate governance and strategic Committee (Therese Esperdy, Paul Golby and oversight. This assessment will further aid in Mark Williamson), John Pettigrew and Andy identifying gaps and areas of strengthening Agg. In November 2019, the Committee agreed needed when appointing members in the that Liz Hewitt was the preferred candidate and future. The Committee has also borne the made a recommendation to the Board. Liz has < 3 years Code in mind in its deliberations throughout the a strong background in dealing with complex year to ensure that we have in place a strong 3-6 years and challenging audit issues. The Board > 6 years Board and senior management team with the welcomed Liz Hewitt as a Non-executive breadth of skills, experience and perspectives Director and member of the Audit, Safety, Charts as at 17 June 2020 necessary to reflect the changing demands of Environment and Health, and Nominations the business and Company strategy. The Committees on 1 January 2020. Committee will continue to monitor the skills and capabilities, and length of tenure of Board When considering the recruitment of new members to ensure that broad and relevant Directors, the Committee adopts a formal expertise is evident and will recommend further and transparent procedure which takes into appointments if necessary. Further information account the skills, knowledge and level of on our individual Directors’ skills and experience required as well as diversity. For capabilities can be found on pages 66 and 67. both appointments the candidate pool was as diverse as possible ensuring the Committee had options to balance the diversity on the Board. The effectiveness of the Board is also reviewed through the annual Board evaluation; see page 74 for further information. 84
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Nominations Committee Board diversity objectives Objectives Progress The Board aspires to meet the target of 33% of Board and Executive Objective met: there are currently 33.3% women on the Board, 33.3% Committee positions, and direct reports to the Executive Committee, women on the Executive Committee and 33.8% women direct reports to to be held by women in 2020. the Executive Committee. We continually aspire to exceed this target and we take gender diversity into consideration in all our Executive and Non-executive Directors searches. All appointments are however made on merit. The Board aspires to meet the Parker Review target for FTSE 100 boards Objective met: we currently have one Director from a non-white ethnic to have at least one director from a non-white ethnic minority by 2021. minority on the Board. Additionally, our mandatory requirement for a diverse candidate pool should facilitate the opportunity to recruit further from non-white ethnic minorities. Director tenure Terms of reference Chairman’s succession The Committee believes that Non-executive Following the introduction of the Code, Mark Williamson Directors should generally stay in role no longer the Committee terms of reference have been Senior Independent Director than nine years, in line with the Code; however, revised to align with the new requirements. the Committee may determine that on These reflect the broadening of the Throughout the year I have chaired the occasion it is in the Company’s best interest for Committee’s responsibility for overseeing Nominations Committee, without Sir Peter a Director with particular skills, knowledge and the development of a diverse pipeline of Gershon present, to discuss the Chairman’s experience to stay beyond the nine-year term. high-performing potential successors to performance, tenure and succession. In last It is proposed that Paul Golby stay for a limited senior management and keeping under year’s report I reported that Sir Peter’s extension beyond 1 February 2021 in order review the leadership and succession tenure may be extended beyond the for the Board to maintain the knowledge needs of the Company. recommended nine-year term in order to and experience required to conclude the conclude the RIIO-2 process. This was RIIO‑2 process. Diversity and Board diversity policy agreed following discussion with 18 of our National Grid supports the creation of an largest shareholders, who unanimously Talent pipeline – Senior leadership inclusive and diverse culture which we believe supported the extension. In January 2020, succession supports the attraction and retention of Sir Peter Gershon formally announced The Board and Nominations Committee support talented people, improves effectiveness, his intention to step down as Chairman and encourage initiatives that strengthen the delivers superior performance and enhances and retire from the Board following the talent pipeline within the Company. Over the the success of the Company. appointment of a suitable successor. To last 12 months we have seen several changes manage a smooth transition, we intend to within the Executive and senior leadership Our Board diversity policy (Policy) reflects our appoint a Chairman designate to the Board. team as we refresh the skills and capabilities continued commitment to promote an inclusive A search process for the next Chairman is needed to achieve our long-term strategy. The and diverse culture and we value diversity of currently underway, supported by Russell Committee has considered whether the talent thought, skills, experience, knowledge and Reynolds, and the Committee considered a pipeline and the collective strength of the expertise including of educational and long-list of potential candidates at the current leadership and senior management professional backgrounds, alongside diversity January 2020 meeting. Over the next few bench in the business is strong enough in its criteria such as gender, ethnicity and age. months, the Committee will agree a shortlist key positions, specifically in relation to handling of preferred candidates and a full explanation crises and ensuring the business is fit for the The Policy applies to the Board, Executive of the search and appointment process will future. It is an area of focus for the Committee Committee and direct reports to the be reported in next year’s report. to ensure that the required pace of change Executive Committee. facilitates strong and effective succession We will continue to review our progress across the Board and the wider business. As set out in the Policy: against the Policy and report on our objectives • all Board appointments and succession plans (set out above) annually in the Annual Report The Executive Committee continues to meet are made on merit and objective criteria, in and Accounts. The Committee will be reviewing regularly to discuss the succession pipeline the context of the skills and experience that this Policy throughout the year to ensure it and health of the talent pool further down are needed for the Board to be effective remains up to date and relevant. the organisation; as a result, a number of and to guard against ‘group think’; individuals have been identified as potential • we will only engage executive search firms Examples of the initiatives to promote and successors to key positions. Our senior leaders who have signed up to the UK Voluntary support inclusion and diversity throughout below the Board were invited to participate in the Code of Conduct on Gender Diversity; and our Company are set out on page 53. ‘Energise Our Business’ programme this year which combines flexible online development • we will continue to make key diversity data, and peer learning with more traditional both about the Board and our wider development activity. The Committee has employee population, available in the developed a strong understanding of executive Annual Report and Accounts. talent requirements and the capabilities we need for the future to fit with our purpose, vision and values. This has been evidenced by Sir Peter Gershon the appointment of Badar Khan as President Chairman and Committee Chair of the US Business and Jon Butterworth as Managing Director of National Grid Ventures. The Committee regularly reviews the development plans of the high potential senior leaders below the Board. The Board has also met with high-potential employees both in the UK and the US on several occasions during the year. 85
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Statement of application of and compliance with the UK Corporate Governance Code 2018 The statement below, together with the rest of the Corporate Governance 3. Composition, Succession and Evaluation report, explains the main aspects of the Company’s governance structure Composition to give a greater understanding of how the Company has applied the The Board believes it operates effectively with an appropriate balance principles in the UK Corporate Governance Code 2018 (the Code). For of independent Non-executive and Executive Directors who have the the year ended 31 March 2020, the Board considers that it has complied right balance of skills, experience, independence and knowledge of in full with the provisions of the Code, available at www.frc.org.uk. the Company. Details of our Board, their biographies and Committee The Corporate Governance report also explains compliance with the membership are set out on pages 66 and 67 and fuller biographies are Disclosure Guidance and Transparency Sourcebook. The index on available on our website. Board and Committee attendance during the page 87 sets out where to find each of the disclosures required in the year to 31 March 2020 is set out on page 69. The size and composition Directors’ Report in respect of Listing Rule 9.8.4 R. of the Board and its Committees is kept under review by the Nominations Committee to ensure the appropriate balance of skills, 1. Board Leadership and Company Purpose experience, independence and knowledge. The Committee also Our Board is collectively responsible for the effective oversight and monitors the expertise of the Board and will recommend further long-term success of the Company and champions our purpose, vision, appointments if desirable. The appointment of Liz Hewitt in January values and desired culture, ensuring consistency with our workforce 2020 ensures the Board has a Non‑executive Director with the required policies and practices. It also determines the strategic direction, business capabilities and expertise to succeed as Audit Committee Chair. The plan, objectives, principal risks and viability of the Company and sets the independence of the Non‑executive Directors is considered at least governance structure that will help achieve the long-term success of the annually along with their character, judgement, commitment and Company and deliver sustainable shareholder and stakeholder value. performance on the Board and Board Committees. The Board took into consideration the Code and indicators of potential non-independence, The Board sets the risk appetite and principal risks for the Company including length of service. Following due consideration, the Board and takes the lead in areas such as safeguarding the reputation of the determined that all Non-executive Directors were independent in Company and its financial policy, as well as making sure we maintain character and judgement. a sound and prudent system of internal control and risk management. Since the onset of the COVID-19 pandemic, we have received updates Succession on the impact on our UK networks that are managing the rapid and The Nominations Committee, which comprises the Chairman and unprecedented decrease in energy demand across all UK networks Non-executive Directors, leads the process for Board appointments and and in May 2020 it was agreed to add COVID-19 as a principal risk. makes recommendations to the Board. The Nominations Committee The Board also agreed to add a new climate change principal risk in also has responsibility for ensuring that plans are in place for orderly March 2020. succession to both the Board and senior management positions as well as overseeing the development of the talent pipeline to ensure that the There is a clear schedule of matters reserved for the Board and future leadership needs of the Company are considered and these fit schedule of delegation, which were both reviewed and updated in the culture and forward-looking strategy of the Company. January 2020. The schedule of matters reserved for the Board is available on our website, together with other governance documentation. Each Director is subject to election at the first AGM following their appointment, and re-election at each subsequent AGM. Following The Board actively engages with shareholders and stakeholders, recommendations from the Nominations Committee, the Board including employees, on a regular basis. Further information on how the considers whether all Directors continue to be effective, committed Board has effectively discharged this responsibility can be found on to their roles and have sufficient time available to perform their duties. pages 44 – 47. In April 2020 the Nominations Committee confirmed to the Board that all Directors continued to perform their duties in accordance with the 2. Division of Responsibilities principles above. Succession planning is ongoing for those members The Chairman, who was independent on appointment, is responsible of the Board who are approaching the nine-year tenure recommendation. for the leadership and management of the Board and its governance. He makes sure the Board is effective in its role by promoting a culture of Evaluation openness and debate, facilitating the effective contribution of all Directors The 2019/20 performance evaluations of the Board, Board Committees and helping to maintain constructive relations between Executive and and individual Directors were carried out internally with consideration Non-executive Directors. The Chairman sets the Board’s agenda making given to composition, diversity, how effectively members work together sure consideration is given to the main challenges and opportunities to achieve objectives and effectiveness of decision-making. You can facing the Company, and adequate time is available to discuss all read more about this on page 74. agenda items, including strategic issues. This particular area was reviewed as part of the internal Board evaluation. For further information Chairman’s Performance on the Chairman’s independence and tenure, please see page 85. As part of our annual evaluation process, Mark Williamson, as Senior Independent Director, led a review of the Chairman’s performance. The annual evaluation of our Board considers the composition, including At a private meeting, the Non-executive Directors, with input from the the combination of Executive and independent Non-executive Directors, Executive Directors, assessed his ability to fulfil his role as Chairman to ensure there is no dominant decision-making. The Board supports and considered the arrangements he has in place to fulfil his role. They the separation of the roles of the Chairman and Chief Executive. The key concluded that the Chairman showed effective leadership of the Board responsibilities are clearly documented and reviewed when appropriate. and his actions continued to influence the Board and wider organisation See our website for more details. positively. They also confirmed it would be in the Company’s best interest for Sir Peter Gershon to continue in his role as Chairman during Non-executive Directors are advised of the time commitment and travel the conclusion of the RIIO-2 regulatory process. expected from them on appointment. External commitments, which may impact existing time commitments, must be agreed with the Chairman At the end of the year, the Chairman held performance meetings with prior to appointment and during their time on the Board. As part of the each Board member to discuss their contribution and performance over Chairman’s succession, potential candidates are notified of the expected the prior year, including how effectively they worked together to achieve time commitment at the beginning of the process. Details of external objectives and any training and development needs. Following these appointments are set out in the biographies on pages 66 and 67 and on meetings, the Chairman confirmed to the Nominations Committee that our website. Independent of management, our Non-executive Directors he considered each Director to have demonstrated a commitment to the bring diverse skills and experience vital to providing strategic guidance, role and that their contribution continued to be effective. constructive challenge and debate. See our website for the matters reserved for the Board schedule. The Group General Counsel and Company Secretary makes sure that the Board has access to the necessary policies, processes and resources required to operate effectively and efficiently. She is also responsible for ensuring that timely information is provided and advises and supports the Chairman and the Board on all governance matters. 86
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Statement of application of and compliance with the UK Corporate Governance Code 2018 4. Audit, Risk and Internal Control Index to Directors’ Report and other disclosures Under the Disclosure and Transparency Rules and the Code, the composition and competence of the Audit Committee was considered by AGM 232 the Nominations Committee at its April meeting. The Board confirmed the Articles of Association 231 recommendations of the Nominations Committee: that all members of Audit information 110 the Committee are independent (including the Chair of the Committee), that Mark Williamson, as a chartered accountant, is considered to have Board of Directors 66 competence in accounting, and that the Committee, as a whole, has Business model 2 competence relevant to the sector in which it operates. Change of control provisions 236 Code of Ethics 236 The requirement for Directors to state that they consider the Annual Report and Accounts, taken as a whole, is fair, balanced and Conflicts of interest 236 understandable remains a key consideration in the drafting and review Directors’ indemnity 237 process. The coordination and review of the Annual Report and Accounts Directors’ service contracts and letters of appointment 95 is conducted in parallel with the formal audit process undertaken by the external auditors and the review by the Board and its Committees. The Directors’ share interests 103 Board is satisfied that the current policies and procedures in place ensure Diversity 53 and 54 the independence and effectiveness of the internal and external audit Dividends 9, 37 and 257 functions. Further details can be found on page 81. Events after the reporting period 208 and 233 The drafting and assurance process support the Audit Committee’s Financial instruments 156 and Board’s assessment of the overall fairness, balance and clarity of Future developments 13 the Company’s position and prospects as detailed in the Annual Report Greenhouse gas emissions 20 and Accounts, and the statement of Directors’ responsibilities as set out on page 109. Human rights 237 Important events affecting The Board has carried out a robust assessment of the nature and extent the Company during the year 10 of the principal and emerging risks facing the Company in achieving its Internal control 22 long-term strategic objectives, including those that would threaten the business model, future performance, solvency or liquidity. Further details Internal control over financial reporting 227 can be found on pages 22 – 27. Listing Rule 9.8.4 R cross-reference table 237 The Board also sets the Company’s risk appetite, internal controls and Material interests in shares 233 risk management processes. The Board monitors the Company’s risk management, internal control systems and framework and undertakes Our workforce 52 a review of their effectiveness annually. The activities of the Audit Political donations and expenditure 237 Committee, which assists the Board with its responsibilities relating Research and development 237 to risk and assurance, are set out on pages 76 – 81. Risk management 22 5. Remuneration Share capital 233 The Remuneration Committee, comprised entirely of Independent Non-executive Directors, is responsible for recommending to the Board the remuneration policy for Executive Directors, the Chairman and senior management, and the implementation of this policy. The aim is to align the remuneration policy to the long-term Company strategy and key business objectives that will promote long-term sustainable success. Our policy is reviewed against workforce remuneration and performance, and is designed to reflect our shareholders’, customers’ and regulators’ interests. The Directors’ Remuneration Report on pages 88 – 107, sets out the work of the Remuneration Committee, its activities during the year and further details on how our Remuneration Policy is implemented including the remuneration of Non-executive Directors. Executive Remuneration, including alignment to broader workforce pay policies has been discussed at employee voice engagement sessions, along with gender pay reporting. These topics will remain key areas for discussion as we continue our programme of engagement into 2020/21. For more information regarding our policy on the Executive Directors pension contribution/allowance and the alignment to the workforce, please see page 89 of the Directors’ Remuneration Report. 87
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Directors’ Remuneration Report Annual statement from the Remuneration Committee Chair Introduction Last year, our shareholders approved the new Directors’ Remuneration Policy for the period from 2019, with 97.03% votes in favour. At the same time, the Directors’ Remuneration Report received 96.53% votes in favour. The Remuneration Committee and the whole Board are grateful to shareholders for their support for our Policy and our implementation of it. As a company, our aim is to ensure transparency with our shareholders and all stakeholders in what we do, particularly with regard to governance and remuneration. The Committee fully recognises the central importance of these areas for National Grid’s reputation, and the strong interest of shareholders in our standards and performance. Last year’s vote followed extensive consultation with our major institutional shareholders in light of which we put forward proposals that were approved at the AGM. This year we are not seeking approval of a new Policy, although through the annual advisory vote we are seeking your Jonathan Dawson support for our implementation of the Policy during 2019/20. We are Committee Chair planning to seek your approval of a new Policy next year in light of decisions to be made by Ofgem during the year regarding the next regulatory period (RIIO-2) commencing April 2021. As we have done Key areas of focus in 2019/20: previously, we will consult with major institutional shareholders before • Items relating to the appointment of new putting forward our proposals. Executive Committee members and leaving arrangements for former Executive Review of decisions made during the year Director, US; and Annual Performance Plan (APP) • Reviewed impact of evolving corporate National Grid again delivered good financial performance for the year, governance standards, including pension with Group underlying Profit before Tax of £2,493 million, Underlying arrangement for UK-based new hires. Earnings per Share of 58.2 pence and Group Return on Equity of 11.70%; and the Directors have recommended an increase in the final dividend in line with our stated policy. Against this background, the Key areas of focus in 2020/21: Group financial metrics for the APP (impacting the CEO and CFO) • COVID-19 related remuneration decisions; represented 79.4%, a little over half way between target and stretch • RIIO-2 impact on future LTPP awards; and performance. The financial outcome for the Executive Director, UK was 58.3%, just ahead of target performance, reflecting lower UK-specific • Directors’ Remuneration Policy review and financials versus Group particularly on RoE. The financial performance shareholder consultation. metrics for the APP are based on financial results, with technical adjustments made in line with past practice in respect of currency adjustments, unbudgeted pension costs, scrip dividend dilution and storm damage repair costs. The final APP outcomes (which incorporate assessments against individual objectives and financial performance) have, however, had one adjustment affecting all staff eligible for APP awards. With the bulk of colleagues working remotely due to COVID-19 restrictions, and heavily focused on maintaining continuity of service and supply to our customers, it would have been difficult for in-depth annual personal performance reviews to be undertaken in the normal way. The Committee therefore agreed with senior management that, across the Group, the individual component under the APP would be capped at the lower of actual and target, which is equal to 50% of maximum. The Committee has also applied this principle to the Executive Directors and other senior executives; the unadjusted individual scores for the Executive Directors are shown on pages 98 and 99, from which it can be seen that the outturn for the individual objectives of all current Executive Directors has been reduced in light of this approach. Coupled with the financial measures for the APP, the overall outcome for the CEO and CFO is 88.3% of salary, and for the Executive Director, UK 69.8% of salary, in each case out of a maximum potential of 125% of salary. In its assessment of the overall performance of John Pettigrew and the level of APP outcome for him for the year, the Committee gave careful consideration to the issues arising from the decision to impose a moratorium on new gas supply connections in National Grid’s service territory in downstate New York (KEDNY/KEDLI). Although this was an operational decision taken by the Group’s US leadership in response to a potential shortfall in gas supplies coming into the region, the Committee and John agreed that, as CEO, he was ultimately accountable for the adverse financial and reputational consequences suffered by the Company. The Committee also recognised the subsequent outstanding leadership that John had given in reaching a settlement with the New York authorities and in actions taken to address the situation. Accordingly, the Committee and John agreed that it would be appropriate for John to donate 20% of his APP award (net of tax) when it is paid in July to a charity involved in the emergency COVID-19 response in our US service territories. In reaching its overall decisions on the APP, the Committee took account of Environmental, Social and Governance (ESG) considerations, including those related to COVID-19, noting in particular that no employees have been furloughed, no compulsory redundancies or pay reductions have been made, and trade union agreements have been honoured. 88
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Directors’ Remuneration Report Annual statement from the Remuneration Committee Chair continued Long Term Performance Plan (LTPP) I noted last year that our recently appointed CFO’s pension allowance The performance period for the 2017 LTPP ended on 31 March 2020, was already set at 20% of base salary at the time of his appointment. with a vesting outcome of 84.9% of the maximum potential (350% for Also, as reported last year, our previously appointed UK-based Executive the CEO and 300% for other Executive Directors). This outturn was Directors agreed to reduce their pension allowance from 30% of base based on our performance measures of Group Return on Equity and salary to 20% by the end of 2022, without compensation. Group Value Growth, with adjustments in respect of inclusion of the value created from the sale of the residual interest in the UK Gas Distribution We recognise recent governance and remuneration statements from business and revised timing of UK tax payments. More details on the major institutions to the effect that companies are expected to develop performance measures are set out on page 100. The Committee a credible plan to align incumbent directors’ pension contribution rates reviewed whether there were any factors which might cause it to with the majority of the wider UK workforce by the end of 2022. The reduce the vesting levels, including compliance with the dividend policy, Committee has been thinking carefully about this issue, particularly in but concluded after careful consideration that the vesting levels fairly the context of the variety of legacy pension plans in operation and the reflected performance over the performance period, and that the tiered structure of pension contributions throughout the Company which additional two-year holding period and significant shareholding I described last year. This matter is under active review, and we shall requirements appropriately align interests with shareholders, incorporate our longer-term pension proposals as part of our consultation particularly through COVID-19 uncertainty. for the Directors’ Remuneration Policy binding vote in 2021. Annual salary review What is our remuneration policy seeking to achieve? Against the background of the pandemic and its impact on wider Although we have regularly stated our remuneration policy objectives, it society and the economies of the territories where National Grid is important to set out again what we are seeking to achieve in the way operates, the Committee agreed that, whilst most managers and all we structure senior executives’ remuneration. Our policy aim is to ensure those covered by trade union agreements would receive increases, it that how we structure remuneration and how we make decisions on would exercise restraint and not award annual salary increases to the annual and long-term reward plans are compatible with and fully support: Group Executive Committee members at this time. The Committee • attracting, motivating and retaining senior executives while not however felt that an exception should be made in respect of Andy Agg, over-paying; the CFO. Andy was appointed to his role in January 2019 and, as we have done for other appointments, his starting salary was set • ensuring we pay our senior executives in a way that incentivises significantly below the assessed market rate for the job with the publicly stretching financial and operational performance, within the risk stated intention to increase his salary, subject to his performance and appetite set by the Board; progression in the role, toward the assessed market rate. In line with this • being fully aligned to the way National Grid earns its returns for plan Andy would have received a salary increase of 9% from 1 June 2020. shareholders; and However, in the context of the other senior executives not receiving a • actively supporting our strategy, ethics, values and contribution to salary increase this year, the Committee decided to restrict Andy’s society in the territories where we operate. increase to 6.5%. In approving this increase, the Committee considered that Andy had made a very good contribution to the Group in his first full In addition, in order to ensure internal alignment and common purpose, year as CFO, with a particular focus on strengthening his senior financial we apply the same broad architecture to the remuneration of our senior team as well as focusing on the financial preparations for RIIO-2. The management team below the Executive Directors. Committee will again review Andy’s salary next year and may, as previously, award him an increase in excess of other senior executives, The key components of our approach are: subject to continuing good performance, to bring his salary in line with the market rate. 1. Significant weighting towards long-term value creation and alignment with shareholder interests The Remuneration Committee will continue to consider the current and potential impact of COVID-19 on the Company and its stakeholders in Nearly three quarters of John Pettigrew’s variable pay opportunity is determining if and when any salary increases are awarded. Consistent represented by the LTPP. We continue to put a much higher weight on with this decision, there will be no increases in fees for the Board this element compared with the APP because National Grid is a Chairman or other Non-executive Directors at this time. long-term business with long-life assets. We want to make sure investment decisions are made, and operating efficiencies achieved, I would also like to note and thank John Pettigrew and Andy Agg for against this background. Moreover, for Executive Directors, some 85% their generous donations of £50,000 and £20,000, respectively, to the of their variable pay opportunity (both annual and long-term) is delivered Prince’s Trust to support the Trust’s work with young people giving them in National Grid’s shares. Consistent with our approach for aligning a lifeline and increased social mobility despite the challenges created executive interests to the long term, LTPP awards have a three-year by the COVID-19 pandemic. The £20,000 donation from Andy Agg performance period and a further two-year post-vesting holding period. represents some 50% of the salary increase he will receive for 2020. Our LTPP measures for 2020 will continue to be fully aligned with long-term value creation and shareholder interests. Figure 1 below Leaving arrangements for Dean Seavers illustrates how performance measures are structured for 2019 and 2020 Dean Seavers, Executive Director, US, stepped down for personal LTPP awards, taking account of the impact of the transition from RIIO-1 reasons from the Board on 5 November 2019. His employment with to RIIO-2. National Grid subsequently terminated on 31 December 2019, following a handover period with his successor as President of National Grid’s US business. The Committee concluded that ‘good leaver’ remuneration provisions should apply under our Directors’ Remuneration Policy. Impact of RIIO-2 on our Long Term Performance Plan Details of his leaving arrangements are provided on page 102. Figure 1: LTPP measures The Board decided that this position will no longer sit on the Main Board. 19/20 20/21 21/22 22/23 23/24 24/25 Badar Khan was appointed Interim President of the US Business and 2019 then was made permanent in this role from 1 April 2020. Award Pension 2020 Under the new Policy approved last year, any new UK-based Award Executive Directors will receive a pension contribution/allowance of RIIO-1 RIIO-2 up to 20% of base salary (reduced from 30% previously). To further align Key: with the evolving shareholder expectations and market practice, the Group Value Growth Group RoE Holding period Committee decided that, from November 2019 onwards, any new UK-based Executive Directors will receive a pension contribution/ 2. We require senior executives to maintain very high allowance of up to 12% of base salary, which is in line with the defined shareholdings in National Grid contribution rate available to the majority of the UK-based wider workforce. The Company has also cascaded this change so that it As CEO, John Pettigrew has to hold at least five times his pre-tax salary applies to all new UK hires regardless of level. The current average in National Grid’s shares, which is equivalent to around nine times his pension contribution across the various pension schemes for the wider post-tax salary. Other UK-based Executive Directors must hold at least UK workforce has decreased from 18% last year to 17% this year due four times their pre-tax salary in National Grid’s shares (equivalent to to natural attrition. around seven times their post-tax salary). This requirement ensures that 89
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Directors’ Remuneration Report continued executives necessarily have a longer-term view in their decision-making, performance (for example, safety and environmental performance) are rewarded for achieving success progressively over the long term, are also taken into account, and discretion applied if appropriate, and have interests aligned to our private and institutional shareholders when determining an executive’s performance against their individual – gaining if the share price increases, and sharing in the consequences objectives and in confirming the overall final payouts (APP) and/or of share price falls. Moreover, we believe our senior management, not vesting outcomes (LTPP). Our approach, illustrating how variable pay just Executive Directors, should view the dividends paid on shares they is linked to performance, is illustrated below in Figure 2. earn as part of their overall remuneration arising from National Grid, rather than focusing on the annual capital value. An important 4. Discretion and independent judgement is applied. characteristic of our high shareholding requirement is that a newly Achievement of short-term (APP) and long-term (LTPP) appointed Executive Director who owns no National Grid shares should incentive opportunities is linked to National Grid’s expect to take some six to seven years (assuming target payout levels) to performance have earned the minimum shareholding requirement and will be unable to sell shares (other than to pay income tax arising on vesting) prior to As I stated last year, as a committee we consider whether to apply that point. Our post-employment shareholding requirement further discretion when assessing remuneration outcomes for Executive enhances the alignment of interests between executives and Directors. Before approving any payments under either the APP or LTPP, shareholders. Our current post-employment shareholding policy requires we reflect with great care first on both the underlying financial and wider Executive Directors to hold 200% of salary for two years. We have noted business performance of the Company; we then assess the wider recent governance developments and shareholder expectations that the performance of the Company in terms of its societal contribution, its post-employment shareholding requirement should be at the same level relations with regulators, and its overall reputational standing with as the in-employment shareholding requirement, although balanced stakeholders. We also undertake a careful appraisal of the performance against that our in-employment shareholding requirement is at the top of each Executive Director and members of the Executive Committee end of market practice. We will review this matter as part of our against their individual objectives set for them at the start of the year and consultation for the Directors’ Remuneration Policy vote in 2021. their demonstration of leadership qualities and our values. Whilst the underlying financial performance of the Company is a material factor 3. Achievement of short-term (APP) and long-term (LTPP) in our assessments, the Committee has shown and will continue to incentive opportunities is linked to National Grid’s demonstrate a willingness to apply discretion to adjust final payments performance in light of all factors considered relevant by the Committee. A key principle of our remuneration policy, and how it operates, is that In addition to applying discretion to final payment levels, the Committee reward should be aligned to the financial and operational performance considers whether there might be any basis for applying malus and/or of the Company and to shareholder interests. As set out in the Strategic clawback to awards made and/or payments already received by an Report, a number of our financial KPIs directly align to our APP and individual where subsequent events or factors justify taking such steps. LTPP rewards. In addition, non-financial KPIs and wider business Figure 2: How our variable pay is determined and linked to performance Financial measures + Individual objectives + Committee discretion + Malus/clawback Objectives are set on Group/Business Return APP an individual basis, on Equity 1-year dependent on role, remit and Business Value Added performance period requirements. Includes wider Committee considers Business Underlying Profit (up to 125% of salary) business measures as wider financial and Earnings per Share appropriate business performance Committee has discretion to as well as individual apply malus/clawback in demonstration of leadership exceptional circumstances qualities and values, and will LTPP adjust as appropriate 3-year performance period Group Return on Equity (up to 350% of salary for n/a Group Value Growth CEO, 300% for other Executive Directors) Fair and Appropriate executive pension levels (where we have already taken steps to align When making remuneration decisions for the Executive Directors and different employee levels). We will also be considering how best to build other senior leaders, the Remuneration Committee takes account of into our remuneration arrangements consideration of key non-financial the remuneration arrangements and outcomes for the wider workforce, objectives, such as environmental issues and the Company’s statistical information, such as the CEO pay ratio and gender pay gap performance in reducing emissions and enabling the wider societal data, employee views on executive pay as part of our employee voice evolution towards new and renewable energy sources and networks. process, and our Company values. Last year, we voluntarily reported our In our review of policy for 2021, we will consult on all of these matters CEO pay ratio one year early, with a median ratio of 76:1 for UK-based during the year ahead. employees. This year, the median ratio for UK-based employees is 86:1. Our Group-wide median ratio was 48:1 last year and 53:1 this year. The Conclusion increases in both ratios are largely due to the increase in LTPP vesting. The Committee has carefully reviewed the performance of the senior The lower Group-wide ratio reflects the higher general level of wages in executive team during the year and the prior three years to assess the US compared with the UK, and especially in the regions of the US whether the level of APP and LTPP payments/vesting were aligned with where the Company operates. It is also important to recognise that the Company’s performance over the period and concluded that the around three quarters of our employees are in the US. In terms of UK arrangements set out in this Remuneration Report were a fair reflection gender pay gap, there has been an improvement from the median of of their individual and collective performance. Accordingly, on behalf of 4.4% last year to 2.6% this year. the Committee, I commend this Directors’ Remuneration Report to you and ask for your support at the Annual General Meeting. Changes to the Committee membership Nora Mead Brownell resigned from the Board on 8 April 2019. Jonathan Silver joined the Board and was appointed to the Committee on 16 May 2019. Developments for 2020/21 Jonathan Dawson Remuneration Committee Chair Looking ahead, and as already mentioned, the Committee’s work will be dominated by considering the impact of RIIO-2 on our remuneration structure. In addition, we will also be mindful of the evolving practice on 90
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Directors’ Remuneration Report At a glance – 2019/20 Our ‘At a glance’ highlights the performance and remuneration outcomes for our Executive Directors for the year ended 31 March 2020. Further detail is provided in the Statement of implementation of remuneration policy in 2019/20. Annual Report on Remuneration A comparison of the 2019/20 single total figure of remuneration, with the maximum remuneration if variable pay had vested in full, is set out below for the Executive Directors. Andy Agg, John Pettigrew and Nicola Shaw were each in office for the full year. Dean Seavers was in office for part of the year. Total remuneration Maximum if variable 2019/20 total single figure of remuneration pay vested Executive Director in full £’000 £’000 Split by component (%) Andy Agg 2,015 1,716 43.0% 30.6% 23.2% 3.2% John Pettigrew 6,227 5,322 27.0% 16.9% 50.2% 5.9% Dean Seavers 2,905 2,502 24.4% 69.3% 6.3% Nicola Shaw 3,074 2,520 29.3% 15.3% 49.6% 5.8% Key: Fixed APP 2017 LTPP – face value 2017 LTPP – share appreciation/depreciation and dividend equivalent values Notes: 1. Dean Seavers stepped down from the Board for personal reasons on 5 November 2019 and left the Company on 31 December 2019. In the above table, the maximum if variable pay vested in full relates to the period 1 April to 31 December 2019 and includes base salary, benefits in kind, pension, 2019/20 APP and 2017 LTPP vesting. 2. For each UK-based Executive Director the share price has increased between grant date of the LTPP awards in 2017 and the estimated share price value at vesting, being the three months’ average preceding 31 March 2020. Comparing the share price at grant of 973.80p for Andy Agg, John Pettigrew and Nicola Shaw versus the estimated average share price for the period 1 January 2020 to 31 March 2020 (978.75p), there is an increase of 4.95p (0.5%) per share. Andy Agg received a second 2017 LTPP tranche and comparing the share price at grant of 941.50 versus the estimated average share price for the period 1 January 2020 to 31 March 2020 (978.75p), there is an increase of 37.25p (4.0%) per share. This results in an estimated increase in value (net of dividend equivalents) of £10,554 in total for Andy Agg, £15,107 for John Pettigrew, and £7,063 for Nicola Shaw. For the former US-based Executive Director, Dean Seavers, the ADS price has decreased between grant date and the estimated average ADS price for the period 1 January 2020 to 31 March 2020 ($62.48). Comparing the ADS price at grant of $63.94 versus the estimated ADS price of $62.48 there is a reduction of $1.46 (2.0%) per ADS. This results in an estimated reduction in value (net of dividend equivalents) of $56,810 for Dean Seavers. Overall, the percentage growth in value over the three-year period due to dividend income per share/ADS is at least 11%, and this will increase further subject to a final dividend to be included on the vesting date. Key features of remuneration policy (adopted 2019) Implementation of policy in 2019/20 • Target broadly mid-market against FTSE 11-40 • Salary increases of 8.0% (comprising the UK budget of 2.9% and a further 5.1%) for UK-based Executive Directors and general for each of John Pettigrew and Nicola Shaw (June 2019). These increases were industry and energy services companies with awarded in line with remuneration policy and given their strong individual Salary similar revenue for US-based Executive Directors. performance and to align their pay to the appropriate market levels for their roles; • Salary increase of 3.1% for Dean Seavers (June 2019). This increase was in line with the budget for US managerial employees; and • Andy Agg was not eligible for a June 2019 salary increase because he was internally promoted on 1 January 2019. • Maximum opportunity is 125% of salary; • 70% based on financial measures and 30% based on individual objectives; Annual • 50% paid in cash, 50% paid in shares which must • Financial measures for CEO and CFO comprise 35% underlying EPS and Performance be retained until the later of two years and 35% Group RoE; Plan (APP) meeting the shareholding requirement; and • Financial measures for Executive Director, US, and Executive Director, UK, • Subject to both malus and clawback. comprise 23.3% US/UK Value Added respectively, 23.3% US/UK RoE respectively and 23.3% US/UK Underlying Operating Profit respectively; and • Individual objectives cover driving efficiency, delivering value for investors, stakeholder engagement including regulatory and government, our workforce/ talent and culture agenda, corporate social responsibility and customer. • 2019/20 APP payouts as a percentage of maximum opportunity: 71% for each of Andy Agg and John Pettigrew, 0% for Dean Seavers and 56% for Nicola Shaw. • Maximum award level is 350% of salary for CEO • 2019 LTPP award: 33.33% Group RoE and 66.67% Group Value Growth; and Long Term and 300% for other Executive Directors; • Overall the 2017 LTPP vested at 84.9% of the maximum and is based on the Performance • Vesting is subject to long-term performance performance of two equally weighted measures of Group RoE and Group Value Plan (LTPP) conditions over a three-year performance period; Growth achieving 69.8% and 100.0% respectively. • Shares must be retained until the later of two years from vesting and meeting the shareholding requirement; and • Subject to both malus and clawback. • Eligible to participate in a defined contribution • UK cash allowance for John Pettigrew and Nicola Shaw, 30% of pensionable pay plan (or defined benefit if already a member); (reducing to 26.7% at 1 April 2020, 23.4% at 1 April 2021 and 20% at 1 April Pension and • Pensionable pay is salary only in UK and salary 2022) and for Andy Agg, 20% of pensionable pay; other benefits and APP in US in alignment with market; and • US-defined contribution for Dean Seavers, 9% of pensionable pay with additional • Other benefits as appropriate. match of up to 4%; and • Other benefits include private medical insurance, life assurance, and for UK-based Executive Directors either a fully expensed car or a cash alternative, and a car and driver when required. • The Committee agreed in November 2019 that newly appointed UK-based Executive Directors will receive pension contributions of up to 12% of base salary for the DC plan (or cash supplement in lieu); this is in line with the level for new joiners across the rest of the UK-based workforce. • 500% of salary for CEO; • Shareholdings for Andy Agg, John Pettigrew and Nicola Shaw are 195%, 609% • 400% of salary for other Executive Directors; and and 175% respectively and for Dean Seavers (at 5 November 2019) 423%; and Shareholding • Post-employment shareholding requirement, • John Pettigrew has met his shareholding requirement. Andy Agg and Nicola requirement 200% of salary for two years. Shaw have not yet met their shareholding requirements due to relatively shorter tenure in role and in company, respectively. • Andrew Bonfield and Dean Seavers have each met their post‑employment shareholding requirement as at 31 March 2020. 91
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Directors’ Remuneration Report continued Directors’ remuneration policy – approved by shareholders in 2019 Key aspects of the current Director’s remuneration policy, along with elements particularly applicable to the 2019/20 financial year, are shown on pages 92 – 95 for ease of reference only. The current policy was approved for three years from the date of the 2019 AGM, held on 29 July 2019. A shareholder vote on the remuneration policy is not required in 2020. A copy of the full remuneration policy is available within the 2018/19 Annual Report and Accounts on the Company’s investor website (investors.nationalgrid.com). From time to time, the Committee may consider it appropriate to apply some judgement and discretion in respect of the approved policy. This is highlighted where relevant in the policy, and the use of discretion will always be in the spirit of the approved policy. Our peer group The Committee reviews its remuneration policy against appropriate peer groups annually to make sure we remain competitive in the relevant markets. The primary focus for reward market comparisons is the FTSE 11-40 for UK-based Executive Directors and general industry and energy services companies with similar levels of revenue for US-based Executive Directors. These peer groups are considered appropriate for a large, complex, international and predominantly regulated business. The Committee reviews annually the overall appropriateness and relevance of the remuneration policy and whether any changes should be put to shareholders. Decisions on the levels of measures and targets for performance related pay (APP and LTPP) and payouts are made taking account of overall financial and business performance. A member of the Audit Committee is required to be a member of the Committee and this ensures the Committee receives knowledgeable input on setting financial measures and assessing outturns including any adjustments and judgements considered by the Audit Committee. The Committee also works closely with the Nominations Committee in respect of pay and conditions of newly appointed executives to ensure their remuneration is within policy. The Committee will interface with the Share Schemes Sub-Committee as required. Consistent with the UK Corporate Governance Code, members of the Remuneration Committee are independent Non-executive Directors who do not receive any variable remuneration and do not participate in decisions about their own remuneration. Approved policy tables – Executive Directors Salary Purpose and link to business strategy: to attract, motivate and retain high-calibre individuals, while not overpaying. Performance metrics, weighting Operation Maximum levels and time period applicable Salaries are generally reviewed annually and are targeted No prescribed maximum annual Not applicable. broadly at mid-market of our peer group. However a increase, although increases are number of other factors are also taken into account: generally aligned to salary increases • business performance and individual contribution; received by other Company employees and to market movement. • the individual’s skills and experience; Increases in excess of this may be • scope of the role, including any changes in responsibility; and made at the Committee’s discretion • market data, including base pay and total remuneration in circumstances such as a opportunity in the relevant comparator group. significant change in responsibility, progression if more recently appointed in the role and broad alignment to mid-market. Benefits Purpose and link to business strategy: to provide competitive and cost-effective benefits to attract and retain high-calibre individuals. Performance metrics, weighting Operation Maximum levels and time period applicable Benefits provided include: The cost of providing benefits Not applicable. • company car or a cash alternative (UK only); will vary from year to year in line with market. • use of a car and driver when required; • private medical insurance; Participation in tax-approved • life assurance; all-employee share plans is subject • personal accident insurance (UK only); to limits set by the relevant tax authorities from time to time. • opportunity to purchase additional benefits (including personal accident insurance for US) under flexible benefit schemes available to all employees; and • opportunity to participate in HMRC (UK) or Internal Revenue Service (US) tax-advantaged all-employee share plans, currently: Sharesave: UK employees may make monthly contributions from net salary for a period of three or five years. The savings can be used to purchase shares at a discounted price, set at the launch of each plan period. Share Incentive Plan (SIP): UK employees may use their gross salary to purchase shares. These shares are placed in trust. Employee Stock Purchase Plan (ESPP) (423(b) plan): eligible US employees may purchase ADSs on a monthly basis at a discounted price. Other benefits may be offered at the discretion of the Committee. 92
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Directors’ Remuneration Report Directors’ remuneration policy – approved by shareholders in 2019 continued Pension Purpose and link to business strategy: to reward sustained contribution and assist attraction and retention. Performance metrics, weighting Operation Maximum levels and time period applicable Externally hired Executive Directors will participate in UK DC: annual contributions for new Not applicable. a Defined Contribution (DC) arrangement. UK-based appointments of up to 20% of basic salary. Executive Directors may alternatively choose to Existing Executive Directors may receive annual None of the current Executive Directors are active receive cash in lieu. contributions of up to 30% of basic salary. members of a DB plan. Executive Directors may take a full or partial In cases of internal promotion to the Board, the cash supplement in lieu. Company will recognise legacy Defined Benefit (DB) pension arrangements of existing employees in both Life assurance of four times basic salary and a the UK and US where these have been provided dependant’s pension of one third of basic salary under an existing arrangement. is provided. Executives with HMRC pension protection may be offered lump sum life assurance In line with market practice, pensionable pay for only, equal to four times basic salary. UK-based Executive Directors includes basic salary only and for US-based Executive Directors it UK DB: a pension generally payable from age 60 includes basic salary and APP award. or 63. DB benefits are subject to capped increases in pensionable salary. No enhancement is provided on promotion to the Board. Funded DB benefits are subject to HMRC maximum allowances and limits. On death in service, a lump sum of four times pensionable salary and dependant’s pension of two-thirds of the Executive Directors’ pension is provided. DB pension plans were closed to new members by April 2006. US DC: annual contributions of up to 9% of basic salary plus APP award with additional 401(k) plan match of up to 4%. US DB: an Executive Supplemental Retirement Plan provides for an unreduced pension benefit at age 62 (this plan is closed to new participants from 1 January 2015). For retirements at age 62 with 35 years of service, the pension benefit would be approximately two thirds of pensionable salary. DB final average pay plan is subject to capped increases in pensionable pay. Upon death in service, the spouse would receive 50% of the pension benefit (100% if the participant died while an active employee after the age of 55). Pension footnote: The Remuneration Committee agreed in November 2019 (i.e. after the July 2019 AGM Policy vote) that newly appointed Executive Directors will receive annual contributions of up to 12% of basic salary for the DC pension scheme, or cash supplement in lieu. Annual Performance Plan (APP) Purpose and link to business strategy: to incentivise and reward the achievement of annual financial measures and strategic non-financial measures including the delivery of annual individual objectives and demonstration of our Company leadership qualities and values. Performance metrics, weighting Operation Maximum levels and time period applicable The APP comprises reward for achievement against The maximum award is 125% of basic salary At least 50% of the APP is based on performance financial measures and achievement against in respect of a financial year. against financial measures. individual objectives. The Committee may use its discretion to set Financial performance measures and targets are financial measures that it considers appropriate normally agreed at the start of each financial year in each financial year and has the flexibility to and are aligned with strategic business priorities. modify the amount payable, to reflect wider Targets are set with reference to the budget. financial and business performance, Individual objectives and associated targets are demonstration of leadership qualities and our normally agreed also at the start of the year. values, or to take account of a significant event. APP awards are paid in June. The payout levels at threshold, target and stretch performance levels are 0%, 50% and 50% of the APP award is paid in shares, which 100%, respectively. (after any sales to pay-associated income tax) must be retained until the shareholding requirement is met, and in any event for two years after receipt. Awards are subject to malus and clawback provisions as set out in the paragraph overleaf. 93
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Directors’ Remuneration Report continued Long Term Performance Plan Purpose and link to business strategy: to drive long-term business performance, aligning Executive Director incentives to key strategic objectives and shareholder interests over the longer term. Operation Maximum levels Performance metrics, weighting and time period applicable Awards of shares may be granted each year, with The maximum award for the The performance measures are Group Value Growth and Group vesting subject to long-term performance conditions. CEO is 350% of salary and it RoE for all Executive Directors. For awards made in financial year is 300% of salary for the other 2019/20: Group Value Growth measured over three years The performance measures have been chosen as the Executive Directors based on (2019/20, 2020/21 and 2021/22) and Group RoE measured over Committee believes they reflect the Executive Directors’ salary at the time of the award. two years (2019/20 and 2020/21) such that Group Value Growth creation of long-term value within the business. Targets represents two thirds and Group RoE represents one third of the are set for each award with reference to the business plan. total vesting outcome. Participants may receive ordinary dividend equivalent For awards made in financial year 2020/21: Group Value Growth shares on vested shares, from the time the award was measured over three years (2020/21, 2021/22 and 2022/23) and made, at the discretion of the Committee. Group RoE measured over one year (2020/21) such that Group Value Growth represents five sixths and Group RoE represents Participants must retain vested shares (after any sales one sixth of the total vesting outcome. to pay tax) until the shareholding requirement is met, and in any event for a further two years after vesting. For awards made in 2016 which will vest in 2019, the performance measures and percentage weightings are: Group Awards are subject to malus and clawback provisions Value Growth (50%) and Group RoE (50%) for the CEO and CFO; as set out in the paragraph below. Group Value Growth (50%), Group RoE (25%) and UK or US RoE (25%) for the UK and US Executive Directors respectively. For awards made in 2017 and 2018 which will vest in 2020 and 2021 respectively, the performance measures were Group Value Growth and Group RoE, equally weighted, for all Executive Directors. All awards have a three-year performance period. For each performance measure, threshold performance will trigger only 20% of the award to vest; 100% will vest if maximum performance is attained. Notwithstanding the level of award achieved against the performance conditions, the Committee may use its discretion to modify the amount vesting to reflect wider financial and business performance and take account of a significant event and/or compliance with the dividend policy. Malus and clawback The Committee has discretion to determine whether exceptional circumstances exist which justify whether any or all of an award should be forfeited, even if already paid. Examples of exceptional circumstances include, but are not limited to, material misstatement, misconduct of the participant, a significant environmental, health and safety or customer issue or failure of risk management, and if certain other facts emerge after termination of employment. The Committee also has a prescribed process to follow when determining whether and how to apply this discretion. Approved policy table – Non-executive Directors (NEDs) Fees for NEDs Purpose and link to business strategy: to attract NEDs who have a broad range of experience and skills to oversee the implementation of our strategy. Operation Maximum levels Performance metrics, weighting and time period applicable NED fees (excluding those of the Chairman) are set by There are no prescribed Not applicable. the Executive Committee in conjunction with the Chairman. maximum fee levels although fees The Chairman’s fees are set by the Committee. are generally aligned to salary increases received by other Fee structure: Company employees and market • Chairman fee (all inclusive); movement for NEDs of companies of similar scale and complexity. • basic fee, which differs for UK- and US-based NEDs; • Committee chair fee; The cost of benefits provided to • Committee membership fee; and the Chairman is not subject to a • Senior Independent Director fee. predetermined maximum since the purchase cost will vary from No additional fees are paid for membership/chair of the year to year. Nominations Committee. Fees are reviewed every year taking into account those in companies of similar scale and complexity. The Chairman is covered by the Company’s private medical and personal accident insurance plans, and has the use of a car and driver, when required. NEDs do not participate in incentives, pension or any other benefits. However, they are eligible for reimbursement for all Company-related travel expenses. In instances where these costs are treated by HMRC as taxable benefits, the Company also meets the associated tax cost to the Non-executive Directors through a PAYE settlement agreement with HMRC. NEDs who also sit on National Grid subsidiary boards may receive additional fees related to service on those boards. 94
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Directors’ Remuneration Report Directors’ remuneration policy – approved by shareholders in 2019 continued Shareholding requirement – in employment In the event of a UK Director’s role becoming redundant, statutory The requirement of Executive Directors to build up and hold a significant compensation would apply and the relevant pension plan rules may value of National Grid shares ensures they share a significant level of risk result in the early payment of an unreduced pension. with shareholders and aims to align their interests. Executive Directors are required to build up and retain shares in the Company. The level of On termination of employment, no APP award would generally be holding required is 500% of salary for the CEO and 400% of salary for payable. However, the Committee has the discretion to deem an the other Executive Directors. Unless the shareholding requirement is individual to be a ‘good leaver’, in which case a pro-rata discretionary met, Executive Directors will not be permitted to sell shares, other than payment could be paid, based on financial performance (as measured at to pay income tax liabilities on shares just vested or in exceptional the end of the financial year) and the achievement of individual objectives circumstances approved by the Remuneration Committee. during the financial year up to termination. In the UK the discretionary payment would generally be paid at the normal time. In the US the Shareholding requirement – post employment payment would be made earlier if required for tax compliance purposes, in which case the Committee would apply discretion to determine an The requirement of Executive Directors to continue to hold National Grid appropriate level of financial performance. Examples of circumstances, shares after leaving ensures they continue to share a risk with whilst not exhaustive, which could trigger ‘good leaver’ treatment include shareholders and maintain alignment with shareholders’ interests. redundancy, retirement, illness, injury, disability and death. The Executive Directors will be required to hold 200% of base salary Committee will apply discretion to determine if the pro-rata discretionary calculated at their leave date, or maintain their actual holding percentage payment should be made sooner than it would normally be paid, for if lower, expressed as a number of shares and held for a period of two example, in the case of death. years. This calculation excludes the value of any awards not yet vested for ‘good leavers’ that will vest according to the normal schedule and On termination of employment, outstanding awards under the share which in any event must be held for a two-year period. The calculation plans will be treated in accordance with the relevant plan rules approved will include recently vested LTPP awards or APP awards paid as shares by shareholders. Unvested share awards would normally lapse. ‘Good which are subject to respective two-year holding periods, even after leaver’ provisions apply at the Committee’s discretion and in specified employment. Unless the post-employment shareholding requirement is circumstances. Examples of circumstances, whilst not exhaustive, which met, Executive Directors will not be permitted to sell shares, other than could trigger ‘good leaver’, include: redundancy, retirement, illness, injury, to pay income tax liabilities on shares just vested or in exceptional disability and death, where awards will be released to the departing circumstances approved by the Remuneration Committee. Executive Director or, in the case of death, to their estate. Long-term share plan awards held by ‘good leavers’ will normally vest subject to Consideration of remuneration policy elsewhere in the Company performance measured at the normal vesting date and will be reduced Our remuneration policy is generally aligned to the policies for our pro-rata for each completed month starting on the date of grant. Such non-unionised workforce. All employees are entitled to base salary, awards would vest at the same time as for other participants, apart from benefits and pension contributions. In setting the remuneration policy circumstances in which the award recipient has died, in which case the the Committee considers the remuneration packages offered to awards vest as soon as practicable (based on a forecast of performance). employees across the Company. As a point of principle, salaries, benefits, pensions and other elements of remuneration are assessed At the Committee’s discretion, the Company may also agree other regularly to ensure they remain competitive in the markets in which we payments such as an agreed amount for legal fees associated with the operate. In undertaking such assessment our aim is to be at mid-market departure of the Executive Director and outplacement support. for all job bands, including those subject to union negotiation. As would be expected, we have differences in pay and benefits across the Service contracts/letters of appointment business which reflect specific accountabilities and labour markets. In line with our policy, all Executive Directors have service contracts There are elements of remuneration policy which apply to all, for which are terminable by either party with 12 months’ notice. example, flexible benefits and share plans. Non‑executive Directors are subject to letters of appointment. The Chairman’s appointment is subject to six months’ notice by When considering annual salary increases, the Committee reviews the either party; for other Non-executive Directors, notice is one month. proposals for salary increases for the employee population generally, Both Executive Directors and Non-executive Directors are required as it does for any other changes to remuneration being considered. to be re-elected at each AGM. All employees are eligible for an annual performance-based award. Eligibility and the maximum opportunity available is based on market practice for incentives for the employee’s job band. In addition, around Please refer to the full remuneration policy within the 2018/19 400 senior management employees are awarded LTPPs annually, which Annual Report and Accounts on the Company’s investor website include the same performance measures as those for Executive Directors. (http://investors.nationalgrid.com) for our remuneration policy on Directors’ recruitment, external appointments, total remuneration The Company has a number of all-employee share plans that provide opportunity and corporate and share capital events. employees with the opportunity to become, and to think like, a shareholder. These plans include Sharesave and the Share Incentive Plan (SIP) in the UK and the 401(k) and 423(b) plans in the US. Further information is provided on page 92. The Company issues an employee engagement survey each year, which includes remuneration as a topic. It does not specifically invite employees to comment on the Directors’ remuneration policy but any comments made by employees are noted. The Board also regularly engages with employees on a variety of topics, including remuneration. Policy on payment for loss of office The contracts contain provisions for payment in lieu of notice, at the sole and absolute discretion of the Company. Such contractual payments are limited to payment of salary only for the remainder of the notice period. In the UK such payments would be phased on a monthly basis, over a period not greater than 12 months, and the Executive Director would be expected to mitigate any losses where employment is taken up during the notice period. In the US, for tax compliance purposes, the policy is to make any payment in lieu of notice as soon as reasonably practicable, and in any event within two and a half months of the later of 31 December and 31 March immediately following the notice date. 95
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Directors’ Remuneration Report continued Statement of implementation of remuneration policy in 2019/20 Key AUDITED Audited Information Content contained within a blue box highlighted with an ‘Audited’ tab indicates that all the information in the panel is audited. Role of Remuneration Committee The Committee is responsible for recommending to the Board the remuneration policy for Executive Directors, the other members of the Executive Committee and the Chairman, and for implementing this policy. The aim is to align the remuneration policy to Company strategy and key business objectives, and ensure it reflects our shareholders’, customers’ and regulators’ interests. The members of the Remuneration Committee in 2019/20 were Nora Mead Brownell (until 8 April 2019), Jonathan Dawson (Chair), Earl Shipp, Jonathan Silver (from 16 May 2019) and Mark Williamson. The Committee’s activities during the year – activities of the Committee during the year can be found at page 106. AUDITED Single Total Figure of Remuneration – Executive Directors The following table shows a single total figure in respect of qualifying service for 2019/20, together with comparative figures for 2018/19: Benefits Salary in kind Total fixed Total variable Total £’000 £’000 Pension pay APP LTPP pay remuneration Andy Agg 19/20 595 23 119 737 525 454 979 1,716 18/19 149 4 30 183 158 20 178 361 John Pettigrew 19/20 1,017 116 305 1,438 897 2,987 3,884 5,322 18/19 944 94 283 1,321 994 2,336 3,330 4,651 Dean Seavers 19/20 512 27 74 613 0 1,889 1,889 2,502 18/19 825 30 138 993 457 1,551 2,008 3,001 Nicola Shaw 19/20 555 15 166 736 387 1,397 1,784 2,520 18/19 515 15 155 685 552 997 1,549 2,234 Notes: Dean Seavers: 2019/20 fixed pay components in the table above are for the period he served as a Director during the year, from 1 April to 5 November 2019; 2019/20 variable pay components in the table above are for the period during which he was employed, from 1 April to 31 December 2019. Andy Agg: 2018/19 figures in the table above are for the period he served as a Director during the year, from 1 January to 31 March 2019. Salary: Base salaries were last increased on 1 June 2019 other than for Andy Agg, who was not eligible to receive a salary increase due to being appointed CFO on 1 January 2019. Benefits in kind: Benefits in kind (BIK) include private medical insurance, life assurance and, for UK-based Executive Directors, either a fully expensed car or a cash alternative to a car and the use of a car and a driver when required and which, for John Pettigrew, amounted to approximately £86,000 for 2019/20 (and approximately £75,000 for 2018/19). A Sharesave option award was granted to John Pettigrew on 27 December 2019 and the benefit (approximately £8,000) of this award is included. There were no Sharesave options granted to any of the other Executive Directors during 2019/20. APP: John Pettigrew will donate 20% of his 2019/20 APP (net of tax) to a charity involved in the emergency COVID-19 response in our US service territories. Dean Seavers received a nil payout for the individual portion of the APP. Consistent with Company policy for all colleagues not covered by a trade union agreement, this results in a nil payout overall. Information relating to amounts paid for the loss of office can be found on page 102. LTPP: The 2017 LTPP is due to vest in July 2020. The average share price over the three months from 1 January 2020 to 31 March 2020 of 978.75p ($62.48 per ADS) has been applied and estimated dividend equivalents are included. The 2018/19 LTPP figures have been restated because last year they were estimated using the average share price (January–March 2019) and they now include the actual share price on vesting at 1 July 2019 and all dividend equivalent shares. Due to a higher share price at vesting of 842.10p versus the estimate of 837.34p (and the additional dividend equivalent shares added for the dividend with a record date of 31 May 2019 with a dividend rate of 31.26p per share), the actual value at vesting was £770, £89,005 and £37,991 higher than for the estimate last year for Andy Agg, John Pettigrew, and Nicola Shaw, respectively. Despite a lower ADS price at vesting of $52.736 versus the estimate of $54.73, the actual value at vesting was £539 higher than for the estimate last year for Dean Seavers. This is because the change in ADS price was offset by the additional dividend equivalent ADSs for the dividend with a record date of 31 May 2019 with a dividend rate of $2.0256 per ADS. Impact of share price change: The impact of share price appreciation/depreciation, comparing share/ADS prices at grant versus the estimated share/ADS prices upon vesting is set out in the notes to the 2017 LTPP (vesting) table on page 101. Exchange rate: $1.2868:£1. AUDITED Total pension benefits Andy Agg, John Pettigrew and Nicola Shaw received a cash allowance in lieu of participation in a pension arrangement. Dean Seavers participated in a defined contribution pension arrangement in the US until he left the business at 31 December 2019. There are no additional benefits on early retirement. The values of these benefits, received during this year, are shown in the single total figure of remuneration table. John Pettigrew has, in addition, accrued defined benefit (DB) entitlements. He opted out of the DB scheme on 31 March 2016 with a deferred pension and lump sum payable at his normal retirement date of 26 October 2031. At 31 March 2020, John Pettigrew’s accrued DB pension was £165,031 per annum and his accrued lump sum was £495,092. No additional DB entitlements have been earned over the financial year, other than an increase for price inflation due under the pension scheme rules and legislation. Under the terms of the pension scheme, if he satisfies the ill health requirements, or he is made redundant, a pension may be payable earlier than his normal retirement date. A lump sum death in service benefit is also provided in respect of these DB entitlements. 96
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Directors’ Remuneration Report Statement of implementation of remuneration policy in 2019/20 continued AUDITED Annual Performance Plan (APP) Performance against targets for APP 2019/20 APP awards are earned by reference to the financial year and this year will be paid in July 2020. Financial measures determine 70% of the APP, and individual objectives determine 30% of the APP. Payment of the APP award is made in shares (50% of the award) and cash (50%). Shares (after any sales to pay income tax) must be retained until the shareholding requirement is met, and in any event for two years after receipt. For financial measures, threshold, target and stretch performance levels are predetermined by the Committee and pay out at 0%, 50% and 100% of the maximum potential for each part and on a straight-line basis in between threshold and stretch performance. Target and stretch performance levels for the individual objectives are also predetermined by the Committee, and an assessment of the performance relative to the target and stretch performance levels is made at the end of the performance year on each objective. The outcomes of APP awards earned for financial performance are summarised in the table immediately below. Performance against individual objectives is set out in the tables which follow. Proportion of Proportion of Performance measure max opportunity Threshold Target Stretch Actual max achieved CEO and CFO Underlying EPS (p/share) 35% 54.0 57.5 61.0 58.2 60.0% Group RoE (%) 35% 10.91 11.31 11.71 11.70 98.8% Executive Director, UK UK Value Added (£m) 23.3% 1,655 1,715 1,775 1,734 65.8% UK RoE (%) (Percentage points above average allowed regulatory return) 23.3% 2.01 2.26 2.51 2.34 66.0% Underlying UK Operating Profit (£m) 23.3% 1,533 1,583 1,633 1,576 43.0% Executive Director, US US Value Added (£m) 23.3% 1,276 1,327 1,387 1,344 64.2% US RoE (%) 23.3% 8.96 9.16 9.36 9.25 72.5% Underlying US Operating Profit (£m) 23.3% 1,725 1,785 1,845 1,645 0.0% All Executive Directors Individual objectives (%) 30% Detail expanded in tables below 60–65% Notes: Underlying EPS: Technical adjustments have been made reducing the target by 2.5p to reflect the net effect of currency adjustments, the impact of deferrable storm costs, certain actuarial assumptions on pensions and scrip dividend uptake. Group RoE: A technical adjustment has been made reducing the target by 0.33% to reflect the true-up of opening equity. UK financial measures: Technical adjustments have been made reducing the underlying UK Operating Profit target to reflect the net effect of certain actuarial assumptions on pensions (£5m reduction) and normalisation to reflect the impact of RPI (£11m reduction) and reducing the UK Value Added target by £14m to ensure consistency of accounting treatment. US financial measures: Technical adjustments have been made reducing the underlying US Operating Profit target by £70m to reflect the net effect of currency adjustments, deferrable storm costs and certain actuarial assumptions on pensions. Technical adjustments have been made reducing the US Value Added target by £33m to reflect the net effect of currency adjustments and the impact of deferred tax movements. Individual Objectives: For 2019/20 the Committee has applied discretion to cap the payout for overall individual achievement against individual objectives at the lower of target and actual achievement to reflect restraint in the context of COVID-19 and to be consistent with decisions made for the wider managerial population. This discretion is not incorporated above. 97
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Directors’ Remuneration Report continued Individual Objectives The individual objectives of the Executive Directors when taken together were designed to deliver against each of our 2019/20 business priorities. The Committee adopts a two-stage process to agree individual objectives. First it reviews and provides feedback on the objectives including consideration of the weighting based on business criticality of the objective and then, at a second meeting, it completes a final review and approves the objectives. At the end of the year an overall assessment is made which takes account of the weighting and achievement of the respective individual objectives for each Director and the degree to which each element of the objective was met against specific target and stretch targets. As with the financial measures, the achievement of ‘stretch’ performance and ‘target’ performance overall results in 100% and 50% respectively of the maximum payout. For 2019/20 the Committee has applied discretion to cap the payout for overall achievement against individual objectives at the lower of target and actual achievement to reflect restraint in the context of COVID-19 and to be consistent with decisions made for the wider managerial population. This discretion is not incorporated in the percentage outcomes below. Andy Agg Individual objective & performance commentary Weighting Outcome Drive operating efficiency of the business and finance function 25% 64% • Delivered targeted UK cost efficiencies of £50 million and on track to deliver a further £100 million in 2020/21 • Delivered US cost efficiencies, but was short of target • Made good progress on the digital transformation of the Finance function, including the successful implementation of SAP improvements and strong leadership of a Finance transformation programme, with more work to be done to crystallise cost reductions Support financial aspects of regulatory negotiations 25% 80% • Provided effective support on the Hinkley-Seabank agreements and in continuing RIIO-2 discussions with Ofgem in the UK, enabling financial parameters that are viewed as positive by shareholders • Enabled positive outcome on Massachusetts Electric (MECO) rate case • Maximum not awarded due to regulatory outcomes not fully at stretch levels Support in updated investor proposition review and Total Societal Impact initiative 25% 80% • Established and gained agreement from the Board for an appropriate investor proposition • Completed sale of minority stake in Cadent in line with agreed timing • More opportunities remain in identifying additional financeable growth opportunities for sustained outperformance Drive the talent agenda 25% 36% • Made positive progress on development and succession planning deeper in the Finance function • Increased the Colleague Enablement score and workforce diversity in the Finance function, though fell short of targeted aspirations Summary Andy had a good year and has firmly established himself in the CFO role. He provided good leadership on the investment 100% 65% proposition, started to transform the Finance function and strengthened talent capabilities. Outside of his core objectives he has also made strong contributions in articulating National Grid’s contributions as a corporate entity in the State Ownership debate, introducing GAAP reporting. More work is needed in driving the talent agenda in the US and progressing additional risk and control measures. John Pettigrew Individual objective & performance commentary Weighting Outcome Optimise regulatory/government agreements and relationships 40% 50% • Led a successful response to the near simultaneous tripping of two large power stations in August 2019 leading to power outages in various parts of England and Wales, including re-establishing power within the timeframes required by Ofgem, and engaging with Ofgem in the investigation and learnings reviews which confirmed that the outage was not caused by National Grid infrastructure • Continued dialogue with Ofgem and stakeholders on the proposed parameters for RIIO-2 although there remain differences on certain issues • Achieved a successful outcome for the Hinkley-Seabank project in the UK and the MECO rate case in Massachusetts • Continued positive engagement with key regulatory and government stakeholders, including a new UK government, and administrations in Massachusetts and Rhode Island, though there is more work to be done in New York to rebuild our reputation following the issues arising from the downstate New York Gas moratorium Develop external National Grid value proposition 20% 100% • Established and gained agreement from the Board for an appropriate investor proposition • Additionally, established and gained agreement from the Board for a new framework for defining National Grid’s Total Societal Impact to support our aspirations as we continue to emphasise the importance of being a purpose-led organisation Continue work to ensure National Grid is well placed for growth and innovation 20% 75% • Continued to build an effective platform for growth through National Grid Ventures, particularly with the purchase of renewables developer Geronimo Energy • Delivered the digital strategy in both the UK and US • Responded appropriately to innovation and disruptive technologies, particularly through National Grid Partners, though there remains more work to be done to achieve our ambitions 98
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Directors’ Remuneration Report Statement of implementation of remuneration policy in 2019/20 continued John Pettigrew continued Individual objective & performance commentary continued Weighting Outcome Drive the talent and culture agenda 20% 50% • Increased the colleague engagement score by 6% and articulated clear aspirations on culture, which now need to be embedded in the organisation • Demonstrated enhancements in the capabilities and strength of succession of the National Grid leadership team, including the successful appointments of a President of the US business, and Managing Director, National Grid Ventures; there remains more work to be done on succession planning and further investment in leadership capability • Made strides in inclusion and diversity, though success of I&D initiatives still needs to be evidenced with increased proportion of women and minorities in leadership and managerial positions Summary John Pettigrew’s performance in his role as CEO continues to be strong, with particular highlights in the areas of the value 100% 65% proposition for our investors and communities, stakeholder engagement and outcomes in the UK and Massachusetts, and growth and innovation. More work is to be done on completing agreements on downstate NY and in the succession planning and diversity of our workforce. Nicola Shaw Individual objective & performance commentary Weighting Outcome Deliver a step change improvement in the performance of customer service as measured by Net Promoter Score 25% 80% and Customer Satisfaction (CSAT) • Met Net Promoter Score stretch target • Met Customer Satisfaction score target, and was very close to stretch target • Demonstrated strong focus on customer service during the year, including positive personal engagement with customers Deliver a step change in Operational Performance 25% 45% • Delivered cost reductions as part of the UK transformation programme whilst successfully managing all key risks • Successfully managed implications of Brexit, with no interruption to business • Made progress on digital transformation, with some further implementation work to be done • More work to be done on risk and control measures Deliver successful regulatory outcomes 25% 55% • Delivered RIIO-2 business plans with stakeholder support, with some items posed by independent challenge group to be addressed, although there remain differences on certain issues • Positive engagement with UK regulator, including on Hinkley-Seabank activities which led to a positive outcome • Led a successful response to the August 2019 power outage, although external communications response times could have been better Drive the talent agenda 25% 60% • Made positive progress on succession planning but more work to be done • Increased the Colleague Enablement and Engagement scores in the Core UK business • Improved workforce diversity in the Core UK business Summary Overall Nicola Shaw has had a good year with delivering on cost reduction commitments, strong progress in improving 100% 60% customer service, positive engagement with our stakeholders, particularly with RIIO-2 and Hinkley-Seabank, and excellent Colleague Enablement and Engagement scores. There remains work to be done on risk and control measures and certain issues regarding RIIO-2. 99
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Directors’ Remuneration Report continued 2019/20 APP as a proportion of base salary The overall APP award and its composition based on financial performance and individual performance for each Executive Director is shown as a proportion of salary. Executive Directors at 31 March 2020 Former Executive Director, US Max Actual Max Actual Max Actual Max Actual 125% 125% 125% 125% 37.50% 37.50% 37.50% Key: 37.50% 88.23% 88.23% Individual Underlying EPS or 43.75% 18.75% 43.75% 18.75% 29.17% 29.17% 69.73% UK/US Underlying 26.25% 26.25% 18.75% Operating Profit 29.17% 29.17% 12.54% Group/UK/US RoE 43.75% 43.23% 43.75% 43.23% 19.25% UK/US Value Added 29.16% 29.16% 19.19% 0% APP £743,750 £524,969 £1,270,940 £897,080 £693,240 £386,717 £807,407 £0 amount Andy Agg John Pettigrew Nicola Shaw Dean Seavers Notes: 1. Underlying EPS and Group RoE pertain to Andy Agg, CFO and John Pettigrew, CEO. 2. Underlying UK Operating Profit, UK RoE and UK Value Added pertain to Nicola Shaw, Executive Director, UK. 3. Underlying US Operating Profit, US RoE and US Value Added pertain to Dean Seavers, Executive Director, US. The APP maximum opportunity and actual award for Dean Seavers are for the period during which he was employed, from 1 April to 31 December 2019. 4. For 2019/20 the Committee has applied discretion to cap the payout for overall achievement against individual objectives for Andy Agg, John Pettigrew and Nicola Shaw, at the lower of target and actual achievement to reflect restraint in the context of COVID-19 and to be consistent with decisions made for the wider managerial population. This discretion is incorporated in the actual payouts above. 5. John Pettigrew will donate 20% of his 2019/20 APP (net of tax) to a charity involved in the emergency COVID-19 response in our US service territories. AUDITED LTPP performance The LTPP value included in the 2019/20 single total figure relates to anticipated vesting in July 2020 of the conditional LTPP awards granted in 2017. 2017 LTPP The 2017 award is determined by performance over the three years ended 31 March 2020 of Group RoE (50% weighting) and Group Value Growth (50% weighting), which is expected to vest on 27 July 2020. The financial components and weightings for this year’s vesting, i.e., the 2017 LTPP awards, are the same for all Executive Directors. The Group Value Growth outturn includes an amount to reflect the value added from the sale of the residual interest in the UK Gas Distribution business and to adjust for revised timing of UK tax payments in 2019/20. The Committee has decided not to apply any discretion following consideration of wider financial performance during the 3-year performance period. Actual/expected Threshold – 20% Maximum – 100% Actual/expected proportion of Performance measure vesting vesting vesting maximum achieved Group RoE (50% weighting) 11.0% 12.5% or more 11.9% 69.8% Group Value Growth (50% weighting) 10.0% 12.0% or more 12.8% 100.0% 100
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Directors’ Remuneration Report Statement of implementation of remuneration policy in 2019/20 continued AUDITED 2017 LTPP (vesting) The 2017 LTPP is expected to vest on 27 July 2020. The amounts expected to vest under the 2017 LTPP for the performance period ended on 31 March 2020 and included in the 2019/20 single total figure are shown in the table below. The share price valuation is an estimate based on the average share price over the three months from 1 January 2020 to 31 March 2020 of 978.75p ($62.48 per ADS); the final dividend to be paid in August 2020 is excluded. Total value of Original number Overall vesting Number awards vesting and of share awards percentage Number of of dividend dividend equivalent in 2017 LTPP (as % of max.) awards vesting equivalent shares shares (£’000) Andy Agg 49,080 84.9% 41,668 4,675 454 John Pettigrew 323,205 84.9% 274,401 30,794 2,987 Dean Seavers (ADSs) (prorated) 41,078 84.9% 34,875 4,036 1,889 Nicola Shaw 151,109 84.9% 128,291 14,397 1,397 Notes: The total value of awards vesting and dividend equivalent shares are subject to a two-year holding period. Andy Agg: Andy Agg’s award of 49,080 shares was granted in two tranches. The first tranche of 21,996 shares was granted on 28 June 2017 followed by a second tranche of 27,084 shares granted on 24 July 2017. Both awards are subject to the same performance conditions, performance period and vesting percentage/dividend equivalents estimates. Dean Seavers: Dean Seavers’ original award of 49,294 ADSs has been prorated to 41,078 ADSs on the basis of completed months employed between the grant date and 31 December 2019. Impact of share price change: The impact of share price change for the 2017 LTPP, comparing share price at grant versus the average share price for the period 1 January 2020 to 31 March 2020 of 978.75p ($62.48 per ADS), for each Executive Director: for John Pettigrew and Nicola Shaw the share price at grant was 973.80p resulting in an increase per share of 4.95p (0.5%) and this results in an estimated increase in value (including dividend equivalents) of £15,107 for John Pettigrew and £7,063 for Nicola Shaw; Andy Agg received his 2017 LTPP award in two tranches and the share prices at grant for his awards were 973.80p and 941.50p resulting in increases per share of 4.95p (0.5%) and 37.25p (4%) respectively and this results in estimated increases in value (including dividend equivalents) of £1,028 and £9,526 respectively; for Dean Seavers the ADS price at grant was $63.94 resulting in a decrease per ADS of $1.46 (2%) and this results in an estimated reduction in value (including dividend equivalents) of $56,810. The impact of share price change is not included in the expected amounts to vest shown in the above table. AUDITED Single total figure of remuneration – Non-executive Directors The following table shows a single total figure in respect of qualifying service for 2019/20, together with comparative figures for 2018/19: Fees £’000 Other emoluments £’000 Total £’000 2019/20 2018/19 2019/20 2018/19 2019/20 2018/19 Nora Mead Brownell 2 100 – 8 2 108 Jonathan Dawson 111 108 0 2 111 110 Therese Esperdy 141 138 19 15 160 153 Sir Peter Gershon 538 523 86 83 624 606 Paul Golby 104 101 5 5 109 106 Liz Hewitt 23 n/a 1 n/a 24 n/a Amanda Mesler 91 77 2 – 93 77 Earl Shipp 103 25 17 3 120 28 Jonathan Silver 91 n/a 11 n/a 102 n/a Mark Williamson 134 130 6 6 140 136 Total 1,338 1,202 147 122 1,485 1,324 Notes: Receiving the US-based Board fee: Nora Mead Brownell, Therese Esperdy, Earl Shipp and Jonathan Silver. Receiving the UK-based Board fee: Jonathan Dawson, Paul Golby, Liz Hewitt, Amanda Mesler and Mark Williamson. Nora Mead Brownell: Nora Mead Brownell stepped down from the Board on 8 April 2019. Therese Esperdy: Fees for 2019/20 include £25,000 in fees for serving on the National Grid USA Board. Sir Peter Gershon: Other emoluments comprise private medical insurance and the use of a car and driver when required and this amounted to approximately £85,000 for 2019/20 (and approximately £81,000 for 2018/19). Jonathan Silver: Jonathan Silver joined the Board on 16 May 2019. Other emoluments: In accordance with the Company’s expenses policies, Non-executive Directors receive reimbursement for their reasonable expenses for attending Board meetings. In instances where these costs are treated by HMRC as taxable benefits, the Company also meets the associated tax cost to the Non-executive Directors through a PAYE settlement agreement with HMRC and these costs are included in the table above. The total emoluments paid to Executive and Non-executive Directors in the year was £13.5 million (2018/19: £11.6 million). 101
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Directors’ Remuneration Report continued AUDITED Other Remuneration Disclosures 2019 LTPP (conditional award) granted during the financial year The face values of the awards are calculated using the volume weighted average share price at the date of grant (28 June 2019) (£8.341132 per share and $53.0487 per ADS) and are used to determine the value of the awards granted. Proportion vesting at threshold Performance Basis of award Face value ’000 performance Number of shares period end date Andy Agg 300% of salary £1,785 20% 213,999 31 March 2022 John Pettigrew 350% of salary £3,603 20% 431,969 31 March 2022 Dean Seavers (ADSs) 300% of salary $3,347 20% 63,094 (ADSs) 31 March 2022 Nicola Shaw 300% of salary £1,677 20% 201,059 31 March 2022 Notes: The 2019 LTPP grant will vest on 1 July 2022. The total value of awards vesting and dividend equivalent shares are subject to a two-year holding period. Dean Seavers: Dean Seavers’ 2019 LTPP award of 63,094 ADSs will be prorated to 10,515 ADSs to reflect the time served between the award date and 31 December 2019 when he left the Company. AUDITED Performance conditions for 2019 LTPP awards granted during the financial year Conditional share awards granted – 2019 Weighting for all Threshold Maximum Performance measure Executive Directors 20% vesting 100% vesting Group RoE 33.33% 11.0% 12.5% or more Group Value Growth 66.67% 10.0% 12.0% or more Notes: Group RoE: Group RoE is measured during the first two years of the three-year performance period and will contribute one-third of the total vesting outcome (at the end of three years). Group Value Growth: Group Value Growth is measured over the entire three-year performance period and will contribute two-thirds of the total vesting outcome. AUDITED Payments for loss of office and payments to past Directors Leaving arrangements for Dean Seavers Dean Seavers stepped down from the Board for personal reasons on 5 November 2019 and remained employed by the Company until 31 December 2019 to support a smooth leadership transition and handover. Mr Seavers’ remuneration in relation to his fixed pay for the period 1 April 2019 to 5 November 2019, his 2019/20 APP and his 2017 LTPP is disclosed in the Single Total Figure of Remuneration table on page 96. For the period from 6 November 2019 to 31 March 2020, Mr Seavers received remuneration totalling £1.1 million which predominantly includes his fixed pay (salary, benefits and pension) until 31 December 2019, his pay in lieu of notice of approximately £732,000 and his accrued holiday of approximately £133,000. All payments are in accordance with his service agreement and the Directors’ Remuneration Policy and subject to applicable tax withholdings. As part of Mr Seavers’ agreed leaver arrangements the Company will fund limited costs for security arrangements until 31 December 2020. These costs are expected to be no more than $35,000. The Committee agreed to grant good leaver treatment for Mr Seavers’ outstanding LTPP awards given his overall long-term strong performance and contribution to the business. Mr Seavers’ outstanding ADS awards under the 2018 and 2019 Long Term Performance Plan (LTPP) will be prorated for completed months held since the award date until 31 December 2019, as set out in the table below. These awards will vest at the same time as other participants, subject to performance measured at the vesting date and any discretion the Committee may decide to exercise at the time of vesting, in line with our Directors’ Remuneration Policy. These shares will be subject to the two-year post-vesting holding requirement and post-employment shareholding requirement, if not already met. LTPP Awards Award ADSs awarded Pro-rata ADSs Vesting Date 2018 LTPP 58,786 29,393 July 2021 2019 LTPP 63,094 10,515 July 2022 Total 121,880 39,908 Mr Seavers is subject to the Company’s post-employment shareholding requirement of 200% of base salary for two years after leaving the Company. 102
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Directors’ Remuneration Report Statement of implementation of remuneration policy in 2019/20 continued Payments to past Directors and post-employment shareholdings There have been no payments to any other past Director during 2019/20. Past Directors are required to continue to hold their shares/ADSs with the Company’s third-party share scheme administrator in order to audit compliance; at 31 March 2020 Andrew Bonfield and Dean Seavers have each continued to meet their post-employment share-holding requirements. Shareholder dilution Where shares may be issued or treasury shares reissued to satisfy incentives, the aggregate dilution resulting from executive share-based incentives will not exceed 5% in any 10-year period. Dilution resulting from all incentives, including all-employee incentives, will not exceed 10% in any 10-year period. The Committee reviews dilution against these limits regularly and under these limits the Company, as at 31 March 2020, had headroom of 3.89% and 7.86% respectively. AUDITED Statement of Directors’ shareholdings and share interests The Executive Directors are required to build up and hold a shareholding from vested share plan awards. The following table shows how each Executive Director complies with the shareholding requirement and also the number of shares owned by the Non-executive Directors, including connected persons. The shareholding is as at 31 March 2020 and the salary used to calculate the value of the shareholding is the gross annual salary as at 31 March 2020. John Pettigrew has met his shareholding requirement. As Andy Agg and Nicola Shaw are still relatively new in post and to the Company, respectively, they have not yet met their requirement, but each are expected to do so in 2023 assuming on-target performance/vesting outturns. They will not be allowed to sell shares, except for covering associated tax liabilities, until this requirement is met. Dean Seavers had met his shareholding requirement before he stepped down from the Board. Non-executive Directors do not have a shareholding requirement. A further 50 shares have been purchased between April and June on behalf of each of Andy Agg, John Pettigrew and Nicola Shaw via the Share Incentive Plan (an HMRC tax-advantaged all-employee share plan), thereby increasing their beneficial interests. There have been no other changes in Directors’ shareholdings between 1 April 2020 and 17 June 2020. The normal vesting dates for the conditional share awards subject to performance conditions are 1 July 2020, 1 July 2021 and 1 July 2022 for the 2017 LTPP, 2018 LTPP and 2019 LTPP respectively. Number of Conditional share awards Share ownership shares owned outright Value of shares held Number of options subject to performance requirements (including connected as multiple of current held under the conditions (LTPP 2017, Directors (multiple of salary) persons) salary Sharesave Plan 2018 & 2019) Executive Directors Andy Agg 400% 122,351 195% 4,045 372,965 John Pettigrew 500% 662,828 609% 7,253 1,153,572 Dean Seavers (ADSs) (at 5 November 2019) 400% 81,817 420% – 80,986 Nicola Shaw 400% 103,897 175% 4,070 539,331 Non-executive Directors Nora Mead Brownell (ADSs) (at 8 April 2019) – 4,583 – – – Jonathan Dawson – 41,077 – – – Therese Esperdy (ADSs) – 1,587 – – – Sir Peter Gershon – 107,215 – – – Paul Golby – 2,291 – – – Liz Hewitt – 0 – – – Amanda Mesler – 1,500 – – – Earl Shipp (ADSs) – 1,000 – – – Jonathan Silver (ADSs) – 0 – – – Mark Williamson – 47,46 0 – – – Notes: Andy Agg: On 31 March 2020 Andy Agg held 4,045 options granted under the Sharesave Plan. 4,045 options were granted with an exercise price of 749 pence and these have since been exercised at 749 pence per share in April 2020. The number of conditional share awards subject to performance conditions is as follows: 2017 LTPP: 49,080; 2018 LTPP: 109,886; 2019 LTPP: 213,999. John Pettigrew: On 31 March 2020 John Pettigrew held 7,253 options granted under the Sharesave Plan. 3,034 options were granted with an exercise price of 749 pence per share and these have since been exercised at 749 pence per share in April 2020. 4,219 options were granted with an exercise price of 711 pence per share and they can, subject to their terms, be exercised at 711 pence per share between 1 April 2025 and 30 September 2025. The number of conditional share awards subject to performance conditions is as follows: 2017 LTPP: 323,205; 2018 LTPP: 398,398; 2019 LTPP: 431,969. Dean Seavers: The number of conditional share awards (ADSs), subject to performance conditions, has been prorated (from 171,174 ADSs) for completed months served since the grant date until his last day of employment (31 December 2019) and is made up as follows: 2017 LTPP: 41,078 (the original award of 49,294 ADSs prorated for 30/36 months); 2018 LTPP: 29,393 (the original award of 58,786 ADSs prorated for 18/36 months); 2019 LTPP: 10,515 (the original award of 63,094 ADSs prorated for 6/36 months). Nicola Shaw: On 31 March 2020 Nicola Shaw held 4,070 options granted under the Sharesave Plan. 4,070 options were granted with an exercise price of 737 pence per share and they can, subject to their terms, be exercised at 737 pence per share between 1 April 2022 and 30 September 2022. The number of conditional share awards subject to performance conditions is as follows: 2017 LTPP: 151,109; 2018 LTPP: 186,263; 2019 LTPP: 201,959. Nora Mead Brownell: stepped down from the Board on 8 April 2019. Dean Seavers, Therese Esperdy, Earl Shipp and Jonathan Silver: Holdings and awards are shown as ADSs and each ADS represents five ordinary shares. 103
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Directors’ Remuneration Report continued External appointments and retention of fees Experience as a board member of another company is considered to be valuable personal development, which in turn is of benefit to the Company. The table below details the Executive Directors (at 31 March 2020) who served as Non-executive Directors in other companies during the year ended 31 March 2020: Company Retained fees John Pettigrew Rentokil Initial plc £68,986 Nicola Shaw International Consolidated Airlines Group S.A. £107,0 42 (€120,000) Relative importance of spend on pay The chart below shows the relative importance of spend on pay compared with other costs and disbursements (dividends, tax, net interest and capital expenditure). Given the capital-intensive nature of our business and the scale of our operations, these costs were chosen as the most relevant for comparison purposes. All amounts exclude exceptional items and remeasurements. 17% 5,079 Key: 4,321 2019/20 £m 2018/19 £m -9% 5% 1,852 1,684 1,618 1,699 6% -11% 993 1,049 488 433 Payroll costs Dividends Tax Net interest Capital expenditure Notes: 1. The Dividends figure for 2018/19 has been restated at £1,618 million (from £1,610 million) to reflect the actual value of dividends paid. 2. Percentage increase/decrease of the costs between years is shown. Performance graph This chart shows National Grid plc’s 10-year annual Total Shareholder Return (TSR) performance against the FTSE 100 Index since 31 March 2010 and illustrates the growth in value of a notional £100 holding invested in National Grid on 31 March 2010, compared with the same invested in the FTSE 100 index. The FTSE 100 Index has been chosen because it is the widely recognised performance benchmark for large companies in the UK. The TSR level shown at 31 March each year is the average of the closing daily TSR levels for the 30-day period up to and including that date. It assumes dividends are reinvested. Total shareholder return 300 275.28 Key: 250.68 242.74 250 233.89 National Grid plc 201.09 203.31 FTSE 100 Index 200 180.95 154.46 150 125.70 179.40 106.04 168.68 168.88 100.00 135.73 145.92 149.60 100 127.05 135.58 100.00 107.30 111.65 50 0 31/03/10 31/03/11 30/03/12 29/03/13 31/03/14 31/03/15 31/03/16 31/03/17 30/03/18 29/03/19 31/03/20 Data source: DataStream Chief Executive’s pay in the last ten financial years Steve Holliday was CEO throughout the six-year period from 2010/11 to 2015/16. John Pettigrew became CEO on 1 April 2016. Steve Holliday John Pettigrew 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Single total figure of remuneration (£’000) 3,738 3,539 3,170 4,801 4,845 5,151 4,623 3,648 4,651 5,322 Single total figure of remuneration including only 2014 LTPP (£’000) 3,931 APP (proportion of maximum awarded) 81.33% 68.67% 55.65% 77.94% 94.80% 94.60% 73.86% 82.90% 84.20% 70.58% PSP/LTPP (proportion of maximum vesting) 65.15% 49.50% 25.15% 76.20% 55.81% 63.45% 90.41% 85.20% 84.20% 84.90% Notes: Single total figure 2019/20: The figure for 2019/20 for John Pettigrew is explained in the single total figure of remuneration table for Executive Directors. Single total figure 2018/19: The figure for 2018/19 has been restated to reflect actual share price at 1 July 2019, consistent with comparative figures shown in this year’s single total figure of remuneration table. 2014 LTPP: The 2016/17 single total figure of remuneration includes both the 2013 LTPP award and the 2014 LTPP award due to a change in the vesting period of three years to four years between the 2013 LTPP and 2014 LTPP. PSP/LTPP plans: Prior to 2014, LTPP awards were made under a different LTI framework which incorporated a four-year performance period for the RoE element of the awards. The last award under this framework was made in 2013 and was fully vested in 2017. Awards made from 2014 are subject to a three-year performance period. The first of these awards vested in 2017. 104
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Directors’ Remuneration Report Statement of implementation of remuneration policy in 2019/20 continued Percentage change in CEO’s remuneration The table below shows how the percentage change in the CEO’s salary, benefits and APP between 2018/19 and 2019/20 compares with the percentage change in the average of each of those components of remuneration for non-union employees in the UK and the US. The Committee views this group as the most appropriate comparator group, as this group excludes employees represented by trade unions whose pay and benefits are negotiated with each individual union, each with their own pay structure. Salary Taxable benefits APP 2019/20 2018/19 2019/20 2018/19 2019/20 2018/19 £’000 £’000 Change £’000 £’000 Change £’000 £’000 Change John Pettigrew 1,017 944 7.7% 116 94 23.4% 897 994 -9.8% Non-union employees (average increase/decrease) 3.6% -1.3% -5.9% Notes: Non-union employees: The population is not a constant comparator group due to external hires, promotions and attrition between years. Calculating the APP change comparing employees that were employed throughout the period results in a 0.35% change. The result is impacted also by the proportion of new employees that have not accrued a ‘full year’ of APP payout and changes in business results which this year drive in particular a lower APP payout for our US business versus last year. Pay data for US employees have been converted at $1.2868:£1. CEO pay ratio We have disclosed our CEO pay ratios comparing the CEO single total figure of remuneration to the equivalent pay for the lower quartile, median and upper quartile UK employees (calculated on a full-time equivalent basis) in accordance with the Companies (Miscellaneous Reporting) Regulations 2018 (as amended), which formally apply to National Grid from this reporting year, 2019/20. We disclosed these ratios on a voluntary basis last year for 2018/19. UK Group-wide 25th percentile Median 75th percentile Median Year Method pay ratio pay ratio pay ratio pay ratio 2018/19 – voluntary Option A 96:1 76:1 58:1 48:1 2019/20 Option A 111:1 86:1 66:1 53:1 The comparison with UK employees is specified by the regulations. US employees represent approximately 73% of our total employees. Our median pay ratio on a Group-wide basis is 53:1, calculated on the same basis as the UK pay ratios and an exchange rate of $1.2868:£1. Salaries at 31 March 2020 and estimated performance-based annual payments for 2019/20 have been annualised to reflect full-time equivalents. Performance payments have not been further adjusted to compensate where new employees have not completed a full performance year. The CEO pay ratio has increased from 76:1 to 86:1 at the median. The CEO single total figure of remuneration has increased by approximately 17% versus last year and this increase is driven predominantly by an approximate 25% increase in estimated LTPP vesting value. Increases in salary, benefits in kind and pensions as a result of the increase to base salary are broadly offset by an approximate reduction of 11% in 2019/20 APP payout for the CEO. Excluding LTPP the total pay and benefits for the CEO has increased by 0.8% whilst the total pay and benefits for the reference employee at the median has increased by 2.4%, compared with last year. Excluding estimated 2017 LTPP vesting, our UK median pay ratio is the same as last year at 38:1 and on a Group basis has marginally reduced to 23:1 this year compared with 24:1 last year. The lower Group median pay ratio versus the UK reflects the higher labour cost in the US versus the UK, which is further influenced by the US locations in which we operate which have even higher labour costs than the US on average. The ratio of the pay of our Executive Director, UK, to the median UK employee is 41:1 and excluding the estimated 2017 LTPP vesting is 18:1. This year the 2017 LTPP vesting represents some 56% of the CEO’s single total figure of remuneration. However, only 2% of UK-based employees will receive an estimated 2017 LTPP vest in our pay ratio calculations, and all of these employees are in the upper quartile of our ranked list and so are not selected as a 75th percentile (or below) reference employee. Removing the impact of 2017 LTPP vesting in our calculations results in lower ratios, for the reference employees of 49:1, 38:1 and 29:1 at the 25th, 50th and 75th percentiles respectively and these ratios are the same as last year. As employees advance through the Group, there will be the opportunity to receive higher rewards commensurate with increased accountability and market practice. The regulations require the total pay and benefits and the salary component of total pay and benefits for this year to be set out as follows: Total pay & Pay data 2019/20 Base salary benefits CEO remuneration £1,016,752 £5,321,735 UK employee 25th percentile £34,521 £47,8 49 UK employee 50th percentile £51,149 £61,842 UK employee 75th percentile £60,913 £80,614 Flexibility is provided to adopt one of three methods for calculating the ratios. We have chosen Option A, which is a calculation based on the pay of all UK employees on a full-time equivalent basis, as this option is considered to be more statistically robust. The ratios are based on total pay and benefits inclusive of short-term and long-term incentives applicable for the respective financial year 1 April – 31 March. The reference employees at the 25th, 50th and 75th percentile have been determined by reference to pay and benefits as at the last day of the respective financial year, 31 March, though estimates have been used for the respective APP payouts and performance outturns of the LTPP and dividend equivalents. 105
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance Directors’ Remuneration Report continued Statement of implementation of remuneration policy in 2019/20 continued All employees are eligible for a performance-based annual payment. Our principles for pay setting and progression in our wider workforce are the same as for our executives – mid-market approach to total reward, being sufficiently competitive to attract and retain high-calibre individuals without over-paying and providing the opportunity for individual development and career progression. The pay ratios reflect how remuneration arrangements differ, as accountability increases for more senior roles within the organisation, and in particular the ratios reflect the weighting towards long-term value creation and alignment with shareholder interests for the CEO. We are satisfied that the median pay ratio reported this year is consistent with our wider pay, reward and progression policies for employees. The median reference employee falls within our collectively bargained employee population and has the opportunity for annual pay increases, annual performance payments and career progression and development opportunities. The Committee’s activities during the year Meeting Main areas of discussion April 2018/19 individual objectives scoring for Executive Committee Approval of 2019/20 Objectives for Executive Committee Discussion on 2018/19 expected incentive plan outturns May 2018/19 APP financial outturns and confirmation of awards for Executive Committee Discussion on expected 2016 LTPP outturns Annual salary review and LTPP proposals for Executive Committee Approval of 2019/20 APP financial metrics Review and approval of Chairman’s fees November (two meetings) Performance update for outstanding LTPP awards Review of gender and ethnicity pay gaps Items related to Executive Committee appointments Leaving arrangements for Executive Director, US Debrief of AGM season and remuneration trends Review of pensions arrangements for Executive Committee March Market data review for Executive Committee remuneration and initial proposals for base salary increases First review of 2019/20 individual objectives of Executive Committee Item related to new Executive Committee appointment Advisors to the Remuneration Committee The Committee received advice during 2019/20 from independent consultants Willis Towers Watson. Willis Towers Watson was selected by the Committee to become its independent advisor from 23 October 2017 following a competitive tendering process. Willis Towers Watson is a member of the Remuneration Consultants Group and has signed up to that group’s code of conduct. The Committee is satisfied that any potential conflicts were appropriately managed. Work undertaken by Willis Towers Watson in its role as independent advisor to the Committee has included providing market information for the Executive Directors and other senior employees and for governance matters. This work has incurred fees of £57,488 incurred on the basis of time charged to perform services and deliverables. The Committee reviews the objectivity and independence of the advice it receives from its advisors each year. It is satisfied that Willis Towers Watson provided credible and professional advice. Willis Towers Watson also provided general and technical remuneration services in relation to employees below Board and Group Executive Committee level. The Committee considers the views of the Chairman on the performance and remuneration of the CEO, and of the CEO on the performance and remuneration of the other members of the Executive Committee. The Committee is also supported by the Group General Counsel and Company Secretary, who acts as Secretary to the Committee, the Chief Human Resources Officer, the HR Director – Reward; and, as required, the Group Head of Pensions and Group Financial Controller. No other advisors have provided significant services to the Committee in the year. Voting on Directors’ Remuneration Policy adopted at the 2019 AGM The voting figures shown refer to votes cast at the 2019 AGM and represent 63.86% of the issued share capital. In addition, shareholders holding 28.6 million shares abstained. For Against Number of votes 2,116,131,831 64,718,198 Proportion of votes 97.03% 2.97% Voting on 2018/19 Directors’ Remuneration Report at the 2019 AGM The voting figures shown refer to votes cast at the 2019 AGM (in respect of the prior remuneration policy adopted in 2017) and represent 63.71% of the issued share capital. In addition, shareholders holding 33.8 million shares abstained. For Against Number of votes 2,100,158,370 75,482,807 Proportion of votes 96.53% 3.47% 106
National Grid plc Annual Report and Accounts 2019/20 Corporate Governance | Directors’ Remuneration Report How our remuneration policy will be implemented in 2020/21 The remuneration policy adopted at the 2019 AGM will be implemented during 2020/21 as described below. Salary Salary increases will normally be in line with the increase awarded to other employees in the UK and US, subject to performance. Higher salary increases may also be awarded for a change in responsibility. Additionally, in line with the policy on recruitment remuneration, salaries for new directors may be set below market level initially and aligned to market level over time (provided the increase is merited by the individual’s contribution and performance). As explained in the Remuneration Committee Chair’s Statement, for 2020/21 a salary increase for Andy Agg will be awarded and this will be effective from July in line with the rest of the workforce. Salary increases for John Pettigrew and Nicola Shaw will not be awarded at this time. From 1 July 2020 From 1 June 2019 Increase Andy Agg £633,675 £595,000 6.5% John Pettigrew £1,029,461 £1,029,461 0% Nicola Shaw £561,524 £561,524 0% Pensions The remuneration policy approved at the July 2019 AGM stated that new appointments would receive contributions of up to 20% of base salary. In addition to this, John Pettigrew and Nicola Shaw agreed progressive reductions from 30% to 20% of base salary. Implementation of this agreement is now underway and effective 1 April 2020, cash in lieu of pension contributions for each of John Pettigrew and Nicola Shaw have reduced to 26.7% and further reductions to 23.4% and then 20.0% will take place at 1 April 2021 and 1 April 2022 respectively. Andy Agg already receives the approved policy maximum of 20%. Further to the 2019 AGM the Committee agreed in November 2019 that newly appointed Executive Directors will receive annual contributions of up to 12% of basic salary for the DC pension scheme, or cash supplement in lieu. Further discussions on pension contributions will be conducted as part of the 2021 Directors’ Remuneration Policy review. APP measures for 2020/21 Due to the uncertainty in the context of COVID-19, the Committee has opted not to finalise financial measures, associated weightings or targets at this time but intends to do so as soon as practicable. APP targets are considered commercially sensitive and consequently will be disclosed in the 2020/21 Directors’ Remuneration Report. Performance measures for LTPP to be awarded in 2020 Due to the uncertainty in the context of COVID-19, the Committee has opted not to finalise the targets for the 2020 LTPP financial measures. The weightings for these measure are Group RoE (16.67%) and Group Value Growth (83.33%). Group RoE will be measured over the first year of the three-year performance period and Group Value Growth will be measured over the entire three-year performance period, determining 1/6th and 5/6ths of the total vesting outcome for the 2020 LTPP, respectively. LTPP awards are expected to be made later in the year and will be based on 1 July 2020 salaries. Fees for NEDs Therese Esperdy was appointed as Non-executive Director to the National Grid USA Board in 2015 with an annual fee of £25,000 in addition to her current NED fees. We will not be increasing the Chairman’s fee or other NED fees at this time. Fees effective from 1 June 2019 remain unchanged and are set out in the table below. From 1 June 2019 From 1 June 2019 Role £’000 Role £’000 Chairman 540.2 Committee membership fee 10.8 Senior Independent Director 23.1 Chair Audit Committee 31.2 Board fee (UK-based) 69.5 Chair Remuneration Committee 31.2 Board fee (US-based) 82.1 Chair (other Board Committees) 23.9 The Directors’ Remuneration Report has been approved by the Board and signed on its behalf by: Jonathan Dawson Committee Chairman 17 June 2020 107
National Grid plc Annual Report and Accounts 2019/20 3. Financial Statements Directors’ statement and independent Note 34 – Subsidiary undertakings, auditor’s reports joint ventures and associates 196 Statement of Directors’ responsibilities 109 Note 35 – Sensitivities 201 Independent auditor’s report 110 Note 36 – Additional disclosures in respect of guaranteed securities 203 Consolidated financial statements Note 37 – Transition to new under IFRS accounting standards 203 Primary statements Note 38 – Acquisition of Geronimo Energy LLC and Consolidated income statement 121 Emerald Energy Venture LLC 208 Consolidated statement Note 39 – Post balance sheet events 208 of comprehensive income 123 Consolidated statement of changes in equity 124 Consolidated statement of financial position 125 Consolidated cash flow statement 126 Notes to the consolidated financial statements – analysis of items in the primary statements Note 1 – Basis of preparation and recent accounting developments 127 Note 2 – Segmental analysis 130 Note 3 – Revenue 132 Note 4 – Operating costs 135 Note 5 – Exceptional items and remeasurements 137 Note 6 – Finance income and costs 140 Note 7 – Tax 141 Note 8 – Earnings per share (EPS) 145 Note 9 – Dividends 146 Note 10 – Discontinued operations and assets held for sale 147 Note 11 – Goodwill 148 Note 12 – Other intangible assets 149 Note 13 – Property, plant and equipment 150 Note 14 – Other non-current assets 152 Note 15 – Financial and other investments 153 Note 16 – Investments in joint ventures and associates 154 Company financial statements Note 17 – Derivative financial instruments 156 under FRS 101 Note 18 – Inventories and current intangible assets 158 Basis of preparation Note 19 – Trade and other receivables 159 Company accounting policies 209 Note 20 – Cash and cash equivalents 160 Note 21 – Borrowings 161 Primary statements Note 22 – Trade and other payables 163 Company balance sheet 211 Note 23 – Contract liabilities 164 Company statement of changes in equity 212 Note 24 – Other non-current liabilities 164 Notes to the Company financial Note 25 – Pensions and other statements post-retirement benefits 165 Note 1 – Fixed asset investments 213 Note 26 – Provisions 174 Note 2 – Debtors 213 Note 27 – Share capital 176 Note 3 – Creditors 214 Note 28 – Other equity reserves 177 Note 4 – Derivative financial instruments 214 Note 29 – Net debt 178 Note 5 – Investments 214 Notes to the consolidated financial Note 6 – Borrowings 215 statements – supplementary information Note 7 – Share capital 215 Note 30 – Commitments Note 8 – Shareholders’ equity and contingencies 181 and reserves 215 Note 31 – Related party transactions 182 Note 9 – Parent Company guarantees 215 Note 32 – Financial risk management 182 Note 10 – Audit fees 215 Note 33 – Borrowing facilities 195 108
National Grid plc Annual Report and Accounts 2019/20 Financial Statements Statement of Directors’ responsibilities The Directors are responsible for preparing the Annual Report and Each of the Directors, whose names and functions are listed on Accounts, including the Group financial statements and the Parent pages 66 – 67, confirms that: Company financial statements in accordance with applicable law • to the best of their knowledge, the Group financial statements and regulations. and the Parent Company financial statements, which have been prepared in accordance with IFRSs as issued by the IASB and Company law requires the Directors to prepare financial statements for IFRS as adopted by the European Union and UK GAAP FRS 101 each financial year. Under that law the Directors are required to prepare respectively, give a true and fair view of the assets, liabilities, the Group financial statements in accordance with International Financial financial position and profit of the Company on a consolidated and Reporting Standards (IFRSs) as adopted by the European Union and individual basis; Article 4 of the IAS Regulation and have elected to prepare the Parent • to the best of their knowledge, the Strategic Report contained in Company financial statements in accordance with United Kingdom the Annual Report and Accounts includes a fair review of the Generally Accepted Accounting Practice (United Kingdom Accounting development and performance of the business and the position of Standards and applicable law), including FRS 101 ‘Reduced Disclosure the Company on a consolidated and individual basis, together with a Framework’. Under company law, the Directors must not approve the description of the principal risks and uncertainties that it faces; and accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of the profit • they consider that the Annual Report and Accounts, taken as a or loss of the Group and Parent Company for that period. whole, are fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s In preparing the Group financial statements, International Accounting position and performance, business model and strategy. Standard 1 requires that Directors: This Responsibilities Statement was approved by the Board and signed • properly select and apply accounting policies; on its behalf. • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable Directors’ Report information; The Directors’ Report, prepared in accordance with the requirements • provide additional disclosures when compliance with the specific of the Companies Act 2006 and the UK Listing Authority’s Listing Rules, requirements in IFRSs are insufficient to enable users to understand and Disclosure Rules and Transparency Rules, comprising pages 1 – 107 the impact of particular transactions, other events and conditions and 216 – 252, was approved by the Board and signed on its behalf. on the entity’s financial position and financial performance; and • make an assessment of the Group’s ability to continue as a Strategic Report going concern. The Strategic Report, comprising pages 1 – 62, was approved by the In preparing the Parent Company financial statements, the Directors are Board and signed on its behalf. required to: By order of the Board • select suitable accounting policies and then apply them consistently; • make judgments and accounting estimates that are reasonable and prudent; • state whether applicable UK Accounting Standards have been Alison Kay followed, subject to any material departures disclosed and explained Group General Counsel in the financial statements; and & Company Secretary • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue 17 June 2020 in business. Company number: 4031152 The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and Parent Company on a consolidated and individual basis, and to enable them to ensure that the Group financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Parent Company and its subsidiaries and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Having made the requisite enquiries, so far as the Directors in office at the date of the approval of this Report are aware, there is no relevant audit information of which the auditors are unaware and each Director has taken all reasonable steps to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information. 109
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