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Annual Report and Accounts 2010/11
National Grid Gas plc
Company number 2006000

Table of contents

  • Page 1
    Annual Report and Accounts 2010/11 National Grid Gas plc Company number 2006000

  • Page 2
    ... Grid Gas plc Annual Report and Accounts 2010/11 Contents 1 Operating and Financial Review 24 Directors' Report 25 Statement of Directors' responsibilities 26 Independent Auditors' report to the members of National Grid Gas plc Consolidated financial statements under IFRS 27 Accounting policies...

  • Page 3
    ... development, performance and position of National Grid Gas plc during the year ended 31 March 2011 as well as those likely to affect the Company in the future. It has been prepared in line with the guidance provided in the Reporting Statement on the Operating and Financial Review issued by the UK...

  • Page 4
    2 National Grid Gas plc Annual Report and Accounts 2010/11 How the UK gas industry works Within the UK gas industry there are four areas; production and importation (carried out by other companies), transmission (carried out by National Grid Gas plc), distribution (carried out by National Grid Gas ...

  • Page 5
    National Grid Gas plc Annual Report and Accounts 2010/11 3 Executive Director responsible for the global Transmission business. The day-to-day management of National Grid Gas's Gas Distribution business is carried out by the Distribution Executive Committee. This was chaired by Mark Fairbairn who ...

  • Page 6
    ...Doing the Right Thing mentioned above) and an extensive training and awareness programme that will include eLearning for all employees. More information on the business conduct of National Grid can be found in the National Grid Annual Report and Accounts 2010/11 and on National Grid's website at www...

  • Page 7
    National Grid Gas plc Annual Report and Accounts 2010/11 5 in our regulated businesses, is adjusted to reflect asset additions, removals, depreciation and the rate of inflation. The RPI-X price control takes the retail price index as its benchmark and subtracts X, an efficiency factor, from it. For...

  • Page 8
    6 National Grid Gas plc Annual Report and Accounts 2010/11 availability; safe network services; connection terms; environmental impact; and social obligations. These outputs will cover both primary and secondary deliverables. We will be required to demonstrate in price controls that the primary ...

  • Page 9
    National Grid Gas plc Annual Report and Accounts 2010/11 7 Vision, strategy and objectives As a subsidiary company of National Grid, National Grid Gas participates in the National Grid vision and strategy, as described below: „ Vision The vision is the long term aspiration for National Grid - ...

  • Page 10
    ... surveys (see page 10) Gas Distribution 2010/11: 4th quartile ranking 2009/10: 4th quartile ranking Number of employee lost time injuries per 100,00 hours worked on a 12 month basis (see pages 9 and 10) 2010/11: 0.16 2009/10: 0.09 Employee engagement index calculated using responses to National Grid...

  • Page 11
    National Grid Gas plc Annual Report and Accounts 2010/11 9 Performance against objectives We use a number of detailed performance measures in addition to the key performance indicators shown on the previous page, reflecting the scale and complexity of our operations. We use qualitative assessments ...

  • Page 12
    10 National Grid Gas plc Annual Report and Accounts 2010/11 with 0.09 in 2009/10. Definitions for lost time injury and lost time injury frequency rate are included in the glossary on page 79. At the same time, we have seen a significant improvement in the lost time injury performance of our ...

  • Page 13
    ... developments in the year see pages 4 to 6. Becoming more efficient by transforming our operating model and increasingly aligning our processes Gas Distribution front office (GDFO) GDFO is a significant investment for National Grid in the replacement of our legacy IT applications for asset and work...

  • Page 14
    ... on employees. An essential component of the transformation programme is to ensure that the structure of the IS department and its commercial arrangements are consistent with the overall National Grid strategy and specific line of business objectives, including National Grid Gas. The IS strategy and...

  • Page 15
    National Grid Gas plc Annual Report and Accounts 2010/11 13 eLearning solutions was introduced covering the areas of communication, performance management, business acumen and general management. More will be added as further business needs are identified. The UK apprenticeship training programmes ...

  • Page 16
    ...financing costs and a pension deficit adjustment. The regulatory asset base consists of invested capital, which is the opening RAV inflated to midyear using RPI inflation. This is equivalent to the vanilla return set out in our price controls. For Gas Transmission, our operational return for 2010/11...

  • Page 17
    National Grid Gas plc Annual Report and Accounts 2010/11 15 Reconciliation of operating profit to profit and earnings Years ended 31 March 2011 £m 2010 £m credit on exceptional items and remeasurements. This compares with a net charge of £288 million in 2009/10, comprising a £322 million ...

  • Page 18
    ... National Grid Gas plc Annual Report and Accounts 2010/11 Gas Transmission The results for the Gas Transmission segment for the years ended 31 March 2011 and 2010 were as follows: Years ended 31 March 2011 £m 2010 £m 2010/11 compared with 2009/10: Adjusted operating profit Continuing operations...

  • Page 19
    ... and financial investments of £326 million). Capital structure We monitor the regulatory asset value (RAV) gearing of the Gas Transmission and Gas Distribution businesses. This is calculated as net debt expressed as a percentage of RAV, and indicates the level of debt employed to fund the regulated...

  • Page 20
    ... the business's operational requirements and their use is explained on page 20. Current condition of the financial markets The financial markets have essentially returned to normal for National Grid following the turmoil in the capital markets in 2008 and 2009. Following National Grid's rights issue...

  • Page 21
    National Grid Gas plc Annual Report and Accounts 2010/11 19 interest rates and exchange rates. We use financial instruments, including financial derivatives, to manage exposures of this type. Our policy is not to use financial derivatives for trading purposes. More details on derivative financial ...

  • Page 22
    ...substantial majority of our employees are members of the National Grid UK Pension Scheme, which is operated by Lattice Group plc, an intermediate holding company of National Grid Gas. We do not provide any other post-retirement benefits. The scheme has both a defined benefit section, which is closed...

  • Page 23
    ... limited to our guaranteed minimum pensions and the financial consequence was an approximate £50 million reduction in plan liabilities. As there is no contractual arrangement or stated policy for charging the net defined benefit cost of the scheme to National Grid Gas, we account for the scheme...

  • Page 24
    ... Pension obligations Defined benefit pension obligations are accounted for as if the National Grid UK Pension Scheme were a defined contribution scheme as there is neither a contractual arrangement, nor a stated policy under which the Company is charged for the costs of providing pensions. A change...

  • Page 25
    ...Gas plc Annual Report and Accounts 2010/11 23 Accounting standards, amendments to standards and interpretations not yet adopted New accounting standards, amendments to standards and interpretations which have been issued but not yet adopted by National Grid are discussed in the financial statements...

  • Page 26
    24 National Grid Gas plc Annual Report and Accounts 2010/11 Directors' Report for the year ended 31 March 2011 In accordance with the requirements of the Companies Act 2006 and UK Listing Authority's Listing, Disclosure and Transparency Rules, the following sections describe the matters that are ...

  • Page 27
    National Grid Gas plc Annual Report and Accounts 2010/11 25 Statement of Directors' responsibilities The Directors are responsible for preparing the Annual Report and Accounts, including the consolidated financial statements and the Company financial statements and the Directors' Report, in ...

  • Page 28
    26 National Grid Gas plc Annual Report and Accounts 2010/11 Independent Auditors' report to the Members of National Grid Gas plc We have audited the consolidated and Company financial statements (the ''financial statements'') of National Grid Gas plc for the year ended 31 March 2011 which comprise ...

  • Page 29
    ... Annual Report and Accounts 2010/11 27 Accounting policies for the year ended 31 March 2011 A. Basis of preparation of consolidated financial statements under IFRS National Grid Gas's principal activities involve the transmission and distribution of gas and the provision of gas metering services...

  • Page 30
    28 National Grid Gas plc Annual Report and Accounts 2010/11 Property, plant and equipment include assets in which the Company's interest comprises legally protected statutory or contractual rights of use. Additions represent the purchase or construction of new assets, including capital expenditure ...

  • Page 31
    ... substantial majority of the Company's employees are members of the defined benefit section of the National Grid UK Pension Scheme. There is no contractual arrangement or stated policy for charging the net defined benefit cost of the Scheme to the Company. Accordingly, the Scheme is recognised as if...

  • Page 32
    ... the previously hedged item affects net profit or loss. For fair value hedges, the cumulative adjustment recorded to the carrying value of the hedged item at the date hedge accounting is discontinued, is amortised to the income statement using the effective interest rate method. If a hedged forecast...

  • Page 33
    National Grid Gas plc Annual Report and Accounts 2010/11 31 P. Share-based payments National Grid issues equity-settled share-based payments to certain employees of the Company and its subsidiaries. Equity-settled, share-based payments are measured at fair value at the date of grant. The fair value...

  • Page 34
    ... of adjusted earnings - note 4. The exemptions adopted on transition to IFRS on 1 April 2004. The recognition of defined benefit pension costs as if the National Grid UK Pension Scheme was a defined contribution scheme - accounting policy L. Hedge accounting - accounting policy O. Key sources...

  • Page 35
    National Grid Gas plc Annual Report and Accounts 2010/11 33 Adoption of new accounting standards New IFRS accounting standards and interpretations adopted in 2010/11 During the year ended 31 March 2011, the Company adopted the following International Financial Reporting Standards (IFRS), ...

  • Page 36
    34 National Grid Gas plc Annual Report and Accounts 2010/11 Consolidated income statement for the years ended 31 March 2011 2011 £m 2010 £m 2010 £m Notes £m Revenue Other operating income Operating costs Operating profit Before exceptional items Exceptional items Total operating profit ...

  • Page 37
    National Grid Gas plc Annual Report and Accounts 2010/11 35 Consolidated statement of comprehensive income for the years ended 31 March 2011 2010 £m Notes £m Profit for the year Other comprehensive income/(loss): Net gains/(losses) in respect of cash flow hedges Transferred to profit or loss...

  • Page 38
    36 National Grid Gas plc Annual Report and Accounts 2010/11 Consolidated balance sheet at 31 March 2011 2010 £m Notes £m Non-current assets Intangible assets Property, plant and equipment Other non-current assets Derivative financial assets Total non-current assets Current assets Inventories...

  • Page 39
    National Grid Gas plc Annual Report and Accounts 2010/11 37 Consolidated statement of changes in equity Called up share capital £m Share premium account £m Retained earnings £m Cash flow hedge reserve £m reserves £m Total Other shareholders' equity £m Noncontrolling interests £m Total equity...

  • Page 40
    ... operating profit Adjustments for: Exceptional items Depreciation and amortisation Profit on disposal of property, plant and equipment Share-based payment charge Changes in working capital Changes in provisions Cash flows relating to exceptional items Cash generated from operations Tax paid Net cash...

  • Page 41
    National Grid Gas plc Annual Report and Accounts 2010/11 39 Notes to the consolidated financial statements analysis of items in the primary statements 1. Segmental analysis The Board of Directors is National Grid Gas plc's chief operating decision making body (as defined by IFRS 8 on operating ...

  • Page 42
    40 National Grid Gas plc Annual Report and Accounts 2010/11 1. Segmental analysis continued c) Capital expenditure and depreciation Depreciation Capital expenditure 2011 £m 2010 £m and amortisation 2011 £m 2010 £m Operating segments - continuing operations Gas Transmission Gas Distribution Gas...

  • Page 43
    ...-term employee benefits Post employment benefits Share-based payments 3 2 2 7 3 2 2 7 Key management comprises the Board of Directors of the Company together with those Executive Directors of National Grid plc who have managerial responsibility for any of the businesses of National Grid Gas plc...

  • Page 44
    42 National Grid Gas plc Annual Report and Accounts 2010/11 3. Operating costs continued (d) Directors' emoluments The aggregate amount of emoluments paid to Directors in respect of qualifying services for 2011 was £1,318,924 (2010: £1,476,935). There were payments in respect of compensation for ...

  • Page 45
    National Grid Gas plc Annual Report and Accounts 2010/11 43 4. Exceptional items and remeasurements 2011 £m 2010 £m Included within operating profit: Exceptional items: Restructuring costs (i) Environmental charges (ii) Pension deficit charges (iii) Other (iv) (57) (8) (65) (72) (14) (58) (43)...

  • Page 46
    44 National Grid Gas plc Annual Report and Accounts 2010/11 5. Pensions Substantially all of National Grid Gas plc's employees are members of the defined benefit section of the National Grid UK Pension Scheme. There is no contractual arrangement or stated policy for charging the net defined benefit...

  • Page 47
    National Grid Gas plc Annual Report and Accounts 2010/11 45 6. Finance income and costs 2011 £m 2010 £m Interest income and similar income Interest income on financial instruments (i) Interest income and similar income Interest expense and other finance costs Interest expense on financial ...

  • Page 48
    46 National Grid Gas plc Annual Report and Accounts 2010/11 7. Taxation Taxation on items charged/(credited) to the income statement Before exceptional items and remeasurements 2011 £m 2010 £m Exceptional items and remeasurements 2011 £m 2010 £m Total 2011 £m 2010 £m United Kingdom ...

  • Page 49
    National Grid Gas plc Annual Report and Accounts 2010/11 47 7. Taxation continued Factors that may affect future tax charges A number of changes to the UK Corporation Tax system were announced in the 2011 Budget Report and are expected to be enacted in the 2011 Finance Act. However, the reduction ...

  • Page 50
    ... National Grid Gas plc Annual Report and Accounts 2010/11 10. Property, plant and equipment Assets in the Land and buildings £m Plant and £m course of £m machinery construction Motor vehicles and office equipment £m Total £m Cost at 1 April 2009 Additions Disposals Reclassifications (i) Cost...

  • Page 51
    National Grid Gas plc Annual Report and Accounts 2010/11 49 12. Derivative financial instruments For further information and a detailed description of our derivative financial instruments and hedge type designations, refer to note 27. The fair value by designated hedge type can be analysed as ...

  • Page 52
    50 National Grid Gas plc Annual Report and Accounts 2010/11 13. Inventories and other intangible assets 2011 £m 2010 £m Raw materials and consumables Other intangible assets - emission allowances 25 15 40 28 15 43 14. Trade and other receivables 2011 £m 2010 £m Trade receivables Amounts ...

  • Page 53
    National Grid Gas plc Annual Report and Accounts 2010/11 51 15. Financial investments 2011 £m 2010 £m Current Available-for-sale investments - investments in short-term money funds Loans and receivables - amounts due from fellow subsidiaries 223 19 242 307 19 326 Available-for-sale ...

  • Page 54
    52 National Grid Gas plc Annual Report and Accounts 2010/11 17. Borrowings 2011 £m 2010 £m Current Bank loans Bonds Other loans Borrowings from fellow subsidiaries Bank overdrafts (note 16) 278 101 2 369 34 784 243 115 2 74 15 449 659 6,165 149 250 7,223 7,672 2010 £m Non-current Bank loans ...

  • Page 55
    National Grid Gas plc Annual Report and Accounts 2010/11 53 19. Other non-current liabilities 2011 £m 2010 £m Trade payables Other payables Deferred income 22 1,079 1,101 4 1,100 1,104 The fair value of trade and other payables approximates to their book value. All other non-current ...

  • Page 56
    ... emission allowances granted or purchased. Other provisions Other provisions at 31 March 2011 include £5m (2010: £6m) in respect of property transfer costs related to the sales of four UK gas distribution networks and £22m (2010: £21m) in respect of employer liability claims. The payment dates...

  • Page 57
    National Grid Gas plc Annual Report and Accounts 2010/11 55 22. Share capital Number of shares 2011 millions Number of shares 2010 millions 2011 £m 2010 £m At 31 March 2010 and 2011 - ordinary shares of 1 /15p each Allotted, called up and fully paid 2 3,944 3,944 45 45 23. Consolidated ...

  • Page 58
    56 National Grid Gas plc Annual Report and Accounts 2010/11 Notes to the consolidated financial statements supplementary information 24. Commitments and contingencies a) Future capital expenditure 2011 £m 2010 £m Contracted for but not provided b) Operating lease commitments Total commitments ...

  • Page 59
    ...of National Grid and a pension plan, and are in the normal course of business. Parent 2011 £m 2010 £m Other related parties 2011 £m 2010 £m Total 2011 £m 2010 £m Income: Goods and services supplied Expenditure: Services received Corporate services received Charges in respect of pensions costs...

  • Page 60
    58 National Grid Gas plc Annual Report and Accounts 2010/11 26. Actuarial information on pensions The National Grid UK Pension Scheme is funded with assets held in a separate trustee administered fund. The scheme is subject to independent actuarial valuation at least every three years, on the basis...

  • Page 61
    National Grid Gas plc Annual Report and Accounts 2010/11 59 26. Actuarial information on pensions continued Sensitivities to actuarial assumptions Change in pension obligations 2011 £m 2010 £m Change in annual pension cost 2011 £m 2010 £m Sensitivities (all other assumptions held constant) ...

  • Page 62
    60 National Grid Gas plc Annual Report and Accounts 2010/11 28. Financial risk Our activities expose us to a variety of financial risks: market risk, including foreign exchange risk; fair value interest rate risk and cash flow interest rate risk; credit risk; and liquidity risk. The overall risk ...

  • Page 63
    ... issued are index-linked, that is their cost is linked to changes in the UK Retail Prices Index (RPI). We believe that these borrowings provide a hedge for revenues and regulatory asset values that are also RPI-linked. Interest rate risk arising from our financial investments is primarily variable...

  • Page 64
    ... value is a quoted price in an actively traded market. In the event that the market for a financial instrument is not active, a valuation technique is used. 2011 Level 1 £m Level 2 £m Level 3 £m Total £m Level 1 £m 2010 Level 2 £m Level 3 £m Total £m Assets Available-for-sale investments...

  • Page 65
    ...governed by the credit rules within the Uniform Network Code. These lay down the level of credit relative to the regulatory asset value for each credit rating. Sales to retail customers, such as those requiring connections, are usually settled in cash or using major credit cards. Management does not...

  • Page 66
    ... 2011 was 54% compared with 57% at 31 March 2010. We regularly review and maintain or adjust the capital structure as appropriate in order to manage the level of gearing. Our licence and some of our bank loan agreements impose lower limits for the long-term credit ratings that the Company must hold...

  • Page 67
    National Grid Gas plc Annual Report and Accounts 2010/11 65 29. Share options and reward plans National Grid operates three principal forms of share option and award plans in which our employees and Directors participate. These plans include an employee Sharesave scheme, a Performance Share Plan (...

  • Page 68
    66 National Grid Gas plc Annual Report and Accounts 2010/11 29. Share options and reward plans continued Share options - Sharesave scheme and Executive Share Option Plan Sharesave scheme options Weighted average price £ millions Executive Plan options Weighted average price £ millions millions ...

  • Page 69
    National Grid Gas plc Annual Report and Accounts 2010/11 67 29. Share options and reward plans continued Awards under share option and reward plans 2011 2010 Share Options: Average share price at date of grant Average exercise price Average fair value Other share plans Average share price at date ...

  • Page 70
    68 National Grid Gas plc Annual Report and Accounts 2010/11 30. Ultimate parent company National Grid Gas plc's immediate parent company is National Grid Gas Holdings Limited. The ultimate parent company and controlling party is National Grid plc. Both of these companies are incorporated in Great ...

  • Page 71
    National Grid Gas plc Annual Report and Accounts 2010/11 69 Company accounting policies for the year ended 31 March 2011 A. Basis of preparation of individual financial statements under UK GAAP These individual financial statements of the Company have been prepared in accordance with applicable UK...

  • Page 72
    ... operating costs and represents the cost of planned maintenance of mains and services assets by replacing or lining sections of pipe. This expenditure is principally undertaken to repair and maintain the safety of the network and is written off as incurred. Expenditure that enhances the performance...

  • Page 73
    National Grid Gas plc Annual Report and Accounts 2010/11 71 the transactions are with the same counterparty, a legal right of set-off exists and the cash flows are intended to be settled on a net basis. Gains and losses arising from changes in fair value are included in the profit and loss account ...

  • Page 74
    72 National Grid Gas plc Annual Report and Accounts 2010/11 Company balance sheet at 31 March 2011 2010 £m Notes £m Fixed assets Tangible assets Investments 5 6 7,072 17 7,089 6,925 17 6,942 43 297 5,619 72 565 398 6,994 (1,161) (30) (813) (2,004) 4,990 11,932 (6,637) (121) (718) (7,476) (...

  • Page 75
    National Grid Gas plc Annual Report and Accounts 2010/11 73 Notes to the Company financial statements 1. Auditors' remuneration Auditors' remuneration in respect of the Company is set out below: 2011 £m 2010 £m Audit services Audit fee of Company Other services Other services supplied pursuant ...

  • Page 76
    ... Grid Gas plc Annual Report and Accounts 2010/11 6. Investments Shares in subsidiary undertakings £m Cost and net book value at 31 March 2010 and 31 March 2011 The names of the principal subsidiary undertakings are included in note 31 to the consolidated financial statements. The directors...

  • Page 77
    National Grid Gas plc Annual Report and Accounts 2010/11 75 10. Creditors (amounts falling due within one year) 2011 £m 2010 £m Derivative financial instruments (note 9) Borrowings (note 12) Trade creditors Amounts owed to Group undertakings Amounts owed to fellow subsidiary undertakings ...

  • Page 78
    76 National Grid Gas plc Annual Report and Accounts 2010/11 13. Provisions for liabilities and charges Deferred Environmental £m Restructuring Emissions £m £m taxation £m Other £m Total £m At 1 April 2010 Charged to profit and loss account Transferred to reserves Utilised Released Unwinding ...

  • Page 79
    ... Grid Gas plc is a wholly owned subsidiary undertaking of National Grid Gas Holdings Limited. 3,944 3,944 45 45 15. Reserves Share Premium Account £m Cash flow hedge reserve £m Capital redemption reserve £m Profit and loss account £m At 1 April 2010 Profit for the year Dividends Net...

  • Page 80
    78 National Grid Gas plc Annual Report and Accounts 2010/11 16. Commitments and contingencies a) Future capital expenditure As at 31 March 2011, the Company had placed contracts for capital expenditure (tangible fixed assets) amounting to £427m (2010: £532m). b) Lease commitments At 31 March 2011...

  • Page 81
    National Grid Gas plc Annual Report and Accounts 2010/11 79 Glossary and definitions References to the 'Company', 'we', 'our', and 'us', refer to National Grid Gas plc itself or to National Grid Gas plc and its subsidiaries collectively, depending on context. FRS UK Financial Reporting Standard ...

  • Page 82
    National Grid Gas plc 1-3 Strand, London WC2N 5EH, United Kingdom Registered in England and Wales Company number 2006000