National Grid 2011 Annual Report Download - page 22

20 National Grid Gas plc Annual Report and Accounts 2010/11
For debt and derivative instruments held, we utilise a sensitivity
analysis technique to evaluate the effect that changes in
relevant rates or prices would have on the market value of such
instruments.
As described in note 28(e) to the consolidated financial
statements, movements in financial indices would have the
following estimated impact on the financial statements as a
consequence of changes in the value of financial instruments.
Years ended 31 March 2011 2010
Income
statement
£m
Othe
r
compre-
hensive
income
£m
Income
statement
£m
Othe
r
compre-
hensive
income
£m
UK Retail Prices Index ± 0.50% 12 - 10 -
UK interest rates ± 0.50% 7 13 516
Commodity contracts
Gas purchased for our own use relates to the operation of our
gas transmission and gas distribution networks. Contracts are
accounted for as ordinary purchase contracts.
In our gas transmission operations, we are obliged to offer for
sale through a series of auctions, both short- and long-term, a
predetermined quantity of entry capacity for every day in the
year at pre-defined locations. Where, on the day, the gas
transmission system’s capability is constrained, such that gas is
prevented from entering the system for which entry capacity
rights have been sold, then UK gas transmission is required to
buy back those entry capacity rights sold in excess of system
capability. Forward and option contracts may be used to reduce
the risk and exposure to on the day entry capacity prices.
Commitments and contingencies
Commitments and contingencies outstanding at 31 March 2011
and 2010 are summarised in the table below:
2011 2010
£m £m
Future capital expenditure contracted but not
provided for 428 533
Total operating lease commitments 70 77
Other commitments and contingencies 19 26
Information regarding obligations under pension and other post-
retirement benefits is given below under the heading
‘Retirement arrangements’.
We propose to meet all of our commitments from existing cash
and investments, operating cash flows, existing credit facilities,
future facilities and other financing that we reasonably expect to
be able to secure in the future.
Details of material litigation as at 31 March 2011
We were not party to litigation that we considered to be material
as at 31 March 2011. Save as set out below, there have been
no governmental, legal or arbitration proceedings in the last 12
months which may have or have had significant effects on the
Company’s financial position or profitability.
Metering competition investigation
As previously reported, on 25 February 2008 the Gas and
Electricity Markets Authority (GEMA) announced it had decided
we had breached Chapter II of the Competition Act 1998 and
Article 82 (now Article 102) of the Treaty of the Functioning of
the European Union and fined us £41.6 million. Following
appeals, the Competition Appeal Tribunal reduced the fine to
£30 million and the Court of Appeal further reduced the fine to
£15 million. On 22 March 2010, we applied to the Supreme
Court for leave to appeal the Court of Appeal’s judgement. On
28 July 2010, the Supreme Court denied our application and
this ends the legal process. The £15 million fine was paid to
GEMA on 1 April 2010.
Gas distribution mains replacement investigation
As previously reported, in October 2008 we informed Ofgem
that mains replacement activity carried out by the Gas
Distribution business may have been inaccurately reported.
Ofgem has now concluded its investigation and, following the
reaching of a settlement between Ofgem and the Company, on
6 January 2011 Ofgem announced its intention to impose a
penalty of £8 million and to find the Company in breach of
certain obligations in respect of the reporting of mains
replacement data. Ofgem also stated that the penalty would
have been higher had it not been for the cooperation and
corrective action by the Company. On 10 March 2011, following
the end of the period in which representations could be made in
respect of the proposed decision, Ofgem wrote to us to confirm
its decision. On 13 May 2011, we received the Final Penalty
Notice the penalty has now been paid.
Related party transactions
We provide services to and receive services from related
parties, principally fellow subsidiary companies of National Grid.
In the year ended 31 March 2011, National Grid Gas charged
£20 million and received charges of £76 million from related
parties (other than Directors and key managers), compared with
£21 million and £139 million respectively in 2009/10.
Further information relating to related party transactions is
contained within note 25 to the consolidated financial
statements. Details of key management compensation and
amounts paid to Directors are included within notes 3(c) and
3(d) to the consolidated financial statements respectively.
Retirement arrangements
The 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 to
new entrants, and a defined contribution section, which is
offered to all new employees.
In September 2010 the UK government changed the basis for
statutory pension increases from the retail price index (RPI) to
the consumer price index (CPI). The scheme rules of our
pension scheme specifically reference RPI. As a consequence,