Annual Report and Accounts 2011/12National Grid Gas plcCompany number 2006000
National Grid Gas plc Annual Report and Accounts 2011/12ContentsBusiness Review 1 to 30 1 Our business 1 Management structure 2 Our business model: 2 Driven by strategy 3 What we do: UK gas industry 4 Our operating environment: 4 Energy policy 4 Economic environment 4 Regulatory environment 6 Delivering our strategy: 7 How do we deliver?12 Measuring performance – our KPIs13 Risks to delivery18 What we delivered this year20 Financial performance23 Principal operations23 Gas Transmission24 Gas Distribution25 Gas Metering25 Other activities26 Financial position and resources29 Accounting policiesDirectors’ Report 31Financial Statements 32 to 8132 Statement of Directors’ responsibilities33 Independent Auditors’ Report to the Members of National Grid Gas plc Consolidated financial statements under IFRS:34 Accounting policies40 Adoption of new accounting standards41 Consolidated income statement42 Consolidated statement of comprehensive income43 Consolidated balance sheet44 Consolidated statement of changes in equity45 Consolidated cash flow statement46 Notes to the consolidated financial statements Company financial statements under UK GAAP:72 Company accounting policies75 Company balance sheet76 Notes to the Company financial statementsAdditional Information 8282 Glossary and definitions
National Grid Gas plc Annual Report and Accounts 2011/12 1Business ReviewOur business Management structureNational Grid Gas is a subsidiary of National Grid plc The overall management and governance of National Grid Gas(National Grid), based in the UK, where we own and is the responsibility of its Board of Directors. Strategic directionoperate regulated gas transmission and distribution is determined by our parent company, National Grid. Our Directors are listed on page 31.networks, and provide gas metering services. We play avital role in connecting millions of people safely, reliably The Transmission Executive Committee is a joint committeeand efficiently to the energy they use. with National Grid Electricity Transmission plc and is responsible for day to day management of our Gas Transmission business. The Distribution Executive Committee is responsible for day to day management of our Gas Distribution business. The membership of these two committees comprises Directors and senior business managers. The Transmission Executive Committee is chaired by Nick Winser, who also sits on the Board and Executive Committee of National Grid, and is the National Grid Executive Director, UK. The Distribution Executive Committee is chaired by John Pettigrew. In addition to its own governance processes, National Grid Gas participates in the governance process of National Grid, which is subject to the UK Corporate Governance Code. More information on the management structure of National Grid can be found in the National Grid Annual Report and Accounts 2011/12 and on National Grid’s website at www.nationalgrid.com.
2 National Grid Gas plc Annual Report and Accounts 2011/12Our business modelDriven by strategyWe share the National Grid vision and strategy. customers, regulators, governments and wider industry is critical to understanding their expectations and therebyVision delivering service that meets their needs. We must engageWe, at National Grid, will be the foremost international electricity effectively on climate change and the future energy mix toand gas company, delivering unparalleled safety, reliability and deliver networks fit for a low carbon economy. We engage withefficiency, vital to the well-being of our customers and regulators to ensure operational excellence is rewarded with thecommunities. opportunity to deliver attractive revenue streams andWe are committed to being an innovative leader in energy mechanisms to manage uncertainty.management and to safeguarding our global environment for Equity growth is driven by efficient capital investment in ourfuture generations. regulated networks, which will grow our regulated asset base. A disciplined investment programme is critical to deliveringStrategy customers’ needs through reliable and affordable networks. WeWe will operate and grow our business to deliver consistently must be clear about how and when any investment will besuperior financial returns through: remunerated and ensure we only invest where we can our drive for operational excellence; reasonably expect to earn an adequate return. embedding innovation and efficiency in our corporate culture; understanding the needs of our stakeholders and shaping energy policy through external engagement; and maintaining a disciplined investment programme to grow our regulated asset base.Our strategy aims to enhance our reputation as an operator andowner of gas networks, delivering quality and reliable servicefor a reasonable cost in a sustainable way. Delivering ourstrategy will provide a competitive advantage through attractiveregulatory arrangements. This combines with a balance ofgrowth and cash generating businesses to drive totalshareholder returns for our parent, National Grid.Operating at the highest levels of safety, reliability, efficiencyand customer service is fundamental to the strength of ourreputation with our customers, communities and regulators.Operational excellence will help us to strengthen thisreputation and to deliver the outputs that underpin our corerevenue streams. It also helps in maximising income under ourincentive schemes and controlling costs. By delivering it we canimprove cash returns and manage the risks of our businessmost effectively.Innovation and efficiency underpin operational excellence.They drive incentive performance, give access to investmentand growth opportunities, and aid regulatory engagement. Wecontinue to track, and where appropriate participate in,emerging technologies that are likely to have an impact on ourbusiness. More than ever before, being successful will requireus to embed an innovative mindset within our organisationalculture. Innovation extends to the way we finance ouroperations; delivering enhanced returns and increasingavailable cash while managing risk.Policy decisions by regulators, governments and others directlyaffect our regulated businesses. External engagement with
National Grid Gas plc Annual Report and Accounts 2011/12 3Our business modelWhat we do: UK gas industryThe UK gas industry has four main sectors. For shippers who use the system, there is also a commodity charge based on the actual flows of gas into the NTS.Production and importation – other companiesThe modern gas industry in Great Britain is an organisational Distribution – National Grid Gas and otherschain from production, processing, storage, transmission and Gas exits the NTS at 49 offtake points where it is odorised. It isdistribution through to the supply of industrial and commercial transported in the distribution networks at various pressuresusers and domestic users. Gas is sourced by extraction from ranging from 75 bar down to 21 mbar for final delivery tooffshore gas fields in the North Sea and Irish Sea, consumers.interconnection with Europe, and through LNG imports. There Within the distribution networks, gas storage is used to helpalso remains a small amount of onshore production. manage daily variation in demand.Gas producers, LNG importers and interconnector operators In the UK, there are 13 local distribution zones grouped intobring gas onshore. In the UK, there are seven gas reception eight regional distribution networks. We own four of the eightterminals, three LNG importation terminals and three distribution networks and three other companies own the otherinterconnectors, connecting Great Britain with Ireland, Belgium four. The commodity is transported on behalf of shippers.and the Netherlands. Shippers contract with National Grid Gas and other gasWe do not participate in the production of gas for the UK distribution network operators to transport their gas tomarket, the transportation of LNG by sea or the importation of consumers. The transportation charges shippers pay for theLNG. use of gas distribution networks are ultimately passed on toGas producers and importers sell the gas to licensed shippers, consumers.who then own the gas as it travels through the transmission and The transportation charges reflect the costs of building,distribution networks. We are not a gas shipper; we do not buy maintaining and operating the networks, and also the costs ofor sell the gas, we transport it. operating a 24 hour gas emergency telephone helpline andLNG importers pay for the right to land LNG at importation emergency response.terminals. As with the transmission system, the owners of the distributionTransmission – National Grid Gas only networks do not buy or sell gas.Gas producers supply gas to our national transmission system Supply – other companies(NTS) through reception terminals. Although consumers in the UK have a choice of gas supplyGas from the importation terminals is injected into the NTS after company, the gas is physically delivered to most consumers’it has been checked for quality including checking its calorific premises through a pipe belonging to the local distributionvalue. Gas previously extracted from the NTS and held in network. Our distribution networks deliver gas to approximatelystorage may be reintroduced into the system. 10.8 million consumers.The NTS operates at pressures of up to 91 bar, transporting Although we do not sell gas, and are not involved in billinggas in high grade welded steel pipes of up to 1.2 metres consumers, we consider all consumers connected to ourdiameter. The compressor stations play a vital role in keeping distribution network to be customers because our activitieslarge quantities of gas flowing through the system, particularly directly affect them.at times of high demand. Consumers contract with gas supply companies for the supplyWe are the sole owner and operator of gas transmission of gas. The supply companies in turn contract with gas shippersinfrastructure in Great Britain. who purchase the gas and arrange for it to be transported.Shippers pay us for the use of the NTS via entry and exit Suppliers also contract with metering companies such ascapacity charges. Shipping involves buying the gas from National Grid Metering, which we own and which providesproducers, arranging for it to be conveyed to supply points and meters and metering services.selling it on to suppliers. Of the average domestic residential bill, at May 2012,Entry capacity allows shippers to put gas into the NTS at transmission charges were approximately 2% and distributionsystem entry points. Entry capacity is sold in a variety of charges approximately 19%. The majority of the bill is the costauctions, ranging from daily to quarterly. of gas itself.Exit capacity allows shippers to take gas off the NTS at exitpoints or offtakes into distribution networks and to othercustomers who are supplied directly from the NTS.
4 National Grid Gas plc Annual Report and Accounts 2011/12Our operating environmentWe operate in a complex environment with a number of The price control includes a number of mechanisms to achieveexternal factors affecting our operations. its objectives, including financial incentives designed to encourage us to: continuously improve the cost andEnergy policy effectiveness of our services; manage and operate ourWith the implementation of the 3rd Energy Package in 2011, networks; provide quality customer service; and invest in thethe development of the European Infrastructure Package in development of the network in a manner that ensures the long-2012 and emerging EU thinking on a roadmap to 2050 (ie term security of supply.moving beyond the 2020 CO2 targets), the EU is an important To ensure that our licensed businesses are operating efficiently,factor in the development of energy policy in the UK. The 3rd and consumers are protected, we operate under six priceEnergy Package is largely associated with the development of controls, comprising: two for our gas transmission operations,EU level codes, to establish EU wide rules on technical and one covering our role as transmission owner (TO) and the othercommercial issues relating to cross border trade. These codes for our role as system operator (SO) and one for each of ourare the responsibility of the European networks for transmission four regional gas distribution networks. In addition to the sixsystem operators for electricity and the European networks for price controls, our LNG storage business has a price controltransmission system operators for gas, and we have been covering some aspects of its operations. There is also a tariffworking closely with the latter. cap price control applied to certain elements of domesticEconomic environment metering and daily meter reading activities undertaken byThe economic uncertainty within the eurozone has led to National Grid Metering.volatility in financial markets during the year. However, we have Current price controlsnot experienced any adverse effects. Instead, as the UK is seen The current price control mechanisms for our gas distributionas a safe haven, its bond yields have fallen and this has had a business will expire on 31 March 2013. The price controls forpositive effect on our cost of debt. We continue to monitor our transmission business were extended for one year and willdevelopments, as it may affect our ability to access capital now also expire on 31 March 2013. The extension included realmarkets or the financial strength of our counterparties. increases in revenues for gas transmission next year and aInflation in the UK has declined from its peak in September base real vanilla return of 4.75%. The revenue increase partly2011, but remains above the long-term trend. Our regulated reflects the capital investment we have made over the currentrevenues are linked to inflation and this has therefore led to price control period which forms part of our total RAV, which athigher revenues (see below for an explanation of the regulatory 31 March 2012 was over £13 billion.regime). We also have index-linked debt so our financing cost The current price control mechanism establishes the amount ofincreases with inflation, providing a partial economic offset. money that can be earned by our regulated businesses which is restricted by what is referred to as an RPI-X price control. TheRegulatory environment RPI-X allowance is based on Ofgem’s estimates of efficientThe Gas Act 1986, as amended (the Act), provides the operating expenditure (opex), capital expenditure (capex) andfundamental legal framework for gas companies. It establishes asset replacement, together with an allowance for depreciationthe licences for gas transmission, distribution, shipping and and an allowed rate of return on capital invested in oursupply. The licences established under the Act require us to businesses. The RPI-X price control takes the RPI as itsdevelop, maintain and operate an economic and efficient inflation benchmark and subtracts X, an efficiency factor, fromnetwork and to facilitate competition in the supply of gas in it. For example, at a time when annual inflation was 3%, a valueGreat Britain. They also give our licensed businesses statutory for X of 2% would allow our regulated businesses to raisepowers, such as the right to bury our pipes under public prices by no more than 1%.highways and the ability to use compulsory powers to purchaseland to enable the conduct of our businesses. The RAV, which represents the value ascribed by Ofgem to the capital employed in our regulated businesses, is adjusted toEnergy networks are regulated by Ofgem which operates under reflect asset additions, removals, depreciation and the rate ofthe direction and governance of the Gas and Electricity Markets inflation.Authority. Ofgem has established price control mechanisms thatset the amount of revenue that can be earned by our regulatedbusinesses.Price control regulation is designed to ensure our interests, as amonopoly, are balanced with those of our customers. Ofgemallows us to charge reasonable, but not excessive prices, givingus a future level of revenue sufficient to meet our statutoryduties and licence obligations, and also to make a reasonablereturn on our investment.
National Grid Gas plc Annual Report and Accounts 2011/12 5Current regulatory building blocks Managing uncertaintyRevenue is the sum of: With an eight year price control period replacing the previous● Allowed return on RAV five year controls, there will inevitably be a larger exposure to● Depreciation of RAV potential variance against our forecasts. In order to understand● Controllable operating costs● Other costs, eg tax the impact that different outcomes might have, we have● Performance against incentives modelled a range of credible future demand scenarios using the scenarios developed with stakeholders through National Grid’sFuture price controls UK Future Energy Scenarios process.It is estimated that we will need to invest over £10 billion during Building on our existing risk management approach, we havethe RIIO period to facilitate the move to a low carbon economy. developed an innovative risk model to better understand theThis will include the gas networks meeting environmental risks that our business will face, how those risks might best bechallenges and securing energy supplies. managed, and to evaluate the relationship between uncertaintyIn light of the challenges around the evolving energy mechanisms and the required rate of return. We have sharedenvironment and the significant investments required, Ofgem this model with stakeholders, including Ofgem, who have beenhave introduced a new regulatory price control framework to broadly supportive of it.replace the existing framework which has been in use for over Following discussions with stakeholders, we have proposed a20 years. This is known as RIIO: revenue = incentives + number of regulatory mechanisms which would adjust ourinnovation + outputs. allowed investment levels over the period of the price control, toUnder this regime, networks will be encouraged to deliver ensure there are no inappropriate windfall gains or losses foroutputs, such as agreed levels of safety, reliability and our networks or consumers, as a result of reality diverging fromenvironmental performance, while ensuring timely connections the assumptions we have made in forecasting the next eightfor customers, improving on customer satisfaction and (for Gas years. In doing this, we have maintained the principle that risksDistribution only) complying with social obligations. The should be borne by the party best able to manage them.networks will be incentivised to deliver these innovatively and Further information on these mechanisms and the risks theyefficiently. During the price control review process, Ofgem will seek to reduce is available on our price control stakeholderassess what an efficient level of expenditure would be to deliver engagement website: www.talkingnetworkstx.com.these outputs and will then set the revenue levels accordingly.The RIIO price control will last for eight years with a mid-periodreview at four years.The fundamentals of how our revenue will be derived underRIIO are not that different, but the mechanics of how capex andopex (totex) are treated has changed. A fixed proportion oftotex goes into the RAV (“slow” money) with the remainderremunerated within the year (“fast” money).Proposed regulatory building blocksRevenue is the sum of:● Allowed return on RAV (slow money)● Depreciation of RAV (slow money)● Fast money (totex less proportion included in RAV)● Other costs, e.g. tax● Performance against incentivesWe have developed our business plans in conjunction with ourstakeholders and have reflected their views and feedback in ourupdated plans, submitted to Ofgem in March and April 2012 forour UK Transmission and UK Gas Distribution businessesrespectively. Full details of these business plans can be foundon National Grid’s website.Ofgem will issue its initial proposals for the first RIIO controlperiod in July 2012 and its final proposals in December 2012.We will continue to work with Ofgem as the RIIO price controlsare finalised, to secure positive opportunities to invest for long-term profitable growth and reasonable returns.
6 National Grid Gas plc Annual Report and Accounts 2011/12Delivering our strategyThe following diagram demonstrates the alignment between the elements of our strategy, the strategic objectives that will enable us todeliver it, the risks we face and what we have delivered this year. Use this as a road map to the content on pages 7 to 19. Our strategy Operational Innovation & Engaging externally Disciplined excellence efficiency investmentHow do we People Measuringdeliver? Our people are the foundation of everything we do. We are committed to developing our employees to the best of performance their abilities and attracting new talent from diverse backgrounds to meet the requirements of our business. – our KPIsSee page 7 See page 12In this sectionwe discuss the This sectionobjectives that highlights our Safety & reliability Environmental Stakeholder engagementwill enable us to Providing a safe and responsibility Stakeholders’ views form an key performancedeliver our reliable network is our As a responsible business, integral part of the way we indicators withstrategy. primary objective. It is what we are committed to do business and make comparison to our customers expect. protecting the environment decisions. last year. for current and future Analysis of the generations. performance can Financial outperformance be found in the We aim to maximise our returns within the constraints of our regulatory agreements, while continuing to invest for relevant sections future growth. under How do we deliver?Risks to Harmful activities Infrastructure and IT Law and regulationdelivery Aspects of our business are systems Changes in law and potentially dangerous or Our network or system regulation may affect ourSee page 13 could damage the security may fail. performance. environment.In this sectionwe discuss the Business performanceprincipal risks Future business performance may not meet expectations.that may prevent Cost escalation Financing and liquidityus from Costs or cash outflows may increase faster than revenue. Our future growth requiresdelivering our access to capital markets atstrategy and commercially acceptablehow we respond interest rates.to those risks. Customer and counterparty risk Employees and others Customers and counterparties may not perform their obligations. We need to attract and retain a diverse mix of talented people and ensure they are engaged to act in our best interests.Priorities for Continued the implementation of the Gas Distribution Submitted business plans Accelerated employee What we2011/12 front office system. under new RIIO price programmes to build a delivered See Streamlining processes page 18 control framework. skilled and engaged See Talking networks page workforce. this yearThese weresome of the 19 See Investing in our people See page 18areas of focus page 19during the year. In this section we use caseOur case studies studies toprovide more Progressed our provide a transformation ininformation. detailed insight information systems (IS) and support. into some of the See A step change in IS focus areas and page 18 our achievements during the year.
National Grid Gas plc Annual Report and Accounts 2011/12 7Delivering our strategyHow do we deliver?Our people are the foundation of what we do. It is through their forums where senior leaders share key topics relevant to ouractions that we will deliver our strategy; ensuring we have a business. These provide our people with the opportunity to askskilled, engaged and dedicated workforce is essential to this. questions and connect with leadership. National Grid producesDelivering a safe and reliable network is the number one priority a monthly magazine and we use various team forums andfor our people. We also remain committed to being an communication methods such as email broadcasts andinnovative leader in energy management and to safeguarding discussion boards.our global environment for future generations. Aligning individual and corporate goalsThe relationships we hold with our regulators, customers and Our strategy is cascaded to employees. This ensures that thecommunities continue to be important; we have made changes objectives of each employee align with those of National Gridto forge even deeper relationships and broaden our and the actions required to deliver the strategy are allocated toengagement with stakeholders. and shared by all our people, connecting them to our corporate goals.We continue to invest to create organic growth. Any investmentwe make will fit with our strategic goals, deliver a reasonable Our performance, talent and reward management process forreturn and maintain the balance and spread of our businesses. managers, links incentive compensation to an assessment of both what the individual has achieved and how those outcomesPeople have been achieved, with reference to their individualWe are committed to developing our employees to the objectives. This provides ongoing incentive for all managers tobest of their abilities and to ensuring we have access to contribute to the achievement of our strategic goals andthe widest possible pool of talent to meet the current and ensures that our top performers are recognised for theirfuture requirements of our business. contributions.Building an engaged workforce Building capabilityWe measure how engaged our people are through our We have reviewed the leadership, business and technicalemployee engagement index, calculated from certain questions capabilities that we will need to ensure we are successful,in our employee survey. National Grid’s 2012 employee survey including: driving process excellence; innovation; andincluded 68 questions and was completed by 84% of stakeholder management. We are designing tools andemployees. The results allow us to identify specific areas where processes to help elevate our capabilities in those areas andwe are performing well and those areas we need to improve. they will be supported by training programmes and otherOur employee engagement scores have increased compared learning opportunities. We have invested in a range ofwith the last survey in 2010. technologies that will enhance the learning experience and reduce the cost associated with training delivery. We endeavourWe want to make sure our people are as fully engaged as they to continually improve the quality of our new talent developmentcan be. To demonstrate our ongoing commitment to this programmes and National Grid’s focus on this has externalimportant area, one of our 2012/13 shared priorities is to recognition, including 2010 Ofsted grade 1 outstandingincrease levels of employee engagement across all our teams. performance rating and UK Learning and Skills ImprovementNational Grid has created a company wide framework called Service Beacon status.engaging for performance that explains what we believecontributes to increasing engagement, which in turn results in National Grid’s graduate scheme is well regarded and we havehigher levels of performance. continued to be an employer of choice. In 2012, National Grid was ranked 84 in the Times Top 100 graduate employers, anSurvey reports are produced at business unit, function and improvement on 2011 when we entered the Top 100 for the firstteam levels and associated action plans are created. The time. Graduate retention levels are good, standing at 86%.engaging for performance framework provides managers withaccess to practical and easy to use tools and guidance to National Grid’s foundations of leadership programme, aimed atsupport them when developing team action plans. the next generation of managers, continued to run throughout 2011. For our female employees, we also continued to provideCommunicating for success access to the Springboard and Spring Forward developmentGood communication helps employee engagement and we programmes. National Grid appeared in the Times Top 50have multiple communication channels to ensure our Employers for Women, appearing in the list since 2006.employees have access to information that is relevant to themand so that they feel connected to the business. We use our Promoting inclusion and diversityintranet site to make announcements, share our achievements We aim to develop and operate our business with an inclusiveand to communicate what we have learnt and other information and diverse culture, ensuring equal opportunity in recruitment,useful to our people. National Grid also has various open career development, training and reward for all employees
8 National Grid Gas plc Annual Report and Accounts 2011/12regardless of race, gender, nationality, age, disability, sexual Safety and reliabilityorientation, gender identity, religion and background. Where Providing safe and reliable services is what ourexisting employees become disabled, our policy is to provide customers expect.continued employment and training wherever practical. A focusfor 2011/12 was creating a level playing field in the Keeping our people and the public safeorganisation. These policies support the attraction and retention While our employee lost time injury frequency rate was 0.15,of the best people, improve effectiveness, deliver superior compared with 0.16 in 2010/11, this year we have seen anperformance and enhance our success. accident leading to the death of one contractor. We have investigated thoroughly and learnt from this tragedy.Our employee resource groups, which cover areas includinggender, ethnicity, disability, faith, sexual orientation, veterans We recognise the need to reinvigorate and reinforce our safetyand new employees, continue to have good membership. agenda across the organisation. All our senior leadership teamThese groups deliver opportunities for professional are asked to be visible safety leaders, actively engaging withdevelopment, networking, supporting our community relations employees, to drive our safety ambition forward and ensuringactivities and increasing the broader understanding of inclusion lessons learnt from any incidents are acted on whereand diversity through workshops, presentations and other appropriate.educational events. Further development of our safety culture will be critical toInformation on our inclusion and diversity policies can be found navigating the heightened risks that come with our expandingon the corporate responsibility section of National Grid’s capital investment programme. Key parts of the business havewebsite. undertaken safety culture surveys to capture what our employees think about how we manage safety and help usAttracting the best people identify areas where we need to improve. We are committed toAs a result of our extensive capital investment plans, we need ensuring that everyone has the expertise, and exhibits the rightto increase our employee numbers in key parts of our business, behaviours, to work safely and without harm. We will alsoparticularly engineers and other technical roles. leverage our size, and learn from our partners, to identify bestNational Grid is establishing medium- and long-term talent practices and ensure these are shared and implemented acrosspipelines and has launched an engineering entry programme our business.for recent graduates with science, technology, engineering or A recent area of focus has been deploying a major accidentmaths (STEM) degrees. The two year comprehensive and hazard framework and risk methodology, and standards thatstructured training programme will provide a blend of practical build greater structure into process safety and riskexperience with traditional training programmes and will help management. The requirements are being discussed with all ofthe recruits develop project management and development our relevant businesses and teams to ensure they areexpertise, as well as increase their technical knowledge and implemented and applied consistently. A review process hasgain specialist experience of the energy sector. On successful been established using technical specialists and third partycompletion, they will be appointed to a permanent role. independent assessors, to aid sharing and consistentWith an ageing workforce and declining interest in STEM application of standards.subjects by young people, pressure on recruitment will continue National Grid’s Executive Committee monitors progress againstfor many years. National Grid’s long-term talent programmes our safety goals monthly and the governance arrangements forwill help to provide us with the expertise we need to be the oversight of safety are being strengthened.successful well into the future. This year in the UK, NationalGrid worked with more than 3,900 school students giving them Delivering reliabilityan insight into engineering, the energy sector and National Grid. Our licences and regulatory agreements set out reliabilityNational Grid delivered 22 open days, ran two residential work targets and these are linked to our revenue streams. We areexperience week courses for nearly 100 15 year olds at its pleased to report that we have met all our reliability targets fortraining centre, supported seven engineering education scheme the year. After failing to meet our standards of service last yearprojects, delivered 30 STEM enhancement days and many talks and being fined £4.3 million by Ofgem, we are also pleased toin schools. report that we met all our standards of service this year.National Grid also runs an engineering pipeline programme and Reliability is achieved through four interrelated actions: planninghas recently completed the second year. This six year our capital investments to meet changing demand and supplydevelopment programme is designed to inspire promising patterns; designing and building robust networks; risk basedstudents to become engineers and provide them with an maintenance and replacement programmes; and detailed andopportunity for fast tracked employment with us. tested incident response plans. National Grid’s UK Future Energy Scenarios publication, available from its website, outlines our forecasts for energy needs in the UK up to 2050. We use this to inform our capital
National Grid Gas plc Annual Report and Accounts 2011/12 9investment plans and ensure our networks will deliver what is reduction in gas losses each year. We also now userequired in the future. computerised pressure management equipment that matches system pressures with demand, improving safety, drivingOur construction teams work closely with our engineers to considerable reductions in gas losses and, consequently,ensure that the networks designed, and built will meet internal reducing the levels of our greenhouse gas effects.and external technical specifications and deliver the requiredlevels of reliability, once brought into service. Our Gas Stakeholder engagementTransmission business is PAS 55 and ISO 9001 certified, and Stakeholders’ views form an integral part of the way wehas detailed procedures in place governing a project throughout do business and make decisions.each phase of scoping, design, commissioning and thetransition to normal operations. Key roles on each project are Meeting the needs of stakeholdersdefined and owners assigned, along with appropriate Our stakeholder engagement principles include:independent checks to ensure quality is maintained. Integrity: We will be open and engaging so we canWe collect and analyse a large quantity of data relating to develop a clear understanding of what our stakeholdersnetwork reliability including faults, failures and defect want us to deliver.information. Using this information, asset health indices are Accountability: We will inform stakeholders of how theirassigned to the major equipment groups. These are then views have been taken into account and, if they have not,considered together with safety, system and environmental the reasons why.criticality to give replacement priorities that feed into our Transparency: We will conduct our engagement activitiesmaintenance and replacement programmes. in a transparent manner, ensuring all relevant information is readily available and understandable to all stakeholders.Environmental responsibility Inclusivity: We recognise the need to increaseAs a responsible business, we are committed to engagement with the broadest possible range of ourprotecting the environment for current and future stakeholders and we will seek their views.generations. For example, in the course of developing our transmission andInvesting in and running gas networks means we use energy gas distribution business plans for RIIO-T1 and RIIO-GD1, weand raw materials, and produce waste. Our goal is to reduce held 26 workshops, talking directly to several hundredany adverse effect we may have and we look for ways to stakeholders with a broad range of interests. We producedimprove the environment. We embrace new technology and three written consultations, held numerous forums and focusmethods to use resources more efficiently and sustainably, groups, undertook in-depth telephone interviews and surveyedseek to responsibly refurbish existing assets and reduce waste opinions from over 10,000 customers. We used an independentthrough recycling and materials efficiency. third party to facilitate our stakeholder engagement so we could be sure we were not unwittingly influencing, misunderstandingReducing greenhouse gases or misinterpreting what our stakeholders were saying.We have continued with our climate change and energyefficiency programmes and remain committed to National Grid’s Our regulators remain an important area of focus for ourtargets of a 45% reduction in Scope 1 and 2 greenhouse gas stakeholder engagement activities. National Grid has opened(GHG) emissions by 2020 and 80% by 2050. Refer to the an office in Brussels to establish a stronger and more visibleglossary on page 82 for a definition of Scope 1 and 2 presence with EU institutions and policy makers on keyemissions. We continue to look for new technology or more strategic issues facing us in the years to come.efficient equipment that will help us achieve these goals and we Industry engagementhave outperformed a number of targets for emissions during the Participation by our employees on other bodies allows us toyear, including some tied to incentive revenues. Our total Scope engage more broadly, and we aim to be supportive of roles on1 and 2 emissions for 2011/12 were 2.1 million tonnes carbon industry boards and other groups where it does not disruptdioxide equivalent. This represents a 62% reduction on our responsibilities to National Grid.1990 baseline. We have refreshed our rolling five yeargreenhouse gas reduction plans and, although our 2011/12 Improving customer serviceoutturn is better than our 2020 target, we have many challenges We recognise the importance of good customer and communitythrough the next few years that will require considerable focus relationships. Success is evident from the improved results inin the business. our key Ofgem customer satisfaction studies, as shown in our KPIs on page 12.We have a number of ongoing initiatives that have helpedachieve these results. Some of our gas distribution networks In late 2011, we opened our new Gas Distribution customerconsist of old metallic pipe, which contributes significantly to the centres in Hinckley and Leicester, which combine cutting edgegas losses from our system. We have replaced around 2,000 technology and specialist training to offer a fresh approach tokilometres of this leak prone pipe during the year and have customer service. The new technology provides greater visibilityestimated the replacements will achieve the equivalent of a 3% of all the work we are doing, allowing our employees to respond more effectively and resolve more enquiries on the first call,
10 National Grid Gas plc Annual Report and Accounts 2011/12resulting in improved service and customer satisfaction. The incentive revenue will increase. Examples of our currentcentres provide our customers with a single point of contact 24 incentive mechanisms include:hours a day, seven days a week to ensure we can always Day ahead gas demand forecast: if we achieve targets formaintain a high level of service and meet our commitments. The the accuracy of the forecast published daily on ourimportance of this work in the UK will be reinforced by website, we can receive an incentive payment of up torequirements under the new RIIO price control, where customer around £8 million, however penalties can be charged if thesatisfaction is a specific output measure linked to our potential forecast is inaccurate.revenue. Greenhouse gas emissions: we can earn incentiveWorking with our communities payments if certain greenhouse gas emissions are belowWe have extended our outreach to include the communities in targets.which our key suppliers operate. The Global SpirIT initiative Under our price controls, our revenues include an imputed costraises funds for the education of under-privileged children in of debt. We manage our interest rate risk using fixed- andIndia, where we have been working with IT suppliers for over 17 floating-rate debt and derivative financial instruments includingyears. interest rate swaps, swaptions and forward rate agreements.Financial outperformance Where we actively manage our interest rate risk, we seek to minimise total financing costs (being interest costs and changesWe aim to maximise our returns within the constraints of in the market value of debt), subject to constraints. Nationalour regulatory agreements, while continuing to invest for Grid’s Finance Committee regularly monitors performance byfuture growth. comparing the actual total financing costs with those of aWe have seen a good financial performance this year with comparable, passively managed, benchmark portfolio.improvement in our financial KPI. Increasing productivityCapital investment programme We are undertaking a number of transformation initiatives toA feature of our price controls is that we earn a return on our improve the efficiency and effectiveness of our operations.regulated asset base. As a result, as our regulated asset base National Grid’s global information services (IS) transformationincreases, our returns should similarly increase. We continue to project will replace ageing IS infrastructure that currently limitsinvest in our regulated asset base and our RIIO submissions our ability to deliver reliable IT systems and inhibits the creationhave reflected a need for investment over the eight year price of platforms for growth. Under a partner provided approach, ourcontrol in excess of £10 billion. This is dependent on the IS services will offer a more flexible, cost effective, transparentlocation and number of new connections required and, if and responsive delivery model. Our Gas Distribution front officeachieved, will represent an average annual growth rate in our programme has progressed significantly during the year and isregulated asset value of around 7%. already showing benefits. The final deployment of the system,This amount of investment will not be without its challenges: which will help our repair and construction teams, is on track toobtaining planning permission for major projects is time complete ahead of the Olympics this summer. More informationconsuming and can create delays; finding and developing on these programmes can be found in the case studies on pageenough people with the right skills will be difficult; and 18.managing the costs of key inputs that are forecast to increase These transformation initiatives contribute to our ability tofaster than the rate of inflation due to worldwide demand for support our future growth, improve operational performancethese products, will also pose a challenge. and efficiency, and respond to the needs of our stakeholders.Remuneration from investment Managing costsWe work closely with Ofgem and the Health and Safety As discussed on pages 4 to 5, our allowed revenues are set inExecutive, to balance the needs of all stakeholders for a safe reference to an expected cost to deliver our services. We mustand reliable network, with a price control that provides the manage our costs closely within that framework as, without therequired return to allow us to operate our businesses permission of our regulators, we may not be able to increaseeffectively. We will only accept a price control settlement if we our revenues to compensate for cost overruns. We set budgetsbelieve that it achieves this balance. and assign owners for cost centres within the business who areFor more information on the features of our price controls, refer responsible for delivering set outputs within that budget.to pages 4 to 5. 2012/13 prioritiesIncentives and outperformance At the beginning of each year, we set ourselves priorities;Achieving output targets to earn incentive revenue is a key achieving these will help us deliver our strategy. Our prioritieselement of our ability to provide superior financial returns. Our for 2012/13 are:price control plans have historically included a range of deliver the core Gas Transmission and Gas Distributionincentive mechanisms and under RIIO the importance of investment programmes;
National Grid Gas plc Annual Report and Accounts 2011/12 11agree a RIIO price control for both transmission and gasdistribution that allows a reasonable return for investors;develop and implement the right processes andorganisational model that will allow us to be successfulunder RIIO and maintain our credit ratings;deepen relationships with important Europeanstakeholders and raise our profile within the EU;deliver a step change improvement in safety performanceacross our organisation;increase levels of employee engagement across all teams;deliver significant improvements in how we meet ourcustomer commitments; andachieve our financial targets.
12 National Grid Gas plc Annual Report and Accounts 2011/12Delivering our strategyMeasuring performance – our KPIsWe measure the achievement of our objectives, make future financial performance as improvements in theseoperational and investment decisions and reward our measures build our competitive advantage, for exampleemployees through the use of qualitative assessments and through attractive regulatory arrangements. Financial KPIsthrough the monitoring of quantitative indicators. To provide a are trailing indicators of the success of past initiatives andfull and rounded view of our business, we use non-financial as specific programmes. They also highlight areas for furtherwell as financial measures. Although all these measures are improvement and allow us to ensure our actions areimportant, some are considered to be of more significance culminating in sustainable long-term growth in shareholderthan others, and these more significant measures are value.designated as KPIs. Commentary on our overall financial results can be found onKPIs are used to measure our progress on strategic priorities, pages 20 to 22, and information on the performance andaligning with those activities that combine to deliver our financial results of each line of business is set out on pagesstrategy. Non-financial KPIs are often leading indicators of 23 to 25.Financial KPIStrategic element Measuring performance for KPI Definition and performanceAll Financial outperformance Operational return Gas Transmission and Gas Distribution operational return against the target set by our regulator for the 5 year price control period. Gas Transmission Gas Distribution 2011/12: 7.3% 2011/12: 5.74% 2010/11: 7.2% 2010/11: 5.54% Target: 5.05% Target: 4.94%Non-financial KPIsStrategic element Measuring performance for KPIs Definition and performanceOperational Safety and reliability Employee lost time injury Number of employee lost time injuries per 100,000 hoursexcellence frequency rate worked on a 12 month basis. 2011/12: 0.15 2010/11: 0.16 Target: zero Network reliability Reliability of gas network as a percentage against the target set by our regulator. Gas Transmission Gas Distribution 2011/12: 100% 2011/12: 99.999% 2010/11: 100% 2010/11: 99.999% Target: 100% Target: 99.999%All People Employee engagement Employee engagement index calculated using responses to index National Grid’s annual employee survey. Target is to improve. Transmission Gas Distribution 2011/12: 84% 2011/12: 69% 2010/11: not measured 2010/11: not measured 2009/10: 77% 2009/10: 68%Engaging externally Stakeholder engagement Customer satisfaction Our position in customer satisfaction surveys. Target is to improve. Gas Distribution 2011/12: 3rd quartile ranking 2010/11: 4th quartile rankingInnovation & Environmental responsibility Greenhouse gas emissions Percentage reduction in greenhouse gas emissions.efficiency % reduction against 1990 baseline 2011/12: 62% reduction 2010/11: 55% reduction
National Grid Gas plc Annual Report and Accounts 2011/12 13Delivering our strategyRisks to deliveryRisks are managed within the National Grid risk and registers to capture their key risks and the actions being takencompliance management processes which are described to manage them. Directors and other senior managementbelow. Overall responsibility for management of risks lies review, challenge and debate these bottom-up results, producing an overall evaluation of the risks facing thewith the Board of National Grid, which is committed to Company. The Executive, Audit and Risk & Responsibilitythe long-term success of the Company and the Committees of National Grid review the risk profile and anyprotection of our reputation and assets. It ensures we changes to it in accordance with their terms of reference, andmaintain a sound system of internal control in order to the Audit Committee reviews the overall risk managementsafeguard the interests of shareholders. process.National Grid’s system of internal control In the last year, a number of enhancements to the process wereNational Grid’s system of internal control, and in particular its initiated. The National Grid corporate risk function wasrisk management process, has been designed to manage reorganised and brought into the strategic planning andrather than eliminate material risks to the achievement of corporate development function, to provide appropriate regionalstrategic and business objectives while also recognising that focus in line with National Grid’s new operating model and toany such process can provide only reasonable, and not forge stronger links with strategic planning activities. The Boardabsolute, assurance against material misstatement or loss. This of National Grid considered the characteristics of corporate riskprocess complies with the Turnbull working party guidance, appetite and the outcome will determine the appropriate riskrevised October 2005. appetite for us in the pursuit and delivery of our strategy. New reporting formats, including dashboards incorporating riskIn accordance with the UK Corporate Governance Code and timings and mitigation objectives, were developed and rolledthe schedule of matters reserved to the Board of National Grid, out to focus the risk management debate toward future actions.the Board of National Grid retains overall responsibility for our Also, the implementation of a governance, risk and compliancesystem of internal control and monitoring of its effectiveness. system that will improve our ability to link risks, automate riskOur established system of internal control is based on thorough metrics and capture associated assurance data hasand systematic processes for the identification and assessment commenced.of business critical risks and their management and monitoringover time. In depth reports are provided from both line National Grid’s compliance management processmanagers and internal assurance providers such as corporate National Grid’s enterprise wide compliance managementaudit, corporate risk and ethics and compliance. These reports process is consistent with, and complementary to, its riskare provided to the Committees of the Board of National Grid in management process and provides assurance to seniorrelation to their specific areas of responsibility and they, in turn, management on the effectiveness of control frameworks toprovide reports to that Board. manage key internal and external obligations, and also highlights any instances of significant non-compliance withThe Board of National Grid reviews the effectiveness of our those obligations. External obligations are driven primarily byinternal control process, including around financial reporting, on key legal and regulatory requirements, while internal obligationsan annual basis, to ensure it remains robust and to identify any focus on compliance with National Grid’s corporate policies andweaknesses. The latest review included the financial year to 31 procedures.March 2012. In examining a business area’s compliance performance, weNational Grid’s risk management process look for any actual or potential instances of non-compliance,National Grid’s risk management process is designed to protect consult with other assurance providers, and frequently reviewvalue and enhance performance by building vigilance, agility the effectiveness of communications and training programmes.and resilience into our management process. The process Before issuing an opinion on an area’s compliance controlensures that risks are assessed against a uniform set of criteria, framework, we obtain the views of experts in the field such ascontinuously managed and regularly reported in a visible and internal safety and environmental specialists.structured manner. The output informs management decisionsand provides assurance to management and the Board of The Executive, Risk & Responsibility and Audit Committees ofNational Grid, helping to safeguard our assets and reputation. National Grid each receive a report twice a year setting out key internal and external compliance obligations and any significantOur risk management process is based on comprehensive non-compliance with those obligations, together withbottom-up and top-down assessments of a wide range of risks, compliance opinions and action plans to improve controlswhich typically include strategic, operational (including safety where necessary.and reliability), financial and project risks. Our businesses andthe functions that support them, prepare and maintain risk
14 National Grid Gas plc Annual Report and Accounts 2011/12Principal risk factorsOur risk management process has identified the following principal risk factors that could have a material adverse effect on ourbusiness, financial condition, results of operations and reputation, as well as the value and liquidity of our securities. Whenappropriate, we implement processes, procedures and controls to minimise the likelihood of a risk occurring or the potential impact if itdoes occur. It is not possible to eliminate a risk and even where a response is in place and effective, a risk may still occur.Risk factor Details of the risk and examples of our responsesHarmful activities Aspects of our activities are potentially hazardous or could damage the environment. We are exposed to costs and liabilities from our operations and properties, including those inherited from predecessor bodies, or formerly owned by us, and sites used for the disposal of our waste. We are increasingly subject to regulation in relation to climate change and are affected by requirements to reduce our own carbon emissions as well as reduction in energy use by our customers. If the legal requirements become more onerous or our regulatory framework changes, then we may not be able to recover all the costs of complying with these laws and regulations. Our responses We have implemented safety and occupational health plans, programmes and procedures that are aimed at continuous improvements in safety performance. We continue to focus on process safety, which ensures that at all stages of the asset life cycle key safety considerations are taken into account. This includes the process and procedures that govern the development and design of the assets, the competence of the staff who will build, operate and maintain the assets and the quality of the materials used to construct them. During the life cycle of our assets we develop risk assessments and method statements to ensure the safety of those working on equipment, the public and the operational performance of the system are not compromised. More information on our safety initiatives can be found on page 8. We are working to reduce our greenhouse gas (GHG) emissions and promote their global reduction through support of mandatory reporting legislation. Our approach to GHG emission reductions is discussed on page 9. We maintain robust investigation and remediation programmes to clean up wastes. We have engineered controls in place to minimise or mitigate releases to the environment during remediation activities, including containment, alarms, spill response contracts and equipment.Infrastructure and IT We may suffer a major network failure or interruption, or may not be able to carry out critical non-networksystems operations. This could cause us to fail to meet agreed standards of service, incentive and reliability targets, or be in breach of a licence, approval, regulatory requirement or contractual obligation, and even incidents that do not amount to a breach could result in adverse regulatory and financial consequences, as well as harming our reputation. Our responses Routine maintenance is supported by a risk-based asset replacement strategy. A global safety management process was initiated last year to reduce the likelihood of a major accident hazard. It focuses on industry best practice risk assessment techniques, which may proactively identify opportunities to improve asset integrity. We have robust demand forecasting processes and scenario analysis in place informed by broad consultation. We use this information to plan our future development activity to ensure our network has the capacity to meet customer demands and also make this analysis available to stakeholders to inform their actions. UK Future Energy Scenarios, available on National Grid’s website, gives more information. We use industry best practices as part of our cyber security policies, processes and technologies and continually invest in cyber strategies that are commensurate with the changing nature of the security landscape.
National Grid Gas plc Annual Report and Accounts 2011/12 15Risk factor Details of the risk and examples of our responsesLaw and regulation Changes in law or regulation or decisions by governmental bodies or regulators could materially adversely affect us. See pages 4 to 5 which explain our regulatory environment in detail. Our responses We actively participate in regulatory development and implementation to help shape favourable outcomes for National Grid’s shareholders and the industry. We are working closely with Ofgem as they review our business plan submissions for RIIO-T1 and RIIO- GD1. Initial feedback has been favourable but final decisions are not due until later in the year and our engagement in this process will continue. National Grid recently opened an office in Brussels to establish a stronger and more visible presence with EU institutions and policy makers. We will inform the evolving discussion around European Network Codes, CO2 reduction targets beyond 2020 and more.Cost escalation Changes in foreign currency rates or interest rates or could materially impact earnings or our financial condition. Our results and net debt position may be affected because a significant proportion of our borrowings, and derivative financial instruments are affected by changes in interest rates and exchange rates, in particular the euro to sterling and the dollar to sterling exchange rates. Furthermore, our cash flow may be materially affected as a result of settling hedging arrangements entered into to manage our exchange rate and interest rate exposure, or by cash collateral movements relating to derivative market values. Operating costs may increase faster than revenues. While income under our price controls is linked to the RPI, our operating costs may increase at a faster rate than RPI. The majority of our employees are members of a defined benefit pension scheme where the scheme assets are held independently of our own financial resources. If the scheme does not perform as currently expected, then we may be required by National Grid to make additional contributions to the pension scheme which, to the extent they are not recoverable under our price controls, could adversely affect our results and financial condition. Our responses National Grid’s treasury function manages our financial risks, including foreign currency and interest rate, to within acceptable boundaries and under policies and guidelines approved by the Finance Committees of National Grid and our Board. The treasury function is not operated as a profit centre. Debt and treasury positions are managed in a non-speculative manner with all transactions in financial instruments or products matched to an underlying current or anticipated business requirement. Foreign currency risk: Transaction risk is managed by hedging contractually committed foreign exchange transactions over a prescribed minimum size. Where foreign currency cash flow forecasts are uncertain and a judgement has to be made, we hedge a proportion based on the likelihood of them occurring, aiming to hedge substantially all such cash flows without over hedging. A hedge may be put in place where a foreign currency exposure is likely to occur, but where contracts have yet to be signed. Cover usually involves forward sale or purchase of foreign currencies and must always relate to forecast underlying operational cash flows. Interest rate risk: Interest rate risk is managed by seeking to minimise total financing costs (interest costs and changes in the market value of debt) subject to constraints. We do this by using fixed- and floating-rate debt and derivative financial instruments, including interest rate swaps, swaptions and forward rate agreements. We maintain a portion of our debt portfolio as inflation linked bonds. This provides a partial economic offset to the inflation risk associated with our UK inflation linked revenues. We measure the effectiveness of our interest rate risk management by comparing the actual total financing costs with those of a passively managed benchmark portfolio. This is regularly monitored by the Finance
16 National Grid Gas plc Annual Report and Accounts 2011/12Risk factor Details of the risk and examples of our responses Committee of National Grid. Inflation: Actions to minimise the impact of inflation include: transformation initiatives designed to improve productivity or reduce the cost of delivering outputs; contracting for future needs where appropriate; and a multi-supplier tendering process to ensure costs are minimised. Pensions: We negotiate recovery of pension costs from our regulators.Financing and liquidity Maintenance and growth of our business requires access to capital markets at commercially acceptable interest rates. Our business is financed through cash generated from our ongoing operations, bank lending facilities and the capital markets, particularly the long-term debt capital markets. Some of the debt we issue is rated by credit rating agencies and changes to these ratings may affect both our borrowing capacity and borrowing costs. In addition, restrictions imposed by regulators may also limit how we service the financial requirements of our businesses. Financial markets can be subject to periods of volatility and shortages of liquidity, which may be exacerbated by the eurozone crisis. If we were unable to access the capital markets or other sources of finance at competitive rates for a prolonged period, our cost of financing may increase, the discretionary and uncommitted elements of our proposed capital investment programme may need to be reconsidered and the manner in which we implement our strategy may need to be reassessed. The occurrence of any such events could have a material adverse impact on our business, results and prospects. Our regulatory agreements impose lower limits for the long-term senior unsecured debt credit ratings that we must hold. In addition, our regulatory arrangements impose restrictions on the way we can operate. These include regulatory requirements for us to maintain adequate financial resources within the Company. The inability to meet such requirements may have an adverse impact on our business and financial condition. Our responses We identify short-term liquidity and long-term funding requirements by regularly producing short- and long- term cash flow forecasts, along with undertaking financial headroom analysis. To facilitate short- and long-term debt issuance, we maintain commercial paper and medium-term note programmes. We manage refinancing risk by limiting the amount of debt maturities on borrowings in any one financial year. Details of our long-term borrowings maturity profile is on page 27. We also have both committed and uncommitted bank borrowing facilities that are available for general corporate purposes to support our liquidity requirements. The majority of our committed borrowing facilities are used to provide back up to our commercial paper programmes or other specific debt issuances. To date, these have never been drawn and there is no current intention to draw them in the future. We consider restrictions imposed by regulatory agreements in preparing cash flow forecasts and determining our future funding requirements. Details of the programmes and facilities we maintain can be found in the debt investors section of National Grid’s website.Customers and Customers and counterparties may not perform their obligations. We have significant concentrations ofcounterparties receivables with a small number of large gas utilities. Our responses Advance payments, security deposits or other forms of collateral may be obtained, to reduce the risk from customer default. The Finance Committee of National Grid has agreed a policy for managing counterparty risk that sets limits to the exposure we can have based on an individual counterparty’s credit rating from independent rating agencies. Limits are monitored daily and amended as credit ratings change and are set on a portfolio basis to ensure that our total exposure is acceptable. Given the economic uncertainties in the eurozone, we consider other leading indicators of counterparty distress and reduce exposure below the approved limits, if
National Grid Gas plc Annual Report and Accounts 2011/12 17Risk factor Details of the risk and examples of our responses appropriate. Where multiple financial transactions are entered into with a single counterparty, a netting arrangement is usually put in place to reduce our exposure to the credit risk arising. More information about managing counterparty risk is given in note 27(c) to the consolidated financial statements.Employees and others We need to attract and retain employees with the skills and experience required to deliver our strategy. We also need to ensure they and others acting on our behalf, are engaged to act in our best interests. Our responses To demonstrate our commitment to this important area, one of our 2012/13 priorities is to increase levels of employee engagement across all of our teams. We will use our engaging for performance framework, see page 7, to deliver this priority. We are confident that we understand our resource and skills gaps in our gas transmission business and plans are in place to respond to these risks. Plans are not just aimed at recruiting qualified engineers with experience in our industry, but recognise that we must look more widely, identifying capable individuals we can train and develop to create a talent pipeline that will support our growth over time. In our Gas Distribution business, plans are being developed to ensure this is also the case. We also continue to work closely with existing partners, and when appropriate, will seek to create new partnerships. Through our partnerships we can leverage external resources, expertise and best practices to supplement our internal knowledge and experience and ensure that we can deliver our planned capital investment programme. We maintain a strong commitment to ethical business conduct. National Grid’s ethics and compliance office was established specifically to answer questions and address concerns about unethical behaviour affecting National Grid’s businesses.Information assuranceThe Board of National Grid considers that it is imperative tohave accurate and reliable information to enable informed andtimely decisions to be taken that further our objectives. Keyelements in managing information assurance risks includeeducation, training and awareness.These initiatives emphasise the importance of informationsecurity, the quality of data collection and the affirmationprocess that supports our business transactions, evidencing ourdecisions and actions. All communication channels, includingtraining for doing the right thing, make it clear that the accurateand honest reporting of data and other information must neverbe compromised. These initiatives are supported by the letter ofassurance process in which managers affirm, among otherthings, they have control frameworks in place to ensure dataand other information is reported accurately. In line withongoing transformation initiatives, we continue to monitor andevolve our control processes.
18 National Grid Gas plc Annual Report and Accounts 2011/12Delivering our strategyWhat we delivered this yearAs we enter each new year, we assess our strategy and set priorities for the coming period. These priorities cover a broad array ofactions that will collectively, over time, deliver our strategy. Some examples of the actions taken this year can be found in the how wedeliver section on pages 7 to 11. In this section, we provide a closer look at some of our priorities and how we have performed againstthem during the year.Strategies: operational excellence and innovation GD1 submission, where we committed to delivering significant efficiencies in our delivery of outputs.& efficiencySome of the priorities set for 2011/12 that underpinned our We have replaced our legacy asset databases so, for theoperational excellence and innovation & efficiency strategic first time, all our gas distribution asset records are in onegoals were to: place; all 95 million have been loaded into the systems. Network extensions and replacements are now designed Deliver common key processes and execute on best directly onto online maps and work orders are produced practice initiatives. automatically instead of designs being created on paper Deliver the Gas Distribution transformation programme. with manually produced work orders.We have made significant progress on a number of our The integrated systems are helping to improve thetransformation initiatives, as well as driving continuous efficiency of our end-to-end processes through betterimprovements across the business, but there is more to do and designs, eliminating data duplication, streamlining capitalprocess improvement underpins a number of our priorities for planning and providing improved management information2012/13. to enable better decision-making. The system delivers real time geographical visibility of allOur Gas Distribution transformation, underpinned by the Gas work and vehicles which, along with auto scheduling andDistribution front office (GDFO) programme, is already reaping the ability to bulk issue and drip feed work, will help torewards. This year we have met all our standards of service and optimise the efficiency of our field staff.improved our customer satisfaction scores. Our maintenance process, after early challenges when theStreamlining processes system was introduced in 2010, is now seeing significantAs part of our Gas Distribution transformation programme, we operational improvements. Maintenance productivity hashave redesigned many critical business processes so we can improved by 16% and our on time response to faults hasimprove the service we deliver to customers and, at the same also improved significantly.time, achieve cost efficiencies and improve employee A step change in ISproductivity. We have reduced the number of core business Our business is evolving to meet the demands of our customerssystems from 40 to four and created an integrated solution, with and regulators; we have revised our organisational structuregeospatial planning, scheduling and mobile applications. This and sourcing strategies; and we are working to ensure that ourwill enhance our asset and work management capabilities and IS are also positioned to support us. We are taking a newensure our field staff are able to respond to customers quickly approach to system design and delivery, infrastructure andand effectively. service delivery across our IS landscape with the followingThe programme has successfully implemented the new objectives:technology and process improvements for our emergency and removing the reliance on an ageing infrastructure andmaintenance, and customer service operations. The final GDFO complex application portfolio that limit our ability to deliverdeployment to our repair teams, which was delayed, is on track a reliable service and respond to growth opportunities;to complete ahead of the Olympics this summer. meeting the challenge of our customers and regulators toWe have replaced all telephony hardware and introduced a new operate more efficiently and continue to deliver qualitycustomer service solution for the national gas emergency services at better value; andservice. The new system provides information on job progress developing the capability and capacity to deliver more andand previous work at our customers’ premises enabling us to better IS solutions and services to the business inrapidly communicate with engineers about any issue, in response to our customers’ needs.response to customers’ needs. We have already seen an National Grid’s new IS operating model includes six strategicimprovement in service levels and this will support further partners, to help the delivery of our investment plan, and levelsenhancement of our customer satisfaction scores. of investment that would be unachievable if we did notSystem investment was key to the improved operational significantly change our ways of working. Under this partnerperformance forecast we gave to Ofgem as part of our RIIO- leveraged approach, IS will be able to offer a more flexible,
National Grid Gas plc Annual Report and Accounts 2011/12 19agile, cost effective, transparent and responsive delivery model service had improved but could still be better and that theyfor its services. The benefits of the new model will be: would like to see further improvements in our connections services. They believe that innovation will play a crucial role in operating through one common global infrastructure, enabling us to continue to manage our networks going forward. standard processes and tools, which makes managing our systems simpler and more efficient; All of this has shaped our RIIO business plan submissions, but delivering higher quality at better value – which is being it is important that our engagement doesn’t end once the first demanded from our customers and regulators; RIIO period begins. Our intention is to make talking networks an partnering with businesses across National Grid to better enduring process and to put stakeholder engagement at the serve our customers; heart of our business activities. providing real cost transparency – helping the businesses to make more informed decisions around service levels Strategy: disciplined investment and investments; and One of the priorities set for 2011/12 that underpinned our a significantly more secure and resilient IS environment disciplined investment strategy was ensure successful delivery protecting our assets and information. of the core UK investment programme. Our future organic growth is dependent on the successfulStrategy: engaging externally delivery of our capital investment plans which in 2011/12One of the priorities set for 2011/12 that underpinned our amounted to £0.9 billion.engaging externally strategy was to work with Ofgem and otherstakeholders to implement a successful rollover for TPCR4 and Investing in our peoplesubmit final proposals for RIIO-T1 and RIIO-GD1 plans. We are committed to investing in our people, providing the training and other support necessary for them to build, maintainTalking networks and operate our networks safely and reliably. Delivering aOur RIIO business plan submissions for Transmission and Gas training programme of the required magnitude needs state ofDistribution were very different to anything we had previously the art facilities and equipment.submitted to Ofgem, with (among other things) a much greateremphasis on demonstrating how stakeholders have influenced A new gas transmission training centre has been sanctioned.the development of our business plans. Our training centres use innovative and engaging eLearning, 3D virtual reality, SMART board technology, learner responseIn developing the business plans, we drew together the views technology and virtual classrooms to enhance the learningand opinions of our broad range of stakeholders, using all the experience and reduce the costs associated with off the jobmethods of engagement at our disposal, including some new training delivery.and innovative engagement activities which have focused oninforming and shaping our plans.At the very beginning of our RIIO engagement, we developed‘talking networks’, a comprehensive and coordinatedprogramme of stakeholder engagement covering bothTransmission and Gas Distribution. Through this, we built onour existing engagement activities to proactively engage withour stakeholders on topics related to the first RIIO price controlperiod. We promised our stakeholders we would listen to whatthey have to say, discuss our future challenges and plans withthem, and then act on what they told us.Initial response to our engagement has been very positive. Weare seen as industry leading in our engagement activities andthe fact that we have been so proactive in discussing our ideaswith our stakeholders and incorporating their views into ourplans has been very well received.We have gathered a great deal of detail about what ourstakeholders think of the services we provide and what they seeas being our priorities going forward. For example,Transmission stakeholders have told us that reliability of supplyis paramount. They trust our record on safety and expect that tocontinue, and see us as having an important role to play infacilitating the move towards meeting the country’senvironmental targets by connecting new low carbongeneration. Stakeholders also told us that our level of customer
20 National Grid Gas plc Annual Report and Accounts 2011/12Financial performanceIntroduction more clearly understood if separately identified and analysed.This year has seen good financial performance across our The presentation of these two components of financialbusiness. Excluding the impact of the timing differences that performance is additional to, and not a substitute for, thebenefited this year’s results, our adjusted operating profit comparable total profit measures presented.increased by 7%. On this basis, we saw increases in all of our Management uses adjusted profit measures as the basis forbusiness segments. monitoring financial performance and in communicatingOur interest expense and other finance costs were slightly financial performance to investors in external presentations andhigher in 2011/12 with the benefit of lower debt buy back costs announcements of financial results. Internal financial reports,offset by losses on derivative financial instruments. The total tax budgets and forecasts are primarily prepared on the basis ofcharge this year was higher as a result of higher taxable profits, adjusted profit measures, although planned exceptional items,partly offset by the benefit of the lower tax rates in the UK. Our such as significant restructurings, are also reflected in budgetseffective tax rate, excluding exceptional items and and forecasts. We separately monitor and disclose theremeasurements, reduced from the prior year to 27.3%. excluded items as a component of our overall financial performance.Capital investment for the year was £0.9 billion. Taken togetherwith the impact of depreciation and inflation, growth in our Reconciliations of adjusted profit measures to the total profitregulated asset base in 2011/12 has again been significant at measure, that includes both components, can be found on pageover £0.6 billion. 22.Following strong cash flow from operations, we saw only a Timingsmall increase in our net debt of £118 million. We expect net As discussed on pages 4 to 5, our allowed revenues are set indebt to continue to increase in line with our capital investment accordance with our regulatory price controls. We calculate theprogramme. billing rates we charge our customers based on the estimated volume of gas transportation services we believe will beWith the anticipated revenue growth from our regulatory provided during the coming period. The actual volumes ofarrangements, we look forward to another year of good financial transportation services will differ from this estimate andresults in 2012/13. therefore our total actual revenue will be different from our total allowed revenue. These differences are commonly referred toMeasurement of financial performance as timing differences. If we collect more than the allowed levelWe report our financial results and position in accordance with of revenue, the balance must be returned to customers inIFRS. subsequent periods, and if we collect less than the allowedUse of adjusted profit measures level of revenue we may recover the balance from customers inIn considering the financial performance of our business and subsequent periods. The amounts calculated as timingsegments, we analyse each of our primary financial measures differences are estimates and subject to change until theof operating profit, profit before tax and profit for the year into variables that determine allowed revenue are final.two components. Our profit for the year includes an in year estimated over-The first of these components is referred to as an adjusted collection of £39 million (2010/11: £14 million over-collection)profit measure, also known as a business performance and our closing balance of estimated under-recovery at 31measure. This is the principal measure used by management to March 2012 was £1 million (2011: £40 million under-recovery).assess the performance of the underlying business. The table below shows the impact of timing differences on adjusted operating profit.Adjusted results exclude exceptional items andremeasurements. These items are reported collectively as the Years ended 31 Marchsecond component of the financial measures. 2012 2011 £m £mAccounting policy Q on page 38 explains in detail the items Adjusted operating profit excluding timing differences 1,330 1,240which are excluded from our adjusted profit measures. Timing differences 39 14Adjusted profit measures have limitations in their usefulness Adjusted operating profit 1,369 1,254compared with the comparable total profit measures as theyexclude important elements of our financial performance. Key performance indicators (KPIs)However, we believe that by presenting our financial Our financial KPIs are set out on page 12.performance in two components it is easier to read and interpret Operational returnfinancial performance between periods, as adjusted profit We measure our performance in generating value from themeasures are made more comparable by removing the investments we make by dividing the annual return of our Gasdistorting effect of the excluded items, and those items are Transmission and Gas Distribution businesses by their
National Grid Gas plc Annual Report and Accounts 2011/12 21regulatory asset bases. Annual return consists of adjusted More information can be found in the discussion of ourearnings, amended for a number of items including regulatory segments on pages 23 to 25.timing differences and depreciation, net financing costs and a Adjusted net finance costspension deficit adjustment. The regulatory asset base consists Adjusted net finance costs were £347 million in 2011/12of invested capital, which is the opening RAV inflated to mid- compared with £370 million in 2010/11. The £23 millionyear using RPI inflation. This is equivalent to the vanilla return decrease in adjusted net finance costs is primarily due to theset out in our price controls. reduction in interest costs on bank loans and overdrafts.For Gas Transmission, our operational return for 2011/12 was Adjusted taxation7.3% compared with 7.2% in 2010/11 and a regulatory allowed Adjusted taxation for 2011/12 was a charge of £279 millionreturn (vanilla return) of 5.05%. (2010/11: £268 million). This represents an effective tax rate ofFor Gas Distribution, our operational return for 2011/12 was 27.3% (2010/11: 30.3%). This reduction in effective tax rate is5.74% compared with 5.54% in 2010/11 and a regulatory primarily because of a 2% reduction in the UK corporation taxallowed return (vanilla return) of 4.94%. rate. More information on taxation can be found in the note 6 to the consolidated financial statements.These increases in operational return are due to higher annualreturn. Exceptional items and remeasurements Exceptional charges of £25 million in 2011/12 consisted ofProfit for the year restructuring costs of £31 million and other credits of £6 million.Adjusted profit and adjusted earningsAdjusted profit for the year from continuing operations was Exceptional charges of £65 million in 2010/11 consisted of£743 million in 2011/12 (2010/11: £616 million). Adjusted restructuring costs of £57 million and other charges of £8earnings, being adjusted profit for the year from continuing million.operations attributable to equity shareholders of the Company, Exceptional finance costs and remeasurementswere £742 million (2010/11: £615 million). There were no exceptional finance costs in 2011/12. There were exceptional finance costs of £31 million during 2010/11Profit and earnings relating to the early redemption of debt following the rights issueProfit for the year from continuing operations was £834 million by National Grid in June 2010.in 2011/12 (2010/11: £695 million). Earnings, being profit for theyear from continuing operations attributable to equity Financial remeasurements relate to net losses on derivativeshareholders of the Company, were £833 million (2010/11: financial instruments of £59 million (2010/11: £7 million gains).£694 million). Exceptional taxationAdjusted operating profit Taxation related to exceptional items and remeasurementsThe £115 million increase in adjusted operating profit in changes each year in line with the nature and amount of2011/12 to £1,369 million is primarily due to: transactions recorded. In addition, exceptional taxation in 2011/12 included an exceptional deferred tax credit of £152 An increase in regulated revenues of £140 million million arising from a reduction in the UK corporation tax rate reflecting the impact of inflation on our RPI-X price from 26% to 24% applicable from 1 April 2012. A similar controls. reduction in the UK corporation tax rate in 2010/11 from 28% to Favourable timing differences of £25 million, as noted on 26% resulted in a £144 million deferred tax credit in that year. page 20. More information on exceptional items and remeasurementsPartially offset by: can be found in note 3 to the consolidated financial statements. Higher depreciation and amortisation of £37 million due to our capital investment programme. Higher other operating costs due to inflationary pressures and additional staffing costs to support the GDFO system implementation in our Gas Distribution business.
22 National Grid Gas plc Annual Report and Accounts 2011/12Reconciliations of adjusted profit measures SegmentsReconciliation of adjusted operating profit to total Revenue by operating segmentoperating profit Years ended 31 MarchAdjusted operating profit is presented on the face of the income 2012 2011 £m £mstatement under the heading operating profit before exceptionalitems and remeasurements. Gas Transmission 959 889 Gas Distribution 1,597 1,522 Years ended 31 March Gas Metering 331 311 2012 2011 Other activities 47 38 £m £mAdjusted operating profit 1,369 1,254 Total segmental revenues 2,934 2,760Exceptional items (25) (65) Less: sales between operating segments (75) (67)Total operating profit 1,344 1,189 Total revenue 2,859 2,693Reconciliation of adjusted operating profit to adjusted Adjusted operating profit by segment Years ended 31 Marchearnings and earnings 2012 2011 Years ended 31 March £m £m 2012 2011 £m £m Gas Transmission 459 420Adjusted operating profit 1,369 1,254 Gas Distribution 763 711Adjusted net finance costs (347) (370) Gas Metering 162 136Adjusted profit before tax 1,022 884 Other activities (15) (13)Adjusted taxation (279) (268) Adjusted operating profit 1,369 1,254Adjusted profit 743 616Attributable to non-controlling interests (1) (1) Operating profit by segment Years ended 31 MarchAdjusted earnings 742 615 2012 2011Exceptional items 134 74 £m £mRemeasurements (43) 5 Gas Transmission 458 412Earnings 833 694 Gas Distribution 733 654 Gas Metering 168 136Reconciliation of adjusted profit before tax to total profit Other activities (15) (13)before tax Total operating profit 1,344 1,189Adjusted profit before tax is presented on the face of theincome statement under the heading profit before tax beforeexceptional items and remeasurements. Analysis of adjusted operating profit 2011/12 compared with 2010/11 Years ended 31 March Changes adjusted operating profit for 2011/12 compared with 2012 2011 2010/11 are analysed by operating segment in the table below. £m £m The principal movements for each segment are shown on theAdjusted profit before tax 1,022 884 following pages.Exceptional items (25) (96)Remeasurements (59) 7Total profit before tax 938 795 Operating profit £m 2010/11 adjusted operating profit 1,254 Gas Transmission – see page 23 39 Gas Distribution – see page 24 52 Gas Metering – see page 25 26 Other activities – see page 25 (2) 2011/12 adjusted operating profit 1,369
National Grid Gas plc Annual Report and Accounts 2011/12 23Principal operationsGas TransmissionWe own and operate the gas national transmission system in Our safety and reliability performance has remained strongGreat Britain, with day-to-day responsibility for balancing during the year and we believe this can continue. Our customerdemand. We also own and operate two LNG storage facilities in satisfaction scores have improved and work is underway to helpGreat Britain, one of which has been subsequently closed in deliver further improvement in this area.April 2012. We are working with stakeholders to try to develop the networkFor more details on how our Gas Transmission business of the future, designed to have appropriate flexibility to copeoperates see page 3. with the transition to a low carbon economy.Key achievements Results delivered our capital investment programme totalling £0.2 The results for the Gas Transmission segment for the years billion; ended 31 March 2012 and 2011 were as follows: continued to deliver 100% transmission system reliability; Years ended 31 March opened an office in Brussels to engage at a European 2012 2011 level; and £m £m outperformed our transmission carbon budgets. Revenue and other operating income 976 912Strategy Operating costs excluding exceptional items (517) (492)Gas Transmission’s strategy will include: Adjusted operating profit 459 420 Exceptional items (1) (8) delivering the increased capital investment programme. Operating profit 458 412 This adds to our regulated asset value and supports future equity growth; Principal movements (2010/11 – 2011/12) working with Ofgem to achieve an acceptable outcome to Adjusted RIIO T1. This will include reviewing the output measures operating and incentives and considering how best to maximise our profit £m returns under these new mechanisms. This will contribute to future earnings and cash flows; 2010/11 adjusted operating profit 420 continuing work to increase our influence in Europe and Timing (1) 7 create a long-term EU strategy, intended to help contribute Net regulated income (2) 68 to the evolution of the laws and regulations that affect our Regulated controllable operating costs (2) business and our consumers; and Depreciation and amortisation (3) (15) increasing innovation, commercially, technically and Other (4) (19) financially. This can help us meet the output measures of 2011/12 adjusted operating profit 459 our RIIO regulatory agreement and assist in finding new ways to generate growth. 1 - In year estimated over-recovery of £17 million compared with a prior year estimated over-recovery of £10 million. ThePrincipal risks closing estimated under-recovered balance is £3 million. the assets associated with our major project developments 2 - Increase in regulated revenues collectable under our will require significant stakeholder engagement in order to regulatory RPI-X formula. secure the necessary permissions to be built; 3 - Higher average asset values due to the capital investment the increased capital expenditure programme drives a programme need to ensure we have the appropriate core 4 - Primarily relates to the impairment of LNG storage assets organisational and leadership capabilities; and that are no longer required. the outcome of Ofgem’s review of our business plans is uncertain.OutlookWe believe the outlook for our Gas Transmission business overthe coming year is positive. While there are challenges ahead,we believe we have the right skills and approach to overcomethem.In the next 12 months we aim to deliver £0.2 billion of capitalinvestment and over the RIIO price control period we estimatethis will be £7 billion.
24 National Grid Gas plc Annual Report and Accounts 2011/12Gas DistributionWe own and operate four of the eight regional gas distribution extreme weather conditions or other events. We thereforenetworks in Great Britain. Our networks comprise approximately actively drive performance throughout the year; and132,000 kilometres (82,000 miles) of gas distribution pipeline the outcome of Ofgem’s review of our business plan isand we transport gas from the gas national transmission system uncertain.to around 10.8 million consumers on behalf of 26 active gas Outlookshippers. Gas consumption in our UK networks was 259 TWh in We expect to complete the roll out of the GDFO system across2011/12 compared with 304 TWh in 2010/11. our networks over the summer of 2012. Once completed, thisWe manage the national gas emergency number will be an enabling tool for our process improvements and(0800 111 999). This service, along with the enquiries lines, should assist in improving productivity.appliance repair helpline and meter enquiry service, handled Our mains replacement programme will continue and is2,498,804 calls during 2011/12. estimated at around £5 billion over the eight years of the firstFor more details on how our Gas Distribution business operates RIIO price control. In addition, we estimate around £1.3 billionsee page 3. in other capital expenditure.Key achievements We plan to introduce process and system improvements which achieved all our overall standards of service, including our are designed to help achieve output measures and earn emergency standards; incentive revenues under RIIO. delivered £645 million of capital investment, including Results £474 million of replacement expenditure to deliver 1,979 The results for the Gas Distribution segment for the years kilometres of decommissioned mains; ended 31 March 2012 and 2011 were as follows: significantly improved customer satisfaction, increasing Years ended 31 March scores by 5.5% over the first three quarters of the year 2012 2011 and closing the gap on the independent distribution Continuing operations £m £m networks (IDNs); Revenue and other operating income 1,604 1,523 submitted our RIIO business plans, prompting a Operating costs excluding exceptional items (841) (812) favourable reaction from Ofgem and subsequently Adjusted operating profit 763 711 submitted revised plans; and Exceptional items (30) (57) completed the exit of all IDNs from the system operator Total operating profit 733 654 managed services agreement, including delivery of all systems. Principal movements (2010/11 – 2011/12)Strategy Adjusted operatingGas Distribution’s strategy will include: profit Continuing operations £m improving our safety performance. This discipline is important for our people, our contractors and the public 2010/11 adjusted operating profit 711 and is an output measure under RIIO; Timing (1) 18 further improving our service to customers. This aids our Net regulated income (2) 72 relationships with stakeholders and is an output measure Regulated controllable operating costs (3) (11) under RIIO; Depreciation and amortisation (4) (33) embedding process excellence, along with systems Other (5) 6 improvements and training to make us more efficient and 2011/12 adjusted operating profit 763 productive. Efficient processes should help us to meet output targets at reasonable cost, contributing to superior 1 - Represents the collection of under-recoveries from prior financial returns; and years. The closing over-recovered value is £2 million. developing a high performance culture to help inspire our 2 - Revenues increased driven by our regulatory RPI-X pricing people to do their best. Our people are the foundation of formula and performance under incentive programmes. what we do. 3 - Increased contractor and IS costs to support the GDFO programme implementation and achieving our standards ofPrincipal risks service. the potentially dangerous nature of our activities, for our 4 - Higher average asset values due to the capital investment employees, contractors and the public, drives us to stay programme. focused on process and personal safety; 5 - The environmental provision costs incurred in the prior year operational performance and our ability to meet standards did not recur. of service could be materially adversely affected by
National Grid Gas plc Annual Report and Accounts 2011/12 25Gas Metering Other activitiesOur gas metering business, which is undertaken through our Other activities include Xoserve and central corporatesubsidiary company National Grid Metering Limited, provides overheads. Xoserve delivers transactional services on behalf ofinstallation and maintenance services to gas suppliers in the all the major gas network transportation companies in Greatregulated gas market in Great Britain. Our metering business Britain, including ourselves. We jointly own Xoserve with theprovides services for an asset base of around 15 million other gas distribution network companies, but we hold thedomestic, industrial and commercial meters. controlling interest.Key achievements Results significantly improved our approach to measuring process The results for other activities for the years ended 31 March safety measures and reported no lost time injuries; and 2012 and 2011 were as follows: improved customer satisfaction as measured under a Years ended 31 March biannual customer survey. 2012 2011 £m £mStrategyGas Metering’s strategy will include: Revenue and other operating income 47 38 Operating costs excluding exceptional items (62) (51) delivering effective and efficient management of the Adjusted operating loss and operating loss (15) (13) downsizing of our domestic meter asset base while facilitating the industry’s transition to Smart metering; and improving financial performance by extending the quality and range of service provided to industrial and commercial customers.Principal risks impairment of our asset base due to an increase in the rate of Smart meter roll out or a change in our regulatory arrangements.OutlookWe will continue to reorganise to improve our market focus andsupport the transition to Smart metering.ResultsThe results for the Gas Metering segment for the years ended31 March 2012 and 2011 were as follows: Years ended 31 March 2012 2011 £m £mRevenue 331 311Operating costs excluding exceptional items (169) (175)Adjusted operating profit 162 136Exceptional items 6 -Total operating profit 168 136Principal movements (2010/11 – 2011/12) Adjusted operating profit £m2010/11adjusted operating profit 136Revenues (1) 9Operating costs 6Depreciation and amortisation (2) 112011/12 adjusted operating profit 1621 - Increased meter rental charges.2 - Review of depreciation profile and reduction in asset base.
26 National Grid Gas plc Annual Report and Accounts 2011/12Financial position and resourcesGoing concern Other non-current assetsHaving made enquiries, the Directors consider that the Other non-current assets, which comprise an interest free loanCompany and its subsidiaries have adequate resources to to our immediate parent company, National Grid Gas Holdingscontinue in business for the foreseeable future and that it is Limited, remain at £5,611 million.therefore appropriate to adopt the going concern basis in Current assetspreparing the consolidated and individual financial statements Current assets have increased by £58 million to £329 million.of the Company. More details of our liquidity position are This increase was primarily due to increases in tradeprovided under the risk factors discussion on page 16 and in receivables of £35 million and prepayments and accruednote 27 to the consolidated financial statements. income of £32m.Summarised balance sheet Current liabilities Years ended 31 March Current liabilities have decreased by £45 million to £725 million, 2012 2011 largely as a result of a £68 million reduction in trade payables. £m £m Deferred tax liabilitiesIntangibles 237 192 The net deferred tax liability decreased by £49 million to £1,824Property, plant and equipment 11,644 11,282 million. This decrease arose from the deferred tax credit for theOther non-current assets 5,611 5,611 year. Refer to notes 6 and 19 to the consolidated financialCurrent assets* 329 271 statements for further information.Current liabilities* (725) (770) Provisions and other non-current liabilitiesNet deferred tax liabilities (1,824) (1,873) Provisions and other non-current liabilities decreased by £59Provisions and other non-current liabilities (1,242) (1,301) million to £1,242 million. This was primarily as a result of aNet debt (7,188) (7,070) release of unused provisions of £38 million, principallyNet assets 6,842 6,342 restructuring costs. Further information on provisions is* excludes amounts related to net debt and provisions reported in other provided in note 20 to the consolidated financial statements.lines Net debtIntangibles Funding and liquidity managementIntangibles increased by £45 million during 2011/12 to £237 Funding and treasury risk management for National Grid Gas ismillion. This increase primarily relates to software additions of carried out by the treasury function of National Grid under£70 million offset by amortisation of £41 million. policies and guidelines approved by the Finance Committees of the Boards of National Grid and National Grid Gas. TheProperty, plant and equipment Finance Committees are responsible for regular review andProperty, plant and equipment increased by £362 million to monitoring of treasury activity and for the approval of specific£11,644 million. This was principally due to capital expenditure transactions, the authority for which may be further delegated.of £865 million, predominantly in the extension of our regulatednetworks, partially offset by £453 million of depreciation and net The primary objective of the treasury function is to manage thedisposals of £18 million. funding and liquidity requirements of National Grid. A secondary objective is to manage the associated financial risks, in the formThe table below shows capital expenditure by segment. of interest rate risk and foreign exchange risk, to within Years ended 31 March acceptable boundaries. Further details of the management of 2012 2011 funding and liquidity and the main risks arising from our £m £m financing activities can be found in the Principal risk factorsGas Transmission 235 289 discussion starting on page 15 and in note 27 of theGas Distribution 645 669 consolidated financial statements.Gas Metering 48 54 Surplus fundsOther activities 7 6 Investment of surplus funds, usually in short-term fixed deposits 935 1,018 or placements with money market funds that invest in highly liquid instruments of high credit quality, is subject to ourAs a result of capital expenditure in 2011/12, and after allowing counterparty risk management policy.for depreciation and inflation, we estimate that our regulatedasset base will increase by approximately £0.6 billion.
National Grid Gas plc Annual Report and Accounts 2011/12 27Trend and composition of net debt £m At 31 March Less than 1 year 953 2012 2011 In 1 to 2 years 481 £m £m In 2 to 3 years 124Cash, cash equivalents & financial investments 452 325 In 3 to 4 years -Borrowings and bank overdrafts (8,139) (7,902) In 4 to 5 years 54Derivatives 499 507 In more than 5 years 6,527Total net debt (7,188) (7,070) 8,139The increase in net debt of £118 million to £7,188 million isexplained as follows: As at 31 March 2012, total borrowings of £8,139 million including bonds, bank loans and other debt, was £237 millionMovement in net debt higher than prior year, primarily due to increases in the fair £m value of borrowings, combined with accretions on RPI linkedOpening net debt at 1 April 2011 (7,070) debt. We expect to repay £953 million of our maturing debt inFactors decreasing net debt: the next 12 months, and that we will be able to refinance this- Operating cash flows 1,736 debt through the capital and money markets.Factors increasing net debt::- Non-cash movements (i) (229) Further information on borrowings can be found on the debt- Tax (130) investors’ section of National Grid’s website and in note 16 of the consolidated financial statements.- Dividends (350)- Interest (177) Derivatives- Capital expenditure & other (968) At 31 MarchClosing net debt at 31 March 2012 (7,188) 2012 2011 £m £m(i) Includes RPI inflation linked debt accretion £(162) million (2011:£(151) million). Interest rate swaps 150 105 Cross-currency interest rate swaps 470 407Factors decreasing net debt Forward rate agreements (3) (3)Our primary source of cash relates to operating cash flows asdetailed separately below. Inflation linked swaps (118) (2) 499 507Factors increasing net debtOur primary use of cash is for capital expenditure and other We use derivative financial instruments to manage ourinvesting activities. This has decreased by £37 million primarily exposure to risks arising from fluctuations in interest rates anddue to decreased investment in our Gas Transmission exchange rates. We value our derivatives by discounting allbusiness. We also utilised cash for dividends which were £50 future cash flows by externally sourced market yield curves atmillion lower. Net interest paid was £85 million lower than prior the balance sheet date, taking into account the credit quality ofyear, reflecting lower interest rates, lower average net debt both parties. The decrease in our derivatives of £8 millionduring the year and reduced debt repurchase costs. Tax paid therefore represents movements as a result of underlyingwas £130 million, £12 million higher than prior year due to a market variables and composition of the derivative portfolio.refund received in March 2011. Non-cash movements related to The currency exposure on our borrowings is managed throughincreases in the value of inflation linked debt and the use of cross-currency swaps and results in a net debt profileremeasurements. post derivatives that is almost entirely sterling.Operating cash flows The interest rate profile of net debt is actively managed underAnnual cash flows from our operations are largely stable over a the constraints of our interest rate risk management policy asperiod of years, as our gas transmission and distribution approved by the Finance Committee of National Grid. Ouroperations are subject to multi-year price control agreements interest rate exposure, and therefore profile, will change overwith Ofgem. time.Cash flows from operations increased by £30 million in The table below shows the interest rate profile of our net debt2011/12, to £1,736 million, due to higher operating profits, before derivatives as at 31 March 2012 and the locked inpartially offset by unfavourable working capital movements. impact of derivatives on our net debt as at 31 March 2012 forBorrowings 2012/13 and future years. The 2012/13 position reflects the useThe Finance Committee of National Grid controls refinancing of derivatives, including forward rate agreements to lock inrisk by limiting the amount of our debt maturities arising from interest rates in the short term. The future years’ positionborrowings in any one year, which is demonstrated by our excludes derivatives that mature within the next year.maturity profile. The maturity profile of our gross borrowings at31 March 2012 was as follows:
28 National Grid Gas plc Annual Report and Accounts 2011/12Interest rate profile of borrowings the level of RAV gearing indicated by Ofgem as being Pre- Post derivatives appropriate for these businesses. To calculate RAV gearing we derivatives 31 March 2012/13 Future exclude an element of debt that is associated with funding the 2012 years Gas Metering business, which no longer has a RAV associated % % % with it. RAV gearing as at 31 March 2012 was 52% comparedFixed 43 36 25 with 54% as at 31 March 2011.Floating 3 14 23 Our regulatory agreements require that we must maintain anRPI linked 54 50 52 investment grade credit rating. These requirements are 100 100 100 monitored on a regular basis in order to ensure compliance.Further details on our foreign currency and interest rate risk Further details on credit ratings can be found on the debtmanagement can be found in the risk factors discussion starting investors’ section of National Grid’s website.on page 15 and in note 27(a) of the consolidated financialstatements. Actuarial valuation of pensions A triennial valuation is carried out for the independent trusteesOff-balance sheet items of National Grid’s two UK defined benefit plans byPensions professionally qualified actuaries, using the projected unitWe operate pension arrangements on behalf of our employees, method. The purpose of the valuation is to design a fundingthe majority of whom are members of the defined benefit plan to ensure that present and future contributions should besection of the National Grid UK Pension Scheme, which is sufficient to meet future liabilities.closed to new entrants. Membership of the defined contribution The last completed full actuarial valuation of the National Gridsection of the National Grid UK Pension Scheme is offered to UK Pension Scheme, to which the majority of our employeesall new employees. belong, was as at 31 March 2010. This concluded that the pre-Liabilities and assets of the scheme are not recognised in the tax funding deficit was £599 million in the defined benefitfinancial statements of National Grid Gas, as there is neither a section on the basis of the funding assumptions. Employer cashcontractual arrangement, nor a stated policy under which the contributions for the ongoing cost of this plan are currentlyCompany is charged for the costs of providing pensions. being made at a rate of 32% of pensionable payroll.Other off-balance sheet arrangements National Grid agreed with the Trustees of the National Grid UKThere were no other significant off-balance sheet Pension Scheme that the deficits should be repaired over 17arrangements, other than the commitments and contingencies years, and that it would deposit additional cash in a restrictedshown below. account over which the Trustees have a charge and that would be paid to the Trustees in the event of insolvency or loss ofCommitments and contingencies licence of the relevant employer. The money is returned back toCommitments and contingencies outstanding at 31 March 2012 National Grid if the scheme moves into surplus.and 2011 are summarised in the table below: More information on the actuarial valuations can be found in 2012 2011 note 25 to the consolidated financial statements. £m £mFuture capital expenditure contracted but notprovided for 481 428Total operating lease commitments 73 70Other commitments and contingencies 194 121We propose to meet all of our commitments from existing cashand investments, operating cash flows, existing credit facilities,future facilities and other financing that we reasonably expect tobe able to secure in the future.Further information on commitments and contingencies can befound in note 23 to the consolidated financial statements,together with information on litigation and claims.Capital structureThe principal measure of our balance sheet efficiency is ourregulatory asset value (RAV) gearing ratio. We monitor the RAVgearing of the Gas Transmission and Gas Distributionbusinesses. This is calculated as net debt expressed as apercentage of RAV and indicates the level of debt employed tofund the regulated businesses. It is compared to 60% which is
National Grid Gas plc Annual Report and Accounts 2011/12 29Accounting policiesBasis of accounting RevenueThe consolidated financial statements present the results of Revenue includes an assessment of gas transportation servicesNational Grid Gas for the years ended 31 March 2012 and 2011 supplied to customers between the date of the last invoice andand financial position as at 31 March 2012 and 2011. They the year end. Changes to the estimate of the gas transportationhave been prepared using the accounting policies shown, in services supplied during this period would have an impact onaccordance with International Financial Reporting Standards the reported results.(IFRS). Unbilled revenues at 31 March 2012 are estimated at £195In complying with IFRS, we are also complying with the version million compared with £165 million at 31 March 2011.of IFRS that has been endorsed by the European Union (EU) Estimated economic lives of property, plant and equipmentfor use by listed companies. The reported amounts for depreciation of property, plant and equipment and amortisation of non-current intangible assetsChoices permitted under IFRS can be materially affected by the judgments exercised inIFRS provide certain options available within accounting determining their estimated economic lives.standards. Material choices we have made, and continue tomake include the following: Hedge accounting We use derivative financial instruments to hedge certainPresentation formats economic exposures arising from movements in exchange andWe use the nature of expense method for our income statement interest rates or other factors that could affect either the valueand total our balance sheet to net assets and total equity. of the our assets or liabilities or affect future cash flows.In the income statement, we present subtotals of total operating Movements in the fair values of derivative financial instrumentsprofit, profit before tax and profit from continuing operations, may be accounted for using hedge accounting where thetogether with additional subtotals excluding exceptional items relevant eligibility, documentation and effectiveness testingand remeasurements. Exceptional items and remeasurements requirements are met. If a hedge does not meet the strictare presented on the face of the income statement. criteria for hedge accounting, or where there is ineffectivenessCustomer contributions or partial ineffectiveness, then the movements will be recordedContributions received prior to 1 July 2009 towards capital in the income statement immediately instead of beingexpenditure are recorded as deferred income and amortised in recognised in the statement of comprehensive income or byline with the depreciation on the associated asset. being offset by adjustments to the carrying value of debt.Financial instruments Exceptional items and remeasurementsWe normally opt to apply hedge accounting in most Exceptional items and remeasurements are items of incomecircumstances where this is permitted. and expenditure that, in the judgement of management, should be disclosed separately on the basis that they are material,Critical accounting policies either by their nature or their size, to an understanding of theThe application of accounting principles requires us to make company’s financial performance and distort the comparabilityestimates, judgments and assumptions that may affect the of financial performance between periods.reported amounts of assets, liabilities, revenue and expenses Items of income or expense that are considered byand the disclosure of contingent assets and liabilities in the management for designation as exceptional items include suchaccounts. On an ongoing basis, we evaluate our estimates items as significant restructurings, write-downs or impairmentsusing historical experience, consultation with experts and other of non-current assets, material changes in environmentalmethods that we consider reasonable in the particular provisions, gains or losses on disposals of businesses orcircumstances to ensure compliance with IFRS. Actual results investments and debt redemption costs.may differ significantly from our estimates, the effect of whichwill be recognised in the period in which the facts that give rise Remeasurements comprise gains or losses recorded in theto the revision become known. income statement arising from changes in the fair value of derivative financial instruments. These fair values increase orCertain accounting policies, described below, have been decrease as a consequence of changes in financial indices andidentified as critical accounting policies, as these policies prices over which the Company has no control.involve particularly complex or subjective decisions orassessments. The discussion of critical accounting policies Tax estimatesbelow should be read in conjunction with the description of our Our tax charge is based on the profit for the year and tax ratesaccounting policies set out in our consolidated financial in effect. The determination of appropriate provisions forstatements on pages 34 to 39. taxation requires us to take into account anticipated decisions of tax authorities and estimate our ability to utilise tax benefits through future earnings and tax planning.
30 National Grid Gas plc Annual Report and Accounts 2011/12Carrying value of assets and potential for impairments Asset useful livesThe carrying value of assets recorded in the consolidated An increase in the useful economic lives of assets of one yearbalance sheet could be materially reduced if an impairment on average would reduce our annual depreciation charge onwere to be assessed as being required. Impairment reviews are property, plant and equipment by £12 million (pre-tax) and ourcarried out when a change in circumstance is identified that annual amortisation charge on intangible assets by £5 millionindicates an asset might be impaired. An impairment review (pre-tax).involves calculating either or both of the fair value or the value- Hedge accountingin-use of an asset or group of assets and comparing with the If using our derivative financial instruments, hedge accountingcarrying value in the balance sheet. had not been achieved during the year ended 31 March 2012These calculations involve the use of assumptions as to the then the profit for the year would have been £117 million higherprice that could be obtained for, or the future cash flows that will than that reported net of tax, and net assets would have beenbe generated by, an asset or group of assets, together with an £112 million higher.appropriate discount rate to apply to those cash flows. Assets carried at fair valueAssets and liabilities carried at fair value A 10% change in assets and liabilities carried at fair valueCertain financial investments and derivative financial would result in an increase or decrease in the carrying value ofinstruments are carried in the balance sheet at their fair value derivative financial instruments of £50 million.rather than historical cost. ProvisionsThe fair value of financial investments is based on market A 10% change in the estimates of future cash flows estimatedprices, as are those of derivative financial instruments where in respect of provisions for liabilities would result in an increasemarket prices exist. Other derivative financial instruments are or decrease in our provisions of approximately £16 million.valued using financial models, which include judgements on, inparticular, future movements in exchange and interest rates. Accounting developments Accounting standards, amendments to standards andProvisions interpretations adopted in 2011/12Provisions are made for liabilities, the timing and amount of In preparing our consolidated financial statements we havewhich is uncertain. These include provisions for the cost of complied IFRS, IAS and interpretations applicable for 2011/12.environmental restoration and remediation, restructuring and None of the standards, amendments to standards andemployer and public liability claims. interpretations adopted during 2011/12 resulted in a materialCalculations of these provisions are based on estimated cash change to our consolidated financial statements for the year, orflows relating to these costs, discounted at an appropriate rate the comparatives presented.where the impact of discounting is material. The amounts and Accounting standards, amendments to standards andtiming of cash flows relating to environmental liabilities are interpretations not yet adoptedbased on management estimates supported by the use of New accounting standards, amendments to standards andexternal consultants. interpretations which have been issued but not yet adopted byPension obligations National Grid are discussed in the financial statements on pageDefined benefit pension obligations are accounted for as if the 40.National Grid UK Pension Scheme were a defined contributionscheme as there is neither a contractual arrangement, nor astated policy under which the Company is charged for the costsof providing pensions.A change in these arrangements may lead to the Companyrecognising the cost of providing pensions on a different basis,together with a proportion of the actuarial gains and losses andof the assets and liabilities of the pension scheme.SensitivitiesIn order to illustrate the impact that changes in assumptionscould have on our results and financial position, the followingsensitivities are presented:Revenue accrualsA 10% change in our estimate of unbilled revenues at 31 March2012 would result in an increase or decrease in our recordednet assets and profit for the year by approximately £20 millionnet of tax.
National Grid Gas plc Annual Report and Accounts 2011/12 31Directors’ Reportfor the year ended 31 March 2012In accordance with the requirements of the Companies Act Financial instruments2006 and UK Listing Authority’s Listing, Disclosure and Details on the use of financial instruments and financial riskTransparency Rules, the following sections describe the matters management are included on pages 15 to 16 in the Businessthat are required for inclusion in the Directors’ Report and were Review.approved by the Board. Further details of matters required to be Future developmentsincluded in the Directors’ Report are incorporated by reference Details of future developments are contained in the Businessinto this report, as detailed below. Review.Directors Employee involvementThe Directors serving during the year or subsequently were: Details of how the Company involves its employees areMalcolm Cooper Appointed June 2007 contained in the Business Review on page 7, which areStuart Humphreys Appointed July 2008 incorporated by reference into this report.John Pettigrew Appointed April 2011 Policy and practice on payment of creditorsPaul Whittaker Appointed June 2007 It is our policy to include in contracts or other agreements,Adam Wiltshire Appointed June 2006 terms of payment with suppliers. Once agreed, we aim to abideNick Winser Appointed July 2003 by these terms of payment. The average creditor payment period at 31 March 2012 was 24 days (20 days at 31 MarchDirectors’ and Officers’ liability insurance cover is arranged and 2011).qualifying third party indemnities are in place for each Director. Audit informationPrincipal activities and business review Having made the requisite enquiries, so far as the Directors inA full description of the Company’s principal activities, office at the date of the signing of this report are aware, there isbusinesses, key performance indicators and principal risks and no relevant audit information of which the auditors are unawareuncertainties is contained in the Business Review on pages 1 to and each Director has taken all reasonable steps to make30, which are incorporated by reference into this report. themselves aware of any relevant audit information and toMaterial interests in shares establish that the auditors are aware of that information.National Grid Gas plc is a wholly owned subsidiary undertaking Annual General Meetingof National Grid Gas Holdings Limited. The ultimate parent Notice of the National Grid Gas’s Annual General Meeting forcompany of National Grid Gas plc is National Grid plc. 2012 will be issued separately to shareholders.Dividends By order of the BoardDuring the year, interim dividends totalling £350 million werepaid (2010/11: £400 million interim dividend). The Directorshave not proposed a final dividend.DonationsDuring 2011/12, some £0.04 million (2010/11: £0.1 million) wasinvested in support of community initiatives and relationships in Adam Wiltshirethe UK. There were no direct charitable donations for 2011/12 Director(2010/11: £nil). 2 July 2012No political donations were made in the UK and EU, including National Grid Gas plc, 1-3 Strand, London WC2N 5EHdonations as defined for the purposes of the Political Parties, Registered in England and Wales Number 2006000Elections and Referendums Act 2000.Research and developmentExpenditure on research and development was £6 millionduring the year (2010/11: £9 million).
32 National Grid Gas plc Annual Report and Accounts 2011/12Statement of Directors’ responsibilitiesThe Directors are responsible for preparing the Annual Report The Directors are responsible for keeping adequate accountingand Accounts, including the consolidated financial statements, records that are sufficient to show and explain the Company’sand the Company financial statements and the Directors’ transactions and disclose with reasonable accuracy at any timeReport, in accordance with applicable law and regulations. the financial position of the Company on a consolidated and individual basis, and to enable them to ensure that the financialCompany law requires the Directors to prepare financial statements comply with the Companies Act 2006 and Article 4statements for each financial year. Under that law the Directors of the IAS Regulation, and the Company financial statementshave prepared the consolidated financial statements in comply with the Companies Act 2006. They are alsoaccordance with International Financial Reporting Standards responsible for safeguarding the assets of the Company and its(IFRS) as adopted by the European Union, and the Company subsidiaries, and hence for taking reasonable steps for thefinancial statements in accordance with applicable law and prevention and detection of fraud and other irregularities.United Kingdom Accounting Standards (United KingdomGenerally Accepted Accounting Practice, UK GAAP). In Each of the Directors, whose names are listed in the Directorspreparing the consolidated financial statements, the Directors report on page 31, confirms that, to the best of their knowledge:have also elected to comply with IFRS, issued by the The consolidated financial statements and the CompanyInternational Accounting Standards Board. Under company law financial statements, which have been prepared inthe Directors must not approve the financial statements unless accordance with IFRS as adopted by the European Unionthey are satisfied that they give a true and fair view of the state and UK GAAP respectively, give a true and fair view of theof affairs of the Company on a consolidated and individual basis assets, liabilities, financial position and profit of theand of the profit of the Company on a consolidated basis for Company on a consolidated and individual basis; andthat period. The Annual Report includes a fair review of theIn preparing these financial statements, the Directors are development and performance of the business and therequired to: position of the Company on a consolidated and individual basis, together with a description of the principal risks and select suitable accounting policies and then apply them uncertainties that it faces. consistently; make judgements and estimates that are reasonable and By order of the Board prudent; state that the consolidated financial statements comply with IFRS as issued by the Internal Accounting Standards Board and IFRS adopted by the European Union, and with regard to the Company financial statements, that applicable UK Accounting Standards have been followed, subject to any material departures disclosed and Adam Wiltshire explained in the financial statements; and Director prepare the consolidated financial statements and 2 July 2012 Company financial statements on a going concern basis unless it is inappropriate to presume that the Company, on a consolidated and individual basis, will continue in business, in which case there should be supporting assumptions or qualifications as necessary.
National Grid Gas plc Annual Report and Accounts 2011/12 33Independent Auditors’ reportto the Members of National Grid Gas plcWe have audited the consolidated and Company financial presentation of the financial statements. In addition, we read allstatements (the ‘‘financial statements’’) of National Grid Gas plc the financial and non-financial information in the Annual Reportfor the year ended 31 March 2012, which comprise the and Accounts to identify material inconsistencies with theconsolidated income statement, the consolidated statement of audited financial statements. If we become aware of anycomprehensive income, the consolidated balance sheet, the apparent material misstatements or inconsistencies we considerCompany balance sheet, the consolidated statement of the implications for our report.changes in equity, the consolidated cash flow statement, the Opinion on financial statementsaccounting policies, the Company accounting policies, the In our opinion:adoption of new accounting standards, the notes to the the financial statements give a true and fair view of theconsolidated financial statements and the notes to the state of the group’s and of the Company’s affairs as at 31Company financial statements. The financial reporting March 2012 and of the group’s profit and cash flows forframework that has been applied in the preparation of the the year then ended;consolidated financial statements is applicable law and the consolidated financial statements have been properlyInternational Financial Reporting Standards (IFRS) as adopted prepared in accordance with IFRS as adopted by theby the European Union. The financial reporting framework that European Union;has been applied in the preparation of the Company financial the Company financial statements have been properlystatements is applicable law and United Kingdom Accounting prepared in accordance with United Kingdom GenerallyStandards (United Kingdom Generally Accepted Accounting Accepted Accounting Practice; andPractice). the financial statements have been prepared inRespective responsibilities of directors and auditors accordance with the requirements of the Companies ActAs explained more fully in the Statement of Directors’ 2006 and, as regards the consolidated financialResponsibilities set out on page 32, the Directors are statements, Article 4 of the IAS Regulation.responsible for the preparation of the financial statements and Opinion on other matters prescribed by the Companies Actfor being satisfied that they give a true and fair view. Our 2006responsibility is to audit and express an opinion on the financial In our opinion, the information given in the Directors’ Report forstatements in accordance with applicable law and International the financial year for which the financial statements areStandards on Auditing (UK and Ireland). Those standards prepared is consistent with the financial statements.require us to comply with the Auditing Practices Board’s EthicalStandards for Auditors. Matters on which we are required to report by exception We have nothing to report in respect of the following:This report, including the opinions, has been prepared for andonly for the Company’s members as a body in accordance with Under the Companies Act 2006, we are required to report toChapter 3 of Part 16 of the Companies Act 2006 and for no you if, in our opinion:other purpose. We do not, in giving these opinions, accept or adequate accounting records have not been kept by theassume responsibility for any other purpose or to any other Company, or returns adequate for our audit have not beenperson to whom this report is shown or into whose hands it may received from branches not visited by us; orcome save where expressly agreed by our prior consent in the Company financial statements are not in agreementwriting. with the accounting records and returns; or certain disclosures of Directors’ remuneration specified byScope of the audit of the financial statements law are not made; orAn audit involves obtaining evidence about the amounts and we have not received all the information and explanationsdisclosures in the financial statements sufficient to give we require for our audit.reasonable assurance that the financial statements are freefrom material misstatement, whether caused by fraud or error.This includes an assessment of: whether the accounting Stephen Snook (Senior Statutory Auditor)policies are appropriate to the group’s and Company’s for and on behalf of PricewaterhouseCoopers LLPcircumstances and have been consistently applied and Chartered Accountants and Statutory Auditorsadequately disclosed; the reasonableness of significant Birminghamaccounting estimates made by the Directors; and the overall 2 July 2012(a) The maintenance and integrity of the Company website is the responsibility of the Directors; the work carried out by the auditors does not involve considerationof these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initiallypresented on the website.(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
34 National Grid Gas plc Annual Report and Accounts 2011/12Accounting policiesA. Basis of preparation of consolidated financial of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that arestatements under IFRS denominated in foreign currencies are retranslated at closingNational Grid Gas’s principal activities involve the transmission exchange rates. Other non-monetary assets are notand distribution of gas and the provision of gas metering retranslated unless they are carried at fair value.services within Great Britain. The Company is a public limitedcompany incorporated and domiciled in England with its Gains and losses arising on retranslation of monetary assetsregistered office at 1-3 Strand, London WC2N 5EH. and liabilities are included in the income statement, except where the adoption of hedge accounting requires inclusion inThese consolidated financial statements were approved for other comprehensive income (accounting policy O).issue by the Board of Directors on 2 July 2012. On consolidation, the assets and liabilities of overseas financingThese consolidated financial statements have been prepared in operations that have a functional currency different from theaccordance with IFRS as issued by the IASB and IFRS as Company’s functional currency of pounds sterling are translatedadopted by the EU. They are prepared on the basis of all IFRS at exchange rates prevailing at the balance sheet date. Incomeaccounting standards and interpretations that are mandatory for and expense items are translated at the weighted averageperiods ending 31 March 2012 and in accordance with the exchange rates for the period, where these do not differCompanies Act 2006 applicable to companies reporting under materially from rates at the date of the transaction. ExchangeIFRS and Article 4 of the EU IAS regulation. The 2011 differences arising are classified as equity and transferred tocomparative financial information has also been prepared on the consolidated translation reserve.this basis.The consolidated financial statements have been prepared on D. Intangible assetsan historical cost basis, except for the revaluation of derivative Identifiable intangible assets are recorded at cost lessfinancial instruments and investments classified as available for accumulated amortisation and any provision for impairment.sale. Internally generated intangible fixed assets, such as software,These consolidated financial statements are presented in are recognised only if an asset is created that can be identified;pounds sterling, which is the functional currency of the it is probable that the asset created will generate futureCompany. economic benefits; and that the development cost of the asset can be measured reliably. Where no internally generatedThe preparation of financial statements requires management intangible asset can be recognised, development expenditure isto make estimates and assumptions that affect the reported recorded as an expense in the period in which it is incurred.amounts of assets and liabilities, disclosures of contingentassets and liabilities and the reported amounts of revenue and Intangible assets under development are not amortised. Otherexpenses during the reporting period (see accounting policy W). non-current intangible assets are amortised on a straight-lineActual results could differ from these estimates. basis over their estimated useful economic lives. The principal amortisation periods for categories of intangible assets are:B. Basis of consolidation Amortisation periods YearsThe consolidated financial statements incorporate the financial Software 3 to 7statements of the Company and its subsidiaries.A subsidiary is defined as an entity controlled by the Company. Intangible emission allowances are accounted for inControl is achieved where the Company has the power to accordance with accounting policy R.govern the financial and operating policies of an entity so as toobtain benefits from its activities. E. Property, plant and equipment Property, plant and equipment are recorded at cost lessWhere necessary, adjustments are made to bring the accumulated depreciation and any impairment losses.accounting policies used in the individual financial statements ofthe Company and its subsidiaries into line with those used by Cost includes payroll and finance costs incurred which arethe Company in its consolidated financial statements under directly attributable to the construction of property, plant andIFRS. Inter-company transactions are eliminated. equipment. Property, plant and equipment include assets in which theC. Foreign currencies Company’s interest comprises legally protected statutory orTransactions in currencies other than the functional currency of contractual rights of use.the Company or subsidiary concerned are recorded at the rates
National Grid Gas plc Annual Report and Accounts 2011/12 35Additions represent the purchase or construction of new assets, Material impairments are recognised in the income statementincluding capital expenditure for safety and environmental and are disclosed separately.assets, and extensions to, enhancements to, or replacement ofexisting assets. G. Taxation Current taxContributions received prior to 1 July 2009 towards the cost of Current tax assets and liabilities are measured at the amountproperty, plant and equipment, together with contributions expected to be recovered from or paid to the taxationtowards the cost of relocating plant and equipment, are authorities. The tax rates and tax laws used to compute theincluded in trade and other payables as deferred income and amount are those that are enacted or substantively enacted bycredited on a straight-line basis to the income statement over the balance sheet date. Current tax is charged or credited to thethe estimated economic useful lives of the assets to which they income statement, except to the extent that it relates to itemsrelate. recognised in other comprehensive income or directly in equity.Contributions from customers received post 1 July 2009 In these cases the tax is also recognised in othertowards the cost of property, plant and equipment are comprehensive income or directly in equity, respectively.recognised in revenue immediately, except where the Management periodically evaluates positions taken in taxcontributions are consideration for a future service, in which returns with respect to situations in which applicable taxcase they are recognised initially as deferred income and regulation is subject to interpretation and establishes provisionsrevenue is subsequently recognised over the period in which where appropriate on the basis of amounts expected to be paidthe service is provided. to the tax authorities.Depreciation is not provided on freehold land or assets in the Deferred taxcourse of construction. Other items of property, plant and Deferred tax is provided using the balance sheet liabilityequipment are depreciated, on a straight-line basis, at rates method and is recognised on temporary differences betweenestimated to write off their book values over their estimated the carrying amounts of assets and liabilities in the financialuseful economic lives. In assessing estimated useful economic statements and the corresponding tax bases used in thelives, which are reviewed on a regular basis, consideration is computation of taxable profit.given to any contractual arrangements and operationalrequirements relating to particular assets. Unless otherwise Deferred tax liabilities are generally recognised on all taxabledetermined by operational requirements, the depreciation temporary differences and deferred tax assets are recognisedperiods for the principal categories of property, plant and to the extent that it is probable that taxable profits will beequipment are, in general, as shown in the table below: available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if theDepreciation periods Years temporary difference arises from the initial recognition of assetsFreehold and leasehold buildings up to 50 and liabilities in a transaction (other than a businessPlant and machinery combination) that affects neither the accounting nor taxable– mains, services and regulating equipment 30 to 100 profit or loss.– meters and metering equipment 10 to 16Motor vehicles and office equipment 3 to 10 Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised, based on the tax rates and tax laws that have beenF. Impairment of assets enacted or substantively enacted by the balance sheet date.Impairments of assets are calculated as the difference between Deferred tax is charged or credited to the income statement,the carrying value of the asset and its recoverable amount, if except to the extent that it relates to items recognised in otherlower. Where such an asset does not generate cash flows that comprehensive income or directly in equity. In these cases theare independent from other assets, the recoverable amount of tax is also recognised in other comprehensive income orthe cash-generating unit to which that asset belongs is directly in equity, respectively.estimated. Recoverable amount is defined as the higher of fairvalue less costs to sell and estimated value in use at the date The carrying amount of deferred tax assets is reviewed at eachthe impairment review is undertaken. balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allowValue in use represents the present value of expected future all or part of the deferred income tax asset to be recovered.cash flows, discounted using a pre-tax discount rate that Unrecognised deferred tax assets are reassessed at eachreflects current market assessments of the time value of money balance sheet date and are recognised to the extent that it hasand the risks specific to the asset for which the estimates of become probable that future taxable profit will allow thefuture cash flows have not been adjusted. deferred tax asset to be recovered.Tests for impairment are carried out only if there is some Deferred tax assets and liabilities are offset when there is aindication that the carrying value of the assets may have been legally enforceable right to set off current tax assets againstimpaired. current tax liabilities, and when they relate to income taxes
36 National Grid Gas plc Annual Report and Accounts 2011/12levied by the same taxation authority and it is intended to settle items before exceptionals and remeasurements (seecurrent tax assets and liabilities on a net basis. accounting policy Q).H. Inventories L. PensionsInventories, which comprise raw materials, spares and The substantial majority of the Company’s employees areconsumables, are stated at cost, calculated on a weighted members of the defined benefit section of the National Grid UKaverage basis, less provision for damage and obsolescence. Pension Scheme. There is no contractual arrangement or stated policy for charging the net defined benefit cost of theCost comprises direct materials and those costs that have been Scheme to the Company. Accordingly, the Scheme isincurred in bringing the inventories to their present location and recognised as if it were a defined contribution scheme. Thecondition. pension charge for the year represents the contributionsI. Environmental costs payable to the Scheme for the period. A share of the assets andProvision is made for environmental costs arising from past liabilities, or the actuarial gains and losses of the Scheme areoperations, based on future estimated expenditures, discounted not recognised in these financial statements.to present values. M. LeasesChanges in the provision arising from revised estimates or Rentals under operating leases are charged to income on adiscount rates or changes in the expected timing of straight-line basis over the term of the relevant lease.expenditures are recognised in the income statement. N. Financial instrumentsThe unwinding of the discount is included within the income Financial assets, liabilities and equity instruments are classifiedstatement as a financing charge. according to the substance of the contractual arrangements entered into, and recognised on trade date. Available-for-saleJ. Revenue financial assets are non-derivatives that are either designated inRevenue represents the sales value derived from the this category or not classified in any other categories.transmission and distribution of gas and the provision of gasmetering services during the year including assessment of the Trade receivables are initially recognised at fair value andvalue of services provided, but not invoiced at the year end. It subsequently measured at amortised cost, less any appropriateexcludes value added tax and intra-group sales. allowances for estimated irrecoverable amounts. A provision is established for irrecoverable amounts when there is objectiveThe sales value for the transmission and distribution of gas is evidence that amounts due under the original payment termslargely determined from the amount of system capacity sold for will not be collected. Indications that the trade receivable maythe year and the amount of gas transported in the year, become irrecoverable would include financial difficulties of theevaluated at contractual prices on a monthly basis. The sales debtor, likelihood of the debtor’s insolvency, and default orvalue for the provision of gas metering services is largely significant failure of payment. Trade payables are initiallyderived from monthly charges for the provision of individual recognised at fair value and subsequently measured atmeters under contractual arrangements. amortised cost.Where revenue for the year exceeds the maximum amount Loans receivable and other receivables are carried at amortisedpermitted by regulatory agreement and adjustments will be cost using the effective interest rate method. Interest income,made to future prices to reflect this over-recovery, a liability for together with gains and losses when the loans and receivablesthe over-recovery is not recognised as such an adjustment to are derecognised or impaired, are recognised in the incomefuture prices relates to the provision of future services. Similarly, statement.an asset is not recognised where a regulatory agreementpermits adjustments to be made to future prices in respect of an Other financial investments are recognised at fair value plus, inunder-recovery. the case of available-for-sale financial investments, directly related incremental transaction costs and are subsequentlyIncome arising from the sale of properties as a result of property carried at fair value on the balance sheet. Changes in the fairmanagement activities, from the sale of emission allowances value of investments classified as available-for-sale areand from the recovery of pension deficit from other gas recognised directly in equity, until the investment is disposed oftransporters under regulatory arrangements, is reported under or is determined to be impaired. At this time, the cumulativeother operating income gain or loss previously recognised in equity is included in theK. Segmental information income statement for the period. Investment income onSegmental information is based on the information the Board of available-for-sale investments is recognised using the effectiveDirectors uses internally for the purposes of evaluating the interest rate method and taken through interest income in theperformance of operating segments and determining resource income statement.allocation between operating segments. The Board of Directors Borrowings, which include interest-bearing loans, UK Retailis the chief operating decision-maker and assesses the Prices Index (RPI) linked debt and overdrafts, are recorded atperformance of operations principally on the basis of operating their initial fair value which normally reflects the proceeds
National Grid Gas plc Annual Report and Accounts 2011/12 37received, net of direct issue costs less any repayments. Hedge accounting allows derivatives to be designated as aSubsequently they are stated at amortised cost, using the hedge of another (non-derivative) financial instrument, toeffective interest rate method. Any difference between the mitigate the impact of potential volatility in the income statementproceeds after direct issue costs and the redemption value is of changes in fair value of the derivative instruments. To qualifyrecognised over the term of the borrowing in the income for hedge accounting documentation is prepared specifying thestatement using the effective interest rate method. hedging strategy, the component transactions and methodology used for effectiveness measurement. The Company uses twoBorrowing costs directly attributable to the acquisition, or hedge accounting methods.construction of assets that necessarily take a substantial periodof time to prepare for their intended use, are added to their cost. Firstly, changes in the carrying value of financial instrumentsSuch additions cease when the assets are substantially ready that are designated and effective as hedges of future cash flowsfor their intended use. (cash flow hedges) are recognised directly in equity and any ineffective portion is recognised immediately in the incomeDerivative financial instruments are recorded at fair value, and statement. Amounts deferred in equity in respect of cash flowwhere the fair value of a derivative is positive, it is carried as a hedges are subsequently recognised in the income statement inderivative asset and where negative, as a derivative liability. the same period in which the hedged item affects net profit orAssets and liabilities on different transactions are only netted if loss. Where a non-financial asset or a non-financial liabilitythe transactions are with the same counterparty, a legal right to results from a forecasted transaction or firm commitment beingset-off exists and the cash flows are intended to be settled on a hedged, the amounts deferred in equity are included in thenet basis. Gains and losses arising from changes in the fair initial measurement of that non-monetary asset or liability.value are included in the income statement in the period theyarise. Secondly, fair value hedge accounting offsets the changes in the fair value of the hedging instrument against the change inNo adjustment is made with respect to derivative clauses the fair value of the hedged item in respect to the risk beingembedded in financial instruments or other contracts that are hedged. These changes are recognised in the incomeclosely related to those instruments or contracts. In particular, statement to the extent the fair value hedge is effective.interest payments on UK RPI debt are linked to movements in Adjustments made to the carrying amount of the hedged itemthe UK retail price index. The link to RPI is considered to be an for fair value hedges will be amortised over the remaining life, inembedded derivative, which is closely related to the underlying line with the hedged item.debt instrument based on the view that there is a strongrelationship between interest rates and inflation in the UK Changes in the fair value of derivatives that do not qualify foreconomy. Consequently these embedded derivatives are not hedge accounting are recognised in the income statement asaccounted for separately from the debt instrument. Where there they arise, within finance costs (included withinare embedded derivatives in host contracts not closely related, remeasurements – see accounting policy Q).the embedded derivative is separately accounted for as a Hedge accounting is discontinued when the hedging instrumentderivative financial instruments and recorded at fair value. expires or is sold, terminated, or exercised, or no longerAn equity instrument is any contract that evidences a residual qualifies for hedge accounting. At that time, any cumulativeinterest in the consolidated assets of the Company after gains or losses relating to cash flow hedges recognised indeducting all of its liabilities and is recorded at the proceeds equity are initially retained in equity and subsequentlyreceived, net of direct issue costs with an amount equal to the recognised in the income statement, in the same periods innominal amount of the shares issued included in the share which the previously hedged item affects net profit or loss. Forcapital account and the balance recorded in the share premium fair value hedges, the cumulative adjustment recorded to theaccount. carrying value of the hedged item at the date hedge accounting is discontinued, is amortised to the income statement using theSubsequent to initial recognition, the fair values of financial effective interest rate method.instruments measured at fair value that are quoted in activemarkets are based on bid prices for assets held and offer prices If a hedged forecast transaction is no longer expected to occur,for issued liabilities. When independent prices are not available, the net cumulative gain or loss recognised in equity isfair values are determined using valuation techniques which are transferred to the income statement immediately.consistent with techniques commonly used by the relevantmarket. The techniques use observable market data. P. Share-based payments National Grid issues equity-settled share-based payments toO. Hedge accounting certain employees of the Company and its subsidiaries.The Company and its subsidiaries enter into both derivative Equity-settled, share-based payments are measured at fairfinancial instruments (derivatives) and non-derivative financial value at the date of grant. The fair value determined at the grantinstruments in order to manage interest rate and foreign date of the equity-settled, share-based payments is expensedcurrency exposures, and commodity price risks associated with on a straight-line basis over the vesting period, based on anunderlying business activities and the financing of those estimate of the number of shares that will eventually vest.activities.
38 National Grid Gas plc Annual Report and Accounts 2011/12Payments made by the Company to National Grid in respect of R. Emission allowancesshare-based payments are recognised as a reduction in equity. Emission allowances, which relate to the emissions of carbon dioxide, are recorded as an intangible asset within currentQ. Business performance and exceptional items assets and are initially recorded at cost, and subsequently atand remeasurements the lower of cost and net realisable value. For allocations ofOur financial performance is analysed into two components: emission allowances granted by the UK Government, cost isbusiness performance, which excludes exceptional items and deemed to be equal to fair value at the date of allocation.remeasurements; and exceptional items and remeasurements. Receipts of such grants are treated as deferred income and areBusiness performance is used by management to monitor recognised in the income statement in the period in whichfinancial performance, as it is considered to increase the carbon dioxide emissions are made. A provision is recorded incomparability of our reported financial performance from year to respect of the obligation to deliver emission allowances andyear. Business performance subtotals, which exclude charges are recognised in the income statement in the period inexceptional items and remeasurements, are presented on the which carbon dioxide emissions are made.face of the income statement or in the notes to the financialstatements. Income from emission allowances which are sold is reported as part of other operating income.Exceptional items and remeasurements are items of incomeand expenditure that, in the judgment of management, should S. Cash and cash equivalentsbe disclosed separately on the basis that they are material, Cash and cash equivalents include cash held at bank and ineither by their nature or their size, to an understanding of our hand, together with short-term highly liquid investments with anfinancial performance and significantly distort the comparability original maturity of less than three months that are readilyof financial performance between periods. convertible to known amounts of cash and subject to an insignificant change in value. Net cash and cash equivalentsItems of income or expense that are considered by reflected in the cash flow statement are net of bank overdrafts,management for designation as exceptional items include such which are reported in borrowings.items as significant restructurings, write-downs or impairmentsof non-current assets, significant changes in environmental T. Net debtprovisions, and gains or losses on disposals of businesses or The movement in cash and cash equivalents is reconciled toinvestments. the movements in net debt. Net debt comprises cash and cashCosts arising from restructuring programmes primarily relate to equivalents, current financial investments, borrowings andredundancy costs. Redundancy costs are charged to the derivative financial instruments.income statement in the year in which a commitment is made to U. Other reservesincur the costs and the main features of the restructuring plan Other reserves comprise the capital redemption reserve arisinghave been announced to affected employees. from the refinancing and restructuring of the Lattice Group inRemeasurements comprise gains or losses recorded in the 1999. It represents the amount of the reduction in the shareincome statement arising from changes in the fair value of capital of the Company as a consequence of that restructuring.derivative financial instruments to the extent that hedge As the amounts included in other reserves are not attributableaccounting is not achieved or is not effective. to any of the other classes of equity presented, they have been disclosed as a separate classification of equity. V. Dividends Interim dividends are recognised when they become payable to the Company’s shareholders. Final dividends are recognised in the financial year in which they are approved.
National Grid Gas plc Annual Report and Accounts 2011/12 39W. Areas of judgement and key sources ofestimation uncertaintyThe preparation of financial statements requires managementto make estimates and assumptions that affect the reportedamounts of assets and liabilities, disclosures of contingentassets and liabilities and the reported amounts of revenue andexpenses during the reporting period. Actual results could differfrom these estimates. Information about such judgements andestimation is contained in the accounting policies or the notes tothe financial statements, and the key areas are summarisedbelow.Areas of judgement that have the most significant effect on theamounts recognised in the financial statements: The categorisation of certain items as exceptional items and remeasurements and the definition of adjusted earnings – note 3. 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 of estimation uncertainty that have a significantrisk of causing a material adjustment to the carrying amounts ofassets and liabilities within the next financial year: Review of residual lives, carrying values and impairment charges for intangible assets and property, plant and equipment – accounting policies D, E and F. Valuation of financial instruments and derivatives – notes 11, 14 and 26. Revenue recognition and assessment of unbilled revenue – accounting policy J. Environmental provisions – note 20.
40 National Grid Gas plc Annual Report and Accounts 2011/12Adoption of new accounting standardsNew IFRS accounting standards andinterpretations adopted in 2011/12During the year ended 31 March 2012, the Company has notadopted any new IFRS, IAS or amendments issued by theIASB or interpretations by the IFRS InterpretationsCommittee, which have had a material impact on theCompany’s consolidated financial statements.New IFRS accounting standards andinterpretations not yet adoptedThe Company enters into a significant number of transactionswhich fall within the scope of IFRS 9 on financial instruments.The IASB is completing IFRS 9 in phases and the Company isevaluating the impact of the standard as it develops.IFRS 10 on consolidated financial statements, IFRS 11, onjoint arrangements, IFRS 12 on disclosures of interests inother entities and IFRS 13 on fair value measurements andconsequent amendments to IAS 27 and IAS 28 were issued inMay 2011. The Company is evaluating the impact of thesestandards on its financial statements. The standards arerequired to be adopted by the Company on 1 April 2013,subject to endorsement by the EU.The amended version of IAS 19 on employee benefits, issuedin June 2011 and effective for periods beginning after 1January 2013 (subject to EU endorsement), requires netinterest to be calculated on the net defined benefitliability/(asset) using the same discount rate used to measurethe defined benefit obligation. Where the expected return onassets exceeds the discount rate, the adoption of theamended standard will result in a reduction in reported netincome with a corresponding increase in other comprehensiveincome. As the Company does not recognise any definedbenefit pension obligations within its financial statements, thisamended standard will not directly impact on the Company’sfinancial statements.Other standards and interpretations or amendments theretowhich have been issued, but are not yet effective, are notexpected to have a material impact on the Company’sconsolidated financial statements.
National Grid Gas plc Annual Report and Accounts 2011/12 41Consolidated income statementfor the years ended 31 March 2012 2012 2011 2011 Notes £m £m £m £mRevenue 1 (a) 2,859 2,693Other operating income 24 24Operating costs 2 (1,539) (1,528)Operating profit Before exceptional items 1 (b) 1,369 1,254 Exceptional items 3 (25) (65)Total operating profit 1 (b) 1,344 1,189Interest income and similar income 5 1 2Interest expense and other finance costs Before exceptional items and remeasurements 5 (348) (372) Exceptional items and remeasurements 3, 5 (59) (24) 5 (407) (396)Profit before tax Before exceptional items and remeasurements 1,022 884 Exceptional items and remeasurements 3 (84) (89)Total profit before tax 938 795Taxation Before exceptional items and remeasurements 6 (279) (268) Exceptional items and remeasurements 3, 6 175 168Total taxation 6 (104) (100)Profit after tax Before exceptional items and remeasurements 743 616 Exceptional items and remeasurements 3 91 79Profit for the year 834 695Attributable to: Equity shareholders of the parent 833 694 Non-controlling interests 1 1 834 695The notes on pages 46 to 71 form part of the consolidated financial statements.
42 National Grid Gas plc Annual Report and Accounts 2011/12Consolidated statement of comprehensive incomefor the years ended 31 March 2012 2011 Notes £m £mProfit for the year 834 695Other comprehensive income/(loss):Net (losses)/gains in respect of cash flow hedges (1) 5Transferred to profit or loss on cash flow hedges 14 5Deferred tax on cash flow hedges 6 (4) (2)Other comprehensive income for the year, net of tax 9 8Total comprehensive income for the year 843 703Total comprehensive income attributable to: Equity shareholders of the parent 842 702 Non-controlling interests 1 1 843 703
National Grid Gas plc Annual Report and Accounts 2011/12 43Consolidated balance sheetas at 31 March 2012 2011 Notes £m £mNon-current assetsIntangible assets 8 237 192Property, plant and equipment 9 11,644 11,282Other non-current assets 10 5,611 5,611Derivative financial assets 11 857 535Total non-current assets 18,349 17,620Current assetsInventories and current intangible assets 12 25 40Trade and other receivables 13 304 231Financial investments 14 451 242Derivative financial assets 11 85 80Cash and cash equivalents 15 1 83Total current assets 866 676Total assets 19,215 18,296Current liabilitiesBorrowings 16 (953) (784)Derivative financial liabilities 11 (52) (22)Trade and other payables 17 (704) (747)Current tax liabilities (21) (23)Provisions 20 (57) (79)Total current liabilities (1,787) (1,655)Non-current liabilitiesBorrowings 16 (7,186) (7,118)Derivative financial liabilities 11 (391) (86)Other non-current liabilities 18 (1,083) (1,101)Deferred tax liabilities 19 (1,824) (1,873)Provisions 20 (102) (121)Total non-current liabilities (10,586) (10,299)Total liabilities (12,373) (11,954)Net assets 6,842 6,342EquityCalled up share capital 21 45 45Share premium account 204 204Retained earnings 5,287 4,795Cash flow hedge reserve (27) (36)Other reserves 1,332 1,332Shareholders equity 6,841 6,340Non-controlling interests 1 2Total equity 6,842 6,342These financial statements, comprising the consolidated income statement, consolidated statement of comprehensive income, consolidatedbalance sheet, consolidated statement of changes in equity, consolidated cash flow statement, accounting policies, adoption of newaccounting standards and the notes to the consolidated financial statements 1 to 30, were approved by the Board of Directors on 2 July 2012and were signed on its behalf by: Paul Whittaker Director Adam Wiltshire Director
44 National Grid Gas plc Annual Report and Accounts 2011/12Consolidated statement of changes in equity Called-up Share Cash flow Total Non- share premium Retained hedge Other shareholders controlling Total capital account earnings reserve reserves equity interests equity £m £m £m £m £m £m £m £mAs at 1 April 2010 45 204 4,492 (44) 1,332 6,029 2 6,031Total comprehensive income for the year - - 694 8 - 702 1 703Equity dividends - - (400) - - (400) - (400)Other movements in non-controlling interests - - - - - - (1) (1)Share-based payments - - 9 - - 9 - 9As at 31 March 2011 45 204 4,795 (36) 1,332 6,340 2 6,342Total comprehensive income for the year - - 833 9 - 842 1 843Equity dividends - - (350) - - (350) - (350)Other movements in non-controlling interests - - - - - - (2) (2)Share-based payments - - 8 - - 8 - 8Tax on share-based payments - - 1 - - 1 - 1At 31 March 2012 45 204 5,287 (27) 1,332 6,841 1 6,842The Company is prohibited from declaring a dividend or other distribution unless it has certified that it is in compliance in all material respectswith certain regulatory obligations, including a requirement to ensure it has sufficient financial resources and facilities to enable it to carry onits business and a requirement to use all reasonable endeavours to maintain an investment grade credit rating.The cash flow hedge reserve on interest rate swap contracts will be continuously transferred to the income statement until the borrowings arerepaid. The amount due to be released from reserves to the income statement within the next year is £8m, with the remaining amount due tobe released with the same maturity profile as borrowings due after more than one year.
National Grid Gas plc Annual Report and Accounts 2011/12 45Consolidated cash flow statementfor the years ended 31 March 2012 2011 Notes £m £mCash flows from operating activitiesTotal operating profit 1(b) 1,344 1,189Adjustments for: Exceptional items 3 25 65 Depreciation, amortisation and impairment 522 462 Share-based payment charge 8 9 Changes in working capital (93) 46 Changes in provisions (12) 7Cash flows relating to exceptional items (58) (72)Cash generated from operations 1,736 1,706Tax paid (130) (118)Net cash inflow from operating activities 1,606 1,588Cash flows from investing activitiesPurchases of intangible assets (71) (86)Purchases of property, plant and equipment (904) (921)Disposals of property, plant and equipment 7 2Interest received 1 2Net movement in short-term financial investments (208) 84Net cash flow used in investing activities (1,175) (919)Cash flows from financing activitiesProceeds from loans received - 350Repayment of loans (1) (394)Net movements in short-term borrowings and derivatives 22 102Interest paid (178) (264)Dividends paid to shareholders (350) (400)Net cash flow used in financing activities (507) (606)Net (decrease)/increase in cash and cash equivalents (76) 63Net cash and cash equivalents at the start of the year (i) 49 (14)Net cash and cash equivalents at the end of the year (i) 15 (27) 49(i) Net of bank overdraft of £28m (2011: £34m).
46 National Grid Gas plc Annual Report and Accounts 2011/12Notes to the consolidated financial statements -analysis of items in the primary statements1. Segmental analysisThe Board of Directors is National Grid Gas plcs chief operating decision making body (as defined by IFRS 8 on operating segments). Thesegmental analysis is based on the information the Board of Directors uses internally for the purposes of evaluating the performance ofoperating segments and determining resource allocation between segments. The performance of operating segments is assessed principallyon the basis of operating profit before exceptional items. The following table describes the main activities for each operating segment:Gas Transmission - the gas transmission network in the UK and the associated UK liquefied natural gas (LNG) storage activitiesGas Distribution - four of the eight regional networks of Great Britains gas distribution systemGas Metering - regulated gas metering activities in the UKOther activities relate to the xoserve business which provides transportation transaction services on behalf of all the major gas networktransportation companies, including ourselves, together with corporate activities.Our segments are unchanged from those reported in the financial statements for the year ended 31 March 2011. All of the Companys salesand operations take place within the UK.Sales between businesses are priced having regard to the regulatory and legal requirements that the businesses are subject to, which includerequirements to avoid cross-subsidies.(a) Revenue Sales Sales Sales Sales Total between to third Total between to third sales businesses parties sales businesses parties 2012 2012 2012 2011 2011 2011 £m £m £m £m £m £mOperating segments Gas Transmission 959 - 959 889 1 888 Gas Distribution 1,597 43 1,554 1,522 44 1,478 Gas Metering 331 1 330 311 - 311Other activities 47 31 16 38 22 16 2,934 75 2,859 2,760 67 2,693Where revenue received or receivable exceeds the maximum amount permitted by regulatory agreement and adjustments will be made tofuture prices to reflect the over-recovery, no liability is recognised. Similarly, no asset is recognised where a regulatory agreement permitsadjustments to be made to future prices in respect of an under-recovery. There was an under-recovery of £1m at 31 March 2012 (2011:£51m).Revenues of £852m (2011: £875m) are derived from a single external customer. These revenues are attributable to the Gas Transmission,Gas Distribution and Gas Metering businesses.(b) Operating profit/(loss)Further details of the exceptional items and remeasurements are provided in note 3. Before exceptional items After exceptional items 2012 2011 2012 2011 £m £m £m £mOperating segments Gas Transmission 459 420 458 412 Gas Distribution 763 711 733 654 Gas Metering 162 136 168 136Other activities (15) (13) (15) (13) 1,369 1,254 1,344 1,189
National Grid Gas plc Annual Report and Accounts 2011/12 471. Segmental analysis continued(c) Capital expenditure and depreciation Depreciation Capital expenditure and amortisation 2012 2011 2012 2011 £m £m £m £mOperating segments Gas Transmission 235 289 146 132 Gas Distribution 645 669 251 218 Gas Metering 48 54 94 105Other activities 7 6 3 2 935 1,018 494 457By asset type Property, plant and equipment 865 932 453 431 Other non-current intangible assets 70 86 41 26 935 1,018 494 457
48 National Grid Gas plc Annual Report and Accounts 2011/122. Operating costs Before exceptional items Exceptional items Total 2012 2011 2012 2011 2012 2011 £m £m £m £m £m £mDepreciation and amortisation 494 457 - - 494 457Payroll costs 257 264 6 17 263 281Purchases of gas 134 142 - - 134 142Rates 236 239 - - 236 239Other 393 361 19 48 412 409 1,514 1,463 25 65 1,539 1,528(a) Payroll costs 2012 2011 £m £mWages and salaries 252 254Social security costs 22 22Pension costs (note 4) 61 73Share-based payments (note 28) 8 8Severance costs (excluding pension costs) 8 10 351 367Less: payroll costs capitalised (88) (86) 263 281(b) Number of employees, including Directors 31 March Average Average 2012 2012 2011 Number Number NumberUK 5,524 5,527 6,045The vast majority of employees are either directly or indirectly employed in the transmission and distribution of gas.(c) Key management compensation 2012 2011 £m £mSalaries and short-term employee benefits 3 3Post retirement benefits 2 2Share-based payments 2 2 7 7Key management comprises the Board of Directors of the Company together with those Executive Directors of National Grid plc who havemanagerial responsibility for any of the businesses of National Grid Gas plc and who are not also Directors of the Company.(d) Directors emolumentsThe aggregate amount of emoluments paid to Directors in respect of qualifying services for 2012 was £1,432,688 (2011: £1,318,924). Therewere no payments in respect of compensation for loss of office in the year (2011: £4,182).Five Directors and the highest paid Director exercised share options during 2012 (2011: one Director other than highest paid Director).A number of the current Directors are also Directors and employees of National Grid plc or a subsidiary undertaking of that Company and arepaid by these companies.As at 31 March 2012, retirement benefits were accruing to six Directors under a defined benefit scheme (2011: six Directors under a definedbenefit scheme).The aggregate emoluments for the highest paid Director were £555,237 for 2012 (2011: £420,045) and total accrued annual pension at 31March 2012 for the highest paid Director was £80,717 (2011: £93,954).
National Grid Gas plc Annual Report and Accounts 2011/12 492. Operating costs continued(e) Auditors remuneration 2012 2011 £m £mAudit services Audit of parent company and consolidated financial statements 0.2 0.3Other services Other services supplied pursuant to legislation 0.2 0.2Other services supplied pursuant to legislation represent fees payable for services in relation to engagements which are required to be carriedout by the auditors. In particular, this includes fees for audit reports on regulatory returns.3. Exceptional items and remeasurements 2012 2011 £m £mIncluded within operating profit:Exceptional items: Restructuring costs (i) (31) (57) Other (ii) 6 (8) (25) (65)Included within finance costs:Exceptional items: Debt redemption costs (iii) - (31)Remeasurements: Net (losses)/gains on derivative financial instruments (iv) (59) - 7 - (59) (24)Total included within profit before tax (84) (89)Included within taxation:Exceptional credits arising on items not included in profit before tax: Deferred tax credit arising on the reduction in the UK tax rate (v) 152 144Tax on exceptional items 7 26Tax on remeasurements 16 (2) 175 168Total exceptional items and remeasurements after tax 91 79Total exceptional items after tax 134 74Total remeasurements after tax (43) 5Total exceptional items and remeasurements after tax 91 79(i) Restructuring costs include transformation related initiatives of £27m (2011: £47m) and pension curtailment costs as a result of redundancies of £4m (2011: £10m).(ii) Other exceptional items for the current year comprises a £6m release of an unutilised provision in our Gas Metering business. The charge for the year ended 31 March 2011 was an £8m penalty levied by Ofgem on our Gas Distribution business.(iii) Debt redemption costs in the year ended 31 March 2011 represent costs arising from our debt repurchase programme following the rights issue by National Grid plc.(iv) Remeasurements - net (losses)/gains on derivative financial instruments comprise gains and losses arising on derivative financial instruments reported in the income statement. These exclude gains and losses for which hedge accounting has been effective, which have been recognised directly in other comprehensive income or which are offset by adjustments to the carrying value of debt.(v) The exceptional tax credit arises from a reduction in the UK corporation tax rate from 26% to 24% (2011: from 28% to 26%) included in the Finance Bill 2012 which has statutory effect under the Provisional Collection of Taxes Act 1968 and is applicable from 1 April 2012. This results in a reduction in deferred tax liabilities.
50 National Grid Gas plc Annual Report and Accounts 2011/124. PensionsSubstantially all of our employees are members of either the defined benefit section or the defined contribution section of the National Grid UKPension Scheme. There is no contractual arrangement or stated policy for charging the net defined benefit cost of the scheme to theCompany. Accordingly, the Company accounts for the defined benefit section of the scheme as if it were a defined contribution scheme. Forfurther details regarding the nature and terms of the scheme and the actuarial assumptions used to value the associated assets and pensionobligations, refer to note 25.The following disclosures relate to the scheme as a whole and include amounts not recognised in these financial statements, but which arerecognised in the consolidated financial statements of National Grid plc. 2012 2011 £m £mAmounts recognised in the consolidated balance sheet of National Grid plcPresent value of funded obligations (14,496) (13,353)Fair value of plan assets 14,368 13,755 (128) 402Present value of unfunded obligations (28) (25)Net (liability)/asset (156) 377 2012 2011 £m £mChanges in the present value of the defined benefit obligation (including unfunded obligations)Opening defined benefit obligation (13,378) (13,506)Current service cost (58) (64)Interest cost (718) (739)Actuarial (losses)/gains (1,036) 292Curtailment gains on redundancies 5 8Special termination benefits (10) (12)Curtailment cost - augmentations (2) (1)Employee contributions (1) (1)Benefits paid 674 645Closing defined benefit obligation (14,524) (13,378) 2012 2011 £m £mChanges in the fair value of plan assetsOpening fair value of plan assets 13,755 13,352Expected return 808 827Actuarial gains 389 141Employer contributions 89 79Employee contributions 1 1Benefits paid (674) (645)Closing fair value of plan assets 14,368 13,755Expected contributions to defined benefit plans in the following year 64 70
National Grid Gas plc Annual Report and Accounts 2011/12 515. Finance income and costs 2012 2011 £m £mInterest income and similar incomeInterest income on financial instruments 1 2Interest income and similar income 1 2Interest expense and other finance costsInterest expense on financial liabilities held at amortised cost: Bank loans and overdrafts (55) (50) Other borrowings (377) (396)Derivatives 78 71Other interest (8) (9)Unwinding of discount on provisions (4) (3)Less: interest capitalised (i) 18 15Interest expense and other finance costs before exceptional items and remeasurements (348) (372)Exceptional itemsExceptional debt redemption costs - (31)RemeasurementsNet (losses)/gains on derivative financial instruments included in remeasurements (ii): Ineffectiveness on derivatives designated as: Fair value hedges (iii) (2) 13 Cash flow hedges (9) 4 Derivatives not designated as hedges or ineligible for hedge accounting (48) (10) (59) 7Exceptional items and remeasurements included within interest expense (59) (24)Interest expense and other finance costs (407) (396)Net finance costs (406) (394)(i) Interest on funding attributable to assets in the course of construction was capitalised during the year at a rate of 5.2% (2011: 5.6%).(ii) Includes a net foreign exchange gain on financing activities of £44m (2011: £38m gain). These amounts are offset by foreign exchange gains and losses on derivative financial instruments measured at fair value.(iii) Includes a net gain on instruments designated as fair value hedges of £149m (2011: £53m gain) offset by a net loss of £151m arising from the fair value adjustments to the carrying value of debt (2011: £40m loss).
52 National Grid Gas plc Annual Report and Accounts 2011/126. TaxationTax charged/(credited) to the income statement 2012 2011 £m £mTax before exceptional items and remeasurements 279 268Exceptional tax on items not included in profit before tax (note 3) (152) (144)Tax on total exceptional items and remeasurements (23) (24)Tax on total exceptional items and remeasurements (175) (168)Total tax charge 104 100Taxation as a percentage of profit before tax 2012 2011 % %Before exceptional items and remeasurements 27.3 30.3After exceptional items and remeasurements 11.1 12.6The tax charge for the year can be analysed as follows: 2012 2011 £m £mUnited Kingdom Corporation tax at 26% (2011: 28%) 158 118 Corporation tax adjustment in respect of prior years (1) 1 Deferred tax (40) (13) Deferred tax adjustment in respect of prior years (13) (6)Total tax charge 104 100Adjustments in respect of prior years include £nil corporation tax (2011: £nil) and a £1m deferred tax credit (2011: £1m charge) that relates toexceptional items and remeasurements.Tax charged/(credited) to other comprehensive income and equity 2012 2011 £m £mCorporation tax Share-based payments (1) -Deferred tax Cash flow hedges 4 2 3 2Total tax recognised in the statement of comprehensive income 4 2Total tax relating to share-based payments recognised directly in equity (1) - 3 2The tax charge for the year after exceptional items and remeasurements is lower (2011: lower) than the standard rate of corporation tax in theUK of 26% (2011: 28%). The differences are explained below: Before After Before After exceptional exceptional exceptional exceptional items and items and items and items and remeasure- remeasure- remeasure- remeasure- ments ments ments ments 2012 2012 2011 2011 £m £m £m £mProfit before tax Before exceptional items and remeasurements 1,022 1,022 884 884 Exceptional items and remeasurements - (84) - (89)Profit before tax 1,022 938 884 795Profit before tax multiplied by UK corporation tax rate of 26% (2011: 28%) 266 244 248 223Effects of: Adjustments in respect of prior years (13) (14) (4) (5) Expenses not deductible for tax purposes 7 7 3 3 Deferred tax impact of change in UK tax rate - (152) - (144) Other 19 19 21 23Total tax 279 104 268 100 % % % %Effective tax rate 27.3 11.1 30.3 12.6
National Grid Gas plc Annual Report and Accounts 2011/12 536. Taxation continuedFactors that may affect future tax chargesA reduction in the UK corporation tax rate to 24% from April 2012 was announced in the 2012 UK Budget Report. This has been substantivelyenacted and deferred tax balances have been calculated at this rate.Other changes, such as the proposed reduction in the UK corporation tax rate to 23% from April 2013, with a further 1% reduction in thefollowing year, will result in a UK corporation tax rate of 22% from April 2014. These changes have not been substantively enacted as at thebalance sheet date and have not been reflected in these financial statements.The process for reforming the UKs rules for taxing controlled foreign companies completed with the issue of draft legislation in the FinanceBill 2012. We do not expect any material adverse impact of this legislation on our holdings in foreign operations.7. DividendsThe following table shows the dividends paid to equity shareholders: 2012 2011 pence pence (per ordinary 2012 (per ordinary 2011 share) £m share) £mOrdinary dividendsInterim dividend for the year ended 31 March 2012 8.87 350 - -Interim dividend for the year ended 31 March 2011 - - 10.14 400 8.87 350 10.14 4008. Intangible assets Software £mNon-currentCost at 1 April 2010 221Additions 86Reclassifications between categories 1Cost at 31 March 2011 308Additions 70Disposals (4)Reclassifications between categories 16Cost at 31 March 2012 390Amortisation at 1 April 2010 (90)Amortisation charge for the year (26)Amortisation at 31 March 2011 (116)Amortisation charge for the year (41)Disposals 4Amortisation at 31 March 2012 (153)Net book value at 31 March 2012 237Net book value at 31 March 2011 192Current intangible assets are presented together with inventories in note 12.
54 National Grid Gas plc Annual Report and Accounts 2011/129. Property, plant and equipment Assets Motor in the vehicles Land and Plant and course of and office buildings machinery construction equipment Total (ii) (ii) £m £m £m £m £mCost at 1 April 2010 121 15,706 155 680 16,662Additions 67 734 99 32 932Disposals - (28) - (6) (34)Reclassifications 1 1 (18) (5) (21)Cost at 31 March 2011 189 16,413 236 701 17,539Additions 74 644 114 33 865Disposals (3) (46) - (211) (260)Reclassifications between categories - (9) (32) 25 (16)Cost at 31 March 2012 260 17,002 318 548 18,128Depreciation at 1 April 2010 (51) (5,262) (3) (538) (5,854)Depreciation charge for the year (11) (370) - (50) (431)Disposals - 22 - 6 28Depreciation at 31 March 2011 (62) (5,610) (3) (582) (6,257)Depreciation charge for the year (20) (387) - (46) (453)Disposals 2 28 - 211 241Impairment charge for the year (i) - (15) - - (15)Reclassifications between categories - 5 3 (8) -Depreciation at 31 March 2012 (80) (5,979) - (425) (6,484)Net book value at 31 March 2012 180 11,023 318 123 11,644Net book value at 31 March 2011 127 10,803 233 119 11,282(i) Relates to impairment of LNG storage assets.(ii) Prior year amounts have been restated for the cost of assets in the course of construction incorrectly reported as plant and machinery. The amount of the restatement is£126m at 31 March 2010 and £159m at 31 March 2011. 2012 2011 £m £mInformation in relation to property, plant and equipmentCapitalised interest included within cost 165 147Contributions to cost of property, plant and equipment included within: Trade and other payables 28 26 Non-current liabilities 1,011 1,01910. Other non-current assets 2012 2011 £m £mLoans and receivables - amounts owed by parent 5,611 5,611The amount owed by the parent is non-contractual and accordingly its fair value equals its book value.
National Grid Gas plc Annual Report and Accounts 2011/12 5511. Derivative financial instrumentsFor further information and a detailed description of our derivative financial instruments and hedge type designations, refer to note 26. The fairvalue by designated hedge type can be analysed as follows: 2012 2011 Asset Liabilities Total Asset Liabilities Total £m £m £m £m £m £mFair value hedgesInterest rate swaps 131 - 131 56 (2) 54Cross-currency interest rate swaps 300 (5) 295 256 (1) 255 431 (5) 426 312 (3) 309Cash flow hedgesInterest rate swaps* - (18) (18) - (15) (15)Cross-currency interest rate swaps 178 (8) 170 151 (2) 149Inflation linked swaps* - (12) (12) - (6) (6) 178 (38) 140 151 (23) 128Derivatives not in a formal hedge relationshipInterest rate swaps* 277 (240) 37 119 (53) 66Cross-currency interest rate swaps* 5 - 5 3 - 3Forward rate agreements - (3) (3) - (3) (3)Inflation linked swaps* 33 (139) (106) 27 (23) 4 315 (382) (67) 149 (79) 70 924 (425) 499 612 (105) 507Hedge positions offset within derivative instruments 18 (18) - 3 (3) -Total 942 (443) 499 615 (108) 507* Inflation linked swaps have been separately presented in the current year: comparatives have been adjusted accordingly.The maturity of derivative financial instruments is as follows: 2012 2011 Assets Liabilities Total Assets Liabilities Total £m £m £m £m £m £mIn one year or less 85 (52) 33 80 (22) 58Current 85 (52) 33 80 (22) 58In 1 - 2 years 49 (5) 44 12 (12) -In 2 - 3 years - (13) (13) 80 (4) 76In 3 - 4 years - - - 1 (2) (1)In 4 - 5 years 5 - 5 - - -More than 5 years 803 (373) 430 442 (68) 374Non-current 857 (391) 466 535 (86) 449 942 (443) 499 615 (108) 507For each class of derivative the notional contract amounts** are as follows: 2012 2011 £m £mInterest rate swaps* (4,875) (4,867)Cross-currency interest rate swaps* (1,374) (1,350)Foreign exchange forward contracts - (4)Forward rate agreements (2,454) (1,832)Inflation linked swaps* (752) (560) (9,455) (8,613)*Inflation linked swaps have been separately presented in the current year: comparatives have been adjusted accordingly.**The notional contract amounts of derivatives indicate the gross nominal value of transactions outstanding at the balance sheet date.
56 National Grid Gas plc Annual Report and Accounts 2011/1212. Inventories and current intangible assets 2012 2011 £m £mRaw materials and consumables 22 25Current intangible assets - emission allowances 3 15 25 4013. Trade and other receivables 2012 2011 £m £mTrade receivables 72 37Amounts owed by fellow subsidiaries 17 11Prepayments and accrued income 207 175Other receivables 8 8 304 231Trade receivables are non-interest bearing and generally have a 30-90 day term. Due to their short maturities, the fair value of trade and otherreceivables approximates to their book value. All other receivables are recorded at amortised cost.Provision for impairment of receivables £mAt 1 April 2010 18Recoveries net of additions (17)At 31 March 2011 1Additions net of recoveries 11At 31 March 2012 12As at 31 March 2012, trade receivables of £11m (2011: £23m) were past due but not impaired. The ageing analysis of these trade receivablesis as follows: 2012 2011 £m £mUp to 3 months past due 8 193 to 6 months past due 1 3Over 6 months past due 2 1 11 23For further information about wholesale credit risk refer to note 27(c).14. Financial investments 2012 2011 £m £mCurrentAvailable-for-sale investments - investments in short-term money funds 174 223Loans and receivables - amounts due from fellow subsidiaries 20 19Loans and receivables - restricted cash balances (i) 257 - 451 242(i) Comprises collateral placed with counterparties with whom we have entered into a credit support annex to the ISDA Master Agreement £115m (2011: nil) and pension schemedeficit contributions £142m (2011: nil).Available-for-sale investments are recorded at their fair value. The fair value of loans and receivables approximates to their book value.The maximum exposure to credit risk at the reporting date is the fair value of the financial instruments - for further information on our treasuryrelated credit risk refer to note 27. None of the financial investments are past due or impaired.
National Grid Gas plc Annual Report and Accounts 2011/12 5715. Cash and cash equivalents 2012 2011 £m £mCash at bank and short-term deposits 1 83Cash and cash equivalents excluding bank overdrafts 1 83Bank overdrafts (28) (34)Net cash and cash equivalents (27) 49The fair values of cash and cash equivalents and bank overdrafts approximate to their carrying amounts.Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for various periods rangingbetween one day and three months, depending on immediate cash requirements, and earn interest at the respective short-term deposit rates.16. Borrowings 2012 2011 £m £mCurrentBank loans 683 278Bonds 124 101Other loans 1 2Borrowings from fellow subsidiaries 117 369Bank overdrafts 28 34 953 784Non-currentBank loans 831 994Bonds 6,178 5,964Other loans 177 160 7,186 7,118Total borrowings 8,139 7,902Total borrowings are repayable as follows: 2012 2011 £m £mLess than 1 year 953 784In 1 - 2 years 481 224In 2 - 3 years 124 501In 3 - 4 years - 133In 4 - 5 years 54 -In more than 5 years by instalments 52 51In more than 5 years other than by instalments 6,475 6,209 8,139 7,902The fair value of borrowings at 31 March 2012 was £8,829m (2011: £8,081m). Market values, where available, have been used to determinefair values. Where market values are not available, fair values have been calculated by discounting cash flows at prevailing interest rates.The notional amount outstanding of the debt portfolio as at 31 March 2012 was £8,108m (2011: £8,048m).Collateral is placed with or received from any counterparty where we have entered into a credit support annex to the ISDA Master Agreementonce the current mark-to-market valuation of the trades between the parties exceeds an agreed threshold. Included in current bank loans is£479m (2011: £275m) in respect of cash received under collateral agreements.As at 31 March 2012, the Company had committed credit facilities of £425m (2011: £425m) of which £425m was undrawn (2011: £425mundrawn). These undrawn facilities expire within two to three years. All of the unused facilities at 31 March 2012 and 31 March 2011 wereheld as backup to commercial paper and similar borrowings.None of the Companys borrowings are secured by charges over assets of the Company.
58 National Grid Gas plc Annual Report and Accounts 2011/1217. Trade and other payables 2012 2011 £m £mTrade payables 343 411Amounts owed to fellow subsidiaries 107 78Deferred income 131 147Social security and other taxes 86 67Other payables 37 44 704 747Due to their short maturities, the fair value of trade and other payables (excluding deferred income) approximates to their book value. All tradeand other payables are recorded at amortised cost.18. Other non-current liabilities 2012 2011 £m £mTrade payables 16 22Deferred income 1,067 1,079 1,083 1,101The fair value of trade payables approximates to their book value. All other non-current liabilities are recorded at amortised cost.19. Deferred tax assets and liabilitiesThe following are the major deferred tax assets and liabilities recognised, and the movements thereon, during the current and prior reportingperiods:Deferred tax (assets)/liabilities Accelerated Share- Other net tax based Financial temporary depreciation payments instruments differences Total £m £m £m £m £mDeferred tax assets at 31 March 2010 - (3) - (19) (22)Deferred tax liabilities at 31 March 2010 1,877 - 3 32 1,912At 1 April 2010 1,877 (3) 3 13 1,890Credited to income statement (7) (1) (2) (9) (19)Charged to equity - - 2 - 2At 31 March 2011 1,870 (4) 3 4 1,873Deferred tax assets at 31 March 2011 - (4) - (26) (30)Deferred tax liabilities at 31 March 2011 1,870 - 3 30 1,903At 1 April 2011 1,870 (4) 3 4 1,873Credited to income statement (41) - (3) (9) (53)Charged to equity - - 4 - 4At 31 March 2012 1,829 (4) 4 (5) 1,824Deferred tax assets at 31 March 2012 - (4) - (18) (22)Deferred tax liabilities at 31 March 2012 1,829 - 4 13 1,846At 31 March 2012 1,829 (4) 4 (5) 1,824Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is intention to settle the balancesnet. At 31 March 2012 and 2011 all deferred tax assets were fully offset against deferred tax liabilities.At the balance sheet date there were no material current deferred tax assets or liabilities (2011: £nil).At 31 March 2012 there were no material unrecognised deferred tax assets (2011: £15m of capital losses).
National Grid Gas plc Annual Report and Accounts 2011/12 5920. Provisions Total Environmental Restructuring Other provisions £m £m £m £mAt 1 April 2010 70 48 54 172Additions 5 33 23 61Release of unused amounts - - (11) (11)Unwinding of discount 3 - - 3Utilised (7) (14) (4) (25)At 31 March 2011 71 67 62 200Additions 1 24 5 30Release of unused amounts - (24) (14) (38)Unwinding of discount 4 - - 4Utilised (8) (16) (13) (37)At 31 March 2012 68 51 40 159 2012 2011 £m £mCurrent 57 79Non-current 102 121 159 200Environmental provisionThe environmental provision represents the net present value of the estimated environmental remediation costs relating to old gasmanufacturing sites owned by the Company (discounted using a real rate of 2.0%). Cash flows are expected to be incurred between 2012 and2060.A number of uncertainties affect the calculation of the provision including the impact of regulation, the accuracy of the site surveys,unexpected contaminants, transportation costs, the impact of alternative technologies and changes in the discount rate. The provisionincorporates our best estimate of the financial effect of these uncertainties, but future material changes in any of the assumptions couldmaterially impact on the calculation of the provision and hence the income statement.The undiscounted amount of the provision at 31 March 2012 was £92m (2011: £112m), being the best undiscounted estimate of the liabilityhaving regard to these uncertainties.Restructuring provisionAt 31 March 2012, £14m of the total restructuring provision (2011: £26m) related to the restructuring of our LNG storage facilities, and £13mconsisted of provisions for the disposal of surplus leasehold interests and rates payable on surplus properties (2011: £14m). The expectedpayment dates for property restructuring costs remain uncertain. The remainder of the restructuring provision related to businessreorganisation costs, to be paid over the next two years.Other provisionsOther provisions at 31 March 2012 include £24m (2011: £22m) in respect of employer liability claims. In accordance with insurance industrypractice, the estimates for employer liability claims are based on experience from previous years and, therefore, there is no identifiablepayment date associated with these items.
60 National Grid Gas plc Annual Report and Accounts 2011/1221. Share capital Number Number of shares of shares 2012 2011 2012 2011 millions millions £m £m 2At 31 March 2011 and 2012 - ordinary shares of 1 /15p eachAllotted, called-up and fully paid 3,944 3,944 45 4522. Consolidated cash flow statement(a) Reconciliation of net cash flow to movement in net debt 2012 2011 £m £m(Decrease)/increase in cash and cash equivalents (76) 63Increase/(decrease) in financial investments 208 (84)Increase in borrowings and related derivatives (21) (58)Net interest paid on the components of net debt 177 262Change in net debt resulting from cash flows 288 183Changes in fair value of financial assets and liabilities and exchange movements (53) 10Net interest charge on the components of net debt (353) (404)Movement in net debt (net of related derivative financial instruments) in the year (118) (211)Net debt (net of related derivative financial instruments) at the start of the year (7,070) (6,859)Net debt (net of related derivative financial instruments) at the end of the year (7,188) (7,070)(b) Analysis of changes in net debt Cash and Net cash cash Bank and cash Financial Total equivalents overdrafts equivalents investments Borrowings Derivatives debt £m £m £m £m £m £m £mAt 1 April 2010 1 (15) (14) 326 (7,657) 486 (6,859)Cash flow 82 (19) 63 (86) 275 (69) 183Fair value gains and losses and exchange movements - - - - (9) 19 10Interest charges - - - 2 (477) 71 (404)At 31 March 2011 83 (34) 49 242 (7,868) 507 (7,070)Cash flow (82) 6 (76) 208 298 (142) 288Fair value gains and losses and exchange movements - - - - (109) 56 (53)Interest charges - - - 1 (432) 78 (353)At 31 March 2012 1 (28) (27) 451 (8,111) 499 (7,188)Balances at 31 March 2012 comprise:Non-current assets - - - - - 857 857Current assets 1 - 1 451 - 85 537Current liabilities - (28) (28) - (925) (52) (1,005)Non-current liabilities - - - - (7,186) (391) (7,577) 1 (28) (27) 451 (8,111) 499 (7,188)
National Grid Gas plc Annual Report and Accounts 2011/12 61Notes to the consolidated financial statements -supplementary information23. Commitments and contingencies(a) Future capital expenditure 2012 2011 £m £mContracted for but not provided 481 428(b) Operating lease commitmentsTotal commitments under non-cancellable operating leases were as follows: 2012 2011 £m £mAmounts due:Less than 1 year 17 16In 1 - 2 years 14 11In 2 - 3 years 11 9In 3 - 4 years 7 7In 4 - 5 years 6 5More than 5 years 18 22 73 70(c) Other commitments, contingencies and guaranteesThe value of other commitments, contingencies and guarantees at 31 March 2012 amounted to £194m (2011: £121m), including gaspurchase commitments amounting to £104m (2011: £102m).(d) Parent Company loan guarantees on behalf of subsidiariesThe Company has guaranteed the repayment of principal sums, any associated premium and interest on specific loans due from its financialsubsidiaries to third parties. At 31 March 2012, the sterling equivalent amounted to £1,109m (2011: £1,104m).(e) Litigation and claimsThere are no material outstanding litigation or claims at 31 March 2012.
62 National Grid Gas plc Annual Report and Accounts 2011/1224. Related party transactionsThe following material transactions are with fellow subsidiaries of National Grid and a pension plan, and are in the normal course of business. Parent Other related parties Total 2012 2011 2012 2011 2012 2011 £m £m £m £m £m £mIncome:Goods and services supplied - - 10 20 10 20Expenditure:Services received - - 25 39 25 39Corporate services received - - 15 15 15 15Charges in respect of pensions costs - - 64 14 64 14Interest received on borrowings from fellow subsidiaries - - 1 7 1 7Interest paid on borrowings from fellow subsidiaries - - 8 1 8 1 - - 113 76 113 76Outstanding balances at 31 March in respect of income, expenditureand settlement of corporation tax:Amounts receivable - - 17 11 17 11Amounts payable - - 107 78 107 78Advances to fellow subsidiaries (due within one year):At 1 April 19 19 - - 19 19Advances - - 1 - 1 -At 31 March 19 19 1 - 20 19Advances to parent (due after more than one year):At 1 April and 31 March 5,611 5,611 - - 5,611 5,611Borrowings payable to fellow subsidiaries (amounts due within one year):At 1 April - - 369 74 369 74Reclassification - - - 250 - 250Advances - - 62 71 62 71Repayments - - (314) (26) (314) (26)At 31 March - - 117 369 117 369Borrowings payable to fellow subsidiaries (amounts due after more than one year):At 1 April - - - 250 - 250Reclassification - - - (250) - (250)At 31 March - - - - - -Amounts receivable from or payable to related parties in respect of sales and expenditure are ordinarily settled one month in arrears. Theadvance to the parent due after more than one year is not interest bearing. Other advances to and borrowings from fellow subsidiaries arerepayable on demand and bear interest at commercial rates.No amounts have been provided at 31 March 2012 (2011: £nil) and no expense has been recognised during the year (2011: £nil) in respect ofbad or doubtful debts for related party transactions.Details of guarantees provided in respect of related parties are provided in note 23.Details of key management compensation are provided in note 2(c).
National Grid Gas plc Annual Report and Accounts 2011/12 6325. Actuarial information on pensionsThe National Grid UK Pension Scheme is funded with assets held in a separate trustee administered fund. The defined benefit section of thescheme is subject to independent actuarial valuation at least every three years, on the basis of which the qualified actuary certifies the rate ofemployers contribution which, together with the specified contributions payable by employees and the proceeds from the schemes assets,are expected to be sufficient to fund the benefits payable under the scheme. The next valuation will be based on the position at 31 March2013. The results of the 2010 valuation are shown below:Latest full actuarial valuation 31 March 2010Actuary Towers WatsonMarket value of scheme assets at latest valuation £13,399mActuarial value of benefits due to members £(13,998)mMarket value as percentage of benefits 96%Funding deficit £599mFunding deficit (net of tax) £455mThe 2010 actuarial valuation showed that, based on long-term financial assumptions, the contribution rate required to meet future benefitaccrual was 35% of pensionable earnings (32% employers and 3% employees). In addition, National Grid makes payments to the scheme tocover administration costs and the Pension Protection Fund levy. The employer contribution rate will be reviewed as part of the next valuationin 2013, while the administration costs are reviewed annually.Following the 2010 actuarial valuation, National Grid and the Trustees agreed a recovery plan which will see the funding deficit repaid by 31March 2027. Under the schedule of contributions, no deficit contributions were made in 2010/11 or 2011/12. An annual payment of £47m,rising in line with retail price inflation from March 2010, will commence in 2012/13 and continue until 2027.Following this agreement, the Company has established a secured bank account with a charge in favour of the Trustees of the National GridUK Pension Scheme. The balance of the bank account at 31 March 2012 was £142m. The funds in the bank account will be paid to thescheme in the event that National Grid Gas plc is subject to an insolvency event, or is given notice of less than 12 months that Ofgem intendsto revoke its licence under the Gas Act 1986. The funds in the bank account will be released back to the Company if the scheme moves intosurplus.This defined benefit section of the scheme has been closed to new members since 1 April 2002. A defined contribution arrangement has beenoffered to new employees since that date.Asset allocationsThe major categories of plan assets as a percentage of total plan assets were as follows: 2012 2011 % %Equities 31.6 33.6Corporate bonds 35.7 32.4Gilts 23.1 26.6Property 7.6 6.1Other 2.0 1.3Total 100.0 100.0Actuarial assumptionsThe expected long-term rate of return on assets has been set reflecting the price inflation expectation, the expected real return on each majorasset class and the long-term asset allocation strategy adopted for the scheme. The expected real returns on specific asset classes reflecthistorical returns, investment yields on the measurement date and general future return expectations, and have been set after taking advicefrom the schemes actuaries. 2012 2011 % %Discount rate (i) 4.8 5.5Expected return on plan assets 5.4 6.0Rate of increase in salaries (ii) 4.0 4.4Rate of increase in pensions in payment and deferred pensions 3.2 3.5Rate of increase in Retail Prices Index 3.2 3.5(i) The discount rate for pension liabilities has been determined by reference to appropriate yields on high quality corporate bonds prevailing in the UK debt markets at the balance sheet date.(ii) A promotional scale has been used where appropriate.The assumed life expectations for a retiree at age 65 are as follows: 2012 2011 years yearsToday:Males 22.2 22.1Females 25.0 24.9In 20 years:Males 24.5 24.3Females 27.4 27.3
64 National Grid Gas plc Annual Report and Accounts 2011/1225. Actuarial information on pensions continuedSensitivities to actuarial assumptions Change in Change in pension obligations annual pension cost 2012 2011 2012 2011 £m £m £m £mSensitivities (all other assumptions held constant)0.1% change in discount rate 210 190 1 10.5% change in long term rate of increase in salaries 80 80 3 3Increase of one year in life expectations at age 60 475 420 1 226. Supplementary information on derivative financial instrumentsTreasury financial instrumentsDerivatives are financial instruments that derive their value from the price of an underlying item such as interest rates, foreign exchange,credit spreads, commodities, equities or other indices. Derivatives enable their users to alter exposure to these market or credit risks. We usederivatives to manage the interest rate and foreign exchange risks from our financing portfolio and this enables the optimisation of the overallcost of accessing debt capital markets.We calculate fair value of the financial derivatives by discounting all future cash flows by the market yield curve at the balance sheet date.The market yield curve for each currency is obtained from external sources for interest and foreign exchange rates. In the case of derivativeinstruments that include options, the Blacks variation of the Black-scholes model is used to calculate the fair value.Hedging policies using derivative financial instruments are further explained in note 27 and, where possible, derivatives held as hedginginstruments are formally designated as hedges as defined in IAS 39. Derivatives may qualify as hedges for accounting purposes if they arefair value hedges or cash flow hedges. These are described as follows:Fair value hedgesFair value hedges principally consist of interest rate and cross-currency swaps that are used to protect against changes in the fair value offixed-rate, long-term financial instruments due to movements in market interest rates. For qualifying fair value hedges, all changes in the fairvalue of the derivative and changes in the fair value of the item in relation to the risk being hedged are recognised in the income statement. Ifthe hedge relationship is terminated, the fair value adjustment to the hedged item continues to be reported as part of the basis of the item andis amortised to the income statement as a yield adjustment over the remainder of the life of the hedged item.Cash flow hedgesExposure arises from the variability in future interest and currency cash flows on assets and liabilities which bear interest at variable rates orare in a foreign currency. Interest rate and cross-currency swaps are maintained, and designated as cash flow hedges where they qualify, tomanage this exposure. Fair value changes on designated cash flow hedges are initially recognised directly in the cash flow hedge reserve, asgains or losses recognised in equity. Amounts are transferred from equity and recognised in the income statement as the income or expenseis recognised on the hedged asset or liability.Forward foreign currency contracts are used to hedge anticipated and committed future currency cash flows. Where these contracts qualifyfor hedge accounting, they are designated as cash flow hedges. On recognition of the underlying transaction in the financial statements, theassociated hedge gains and losses deferred in equity are transferred and included with the recognition of the underlying transaction.The gains and losses on ineffective portions of such derivatives are recognised immediately in remeasurements within the income statement.When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or lossexisting in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the incomestatement or on the balance sheet. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reportedin equity is immediately transferred to remeasurements within the income statement.Derivatives not in a formal hedge relationshipOur policy is not to use derivatives for trading purposes. However, due to the complex nature of hedge accounting under IAS 39, somederivatives may not qualify for hedge accounting, or are specifically not designated as a hedge where natural offset is more appropriate.Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately inremeasurements within the income statement.
National Grid Gas plc Annual Report and Accounts 2011/12 6527. Financial riskOur activities expose us to a variety of financial risks: market risk, including foreign exchange risk; fair value interest rate risk and cash flowinterest rate risk; credit risk; and liquidity risk. Our overall risk management programme focuses on the unpredictability of financial marketsand seeks to minimise potential adverse effects on financial performance. We use financial instruments, including derivative financialinstruments to manage risks of this type.Risk management related to financial activities is carried out by a central treasury department under policies approved by the FinanceCommittees of the Board of Directors of National Grid plc and the Company. The objective of the treasury department is to manage fundingand liquidity requirements, including managing associated financial risks, to within acceptable boundaries. The Finance Committee of theBoard provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchangerisk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excessliquidity.(a) Market risk(i) Foreign exchange riskWe are exposed to foreign exchange risk arising from non-sterling future commercial transactions and non-sterling recognised assets andliabilities.Our policy for managing foreign exchange risk is to hedge contractually committed foreign currency cash flows over a prescribed minimumsize. Where cash forecasts are less certain, we hedge a proportion of the foreign currency flows based on the probability of those cash flowsoccurring. Instruments used to manage foreign exchange risk include foreign exchange forward contracts and foreign exchange swaps.During 2012 and 2011, derivative financial instruments were used to manage foreign exchange risk as follows: 2012 Sterling Euro Dollar Other Total £m £m £m £m £mCash and cash equivalents - 1 - - 1Financial investments 451 - - - 451Borrowings (i) (6,135) (832) (802) (370) (8,139)Pre-derivative position (5,684) (831) (802) (370) (7,687)Derivative effect (1,458) 787 800 370 499Net debt position (7,142) (44) (2) - (7,188) 2011 Sterling Euro Dollar Other Total £m £m £m £m £mCash and cash equivalents 82 1 - - 83Financial investments 242 - - - 242Borrowings (i) (5,962) (876) (719) (345) (7,902)Pre-derivative position (5,638) (875) (719) (345) (7,577)Derivative effect (1,406) 848 720 345 507Net debt position (7,044) (27) 1 - (7,070)(i) Includes bank overdraftsThere was no significant currency exposure on other financial instruments, including trade receivables and payables, and other receivablesand payables.
66 National Grid Gas plc Annual Report and Accounts 2011/1227. Financial risk continued(a) Market risk continued(ii) Cash flow and fair value interest rate riskInterest rate risk arises on our long-term borrowings. Borrowings issued at variable rates expose us to cash flow interest rate risk, partiallyoffset by cash held at variable rates. Borrowings issued at fixed rates expose us to fair value interest rate risk.Our interest rate risk management policy seeks to minimise total financing costs (being interest costs and changes in the market value ofdebt) subject to constraints. We do this by using fixed and floating-rate debt and derivative financial instruments, including interest rateswaps, swaptions and forward rate agreements.We hold some borrowings on issue that are inflation linked. We believe that these provide a partial economic offset to the inflation riskassociated with our inflation linked revenues.The following table sets out the carrying amount, by contractual maturity, of borrowings that are exposed to interest rate risk before taking intoaccount interest rate swaps: 2012 2011 £m £mFixed interest rate borrowingsLess than 1 year (104) (83)In 1 - 2 years (481) (24)In 2 - 3 years - (501)In 3 - 4 years - -In 4 - 5 years (54) -More than 5 years (2,781) (2,658) (3,420) (3,266)Floating interest rate borrowings (including RPI linked) (4,719) (4,583)Non-interest bearing borrowings - (53)Total borrowings (8,139) (7,902)During 2012 and 2011, net debt was managed using derivative instruments to hedge interest rate risk as follows: 2012 Fixed Floating rate rate RPI (i) Other (ii) Total £m £m £m £m £mCash and cash equivalents 1 - - - 1Financial investments - 431 - 20 451Borrowings (iii) (3,420) (950) (3,769) - (8,139)Pre-derivative position (3,419) (519) (3,769) 20 (7,687)Derivative effect 819 (435) 115 - 499Net debt position (iv) (2,600) (954) (3,654) 20 (7,188) 2011 Fixed Floating rate rate RPI(i) Other (ii) Total £m £m £m £m £mCash and cash equivalents 83 - - - 83Financial investments - 242 - - 242Borrowings (iii) (3,266) (958) (3,625) (53) (7,902)Pre-derivative position (3,183) (716) (3,625) (53) (7,577)Derivative effect 1,413 (1,135) 229 - 507Net debt position (iv) (1,770) (1,851) (3,396) (53) (7,070)(i) The post-derivative impact represents financial instruments linked to UK RPI.(ii) Represents financial instruments which are not directly affected by interest rate risk, including investments in equity or other non-interest bearing instruments.(iii) Includes bank overdrafts(iv) The post derivative impact includes short-dated derivative contracts maturing within 12 months of the balance sheet date.
National Grid Gas plc Annual Report and Accounts 2011/12 6727. Financial risk continued(b) Fair value analysisThe following provides an analysis of our financial instruments measured at fair value. They are reported in a tiered hierarchy based on thevaluation methodology described in note 26 and reflecting the significance of market observable inputs. The best evidence of fair value is aquoted price in an actively traded market. In the event that the market for a financial instrument is not active, a valuation technique is used. 2012 2011 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total £m £m £m £m £m £m £m £mAssetsAvailable-for-sale investments 174 - - 174 223 - - 223Derivative financial instruments - 941 1 942 - 614 1 615 174 941 1 1,116 223 - 614 - 1 - 838LiabilitiesDerivative financial instruments - (348) (95) (443) - (108) - (108)Total 174 593 (94) 673 223 506 1 730Level 1: Financial instruments with quoted prices for identical instruments in active markets.Level 2: Financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instrumentsin inactive markets and financial instruments valued using models where all significant inputs are based directly or indirectly on observablemarket data.Level 3: Financial instruments valued using techniques where one or more significant inputs are based on unobservable market data.During the year no transfers have been made between the hierarchy levels.The financial instruments classified as level 3 are currency swaps where the currency forward curve is illiquid and inflation linked swaps wherethe inflation curve is illiquid. In valuing these instruments, third party valuations are obtained from more than one source to support thereported value. The changes in the value of our level 3 derivative financial instruments are as follows: 2012 2011 Level 3 Level 3 Valuation Valuation £m £mAt 1 April 1 2Net losses for the year (i) (22) -Purchases (72) -Settlements (1) (1)At 31 March (94) 1(i) Losses of £22m (2011: £nil) are attributable to assets or liabilities held at the end of the reporting period and have been recognised in finance costs in the income statement.During the year, limited price inflation (LPI) swaps were transacted. These derivative instruments are sensitive to changes in the LPI marketcurve. An illustrative movement in the basis points of the LPI market curve would have the following impacts, after the effects of tax: 2012 Income Other Statement equity reserves £m £m+ 20 basis points change in LPI market curve (22) -- 20 basis points change in LPI market curve 21 -A reasonably possible change in assumptions of all other level 3 instruments is unlikely to result in a material change of fair values.
68 National Grid Gas plc Annual Report and Accounts 2011/1227. Financial risk continued(c) Credit riskWe are exposed to the risk of loss resulting from counterparties default on their commitments including failure to pay or make a delivery on acontract. This risk is inherent in commercial business activities. Credit risk arises from cash and cash equivalents, derivative financialinstruments, and deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, includingoutstanding receivables and committed transactions.Treasury related credit riskCounterparty risk arises from the investment of surplus funds and from the use of derivative instruments. Our limits are managed by thecentral treasury department of National Grid, as explained under Principal risk factors on pages 16 and 17.As at 31 March 2012 and 2011, we had a number of exposures to individual counterparties. In accordance with our treasury policies andcounterparty credit exposure utilisations are monitored daily against the counterparty credit limits. Counterparty credit ratings and marketconditions are reviewed continually with limits being revised and utilisation adjusted, if appropriate. We do not expect any significant lossesfrom non-performance by these counterparties.The counterparty exposure under derivative financial contracts as shown in note 11 was £942m (2011: £615m); after netting agreements itwas £789m (2011: £576m). This exposure is further reduced by collateral received as shown in note 16.Wholesale and retail credit riskOur principal commercial exposure is governed by the credit rules within the Uniform Network Code. These lay down the level of credit relativeto the regulatory asset value for each credit rating. Sales to retail customers, such as those requiring connections, are usually settled in cashor using major credit cards. Management does not expect any significant losses of receivables that have not been provided for as shown innote 13.(d) Liquidity analysisWe determine our liquidity requirements by the use of both short and long-term cash flow forecasts. These forecasts are supplemented by afinancial headroom analysis which is used to assess funding adequacy for at least a 12 month period.The following is an analysis of the contractual undiscounted cash flows payable under financial liabilities, and derivative assets and liabilitiesas at the balance sheet date: Due Due Due Due between between 3 years within 1 and 2 2 and 3 and 1 year years years beyond TotalAt 31 March 2012 £m £m £m £m £mNon-derivative financial liabilitiesBorrowings (847) (475) (125) (6,661) (8,108)Interest payments on borrowings (i) (229) (211) (211) (3,233) (3,884)Other non-interest bearing liabilities (380) (16) - - (396)Derivative financial liabilitiesDerivative contracts - receipts 122 475 451 218 1,266Derivative contract - payments (75) (379) (187) (121) (762)Total at 31 March 2012 (1,409) (606) (72) (9,797) (11,884) Due Due Due Due between between 3 years within 1 and 2 2 and 3 and 1 year years years beyond TotalAt 31 March 2011 £m £m £m £m £mNon-derivative financial liabilitiesBorrowings (679) (223) (501) (6,645) (8,048)Interest payments on borrowings (i) (237) (237) (219) (3,494) (4,187)Other non-interest bearing liabilities (455) (22) - - (477)Derivative financial liabilitiesDerivative contract - receipts 95 119 132 726 1,072Derivative contract - payments (23) (32) (23) (549) (627)Total at 31 March 2011 (1,299) (395) (611) (9,962) (12,267)(i) The interest on borrowings is calculated based on borrowings held at 31 March without taking account of future issues. Floating rate interest is estimated using a forward interest rate curve as at 31 March. Payments are included on the basis of the earliest date on which the Company can be required to settle.
National Grid Gas plc Annual Report and Accounts 2011/12 6927. Financial risk continued(e) Sensitivity analysisFinancial instruments affected by market risk include borrowings, deposits and derivative financial instruments. The following analysisillustrates the sensitivity to changes in market variables, being UK interest rates and the UK RPI.The analysis excludes the impact of movements in market variables on the carrying value of provisions.The sensitivity analysis has been prepared on the basis that the amount of net debt, the ratio of fixed to floating interest rates of the debt andderivatives portfolio, and the proportion of financial instruments in foreign currencies are all constant, and on the basis of the hedgedesignations in place at 31 March 2012 and 31 March 2011, respectively. As a consequence, this sensitivity analysis relates to the positionsat those dates and is not representative of the years then ended, as all of these varied.The following assumptions were made in calculating the sensitivity analysis:• the balance sheet sensitivity to interest rates relates only to derivative financial instruments and available-for-sale investments, as debt and other deposits are carried at amortised cost and so their carrying value does not change as interest rates move;• the sensitivity of accrued interest to movements in interest rates is calculated on net floating rate exposures on debt, deposits and derivative instruments;• changes in the carrying value of derivatives from movements in interest rates designated as cash flow hedges are assumed to be recorded fully within equity;• changes in the carrying value of derivative financial instruments not in hedging relationships only affect the income statement;• all other changes in the carrying value of derivative financial instruments designated as hedges are fully effective with no impact on the income statement;• debt with a maturity below one year is floating rate for the accrued interest part of the calculation;• the floating leg of any swap or any floating rate debt is treated as not having any interest rate already set, therefore a change in interest rates affects a full 12 month period for the accrued interest portion of the sensitivity calculations; and• sensitivity to the UK RPI does not take into account any changes to revenue or operating costs that are affected by the UK RPI or inflation generally. Inflation linked derivative sensitivity assumes that changes to nominal interest rates are solely due to changes in inflation.Using the above assumptions, the following table shows the illustrative impact on the income statement and items that are recognised directlyin equity that would result from reasonably possible movements in changes in the UK RPI and UK interest rates, after the effects of tax. 2012 2011 Other Other Income Equity Income Equity statement Reserves statement Reserves -/+ £m -/+ £m -/+ £m -/+ £mUK RPI +/- 0.50% * 13 - 12 -UK interest rates +/- 0.50% 6 14 7 13* Excludes sensitivities to limited price Inflation index, further details on sensitivities are provided in note 27(b).The income statement sensitivities impact interest expense and financial instrument remeasurements.(f) Capital and risk managementOur objectives when managing capital are to safeguard the Companys ability to continue as a going concern, to remain within regulatoryconstraints and to maintain an efficient mix of debt and equity funding thus achieving an optimal capital structure and cost of capital.The principal measure of balance sheet efficiency is gearing calculated as net debt expressed as a percentage of regulatory asset value(RAV). The RAV gearing ratio at 31 March 2012 was 52% compared with 54% at 31 March 2011. We regularly review and maintain or adjustthe capital structure as appropriate in order to manage the level of RAV gearing.Our licence and some of our bank loan agreements impose lower limits for the long-term credit ratings that the Company must hold. Theserequirements are monitored on a regular basis in order to ensure compliance.
70 National Grid Gas plc Annual Report and Accounts 2011/1228. Share options and reward plansNational Grid operates four principal forms of share option and share reward plans. These plans include an employee Sharesave scheme, aLong Term Performance plan (LTPP), the Deferred Share Plan and the Retention Award Plans.Active share plansSharesave Scheme - share options are offered to employees at 80% of the market price at the time of invitation. The share options areexercisable on completion of a three and/or five year Save As You Earn contract.LTPPlan - awards granted in National Grid shares and made to Executive Directors of National Grid and senior employees. The criteria arebased on adjusted earnings per share (50%) when compared to the growth in RPI, National Grids total shareholder return (TSR) (25%) whencompared to the median TSR of the FTSE 100 companies and return on equity (25%) compared against the relevant allowed regulatoryreturn.Deferred Share Plan - 50% of any Annual Performance Plan awarded to Executive Directors of National Grid and a fixed percentage awardedto senior employees is automatically deferred into National Grid shares which are held in trust for three years before release.Retention Award Plans - awards delivered in National Grid shares to senior employees and vest in equal tranches over a period up to fouryears, providing the employee remains employed within National Grid.Additional information in respect of share plans (excluding Sharesave scheme) 2012 2011 millions millionsAwards of ordinary shares at 1 April 1.9 1.3Impact of rights issue - 0.2Awards made 0.6 0.6Lapses/forfeits - (0.2)Awards vested (0.2) -Awards of ordinary shares at 31for release at 31 MarchConditional awards available March 2.3 1.9Conditional awards available for release at 31 March - 0.2Share options - Sharesave scheme Sharesave scheme options Weighted average price £ millionsAt 31 March 2010 5.10 11.4Impact of rights issue - 1.4Granted 4.45 2.7Lapsed - expired 4.63 (0.8)Exercised 5.11 - (2.1)At 31 March 2011 4.43 12.6Transfers 4.43 (0.6)Granted 4.96 2.3Lapsed - expired 5.03 (0.7)Exercised 4.11 - (2.3)At 31 March 2012 4.57 11.3ExercisableAt 31 March 2012 4.57 0.1At 31 March 2011 4.84 0.9Weighted average share price at exercise dateYear ended 31 March 2012 6.15 2.7Year ended 31 March 2011 5.53 2.1The weighted average remaining contractual life of options in the employee Sharesave scheme at 31 March 2012 was 2 years. These optionshave exercise prices between £3.80 and £5.73 per ordinary share. The aggregate intrinsic value of all options outstanding and exercisable at31 March 2012 amounted to £22m and £0.5m respectively.
National Grid Gas plc Annual Report and Accounts 2011/12 7128. Share options and reward plans continuedAwards under share option and reward plans 2012 2011Share Options: Average share price at date of grant 607.0p 564.5p Average exercise price 496.0p 445.0p Average fair value 90.5p 131.6pOther share plans Average share price at date of grant 602.1p 493.3p Average fair value 483.2p 327.8pFair value calculation assumptions 2012 2011Dividend yield (%) 6.4-6.9 4.4-5.0Volatility (%) 25.4-28.0 22.4-26.1 15.6-18.9Risk-free investment rate (%) 0.6-1.2 2.5Average life (years) 4.0 4.0The fair values of awards under the Sharesave scheme have been calculated using the Black-Scholes European model. The fair value ofawards with total shareholder return performance conditions are calculated using a Monte Carlo Simulation model. Fair values of other awardsare calculated as the share price at the grant date, less the present value of dividends not received in the vesting period.Volatility was derived based on the following, and is assumed to revert from its current implied level to its long-run mean, based on historicalvolatility under (ii) below:(i) implied volatility in traded options over National Grid plcs shares;(ii) historical volatility of National Grid plcs shares over a term commensurate with the expected life of each option; and(iii) implied volatility of comparator companies where options in their shares are traded.Additional information in respect of share options 2012 2011 £m £mShare options exercisedCash received on exercise of all share options during the year 10 11Tax benefits realised from share options exercised during the year 2 129. Ultimate parent companyNational Grid Gas plc’s immediate parent company is National Grid Gas Holdings Limited. The ultimate parent company and controlling partyis National Grid plc. Both of these companies are incorporated in Great Britain and are registered in England and Wales. National Grid plcconsolidates the accounts of National Grid Gas plc. Copies of the consolidated accounts of National Grid plc may be obtained from theCompany Secretary, 1-3 Strand, London WC2N 5EH.30. Principal subsidiary undertakings Principal activity HoldingBritish Transco Capital Inc. (incorporated in the US) Financing 100%British Transco Finance Inc. (incorporated in the US) Financing 100%British Transco Finance (No. 1) Limited (incorporated in the Cayman Islands) Financing 100%British Transco Finance (No. 2) Limited (incorporated in the Cayman Islands) Financing 100%British Transco International Finance BV (incorporated in the Netherlands) Financing 100%National Grid Metering Limited Gas metering services 100%Xoserve Limited Gas transportation transaction services 56.57%A full list of all subsidiaries and associated undertakings is available from the Company Secretary of the Company.Unless otherwise stated all subsidiaries are incorporated in England and Wales.
72 National Grid Gas plc Annual Report and Accounts 2011/12Company accounting policiesfor the year ended 31 March 2012A. Basis of preparation of individual financial Additions represent the purchase or construction of new assets, extensions to, or significant increases in, the capacity ofstatements under UK GAAP tangible fixed assets.These individual financial statements of the Company havebeen prepared in accordance with applicable UK accounting Contributions received towards the cost of tangible fixed assetsand financial reporting standards and the Companies Act 2006. are included in creditors as deferred income and credited on a straight-line basis to the profit and loss account over the life ofThe individual financial statements of the Company have been the assets.prepared on a historical cost basis, except for the revaluation offinancial instruments. Depreciation is not provided on freehold land or assets in the course of construction. Other tangible fixed assets areThese financial statements are presented in pounds sterling depreciated principally on a straight-line basis, at ratesbecause that is the currency of the primary economic estimated to write off their book values over their estimatedenvironment in which the Company operates. useful economic lives. In assessing estimated useful economicThe Company has not presented its own profit and loss account lives, which are reviewed on a regular basis, consideration isas permitted by section 408 of the Companies Act 2006. given to any contractual arrangements and operational requirements relating to particular assets. Unless otherwiseThe Company has taken the exemption from preparing a cash determined by operational requirements, the depreciationflow statement under the terms of FRS 1 (revised 1996) ‘Cash periods for the principal categories of tangible fixed assets are,Flow Statements’. in general, as shown in the table below:The Company has taken advantage of the exemptions in FRS 8 Depreciation periods Years‘Related Party Disclosures’ from disclosing transactions with Freehold and leasehold properties up to 50other members of the National Grid plc group of companies. Plant and machinery:In accordance with exemptions under FRS 29 ‘Financial – Mains, services and regulating equipment 30 to 100Instruments: Disclosures’, the Company has not presented the – Meters and metering equipment 10 to 16financial instruments disclosures required by the standard, as Motor vehicles and office equipment 3 to 10disclosures which comply with the standard are included in theconsolidated financial statements. D. Fixed asset investmentsThe preparation of financial statements requires management Investments held as fixed assets are stated at cost less anyto make estimates and assumptions that affect the reported provisions for impairment. Impairments are calculated such thatamounts of assets and liabilities, disclosures of contingent the carrying value of the fixed asset investment is the lower ofassets and liabilities and the reported amounts of revenue and its cost or recoverable amount.expenses during the reporting period. Actual results could differfrom these estimates. E. Impairment of fixed assets Impairments of fixed assets are calculated as the differenceB. Foreign currencies between the carrying values of the net assets of incomeTransactions in currencies other than the functional currency of generating units, including where appropriate, investments, andthe Company are recorded at the rates of exchange prevailing their recoverable amounts. Recoverable amount is defined ason the dates of the transactions. At each balance sheet date, the higher of net realisable value or estimated value in use atmonetary assets and liabilities that are denominated in foreign the date the impairment review is undertaken. Net realisablecurrencies are retranslated at closing exchange rates. Gains value represents the amount that can be generated through theand losses arising on retranslation of monetary assets and sale of assets. Value in use represents the present value ofliabilities are included in the profit and loss account. expected future cash flows discounted on a pre-tax basis, usingC. Tangible fixed assets the estimated cost of capital of the income generating unit.Tangible fixed assets are included in the balance sheet at their Impairment reviews are carried out if there is some indicationcost less accumulated depreciation. Costs include payroll costs that impairment may have occurred, or where otherwiseand finance costs incurred which are directly attributable to the required to ensure that fixed assets are not carried above theirconstruction of tangible fixed assets. estimated recoverable amounts. Impairments are recognised inTangible fixed assets include assets in which the Company’s the profit and loss account, and, where material, are disclosedinterest comprises legally protected statutory or contractual as exceptional. Impairment reversals are recognised when, inrights of use. management’s opinion, the reversal is permanent.
National Grid Gas plc Annual Report and Accounts 2011/12 73F. Taxation scheme to the Company. Accordingly, the Scheme isCurrent tax for the current and prior periods is provided at the recognised in these Company financial statements as if it wereamount expected to be paid (or recovered) using the tax rates a defined contribution scheme. The pension charge for the yearand tax laws that have been enacted or substantively enacted represents the contributions payable to the Scheme for theby the balance sheet date. period. A share of the assets and liabilities or the actuarial gains and losses of the Scheme are not recognised in theseDeferred tax is provided in full on timing differences which result Company financial statements.in an obligation at the balance sheet date to pay more tax, orthe right to pay less tax, at a future date, at tax rates expected L. Leasesto apply when the timing differences reverse, based on tax Operating lease payments are charged to the profit and lossrates and tax laws that have been enacted or substantively account on a straight-line basis over the term of the lease.enacted by the balance sheet date. Timing differences arisefrom the inclusion of items of income and expenditure in M. Financial instrumentstaxation computations in periods different from those in which Financial assets, liabilities and equity instruments are classifiedthey are included in the financial statements. Deferred tax according to the substance of the contractual arrangementsassets are recognised to the extent that it is regarded as more entered into. An equity instrument is any contract thatlikely than not that they will be recovered. Deferred tax assets evidences a residual interest in the assets of the Company afterand liabilities are not discounted. deducting all of its liabilities and is recorded at the proceeds received, net of direct issue costs.G. Stocks Loans receivable are carried at amortised cost using theStocks are stated at cost less provision for deterioration and effective interest rate method less any allowance for estimatedobsolescence. impairments. A provision is established for impairments whenH. Environmental costs there is objective evidence that the Company will not be able toEnvironmental costs, based on discounted future estimated collect all amounts due under the original terms of the loan.expenditures expected to be incurred, are provided for in full. Interest income, together with losses when the loans areThe unwinding of the discount is included within the profit and impaired, is recognised on an effective interest rate basis in theloss account as a financing charge. profit and loss account. Current asset financial investments are recognised at fair valueI. Revenue plus directly related incremental transaction costs and areRevenue represents the sales value derived from the subsequently carried at fair value on the balance sheet.transmission and distribution of gas and the provision of gas Changes in the fair value of investments classified as available-metering services during the year, including an assessment of for-sale are recognised directly in equity, until the investment isservices provided, but not invoiced as at the year end. It disposed of or is determined to be impaired. At this time theexcludes value added tax and intra-group sales. cumulative gain or loss previously recognised in equity isWhere revenue for the year exceeds the maximum amount included in net profit or loss for the period. Investment incomepermitted by regulatory agreement and adjustments will be on investments classified as available-for-sale is recognised inmade to future prices to reflect this over-recovery, a liability for the profit and loss account as it accrues.the over-recovery is not recognised as such an adjustment to Borrowings, which include interest-bearing loans, UK Retailfuture prices relates to the provision of future services. Similarly, Prices Index (RPI) linked debt and overdrafts are recorded atan asset is not recognised where a regulatory agreement their initial fair value which normally reflects the proceedspermits adjustments to be made to future prices in respect of an received, net of direct issue costs less any repayments.under-recovery. Subsequently, these are stated at amortised cost, using theJ. Replacement expenditure effective interest rate method. Any difference between proceeds and the redemption value is recognised over the term of theReplacement expenditure is recognised within operating costs borrowing in the profit and loss account using the effectiveand represents the cost of planned maintenance of mains and interest rate method.services assets by replacing or lining sections of pipe. Thisexpenditure is principally undertaken to repair and maintain the Derivative financial instruments (derivatives) are recorded at fairsafety of the network and is written off as incurred. Expenditure value, and where the fair value of a derivative is positive, it isthat enhances the performance of mains and services assets is carried as a derivative asset and where negative, as a liability.treated as an addition to tangible fixed assets. Assets and liabilities on different transactions are only netted if the transactions are with the same counterparty, a legal right ofK. Pensions set-off exists and the cash flows are intended to be settled on aThe substantial majority of the Company’s employees are net basis. Gains and losses arising from changes in fair valuemembers of the defined benefit section of the National Grid UK are included in the profit and loss account in the period theyPension Scheme. There is no contractual arrangement or arise.stated policy for charging the net defined benefit cost of the
74 National Grid Gas plc Annual Report and Accounts 2011/12Where derivatives are embedded in other financial instruments at the date hedge accounting is discontinued is amortised to thethat are closely related to those instruments, no adjustment is profit and loss account using the effective interest rate method.made with respect to such derivative clauses. Otherwise the If a hedged transaction is no longer expected to occur, the netderivative is recorded separately at fair value on the balance cumulative gain or loss recognised in equity is transferred to thesheet. profit and loss account immediately.The fair values of financial instruments measured at fair valuethat are quoted in active markets are based on bid prices forassets held and offer prices for issued liabilities. When O. Parent Company guaranteesindependent prices are not available, fair values are determined The Company has guaranteed the repayment of the principalby using valuation techniques which are consistent with and any associated premium and interest on specific loans duetechniques commonly used by the relevant market. The from certain subsidiary undertakings to third parties. In thetechniques use observable market data. event of default or non-performance by the subsidiary, the Company recognises such guarantees as insurance contracts,N. Hedge accounting at fair value with a corresponding increase in the carrying valueThe Company enters into derivative financial instruments of the investment.(derivatives) and non-derivative financial instruments in order tomanage interest rate and foreign currency exposures, with a P. Share-based paymentsview to managing these risks associated with the Company’s National Grid issues equity-settled share-based payments tounderlying business activities and the financing of those certain employees of the Company. Equity-settled share-basedactivities. The principal derivatives used include interest rate payments are measured at fair value at the date of grant basedswaps, forward rate agreements, currency swaps, forward on an estimate of the number of shares that will eventually vest.foreign currency contracts and inflation linked swaps. This fair value is recognised on a straight-line basis over the vesting period, as an operating cost and an increase in equity.Hedge accounting allows derivatives to be designated as a Payments made by the Company to National Grid in respect ofhedge of another (non-derivative) financial instrument, to share-based payments are recognised as a reduction in equity.mitigate the impact of potential volatility in the profit and lossaccount. The Company uses two hedge accounting methods. Q. Restructuring costs Costs arising from the Company’s restructuring programmesFirstly, changes in the carrying value of financial instruments primarily relate to redundancy costs. Redundancy costs arethat are designated and effective as hedges of future cash flows charged to the profit and loss account in the period in which the(cash flow hedges) are recognised directly in equity and any Company becomes irrevocably committed to incurring the costsineffective portion is recognised immediately in the profit and and the main features of the restructuring plan have beenloss account. Amounts deferred in equity in respect of cash flow announced to affected employees.hedges are subsequently recognised in the profit and lossaccount in the same period in which the hedged item affects net R. Emission allowancesprofit or loss. Emission allowances, which relate to the emissions of carbonSecondly, changes in the carrying value of financial instruments dioxide, are recorded as an intangible asset within currentthat are designated as hedges of the changes in the fair value assets and are initially recorded at cost, and subsequently atof assets or liabilities (fair value hedges) are recognised in the the lower of cost and net realisable value. For allocations ofprofit and loss account. An offsetting amount is recorded as an emission allowances granted by the UK Government, cost isadjustment to the carrying value of hedged items, with a deemed to be equal to fair value at the date of allocation.corresponding entry in the profit and loss account, to the extent Receipts of such grants are treated as deferred income and arethat the change is attributable to the risk being hedged and that recognised in the income statement in the period in whichthe fair value hedge is effective. carbon dioxide emissions are made. A provision is recorded in respect of the obligation to deliver emission allowances andChanges in the fair value of derivatives that do not qualify for charges are recognised in the income statement in the period inhedge accounting are recognised in the profit and loss account which carbon dioxide emissions are made.as they arise.Hedge accounting is discontinued when the hedging instrument S. Dividendsexpires or is sold, terminated, exercised, or no longer qualifies Interim dividends are recognised when they become payable tofor hedge accounting. At that time, any cumulative gains or the Company’s shareholders. Final dividends are recognised inlosses relating to cash flow hedges recognised in equity are the financial year in which they are approved.initially retained in equity and subsequently recognised in theprofit and loss account in the same periods in which thepreviously hedged item affects net profit or loss. For fair valuehedges the cumulative adjustment recorded to its carrying value
National Grid Gas plc Annual Report and Accounts 2011/12 75Company balance sheetas at 31 March 2012 2011 Notes £m £mFixed assetsTangible assets 5 7,106 7,072Investments 6 17 17 7,123 7,089Current assetsStocks and current intangible assets 7 25 40Debtors (amounts falling due within one year) 8 305 232Debtors (amounts falling due after more than one year) 8 5,622 5,621Derivative financial instruments (amounts falling due within one year) 9 85 80Derivative financial instruments (amounts falling due after more than one year) 9 857 535Current asset investments 580 396 7,474 6,904Creditors (amounts falling due within one year)Borrowings 12 (1,170) (1,502)Derivative financial instruments 9 (52) (22)Other creditors (693) (749) 10 (1,915) (2,273)Net current assets 5,559 4,631Total assets less current liabilities 12,682 11,720Creditors (amounts falling due after more than one year)Borrowings 12 (7,174) (6,535)Derivative financial instruments 9 (391) (86)Other creditors (707) (719) 11 (8,272) (7,340)Provisions for liabilities and charges 13 (896) (976)Net assets 3,514 3,404Capital and reservesCalled up share capital 14 45 45Share premium account 15 204 204Cash flow hedge reserve 15 (27) (36)Capital redemption reserve 15 1,332 1,332Profit and loss account 15 1,960 1,859Total shareholders funds 16 3,514 3,404Commitments and contingencies are shown in note 17 to the Company financial statements.The notes on pages 76 to 81 form part of the individual financial statements of the Company, which were approved by the Board of Directorson 2 July 2012 and were signed on its behalf by: Paul Whittaker Director Adam Wiltshire Director
76 National Grid Gas plc Annual Report and Accounts 2011/12Notes to the Company financial statements1. Auditors remunerationAuditors remuneration in respect of the Company is set out below: 2012 2011 £m £mAudit services Audit fee of Company 0.2 0.3Other services Other services supplied pursuant to legislation 0.2 0.2Other services supplied pursuant to legislation represent fees payable for services in relation to engagements which are required to be carriedout by the auditors. In particular, this includes fees for audit reports on regulatory returns.2. Number of employees, including Directors 2012 2011 Average Average number numberUnited Kingdom - continuing operations 4,933 5,4123. Directors emolumentsDetails of Directors emoluments are provided in note 2(d) to the consolidated financial statements.4. PensionsSubstantially all the Companys employees are members of either the defined benefit section or the defined contribution section of theNational Grid UK Pension Scheme. There is no contractual arrangement or stated policy for charging the net defined benefit cost of thescheme to the Company. Accordingly, the Company accounts for the defined benefit section of the scheme as if it were a defined contributionscheme.The disclosures required by FRS 17 are provided in notes 4 and 25 to the consolidated financial statements.5. Tangible assets Assets Motor in the vehicles Land and Plant and course of and office buildings machinery construction equipment Total (ii) (ii) £m £m £m £m £mCost at 1 April 2011 188 10,715 227 979 12,109Additions 75 171 106 102 454Disposals (3) (46) - (214) (263)Reclassifications - (9) (30) 39 -Cost at 31 March 2012 260 10,831 303 906 12,300Depreciation at 1 April 2011 (62) (4,294) (3) (678) (5,037)Depreciation charge for the year (20) (284) - (82) (386)Disposals 2 29 - 213 244Impairment (i) - (15) - - (15)Reclassifications - 5 3 (8) -Depreciation at 31 March 2011 (80) (4,559) - (555) (5,194)Net book value at 31 March 2012 180 6,272 303 351 7,106Net book value at 31 March 2011 126 6,421 224 301 7,072(i) Relates to a write down of property, plant and equipment items in the LNG storage business.(ii) Prior year amounts have been restated for the cost of assets in the course of construction incorrectly reported as plant and machinery. The amount of the restatement is£159m at 1 April 2011.The net book value of land and buildings comprised: 2012 2011 £m £mFreehold 148 104Short leasehold (under 50 years) 32 22 180 126The cost of tangible fixed assets at 31 March 2012 included £165m (2011: £147m) relating to interest capitalised.Included within creditors (amounts falling due within one year) and creditors (amounts falling due after more than one year) are contributionsto the cost of tangible fixed assets amounting to £16m (2011: £17m) and £635m (2011: £638m) respectively.
National Grid Gas plc Annual Report and Accounts 2011/12 776. Investments Shares in subsidiary undertakings £mCost and net book value at 31 March 2011 and 31 March 2012 17The names of the principal subsidiary undertakings are included in note 30 to the consolidated financial statements.The directors believe that the carrying value of the investments is supported by their underlying net assets.7. Stocks and current intangible assets 2012 2011 £m £mRaw materials and consumables 22 25Current intangible assets - emission allowances 3 15 25 408. Debtors 2012 2011 £m £mAmounts falling due within one year:Trade debtors 70 36Amounts owed by fellow subsidiary undertakings 24 15Other debtors 7 8Prepayments and accrued income 204 173 305 232Amounts falling due after more than one year:Other debtors 11 10Amounts owed by immediate parent undertaking 5,611 5,611 5,622 5,621Total debtors 5,927 5,8539. Derivative financial instrumentsThe fair value of derivative financial instruments shown on the balance sheet is as follows: 2012 2011 Assets Liabilities Total Assets Liabilities Total £m £m £m £m £m £mAmounts falling due in one year 85 (52) 33 80 (22) 58Amounts falling due after more than one year 857 (391) 466 535 (86) 449 942 (443) 499 615 (108) 507For each class of derivative the notional contract amounts** are as follows: 2012 2011 £m £mInterest rate swaps * (4,875) (4,867)Cross-currency interest rate swaps * (1,374) (1,350)Foreign exchange forward contracts - (4)Forward rate agreements (2,454) (1,832)Inflation linked swaps * (752) (560) (9,455) (8,613)*Inflation linked swaps have been separately presented in the current year: comparatives have been adjusted accordingly.**The notional contract amounts of derivatives indicate the gross nominal value of transactions outstanding at the balance sheet date.
78 National Grid Gas plc Annual Report and Accounts 2011/1210. Creditors (amounts falling due within one year) 2012 2011 £m £mDerivative financial instruments (note 9) 52 22Borrowings (note 12) 1,170 1,502Trade creditors 218 268Amounts owed to Group undertakings - 7Amounts owed to fellow subsidiary undertakings 107 72Corporation tax 21 23Social security and other taxes 86 68Other creditors 35 44Accruals and deferred income 226 267 1,915 2,27311. Creditors (amounts falling due after more than one year) 2012 2011 £m £mDerivative financial instruments (note 9) 391 86Borrowings (note 12) 7,174 6,535Other creditors 16 22Deferred income 691 697 8,272 7,340Deferred income mainly comprises contributions to capital projects.12. BorrowingsThe following table analyses the Companys total borrowings: 2012 2011 £m £mAmounts falling due within one year:Bank loans and overdrafts 711 310Bonds 120 97Borrowings from Group undertakings 221 724Borrowings from fellow subsidiary undertakings 117 369Other loans 1 2 1,170 1,502Amounts falling due after more than one year:Bank loans 831 994Bonds 5,560 5,381Borrowings from Group undertakings 606 -Other loans 177 160 7,174 6,535Total borrowings 8,344 8,037Total borrowings are repayable as follows:Less than 1 year 1,170 1,502In 1 - 2 years 481 224In 2 - 3 years 124 501In 3 - 4 years - 133In 4 - 5 years 54 -More than 5 years by instalments 52 51More than 5 years, other than by instalments 6,463 5,626 8,344 8,037The notional amount outstanding of the Companys debt portfolio at 31 March 2012 was £7,826m (2011: £7,668m).None of the Companys borrowings are secured by charges over assets of the Company.
National Grid Gas plc Annual Report and Accounts 2011/12 7913. Provisions for liabilities and charges Deferred Environmental Restructuring taxation Other Total £m £m £m £m £mAt 1 April 2011 71 67 776 62 976Charged to profit and loss account 1 24 (43) 5 (13)Transferred to reserves - - 4 - 4Utilised (8) (16) - (13) (37)Released - (24) - (14) (38)Unwinding of discount 4 - - - 4At 31 March 2012 68 51 737 40 896Environmental provisionThe environmental provision represents the net present value of the estimated environmental remediation costs relating to old gasmanufacturing sites owned by the Company (discounted using a real rate of 2.0%). Cash flows are expected to be incurred between 2012 and2060.A number of uncertainties affect the calculation of the provision including the impact of regulation, the accuracy of the site surveys,unexpected contaminants, transportation costs, the impact of alternative technologies and changes in the discount rate. The provisionincorporates our best estimate of the financial effect of these uncertainties, but future material changes in any of the assumptions couldmaterially impact on the calculation of the provision and hence the income statement.The undiscounted amount of the provision at 31 March 2012 was £92m (2011: £112m), being the best undiscounted estimate of the liabilityhaving regard to these uncertainties.Restructuring provisionAt 31 March 2012, £14m of the total restructuring provision (2011: £26m) related to the restructuring of our LNG storage facilities, and £13mconsisted of provisions for the disposal of surplus leasehold interests and rates payable on surplus properties (2011: £14m). The expectedpayment dates for property restructuring costs remain uncertain. The remainder of the restructuring provision related to businessreorganisation costs, to be paid over the next two years.Deferred taxationDeferred taxation comprises: 2012 2011 £m £mAccelerated capital allowances 750 798Other timing differences (13) (22) 737 776At 31 March 2012 there were no material unrecognised deferred tax assets (2011: £15m of capital losses).Other provisionsOther provisions at 31 March 2012 include £24m (2011: £22m) in respect of employer liability claims. In accordance with insurance industrypractice, the estimates for employer liability claims are based on experience from previous years and, therefore, there is no identifiablepayment date associated with these items.
80 National Grid Gas plc Annual Report and Accounts 2011/1214. Called-up share capital Number Number of shares of shares 2012 2011 2012 2011 millions millions £m £mAt 31 March 2011 and 2012 - ordinary shares of 12/15p eachAllotted, called-up and fully paid 3,944 3,944 45 45National Grid Gas plc is a wholly owned subsidiary undertaking of National Grid Gas Holdings Limited.15. Reserves Share Cash flow Capital Profit Premium hedge redemption and loss Account reserve reserve account £m £m £m £mAt 1 April 2011 204 (36) 1,332 1,859Profit for the year - - - 444Dividends - - - (350)Net gain recognised directly in reserves - 9 - -Share-based payments - - - 7At 31 March 2012 204 (27) 1,332 1,960The Company is prohibited from declaring a dividend or other distribution unless it has certified that it is in compliance in all material respectswith certain regulatory obligations, including a requirement to ensure it has sufficient financial resources and facilities to enable it to carry onits business and a requirement to use all reasonable endeavours to maintain an investment grade credit rating.The Company has not presented its own profit and loss account as permitted by section 408 of the Companies Act 2006. The Company’sprofit after taxation was £444m (2011: £318m).16. Reconciliation of movements in shareholders funds 2012 2011 £m £mProfit for the year after taxation 444 318Dividends (350) (400)Profit/(loss) for the financial year 94 (82)Net gains recognised directly in reserves 9 8Share-based payments 7 8Net increase/(decrease) in shareholders funds 110 (66)Opening shareholders funds 3,404 3,470Closing shareholders funds 3,514 3,404
National Grid Gas plc Annual Report and Accounts 2011/12 8117. Commitments and contingencies(a) Future capital expenditureAs at 31 March 2012, the Company had placed contracts for capital expenditure (tangible fixed assets) amounting to £480m (2011: £427m).(b) Lease commitmentsAt 31 March 2012, the Company’s total operating lease commitments for the financial year ending 31 March 2013 amounted to £16m (2011commitments for 2012: £15m) and are analysed by lease expiry date as follows: Land and buildings Other Total 2012 2011 2012 2011 2012 2011 £m £m £m £m £m £mExpiring:In one year or less - - 1 1 1 1In more than one year, but not more than five years 4 5 5 4 9 9In more than five years 6 5 - - 6 5 10 10 6 5 16 15(c) Other commitments and contingenciesThe value of other commitments, contingencies and guarantees at 31 March 2012 amounted to £169m (2011: £121m), including gaspurchase commitments amounting to £104m (2011: £102m).(d) Parent Company loan guarantees on behalf of subsidiary undertakingsThe Company has guaranteed the repayment of principal sums, any associated premium and interest on specific loans due from its financialsubsidiaries to third parties. At 31 March 2012, the sterling equivalent amounted to £1,109m (2011: £1,104m).(e) Litigation and claimsThere are no material outstanding litigation or claims at 31 March 2012.18. Related partiesThe following material transactions are with a subsidiary of the Company which is not wholly owned by National Grid plc and are in the normalcourse of business. Other related party transactions are not disclosed in accordance with the exemptions available under FRS 8. 2012 2011 £m £mGoods and services supplied 9 9Services received 29 22Amounts receivable at 31 March 2 6Amounts payable at 31 March 4 2Amounts payable or receivable are ordinarily settled one month in arrears. No amounts have been provided at 31 March 2012 (2011: £nil)and no expense has been recognised during the year (2011: £nil) in respect of bad or doubtful debts from the above related partytransactions.
82 National Grid Gas plc Annual Report and Accounts 2011/12Glossary and definitionsReferences to the Company, we, our,and us, refer to National Grid Gas plc itselfor to National Grid Gas plc and its subsidiariescollectively, depending on context.EU OfgemEuropean Union The Office of Gas and Electricity MarketsFRS tonnes CO2 equivalentUK Financial Reporting Standard Measure of greenhouse gas emissions in relation to the impact of carbon dioxideGAAPGenerally accepted accounting principles regulated controllable operating costs Total operating costs under IFRS less depreciationGHG and certain regulatory costs where, under ourGreenhouse Gas regulatory agreements, mechanisms are in place to recover such costs in current or future periods.GWGigawatt, 109 watts regulatory asset value (RAV) The value ascribed by Ofgem to the capital employedGWh in the relevant licensed business. It is an estimate ofGigawatt hours the initial market value of the regulated asset base at privatisation, plus subsequent allowed additions atHSE historical cost, less the deduction of annual regulatoryHealth and Safety Executive depreciation. Deductions are also made to reflect the value realised from the disposal of certain assets thatIAS formed part of the regulatory asset base. It is alsoInternational Accounting Standard indexed to the RPI to allow for the effects of inflation.IASB RPIInternational Accounting Standards Board UK Retail Prices IndexIFRIC TWInternational Financial Reporting Standards Interpretations Committee Terawatt, 1012 wattsIFRS TWhInternational Financial Reporting Standard Terawatt hoursKPIKey Performance IndicatorLNGLiquefied natural gasLost time injuryA work-related injury which causes a person to beaway from work for at least one normal shift after theshift on which the injury occurs, because the person isunfit to perform his or her dutiesNational GridNational Grid plc, the ultimate parent Company ofNational Grid Gas plc and its controlling party
National Grid Gas plc1-3 Strand, London WC2N 5EH, United KingdomRegistered in England and Wales Company number 2006000