National Grid : NGG plc Annual Report and Accounts 2020/21

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National Grid Gas plc

Annual Report and Accounts 2020/21

Company number 2006000

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Contents
National Grid Gas plc Annual Report and Accounts 2020/21
Overview - About National Grid Gas plc.......................................................................................................................................................	1
What we do - Gas..................................................................................................................................	2
What we do - Regulation.....................................................................................................................	3
Principal operations - Gas Transmission...........................................................................................	7
Principal operations - Metering............................................................................................................	9
Our purpose, vision, strategy and values...........................................................................................	10
Our strategic objectives........................................................................................................................	11
Progress against objectives - key performance indicators..............................................................	12
Strategic Report...................................................................................................................................................................................................	13
Operating environment.........................................................................................................................	13
Our commitment to being a responsible business...........................................................................	16
Internal control and risk management................................................................................................	21
Viability statement..................................................................................................................................	29
Financial review......................................................................................................................................	30
Our stakeholders....................................................................................................................................	35
Corporate Governance.........................................................................................................................	37
Directors' Report....................................................................................................................................	42
Introduction to the financial statements.......................................................................................................................................................	43
Statement of Directors' responsibilities..............................................................................................	44
Independent Auditor's report................................................................................................................	45
Consolidated income statement..........................................................................................................	58
Consolidated statement of comprehensive income.........................................................................	59
Consolidated statement of changes in equity...................................................................................	60
Consolidated statement of changes in financial position ...............................................................	61
Consolidated cash flow statement......................................................................................................	62
Notes to the consolidated financial statements.................................................................................	63
Basis of preparation and recent accounting developments............................................................	63
Company balance sheet.......................................................................................................................	115
Company statement of changes in equity .........................................................................................	116
Notes to the company financial statements.......................................................................................	117
Company accounting policies..............................................................................................................	117
Glossary and definitions.......................................................................................................................	128

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National Grid Gas plc Annual Report and Accounts 2020/21

1

Overview

About National Grid Gas plc

National Grid Gas plc (National Grid Gas) is a subsidiary of National Grid plc (National Grid), based in the UK. We own and operate the regulated gas National Transmission System (NTS) in Great Britain, with day-to-day responsibility for balancing supply and demand in real time, and provide gas metering services. Our transmission network comprises approximately 7,630 kilometres of high pressure pipe and 23 compressor stations connecting to 8 distribution networks and other third-party independent systems. We play a vital role in connecting millions of people safely, reliably and efficiently to the energy they use.

The overall management and governance of National Grid Gas is the responsibility of its Board of Directors. Strategic direction is determined by our ultimate parent company, National Grid plc. Our Directors are listed on page 42.

More information on the management structure of National Grid plc can be found in the National Grid plc Annual Report and Accounts 2020/21 and on National Grid's website at www.nationalgrid.com.

The International Financial Reporting Standard (IFRS) technical requirements make reporting some of the performance measures that we use as a regulated business more complex due to differences in standards used in their generation. We provide additional information, about both our significant assets and liabilities that do not form part of our audited accounts, to help our investors gain a fair, balanced and understandable view of our business.

Financial highlights

	2020/21	2019/20	Percentage
			change
	£m	£m
Revenue	1,122	1,186	(5%)
Operating profit before exceptional items	484	475	2%
Exceptional items	(5)	-	100%
Total operating profit¹	479	475	1%
Profit before tax	454	356	28%
Cash generated from operations	616	675	(9%)
Regulated assets²	6,307	6,298	0%

• See page 31 for further details.

• See page 34 for further details.

	2020/21	2019/20
	£m	£m
Return on equity:¹
Gas Transmission	9.6%	9.8%

• See page 34 for further details

Non-financial highlights

	2020/21	2019/20
Number of employees	2,189	2,136
Network reliability:
Gas Transmission	100.00000%	99.99960%

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2	National Grid Gas plc Annual Report and Accounts 2020/21

What we do - Gas

The gas industry connects producers, processors, storage and transmission and distribution network operators, as well as suppliers to industrial, commercial and domestic users.

The UK gas industry has four main sectors.

1. Production and importation

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

We do not produce gas. Gas used is mainly sourced from gas fields in the North and Irish seas, piped from Europe and imported as LNG.

2. Transmission

The transmission system includes pipes and compressor stations. They connect production and storage through terminals to the distribution systems. We own and operate the transmission system in Great Britain.

Gas enters the transmission system through importation and reception terminals and interconnectors and may include gas previously held in storage. Compressor stations located along the network play a vital role in keeping large quantities of gas flowing through the system, particularly at times of high demand.

3. Distribution

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

There are eight regional gas distribution networks in the UK, none of which we own.

4. Supply

Pipeline shippers bring gas from producers to suppliers, who in turn sell it to customers.

We do not supply gas, however we own National Grid Metering Ltd, which provides meters and metering services to supply companies, under contract.

Customers pay the supplier for the cost of gas and for its transportation. We transport the gas through our network on behalf of shippers, who pay us transportation charges.

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National Grid Gas plc Annual Report and Accounts 2020/21

3

What we do - Regulation

Gas Transmission

Our business operates as a regulated monopoly. We have one economic regulator for our business, Office of Gas and Electricity Markets (Ofgem). The regulator puts in place an incentive regime that ensures our interests are aligned with those of customers and society.

The gas transmission system must be kept constantly in balance, which is achieved by buying, selling and using stored gas. This means that, under normal circumstances, demand can be met. We are the sole owner and operator of high pressure gas transmission infrastructure in Great Britain.

The purpose of the regulatory regime

Ofgem's regulatory regime for the energy industry is titled RIIO, which stands for Revenue = Incentives + Innovation + Outputs. This title reflects the policy purpose of the regime. It is designed to encourage companies to invest in efficiency and innovation, creating value that is shared, through the regulatory mechanisms, between the company (and hence creating the incentive) and the customer. It ensures that companies drive to deliver the outputs their customers want and also creates the opportunity for funding schemes with wider societal benefits.

How we manage our regulated assets

Our licence, established under the Gas Act 1986, as amended (the Act) requires us to develop, maintain and operate economic and efficient networks and to facilitate competition in the supply of gas in Great Britain. It also gives us statutory powers. They also give us statutory powers, including the right to bury our pipes under public highways and the ability to use compulsory powers to purchase land so we can conduct our business.

Our licensed activities are regulated by Ofgem, which has a statutory duty under the Act to protect the interests of consumers. Ofgem also has responsibility to enable competition and innovation to drive down prices and introduce new products and services; and deliver a net zero economy at lowest cost to consumers. To protect consumers from the ability of companies to set unduly high prices, Ofgem has established price controls that limit the amount of revenue such regulated businesses can earn. In setting price controls, Ofgem must also have regard to the need to secure that licence holders are able to finance their obligations under the Act. Licensees and other affected parties can appeal licence modifications which have errors, including in respect of financeability. This should give us a level of revenue for the duration of the price control that is sufficient to meet our statutory duties and licence obligations with a reasonable return on our investments.

The price control includes a number of mechanisms designed to help achieve its objectives. These include financial incentives that encourage us to:

• efficiently deliver by investing and maintaining the network outputs that customers and stakeholders require, including reliable supplies, new connections and infrastructure capacity;
• innovate in order to continuously improve the services we give our customers, stakeholders and communities; and
• efficiently balance the transmission networks to support the wholesale markets.

The main price controls for our gas transmission networks came into effect on 1 April 2013 for the eight-year period until 31 March 2021. They follow the RIIO (revenue = incentives + innovation + outputs) framework established by Ofgem.

The Gas Transmission (GT) business operates under two separate price controls; one as transmission owner (TO) and one as system operator (SO).

RIIO Price Controls

The building blocks of the RIIO price control are broadly similar to the price controls historically used in the UK. There are, however, some significant differences in the mechanics of the calculations.

How is revenue calculated?

Under RIIO, the outputs we deliver are explicitly articulated and our allowed revenues are linked to their delivery, although some outputs and deliverables have only a reputational impact or are linked to legislation. We do not earn allowances if we do not deliver the associated agreed output. These outputs were determined through an extensive consultation process, which gave stakeholders a greater opportunity to influence the decisions.

There are five output categories for transmission under the current RIIO price controls:

Safety - ensuring the provision of a safe energy network.

Reliability (and availability) - promoting networks capable of delivering long-term reliability, minimising the number and duration of interruptions experienced during the price control period and ensuring adaptation to climate change.

Environmental impact - encouraging companies to play their role in achieving broader environmental objectives, specifically, facilitating the reduction of carbon emissions, as well as minimising their own carbon footprint.

Customer and stakeholder satisfaction - maintaining high levels of customer satisfaction and stakeholder engagement, and improving service levels.

Customer connections - encouraging networks to connect customers quickly and efficiently.

Within each of these output categories are a number of primary and secondary deliverables that reflect what our stakeholders want us to deliver over the remaining price control period and in preparation for future periods. The nature and number of these deliverables vary according to the output category. Some are linked directly to our allowed revenue and some to legislation, while others have only a reputational impact.

Totex

Ofgem, using information we have submitted, along with independent assessments, determines the efficient level of expected costs necessary for these deliverables to be achieved. Under RIIO this is known as 'totex', which is a component of total allowable expenditure and is broadly the sum of what was defined in previous price controls as operating expenditure (opex) and capital expenditure (capex).