National Grid : NGG plc Annual Report and Accounts 2021/22

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National Grid Gas plc

Annual Report and Accounts 2021/22

Company number 2006000

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Contents
National Grid Gas plc Annual Report and Accounts 2021/22
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, values and strategy...........................................................................................	10
Our strategic objectives ........................................................................................................................	11
Progress against objectives - key performance indicators..............................................................	13
Strategic Report ...................................................................................................................................................................................................	14
Operating environment .........................................................................................................................	14
Our commitment to being a responsible business ...........................................................................	17
Internal control and risk management ................................................................................................	22
Viability statement..................................................................................................................................	30
Financial review......................................................................................................................................	31
Our stakeholders....................................................................................................................................	37
Corporate Governance .........................................................................................................................	39
Directors' Report ....................................................................................................................................	44
Introduction to the financial statements .......................................................................................................................................................	45
Statement of Directors' responsibilities ..............................................................................................	46
Independent Auditor's report ................................................................................................................	47
Consolidated income statement ..........................................................................................................	58
Consolidated statement of comprehensive income .........................................................................	61
Consolidated statement of changes in financial position.................................................................	60
Consolidated statement of changes in equity ...................................................................................	61
Consolidated cash flow statement ......................................................................................................	62
Notes to the consolidated financial statements.................................................................................	63
Basis of preparation and recent accounting developments............................................................	63
Company balance sheet .......................................................................................................................	116
Company statement of changes in equity .........................................................................................	117
Notes to the company financial statements.......................................................................................	118
Company accounting policies ..............................................................................................................	118
Glossary and definitions .......................................................................................................................	129

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National Grid Gas plc Annual Report and Accounts 2021/22

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 connected 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 44.

More information on the management structure of National Grid plc can be found in the National Grid plc Annual Report and Accounts 2021/22 and on National Grid's website at www.nationalgrid.com.

On 27 March 2022 National Grid announced the agreement for sale of a 60% stake in National Grid Gas. The sale is subject to certain conditions.

On 6 April 2022 the UK government announced its intention to create a Future System Operator (FSO), that will, inter alia, take on the longer-term elements of the Gas System Operator (GSO) currently forming part of NGG. NGG work closely with all relevant parties to ensure a smooth transition, subject to parliamentary approval and conclusion of the transaction process, expected by or in 2024.

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

	2021/22	2020/21	Percentage
			change
	£m	£m
Revenue	1,374	1,122	22%
Operating profit before exceptional items	512	484	6%
Exceptional items	(13)	(5)	163%
Total operating profit¹	499	479	4%
Profit before tax	320	454	(30%)
Cash generated from operations	864	616	40%
Regulated assets²	6,561	6,307	4%

• See page 33 for further details.

• See page 36 for further details.

	2021/22	2020/21
	£m	£m
Return on equity:¹
Gas Transmission	7.8%	9.6%

• See page 36 for further details

Non-financial highlights

	2021/22	2020/21
Number of employees	2,118	2,189
Network reliability:
Gas Transmission	100 %	100 %

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2	National Grid Gas plc Annual Report and Accounts 2021/22

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 2021/22

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 needs to ensure that licence holders can 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 current price control period, called RIIO-T2 came into effect on 1st April 2021 and continues for 5 years to 2026. The price control follows 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 three main output categories for transmission under the current RIIO-T2 price controls:

• Meeting the needs of consumers and network users - using outputs and a range of incentives to improve service quality and to encourage the efficient operation of the transmission network. This includes incentives aimed at encouraging us to provide fast access to high quality connections and high network reliability
• Maintaining a safe and resilient network - by funding given to replace ageing assets while ensuring costs to consumers are kept as low as possible. We will allow funding for cyber resilience projects, as well as IT investments where the scope of work is well understood. We will use uncertainty mechanisms to fund further upgrades during RIIO-T2 when there is more certainty around the scope of work required
• Supporting the delivery of an environmentally sustainable network - by providing funding or uncertainty mechanisms which will facilitate the connection of low carbon generation and by setting outputs and incentives to further reduce the harmful impact that the transmission network and related business activities can have on the environment. We are confident that the up-front funding we are providing, combined with our range of fast and flexible uncertainty mechanisms and incentives, will enable proactive work to deliver Net Zero.

Within each of these output categories are a number of primary and secondary deliverables, reflecting what our stakeholders want us to deliver over the remaining price control period. The nature and number of these deliverables varies according to the output category, with some being linked directly to our allowed revenue, some linked to legislation, and others having only a reputational impact.