Annual Report and Accounts 2014

Transcription

1 Annual Report and Accounts

2 Contents Overview 01 Financial and operational highlights 02 Chairman s introduction Strategic report 04 Operational review 14 Key performance indicators 16 Financial review 20 Principal risks and uncertainties 22 Corporate responsibility Directors report 24 Board of Directors 26 Statement of Directors responsibilities 27 Directors report 29 Corporate governance statement Accounts 32 Independent auditor s report 33 Consolidated profit and loss account 34 Consolidated statement of total recognised gains and losses 35 Balance sheets 36 Consolidated cash flow statement 37 Reconciliation of net cash flow to movement in net debt 38 Notes to the financial statements Our new brand identity We now have a new brand identity which can be seen in this report bringing together our two networks under the single name of SGN. This change includes a new look and logo and is designed to help our customers and other stakeholders understand who we are and the essential nature of the work we do.

3 Overview Strategic Report Directors Report Accounts Financial and operational highlights 98.7% Gas escapes attendance within an hour in /14 322m Network investment in /14 Apprentices 186 recruited to date 1,088km Length of pipeline replaced in /14 Innovation UK Energy Innovation Awards: Environmental Impact Award 747 Community Action Programme employees taking part 4.9bn Regulated Asset Value as at 31 March 1,097m Turnover in /14 01

4 02 SGN Annual Report and Accounts Chairman s introduction The past year has been a very challenging one for the energy industry as a whole. There has been an increase in regulatory and political scrutiny both for energy supply companies as well as network operators like ourselves. However, along with the other gas network companies, we have worked hard to deliver a safer and increasingly secure gas supply to the UK, offering exceptional value for money and quality of service for all our customers. I am pleased to report we made a good start to the first year of the eight year price control known as RIIO-GD1, agreed with the industry regulator Ofgem. During /14 our turnover increased to 1,097m and importantly we invested a further 322m in our gas infrastructure. While the final settlement of the /21 price control remained tough, the regulatory process and outcome has, in our opinion, been a success for both our customers and our investors alike. Excellence in service Built into the new price control are incentives to earn additional income by providing excellent customer service and ensuring processes are in place to provide a comprehensive programme of stakeholder engagement, and we have shown leadership in both these areas. On customer service we have focused on training our people to provide an excellent all-round service, whether it be face-to-face, on the telephone or through correspondence and social media. Here we aim to provide all our customers a 10/10 service in everything we do. During the year we underwent an extensive stakeholder engagement programme including two major events in London and Edinburgh. The views of our stakeholders are essential and we make every effort to fully engage with them, incorporating the outcomes from our consultations into our operational and business plans. During the course of the year we refreshed our company goals. Our key priorities stretch right across our business. We aim to deliver excellent levels of safety and operational performance. We also want to meet our regulatory outputs and maximise incentives, while continuing to deliver value for all stakeholders and deliver a strong financial performance and an acceptable shareholder return. We are also active in the creation of an inclusive and engaged team to help shape the future of a lowcarbon environment by leading the way in the development of green gas, looking to minimise our impact on the environment. Committed to safety Safety is and will remain our number one company value. The safety of our customers, our people and the public at large is paramount and something we all take responsibility for. As well as ensuring safety fundamentally underwrites all our activities, it is also important to gain external recognition for our safety culture. Recently we have been awarded two RoSPA Gold Awards. Leaders in the gas industry We are committed to working with our stakeholders, ensuring we make Gold Medal Award Energy Efficiency Award Making the most of Biogas Award Photos on left: Gregor Alexander, Chairman Engaging first-hand with our stakeholders at two well-attended events held in Edinburgh and London.

5 Overview Strategic Report Directors Report Accounts 03 We aim to provide all our customers a 10/10 service in everything we do. a positive impact on our customers, the communities we operate in, our people and the environment. We passionately believe gas has an important role to play beyond 2050, so we are working hard to take the carbon element out of gas and make it an affordable yet green solution for our customers. Gas is a basic need for the majority of UK households providing warmth and security of energy supply in the most harsh of winter conditions to domestic customers. It also provides a vital resource for industrial and commercial outlets which depend on a reliable service to keep their businesses running. Gregor Alexander Chairman 24 July Our Awards Being recognised for the work we do and the professionalism and contributions of our people is something we believe adds value all round. It engenders pride among our employees, knowing their hard work has been recognised, but also it provides our company with a strong standing among our peers, knowing we lead the way in a number of important areas. Whether it s gas industry recognition, safety or innovation, they all matter and throughout the course of and at the start of we have been recognised in a number of different areas. Customer Service Award Environment Impact Award Digital Utilities Award Green Apple Environmental Award Photos on left: Winners in two categories at the Gas Industry awards and at the UK Energy Innovation awards for our biogas plant.

6 04 SGN Annual Report and Accounts Operational review In /14 we have made a number of positive steps forward in innovation, customer service, leading the UK green gas agenda and developing our people, while at the same time championing safety. We re embracing and influencing a gradual changing perception in Government that gas has a future beyond Our business Our primary role is to deliver a safe and reliable gas supply to each of our 5.8 million customers across our two network areas, providing warmth and heat to some 28% of gas users in the UK. Our network comprises 74,000km of gas pipeline, ranging from high pressure transmission lines serving major cities and counties down to the low pressure networks serving rural and local communities. Our 3,100km transmission system is constructed of high grade steel and operates at very high pressure. Our distribution system is a mix of materials from the modern polyethylene plastic pipes to the old cast iron pipes installed in the last century. Gas networks regulation All gas network companies are the subject of economic regulation through Price Control Reviews set by industry regulator Ofgem. The current eight year price control, known as RIIO-GD1, commenced on 1 April and runs to 31 March Our revenue comes from charges levied on network users, to cover costs and earn a return on our regulated assets. Ofgem also places through incentives on all network companies to be more efficient, innovate, reduce complaints, engage with stakeholders and deliver an enhanced quality of service. Ofgem also sets the framework for capital investment we make in maintaining and upgrading our gas network. Our network has a regulatory asset value (RAV) which represents: The price paid when privatised; Plus a fixed proportion, annually, of our total expenditure; Less annual depreciation. Our operations throughout the UK Our Scotland network distributes gas across all of Scotland to 75% of households, including remote areas via the Scottish Independent Undertakings (SIU) at Stornoway, Wick, Thurso, Oban and Campbeltown. In Northern Ireland we are contracted to carry out the maintenance on the gas transmission system and on the above-ground transmission assets. In addition we maintain the assets for the gas pipeline connection between Northern Ireland and Scotland. Our Southern network stretches from Milton Keynes in the north, to Dover in the east and Lyme Regis in the west, including London boroughs to the south of the River Thames, distributing gas to around 90% of households. Photo: John Morea, Chief Executive

7 Overview Strategic Report Directors Report Accounts 05 Aberdeen Edinburgh Our business in numbers We have 5.8 million domestic, commercial and industrial customers in the Southern region and throughout Scotland We have 74,000km of gas mains delivering natural gas throughout our regions We totalled 3,717 full time equivalent employees as at 31 March (: 3,676) Glasgow London Southampton Oxford Scotland Gas Networks plc Southern Gas Networks plc SGN Connections Limited SGN Contracting Limited SGN Commercial Services Limited

8 06 SGN Annual Report and Accounts Operational review (continued) The SGN Way The SGN Way is at the heart of how we understand ourselves as a company. The best way for our customers to understand who we are is to demonstrate our vision and values in everything we do. The SGN Way helps us to tell that story. Our personality As a company we are committed to being positive, responsible and dynamic and we want our customers and stakeholders to recognise that. Positive we look for the best in any stuation. Every interaction is an opportunity for us to demonstrate what we can achieve. Responsible we re in control and can be trused to make important decisions that act in everyone s best interest. Dynamic we re always looking to the future and embracing ways of doing things better. Our vision Dedicated to keeping our customers safe and warm by leading the way in energy delivery. Our values We believe in: Safety first we take responsibility for our own safety of those around us Sustaining our world we maximise our effect on local communities and minimise our impact on the world Putting people at the heart we always work together, talk honestly and treat people with respect Driving performance efficiency, innovation and continuous improvement will help us deliver excellence and achieve commercial success. Looking after customers by listening to our customers, understanding their needs and keeping our promises we can deliver an excellent service that people trust

9 Overview Strategic Report Directors Report Accounts 07 Our new award winning on-line quoting system produces 1,100 quotes a month for our customers and has had the positive effect of reducing complaints. Upgrade We invest in the maintenance, refurbishment and replacement of our pipe network to provide a service our customers expect; keeping them safe, warm and secure. In the nine years since our formation, we have consistently delivered approved iron mains decommissioning lengths, as required by the Health and Safety Executive (HSE) for both of our network areas. During the year we replaced 1,088km of metallic pipe with polyethylene plastic pipe. Since 2005, against a cumulative target of 7,299km we have replaced 7,493km of old metallic gas mains and now have replacement plastic gas mains in around 60% of our network in our southern area and nearly 70% across Scotland. This has the effect of improving the security and reliability of our network, reducing the level of gas escapes and reducing the level of associated repair work. Most importantly, this has reduced the risk of gas explosion by 60% from pre-2005 levels. Emergency We have a desire and obligation through our operating licence to protect life and property. This includes attending uncontrolled gas escapes within one hour of notification at least 97% of the time. In /14 we achieved this 98.7% of the time, exceeding the target set by Ofgem. We have achieved and exceeded this target figure every year since our formation. A key to this success is through our advance contingency planning, a well-established process to ensure when required, we release and mobilise our resources quickly and effectively. Connections In /14 we connected over 16,400 new meter points to our networks. Our new on-line quoting system produces 1,100 quotes a month for our customers and has had the positive effect of reducing complaints. Social action and environmental awareness are combined in our work to connect fuel poor customers to our networks. The fuel poor network extension scheme was introduced by Ofgem in its first gas price control to provide gas connections at a discounted price to vulnerable customers, helping to alleviate fuel poverty through access to natural gas as a cheaper fuel. In /14 we made over 6,400 fuel poor connections across our networks bringing the total since we started the programme in 2009 to around 23,000. In the current price control period we are targeting 20,000 fuel poor connections. A future for gas During, Ofgem s Network Innovation Competition (NIC) was introduced as part of the new eight year price control. Its purpose is to encourage gas network companies to address, through innovation, the move to a low carbon economy and look into initiatives which can deliver wider environmental benefits to customers. In this competition we secured two of the four approved gas sector projects, gaining 8.4m (56%) of the 15.1m of funding awarded. The first of our projects focuses on the further development of robotics for pipeline maintenance, repair and The SGN business model Our business model is based on a local depot organisation. This ensures we are as close to the point of service as possible. We have a policy to in-source where practicable. Full control of our systems and managing down reliance on third party contracts is also a key to our success. Systems approach Depot network Managed service agreements Insourcing contractors

10 08 SGN Annual Report and Accounts Operational review (continued) A further example of our innovation, environmental and sustainability credentials is the leading role we have played in bringing biomethane injection to the UK market. replacement, building on the success of our robotics tool CISBOT (a cast iron joint sealing robot). The second project is looking to open up the gas market through an examination of existing UK gas quality legislation, the aim of which is to prove in our trial at Oban that a more economic entry of unconventional gas sources into the network system can be achieved. A further example of our innovation, environmental and sustainability credentials is the leading role we have played in bringing biomethane injection to the UK market. We were proud to work in partnership with Thames Water and British Gas to deliver the first biogas injection plant in October Since then we have delivered two further plants, each building, learning and developing on the success of the previous project. Maintaining a safe and reliable network is fundamental to the future success of this and similar projects. Our innovation agenda has also driven further sustainability initiatives around the research and development of opportunities for injection of coal bed methane, Syngas and Hydrogen through gas blending, all of which offer the opportunity for a diverse and sustainable energy mix long into the future. We have also led innovation in a number of areas which have allowed us to reduce our footprint when undertaking streetworks, benefitting road users, local communities and the environmental impact on land fill. Where we do need to excavate to gain access to our pipes, we have introduced a number of core and vac machines, utilising keyhole excavation techniques, and deployed them into major city centres including London, Edinburgh and Glasgow where the continuing movement of traffic is essential to the economy. These machines significantly reduce the size of an excavation and speed up the whole operational process. Customer service Feedback from our customers comes from regular engagement, enquiries, surveys and complaints. They have consistently told us they wish to be better informed and looked after when we carry out any work that directly or indirectly affects them. We continue to benchmark our service against other utilities and look to improve our own practices and procedures at every opportunity. We have reacted to the increasing use of social media by our customers, ensuring we are able to respond equally well to Twitter enquiries along with the more traditional letter and requests. Through increased training and customer satisfaction workshops we have reduced complaints during the year by 26% compared with the previous year. This is an overall reduction of 57% since 2009/10. In addition, our customer satisfaction scores are at an all time high and well above the Ofgem baseline. This year we have introduced a free phone number for our customer enquiry line. Previously calls were charged at local rates, however through our stakeholder engagement process, we have listened to and taken on-board the views of our customers about making contacting us cheaper and affordable. Photos on left: Making essential gas connections for our customers while providing a quality customer service.

11 Overview Strategic Report Directors Report Accounts 09 Opening up the gas market free safety checks on their existing installations and appliances. Location: Oban Customers: 1,100 Duration: Jan to Mar 2016 NIC award: 2.1 million Oban gas blend trial This year we embarked upon a project to bring a new and innovative approach towards securing a more affordable future for gas across Great Britain. As a winner of Ofgem s inaugural Network Innovation Competition (NIC), we are pioneering an approach to test gas from different sources, in our network. A trial is taking place In Oban, on the west coast of Scotland, where we are testing different gas blends to demonstrate gas can be transported from wider sources in our network. The composition of the gas we currently transport must comply with national regulations. However if this project proves successful, it will pave the way to allow gas network companies across Great Britain to use gas from a much wider range of sources without costly processing. With the support of the Oban community, we have carried out testing in our customers homes while also providing them free safety checks on their existing installations and appliances. The NIC was established by Ofgem to encourage and celebrate innovation in the gas industry. Case study Pioneering an approach to test gas from different sources in our network.

12 10 SGN Annual Report and Accounts Operational review (continued) We have now developed, built and commissioned the UK s first gas turbo expander. Stakeholder engagement Stakeholder engagement underpins our future plans. We actively engage with all stakeholder groups and, on the basis of the variety of views that have been expressed, we believe we have a clear mandate to continue investing wisely and efficiently in the long term safety and reliability of the gas distribution network. We hear through our stakeholders that safety is of course, paramount. Our emergency service is valued and should be maintained at current levels and the low numbers of unplanned interruptions we make to customers gas supplies was commended. Innovation in gas engineering We utilised a portion of our Network Innovation Allowance (NIA) to fund smaller innovation projects which will deliver benefits to our customers. In addition we also put projects forward for Ofgem s Network Innovation Competition (NIC). One such project was entering a partnership with US company ULC Pipeline Robotics in the pioneering of a cast iron joint sealing robot (CISBOT) system. The project commenced in July, when technicians from ULC travelled to London to perform a robotic pre-inspection of a 24 cast iron main located in south London. Based on the results 88 joints were identified suitable for sealing with CISBOT and the information was used to create an updated map of that section of main. As part of the NIC funded project, ULC produced an entirely new CISBOT robot, which incorporated lessons learned from the 3,000 cast iron joints previously sealed for Con Edison and gas companies throughout the Northeast of America. On 17 October, we became the first distribution network in the UK to successfully seal a lead yarn joint on a live gas main, using this robotics system. A four-week live trial which followed was completed successfully on 13 November. Overall during the demonstration 88 joints were sealed over 20 days at an average rate of 4.4 joints a day, all achieved from just two small excavations. CISBOT could transform the way gas network repairs are carried out. The project has demonstrated the viability of repairing or remediating some of the existing gas mains rather than replacing them and accelerating leakage reduction with minimal disruption to our customers. The roll-out period will be very much network dependent and at least one other network has successfully followed our lead with this technology. Within two years all networks in the UK should see benefits. Sustainable energy turbo expander Traditional sustainable energy projects involve harnessing the energy from the flow of water for hydro power or the wind through wind turbines. We have now developed, built and commissioned the UK s first gas turbo expander, which produces electricity from the flow of gas, in an efficient and sustainable way. Located at St Mary Cray in Kent this innovative project can bring many benefits for both our company and the UK energy industry. Photos on left: Core and Vac equipment provides faster and more efficient repair work, particularly in busy highways.

13 Overview Strategic Report Directors Report Accounts 11 During we held 35 Ownership and Engagement Safety Workshops led by our depot General Managers with active support from their local safety managers and trade union representatives. Our 4.5MW turbo expander uses the reduction in gas pressure through a gas governor in the normal course of business to generate sustainable, low carbon electricity for local homes and businesses. Our pressure reduction equipment works to reduce the pressure of natural gas received at high pressure to levels suitable for onward distribution to our customers through the local medium and low pressure gas networks. But for the turbo expander, the energy lost as a result of reduction in pressure would simply go into the atmosphere and be a wasted resource. Although this technology has been commonplace in Europe our equipment is the first of its kind in the UK. Following the success of this project, we are now planning turbo expanders at other suitable pressure reduction stations in our regions, an exciting prospect for our company and the gas and energy industry overall. Safety Safety has always been and will continue to be our number one company value. Our approach has always been to engage people at every level in our organisation in a positive and productive way, encouraging ownership, authority and accountability. This ensures we keep the public, our people, our assets and the environment at large safe and secure. During we held 35 Ownership and Engagement Safety Workshops led by our depot General Managers with active support from their local safety managers and trade union representatives. General Managers invested time in promoting the initiative and this achieved the desired result of actively engaging the depot workforce, raising safety awareness and highlighting local issues. Trade Union feedback on the approach was positive as it encouraged direct involvement in the promotion and implementation of safety initiatives. Performance management framework An enhanced performance management framework was introduced during the year where all our operations managers have a daily conversation with each member of their team and weekly performance discussions are held enabling managers and staff to work in developing safety solutions and exploring best practices. This is in addition to the requirement any safety concern must immediately be escalated. Improved occupational safety performance We believe all work related injuries and illnesses are preventable. Over the past 12 months our drive for zero incidents has seen: A 83% reduction in our lost time injuries; and A 38% reduction in our Class 1 potentially accountable road traffic collisions. Photos on right: Our turbo expander at St Mary Cray in Kent is an innovative project which is now providing electricity to homes in the local area.

14 12 SGN Annual Report and Accounts Operational review (continued) In order to ensure the safety of our staff we have explored the use of no-dig techniques to harness the safety, health and cost benefits these bring. Improved process safety gas escape management improvement plan Each year we have successfully reduced what is known as our annual residual risk for gas escapes. This is a cumulative measure of the daily risks arising from on-going gas escapes. Recognising the importance of doing so, we have made significant progress in improving our management of gas escapes through: Introduction of revised gas emergency procedures; Prioritisation of high risk gas escapes for immediate prevention; Increased efficiency of escape locate repair teams; and Greater use and flexibility of resources across local boundaries. No-dig technology In order to ensure the safety of our staff we have explored the use of nodig techniques to harness the safety, health and cost benefits these bring. Use of our core and vac excavator minimizes excavation size thereby reducing the likelihood of an electricity cable strike. The latest specialist cable avoidance tools have been issued to our workforce in a structured training and awareness programme, making use of the latest data-logging feature to target our people for coaching as appropriate. Air lances which allow tool-free loosening of excavation material have been deployed across our repair teams and are encouraged as a tool of first choice when ground conditions permit. Board responsibility Our Board has a Safety Health and Environmental Advisory Committee responsible for monitoring our health and safety performance, ensuring adherence to our health and safety policy and providing the Board with reports on key issues. Further details of the committee are set out on page 30 in our corporate governance statements. John Morea Chief Executive Officer 24 July Photos on left: A robust safety management framework ensures safe working with the use of quality protective equipment and clothing.

15 Overview Strategic Report Directors Report Accounts 13 Robotics Partnership: SGN and ULC First UK joint seal: October Joint seal rate: 4.4 a day NIC Award: 6.5 million Innovative robotics In October we trialled a system of mains repair using a robotic joint sealing operation (CISBOT) with our US partner ULC. The trial was performed on 17 October under live gas conditions through one excavation and from the rear of a single box truck. Requiring only a small excavation to seal up 88 joints within 360 metres of 24 CI metallic pipe, the robotic technology worked quietly underground with minimal disruption in the Woolwich street, and we became the first GDN in the UK to seal a lead yarn joint on a live gas main using this technology. In the same month, Ofgem awarded us Network Innovation Competition (NIC) funding of 6.5 million for CISBOT which will be used for greater development of the project. CISBOT could transform the way in which gas network repairs are carried out and we re sharing what we ve learned to maximise the benefits of trenchless technology across the industry. Case study Using the technological advancement in robotics technology to repair leaking joints from the inside of the gas main. Transforming the way gas repairs are carried out.

16 14 SGN Annual Report and Accounts Key performance indicators We measure our success in achieving our objectives through the use of quantitative assessments and, where these are less relevant, through the use of qualitative assessments. Our principal key performance indicators (KPIs), which are used to assess whether principal operating objectives have been achieved, are set out below: Financial Operating profit Capital expenditure 359.1m 99.0m 359.1m 99.0m 225.3m 145.0m m m Replacement expenditure 222.7m 222.7m 253.0m m Operating profit is the profit before financing charges and taxation. It includes controllable operating costs and is a key profit related measure of performance. The increase in operating profit was driven by cost efficiencies, lower replacement expenditure and the impact of depreciation profiling. Debt to RAV ratio 72.2% 72.2% 71.7% % Additions to tangible fixed assets include new distribution mains and storage, new connections to existing mains, new governors and meters, and new investment in IT, land and buildings, vehicles and plant. Replacement expenditure is written off to the profit and loss account as incurred under UK GAAP. It represents the cost of renewing sections of gas network with modern polyethylene pipes to improve future safety and reliability. The sections replaced include mains and smaller diameter service pipes, which connect customers to mains. In total 1,088km of pipes were replaced in the year. The Group s net debt to Regulatory Asset Value ( RAV ) ratio. RAV is defined as Ofgem Regulatory Asset Value of both networks plus adjustments relating to the sharing of out/under performance against allowances. Debt for the purposes of the Debt to RAV ratio excludes shareholders loans and liabilities arising from derivative financial instruments, and is net of cash. The percentages stated are as at 31 March.

17 Overview Strategic Report Directors Report Accounts 15 Operational Employee lost time incidents Customer satisfaction: planned interruptions Customer satisfaction: unplanned interruptions This is defined as the number of incidents per 100,000 hours worked that result in employees taking time off work. This is one of the key operational metrics that is monitored on a consistent basis. Safety is one of our core Company values and is monitored closely by the Board. Results from customer satisfaction surveys (10 = very satisfied) are based on reports obtained for the nine month period ended 31 December. Planned interruptions on our replacement, capital or routine maintenance works are where timing can be predicted and the customer has been notified in advance. Results from customer satisfaction surveys (10 = very satisfied) are based on reports obtained for the nine month period ended 31 December. Unplanned interruptions arise through leakage or other emergencies such as damage to the infrastructure (e.g. by burst water mains). Escapes attendance 98.7% 98.7% 98.4% % This represents the proportion of uncontrolled gas escapes attended within one hour (target 97%). Uncontrolled gas escapes are defined as those where the smell of gas persists and where the gas supply is still on at the time the customer calls. We responded to almost 150,000 uncontrolled and over 80,000 controlled gas escapes during the year ending 31 March.

18 16 SGN Annual Report and Accounts Financial review We have set out below our financial review for the year ended 31 March. The results for the period are reported under UK GAAP including FRS 25, 26 and FRS 29. The comparative figures presented are for the year ended 31 March, as reported in the audited financial statements, unless otherwise stated. During this first year of the new RIIO-GD1 price control period, we made a satisfactory start and maintained a stable financial position. We have reorganised some of our business operations to meet the demands of the new price control, and focused on planning and innovation in order to optimise our network investment in the future. Conditions in the capital markets remain favourable, and we believe we will be able to finance our future maintenance and growth at competitive rates. We describe the year in more detail below including our key financial policies. Key financial highlights 2012 Turnover 1, Operating profit Net finance costs Profit/(loss) for the financial year (20.7) (20.5) Replacement expenditure Capital expenditure Long term debt* 3, , ,402.7 Regulated Asset Value 4, , ,540.0 *excludes shareholder loans Financial performance The increase in operating profit to 359.1m (: 225.3m) was primarily driven by movements in turnover and a reduction in replacement expenditure. The movement in turnover was due to routine timing issues relating to our regulatory allowances and prior year revenue adjustments, higher capacity volumes than anticipated and inflation. Actual expenditure was lower than our regulatory allowances due to a combination of efficiency and timing. Mechanisms exist within our price control to share with our customers the effect of any such timing issues and efficiency savings through the setting of future tariffs, starting in /15, where we envisage a reduction in our tariffs. Network investment Investment in the distribution network is a key priority to maintain safety and integrity. The total network investment in replacement and capital expenditure was 321.7m (: 398.0m). During the year there was focus on planning and Regulated Asset Value (RAV) and Total Network Investment (TNI) RAV ( bn) RAV ( bn) TNI () TNI ()

19 Overview Strategic Report Directors Report Accounts 17 innovation for our eight year programme of capital work to coincide with the RIIO-GD1 price control period. The Regulatory Asset Value increased by 2.1% in the year from 4.78bn to 4.88bn. Replacement expenditure We renew the iron pipes with modern polyethylene pipes to improve the safety of the existing network. Replacement expenditure, primarily of iron pipes, reduced to 222.7m (: 253.0m) due to a higher volume of low diameter pipes being replaced in the year and also through efficiencies arising from new contractual arrangements. During the year we replaced 1,088km of metallic pipe (: 1,124km). Long-term debt maturity profile 0-2 years 3-5 years 6-10 years years over 21 years Floating rate Fixed rate Index linked Capital expenditure Total capital expenditure reduced to 99.0m compared with prior year (: 145.0m) primarily due to timing as we focussed on developing eight year strategic and detailed investment plans for key asset categories. We expect capital expenditure to increase in future years. Capital expenditure is incurred to ensure the networks continue to operate at optimum pressures and sufficient storage capacity is available to meet instances of peak demand. New connections or increases in capacity to the networks also necessitate capital expenditure. Treasury policies and capital structure Financing consists of a mixture of equity, loans from shareholders and long-term debt. The investments and operations are mainly financed by long-term bonds and bank borrowings. Our funding and liquidity are managed within a framework of policies and guidelines authorised by the Board of Directors. Further details are set out in the Directors Report on page 27. As a matter of policy, a minimum of 75% of debt excluding shareholders loans is maintained at either fixed rates of interest or index-linked. This policy is kept under review from time to time. Interest rate swaps are used where necessary, to achieve the desired profile. We manage the maturities of debt and facilities to ensure no significant refinancing is required in any one period, thereby giving us access to competitively priced debt. In addition, the debt interest outflows are managed to ensure a competitive interest risk profile to allow us to meet our financing objective of at least 75% fixed rate or index linked interest. At 31 March, net debt (before issue costs), excluding shareholders loans and liabilities arising from derivative financial instruments, amounted to 3,522.9m (: 3,430.8m) and the debt to RAV ratio was 72.2% (: 71.7%). Of the total long-term borrowings at 31 March, excluding shareholders loans and after taking into account the effect of interest rate swaps, 85.5% were at either fixed rates of interest or were index-linked (: 87.2%). The net interest costs for the year were 249.1m (: 237.9m). The net mark to market loss for the year ended 31 March was 13.8m, compared with a loss of 2.1m in. Accretion charges on index linked bonds were higher at 28.5m (: 26.2m).

20 18 SGN Annual Report and Accounts Financial review (continued) Liquidity is maintained through a mixture of long-term borrowings and short-term liquid funds in order that there are sufficient funds available for our current and planned operations. At 31 March, there was a net derivative liability of 27.9m before tax on the balance sheet (: 32.0m). Appropriate interest rate swap contracts are used to achieve the target interest risk profile. FRS 29 requires these swaps to be valued at fair value, which is calculated using market based interest rate information at the year end. No new derivative contracts were entered into during the year. In line with the gearing objectives, we believe in maintaining a strong balance sheet and an investment grade credit rating. The credit ratings of our two network companies as at 31 March were: Movement in long-term debt () 3,600 3,550 3,500 3,450 3,400 3,350 3,300 3,250 3,200 3,150 3,430.6 long-term debt Revolving credit facilities ,535.6 Index linked bond accretion Amortisation of fees long-term debt Baa1 with stable outlook (Moody s); BBB+ with stable outlook for Scotland Gas Networks plc and negative outlook for Southern Gas Networks plc (Fitch ratings); and BBB with stable outlook (Standard & Poors). Liquidity and cash flows Liquidity is maintained through a mixture of long-term borrowings and short-term liquid funds to ensure there are sufficient funds available for our current and planned operations. Committed facilities are in place in order to provide funding for future capital and replacement expenditure, as well as to provide sufficient available facilities to meet our seasonal working capital requirements. No significant financing activities were undertaken during the year. We remain well placed to issue competitively priced debt in the capital markets. As at 31 March, the undrawn amount of the revolving credit facility was 205.0m (: 280.0m). The revolving credit facility is in place until December Net cash inflow from operating activities for the year amounted to 401.0m (: 333.0m), the increase is due to increased transportation revenues and reduced network expenditure compared with last year. The net cash outflow from returns on investments and servicing of finance reduced slightly from the prior year to 197.1m (: 203.3m). Net investment cash outflow for the year was 78.0m (: 128.8m), the reduction being due to the timing of our capital investment program. After taking into account movements in shortterm deposits and financing items, overdrafts increased by 1.2m in the year (: decrease of 1.7m). During the year we paid dividends of 165.0m (: 60.0m).

21 Overview Strategic Report Directors Report Accounts 19 During this first year of the new RIIO-GD1 price control period, we made a satisfactory start and maintained a stable financial position. Pension commitments A significant proportion of our employees are members of the Scotia Gas Networks Pension Scheme which provides final salary defined benefits for members. In accordance with FRS 17 (Retirement Benefits), our balance sheet accounts for any pension asset or liability. The net pension liability as at 31 March was 55.9m (: 62.1m). Following the valuation carried out by the scheme s actuary as at 31 March 2012, annual special pension contributions remain at 23.5m annually until 31 March 2025 to repair the deficit in the defined benefit pension scheme. Employer normal contributions remain at 37.3%. Dividend policy Our policy is to distribute to shareholders any available surplus funds, after taking into account the cash requirements needed to continue to invest in the business and our level of gearing. At the year end there was 23.8m (: 39.9m) receivable and 167.9m (: 210.3m) payable relating to financial instruments with bank counterparties. Accounting policies Our accounting policies are set out in note 1 to the financial statements. These accounting policies have been applied consistently during the year and in the preceding year and, as previously highlighted in this report, operating profit is stated after writing off replacement expenditure during the year. Chris Brook Chief Financial Officer 24 July Counterparty credit risk The Group transacts with banks for the provision of interest rate and currency hedging transactions. The Group takes reasonable steps to maintain a minimum credit rating requirement as set out in its hedging policy; however, it recognises that at times the market conditions for banks can be unusually tight.

22 20 SGN Annual Report and Accounts Principal risks and uncertainties An essential tenet of responsible and prudent corporate governance is that risk must be understood, communicated and managed effectively. The Board achieves this by demonstrating strong and visible leadership, setting the maximum tolerable risk for the company and ensuring full engagement and involvement of people throughout the organisation. The principal risks and uncertainties identified are as follows: Description and impact of risk Mitigation Health and safety Failures in the design or the implementation of our health and safety management system may result in unsafe behaviour and working practices resulting in injuries or fatalities involving staff, contractors or members of the public; asset damage or loss; and prosecution under relevant legislation. Safety is the first of our core values. The Safety, Health and Environmental Advisory Committee of the Board is responsible for ensuring our safety, health and environmental policy is adhered to. Regulatory compliance Failure to comply with regulatory requirements could result in prosecution; damage to our reputation; and financial penalties. We have experienced regulation, finance and legal teams that manage and engage with all levels of Ofgem and Government. Regulatory returns are submitted following rigorous reviews and are approved by external audit and the Board. Regulatory and legislative change Regulatory, legislative or political reform could have an adverse impact on our business model. We have policy and public affairs specialists who engage openly and constructively with legislators, officials and other policy makers on all aspects of energy and related environment policy. Asset management systems Failures in the design or implementation of our asset management systems including health, physical security and integrity may result in a major incident leading to loss of life; adverse impact on the environment; loss of assets; prosecution under relevant legislation; and failure to meet our licence conditions. Our gas control centre oversees a process of asset integrity and risk based management. Regular emergency exercises and testing are conducted at key sites. Capital spending and maintenance programmes are maintained and the Risk Committee and Engineering and Safety Committee provide oversight and guidance.

23 Overview Strategic Report Directors Report Accounts 21 Description and impact of risk Mitigation Data protection and cyber security Failures in the design or implementation of IT security systems could result in unauthorised access to our IT systems; unauthorised or fraudulent disclosure of sensitive information; and vulnerability to external cyber attack. We have a managed information security programme across all of our activities to ensure resilient business operations. Funding strategy Inability to finance our functions due to deterioration in the economic climate; lack of availability of finance; external events; and failure to meet regulatory targets. Funding strategy papers are regularly presented to the Board. There is regular dialogue with banks and credit rating agencies and key metrics are built into the business planning process. Detailed financial policies are continually monitored, as set out further on page 27. Pension liabilities Liabilities increase due to market conditions or demographic changes or when investments underperform. There are periodic formal valuations of pension schemes and contributions supported by continual monitoring of scheme investments and valuations. Recruitment and retention of a competent workforce The design or implementation of our policies, procedures and reward structures may result in difficulty recruiting and retaining sufficient competent people to carry out our operations safely, efficiently and in compliance with all regulatory obligations and shareholder expectations. We have a comprehensive workforce planning and recruitment programme to ensure optimum resource management, including safety, HR, IT and finance. Crisis management Failure in the design or implementation of crisis management systems may result in an inability to deal with a major crisis; reputational damage; and regulatory enforcement action. Business continuity plans are in place throughout the company and are reviewed continually. Regular test exercises are undertaken. We are also listed under the utilities fuel scheme as part of the national emergency fuel plan. Major projects and capital expenditure Failures in the design, planning and execution of major projects, including non engineering projects could result in the expected operational and financial benefits being either delayed or not realised; project overspends; functionality or specifications being compromised; and contractual disputes. The deployment and updating of our major projects governance framework is designed to ensure projects are governed, developed, approved and executed in an effective manner.

24 22 SGN Annual Report and Accounts Corporate responsibility Corporate Social Responsibility (CSR) remains high on the agenda and it s an integral part of our core values: To keep our customers warm and secure by delivering gas safely, reliably and efficiently; To minimise our effect on the environment and have a positive impact on local communities; and To create an inclusive and engaged workforce that is proud to work and do its best for SGN. We want to show our customers and the public we really mean it when we say we care about the communities in which we work. We continue to adopt best practice to improve our environmental performance, complying with and exceeding where appropriate, all statutory and regulatory environmental requirements. We are working hard to further reduce our business carbon footprint through emissions saved and reducing our spoil to landfill, and all our contractors are encouraged to demonstrate the same level of commitment to CSR as we do. Since the 2008 introduction of our dedicated programme to reduce the environmental impact of our business, our achievements have included: A 15% reduction in our natural gas emissions from leakage over the last five years; Reducing the amount of road spoil we send to landfill by 96%; Cutting our use of quarried materials in our reinstatement activities by 84%; and Lowering our overall business carbon footprint by over 17%. This year the Assisted Connections scheme (an Ofgem supported initiative that aims to substantially reduce the cost of gas connections for qualifying customers), has undertaken a total of 5,775 installations, with 4,750 in Scotland and 1,025 in Southern. The scheme is designed to help existing customers who: Live in areas considered to be among the most deprived in the country (i.e. the lowest 20% as per the Index of Multiple Deprivation); Are in receipt of certain qualifying benefits; Live in fuel poverty based on the current Government definition; or Are 70 years of age or older. Our Corporate Community Investment is monitored through the London Benchmarking Group (Corporate Citizenship), which provides an evaluation of our community programme, our inputs, outputs and impacts. Through our Community Action Programme (CAP) our staff have spent over 5,600 hours volunteering for worthwhile causes, and we offer help and support with charity fund-raising activities and local causes which matter most to our employees. Additionally, our matched funding scheme Into Action has further boosted the cash amounts raised for over 200 charitable organisations. We continue to encourage our staff to get involved with our Give As You Earn scheme. Our community programme going forward We have a clear plan to increase our community activity, focusing on four areas aligned with our company objectives: children, fuel poverty, vulnerable customers and general community. We are working in partnership with the Outward Bound Trust, which is an educational charity dedicated to unlocking the potential in young, often disadvantaged, people through discovery and adventure in the wild. We will be sponsoring 72 year nine students (13 to 14-yearolds) from three schools in Glasgow, Portsmouth and Southwark, south London, to take part in an Outward Bound programme. The school locations have been selected according to local authority figures that identify these areas as having a percentage of 24-33% of children living in poverty. Some of our staff will take on a mentoring role, aiming to initiate positive change and a sense of achievement through guidance and encouragement. On the same theme of young people, our chosen charity of the year is Barnardo s, which believes in a world where no child is turned away, no matter who they are, what they have done or what they have been through. The charity s purpose is to transform the lives of the UK s most vulnerable children to make sure their needs are met and their voices are heard. Fundraising activities are already taking place across our business and will continue throughout the year as we aim to reach our target of 25,000. Gregor Alexander Chairman 24 July Photos on left: Offering our services to local communities and charities through our Community Action Programme has also been beneficial in team building for our people.