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Annual Report & Financial Statements 2018


Working with technology to enhance our network and minimise disruption

SGN is one of the UK’s largest and most innovative gas distribution network companies, operating across Scotland, southern England and in Northern Ireland

Overview 01 2018 Financial and operational highlights 02 SGN overview Strategic Report 04 Chairman and CEO Q&A 06 Chief Executive’s report 08 Introduction to our new five-year strategy 20 Key performance indicators 22 Financial review 26 How we manage risk 29 Corporate responsibility Directors’ Report 37 Chairman’s introduction to governance 38 Board of Directors 40 Directors’ responsibilities statement 41 Directors’ report 43 Corporate governance statement

Inserting new gas pipes in old pipes, while the gas is still flowing has become a big part of our mains replacement strategy to minimise disruption and safety risks. The cover picture shows our large CISBOT robotic repair system working on Brighton seafront, minimising the disruption to road users and passers-by. Now used across both our networks, CISBOT has recently been used alongside our pioneering CIRRIS XI™ Inspection Robot to complete an ambitious £12m pilot programme.

Financial Statements 46 Independent auditor’s report 50 Consolidated profit and loss account 51 Consolidated statement of comprehensive income 52 Balance sheets 53 Consolidated statement of changes in equity 54 Company statement of changes in equity 55 Consolidated cash flow statement 56 Notes to the financial statements Glossary


SGN Annual Report & Financial Statements 2018

| Overview | Strategic Report | Directors' Report | Financial Statements |

2018 Financial and operational highlights

£1,156m

Turnover in 2017/18 3% increase on 2016/17

£398m

Network investment in 2017/18

£

4% increase on 2016/17

98.8%

Gas escapes attendance within an hour in 2017/18

£5.5bn

Consistent with 2016/17

Regulatory Asset Value as at 31 March 2018 6% increase on 2016/17

1hr £

146,238TWh Gas transported in 2017/18

£471.3m

1% increase on 2016/17

Operating profit in 2017/18

External awards in 2017/18

12% decrease on 2016/17

3,226 16

01

Fuel poor homes connected 13% decrease from 2016/17


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SGN Annual Report & Financial Statements 2018

SGN overview

Our vision

Dedicated to keeping our customers safe and warm by leading the way in energy delivery

Our values underpin everything we do

Safety first We take responsibility for our own safety and the safety of those around us

Our commitment • We go out of our way to exceed customer expectations • We’re innovating for a safe, secure and sustainable future for our network

Involving you We engage with our stakeholders at the right time in the right way to help us deliver a better service

Introducing our strategy for the next five years We know we need a future energy system that is clean and meets the country’s 80% carbon reduction target by 2050. SGN has a key role to play in determining this future pathway. Our long-term goal is a decarbonised energy system that makes best use of our networks and expertise. Over the next five years we will focus on six strategic priorities: • Pushing the frontiers of the decarbonisation of heat • Accelerating competitive opportunities in energy • Delivering a low maintenance, smart, cost-efficient network • Driving operational excellence through technology and innovation • Transforming our enabling functions and support processes • Keeping pace with increasing customer and stakeholder expectations

For more information on our strategic priorities and the stakeholder context  See pages 8 to 9

Driving performance Efficiency, innovation and continuous improvement will help us deliver excellence and achieve commercial success

Putting people at the heart We always work together, talk honestly and treat people with respect

Looking after customers By listening to our customers, understanding their needs and keeping our promises we can deliver an excellent service that people trust

Sustaining our world We maximise our effect on local communities and minimise our impact on the world


SGN Annual Report & Financial Statements 2018

Scotland

Our Scotland network distributes gas across all of Scotland to 75% of households, including remote areas through the Scottish Independent Undertakings (SIUs) at Stornoway, Wick, Thurso, Oban and Campbeltown.

Northern Ireland

Dundee

Dunfermline Edinburgh

Glasgow Paisley Coatbridge

In Northern Ireland we have been granted the licence to bring natural gas to eight towns in the west, constructing high, intermediate and low pressure pipelines and mains. We are also contracted to maintain the gas transmission system and maintain the assets for the gas pipeline connection between Northern Ireland and Scotland.

Southern England

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.

Belfast

Key

Operations depot location SGN office/site Satellite depot SIUs

Oxford Epsom Kennington St Mary Cray Ashford Horsham Aldershot

Poole

Portsmouth

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Operations throughout the UK

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SGN Annual Report & Financial Statements 2018

Gregor Alexander Chairman and John Morea CEO come together to answer some of the key questions facing SGN and the energy industry

Gregor Alexander, Chairman

John Morea, Chief Executive Officer

Q.

What are the biggest challenges facing SGN?

A.

Gregor: We’re now in the latter part of the current regulatory price control period (RIIO-GD1), and while we’re certainly concentrating on delivering on all our regulatory outputs for this period, we’re starting to look forward to the next price control (RIIO-GD2) which comes into effect from April 2021. While Ofgem has already started the consultation process, our challenge right now is to effectively engage with all our stakeholders and put over the case for an equitable balance to be struck in RIIO-GD2. John: In addition, we need to continue the work we are doing in showing gas networks of the future have an essential role to play in helping to bring a low carbon economy for the UK. This will be achieved not only through valuable cross-industry collaboration, but also through the development of our own projects such as H100, our hydrogen demonstration project. The solution doesn’t however, just rest in one area and it’s essential we fully embrace the possibilities of other solutions which include further developing our expertise in blending green gasses as well as working with partners to help develop natural gas solutions in the transport sector.

Q.

How are you progressing with your policy to increase the quantity of green gas in the network?

A.

John: We now have 36 Biomethane plants connected to our network, supplying enough green gas for the needs of almost 180,000 homes. This is good progress to achieving our 2021 ambition of supplying 250,000 customers with green gas.

Gregor Alexander (left) and John Morea

Gregor: Through providing an injection hub at our Portsdown Hill site we are actively encouraging smaller producers of green gas, enabling the economy to grow and stimulate growth in this important area which all contributes towards a low carbon economy. It’s widely thought there’s a continuing role for Biomethane at least to 2050, but the industry will need incentives to establish itself and be commercially viable. For example, in the UK only 2.3m tonnes out of 90m tonnes of on-farm waste are used currently.


SGN Annual Report & Financial Statements 2018

Energy costs are very much at the top of most people’s agenda. What are you doing to help keep gas affordable?

A.

Gregor: Energy affordability continues to be a critical issue for every UK energy customer and we continue to do all we can to keep our costs down and operate efficiently. It’s important we continue to focus on connecting fuel poor customers to our network as our efforts here can make a real difference to the most vulnerable in our society. John: While our Regulator sets what we can charge gas suppliers, we can help by keeping our costs down and improving our efficiency through being highly innovative in what we do and how we do it. As a result of this innovation, and due to ongoing efficiency and outperformance, in November 2017 we made a voluntary contribution of £145m to Ofgem for the benefit of customers which was welcomed by the Regulator.

Q.

How is your Help to Heat scheme, designed to help those in fuel poverty, progressing?

With the right regulatory support and political will, gas really can underpin the lower carbon, fully integrated energy system for the customer; one we all want that provides the security of supply we all need. Q.

How is your project progressing building a new network to deliver natural gas to eight large towns in Northern Ireland?

A.

Gregor: SGN Natural Gas is our third gas network and is ground breaking for us. As well as being the first network we’ve operated outside GB, it’s also the first time we will have constructed a network from inception to operation. I’m sure the success of this project will help inspire the path for similar undertakings in the future.

A.

John: Our Help to Heat scheme allows us to provide households living in fuel poverty with free or heavily subsided gas connections onto our networks, and overall, we continue to make substantial progress towards our targets, which run to 2021. In Scotland we have exceeded our original forecasts within five years, and almost achieved our eight-year target to connect 17,130 eligible homes to our network. In our Southern network, we have connected over 5,000 fuel poor households to our network, but know we need to do more if we are to meet our eightyear target of 10,367 connections. Gregor: There’s no doubt in Scotland, government funding to pay for the installation of gas central heating makes a difference. In England there is very little funding available to pay for gas central heating systems in fuel poor homes and consequently, fewer fuel poor households apply for Help to Heat gas connections. To continue to support households living in fuel poverty, our shareholders have provided a £20m ‘Extra Help to Heat’ voluntary contribution to help meet the costs of achieving our objectives.

John Morea on a site safety visit

John: Last year we connected our first domestic customer, and the pathway is set to deliver gas mains, services and meters to around 40,000 customers in eight large towns over the next 40 years. LacPatrick Dairies Ltd in Artigarvan was the first business customer to be connected and businesses, residents and the region are now benefiting from the £250m infrastructure investment being made.

Q.

What is the future of SGN looking like?

A.

Gregor: We have worked extremely hard and produced exceptional results for our customers since establishing 13 years ago. As we embark on negotiations with Ofgem

for the next price control RIIO-GD2, we will gain more insight into how we will continue to deliver these results. Whatever the outcome, the professionalism and commitment of our people will continue to keep our customers safe and warm into the future. John: I believe our company and industry has a very bright future. It’s clear, come 2050, there needs to be a fully-integrated and multi-faceted energy industry serving our customers. Blended gas in networks will play a significant role, hydrogen networks will be strategically placed, district heating will play a role in some urban centres, and electric heat pumps will come into their own for off-grid properties. But if the UK is to meet our 2050 targets, a decision will be required by the early to mid-2020s on the pathway we need to take for the decarbonisation of heat. We therefore need the Government to drive a process of long-term total energy planning in this country. This also means ensuring the regulatory settlements look to the long-term to allow our industry to attract the billions of pounds of investment needed to support a low-carbon Britain. With the right regulatory support and political will, gas really can underpin the lower carbon, fully integrated energy system for the customer; one we all want that provides the security of supply we all need.

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Q.

05


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SGN Annual Report & Financial Statements 2018

Chief Executive’s report

Our awards Recognition through external awards illustrates our commitment to our customers, our stakeholders, our industry, the environment, and of course, our own talented people. The full list of awards is available on our website.

IGEM Gas Industry Awards Manager of the Year – Terry Carroll Engineer of the Year – Andy Musgrave Innovation Product of the Year – CIRRIS™ Edinburgh Medal – Chris Bielby Special Recognition Award – Maureen McIntosh

UKSTT Awards Winner – Innovative Product – iCore (in partnership with TRACTO-TECHNIK UK Ltd)

UK IT Industry Awards Winner – Cyber Security Project of the Year Highly Commended – Best Use of Cloud Services Highly Commended – IT Project Team of the Year (CX/IT)

UK Business Awards Winner – Utilities – Robotics Winner – Innovation – Robotics

Driving our five-year business strategy in an environment that is continually changing presents huge challenges for us, but we will succeed by employing our collective talents and aligning our efforts across the business.

Operations We had a good year in all our operations activities, including emergency, repair and replacement. At the year-end we’ve exceeded our 97% emergency response target and dealt with a number of ‘no gas’ incidents during the year, many caused by broken water mains and third-party damage. We achieved our gas mains replacement year-end targets in both our networks with 269km achieved in Scotland and 731km in Southern. Severe weather event Early March saw the so-called Beast from the East weather event hit us, affecting much of the UK infrastructure. While the gas networks continued to deliver to customers, it was a very challenging time. In our Southern operations region we experienced the highest volume of emergency work since 2008, with over 2,000 jobs in one day. Gas mains replacement productivity was significantly impacted due to the inability of teams to travel to site and to carry out excavation work, while our new gas connections activities were re-planned at the request of our customers and because of the major travel disruption, with no work taking place across Kent and Surrey. Scotland experienced excessive snowfalls from 28 February to 4 March with some towns and cities under a foot of snow. The road networks were severely impacted, and so were our mobility and response times to attend gas emergencies. However, our committed employees worked tirelessly to minimise the impact. All planned work such as new gas connections and meter work was postponed as every competent resource was assigned to emergency work.

Our principle assets such as our pressure reduction stations and gas distribution mains network across both our networks proved very resilient in the circumstances. Major projects We made good progress on our major projects, with the Erskine Bridge project under way and our gasholder dismantlement progressing well. The reinforcement and replacement work we carried out in the heart of Edinburgh’s old town last year was described by Scottish parliamentarians, businesses and locals alike, as copy book engineering, communications and engagement. Gas risers Following the horrific Grenfell Tower disaster on 14 June last year when 72 people lost their lives, the issue of gas main risers on high-rise flats and buildings has been a focus (even though gas itself wasn’t the cause). We’ve been working closely with many local authorities, not just in London, but throughout the country as they all consider the serious issues that have emerged. And with the public inquiry into the tragedy still to come, there may be many more issues about having gas in tall buildings, which will need to be addressed following the inquiry outcome.


SGN Annual Report & Financial Statements 2018

07

Safety is, and always will be, top of our agenda. 2017/18 saw us set challenging targets on people and safety with the single-minded intention of keeping all our people, the public and contractors safe from harm.

1

2

Assets

3

The security installation project at one of our offtake sites was designed and constructed to the High-Level Security Principles (HLSP) provided by the Centre for the Protection of National Infrastructure (CPNI) to protect our assets from theft, damage and attack. 2

Culture

Our bespoke Safety Culture programme is helping us understand human behaviour, increasing motivation and understanding of personal safety hazards, and making our people feel part of the solution, not the problem. 3

Connected vehicles

We’ve rolled out over 100 connected vehicles to our operational colleagues working in poor mobile network areas. 4

Data

In 2017 we created our Information Management framework and strategy, forming a small, cost effective data architecture practice to treat information as a business asset as well as disposing of old records safely. 5

Cyber security

Our new online security knowledge zone offers our people information about cyber risk, how it can impact our Company, and how to protect their families outside work.

4 5

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Safety

1


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SGN Annual Report & Financial Statements 2018

Introduction to our new five-year strategy

During the year we set out our new six priorities to give us a five-year roadmap and to identify how we can lead the way in energy delivery in the UK. Our priorities are designed around the need to develop a future energy system which is clean and helps meet the country’s 2050 decarbonisation targets. We recognise this energy system has to provide value for money for customers while continuing to meet peak demand on the coldest of days. We see technological innovation as a way to drive growth and diversification of new solutions for power, heat, waste and transport. This focus will bring benefits and rewards alongside our long-term goal of delivering a decarbonised energy system which makes the best use of our networks and expertise. Over the next five years we will focus on our six priorities to support this long-term goal. These are: 1. Pushing the frontiers of the decarbonisation of heat 2. Accelerating competitive opportunities in energy 3. Delivering a low maintenance, smart, cost-efficient network 4. Driving operational excellence through technology and innovation 5. Transforming our enabling functions and support processes 6. Keeping pace with increasing customer and stakeholder expectations Our people, ethos and attitudes are essential to our success. By following a shared direction and aligning our efforts and focusing on our strategic priorities, we will be able to make good and measurable progress. Underpinning all of this is our focus on safety as we take responsibility for our own safety and the safety of those around us.

Inputs

Activity

Key components of value creation

Our business model

Regulated businesses Human Our people are at the core of what we do and we have around 3,800 highly skilled and flexible employees. Natural Gas

Operational excellence and efficiency

We strive to uphold high levels of safety, reliability and customer service. We have ongoing programmes to drive efficient decisions.

Asset investment

Decisions around asset investment are made carefully to ensure both short-term and long-term impacts are considered.

Network

£4.3bn network investment since inception.

Revenue Our revenue under the GB price control includes a return on RAV, depreciation, efficient operating costs and incentive income from the Scotland and Southern distribution networks. Our Northern Ireland network is regulated through the Northern Ireland utility Regulator.

Cashflow

Investment Investment during the year saw £282.8m invested in our Southern network and £112.0m in our Scotland network.

Non-regulated businesses Pipeline

10,491km pipeline replaced since inception.

£ Financial

We have a strong liquidity position and good access to capital markets.

Innovation

We continually ensure we are at the forefront of new ideas and technology to work more efficiently.

Non-regulated income comes from a growing portfolio of sustainable and unregulated businesses. This year we saw the creation of SGN Place which is managing our property disposal and development.

The key principles of our engagement:


SGN Annual Report & Financial Statements 2018

09

Our strategic priorities Pushing the frontiers of the decarbonisation of heat

We make a value contribution to the development of the future energy system. We will have readied our network to meet the challenges of decarbonisation, repurposing it to accommodate renewable, low-carbon energy from diverse sources and supporting new markets for green gas.

Access to a sustainable and decarbonised gas network which provides an affordable heat solution and the security of supply everyone requires.

Accelerating competitive opportunities in energy

We will be at the forefront of the delivery of heat having developed a thriving non-regulated business which reaches beyond our current footprint, delivering a range of commercial projects through a separated company structure and which complement the core business.

The acceleration of the green gas provision and use of existing gas networks will bring with it new opportunities of heat delivery but with least disruption for customers, utilising existing infrastructure and home appliances.

 elivering a D low maintenance, smart, cost-efficient network

To have created a reliable, low maintenance network using smart technology and innovation to enable integration into an affordable, decarbonised future energy system. We will have simple data capture and transmission methods to enable machine learning.

With the evolution of a low maintenance and low-impact network there will be less disruption and interference to the lives of energy customers and the public at large.

Driving operational excellence through technology and innovation

Improving and innovating what we do, with a professional and accountable workforce driving change and progress with safety being at the core of everything we do. Our people use smart mobile applications to send and receive information, our planning and scheduling of work allows us all to be more efficient and our contractors want to work for SGN for the long term.

With safety at the core of everything we do, we recruit, develop and retain new people for the future and deliver work of a high standard for our customers and stakeholders.

Transforming our enabling functions and support processes

We will make our people safer, more productive and more efficient through continual improvements in our processes and enabling functions. We will deliver and embed change effectively to deliver benefits and value to our business and our people. We will use technology and automation to help us improve, working systematically to increase efficiency and productivity thereby reducing cost.

Efficient working will help reduce the costs of our operations which directly feeds into benefits for customers.

 eeping pace with K increasing customer and stakeholder expectations

Better decisions are made across our business through the systematic and proactive engagement of a broad range of external stakeholders and customers. Our highly engaged, diverse and talented teams are empowered to deliver valuable insight and outcomes.

People increasingly choose to interact with us digitally allowing us to exceed their expectations efficiently and deliver seamless, hassle free, self-service processes and proactive information.

For more information on associated risks  See pages 18 to 19

Inclusive | Targeted | Transparent | Responsive | Accountable | Measurable | Embedded

Affordability | Reliability

Key impacts on stakeholders

Leading the way in energy delivery

Five-year vision

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Outputs and outcomes


SGN Annual Report & Financial Statements 2018

In February, training was delivered to 20 Agriculture students in Edinburgh and 22 HNC Agriculture students in West Lothian, including six members of staff such as lecturers and regional health and safety advisors. The SRUC has since requested the training also be delivered to its agricultural consultants and properties and estates personnel and will be developing the rollout of the initiative, not only across our Southern network, but also in all land-based colleges across the UK. Customers Initiated in 2015, our three-year customer experience transformation programme is continuing to deliver great customer experience, by leveraging digital technology. Our 10/10 customer app is delivering improved analytics for actionable insight. Our colleagues now speak to our customers before, during and after their work, asking them about the experience they’ve had with us. Our customers rate our service using our 10/10 app which helps track satisfaction levels. If customers give our team a low score, we offer a call back from our management team to

We’re also proud to be the UK number one 1 gas network company for complaint handling. On average we’ve reduced customer complaints by 18% per annum, and overall by 66% since 2012/13.

Scotland

complaint reduction delivered from our new complaints handling procedure.

Southern

Linear (Scotland)

Linear (Southern)

1,564 375

438

1,716

2,842 645

One such initiative was the delivery of our first damage prevention safety-training module at two campuses of Scotland’s Rural College (SRUC). This pilot was delivered to all six campuses during the year with a view to embedding the content within a wider health and safety offering to all incoming students and modern apprentices.

Complaint volumes

new connections made to our networks during the year.

3,173

Working safely near gas pipelines Recognising the dangers to members of the public, farmers and contractors when working near underground pipelines, we have been working on a number of initiatives to both raise awareness and improve training.

4%

778

continued

21,213

4,470

Chief Executive’s report

925

10

2012/13 2013/14 2014/15 2015/16 2016/17

discuss their experience. This allows us to discuss any concerns and pre-empt a customer complaint. Another initiative was the introduction of video capability to enable our engineers on new connections work, to record a short, descriptive video on their smartphone showing the work they’ve carried out at a property, if the customer isn’t there at the time. Details such as meter location and any next steps to reinstate disturbed surfaces can be relayed directly to the customer digitally so they understand what we’re doing. We are now in phase three of the project, which commenced in March 2018, this being a rollout to all our Southern operations depots. Through the commitment and hard work of our operations and field teams, we’ve achieved our goal of becoming the UK number one 1 gas network for customer service. We’ve now achieved this for the second year running and we aim to stay at the top. We’ve achieved outstanding performance results in the last two years with both our networks regularly scoring nine out of ten or above, therefore receiving maximum incentive income for customer satisfaction under RIIO.

Innovation We continue to be recognised as one of the most innovative energy network companies. Leading the way on innovation is what will shape our future, it will drive operational excellence, it will take us to new levels on the decarbonisation of heat, it will bring about smarter and lower maintenance networks and it will help us keep pace with the increasing expectations of our customers and shareholders. Our diverse innovation portfolio includes 43 Ofgem sponsored Network Innovation Allowance (NIA) projects (30% of them collaborations with other gas network companies) together with four Ofgem Network Innovation Competition (NIC) projects. All utilities face an on-going challenge in safely managing excavation activities. This will continue for the life of the assets as they are pushed to return their maximum value for the GB customer. Our pioneering CIRRIS Robotics system is now revolutionising road works and will continue to benefit our customers and the environment. Our new Robotic Roadworks and Excavation System (RRES) will use advanced robotics and artificial intelligence to lower the cost and improve the efficiency, safety and environmental impact of utility excavations and activity. A feasibility study paved the way for our successful NIC bid for £7m to fund this exciting three-year project from April 2018. 1 Ofgem RIIO-GD1 Annual Report 2016/17.


SGN Annual Report & Financial Statements 2018

11

Ofgem funded Robotic Roadworks Excavation System project investment.

Our industry in context

The investment proposition for the UK regulated energy sector Since privatisation regulated utilities in the UK have attracted investment from around the world to build and maintain essential infrastructure and ensure provision of vital services. The consistency of core principles in regulation have provided a stable platform for investors. This platform has driven a significant inflow of private capital into the UK regulated infrastructure sectors since privatisation of almost half a trillion pounds. There also remains significant future opportunities for investors with the National Infrastructure Plan estimating over £100bn of required investment in the five key sectors (aviation, energy, rail, telecommunications, and water) in the next five years alone. We have had a successful year in the debt markets issuing more than £800m of public and private bonds at extremely competitive rates; this debt has been utilised to enhance the efficiency of our capital structure and to provide lasting value for our stakeholders.

For more information visit: www.ofgem.gov.uk/sites/ default/files/docs/2014/12/ ukrn_investor_guide.pdf

Our Real-Time Networks project aims to demonstrate a flexible gas network to accommodate evolving energy market needs and consumer demands. We are currently collecting data to develop a Real-Time Energy Demand Model to update and enhance current industry standards for design and operation of gas distribution systems. Across the southeast, 1,200 loggers are installed at customer meters collecting demand data. Five weather stations are also collecting local weather data to coincide with consumer demand and to identify any regional climatic variations. We’re concurrently carrying out laboratory testing to investigate the effect of renewable technologies on demand. Civil works are complete at three out of six sensor technology sites that will collect gas pressure, quality, flow and temperature data. The data feeds into a newly developed Cloud Data Solution to enable real-time communications to the model.

Implementing new innovation is a priority, and we’ve invested over £30m transforming completed projects to business as usual since Ofgem innovation funding became available. Stakeholders Our well-established stakeholder engagement strategy sets out the way in which we listen and respond to the needs and ideas of our stakeholders to improve our decision-making and achieve better, shared outcomes. We’ve used the DRS (Discretionary Reward Scheme) period to move forward with initiatives, share these with the other Gas Distribution Networks (GDNs), and more importantly work with others from inside and outside of the energy sector. We’ve highlighted some of the initiatives we’ve been carrying out later in this report, demonstrating best practice and scalability to benefit all GB customers.

Reporting our progress on RIIO-GD1 GD1 price control – beyond the halfway point in the current price control we’re focused on achieving our regulatory outputs. We continue to exceed our output targets for iron mains risk removal and leakage of gas in both of our network areas. In addition, we continue to excel in innovation, which facilitates a more reliable and safe gas network for our customers as well as driving efficiency.

UK Regulated Infrastructure An Investor Guide December 2014

UK Regulators Network Prepared by:

UK Regulated Infrastructure – An Investor Guide

AVIATION

ENERGY

RAIL

TELECOMS

WATER

While on-target to meet our fuel poor outputs in Scotland, we are currently focused on the regulatory output for fuel poor in the south of England. Here we are employing several new initiatives and working closely with stakeholders to ensure we meet our target by 2021.

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£7m


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SGN Annual Report & Financial Statements 2018

Customer experience

1 2

Phase 1 of our Customer Experience Management (CEM) is making us fitter for the future as our website is now the first port of call for many of our customers.

1

Technology

Our Customer Experience team is embracing innovation to deliver bespoke technology of real value to our customers, faster, easier and at a lower cost, which is improving our service capability and reducing complaint numbers. 2

Live Chat/Co-Browse

Live Chat and Co-Browse went live in November 2017. This has enhanced our customer experience by leveraging access to new digital platforms. 3

CitNOW

CitNOW video capability enables our engineers working on new gas connections to record a short video on their smartphone showing the work they’ve carried out at a property if a customer isn’t present. This closes a communication gap and often helps us exceed our customers’ expectations. 3 4

4

10/10 app

Our 10/10 customer app is delivering improved analytics for actionable insight. Over 20,000 customers have used the app with 98.4% of them telling us they were ‘Very Happy’ or ‘Happy’ with our work. 2018 will see this important capability extended to all our gas mains replacement teams and contractors.


SGN Annual Report & Financial Statements 2018

reduction in natural gas emissions.

continued

Keeping costs down – We’re being efficient across all our activities to keep network costs as low as possible. It also means playing our part in keeping overall energy costs down, particularly helping to alleviate fuel poverty through our Help to Heat scheme and other initiatives we’ve introduced or are working on with partner organisations. Feedback from stakeholders at last year’s Moving Forward Together workshop revealed 85% agreed we should support people living in fuel poverty. Supporting communities – We’re fully committed to supporting low-income and vulnerable households in our network. Based on our Help to Heat strategy and vulnerable customer drivers our joint priorities for social outputs include front line support for customers who need it the most, and partnerships to deliver social outputs. After speaking at the National Energy Action Conference in September 2016, we began discussions with the Energy Minister and the Department for Business, Energy and Industrial Strategy (BEIS) on funding for home improvement measures, and highlighted the shortcomings of the ECO scheme to provide adequate funding for new central heating systems. This may lead to changes in ECO3 from October 2018. We’re aiming to influence policy to encourage a holistic approach to aligning these two schemes. We have joined Resilience Direct, a secure UK web-based platform, enabling the real time sharing of information across the blue light emergency responders, local authorities/resilience forums and public and private sector

organisations. Our bespoke information on this online portal went live on 13 March, and provides key information which our resilience partners need in the event of an incident. This platform allows us to build on new and existing relationships, which could provide a wide range of support services in the event of an incident, be that loss of supply or severe weather conditions. Future energy solutions – The UK faces a significant energy challenge in moving towards decarbonisation, ensuring affordability and a secure supply. We believe technological innovation will drive growth and diversification of new solutions for power, heat, waste and transport.

We have chaired the Energy Networks Association (ENA) Gas Futures Group since 2014, delivering the report ‘2050 Energy Scenarios – the UK Gas Networks role in a 2050 whole energy system’ and making a significant contribution to the debate about the decarbonisation of heat. In January 2017 the Scottish Government issued a consultation paper on local heat and energy efficiency strategies, including the regulation of district heating. This was one of a number of consultations on its draft Climate Change Plan and draft Energy Strategy, which was also supportive of our H100 hydrogen demonstration project.

How SGN is preparing for the ‘Future of Gas’ Statistically representative

1,100 gas properties

2,500

of Great Britain

SGN

gas appliances

Self-contained network

Supplied with LNG by road truck

Opening up the Gas Markets project in Oban is ensuring a more flexible GB network future. The rollout of the successful Opening up the Gas Markets project not only evidenced that a wider range of gases could be distributed in our networks under a rolling exemption to the Gas Safety Management Regulations approved by the HSE, but ultimately ensured security of supply for nearly 8,000 customers in remote communities. Each year it delivers a £5.8m outperformance against the current base costs, which is shared with our customers. We’re working with the whole gas industry towards GB implementation, and have established the Gas Quality Standard Working group with the Institution of Gas Engineers and Managers (IGEM) to facilitate legislative change to ensure a flexible GB gas network fit for the future.

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11.5%

Chief Executive’s report

Our customer and stakeholder expectations are categorised under three headings:

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SGN Annual Report & Financial Statements 2018

Chief Executive’s report continued

CO Although natural gas itself is no longer a key cause, we still see 40 people losing their lives each year because of carbon monoxide (CO) with thousands more treated in hospital. We continue to raise CO awareness, targeting the most vulnerable groups and lobbying for changes in legislation. Our publication Driving awareness of CO; a data-driven strategy was launched by Clare Adamson MSP (chair of the CrossParty Safety Group) on 22 February 2018 at the Scottish Parliament. This report has also been shared with all gas network companies and industry colleagues who attend collaboration forums, and we’re now campaigning to target the old and the young alike.

Partnership working CO awareness during power cuts We have updated our CO message to inform customers of the dangers of CO during power cuts, particularly around the misuse of barbecues or petrol generators. We and all other distribution networks have updated our websites to feature CO awareness.

CO alarms and literature Across our footprint we continue to work with fire and rescue services providing literature and, where possible, CO alarms for use during their home safety visits. We are also supporting a Handyvan service in Dumfries and Galloway. We have gifted 5,000 CO alarms in total over the past three years.

Making a difference with the younger generation Through partnerships with Solutions for the Planet, Girlguiding and Developing the Young Workforce West region, we have carried out a variety of STEM, gas safety and CO events. We’ve worked with 7,649 students from 5 to 22 years of age.

Greener gas We know we need a future energy system that is clean and meets the country’s 80% carbon reduction target by 2050. We’re continuing to deliver greener gas and work on future energy sources by seeking out innovative ways to minimise our impact on the environment, and positively impact local communities with every interaction being an opportunity.

SGN Natural Gas

Our ground breaking stand-alone distribution business in Northern Ireland progresses at pace. Over 25km of medium and low-pressure distribution mains has been constructed in Strabane making gas available to over 1,700 customers. We’ve embarked on a five-year £35m contract with Kier Group to extend the natural gas network across the eight towns in our licence area, and AEC has been contracted to supply distribution pressure control equipment. Building a medium pressure crossing under the Mourne River using trenchless technology presented a significant engineering challenge but it was completed on time and to budget. Stakeholders and prospective customers have been engaged through roadshows and community sponsorships, while innovative discount schemes are being developed to tackle fuel poverty issues in the west of Northern Ireland.

Hydrogen We have chaired the Energy Networks Association (ENA) Gas Futures Group (GFG) since 2014, a key deliverable of which is the report ‘2050 Energy Scenarios – the UK Gas Networks role in a 2050 whole energy system’. The report highlighted that solutions to the decarbonisation of heat challenge, using the existing gas network infrastructure, are likely to provide the highest value to customers. Following the report BEIS reassessed all the options on decarbonising heat. We responded to the Scottish Government’s Heat Strategy consultation (see page 13) which in turn has led to meetings during the year with the Scottish Government’s energy team. It was pleasing to see its energy strategy specifically stated its support for an SGN hydrogen demonstration (H100) project to be built in Scotland.


SGN Annual Report & Financial Statements 2018

15

Ofgem sponsored Network Innovation Allowance (NIA) projects.

Our industry in context

The GB gas distribution sector composition There are eight gas distribution networks in Great Britain, each covering a separate geographical region. These networks are owned and managed by four companies:

• Cadent Gas which manages

four networks – West Midlands, North West, East of England and North London; • Northern Gas Networks which manages North East England; • Wales & West Utilities which manages Wales and south west England; and • SGN – We manage networks in Scotland and southern England (including south London), we also own and manage a new and developing network in the west of Northern Ireland. Together networks in UK have over 21.9m customers and maintain over 282,000km of pipe.

For more information visit: www.energynetworks.org/gas

“The Scottish Government has met with the UK Government and other partners to develop the 2017 hydrogen and fuel cells roadmap. We remain committed to support further research and development in this area, including proposals by SGN to assess working of construction and operating the first hydrogen distribution network in Scotland.” The Future of Energy in Scotland Scottish Government, December 2017

Working with the Scottish Government and using NIC funding of £2m, we’re conducting a feasibility study that will enable us to assess the viability of constructing and operating a hydrogen network. Three sites in Scotland will be assessed with one being selected as the most suitable location for construction from both a technical and commercial viewpoint. Running concurrently is the development of our safety case. This will be broken down into 11 elements that will look to cover all aspects of gas distribution that may be affected by the switch from natural gas to hydrogen. Gas to the West The Gas to the West project will construct approximately 200km of high-pressure pipeline in the west of Northern Ireland linking towns to the existing network. This will allow 40,000 new domestic, commercial and industrial customers access to natural gas. SGN are working in partnership with Mutual Energy Limited and UREGNI in delivering this project. The SGN Natural Gas team working on our £250m Gas to the West project in Northern Ireland has had a momentous year. We’ve already connected our first domestic and commercial customers and this year will see the completion of the engineering build and a

marketing push to start the process of bringing gas to even more homes and businesses. This project is doing many things for the region in terms of industry competitiveness, promoting regional employment and offering more choice of fuel and supplier for customers. IT Moving all our IT services from old servers to the cloud is progressing well, and it’s where we need to be to make us agile and flexible in the IT space. We’ve mobilised the delivery team of our 18-month ‘all-in’ cloud migration plan, and they’re now working with our key migration partner. The programme will deliver improved security, durability, and agility, reducing our overall costs as well as supporting new ways of working such as robotics, analytics, and real-time network monitoring. Our first set of critical services were migrated away from data centres to the cloud at the end of 2017 and the current programme is due to be completed in the first quarter of 2019. “People are safer, more productive and efficient because of what we do. We aim to be a recognised leader in digital innovation and technology adoption.” Andrew Quail Director of IT and Innovation

The whole company has been preparing for the new General Data Protection Regulation (GDPR), which came into force on 25 May 2018. This is very important because we have an overriding responsibility to protect the data of our customers, employees and suppliers, plus fines for non-compliance by companies and individuals will be considerable.

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SGN Annual Report & Financial Statements 2018

Innovation

1

Implementation continues to be a main priority and following project completion we’ve invested over £30m transforming completed projects to business-as-usual since Ofgem innovation funding became available in 2013/14. 1 2 3

RRES

Robotic roadworks and excavation system (RRES) fuses advanced robotic arm technology with a mobile platform, controlled by artificial intelligence to enable autonomous, safe and efficient mains excavation. 2

H100 project

Using £2m of Ofgem Network Innovation Competition (NIC) funding, we’re conducting a feasibility study to assess the viability of constructing and operating a hydrogen network at one of three sites in Scotland. 4

3

Thurso

Wick

Oban Campbeltown 5

Real-time Networks

We’re now in the third year of our £8m NIC-funded Real-Time Networks pilot trial using sophisticated sensors across a section of our gas network to measure pressure, flow, quality and temperature of both conventional and unconventional gases. 4

SIU roll out

We’ve implemented the changes to gas quality in our four mainland Scottish Independent Undertakings (SIUs) under a rolling exemption to the Gas Safety Management Regulations approved by the HSE. 5

iCore

Phase 2 of our live/dead mains replacement insertion system iCore has started. This new holistic keyhole solution aims to minimise disruption to our customers and road users alike.


SGN Annual Report & Financial Statements 2018

17

continued

Protect, Detect, Respond A security strategy for our people, processes and technology al security and int ration egri ope ty o he fo nt ur ei te nc ch lle no ce lo ex gy

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Risk and Management Compliance Apply and proactively monitor against the ‘least privilege’ principle in regards all colleagues, third parties and systems that access our network.

Incident Management

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Incident Management Implement a continuous cycle of threat intelligence that informs and changes SGN’s security controls. Concentrate on primary risks with actionable outcomes to automated alerts.

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Incident Management Automate security into the provision of technology and automate compliance reporting to SGN standards.

Data and Application Access

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Give SGN colleagues secure access from any device, anytime and anywhere. Improve user experience, functionality and efficiency by enabling automatic system updates and treating all networks as untrusted.

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Improve customer experience and productivity for our colleagues. Integrating and embedding security controls and replacing passwords with biometric technology.

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SGN’s board has identified cyber attack as one of the top threats we face.

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We commit to being secure and resilient to cyber threats and prosperous and confident in the digital world.

Look out for practical advice and information on the changes in the coming months.

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Supply Chain SGN will procure from the best, globally-recognised security providers and advisors, to be a leader on information security management.

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Maximise operational availability by being ready to respond to security incidents with defined processes and Business Continuity Management – which are regularly practised.

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Improve customer experience and productivity for our colleagues. Integrating and embedding security controls and replacing passwords with biometric technology.

Implement a cycle of leadership risk management and governance review, to protect SGN from commercial brand damage. Map and measure security controls to NIST standards.

Manage the risk of the OT/IT convergence by focusing on the cyber security of operational technology and the ‘internet of things’ (IOT).

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Data and Application Access

Risk and Management Compliance

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www.ofgem.gov.uk/networkregulation-riio-model/currentnetwork-price-controls-riio-1/ riio-gd1-network-price-control

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For more information visit:

We carry out test exercises to make sure the measures we put in place are robust enough to ensure the safety of our data and systems. Rules, advice and guidance have been created to help protect both employees and the Company. By promoting and adopting a common

– it’s time to triple our defences

Ofgem’s current price control operates under a performancebased framework called ‘RIIO’. This means that networks’ Revenue is earned from Incentives, Innovation, and Outputs. After five years of the RIIO-GD1 price control we continue to perform highly, we remain on track to achieve all of our eight-year targets, have achieved our annual output targets in each year to date, and continue to develop some significant innovation projects such as ‘Opening up the Gas Market’ which has been testing the safety of different blends of gas within our networks.

company assets. The team is involved in the design and implementation of electronic enhancements, using the latest technology which put us at the forefront of protection, detection and response.

Cyber security

H

The Gas Distribution Networks in GB are classified as regulated natural monopolies, this is because of the separate geographical areas in which they operate. As a result, Ofgem set price controls for the networks; these price controls outline how much companies can earn from charging for use of the networks. This not only protects consumers and provides them with value but also ensures companies operate the networks efficiently and effectively.

Our IT team is responsible for ensuring our commitment to the safe preservation of our customer and employee data as well as our

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Ofgem and the regulatory framework for gas distribution networks

RESP O

Our industry in context

Cyber security Warnings from the UK’s National Crime Agency (NCA) about the threat of cyber-attack and data loss continue to be very strong indeed. The threat of disruption to our customers and our business is continually evolving and it’s why information security is something we take extremely seriously.

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We will achieve this by establishing a continuous cycle of planning, building and reviewing security operations to protect our systems and data.

Early in 2017 the WannaCry attack crippled many global companies, and it’s no surprise our Board identified cyber risk as the number one corporate risk.

The ambitious cyber strategy and pioneering approach we conceived 12 months ago is delivering extraordinary outperformance. By forging progressive ‘lighthouse’ partnerships with suppliers, developing relationships with National Cyber Security Centre (NCSC) and BEIS, becoming the first Critical National Infrastructure (CNI) to migrate 100% to the cloud and one of the first utilities to achieve Cyber Essentials accreditation, our small security team is embedding a risk-management culture and a common-sense approach to dealing with the threats we face so we can keep our customers safe and warm. UK IT Industry Awards Winner – Cyber Security Project of the Year

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Chief Executive’s report


18

SGN Annual Report & Financial Statements 2018

Chief Executive’s report continued

approach, ‘is it secure?’ we aim to embed a culture of awareness to reduce our vulnerability, combat potential losses and demonstrate we are serious about our IT security. Although unaffected directly, we carried out further work to protect our data, people and customers following the cyber-attack on the UK on 12 May 2017. Measures we’ve

taken to protect our business and the data we manage from cyber criminals include: • Significantly raising the profile of cyber security within our business • Achieving Cyber Essentials Plus accreditation – a government security scheme recommended to all UK industry to help protect against common cyber-attacks

The executive leadership team John Morea Chief Executive Officer

John Lobban MD, Scotland & Northern Ireland

Helen Bray Director of Stakeholder Relations

Kate Naylor Director of HR & Services

Mick Carmedy Chief Financial Officer

Glenn Norman Director of Operations (Southern)

Paul Denniff Network Director

Andrew Quail Director of IT & Innovation

Nicola Graham-Shand Director of Legal & Compliance

Simon Reilly Commercial Director

Each year the executive leadership team take part in the company-wide Community Action Programme.  See page 32

Andrew Quail (left) and Nicola Graham-Shand with Glasgow Colleague John Walsh, working at the Impact arts centre in Glasgow

John Lobban (left) and Paul Denniff (right) working with SGN Project Manager Glenda Locke

Ways of working – delivering change Significantly shifting our IT change delivery models to lean and agile, business-owned strategies has resulted in change being delivered faster, at lower cost and in the right way. In 2016/17 our team delivered over 50 projects, 95% of which were on time and on budget. We’ve migrated over 2,000 employees and all office-based staff to the Microsoft Office 365 (O365) platform, and in 2018 we’ll complete the roll out to all our field staff. Digital asset and mapping We’ve completed the first phase rollout of our digital asset and mapping service known as Geofield. In 2018 we’ll roll out additional features such as eLIS, eDR4, and as-laids. This project will eventually save the business many millions as well as make our employees’ jobs much easier and more productive. Mobile apps We’ve deployed several new mobile services to our field engineers and the wider workforce. Building on the excellent work of Agentry mobile and its award-winning image capture solution, we’ve also rolled out the employee Mobi-Inspector safety app which is widely used by operations now.


SGN Annual Report & Financial Statements 2018

1

Apprentices

2

Our outstanding three-year apprentice scheme is providing solid foundations to fill the industry skills gap. This year 70 apprentices achieved full accreditation, and 100% have opted to progress in full time employment with us. 2

Training

A Learning Management System (CornerStone) for course administration has been introduced as well as online and blended learning solutions. 3

3

Talent

Succession management has been a priority, with more robust processes to identify, manage and develop our top talent, and succession plans for our critical roles being introduced. 4

Rising stars

We’re attracting and developing exceptional young talent as part of our overall succession management, which is key to future-proofing our business. Hannah Brett from our communications team won the 2017 Utility Week Stars Awards ‘Shooting Star’ award and was a finalist in the Young Energy Professionals Forum 2017. Matthew Skeoch, one of our ambitious Team Managers is a finalist in the Utility Week Stars ‘Rising Star’ category this year.

4

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1

People and skills

Modernising our training offering has been a priority, as we continue to focus on training our employees in technical, safety and compliance subject areas.

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SGN Annual Report & Financial Statements 2018

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 KPIs Operating profit

Replacement expenditure

Performance and strategic objective Operating profit is the profit before financing charges and taxation. It includes controllable operating costs and is a key profit related measure of performance, indicating the value provided to shareholders and customers.

Performance and strategic objective Replacement expenditure represents the cost of renewing sections of gas network with modern polyethylene pipes to improve future safety and reliability.

2018 £471.3m

The sections replaced include mains and smaller diameter service pipes, which connect customers to mains. In total 1,000km of pipes were replaced in the year.

2018 £259.6m

2017 £532.9m 2016 £511.7m

2017 £241.9m 2016 £223.9m

Capital expenditure Performance and strategic objective Additions to tangible fixed assets include new distribution mains and storage, new connections to existing mains, new governors and meters, new investment in IT, land and buildings, and vehicles and plant.

2018 £143.1m 2017 £141.2m 2016 £135.6m

Net debt to Regulated Asset Value (RAV) ratio Performance and strategic objective RAV is defined by our Regulators and consists of the RAV of the three regulated entities in the Group. Debt excludes shareholders’ loans and liabilities arising from derivative financial instruments and is net of cash. The percentages stated are as at 31 March. Consolidated MidCo group

Regulated businesses

2018 79.3%

2018 72.4% 2017 72.2% 2016 72.2%

 See page 25 for SGN’s organisational structure


SGN Annual Report & Financial Statements 2018

21

Employee lost time incidents

Escapes attendance

Performance and strategic objective 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.

Performance and strategic objective 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 around 140,000 uncontrolled and over 75,000 controlled gas escapes during the year ending 31 March 2018.

2018 0.12

2018 98.8%

2017 0.13 2016 0.06

2017 98.4% 2016 98.5%

Customer satisfaction (score out of 10): planned interruptions Performance and strategic objective Results from customer satisfaction surveys (10 = very satisfied) are based on reports obtained for the nine-month period ended 31 December 2017. Planned interruptions on our replacement, capital or routine maintenance works are where timing can be predicted and the customer has been notified in advance.

2018 8.8

Customer complaint volume reduction Performance and strategic objective This represents the year-on-year reduction in complaints expressed as a percentage. Complaint means any expression of dissatisfaction related to any areas of our operation.

2018 4% 2017 10%

2017 8.8

2016 39%

2016 8.8

Customer satisfaction (score out of 10): unplanned interruptions Performance and strategic objective Results from customer satisfaction surveys (10 = very satisfied) are based on reports obtained for the nine-month period ended 31 December 2017. Unplanned interruptions arise through leakage or other emergencies.

2018 9.4

Business carbon footprint % reduction Performance and strategic objective We have improved our Scope 1 and 2 emissions over which we have direct control, when compared with the baseline year of 2012/13.

2018 25.6% 2017 17.6% 2016 19.4%

2017 9.4 2016 9.4

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Operational KPIs


22

SGN Annual Report & Financial Statements 2018

Financial review

Mick Carmedy Chief Financial Officer 18 July 2018

As we move into the second half of the eight-year RIIO-GD1 price control we continue to embed our strong performance to date. We have also focused on optimising our debt and capital structures to provide lasting value to our shareholders and customers.

Financial overview We successfully issued a £400m 18-year bond in the latter part of the year along with £425m of debt in the private placement market; these issuances were at extremely competitive rates reflecting our continued good standing in the debt capital markets.

Replacement expenditure, primarily of iron pipes, increased to £259.6m (2017: £241.9m) due to an increased workload together with a rise in contractor costs. During the year we replaced 1,000km of metallic pipe (2017: 996km). Other capital expenditure excluding replacement decreased to £138.5m (2017: £141.2m).

In the year we also renegotiated the terms of the revolving credit facility, all providing a strong liquidity position for the Group.

Efficiency and performance In delivering our overall business strategy, we have an objective to maximise our efficiency with a focus on innovation. The RIIO price control provides an effective framework to deliver value to both our shareholders and customers through a regulatory sharing mechanism. The key financial performance indicators we use to assess our progress on this objective are operating profit and cash generated from operations.

Investment and safety Our overriding objective is to ensure safety is at the heart of everything we do. The RIIO price control sets operational outputs for removing risk from the network, and the primary method for achieving this is replacing old iron mains with modern polyethylene pipes. Innovative techniques, such as CISBOT, allow gas mains to be substantially renewed, without replacing the pipe. We look for the most effective method of reducing risk, but we never compromise on the safety and integrity of our distribution network. The key financial performance indicators relating to this objective are the RAV, and total network investment. Our RAV increased by 4.6% in the year from £5.24bn to £5.48bn. The RAV of our GB Networks is determined by Ofgem at periodic reviews and is adjusted for sharing of out/under performance against allowances and inflation indexation. The total network investment in replacement and capital expenditure was £402.7m (2017: £383.1m). All our operational outputs required under the price control are being met as a result of this investment, and we have maintained the highest standards of safety.

There was a decrease in operating profit to £471.3m (2017: £532.9m), mainly due to the decrease in regulated turnover as a result of the timing of allowances set out at the start of the price control period and an increase in expenses due primarily to increases in business rates. This has been offset by an increase in turnover from the non-regulated entities. Operational expenditure was lower than our regulatory allowances due to a continued focus on efficiency. Cash generated from operations before tax has decreased to £613.8m (2017: £664.3m); the movements noted above in operating profits filter through to cash flow. Treasury and financial risk management In line with our broader strategy, we aim for the same high standards in our financial management, as we do in our operational activities. Our objective is to maintain efficient levels of debt finance and liquidity, whilst maintaining an interest rate


SGN Annual Report & Financial Statements 2018

Operating profit

2018 £1,156.3m

2018 £471.3m

2017 £1,125.0m

2017 £532.9m

2016 £1,079.7m

2016 £511.7m

risk and inflation risk exposure for our debt profile that is appropriate to our business exposure to these risks.

for a detailed organisation structure) to diversify our funding sources and optimise our capital structure. Subsequent to establishing this structure we have issued £425m of new debt in private placement markets (£300m at fixed interest rates and £125m of index-linked) and also put in place a new £150m bank facility (£57.2m drawn at 31 March 2018) to finance the construction of the network that we are building in Northern Ireland as part of the Gas to the West project.

Net debt Historically, financing has consisted of a mixture of equity and loans from shareholders provided to Scotia Gas Networks Limited with bank facilities and long-term bond debt issued from our two network companies (Scotland Gas Networks plc and Southern Gas Networks plc). The vast majority (95%) of our regulated revenue is based on capacity provided by our network, and the stable cash inflows provide a suitable foundation for debt financing. During the year we have established a new investment grade financing platform in a ring-fenced group of companies (see page 25

There have not been any material maturities in our debt financing during the financial year, however, as part of optimising our capital restructure we have repaid £206m of shareholder loans to reduce the amount outstanding to £327.6m (2017: £533.6m).

Regulatory Asset Value (RAV) and Total Network Investment (TNI) RAV (£bn)

TNI (£m)

2018 £5.48bn 2018 £398.1m 2017 £5.24bn 2017 £383.1m 2016 £5.03bn 2016 £359.5m 2015 £4.92bn 2015 £369.0m 2014 £4.88bn 2014 £321.7m 2013 £4.78bn 2013 £398.0m 2012 £4.54bn 2012 £404.3m

A key financial performance indicator for the Group is the net debt to RAV ratio, which the Group now monitors on both a network company consolidated level and a group consolidated level. At 31 March 2018, net debt (before issue costs), excluding shareholders’ loans and liabilities arising from derivative financial instruments, amounted to £3,968.7m (2017: £3,795.6m) at the consolidated network level; and £4,349.1m at the group consolidated level. With RAV at £5,483.5m at 31 March 2018, the ratios were 72.4% and 79.3% respectively. Liquidity risk 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 working capital requirements. We manage the maturities of debt and facilities to ensure no significant refinancing is required in any one year, thereby giving us access to competitively priced debt. In anticipation of debt maturities in the next financial year, Southern Gas Networks plc issued new debt of £400m in the public bond markets during the year to 31 March 2018, achieving a 3.1% fixed rate coupon. During the year, we also refinanced the syndicated bank revolving credit facilities provided to our two network companies. The aggregate amount was increased slightly to £360m (£120m Scotland Gas Networks plc and £240m Southern Gas Networks plc) and agreed on a five-year term, ending March 2023 (with two one-year extension options at the lenders’ discretion). As at 31 March

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Turnover

23


24

SGN Annual Report & Financial Statements 2018

Replacement expenditure

Capital expenditure

2018 £259.6m

2018 £138.5m

2017 £241.9m

2017 £141.2m

2016 £223.9m

2016 £135.6m

2018 both facilities were undrawn (2017: £350m undrawn). Our undrawn facility, cash position and short-term deposits totalling £381.3m (2017: £15.1m) combined with careful cash management, ensure we have a healthy liquidity position across the Group.

rating requirement as set out in our hedging policy; however, we recognise that at times the market conditions for banks can be unusually tight.

Interest rate risk and inflation risk The Group’s policy is to maintain a minimum of 75% of long-term debt (excluding shareholders’ loans) at either fixed interest rates or index-linked, at both the consolidated network level and the Group consolidated level. Interest rate swaps are used where necessary to achieve the desired profile.

At 31 March 2018 there was £4.3m (2017: £8.8m) receivable and £123.4m (2017: £133.5m) payable relating to financial instruments with bank counterparties.

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 102, our balance sheet accounts for any pension asset or liability. The net pension asset as at 31 March 2018 was £188.0m (2017: £4.6m).

Financial review continued

All long-term debt issued during the year was issued at either fixed interest rates or index-linked with no new interest rate swaps transacted. At 31 March 2018, the level of long-term debt (excluding shareholders’ loans and after taking into account the effect of interest rate swaps) at either fixed interest rates or index-linked was: 84.9% at the network consolidated level; and 85.3% at the group consolidated level. Net interest costs for the year to 31 March 2018 was: £173.2m (2017: £162.7m) at the network consolidated level; and £223.3m (2017: £212.5m) at the group consolidated level. Our prudent policy of using index linked Retail Price Index (RPI) bonds to provide a natural hedge against our RPI linked revenue is highly effective. Financial instruments Appropriate interest rate swap contracts are used to achieve the target interest risk profile. FRS 102 requires these swaps to be valued at ‘fair value’, which is calculated using market based interest rate information at the year end. We take reasonable steps to maintain a minimum credit

No new derivative contracts were entered during the year.

Credit rating agencies 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 2018 were: • ‘Baa1’ with stable outlook (Moody’s); • ‘BBB+’ with stable outlook (Fitch ratings); and • ‘BBB+’ with stable outlook (Standard and Poor’s). Taxation The current tax rate for the year is 23.0% (2017: 23.0%), and the total tax rate for the year of 21.7% (2017: 1.8%) is higher than the standard rate of 19%. As explained in note 9 to the financial statements, the current year difference is due to the corporate interest restriction that came into effect on 1 April 2017. The difference in the prior year is as a result of a deferred tax credit arising due to a change in future tax rates. The Group takes a prudent approach in relation to tax, recognising all tax liabilities which are expected to arise, and only recognising tax assets on uncertain tax positions once the matter has been agreed with HMRC.

As part of the Group’s triennial review process last valuation was carried out by the scheme’s actuary as at 31 March 2015, the next valuation will be performed based on the year ended 31 March 2018. Annual special pension contributions amounted to £22.4m (2017: £22.2m). These additional contributions (from the current repair plan) are based on the March 2015 valuation and will be paid annually until 31 March 2027 to repair the funding deficit in the defined benefit pension scheme. Employer normal contributions remain at 37.3%. Dividends Our policy is to distribute to shareholders any available surplus funds, after taking into account the cash requirements to continue to invest in the business and our level of gearing. During the year we paid dividends of £286.0m (2017: £200.0m).


SGN Annual Report & Financial Statements 2018

Regulatory asset value

2018 £613.8m

2018 £5,481.2m

2017 £664.3m

2017 £5,238.0m

2016 £653.5m

2016 £5,026.0m

| Overview | Strategic Report | Directors' Report | Financial Statements |

Cash generated from operations

25

SGN ownership structure

SGN has four supportive shareholders in place. They oversee the three regulated operating companies in Scotland, southern England and Northern Ireland as well as the holding company and a number of unregulated operating companies. Shareholders

SSE (33.3%)

OTPP (25%)

SSE is a FTSE 100 company and one of the largest energy companies in the UK with market capitalisation of circa £14bn.

Ontario Teachers’ Pension Plan Board (OTPP) has net assets of circa Can$190bn.

Borealis Infrastructure Europe (UK) (25%) Borealis is wholly owned by OMERS Administration Corporation, a Canadian pension plan with net assets of over Can$95bn.

Blue Spyder B 2016 (16.7%) Blue Spyder B 2016 is wholly owned by Abu Dhabi Investment Authority (ADIA). ADIA is a sovereign wealth fund with a global portfolio of investments.

Scotia Gas Networks Ltd

Holding companies

Unregulated companies

SGN Pledge Ltd SGN MidCo Ltd Operating companies Scotland Gas Networks plc

Southern Gas Networks plc

Public Bonds

Regulated businesses Consolidated MidCo group

SGN Natural Gas Ltd

SGN Contracting Ltd

SGN Commercial Services Ltd

SGN Connections Ltd

SGN Smart Ltd

SGN Place Ltd

Subsidiaries


26

SGN Annual Report & Financial Statements 2018

How we manage risk

The role of the Board The Board has overall responsibility for determining the nature and extent of the risk it is willing to take, and ensuring that risks are managed effectively across the Company. Risk is a regular agenda item at Board meetings and the Board reviews risk on a bi-annually basis. This provides the Board with an appreciation of the key risks within the business and oversight of how they are being managed. The Board delegates oversight of certain risk management activities to the Audit and Executive committees as follows: Audit Committee The Audit Committee is responsible for reviewing the effectiveness of the Company’s system of internal control policies and the annual assurance plan. Executive Committee The Executive Committee has the responsibility to identify, assess and report on risks which could threaten our business model. The status and progression on the key risks are reported to the Board on a regular basis. The Executive Committee is supported by a Risk Committee and business units risk assessments. Principal risks The Board and the Executive Committee has completed a robust assessment of the principal risks facing the Company, including those that would threaten its business model and future performance. Such risks have been identified as principal based on the likelihood of occurrence and the potential impact on our performance and reputation.

Our risk management has a key role to play in the fulfilment of our business and strategic objectives, protection of assets, and the creation of sustainable shareholder value.

Risk management framework The Board Governance over strategic risk

Audit Committee

Sets risk appetite

Executive Committee

Reviews effectiveness of internal control system

Sets and owns risk process Reviews and monitors risk

Operations

Risk Committee

Own business unit risk process

Reviews and monitors risk

Risk Group

Reviews and monitors risk reporting across the Company


SGN Annual Report & Financial Statements 2018

The principal risks and uncertainties identified are as follows: Description and impact of risk

Mitigation

Health and safety Failures in the design or implementation of our safety, health and environmental management system may result in unsafe behaviour and working practices resulting in injuries or fatalities involving employees, contractors or members of the public; asset damage or loss; harm to the environment; and prosecution under relevant legislation.

Safety is the first of our core Company values with a continued focus across all assets and operations. The Safety, Health and Environmental Advisory Committee of the Board and the Engineering Safety Committee (ESC) are responsible for ensuring our safety, health and environmental policy is developed and adhered to. Compliance is supported by independent inspections and an audit programme with reporting of the issues to ESC. The Safety team has been restructured with a focus to implement a behavioural safety programme and upgrading safety reporting.  Risk priority in 2017/18 – No change

Regulatory compliance Failure to comply with regulatory requirements could result in prosecution; damage to our reputation; and financial penalties.

Structures are in place to deal with issues arising from this price control. We have experienced regulation, finance and legal teams which manage and engage with all levels of Ofgem and government. A system is in place to track prevailing energy related issues and to influence regulation and policy with the relevant authorities. The delivery of regulatory outputs is measured and monitored on a regular basis. Regulatory returns are now integrated in a workflow system which strengthens the review process at all levels.  Risk priority in 2017/18 – No change

Regulatory, legislative change and political risk Regulatory, legislative or political reform could have an adverse impact on our business model and could lower returns in the next price control.

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. We have a proactive public affairs campaign with relevant stakeholders to highlight the long-term value of our networks. For the next price control there is a dedicated team to manage all aspects of delivering a successful business plan which meets customers’ and stakeholders’ needs. The team takes the lead in engagement with stakeholders, the Regulator, and our leadership team. Our reviews of UK’s decision to leave the EU do not indicate any material issues for our model but our assessments are ongoing.  Risk priority in 2017/18 – Increased priority Uncertainty in the political arena, continuing scrutiny on network returns, and evolving government energy 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.

We have a comprehensive asset management system and are accredited by Lloyds Register with the internationally recognised IS0 55000. We have a strong framework of engineering governance and risk management to ensure all assets have a strategic plan through their lifecycle and are tracked through a number of committees reporting into the Engineering and Safety Committee. Also on an annual basis a number of audits and inspections are undertaken. There is an on-going security improvement programme for designated sites based on CPNI’s good practice. Crisis management and business continuity plans are regularly evaluated and tested.  Risk priority in 2017/18 – No change

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Principal risks and uncertainties

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How we manage risk continued

Description and impact of risk

Mitigation

Cyber security risk and IT service failure Failures to implement appropriate security management of IT systems and physical assets could result in unauthorised access to our IT systems; unauthorised or fraudulent disclosure of sensitive information; and vulnerability to external cyber-attack.

We continue to manage a long-term information security programme intended to reduce the risk that cyber related attack could harm business resiliency. We conduct regular internal and external penetration and vulnerability tests of our network with government approved security partners to review our security position. Plans are also in place for recovery and resilience. We have collaborated with the BEIS and the CPNI on cyber risks and security strategy.  Risk priority in 2017/18 – Increased priority due to evolving nature and pace of threat landscape

Finance risk Failure to finance our obligations and new projects due to economic climate, lack of availability of finance, and a failure to set appropriate targets and sufficient management information, could lead to inability to deliver expected financial returns.

The funding position, including gearing and future cash requirements, is continually reviewed and managed with regular updates to the Board. There is frequent dialogue with banks and credit rating agencies to assess the impacts of any economic and political change, such as Brexit. We have diversified our funding platform and achieved a diverse source of debt. Key performance metrics and business plans are reviewed by the Executive and Board on a regular basis.  Risk priority in 2017/18 – No change

Maintaining a competent, productive and talented workforce Failure to maintain a sufficiently competent, diverse and productive workforce with effective relationships and sufficient talent may result in resource/workload mismatches; failure to meet licence, regulatory or legislative requirements, or take advantage of business opportunities.

We maintain a workforce planning and recruitment programme to ensure critical skills and knowledge are retained in the business to mitigate against an ageing workforce. This programme is reviewed regularly at Executive and Board level. We also use external benchmarking of employment packages and keep abreast of general economic and industry developments to ensure we identify and respond to issues. The appointment of a new HR Director has provided additional focus on ensuring that our workforce have the right skills to deliver our future plans.  Risk priority in 2017/18 – No change


SGN Annual Report & Financial Statements 2018

Our aim is to build a culture where who you are, and the skills you bring are valued, creating diversity of thinking and delivering difference. In 2017/18 we again exceeded our target of £500,000 overall community investment (£130 per employee), and 1,377 colleagues spent roughly 10,500 hours of company time carrying out voluntary work, while our employee mentors directly helped 2,400 children build confidence, independence, and new skills through our close partnerships with The Outward Bound Trust, Solutions for the Planet, and local schools. We also sponsored several of these partners.

Drone Aid, from Longfield Academy, Kent at the Solutions for the Planet national finals held in the Palace of Westminster in July 2017

Help to Heat connections completed to date.

Supporting vulnerable customers We have a key role to play in helping combat the issue of fuel poverty and are committed to supporting low-income and vulnerable households in our network. Playing our part in alleviating fuel poverty continues to be an important priority for our stakeholders and us. Expert members of our specialist fuel poverty stakeholder panel agreed we should go over and above our established Help to Heat fuel poor connections scheme. We responded to this with a significant increase in focus and resource. With the support of our shareholders we have established a £20m fund and created a dedicated team to drive our additional initiatives forward. Our CEO and Executive team review progress each month.  Our licence commitment to Help to Heat through the Fuel Poor Network Extension Scheme (FPNES) In 2015, based on feedback from stakeholders, we increased our targets for first time gas connections for eligible households by 35% overall, increasing our target to 27,497 connections by 2021 of which we have completed 22,140.

However, it’s still a very different story in our Scotland and Southern networks. This year we have completed 98% of our 2021 target in Scotland and so far, we have delivered 51% of our target in our Southern network. In each of our network areas we have found ways to tailor additional support to the wider context.  Over and above in Scotland Recognising the importance of continuing our Help to Heat scheme in Scotland, we’ve allocated £10m to enable us to continue the scheme beyond the agreed target we’ve been funded for.

We’ve provided £10k complementary funding to Warmworks to create an enabling fund for energy efficiency measures. This pays for vulnerable customers to have lofts cleared or remedial work carried out so they can benefit from funded energy saving measures. So far, £3k investment has enabled 17 households to benefit from 127 energy measures to enable lifetime savings of £3,200 per property.  Overcoming funding blocks in the south The availability of funding for central heating systems continues to be a significant obstacle for fuel poor households in our Southern network. We established a £10m SGN Central Heating Grant Fund in April 2017 to provide extra funding for gas central heating systems and enable eligible households to benefit from existing schemes.

So far, we have committed £2m to partners including local authorities and housing associations, helping 1,158 households out of fuel poverty with a contribution to the cost of their central heating. We have offered a further £2.1m of central heating support funding to assist an additional 1,000 fuel poor households. We provided support to 12 local authorities and housing associations to submit well researched, high quality bids for funding for central heating from the Affordable Warmth Solutions Warm Homes Fund, helping to secure funding in our Southern network for 1,407 central heating systems.  Driving policy change to help more households In 2015/16 we led discussions with Ofgem to secure changes to the FPNES to allow district heating to be included and to recognise those served by independent Gas Transporters. We were asked by the BEIS to deliver a referral system for

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22,140

Corporate responsibility

SGN in the community

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customers who call the Energy Saving Trust Helpline. Expanded to incorporate all four gas networks, a national referral scheme was set up in May 2015 with us co-ordinating a monthly review to drive improvements. In the last three years 687 customers have been referred, leading to 186 fuel poor gas connections. “SGN has been the go-to network to talk to other gas network companies.” Laura Le-Thien Home Energy Team, BEIS  Mental health support Our approach to dementia awareness was endorsed by the 90% of our stakeholders who agreed that training our own staff to recognise signs of dementia is important. In 2015/16 we trained 357 of our frontline staff in dementia awareness through the Care Commission e-learning package and extended the training to include our charity partners. In 2017 we extended our programme and signed up with the Alzheimer’s Society to become a dementia friendly organisation, updating our training package and rolling out a second phase, encouraging our staff to become ‘dementia friends’ with 453 signed up in the first month towards our first target of 1,500. We have also engaged with the mental health charity MIND to train our telephone advisors to interact better with customers who may have mental health issues.  Locking cooker valve Within the last three years, we carried out a pilot to prove the concept, worked with local partners to trial the service and rolled out to both our networks and achieved our ambition to extend the service across all GDN footprints. We’ve installed 241 valves across our footprint, with a further 24 planned. Other GDNs have installed 223 valves.

We’ve made a short film, produced exhibition and print materials including train panel adverts, a booklet distributed via Age UK, libraries, front line workers and hospital services and customers can now apply online to have a Locking Cooker Valve installed. We’ve received five awards including the Association of Gas Safety Managers (AGSM) Safety initiative of the year, Lord Cullen Safety Award and Sustainability First’s ‘Gold’ award for safety and peace of mind.

Partnerships to deliver social outputs On the advice of our specialist stakeholder panel, we are using data to prioritise where our support can be most effective and partnering with delivery organisations to reach out to households in the most vulnerable circumstances to offer advice on support on energy related issues. This work is a development of the pop-up energy cafes that we reported in our last DRS submission, extending further to engage hard to reach groups.

 Voucher scheme We ran a two-month voucher scheme pilot in our Sussex area, for homeowners who have an appliance disconnected as immediately or potentially dangerous and who meet set criteria. Confirmed as eligible, a Gas Safe registered engineer determined the problem and repaired or replaced the appliance up to value of £200. If the cost exceeds this, such as a boiler replacement, additional funding is provided by SGN and assistance sought via the ECO scheme or from local authorities. This ensured those most in need had their gas appliance repaired as quickly as possible. We can also refer the customer to the local Royal Voluntary Service (RVS) for additional support as part of this pilot. Seven customers have been referred and repairs or replacements taken place quickly. One customer, newly discharged from hospital and suffering from dementia was living in her kitchen and wearing gloves at home to keep warm.

CO With around 40 people losing their lives a year because of carbon monoxide (CO) and thousands more treated in hospital we continue to raise CO awareness, targeting the most vulnerable groups and lobbying for changes in legislation.

“It made a huge difference to me, to know that something as worrying as a gas leak could be investigated and resolved quickly without having to wait until I had some funds.” Miss B

To achieve our goal of further reducing the number of UK CO incidents, it’s vital we work collaboratively to deliver a CO strategy that is based on solid and relevant data, is practical, is sensitive to our customers, and ultimately prevents injury and saves lives.  Driving behaviour change – our gas quality project informs CO awareness strategy Throughout our three-year innovative project in Oban and other remote Scottish towns, we collected data from 7,777 homes, which helped us to understand the types of properties in which CO alarms are not fitted. Also, for properties with an alarm fitted, we found out whether it is fitted correctly and whether the householder has their appliances regularly serviced. This large data sample provides robust evidence on which to base our own work and to support the development of UK-wide collaborative strategies. We also rolled out the method and the findings to our other three mainland Independent Undertakings serving 8,000 customers.


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locking cooker valves installed across our network in 2017/18.

The conclusions drawn from this valuable data have enabled us to take our CO strategy to a new level:

Engaging with the local community at one of our public meetings

Kevin Macdonald from the SGN Natural Gas team raises money for Parkinsons by taking part in a bike ride and using our Into Action scheme

The team from our Reading depot take a break from their work at New Bridge Nursery School

• Appliance maintenance, servicing and replacement on this project achieved a sevenfold reduction in absolute risk. This compelling statistic underpins our recommendation that gas network companies’ CO awareness strategy must focus on these protective measures. • Anecdotal feedback from customers indicated they were inclined to think the installation of a CO alarm meant there was no longer need for regular appliance inspection and maintenance. We will make sure any future CO communication and/or campaign makes clear that having a CO alarm is no substitute for regular maintenance and servicing. The full report can be found at sgn.co.uk/publications  Legislation on CO alarms The private rented sector is the most at risk from CO poisoning. To support government legislation to introduce CO alarms within this housing sector, we briefed MPs and drafted an amendment for Baroness Finlay (then Chair of the All-Party Parliamentary CO Group) which was endorsed, and the Bill became Law in October 2015.

We are now engaging further with MPs in Westminster to try to achieve a change to legislation to require landlords to fit CO alarms where a room has solid fuel burning appliances (e.g. coal fire, wood burning stove). This change would bring CO legislation for England and Wales in line with Scotland and Northern Ireland.

 Accident & Emergency (A&E) CO screening research As a member of the original steering group, we supported the creation of the process and protocols for a study at St Georges, Tooting and Frimley Park hospitals to screen 2,000 people attending the accident and emergency department for CO levels in their blood. Any elevated levels of carboxyhemoglobin found by staff result in treatment, completion of a questionnaire and use of an algorithm to confirm the presence of CO.

If the patient’s appliances are the possible cause, a service engineer will visit to check for signs attributable to CO poisoning. The study began a review of procedures in 2017 and an 18-month trial project is now under way.  CO alarm inquiry Sitting on the Policy Connect Steering Group, we supported the development of a report submitted to the Ministry of Housing, Communities and Local Government (MHCLG) recommending the harmonisation of CO alarm regulations across the UK. Consultation with the National Landlords’ Association and other agencies confirmed the regulations should be clear, concise and consistent across the UK and following representations to MHCLG a consultation was opened in October 2017. The consultation has now closed and will form part of the review of building regulations post the Grenfell tragedy.

“We have carried out a home fire safety visit to an elderly couple who reside in a very rural location who would definitely be much safer if we could install a CO alarm for them.” Jane Gibson Community Firefighter

The household has now benefited from one of our gifted CO alarms.

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Corporate responsibility continued

 Training inquiry A concern was raised about short duration training courses by Molly Mather, CO Charity, and whether sufficient competency could be achieved in two weeks to safely undertake gas works in customers’ homes. We instigated a review of training in the downstream sector, with Policy Connect producing a report under our direction. We chaired all the preliminary meetings, and the Parliamentary Evidence Session – Gas Engineer Training Standards Inquiry – was hosted by Barry Sheerman MP and Luke Pollard MP. The final report will be available in Summer 2018.

Grassroots awareness  Customer survey All gas networks survey customers quarterly to test their knowledge on CO after our engineers have visited. With around 1,400 customer surveys each year, knowledge has increased by 13%.  Engaging with youngsters We support the Risk Factory, Edinburgh, Hazard Alley in Milton Keynes and Streetwise, Poole. These safety awareness centres provide venues for children to visit and be educated on a full range of potentially dangerous circumstances including electricity, rail, water, fire and gas. Domestic scenarios highlight the dangers of CO as well as outside activities associated with camping and the safe use of barbecues. Ninety thousand children have visited these centres over the last three years.

Every year we attend Safetaysiders in Scotland raising CO awareness using a comic strip card for completion by the children. In the last three years we have engaged with 9,000 children from 79 schools.

We support the CO competition run collaboratively by the gas networks and we have trained 15 staff to deliver Safety Seymour across both our networks: an initiative created by Cadent for Year 1 students to learn about CO in a fun way. 240 pupils were trained to recognise the dangers of CO.  National TV campaigns We have provided guidance and advice to many TV programmes, including Coronation Street where the story line was carbon monoxide poisoning. Chris Bielby, our Director of Industry Liaison made a guest appearance on Loose Women, which has a reach of nine million viewers, highlighting the dangers of barbecues in tents and caravans, and launching a competition where 1,000 viewers won a CO alarm.

Our community partnership programme is about understanding the issues within our communities and helping where possible to make a difference. CAP Our Community Action Programme (CAP) encourages all our employees to spend a working day out, volunteering for local community or charitable causes. It also helps foster an understanding among our people of the benefits of volunteering and raises awareness of community issues. During the year 874 colleagues took part in 91 projects. Into Action Our long-running Into Action scheme continues apace and provides match-funding for our employees raising cash for UK-based registered charities. It also provides cash for the charities for their time equivalent when offering their services for volunteering. Last year we processed 86 applications and donated £47,124.41 as part of our scheme.

Glasgow Linn Park CAP event, June 2017 (CAP month). Pictured left to right: Paul McKevitt, Eileen Anderson, Caroline McIlroy, Lesley Phillips

Dundee depot CAP day at Lower Largo Beach, Fife, July 2017

Poole depot CAP day at the Clouds Inn in Bovington, July 2017 – a former pub that they helped to decorate so it could become a British Legion club


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SGN employees took part in 91 CAP projects in 2017/18.

Kit for Kids Through our Kit for Kids scheme, our employees can apply for sports equipment for local youth teams they either coach or support. We had 41 funding applications worth £21,339.98 last year. RVS We partner with Royal Voluntary Service (RVS) on a winter campaign producing a leaflet with vital information including CO and gas safety. Through this campaign and a series of hub visits we continue to reach 100,000 service users each year. We’ve provided 29,895 leaflets, 3,314 posters for display at the 68 RVS Hubs and community centres nationwide. These include information on joining the Priority Services Register, our locking cooker valve, and CO awareness. Outward Bound We donated £50,000 through our ongoing partnership with The Outward Bound Trust which enabled 144 disengaged young people to take part in a five-day residential course at one of their rural education centres. In addition, 12 SGN mentors attended sessions to help the students build self-motivation, self-esteem and confidence through a variety of outdoor adventures and teambuilding activities. S4TP Solutions for the Planet is an initiative charity which encourages businesses to work with local schools to come up with solutions to key environmental, social and economic challenges and inspire young people to consider STEM subjects as a career. This year 22 SGN mentors worked with 930 students from six schools in London and Kent to come up with their own ideas for the national competition.

SGN and the environment

Taking responsibility for the environment is something we encourage all our employees and contractors to do. Greenplan five-year benefits At the end of year five of our Greenplan we’ve been able to meet seven of our nine targets. The plan was reviewed in 2017 making changes for new sites. We’ve made reductions in natural gas shrinkage (leakage from the network, own use of gas and theft of gas which accounts for 95.5% of our total business carbon footprint); energy usage at operational sites; spoil and waste to landfill; and reduced our reliance on virgin aggregate. Our biggest Greenplan target success has been reducing natural gas emissions. We’ve achieved a 15.8% reduction in natural gas leakage between 2013 and 2018 (ahead of our target of 15%). This year we’ve reduced this by 23,443 tonnes of carbon achieved through: • Decommissioning and planned deconstruction of gasholders • Mains replacement programme • Robotics and pressure management trials and rollouts • Line search before you dig (LSBUD) project • Hydrogen blending project This reduction in natural gas leakage has saved us 154,000 tonnes of CO2e between 2013 and 2018.

Since 2012/13 we’ve reduced our: • Scope 1 and 2 carbon emissions (those over which we have direct control) by 25.6% • Percentage of excavated spoil reaching landfill from 2.61% to 0.04% • Percentage of reinstatement material containing virgin aggregate from 9.76% to 3.17% • We have nearly achieved our goals of zero waste and zero spoil to landfill, ahead of our 2021 target We continue to hold ISO14001 accreditation and have been recertified for the Carbon Trust standard, showing a year on year reduction in our total footprint. “SGN has put in place a strong framework for achieving continuous action on carbon emissions, with responsibility for reductions well embedded throughout the organisation and high levels of support from senior management. This has resulted in the Company being able to achieve the Carbon Trust Standard, with an impressive absolute emissions reduction of 8.3% over the past certification period. “We have also been impressed by the way that SGN uses its influence with customers to improve their energy efficiency and reduce emissions outside of the Company’s direct operational control. Efforts to reduce fuel poverty and encourage fuel switching should be commended, and over the longer term the Company’s investments into heat networks will play an important role in the UK’s overall shift towards low carbon heat.” John Newton Associate Director at the Carbon Trust

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Corporate responsibility continued

Environmental initiatives • Reducing the amount of hazardous aerosol waste – working with Pressing Solutions – we’ve rolled out aerosol puncture kits which allow empty aerosol cans to be punctured, the remaining gas captured and the cans to be recycled as standard metal waste. • Electric vehicle charging points have been installed in depots to serve the 77 electric or hybrid vehicles in our Company car fleet. • Environmental performance has been built into our tender processes, leading to a new tanker contract serving our SIUs using train travel instead of road, saving 650 miles per trip. • Greenwing has installed ‘magnetic fuel conditioners’ to gas boilers. The initial outcome is positive with a reduction in gas consumption of 10%. Further rollout is planned for Q3 2018. • Water saving technology experts Soaked have installed ‘water volumisers’ at 10 of our sites. The device is fitted to drinking taps, washbasins and non-pressurised water heaters, saving up to 70% of current water usage. Gasholder dismantling – Alloa project Our industry has dismantled gasholders for decades, but the techniques and processes haven’t changed significantly. With a further 55 gasholders to dismantle we wanted to improve the process and reduce our environmental impact, so we encouraged our framework contractors to think innovatively. In partnership with Acumen, we dismantled the Alloa gasholder using a brand new process of high-pressure filtration of solids through multiple membranes. This was the first-time filter press technology has been deployed, and we were able to re-use 84% of materials on site:

77,000 litres of filming oil was recovered, stored and taken to a recycling facility to be refined and re-used. 402,000 litres of gasholder water was treated and passed into the Firth of Forth under discharge consent. 1,143 tonnes of steel was dismantled and transported off site for re-use in the metal industry. Filter cake material was taken to a physico-chemical treatment facility, processed and sent to landfill. Acumen is currently researching alternative recycling solutions for this material in the future as we target 100% re-use of site materials. Reducing our footprint CISBOT robotics and CIRRIS XI – We introduced CISBOT at two large diameter gas mains in high profile areas in London where it showed 70% less time spent on highways and a 98% reduction in excavation. The robot crawls along inside existing cast iron pipes and injects an anaerobic sealant into the full circumference of the joints, where we can seal five to six joints per day compared to only one previously. It operates through one small excavation off the rear of a single box truck. Project name: King’s Road Brighton Project Length: 2,482m Reduction in cost: £982,357 Reduction in duration: 378 days Reduction in excavations: 74 Brighton and Hove City Council hired Swift Argent (Highways and Transport Consultancy) to carry out a financial benefits analysis of using CISBOT compared to conventional trench-based renewal methods. The net benefit (Net Present Value (NPV)) of CISBOT was £137,714, made up of road delay cost and permit costs.

“In summary through both the direct financial and socio-economic criteria to quantify the overall economic merit of CISBOT scheme the appraisal demonstrates this will have a net positive economic benefit.” Swift Argent

To further aid the effectiveness of CISBOT, we have now introduced CIRRIS XI which internally inspects up to 400m of pipe at one metre intervals from a single-entry point. Sensors check four points on the pipe looking for weak points caused by corrosion which then allows CISBOT to seal weak joints, reducing leaks. We’ve sealed over 2,000 joints on live gas mains, in high impact areas. These technologies reduce the amount of spoil to landfill and minimises disruption to customers. Shaping policy  Shipperless and unregistered sites Through measures we’ve implemented, including the method of addressing high priority sites, we’ve achieved a recovery rate from 60% of the 7,000 sites in our network, this amounted to £1.5m recovered. Following the work commenced by Cadent we used our influence to assist other electricity distribution networks to have total control over the issue of ‘MPRN’ numbers to shipper-less suppliers – known as the ‘M’ Number Creation (MNC) with the aim of reducing theft of gas across networks.  Damage prevention Responding to stakeholder feedback that damage prevention was the most important objective for keeping the gas flowing safely, we tailored a self-service website ‘line search before you dig’ (LSBUD) which provides instant online access to our mapping data. We receive 30,000 enquiries per year to which our original process took on average 15 days to respond. We also issued


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homes currently connected to biomethane plants.

700 developers and local authorities with updated DVDs every three months. The new system provides immediate online access to our most up-to-date and accurate information, minimising the possibility of damage to our network. An increase in enquiries from 2,500 a month to 47,300, has seen response time reduced to two minutes. The farming community Following consultation with the National Farmers’ Union of Scotland (NFUS) and Scotland’s Rural Colleges, we influenced them to add our pipeline safety information to the agricultural course structure, aimed at educating future landowners. The course structure has been trialled across six campuses and when fully introduced will reach 3,000 students per year. To date, there has been a 100% pass rate for all students and staff. We’re now progressing discussions in our Southern network.  

Greener gas – Biomethane Recognising the interests of future customers and stakeholders, in June 2016, we gave oral and written evidence to the Energy and Climate Change Committee of MPs as part of its inquiry into 2020 Renewable Heat and Transport Targets and the role we can play in helping meet the target of 12% of UK Heat from renewable sources by 2020. We also met the Committee Chair, Angus MacNeil MP and our messages featured predominantly in the Committee’s final report ‘increasing volumes of Biomethane injection into the gas grid is a low-regret opportunity to reduce emissions now’. Our target is to have 250,000 homes (equivalent) supplied by Biomethane by 2021. We have 33 Biomethane plants currently supplying the equivalent of around 180,000 homes with the ability to serve 285,000 homes when at full

capacity. With a further 18 sites planned on aggregate we will be supplying 270,000 homes (equivalent) and will achieve our original target with more Biomethane plants to follow. Collaboration and data sharing Sharing data and plans can help us to work collaboratively with councils and other utilities to deliver in local communities, a key priority for a broad range of our stakeholders and customers. We have put in place agreements for sharing spatial data to enable collaborative working and visibility of our future mains replacement programme.

Greenplan is the SGN strategy to reduce environmental impact

Examples include: Scottish Climate Adaption Strategy We provided the Climate Ready Clyde initiative with an appreciation of the extent of our infrastructure in the Glasgow city and Clyde Valley area including information on annual customer consumption. We have subsequently been offered a seat on the Climate Ready Board enabling us to work with other organisations to shape the Scottish Climate Adaption Strategy and Action Plan. Growth and Infrastructure Forum (GLA) We are members of the GLA Growth and Infrastructure Forum which considers how London’s growth could be sustained by investment in the city’s infrastructure. Our CEO is part of the London Mayor’s high-level infrastructure group and members of our network planning team sit on GLA’s Infrastructure Mapping Application senior user group.

Mike O’Shea’s photo of the Alloa site after the gasholder had been fully dismantled won the Brownfield Briefing Awards photo of the year

The CISBOT robot in action in Brighton

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SGN employees

The SGN Way sets out the behaviour and actions which all employees across our Company are expected to embrace, as they progress their goals and objectives and develop their careers. Gender pay gap The energy sector’s gender pay gap is generally better than the national average (18.1%), partly due to its highly transparent pay grades. Our own figures are comparable with industry peers. We fully support the UK Government’s aim of taking gender equality further by creating greater transparency and encouraging a more balanced representation of men and women at all levels within organisations. Although our gender pay gap is almost half the national average, we still have a mean pay gap of 9.8%. In the main, our gender pay gap comes from the high proportion of men we employ (85% men and 15% women) and as within many companies, the dominance of men in our higher pay grades. Also, women are unequally represented in our middle pay grades, and we have a higher representation of women in our lowest paid grades. We’re now taking active steps to attract a broader range of women into our business, making sure they are fairly represented throughout the business. We’re also embedding inclusion into the way we recruit, looking at how we select the pools of candidates we see, so we can ultimately select the best person for the job.

“Our gender pay gap report is an important report not least because it confirms our total commitment to ensuring no-one is put off working at SGN because of perceived diversity or fairness issues. The ageing workforce in our sector means we face a skills gap over the next five to ten years which makes it crucial we widen our pool of candidates to include women at all levels and ensure we hang on to female talent. We’ve started to make some positive changes, but accept change will take time. We are, however, committed to building a more diverse SGN and creating a culture of inclusion where everyone, regardless of difference, is valued.”

Oonagh McCann, a senior engineer with SGN Natural Gas, joined through the graduate engineering scheme

Kate Naylor HR & Services Director

International Women in Engineering Day Each year we support International Women in Engineering Day (INWED) and 2017 was no different. We promoted an initiative where some female employees, who work in non-engineering roles, work-shadowed male and female engineering colleagues to get a true understanding of the different roles and tasks they encounter every day. Engineering at SGN is very diverse, with roles in many different departments, including operations. The mentors were chosen to highlight the variety of engineering roles, and we used this year’s campaign to highlight our commitment to diversity and inclusion. Signed on behalf of the Board of Directors.

Gregor Alexander Chairman 18 July 2018

Hayley Boyle, a senior engineer with SGN Natural Gas, joined the company from another large gas company


SGN Annual Report & Financial Statements 2018

During the year we have continued to invest heavily across our business and driven innovative technology and implementation to benefit our customers, our industry and our environment, achieving several industry firsts once again. We continually review our established stakeholder engagement strategy, which sets out the way in which we listen and respond to the needs of our stakeholders. This helps us to improve our decision-making and achieve better outcomes for our stakeholders and for the business. Stakeholder engagement Really listening to our stakeholders and customers has resulted in outstanding customer satisfaction scores as well as plummeting complaint numbers and credit for this goes to our dedicated and highly professional workforce. The work we’ve done in nurturing our people, while building strong and meaningful relationships within the communities we serve, is paying off. We are committed to being open, transparent and accountable in our treatment of our employees and this extends to inclusion and diversity. Sharing our Gender Pay Gap report is an opportunity to show the positive work we’re already doing in building a more diverse workforce and creating an inclusive culture. We value all our people encouraging everyone to do their best work. Working with our Regulator We are all about looking forward, working with our Regulator to try to achieve the best possible outcomes for our company and customers and then getting on and delivering. The importance of preparing for the next price control RIIO-GD2 is clear and having our clear strategic priorities and a shared direction with exceptional leadership from our CEO John Morea, will not only enable us

In SGN we have always aspired to be a leader and not a follower in delivering gas safely and efficiently to our customers. And with that in mind, I’m pleased to report last year we outperformed in almost every area of our business while also winning 24 major awards along the way.

to build on our success but also ensure long-term sustainability. Along with our industry peer group we have done an excellent job since being formed 13 years ago. Our prices to customers are down around 17%, gas network availability is over 99.99 percent plus, we meet our licence conditions and our customer service scores have never been higher. RIIO-GD2 It’s well documented RIIO-GD2 is to be a challenge for the gas network companies, perhaps as tough as any utility regulation has ever been. Ofgem issued its price control consultation on 7 March and it gave an indicative cost of equity of between 3% and 5%, proposed a five-year regulatory period and set out a consumer engagement group and Ofgem RIIO-2 Challenge Group to feed into the business planning process. We were pleased to see the consultation document was broadly supportive of the RIIO structure, and identified some of the key benefits that had arisen as a result of RIIO-GD1. We are now looking forward to working with our Regulator in ensuring we get the best possible outcome and continued high levels of investment to equally benefit our customers, employees and company.

Gregor Alexander Chairman 18 July 2018

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Chairman’s introduction to governance

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SGN Annual Report & Financial Statements 2018

Board of Directors as at 31 March 2018 Gregor Alexander Chairman

Neil Fleming Director

Gregor joined the Board at its inception and was appointed the Chairman of SGN in July 2011. He is Finance Director of SSE plc and previously worked with the accountancy firm Arthur Andersen. He is a member of the Audit Committee, the People and Reward Committee, and the Finance Committee.

Neil joined the Board in March 2015 and is a Senior Principal in Teachers’ Infrastructure Group. He is active in the regulated utilities and transportation sectors in Europe. Neil is a member of the Audit Committee and the Finance Committee. Neil resigned in May 2018 and was replaced by Charlotte Brunning.

Robert McDonald Director

Guy Lambert Director

Robert joined the Board in July 2006. He is Managing Director, Corporate and Business Services at SSE plc and has previously worked with the industry’s regulatory body.

Guy joined the Board in October 2016. He joined the Abu Dhabi Investment Authority (ADIA) in 2008 and currently serves as the Head of Utilities. He is responsible for sourcing and executing new investments in the utilities sector and overseeing the existing utilities portfolio. Guy is a member of the Audit Committee and the Finance Committee.

Andrew Jonathan Mark Taylor Director Jo joined the Board in May 2016. He is Regional Managing Director in Teachers’ Infrastructure Group EMEA, overseeing the full cycle of origination, analysis, execution, value creation and eventual realisation of private investments in EMEA. Jo is the Chairman of the People and Reward Committee and a member of the Safety, Health and Environmental Advisory Committee.

Natalie Flageul Director Natalie joined the Board in September 2011. She is Director of Customer Experience at SSE plc and previously oversaw the transformation to nationwide coverage in preparation for Smart Meter deployment. She is Chair of the Safety, Health and Environmental Advisory Committee.

John McManus Director John joined the Board in March 2012. He is Senior Advisor to OMERS Infrastructure in asset management, assessment of investment opportunities, relationship development and mentorship. John is the Chairman of the Audit Committee and a member of the People and Reward Committee.

Alejandro López Delgado Director

Gregor Alexander Chairman

Robert McDonald Director

Andrew Jonathan Mark Taylor Director

Natalie Flageul Director

John McManus Director

Neil Fleming Director

Guy Lambert Director

Alejandro López Delgado Director

Alejandro joined the Board in November 2015. He is a Director at OMERS Infrastructure, where he is responsible for the origination, acquisition and management of infrastructure investments with a focus in Europe. He is a member of the Safety, Health and Environmental Advisory Committee and the Finance Committee.

Alternate Directors Kenton Edward Bradbury Director (not pictured) Kenton joined the Board in May 2016. He is a Managing Director in asset management at OMERS Infrastructure and is responsible for the active management of infrastructure investments, with a focus on Europe. Kenton was appointed as an Alternate Director. He attends Board meetings as a substitute to Alejandro.

Charles Thomazi Director (not pictured) Charles joined the Board in October 2017. He leads the EMEA Infrastructure team in Teachers’ Infrastructure Group. He has more than 25 years of experience in the financial services sector and has been actively involved in infrastructure since 2001. He attends Board meetings as a substitute to Neil.


SGN Annual Report & Financial Statements 2018

39

Paul Jeffery Director

Graham Juggins Director

Paul Jeffery Director

Graham Juggins Director

Paul joined the Board in January 2014 as an independent non-executive Director. Previously he ran the European Power, Utility and Infrastructure Investment Banking Sector team for Barclays. Paul is also a non-executive Director of UK Power Networks and Saeta Yield S.A. Paul is a member of the Finance Committee.

Graham joined the Board as an independent non-executive Director in January 2014. He is an electrical engineer and has 38 years of experience in the energy and construction industries holding senior posts, including a previous role as Director of Human Resources at SSE plc. Graham is a member of the Safety, Health and Environmental Advisory Committee.

John Morea Chief Executive Officer

Nicola Graham-Shand Company Secretary

John joined the Company in May 2005 from SSE plc. He has over 30 years’ experience in the energy industry. John is a companion of the Institute of Gas Engineers and Managers, a member of the Institute of Engineering and Technology and holds an MBA.

Nicola joined the Board as Company Secretary in July 2011. Nicola is Director of Legal and Compliance and is responsible to the Board for compliance with Board procedures and for advising and keeping the Board up-to-date on all corporate governance developments.

Mick Carmedy Chief Financial Officer

John Morea, Nicola GrahamShand and Mick Carmedy are the senior managers who attend Board meetings.

Senior management team (attending Board meetings)

John Morea Chief Executive Officer

Mick Carmedy Chief Financial Officer

Mick joined the Company in January 2018 following the retirement of Chris Brook, the previous CFO. Mick was CFO of Southern Water, the regulated water business, for five years prior to joining. Mick has also worked at United Utilities and Thames Water in a wide variety of roles.

Registered office Nicola Graham-Shand Director of Legal and Compliance (Company Secretary)

St Lawrence House Station Approach Horley, Surrey RH6 9HJ

Corporate advisors Auditor KPMG LLP, Statutory Auditor, London

Registered number

04958135

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Statutory independent non-executive Directors


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SGN Annual Report & Financial Statements 2018

Directors’ responsibilities statement

Company law requires the Directors to prepare Group and parent Company financial statements for each financial year. Under that law, they are required to prepare the Group and parent Company financial statements in accordance with UK accounting standards and applicable law (UK Generally Accepted Accounting Practice), including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent Company and of their profit or loss for that period. In preparing each of the Group and Parent company financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable, relevant, reliable and prudent; • assess the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and • use the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for preparing the Annual Report and the Group and parent Company financial statements in accordance with applicable law and regulations.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report and a Directors’ Report that complies with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Signed on behalf of the Board of Directors of Scotia Gas Networks Limited:

Gregor Alexander Chairman 18 July 2018


SGN Annual Report & Financial Statements 2018

Principal activities The Company is a holding company which does not trade. The subsidiary undertakings principally affecting the profits or net assets of the Group in the year are listed in note 14 to the financial statements. The Group’s principal activity is the development, administration, maintenance and safe operation of the Southern and Scotland regional gas distribution systems and the supply of associated transportation, connection and metering services. It will continue these activities for the foreseeable future. Directors The Directors of the Company who served during the year ended 31 March 2018 and up to the date of signing, are listed below: Board of Directors Gregor Alexander Chairman Robert McDonald Andrew Jonathan Mark Taylor Natalie Flageul John McManus Neil Fleming (resigned May 2018) Guy Lambert Alejandro López Delgado Charlotte Brunning (appointed May 2018) Alternate Directors Kenton Edward Bradbury Charles Thomazi (appointed October 2017) Mariana Popa (appointed May 2018) Statutory independent non-executive Directors Paul Jeffery Graham Juggins Senior management team John Morea Chief Executive Officer Chris Brook Chief Financial Officer (resigned March 2018)

The Directors present their report and the audited consolidated financial statements for the year ended 31 March 2018. The financial statements consolidate the financial statements of the Company and its subsidiary undertakings (together the ‘Group’).

Mick Carmedy Chief Financial Officer (appointed January 2018) Nicola Graham-Shand Director of Legal and Compliance (Company Secretary) Directors’ insurance and indemnities The Directors of the Company have the benefit of the indemnity provisions in the Company’s Articles of Association. The Directors have been granted a qualifying third-party indemnity provision which was in force throughout the year. In addition, the Company has purchased and maintained throughout the year directors’ and officers’ liability insurance in respect of itself, the Group, the Directors and other senior executives of the Group. Strategic report The review of business for the year, including an analysis using key performance indicators and an indication of likely future developments in the business, together with a description of the principal risks and uncertainties facing the Group are set out in the Strategic Report on pages 4 to 36. Results and dividends The consolidated profit and loss account is set out on page 50 and is reviewed on pages 22 to 25. The Group paid interim dividends of £286.0m (2017: £200.0m). The Directors do not recommend the payment of any final dividend for the year (2017: £nil). There are no subsequent events to report. Financial risk management The Group’s funding, liquidity and exposure to interest rate, foreign exchange and credit risks are managed within a framework of policies and guidelines authorised by the Board of Directors.

Interest rate risk The Group has interest bearing liabilities and as a matter of policy a minimum of 75% of debt, excluding shareholder loans, are maintained at either fixed rates of interest or index-linked. The Group uses interest rate swaps, where necessary, in order to achieve the desired profile. Liquidity risk The Group maintains a mixture of long-term funding and short-term liquid funds in order to ensure there are sufficient funds available for the Group’s current and planned operations. Foreign exchange risk All of the Group’s borrowings are currently denominated in Pound Sterling, so there is no foreign exchange risk. However, in accordance with its policy, should the Group decide to raise finance in currency other than Pound Sterling, cross-currency swaps would be used to fully hedge the borrowings into Pound Sterling. Credit risk The Company transacts with banks for the provision of interest rate and currency hedging transactions. The Company 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. In respect of short-term cash management, counterparties are subject to review and approval according to defined criteria. Trade receivables predominantly relate to transportation income from gas shippers. Credit risk arising from the Group’s regulated business is managed in accordance with industry standards as set out by the Unified Network Code.

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Directors’ report

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SGN Annual Report & Financial Statements 2018

Directors’ report continued

The Group contracts with shippers having investment grade ratings only, or where suitable collateral or cash prepayments are made. Pricing risk The Group’s gas transportation charges are subject to price control formulae set within the regulatory regime. The Group’s maximum allowed revenue in a given price period is dependent upon a number of factors that are not known in advance and, therefore, the maximum allowed annual revenue is not known until the end of the relevant period. However, transportation tariffs are set on a prospective basis, so actual revenue received or receivable in any one year may differ from the maximum allowed revenue. Where revenues received or receivable differ from the maximum allowed annual revenue, adjustments are made to future prices to reflect this over or under recovery. Employees The Group places considerable value on the involvement of its employees and has continued to keep them informed on matters affecting them and on the various factors affecting the Group. Participation by employees generally is encouraged through team meetings, briefings, a new digital app and an intranet site. The CEO and other senior executives regularly communicate with employees through these channels and employee representatives are consulted regularly on a wide range of matters affecting their current and future interests. Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned. In the event of employees becoming disabled, every effort is made to ensure their employment within the

Group continues and that appropriate training and development is arranged. It is the policy of the Group that the training, career development and promotion of disabled persons should, as far as possible, be identical to that of other employees. Going concern The Group’s financial position, cash flows, liquidity position and borrowing facilities together with the factors likely to affect its future performance and the Group’s principal risks and uncertainties are set out in the Strategic Report on pages 4 to 36. The Group’s financial risk management objectives and risk exposures are set out above. As stated in the Strategic Report the Group operates the regulated gas distribution networks in the south of England, Scotland and Northern Ireland. The revenue of the Group is regulated by Ofgem (for the south of England and Scotland) and UREGNI (for Northern Ireland) through established price control mechanisms based on the distribution network capacity. The Group has considerable financial resources together with committed financing facilities as discussed in note 18 to finance the current and future operations. The Group’s forecasts and projections, including performing scenario testing and sensitivity analysis, show the Group should be able to operate within the level of its current facilities. As a consequence, the Directors believe the Group is well placed to manage its business risks successfully. After making enquiries, the Directors have a reasonable expectation the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and financial statements.

Auditor Each of the Directors at the date of this report confirms: 1) so far as the Director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and 2) the Director has taken all the steps they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish the Company’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006. By Order of the Board.

Nicola Graham-Shand Company Secretary 18 July 2018


SGN Annual Report & Financial Statements 2018

This report sets out the key governance principles and practices of the Company and of the Group. The Company, not having listed equity shares, is not subject to the UK Financial Reporting Council’s UK Corporate Governance Code1 (the ‘Governance Code’) and the Board of Directors has decided not to voluntarily apply the Governance Code as they do not consider all the guidance to be applicable to the Company. However, for the purposes of this statement, the Directors have elected to provide additional disclosure in relation to governance to provide clearer understanding of the Company and the Group. Board of Directors The Board of Directors is comprised entirely of non-executive Directors and is the principal decision-making forum for the Company. Directors are nominated to the Board in accordance with the terms of the Shareholders’ and Governance Agreement. The Board is collectively responsible to the Company’s shareholders for the long-term success of the Group and for its overall strategic direction, its values and its governance. It provides the leadership necessary for the Group to meet its business objectives while ensuring a sound system of internal control and risk management is in place. The powers and the duties of the Directors are determined by legislation and by the Company’s Articles of Association. The Board has also adopted a formal schedule of matters detailing key aspects of the Company’s affairs reserved to it for decision. Furthermore, the Board has established four standing

The Board of Directors is the principal decision making forum for the Company and is committed to the highest standards of corporate governance. The Board believes strong governance improves the performance of the Group and enhances shareholder value.

committees and one non-standing committee with specific responsibilities to ensure focused and effective leadership. Details of the committees are set out below. The Board meets regularly and has held eight meetings during the year. Board constitution and appointments The Board of Directors comprises eight non-executive Directors. This consists of a non-executive Chairman and seven non-executive Directors. The Board of Directors is the same for the Company and each company within the Group, except for Scotland Gas Networks plc and Southern Gas Networks plc, which consists of two additional independent non-executive Directors. The non-executive Directors scrutinise, measure and review the performance of management; constructively challenge and assist in the development of strategy; review the Group financial information; and ensure systems of internal control and risk management are appropriate and effective. Biographical details for each of the Directors are set out on page 38. Chairman Gregor Alexander was re-appointed as Chairman on 24 July 2014. Chief Executive Officer and Chief Financial Officer Below the Board, executive responsibility rests with John Morea, Chief Executive Officer (CEO) and Mick Carmedy, Chief Financial Officer (CFO). The CEO and CFO are each employed by the Group and are not Directors of the Company. They are supported by an executive committee

1 The UK Corporate Governance Code was issued in May 2010 (replacing the Combined Code on Corporate Governance). This applies to financial years beginning on or after 29 June 2010 and is available on the Financial Reporting Council’s website (www.frc.org.uk).

which meets on a monthly basis and is responsible for managing the day-to-day operations of the Group. Biographical details for the CEO and CFO are set out on page 39. Timeliness and quality of Board information The Board has sought to ensure that Directors are properly briefed on issues arising at Board meetings. This is done by establishing procedures for distributing Board papers one week in advance of meetings; considering the adequacy of the information provided before making decisions; adjourning meetings or deferring decisions when Directors have concerns about the information available to them; and making the Company Secretary responsible to the Board for the timeliness and quality of information. All Directors have access to the advice and services of the Company Secretary. Conflicts of interest With effect from 1 October 2008, the Companies Act 2006 has introduced a statutory duty on Directors to avoid conflicts of interest. During the year, the Company Secretary reviewed all of the Directors’ reported actual and potential conflicts of interest and the Board then considered and recorded each Director’s reported actual and potential conflicts of interest. The Board has put into place a procedure to consider any future actual or potential conflicts of interest the Directors may have and will review the position regularly. Board committees In order to provide effective and focused leadership, the Board has established four standing committees and one non-standing committee with specific responsibilities. These

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Corporate governance statement

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SGN Annual Report & Financial Statements 2018

Corporate governance statement continued

are the Audit Committee, the Safety, Health and Environmental Advisory Committee, the People and Reward Committee, the GD2 Committee (standing) and the Finance Committee (non-standing). Each committee’s performance, constitution and terms of reference are reviewed annually to ensure they are operating effectively. The Company Secretary acts as secretary for each committee and further details are set out below. Attendance at Board and Board committee meetings The attendance of the Board of Directors and the Board committees during the year is as set out in the table on page 45. Audit Committee The current members of the Audit Committee are John McManus (Committee Chairman), Paul Jeffery (replacing Graham Laughland in May 2018), Gregor Alexander, Charlotte Brunning (replacing Neil Fleming in May 2018) and Guy Lambert. The principal responsibilities of the Audit Committee are as follows: • Ensuring the Company’s financial reports represent an accurate, clear and balanced assessment of the Company’s position and prospects; • Ensuring the economy, efficiency and effectiveness of the Company’s operations and internal controls, the reliability and integrity of information and accounting systems and the implementation of established policies and procedures; • Monitoring and reviewing the Company’s internal audit function; and • Maintaining a close relationship with the Company’s external auditor and reviewing the effectiveness of the external audit process.

As part of its activities, the Audit Committee also reviews and approves key regulatory filings prior to their issue to Ofgem. The Chairman of the Audit Committee reports to the Board of Directors following each committee meeting on the main areas and subjects the committee has reviewed such as risk management, internal control, internal audit reports and any issues arising from its review of the financial statements. The Board considers the membership of the Audit Committee as a whole has sufficient recent and relevant financial experience to discharge its functions. The committee met three times during the year. Safety, Health and Environmental Advisory Committee The current members of the Safety, Health and Environmental Advisory Committee are Natalie Flageul (Committee Chairman), Andrew Jonathan Mark Taylor, Graham Juggins, Alejandro López Delgado, Guy Lambert, John Morea (Chief Executive Officer) and Paul Denniff (Network Director). The principal responsibilities of the Safety, Health and Environmental Advisory Committee are as follows: • Ensuring the health and safety policy statement and environmental policy statement remain fit for purpose and are being adhered to; • Reviewing and monitoring the safety, health and environmental strategy and action plan, which shall be designed to eliminate, reduce or otherwise control personal and process related data; • Reviewing and monitoring the safety, health and environmental compliance and assurance plan (and liaising with the internal auditor in relation thereto);

• Setting health and safety and environmental targets to improve the Group’s performance; • Monitoring health and safety and environmental performance against planned targets and identified key improvement areas by means of appropriate leading and lagging key performance indicators; and • Encouraging greater awareness of the importance of health, safety and the environment and higher achievement in performance in these areas. The Chairman of the Safety, Health and Advisory Committee reports to the Board of Directors following each committee meeting on the main areas and subjects the Committee has reviewed. Three meetings were held during the year. People and Reward Committee The current members of the People and Reward Committee are Andrew Jonathan Mark Taylor (Committee Chairman), John McManus, and Gregor Alexander. The principal responsibilities of the People and Reward Committee are as follows: • To determine and agree with the Board of Directors the Group’s framework or broad policy for executive and senior management remuneration. The Committee has delegated authority for setting the remuneration of the CEO, CFO and their direct reports; and • To review the ongoing appropriateness and relevance of the remuneration policy. The Chair of the People and Reward Committee reports to the Board of Directors following each committee meeting on the remuneration matters which the committee has reviewed. Four meetings were held during the year.


SGN Annual Report & Financial Statements 2018

The principal responsibility of the Finance Committee is to authorise specific transactions of the Group, where it has been provided delegated authority by the Board of Directors to do so. The members of the Finance Committee report to the Board of Directors following each committee meeting on the matters which the committee has reviewed. Four meetings were held during the year. GD2 Committee The current members of the GD2 Committee are Charlotte Brunning, Guy Lambert, Rob MacDonald, Alejandro Lopez Delgado and Mariana Popa. The primary responsibility of the GD2 Committee is to provide leadership and challenge on the RIIO-2 process and business plan that will be developed for the RIIO-2 period that will enter into force from April 2021. The committee is a leadership and challenge group, with recommendations to be reported back to the Board of Directors. The committee meets

alongside the main Board with additional meetings as necessary. Board and committee performance evaluations During the year, the Board has undertaken a comprehensive evaluation of its own performance and that of its three standing committees and individual Directors. This was conducted internally using detailed questionnaires which the Chairman then discussed with each Director and the Company Secretary. The Board has considered and discussed the outcomes of the evaluations and is satisfied it is operating well and focused on the correct strategic issues. The Directors continue to review the Board’s performance and that of its committees and individual Directors on an annual basis. Internal controls in relation to the Company’s financial reporting process The Board of Directors is ultimately responsible for the Group’s internal control systems and risk management. The Group’s system of internal control and embedded risk management, which has been in place throughout the year, helps to safeguard the assets and is designed to manage, rather than eliminate, material risks to the achievement of the business objectives. The Board recognises that these systems can provide only reasonable, and not absolute, assurance against material misstatement or loss.

Meeting attendance Board meetings

Audit Committee meetings

Accordingly, the Directors have regard to what controls, in their judgement, are appropriate to the business, to the materiality of the risks inherent in the business and to relative costs and benefits of implementing specific controls. Internal control is maintained through an organisation structure with clearly defined responsibilities, authority levels and lines of reporting, the appointment of suitably qualified staff in specialised business areas and continuing investment in high quality information systems. These methods of control are subject to periodic review as to their implementation and continued suitability. There were no changes in the Company’s internal controls over financial reporting during the year covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Internal audit The Board of Directors has established the scope of the internal audit function which is responsible for reviewing the effectiveness of the Group’s systems of internal control and reports to the Audit Committee of the Board. The internal audit manager reports to the Audit Committee on the audit programme, progress against the programme and any follow-up actions on a bi-monthly basis.

Safety, Health People and Environmental and Reward Advisory Committee Committee meetings meetings

Finance Committee meetings

GD2 Committee meetings

Attended Possible Attended Possible Attended Possible Attended Possible Attended Possible Attended Possible

Gregor Alexander

8

8

3

3

4

3

4

4

Robert McDonald

7

8

2

2

6

6

Natalie Flageul

8

8

3

3

John McManus

6

8

3

3

4

4

Alejandro López Delgado

8

8

4

4

3

3

6

6

Neil Fleming**

7

8

3

3

1

4

4

1

6

6

Andrew Jonathan  Mark Taylor

6

8

3

4

2

3

Guy Lambert

7

8

3

3

3

4

2

3

Paul Jeffery***

7

8

2

2

Graham Juggins

8

8

3

3

Charles Thomazi*

3

3

Kenton Bradbury*

2

2

Graham  Laughland

n/a

n/a

2

3

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

Mariana Popa

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

6

6

* Attended as Alternate Directors for OMERS Infrastructure and Ontario Teachers’ Pension Plan. ** Attended as an Alternate Director in place of Jo Taylor for a People and Reward Committee meeting in 2017. *** Paul Jeffery became a member of the Finance Committee after the May 2017 Committee meetings.

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Finance Committee The current members of the Finance Committee are Charlotte Brunning (replacing Neil Fleming in May 2018), Guy Lambert, Gregor Alexander, Alejandro Lopez Delgado and Paul Jeffery.

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46

SGN Annual Report & Financial Statements 2018

Independent auditor’s report to the members of Scotia Gas Networks Limited 1. Our opinion is unmodified We have audited the financial statements of Scotia Gas Networks Limited (“the Company”) for the year ended 31 March 2018 which comprise the Consolidated Profit and Loss Account, Consolidated Statement of Comprehensive Income, Balance sheets, Consolidated Statement of Changes in Equity, Company Statement of Changes in Equity, Consolidated Cash Flow Statement and the related notes, including the accounting policies in note 1. In our opinion the financial statements: • give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 March 2018 and of the Group’s profit for the year then ended; • have been properly prepared in accordance with UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland; and • have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the Company in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed entities. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion.

2. Key audit matters: our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In arriving at our audit opinion above, the key audit matters, in decreasing order of audit significance, were as follows:

Retirement benefit obligation (£840.3m) Refer to page 58 (accounting policy) and page 79 (financial disclosures).

The risk

Our response

The Group operates a defined benefit pension scheme. Significant estimates are made in valuing the Group’s pension obligation.

Our procedures included:

Small changes in the assumptions and estimates used to value the Group’s pension obligation (before deducting scheme assets), including in particular the discount rate, the inflation assumptions, the cash commutation assumptions and mortality assumptions, would have a significant effect on the financial position of the Group.

•  Benchmarking assumptions: With the assistance of our own actuarial specialists, we challenged key assumptions applied, including discount rate and inflation rate, and performed a comparison of key assumptions against market data. •  Assessing actuaries’ credentials: We assessed the competence, independence and integrity of the Group’s actuarial expert. • A  ssessing transparency: We have considered the adequacy of the Group’s disclosures in respect of the sensitivity of the obligation to key assumptions.


SGN Annual Report & Financial Statements 2018

Refer to page 57 (accounting policy) and page 66 (financial disclosures).

Our response

Costs are classified between capital expenditure, replacement expenditure, and operating expenditure.

Our procedures included:

Specifically for the plant and machinery asset category, given the size and nature of expenditure within the business, judgement is required to ensure appropriate allocation of costs between capital, replacement and operating expenditure. There is a risk that the allocation around classification of these costs is incorrect, with expenditure misstated between the profit and loss account and balance sheet. The incentive to capitalise more costs to increase profit exists, though the incentive for management bias is reduced because of the Totex regime within GD-1 that SGN operates under.

Environmental provisions (£44.3m) Refer to page 59 (accounting policy) and page 76 (financial disclosures).

The group has an environmental restoration provision to cover the legal obligation to restore sites at the balance sheet date, which is reassessed through an ongoing programme of expert assessment. In assessing the degree of contamination at the various sites, estimation is required where elements of the contamination are underground, resulting in estimation uncertainty around the extent of the contamination. For those sites which have not yet been reviewed, the provision is based on management’s best estimate using existing information about those sites. The assessment required is inherently judgemental, and there is a risk the actual costs of restoration are materially different to the amounts provided.

Financial instruments (£123.4m) Refer to page 60 (accounting policy) and page 71 (financial disclosures).

The Group’s derivatives portfolio includes mirror swaps, and it has cashflow hedges in place to manage interest and currency exposures. The derivatives are recognised at fair value. Due to the uncertainties in forward yield curves used in discounted cash flow calculations, there is a significant risk of error in the valuation of these financial instruments.

• C  ontrol design and operation: We evaluated the controls around the authorisation of capital and replacement expenditure, including their operating effectiveness. We evaluated general IT controls including access controls, to ensure that the ability to make changes to system configuration and project classification was restricted to appropriate individuals. •  Accounting analysis: We assessed whether the Group’s accounting policies for capitalisation are in accordance with relevant accounting standards, including the capitalisation criteria. •  Tests of details: We assessed the appropriateness of the cost classification for a sample of projects, including by inspecting supporting documentation, such as approved budget reports completed for each project, to gain an understanding of the nature and type of costs incurred and assess this against the criteria for capitalisation or expensing. Our procedures included: •  Assessing environmental expert’s credentials: We assessed the competence, independence and integrity of the Group’s environmental expert. • Benchmarking assumptions: We assessed the reasonableness of management’s discount rate assumptions by comparing this to the risk free inflation rate set by Ofgem and long term inflation rates. • S  ensitivity analysis: We performed sensitivity analysis on the discount rate to consider the impact of the change in the assumption. • T  est of details: We vouched site assessments completed in the year to supporting documentation, including third party valuation reports. •  Management enquiry: We challenged the completeness of the provision through enquiries of management based on our understanding of business activity during the year, comparison to sites in the prior year and our review of third party valuation reports. Our procedures included: •  Test of details: For 100% of the portfolio of instruments, we agreed the year end swap valuation to third-party mark to market (‘MTM’) confirmations. • Independent re-performance: We engaged our valuation specialists to recalculate 100% of the year end derivative valuations and the credit risk adjustment using independently sourced market data.

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Cost classification between Capex, Repex and Opex (£374.6m plant and machinery additions)

The risk

47


48

SGN Annual Report & Financial Statements 2018

Independent auditor’s report to the members of Scotia Gas Networks Limited

Parent Company Only – Recoverability of parent company’s investment in subsidiaries (£2,028.4m) Refer to page 57 (accounting policy) and page 67 (financial disclosures).

continued

The risk

Our response

The carrying amount of the parent company’s investments in subsidiaries represents a significant proportion of the company’s total assets. The recoverability is not at a high risk of significant misstatement or subject to significant judgement. However, due to materiality in the context of the parent company financial statements, this is considered to be the area that had the greatest effect on our overall parent company audit.

Our procedures included: •  Test of details: We compared the carrying amount of 100% of investments with the relevant subsidiaries’ draft balance sheet to identify whether their net assets, being an approximation of their minimum recoverable amount, were in excess of their carrying amount and assessing whether those subsidiaries have historically been profit-making. •  Assessing subsidiary audits: We considered the work performed by the audit team on all of those subsidiaries and considered the results of that work on those subsidiaries’ profits and net assets.

3. Our application of materiality and an overview of the scope of our audit Materiality for the statutory financial statements as a whole was set at £12 million, determined with reference to a benchmark of profit before tax of £248 million, of which it represents 5%. We reported to the Audit Committee any corrected or uncorrected identified misstatements exceeding £680,000, in addition to other identified misstatements that warranted reporting on qualitative grounds. The audit was performed using the materiality levels set out above, covering 100% of the profit before taxation and total assets held.

4. We have nothing to report on going concern We are required to report to you if we have concluded that the use of the going concern basis of accounting is inappropriate or there is an undisclosed material uncertainty that may cast significant doubt over the use of that basis for a period of at least twelve months from the date of approval of the financial statements. We have nothing to report in these respects.

5. We have nothing to report on the other information in the Annual Report The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. Strategic report and directors’ report Based solely on our work on the other information: • we have not identified material misstatements in the strategic report and the directors’ report; • in our opinion the information given in those reports for the financial year is consistent with the financial statements; and • in our opinion those reports have been prepared in accordance with the Companies Act 2006.


SGN Annual Report & Financial Statements 2018

49

Under the Companies Act 2006, we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or • the financial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. We have nothing to report in these respects.

7. Respective responsibilities Directors’ responsibilities As explained more fully in their statement set out on page 40, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.

8. The purpose of our audit work and to whom we owe our responsibilities This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Ian Griffiths (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL 18 July 2018

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6. We have nothing to report on the other matters on which we are required to report by exception


50

SGN Annual Report & Financial Statements 2018

Consolidated profit and loss account for the year ended 31 March 2018

Notes

Turnover

2018 ÂŁm

2017 ÂŁm

1,156.3

1,125.0

Net operating costs

4

(685.0)

(592.1)

Operating profit

4

471.3

532.9

Interest receivable and similar income

7

1.5

Interest payable and similar expenses

8

(224.8)

(216.4)

Profit before taxation

5

248.0

320.4

Tax charge on profit

9

(53.7)

23

194.3

Profit for the financial year The above results relate to continuing operations in both the current and previous year. The accompanying notes form part of these financial statements.

1, 3

3.9

(5.9) 314.5


SGN Annual Report & Financial Statements 2018

51

Profit for the financial year

Notes

2018 £m

2017 £m

23

194.3

314.5

Cash flow hedges: – Losses arising on cash flow hedges

22

Remeasurement on net pension asset

27

(2.0) 177.0

(6.6) (64.9)

Deferred tax movement relating to components of other comprehensive income: – Cashflow hedges – Pension asset

22

0.5

0.7

(30.1)

10.4

Other comprehensive income/(loss) for the year

145.4

(60.4)

Total comprehensive income

339.7

254.1

The accompanying notes form part of these financial statements.

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Consolidated statement of comprehensive income for the year ended 31 March 2018


52

SGN Annual Report & Financial Statements 2018

Balance sheets as at 31 March 2018 Group Notes

2018 £m

Company 2017 £m

2018 £m

2017 £m

Fixed assets Intangible assets

12

414.3

427.5

Tangible assets

13

6,149.6

5,924.7

Investments

14

0.2

0.2

2,028.4

2,028.4

6,564.1

6,352.4

2,028.4

2,028.4

Current assets Inventories

15

13.3

27.8

Debtors

16

175.6

124.3

121.5

371.6

11.8

11.8

9.7

7.9

570.2

171.8

121.5

11.8

(848.7)

(310.4)

(9.7)

(1,245.2)

(278.5)

(138.6)

111.8

(1,233.4)

Short term deposits Cash at bank and in hand

Creditors: amounts falling due within one year

17

Net current assets/(liabilities) Total assets less current liabilities Creditors: amounts falling due after more than  one year Provisions for liabilities Deferred income

6,213.8

2,140.2

18

(4,628.1)

(4,467.6)

(794.5)

(766.1)

13

(360.6)

(342.0)

502.4

638.1

1,812.6

261.4

27

Net assets including pension asset

(327.6)

795.0

20

Net assets excluding pension asset Defined benefit pension asset

6,285.6

(533.6) –

194.0

4.6

696.4

642.7

1,812.6

261.4

200.0

200.0

200.0

200.0

Capital and reserves Called up share capital

21

Hedging reserve

22

Profit and loss account

22

548.6

Shareholders’ funds

23

696.4

(52.2)

493.4

1,612.6

61.4

642.7

1,812.6

261.4

(50.7)

The accompanying notes form part of these financial statements. The Company has elected to take the exemption under Section 408 of the Companies Act 2006 from presenting the parent company profit and loss account. The Company’s profit for the year amounted to £1,837.2m (2017: £151.9m). The financial statements of Scotia Gas Networks Limited, registered number 04958135, were approved by the Board of Directors and authorised for issue on 18 July 2018. Signed on behalf of the Board of Directors

Gregor Alexander Director


SGN Annual Report & Financial Statements 2018

53

Called up share capital £m

Hedge reserve £m

Profit and loss account £m

Total £m

433.4

588.6

314.5

314.5

Group: At 1 April 2016

200.0

(44.8)

Profit for the financial year

Cash flow hedges

Remeasurement of net defined benefit pension asset

– Cash flow hedges

0.7

0.7

– Pension asset

10.4

10.4

Total comprehensive income

(5.9)

Dividends paid

(6.6)

– (64.9)

(6.6) (64.9)

Deferred tax movements relating to items of other  comprehensive income:

At 31 March 2017

200.0

– (50.7)

Profit for the financial year

Cash flow hedges

Remeasurement of net defined benefit pension asset

– Cash flow hedges

0.5

– Pension asset

Total comprehensive income

(1.5)

Dividends paid

(2.0)

260.0

254.1

(200.0)

(200.0)

493.4

642.7

194.3

194.3

– 177.0

(2.0) 177.0

Deferred tax movements relating to items of other  comprehensive income:

At 31 March 2018 The accompanying notes form part of these financial statements.

200.0

– (52.2)

– (30.1)

0.5 (30.1)

341.2

339.7

(286.0)

(286.0)

548.6

696.4

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Consolidated statement of changes in equity for the year ended 31 March 2018


54

SGN Annual Report & Financial Statements 2018

Company statement of changes in equity for the year ended 31 March 2018

Notes

Called up share capital £m

Hedge reserve £m

Profit and loss account £m

Total £m

200.0

109.5

309.5

151.9

151.9

151.9

200.0

61.4

261.4

Company: At 1 April 2016 Profit for the financial year

10

Total comprehensive income Dividends paid

11

At 31 March 2017

(200.0)

151.9 (200.0)

1,837.2

1,837.2

Total comprehensive income

1,837.2

1,837.2

Dividends paid

(286.0)

(286.0)

200.0

1,612.6

1,812.6

Profit for the financial year

10

At 31 March 2018 The accompanying notes form part of these financial statements.


SGN Annual Report & Financial Statements 2018

55

2018 £m

2017 £m

Operating profit

471.3

532.9

Depreciation charge

172.5

170.2

Notes

Cash flows from operating activities

Goodwill amortisation Amortisation of deferred income Loss/(profit) on disposal of fixed assets (Increase)/decrease in debtors

9.5

9.5

(8.4)

(7.8)

4.6

6.0

(42.7)

(24.3)

Increase/(decrease) in creditors

1.5

Movement in provisions

5.5

Cash generated by operations

613.8

(21.9) (0.3) 664.3

Taxation

(66.6)

(67.3)

Net cash inflow from operating activities

547.2

597.0

Cash flows from investing activities 0.3

Interest received

(397.7)

Purchase of tangible fixed assets Sale of tangible fixed assets Customer contributions received

13

Net cash outflow from investing activities

1.3 (381.0)

4.3

1.1

27.0

32.3

(366.1)

(346.3)

Interest paid

(192.8)

(193.0)

Issue of debt

882.2

160.0

(286.0)

(200.0)

(206.0)

(257.0)

Cash flows from financing activities

Dividend paid Repayment of borrowings Payments in respect of financial instruments

11

(12.3)

(8.1)

(Increase)/decrease in short term deposits

(359.8)

248.5

Net cash outflow from financing activities

(174.7)

(249.6)

Net increase in cash and cash equivalents

6.4

1.1

Cash and cash equivalents at beginning of the year

3.3

2.2

Cash and cash equivalents at the end of the year

9.7

3.3

Reconciliation to cash at bank and in hand Cash at bank and in hand Bank overdraft Cash and cash equivalents The accompanying notes form part of these financial statements.

9.7 – 9.7

7.9 (4.6) 3.3

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Consolidated cash flow statement for the year ended 31 March 2018


56

SGN Annual Report & Financial Statements 2018

Notes to the financial statements for the year ended 31 March 2018 1. Principal accounting policies The financial statements have been prepared in accordance with applicable accounting standards in the United Kingdom and the Companies Act 2006. The financial statements of the Group present the results for the year ended 31 March 2018. The comparative period presented is the year ended 31 March 2017. A summary of the more significant Group accounting policies, which have been applied consistently in both years is as follows. General information and basis of preparation Scotia Gas Networks Limited is a private limited company incorporated in the United Kingdom under the Companies Act 2006. The address of the registered office is St. Lawrence House, Station Approach, Horley, Surrey RH6 9HJ. The Company and its subsidiary undertakings together form the ‘Group’ for which consolidated financial statements are drawn up. The Group’s principal activity is the development, administration, maintenance and operation of the Southern and Scotland gas distribution systems, the supply of gas transportation services and other gas related services. The financial statements have been prepared under the historical cost convention, modified to include certain items at fair value, and in accordance with Financial Reporting Standard 102 – ‘The Financial Reporting Standard applicable in the United Kingdom and Republic of Ireland’ (FRS 102) issued by the Financial Reporting Council. There were no material departures from that standard. Amounts are expressed in millions of pounds, except where noted otherwise. The functional currency of Scotia Gas Networks Limited and its subsidiary undertakings is considered to be Pound Sterling because that is the currency of the primary economic environment in which the Company and its subsidiary undertakings operate. Amounts are expressed in millions of pounds, except where noted otherwise. The parent company is included in the consolidated financial statements, and is considered to be a qualifying entity under FRS 102 paragraphs 1.8 to 1.12. The following exemptions available under FRS 102 in respect of certain disclosures for the parent company financial statements have been applied: •  The reconciliation of the number of shares outstanding from the beginning to the end of the period has not been included a second time; •  No separate parent company Cash Flow Statement with related notes is included; and •  Certain disclosures required by FRS 102.11 Basic Financial Instruments and FRS 102.12 Other Financial Instrument Issues in respect of financial instruments not falling within the fair value accounting rules of Paragraph 36(4) of Schedule 1. Basis of consolidation The financial statements consolidate the financial statements of the Company and its subsidiary undertakings drawn up to 31 March each year. Subsidiaries are those entities controlled by the Group or the Company. Subsidiaries acquired are consolidated in the financial statements of the Group from the date that control commences until the date control ceases, using the acquisition method of accounting. Intra-Group balances and any unrealised gains and losses or income and expenses arising from intra-Group transactions, are eliminated in preparing the consolidated financial statements. Going concern After reviewing the Group’s forecasts and projections, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The current liabilities position has arisen due to £475m of debt repayments due in 2018/19, new finance will be raised in 2018/19 to meet these repayments; the Directors do not foresee any reason why these funds will not be raised to meet existing liabilities particularly in consideration of recent issuances at extremely competitive rates reflecting our continued good standing in the debt capital markets. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements. Intangible assets – goodwill Goodwill arising on the acquisition of businesses, representing any excess of the fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired, is capitalised and written off on a straight line basis over its useful economic life, which is estimated to be 50 years. Provision is made for any impairment, and it is tested on an annual basis at each balance sheet date.


SGN Annual Report & Financial Statements 2018

57

Tangible fixed assets

Tangible fixed assets are stated at cost, net of depreciation and any provision for impairment. In accordance with Ofgem guidance for gas transportation licensees, costs include an element of capitalised overheads which are, as far as reasonably practicable, allocated in accordance with the activities which lead to the generation of the assets. These costs are directly attributable to the associated assets. Depreciation is provided on all tangible fixed assets, other than investment properties and freehold land, at rates calculated to write off the cost or valuation, less estimated residual value, of each asset on a straight-line basis over its expected useful life, as follows: Freehold buildings: Leasehold land and buildings:

Up to 50 years Over the shorter of lease term and 50 years

Plant and machinery: – Mains and services:

55 to 65 years

– Regulating equipment:

30 to 50 years

– Gas storage: – Motor vehicles and office equipment:

40 years 3 to 10 years

Site remediation costs are depreciated over the life of the asset. Replacement expenditure is capitalised and useful life is based on the range within mains and services above. Residual value represents the estimated amount which would currently be obtained from disposal of an asset, after deducting estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. Fixed asset investments Fixed asset investments are stated at cost less a provision for any impairment in value. Costs of the investments include all costs directly related to the acquisition of the investments. Construction contracts Included within debtors are amounts receivable from construction contracts. These amounts represent the gross unbilled amount for contract work performed to date. They are measured at cost plus profit (when profit can be reliably measured) recognised to date less a provision for foreseeable losses and less progress billings. Cost includes all expenditure related directly to specific projects and an allocation of fixed and variable overheads incurred in the entity’s contract activities based on normal operating capacity. Inventories Inventories are stated at the lower of cost and estimated selling price less costs to sell, which is equivalent to the net realisable value. Cost includes materials, direct labour and an attributable proportion of manufacturing overheads based on normal levels of activity. Cost is calculated using the FIFO (first-in, first-out) method. Provision is made for obsolete, slow-moving or defective items where appropriate. Impairment of non-financial assets Assets, other than those measured at fair value, are assessed for indicators of impairment at each balance sheet date. If there is objective evidence of impairment, an impairment loss is recognised in profit or loss as described below. An asset is impaired where there is objective evidence that, as a result of one or more events that occurred after initial recognition, the estimated recoverable value of the asset has been reduced. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. The recoverable amount of goodwill is derived from measurement of the present value of the future cash flows of the business. Any impairment loss is allocated first to the goodwill, and then to other assets on a pro-rata basis. The Company considers there to be two separate CGUs for the purpose of goodwill impairment: Southern and Scotland Gas Networks Limited.

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Intangible assets – software Software assets are included at cost, net of depreciation and any provision for impairment. Amortisation is provided in equal annual instalments over a period of 3 to 10 years, which is their estimated useful economic life.


58

SGN Annual Report & Financial Statements 2018

Notes to the financial statements for the year ended 31 March 2018 continued 1. Principal accounting policies (continued) Where indicators exist for a decrease in impairment loss, the prior impairment loss is tested to determine reversal. An impairment loss is reversed on an individual impaired asset to the extent that the revised recoverable value does not lead to a revised carrying amount higher than the carrying value had no impairment been recognised. Where a reversal of impairment occurs, the reversal is applied to the assets (other than goodwill) on a pro-rata basis. Goodwill impairment is not reversed. Taxation Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Timing differences are differences between the Group’s taxable profits and its results as stated in the financial statements that arises from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements. Unrelieved tax losses and other deferred tax assets are recognised only to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. Deferred tax is measured using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date that are expected to apply to the reversal of the timing difference. Where items recognised in other comprehensive income or equity are chargeable to or deductible for tax purposes, the resulting current or deferred tax expense or income is presented in the same component of comprehensive income or equity as the transaction or other event that resulted in the tax expense or income. Current tax assets and liabilities are offset only when there is a legally enforceable right to set off the amounts and the Group intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Deferred tax assets and liabilities are offset only if: a) the Group has a legally enforceable right to set off current tax assets against current tax liabilities; and b) the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future year in which signiďŹ cant amounts of deferred tax liabilities or assets are expected to be settled or recovered. Turnover Turnover is stated net of value added tax and is attributable to the continuing activity of transportation of natural gas and the provision of related services. Turnover is recognised to the extent that there is a right to consideration and is recorded at the value of the consideration due. Turnover includes an assessment of transportation services supplied to customers between the date of the last meter reading and the year end. Where revenues received or receivable differ from the amount permitted by regulatory agreements, adjustments will be made to future prices to reflect this over or under recovery. Employee benefits Defined benefit pension scheme The Group operates a Group-wide defined benefit pension plan. The Company is the entity legally responsible for the Group-wide defined benefit pension plan. The net defined benefit cost of the plan is charged to participating entities based on the proportionate number of members relating to each company. The contributions payable by the participating entities are determined on the same basis as the charging policy detailed above. For defined benefit schemes the amounts charged to operating profit are the costs arising from employee services rendered during the year and the cost of plan introductions, benefit changes, settlements and curtailments. They are included as part of staff costs. The net interest cost on the net defined benefit liability is charged to profit or loss and included within finance costs. Remeasurement comprising actuarial gains and losses and the return on scheme assets (excluding amounts included in net interest on the net defined benefit liability) are recognised immediately in other comprehensive income. Defined benefit schemes are funded, with the assets of the scheme held separately from those of the Group, in separate trustee administered funds. Pension scheme assets are measured at fair value and liabilities are measured on an actuarial


SGN Annual Report & Financial Statements 2018

59

A surplus was recognised due to change in actuarial assumptions. It is probable that the surplus recognised will result in reduced amount of future contributions to the scheme or in the form of refund from the scheme. Since the amount recognised is within the cap allowed under regulation, management deem the recognition of surplus appropriate.

Defined contribution pension scheme For defined contribution schemes the amount charged to the profit and loss account in respect of pension costs and other retirement benefits is the contributions payable in the year. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the balance sheet. Foreign currency Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date. Other exchange differences are recognised in profit or loss in the year in which they arise except for exchange differences on transactions entered into to hedge certain foreign currency risks and exchange differences arising on gains or losses on non-monetary items which are recognised in other comprehensive income. Leases Finance leases Assets held under finance leases, hire purchase contracts and other similar arrangements, which confer rights and obligations similar to those attached to owned assets, are capitalised as tangible fixed assets at the fair value of the leased asset (or, if lower, the present value of the minimum lease payments as determined at the inception of the lease) and are depreciated over the shorter of the lease terms and their useful lives. The capital elements of future lease obligations are recorded as liabilities, while the interest elements are charged to the profit and loss account over the period of the leases to produce a constant periodic rate of interest on the remaining balance of the liability.

Operating leases Rentals under operating leases are charged on a straight-line basis over the lease term, even if the payments are not made on such a basis. Benefits received and receivable as an incentive to sign an operating lease are similarly spread on a straight-line basis over the lease term. Borrowing costs capitalised Borrowing costs which are directly attributable to the construction of qualifying tangible fixed assets are capitalised as part of the cost of those assets. Qualifying tangible fixed assets are considered to be those of significant size or complexity, which typically are under construction for in excess of one year and/or where project costs exceed a pre-determined threshold. The commencement of capitalisation begins when both finance costs and expenditures for the asset are being incurred and activities that are necessary to get the asset ready for use are in progress. Capitalisation ceases when substantially all the activities that are necessary to get the asset ready for use are complete. Borrowing costs are not capitalised in respect of construction projects which do not meet the defined thresholds or relate to replacement expenditure. Grants and contributions Customer contributions for connections to the network and for replacement expenditure diversions are capital grants. National Insurance Contributions (NIC) grants are considered revenue grants. Capital grants in respect of additions to fixed assets are treated as deferred income and released to the profit and loss account over the estimated useful lives of the related assets. Revenue grants and contributions are credited to the profit and loss account in the year to which they relate. Deferred income in respect of both revenue grants and contributions is included separately on the face of the balance sheet due to their materiality. Other deferred income items which are not considered as material are shown separately in note 17. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are discounted where the impact of discounting the expected future cash flows is material.

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basis using the projected unit credit method. The actuarial valuations are obtained at least triennially and are updated at each balance sheet date.


60

SGN Annual Report & Financial Statements 2018

Notes to the financial statements for the year ended 31 March 2018 continued 1. Principal accounting policies (continued) Financial instruments FRS 102 sections 11 and 12 give an accounting policy choice for financial instruments. The Group has chosen to apply the recognition and measurement provisions of IAS 39 (as adopted for use in the EU) and the disclosure requirements of FRS 102 in respect of financial instruments. Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the instrument. Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. The Group’s funding, liquidity and exposure to interest rate risks are managed within a framework of policies and guidelines authorised by the Board of Directors. In accordance with these policies financial derivative instruments are used to manage interest rate and currency exposure. Where appropriate these instruments are recorded at fair value and accounted for as described below.

Effective interest method The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period. Income and expense is recognised on an effective interest basis for debt instruments other than those financial assets designated as at ‘fair value through profit or loss’ (FVTPL).

Financial assets Investments are recognised and derecognised on a trade date where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned and are initially measured at fair value, plus transaction costs, except for those financial assets classified as FVTPL, which are initially measured at fair value. Financial assets at the balance sheet date are classified into the following specified categories: financial assets at FVTPL, ‘held-to-maturity’ investments, ‘available-for-sale’ (AFS) financial assets and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Impairment of financial assets For financial assets carried at amortised cost, the amount of an impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate. For financial assets carried at cost less impairment, the impairment loss is the difference between the asset’s carrying amount and the best estimate of the amount that would be received for the asset if it were to be sold at the reporting date. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade debtors. Where indicators exist for a decrease in impairment loss, and the decrease can be related objectively to an event occurring after the impairment was recognised, the prior impairment loss is tested to determine reversal. An impairment loss is reversed on an individual impaired financial asset to the extent that the revised recoverable value does not lead to a revised carrying amount higher than the carrying value had no impairment been recognised.

Derecognition of financial assets The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. Trade debtors Trade debtors are initially recognised at fair value. The carrying amount is reduced through the use of provision. Appropriate provision for estimated irrecoverable amounts are recognised where the estimated cash flows are less


SGN Annual Report & Financial Statements 2018

61

Cash Cash comprises cash on hand and demand deposits, which are those deposits, which are repayable on demand and available within 24 hours (one day) without penalty. Financial liabilities Financial liabilities are classified as either financial liabilities at ‘FVTPL’ or ‘other financial liabilities’. Financial liabilities at FVTPL Financial liabilities are classified as at FVTPL where the financial liability is either held for trading or it is designated as at FVTPL. A financial liability is classified as held for trading if: • It has been incurred principally for the purpose of disposal in the near future; or •  It is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or • It is a derivative that is not designated and effective as a hedging instrument. A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initial recognition if: • S  uch designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or •  The financial liability forms part of a Group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy and information about the Group is provided internally on that basis; or • It forms part of a contract containing one or more embedded derivatives and IAS 39 permits the entire combined contract (asset or liability) to be designated as at FVTPL. Financial liabilities at FVTPL are stated at fair value, with any resultant gain or loss recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability.

Other financial liabilities Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. De-recognition of financial liabilities The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire. Derivative financial instruments and hedge accounting The Group uses interest rate swaps and foreign exchange forward contracts to hedge interest rate and foreign currency risk arising on debt instruments. On inception of the hedge relationship the Group documents the relationships between the hedged item and the hedging instrument along with the risk management objectives and its strategy for undertaking various transactions. Furthermore, at inception of the hedge and on an ongoing basis the Group documents whether the hedging relationship is highly effective. Changes in fair value of derivatives that are designated and are effective as hedges of future cash flows are recognised directly in equity within the hedge reserve. The ineffective portion of the hedge is recognised through the profit and loss account. Changes in the fair value of derivatives that do not qualify for hedge accounting are recognised in the profit and loss account as they arise. Hedge accounting is discontinued when the hedge instrument expires or is terminated. Financial assets and financial liabilities are offset where they are settled net as a matter of practice and there is legal right to offset.

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than the carrying amount. Subsequent recoveries of amounts previously written off are credited against the provision account. Changes in the carrying amount of the provision account are recognised in profit or loss.


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SGN Annual Report & Financial Statements 2018

Notes to the financial statements for the year ended 31 March 2018 continued 2. Critical accounting judgements and key sources of estimation uncertainty In the application of the Group’s accounting policies, which are described in note 1, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years. Critical accounting judgements a. Cost classification – the allocation of overhead costs to capital investment projects is subject to accounting judgement, particularly around the amount of time spent on different activities. Guidelines have been established, and a Cost Allocation Model is used as part of a process to determine the split of attributable overheads between capital expenditure and operating expenditure. b. Componentisation of replacement expenditure – as set out in note 1e, capitalised replacement expenditure is allocated to mains and services components with a range of useful economic lives between 55 and 65 years. On transition to FRS 102, all replacement expenditure incurred since 2005 has been assessed and allocated on an appropriate and relevant basis where replacement projects have involved multiple activities, judgement has been exercised to determine the appropriate accounts. Key source of estimation uncertainty a. Useful lives of assets and residual value – in assessing the estimate of economic useful lives and residual value, consideration is given to the economic life of the gas industry. The depreciation policy is set out in note 1. b. Retirement benefit schemes – the assumptions used in accounting for the defined benefit pension scheme are based on estimates and are subject to uncertainties. These assumptions are set out in note 27 and include: the discount rate on scheme liabilities, mortality rates, pension increases, salary increases and inflation. The Group takes advice from independent actuaries on the appropriateness of these assumptions. c. Valuation of financial instruments – where financial instruments are recognised at fair value there are uncertainties in forward yield curves used in discounted cash flow calculations. d. Environmental provision – in assessing the degree of contamination at the various sites estimation is required where elements of the contamination are underground. In these cases, it is difficult to assess with any certainty the extent of the contamination. The discount rate is also a source of estimation. See note 20. e. Revenue recognition – turnover includes an assessment of transportation services supplied to customers between the date of the last meter reading and the year end. Where revenues received or receivable differ from the amount permitted by regulatory agreements, adjustments will be made to future prices to reflect this over or under recovery.

3. Segmental reporting Turnover arises entirely in the United Kingdom and is attributable to the continuing activity of transportation of natural gas and the provision of related services, which the Directors consider a single class of business.

4. Operating profit and net operating costs 2018 £m

2017 £m

Turnover

1,156.3

1,125.0

Distribution costs

(688.8)

(593.9)

(4.6)

(6.0)

Loss on disposal of fixed assets Other operating income Total net operating costs Operating profit

8.4

7.8

(685.0)

(592.1)

471.3

532.9

Distribution costs include the costs of operating the distribution network together with depreciation and goodwill amortisation.


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63

Group profit before taxation is stated after charging/(crediting): 2018 £m

2017 £m

Auditor’s remuneration

0.3

0.5

Amortisation of goodwill

9.5

9.5

14.0

18.8

158.7

151.4

Amortisation of intangible assets Depreciation of tangible fixed assets

(8.4)

(7.8)

Loss on disposal of fixed assets

4.6

6.0

Rental under operating leases – other assets

3.7

2.2

Amortisation of customer contributions

Auditor’s remuneration for the Group comprises £146,000 (2017: £120,000) in respect of statutory audit services, £100,000 (2017: £89,000) in respect of other services pursuant to legislation, £nil (2017: £32,000) in respect of other assurance services, and £nil (2017: £175,000) in respect of IT consultancy services. Auditor’s remuneration in respect of statutory audit services for the Company amounted to £15,000 (2017: £28,000). This forms part of the total auditor’s remuneration above. All current year balances are due to KPMG, the Group’s new auditors. The prior balances were due to Deloitte, who have since been rotated.

6. Employee information and Directors’ emoluments The Group had 3,829 full time equivalent employees as of 31 March 2018 (2017: 3,789). The average monthly number of full time equivalent employees during the year was 3,821 (2017: 3,816). The Directors received aggregate remuneration of £90,000 (2017: £64,000) for their services to the Group during the year. No retirement benefits are accruing in the year or in the prior year to any Directors under money purchase or defined benefit schemes, in respect of their services to the Group. Staff costs for the Group during the year are as follows: 2018 £m

2017 £m

157.0

153.1

Staff costs Wages and salaries Social security costs Pension costs (see note 27)

17.1

16.4

29.2

29.7

203.3

199.2

2018 £m

2017 £m

The Company had eight employees as of 31 March 2018 (2017: eight).

7. Interest receivable and similar income

Interest receivable on short-term deposits Net defined benefit pension income (see note 27) Other interest receivable

0.3

1.3

0.6

2.6

0.6

1.5

3.9

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5. Profit before taxation


64

SGN Annual Report & Financial Statements 2018

Notes to the financial statements for the year ended 31 March 2018 continued 8. Interest payable and similar expenses

Bank loans Net defined benefit pension charge (see note 27) Index-linked bond interest Other interest payable on bonds Shareholders’ loan interest (see note 28)

2018 £m

2017 £m

0.2

0.2

51.2

34.0

120.9

123.9

45.6

45.8

Other interest payable

0.1

1.4

Unwind of discounts

2.2

2.0

Movement on financial derivatives

4.6

9.1

224.8

216.4

2018 £m

2017 £m

77.0

9. Tax charge/(credit) on profit a) Analysis of the tax charge/(credit) on profit Current tax UK corporation tax on profits for the year

65.2

Adjustment in respect of previous years

(3.4)

(3.4)

Total current tax charge

61.8

73.6

Deferred tax Origination and reversal of timing differences Effect of change in tax rate

(10.5) –

(9.7) (44.3)

Adjustments in respect of previous years

2.4

(13.7)

Total deferred tax credit

(8.1)

(67.7)

Total tax charge/(credit) on profit b) Factors affecting the total tax charge/(credit) for the year Profit before tax Profit multiplied by standard rate of corporation tax in the UK of 19% (2017: 20%)

53.7

5.9

2018 £m

2017 £m

248.0

320.4

47.1

64.1

0.8

0.7

Effects of: Expenses not deductible for tax purposes

1.8

1.9

Depreciation of non qualifying assets

0.6

0.5

Fixed asset disposal – non qualifying

(0.3)

0.1

Non deductible goodwill

Corporate interest restriction

4.7

Adjustment in respect of prior years

(1.0)

Effect of change in tax rate on deferred tax balance Total tax charge/(credit) on profit

– 53.7

– (17.1) (44.3) 5.9

A reduction in the UK corporation tax rate from 21% to 20% (effective from 1 April 2015) was substantively enacted on 2 July 2013. Further reductions to 19% (effective from 1 April 2017) and to 18% (effective 1 April 2020) were substantively enacted on 26 October 2015, and an additional reduction to 17% (effective 1 April 2020) was substantively enacted on 6 September 2016. This will reduce the Company’s future current tax charge accordingly. The deferred tax asset at 31 March 2018 has been calculated based on these rates. Finance (No 2) Act 2015 introduced legislation to reduce the main rate of corporation tax from 20% to 19% from 1 April 2017 and Finance Bill 2016 reduced the main rate of corporation tax to 17% from 1 April 2020.


65

SGN Annual Report & Financial Statements 2018

There is no expiry date on timing differences, unused tax losses or tax credits.

10. Profit of the Company for the financial year The Company’s profit for the year amounted to £1,837.2m (2017: £151.9m), of which £1,376m relates to the clearance of intercompany balances with Scotland and Southern Gas Networks. The intercompany interest payable during the year ended 31 March 2018 amounted to £2.5m (2017: £6.3m) in the Company. The intercompany interest receivable during the year ended 31 March 2018 amounted to £2.0m (2017: £2.4m) in the Company. In accordance with the exemption available under section 408 of the Companies Act 2006, no separate profit and loss account is presented in respect of the Company.

11. Dividends 2018 £m

2017 £m

286.0

200.0

Goodwill £m

Software £m

Total £m

477.6

167.3

644.9

10.4

10.4

477.6

177.7

655.3

113.3

104.1

217.4

9.6

14.0

23.6

122.9

118.2

241.0

At 31 March 2018

354.7

59.6

414.3

At 31 March 2017

364.3

63.2

427.5

Equity shares Interim dividends paid of 60.8446p (2017: 42.5487p)

12. Intangible fixed assets

Group Cost At 1 April 2017 Additions At 31 March 2018 Amortisation At 1 April 2017 Charge for the year At 31 March 2018 Net book value

The goodwill, which arose on the acquisitions of Scotland Gas Networks plc and Southern Gas Networks plc, is being amortised on a straight-line basis over 50 years. 50 years is the expected life of the network and is consistent with the long-term outlook of the Regulator. A review for impairment of goodwill is carried out at the end of each financial year. No impairment loss has been recorded in either the current or the prior year.

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As these changes had been substantively enacted at 31 March 2017, deferred tax was calculated accordingly at that date and this has had nil effect on the Group’s deferred tax liability at 31 March 2018 (2017: £42.4m).


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SGN Annual Report & Financial Statements 2018

Notes to the financial statements for the year ended 31 March 2018 continued 13. Tangible fixed assets

Group

Short leasehold properties £m

Freehold properties £m

Plant and machinery £m

Motor vehicles and office equipment £m

Total £m

Cost 0.7

105.4

6,970.0

133.7

7,209.8

Additions

At 1 April 2017

8.7

374.6

9.0

392.3

Disposals

(0.1)

At 31 March 2018

(14.0)

(0.3)

(14.4)

0.7

114.0

7,330.6

142.4

7,587.7

Depreciation 0.1

26.4

1,173.2

85.4

1,285.1

Charge for the year

At 1 April 2017

4.8

142.2

11.7

158.7

Disposals

0.1

31.2

1,310.0

96.8

At 31 March 2018

0.6

82.8

6,020.6

45.6

6,149.6

At 31 March 2017

0.6

79.0

5,796.8

48.3

5,924.7

At 31 March 2018

(5.4)

(0.3)

(5.7) 1,438.1

Net book value

There is no security held against the fixed assets. Within motor vehicles and office equipment are assets held under finance leases with a net book value of £nil (2017: £0.9m). The Company had no tangible fixed assets in either year. The Group has received customer contributions relating to plant and machinery. In accordance with the Group’s accounting policy the assets are capitalised within fixed assets and the contributions are recognised as deferred income in the balance sheet. The connections contributions are from customers being connected to the network and replacement contributions are related to the diversion of gas mains. The deferred income is released to the profit and loss account over the estimated lives of the related assets. The amount deferred under this policy was as follows:

Group

Connections £m

Replacement £m

Total 2018 £m

Total 2017 £m

Deferred income 222.7

119.3

342.0

317.5

Customer contributions received in year

18.2

8.8

27.0

32.3

Amortisation in year

(6.2)

(2.2)

(8.4)

Customer contributions brought forward

234.7 The Company has no deferred income.

125.9

360.6

(7.8) 342.0


SGN Annual Report & Financial Statements 2018

67

Cost or valuation and net book value

Group £m

Company £m

2,028.4

0.2

0.2

2,028.4

Shares in Group undertakings At 1 April 2017 and at 31 March 2018 Other investments At 1 April 2017 and at 31 March 2018

Other fixed asset investments Other fixed asset investments relate to the Group’s investments in Xoserve Limited, which provides transportation transactional services on behalf of all the major gas network transportation companies. The Group holds 23.02% (2017: 23.02%) of the ordinary shares of Xoserve Limited. Interests in Group undertakings Details of the subsidiary undertakings at the end of the year, which are directly wholly-owned by the Company, are as follows: Name of subsidiary

Description of shares held

Country of registration

Principal activities

SGN PledgeCo Limited

2,517,000,001 ordinary shares of £0.01

England & Wales

Holding company

SGN Place Limited

1 ordinary share of £1

England & Wales

Holding company

SGN Connections Limited

1 ordinary share of £1

England & Wales

Supply of gas connections services

SGN Commercial Services Limited

1 ordinary share of £1

England & Wales

Meter asset manager and supply of commercial services

SGN Smart Limited

1 ordinary share of £1

England & Wales

Supply of managed services

The registered address of Scotland Gas Networks plc is Axis House, 5 Lonehead Drive, Newbridge, Edinburgh, EH28 8TG. The registered address of all other subsidiaries above is St Lawrence House, Station Approach, Horley, Surrey, RH6 9HJ. Details of the subsidiary undertakings at the end of the year, which are indirectly wholly-owned by the Company, are as follows: • • • • • • • • • • • • • • • • •

Southern Gas Networks plc Scotland Gas Networks plc SGN Contracting Limited SGN Natural Gas Limited SGN MidCo Limited SGN Property Holdings Limited SGN Property Services Limited SGN Belvedere Limited SGN Brighton Limited SGN Southampton Limited SGN Epsom Limited SGN Greenwich Limited SGN Motspur Park Limited SGN Old Kent Road Limited SGN Rotherhithe Limited SGN Wandsworth Limited SGN Kennington Limited

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14. Fixed asset investments


68

SGN Annual Report & Financial Statements 2018

Notes to the financial statements for the year ended 31 March 2018 continued 15. Inventories Group

Company

2018 £m

2017 £m

2018 £m

2017 £m

11.8

26.8

1.5

1.0

13.3

27.8

2018 £m

2017 £m

2018 £m

2017 £m

Trade debtors

95.4

96.7

Prepayments and accrued income

75.9

18.8

4.3

8.8

121.5

175.6

124.3

121.5

2018 £m

2017 £m

2018 £m

2017 £m

Work in progress Finished goods

16. Debtors Group

Company

Amounts falling due within one year

Derivative financial instruments (see note 19) Amounts owed by Group undertakings

17. Creditors: amounts falling due within one year Group

Company

4.6

299.8

£25m 3.12% fixed rate loan due 2018

25.0

£25m 3.25% fixed rate loan due 2018

25.0

£75m floating rate loan note due 2018

75.0

£50m floating rate loan note due 2018

50.0

Bank facility

57.2

0.3

21.8

24.8

1,229.7

54.7

63.6

0.3

0.2

17.5

19.6

56.6

60.2

9.4

15.3

134.2

108.8

29.3

26.2

2.6

2.3

848.7

310.4

9.7

1,245.2

Bank loans and overdrafts £300m 5.125% fixed rate loan due 2018

Obligations under finance leases and hire purchase contracts Trade creditors Amounts owed to Group undertakings Other taxation and social security Other creditors Accrued interest Other accruals Deferred income Derivative financial instruments (see note 19)

The amounts owed to Group undertakings represents loans amounting to £nil (2017: £1,289.5m), which incur interest at 0.5% from 1 April 2016 to 3 August 2016, at 0.25% from 4 August 2016 to 20 December 2017, and at base rate from 21 December 2017 to 31 March 2018; and trading balances owed by Group companies of £47.9m (2017: £59.8m).


69

SGN Annual Report & Financial Statements 2018

Group

Company

2018 £m

2017 £m

2018 £m

2017 £m

£165m 2.127% index-linked due 2022

238.2

229.5

£250m 2.013% index-linked due 2035

240.4

231.5

£150m 2.066% index-linked due 2025

216.5

208.6

Bonds: Fixed rate and index-linked:

£15m 2.580% index-linked due 2028

19.5

18.8

£125m 2.32% index-linked due 2039

161.2

155.5

£250m 3.25% fixed rate due 2027

247.6

247.3

£300m 5.125% fixed rate due 2018

299.6

£225m 4.875% fixed rate due 2034

224.6

224.5

£215m 4.875% fixed rate due 2020

214.8

214.7

£375m 4.875% fixed rate due 2029

374.1

374.0

£225m 6.38% fixed rate due 2040

223.8

223.8

£25m 3.12% fixed rate due 2018

25.0

£25m 3.25% fixed rate due 2018

25.0

298.6

298.4

£25m 3.634% fixed rate due 2020

25.0

25.0

£50m 3.765% fixed rate due 2020

50.0

50.0

£35m 2.407% fixed rate due 2025

35.0

35.0

£350m 2.500% fixed rate due 2025

346.4

346.9

£400m 3.1% fixed rate note due 2036

396.2

£100m 2.9% fixed rate note due 2030

99.1

183.4

£15m 3.11% fixed rate note due 2038

14.9

£87.5m index-linked due 2038

88.0

£37.5m index-linked due 2034

37.7

3,735.0

3,233.1

79.7

79.7

75.0

£125m floating rate loan note due 2025

125.0

125.0

£80m floating rate loan note due 2026

80.0

80.0

£50m floating rate loan note due 2019

50.0

£90m floating rate loan note due 2026

90.0

90.0

£70m floating rate loan note due 2026

70.0

70.0

444.7

569.7

4,179.7

3,802.8

327.6

533.6

327.6

533.6

£300m 4.875% fixed rate due 2023

£185m 3.02% fixed rate note due 2033

Floating rates: £80m floating rate loan note due 2043 £75m floating rate loan note due 2018

Total bonds Shareholders’ loans (see note 28) Derivative financial liabilities – Mirror swaps (see note 19)

59.6

72.4

Derivative financial instruments (see note 19)

61.2

58.8

4,628.1

4,467.6

327.6

533.6

Obligations under finance leases and hire purchase contracts

The total revolving credit facility is £360.0m and expires in March 2021. The facility was undrawn at 31 March 2018. The shareholder loans, which are subordinated, are redeemable at par on 31 May 2025 and carry a fixed interest rate of 8.6%. The Company may, upon giving due notice, elect to pay some or all of the interest payable through the issuance of further loans to shareholders.

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18. Creditors: amounts falling due after more than one year


70

SGN Annual Report & Financial Statements 2018

Notes to the financial statements for the year ended 31 March 2018 continued 18. Creditors: amounts falling due after more than one year (continued) Maturity of borrowings

Group 2018 £m

2017 £m

Due within one year

532.0

4.9

Between one and five years

826.6

764.3

After five years

3,683.7

3,572.1

5,042.3

4,341.3

The Company’s borrowings all fall due on 9 April 2043. The above borrowings are unsecured and are stated after the deduction of unamortised issue costs of £15.6m (2017: £12.5m). These costs together with the interest expense are allocated to the profit and loss account over the term of the borrowings. Interest is calculated using the effective interest rate method. Certain interest costs in respect of index-linked bonds are not payable until the principal amount of the bond is repaid and are included within the carrying value of the borrowings stated above. The amount included in the carrying value of the borrowings at 31 March 2018 is £256.6m (2017: £253.2m).

19. Financial instruments The Group’s funding, liquidity and exposure to interest rate, foreign currency exchange and credit risks are managed within a framework of policies and guidelines authorised by the Board of Directors. In accordance with these policies and in accordance with covenants set out as part of the prospectus issued by the Company for the medium term note programme, financial derivatives are used to manage financial exposures. The Treasury function is responsible for managing banking and liquidity requirements of the Group, risk management relating to interest rate and foreign exchange exposures and for managing the credit risk relating to banking counterparties with which it transacts. The function’s operations are governed by policies determined by the Board.


SGN Annual Report & Financial Statements 2018

71

Book value 2018 £m

2017 £m

95.4

96.7

371.6

11.8

Financial assets held at amortised cost Trade debtors(1) Short term deposits(1) Cash

9.7

7.9

476.7

116.4

4.3

8.8

Financial assets at fair value Derivative financial instruments through the profit and loss account Available for sale financial assets(1) Total financial assets

0.2

0.2

481.2

125.4

(1) The carrying amount of financial assets approximates to their fair value.

Book value 2018 £m

2017 £m

Financial liabilities held at amortised cost Trade creditors

21.8

24.8

Accrued interest

56.6

60.2

134.2

108.8

Other accruals Bank loans and overdrafts

4.6

Finance lease liabilities

0.3

4,714.8

3,802.8

Bonds Shareholder loans

327.6

533.6

5,255.0

4,535.1

Financial liabilities at fair value Derivative financial instruments in designated hedging relationships

63.8

61.1

Financial derivatives – mirror swaps

59.6

72.4

Total financial liabilities

123.4

133.5

5,378.4

4,668.6

The carrying amount of financial liabilities approximates to their fair value except for bonds and shareholder loans, the fair value of which is disclosed on the next page. The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable: • Level 1: Valued using unadjusted quoted prices in active markets for identified financial instruments; •  Level 2: Valued using techniques based significantly on observable market data. Instruments in this category are valued using valuation techniques where all of the inputs that have a significant impact on the valuation are directly or indirectly based on observable market data; •  Level 3: Instruments in this category have been valued using a valuation technique where at least one input (which has a significant input on the financial instruments’ valuation) is not based on observable market data. Where inputs can be observed from market data with not undue cost and effort, the observed input is used. Otherwise management determines a reasonable estimate for the input.

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Categories of financial instruments The categories of financial assets and liabilities held by the Group were as follows:


72

SGN Annual Report & Financial Statements 2018

Notes to the financial statements for the year ended 31 March 2018 continued 19. Financial instruments (continued) An analysis of financial assets and liabilities that are recorded at fair value at 31 March 2018 is as follows: 2018 Level 1 £m

Level 2 £m

Level 3 £m

Total £m

Financial assets At fair value through profit and loss – other financial assets (derivatives)

4.3

4.3

4.3

4.3

Financial liabilities At fair value through profit and loss – other financial liabilities (onerous contract swaps)

59.6

59.6

Derivatives used for hedging

63.8

63.8

123.4

123.4

Level 1 £m

Level 2 £m

Level 3 £m

Total £m

8.8

8.8

8.8

8.8

– other financial liabilities (onerous contract swaps)

72.4

72.4

Derivatives used for hedging

61.1

61.1

133.5

133.5

2017

Financial assets At fair value through profit and loss – other financial assets (derivatives)

Financial liabilities At fair value through profit and loss

Mirror swaps In 2005 the Group entered into interest rate swap contracts to fix the Group’s interest cost relating to (floating rate) bridging loans which were in place at the time. In October 2005, permanent long-term capital markets debt was issued to replace floating rate bridging loans. At that point these swaps became obsolete and consequently matching swaps were transacted (under which the Group received fixed rate interest) to close out the position. The crystallised loss was recognised in the profit and loss and a discounted balance equal to the market value of the matched swaps was established within creditors. At 31 March 2018 the mirror swap loss was £59.6m (2017: £72.4m). Fair values The Group’s financial instruments recorded at amortised cost are shown below together with their fair values: 31 March 2018

Bonds Facility Shareholder loans

31 March 2017

Book value £m

Fair value £m

Book value £m

Fair value £m

4,657.6

5,609.8

3,802.8

4,881.3

57.2

57.2

327.6

601.1

533.6

651.2

5,042.4

6,268.1

4,336.4

5,532.5

Fair values of bonds and shareholder loans have been determined by reference to closing quoted market values where available or otherwise by discounting future cash flows at their market interest rate. The carrying value of all other financial assets and liabilities approximates to their book value.


73

SGN Annual Report & Financial Statements 2018

Credit risk Credit risk is the risk that a counterparty will default on its obligation resulting in financial loss to the Company. The maximum exposure to credit risk is the carrying value of financial assets as follows:

Net trade receivables Financial derivative assets Short term deposits Cash

2018 £m

2017 £m

95.4

96.7

4.3

8.8

371.6

11.8

9.7

7.9

481.0

125.2

Counterparty credit risks arising from financial derivatives are managed through the maintenance of financial limits, subject to a minimum credit rating of ‘A’ or equivalent allocated by a recognised major ratings group. In respect of short-term cash management, counterparties are subject to review and approval according to defined criteria. The Group conducted a review of counterparty credit risk and its own credit risk, and concluded that an adjustment was required to reflect the net credit risk in arriving at the fair value of financial instruments stated in the balance sheet. The net credit risk adjustment reduced liabilities by £6.4m (2017: £10.0m). £1.7m (2017: £1.8m) was charged to the profit and loss account. £4.7m (2017: £8.2m) was charged to other comprehensive income. A discounted cash flow method was used. At 31 March 2018 the Group was holding collateral with a fair value of £2.9m (2017: £5.9m). Trade debtors predominantly relate to transportation income from gas shippers. Credit risk arising from the Group’s regulated business is managed in accordance with industry standards as set out by the Unified Network Code. The Group contracts with shippers having investment grade ratings only, or where suitable collateral or cash prepayments are made. Trade debtors from non-transportation income relates to consumers and businesses in relation to works for alterations, diversions, meters or damage repairs. In the year ending 31 March 2018 non-transportation debtors (£16.0m) were 17% (2016/17: 11%) of net trade debtors (£95.4m). An impairment allowance has been set aside according to the Group’s impairment policy. The largest transportation debtor is £20.6m (2017: £26.3m). There is no material credit exposure to any one customer. The ageing of trade debtors net of impairment allowance is:

Not past due

2018 £m

2017 £m

95.4

96.7

Past due 0-30 days

Past due 31-90 days

Past due over 90 days

95.4

96.7

The maximum exposure to credit risk at the reporting date is the fair value of each class of debtors mentioned above. At the end of each reporting year a review of the provision for bad and doubtful debts is performed taking into account the age, status and risk of recovery for each debtor.

Liquidity risk Liquidity risk, the risk that the Group will have insufficient funds to meet liabilities as they fall due, is managed through an appropriate liquidity risk framework for the management of the Group’s short, medium and long-term funding and liquidity requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.

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Risks Exposure to counterparty credit risk, interest rate risk, currency risk and liquidity risk arise in the normal course of business. The extent of any exposures and the policies implemented to manage them are set out below:


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SGN Annual Report & Financial Statements 2018

Notes to the financial statements for the year ended 31 March 2018 continued 19. Financial instruments (continued) The contractual maturity of the Group’s financial assets and liabilities are shown in the following tables. The amounts shown are gross cash inflows/(outflows) with the exception of financial derivatives settled on a net basis where the amounts represent undiscounted net cash flows. When the amount payable is not fixed, the amount disclosed is determined by reference to relevant conditions existing at the reporting date. 2018

0-6 months £m

6-12 months £m

1-2 years £m

2-5 years £m

>5 years £m

(28.2)

(84.5)

(398.0)

Contractual cash flows £m

Interest/ discounting £m

Carrying value £m

Financial liabilities loans  and borrowings Shareholder loans

(14.1)

(14.1) –

(538.9)

211.3

(57.2)

(57.2)

(4,967.7)

(6,666.1)

2,008.5

(4,657.6)

(949.4)

(5,365.7)

(7,262.2)

2,219.8

(5,042.4)

Facility

(57.2)

Bonds

(40.7)

(581.9)

(210.9)

(864.9)

(112.0)

(596.0)

(239.1)

(327.6)

Derivative financial  liabilities Hedging interest rate swaps

(2.8)

3.6

(3.8)

(11.2)

(75.0)

(89.2)

29.7

(59.5)

Onerous contract swaps

(6.4)

(6.5)

(12.9)

(22.2)

(15.7)

(63.7)

4.1

(59.6)

(9.2)

(2.9)

(16.7)

(33.4)

(90.7)

(152.9)

33.8

(119.1)

Other financial liabilities Trade and other creditors Total financial liabilities

(21.8) (143.0)

– (598.9)

– (255.8)

– (982.8)

– (5,456.4)

(21.8)

(21.8)

(7,436.9)

2,253.6

(5,183.3)

The Group expects to meet its obligations from cash balances, operating cash flows and refinancing. The corresponding amounts for 2017 were as follows: 2017

0-6 months £m

6-12 months £m

1-2 years £m

2-5 years £m

>5 years £m

Contractual cash flows £m

Interest/ discounting £m

Carrying value £m

Financial liabilities loans  and borrowings (4.6)

(4.6)

Shareholder loans

Bank overdrafts

(22.9)

(22.9)

(45.9)

(137.7)

(694.2)

(923.6)

390.0

(533.6)

Bonds

(29.2)

(101.4)

(605.8)

(614.6)

(4,150.2)

(5,501.2)

1,698.4

(3,802.8)

(0.2)

(0.2)

(0.4)

0.1

(0.3)

(56.9)

(124.5)

(4,844.4)

(6,429.8)

2,088.5

(4,341.3)

Finance lease liabilities

(4.6)

– (651.9)

– (752.3)

Derivative financial  liabilities Hedging interest rate swaps

(2.9)

3.6

(0.1)

(11.9)

(83.1)

(94.4)

42.1

(52.3)

Onerous contract swaps

(6.4)

(6.5)

(12.9)

(28.8)

(22.0)

(76.6)

4.2

(72.4)

(9.3)

(2.9)

(13.0)

(40.7)

(105.1)

(171.0)

46.3

(124.7)

Other financial liabilities Trade and other creditors

(24.8)

Total financial liabilities

(91.0)

– (127.4)

– (664.7)

– (793.0)

– (4,949.5)

(24.8)

(24.8)

(6,625.6)

2,134.8

(4,490.8)


75

SGN Annual Report & Financial Statements 2018

The Group enters into cross currency swap agreements from time to time with the effect of converting contractual commitments denominated in foreign currencies into Pound Sterling obligations. At 31 March 2018 the Group had minimal foreign currency exposure in relation to purchase contract commitments or bond financing.

Inflation risk The Group’s index-linked borrowings and interest liabilities are exposed to a risk of change in the carrying value due to changes in the UK Retail Price Index (‘RPI’). This form of liability is a good match to the Group’s regulatory asset value which is also index-linked to RPI due to the pricing mechanism imposed by the Regulator. The turnover capacity charges are also linked to RPI. By matching liabilities and assets, index-linked debt hedges the exposure to changes in RPI and delivers cash flow benefit. The compensation for the inflation risk is recorded as payable on the balance sheet with the principal, as opposed to a cash payment. The following table shows the illustrative effect on the profit and loss account that would result from a 1% movement in RPI before the effects of tax. 2018 £m

2017 £m

Impact on profit and loss Index-linked bonds accretion Transportation income Total

8.4

8.3

(10.3)

(10.6)

(1.9)

(2.3)

Interest rate risk The Group limits the impact of interest rate risk by implementing a policy of a minimum of 75% of borrowing being either at fixed or index-linked, excluding borrowing from shareholders. Derivative financial instruments are transacted to hedge risk in accordance with this policy. The impact of a change in interest rates on financial derivatives is dependent on whether their designation is fair value through profit and loss, or if designated as cash flow hedges then the impact will be through equity. The following table represents the annualised impact (net of deferred tax) of 100 basis point change in short-term interest rates at the reporting date in relation to equity and profit and loss account. The analysis assumes that all other variables remain constant. 2018 £m

2017 £m

Floating rate instruments

(5.7)

(5.7)

Fixed to floating swaps

(1.5)

(1.5)

(7.2)

(7.2)

0.8

0.8

Impact on profit and loss account

Impact on equity Floating to fixed swaps

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Currency risk The Group generally transacts in Pound Sterling denominated currency with the exception of certain material purchases and bond financing.


76

SGN Annual Report & Financial Statements 2018

Notes to the financial statements for the year ended 31 March 2018 continued 19. Financial instruments (continued) Cash flow hedges Cash flow hedges comprise floating to fixed interest rate swaps of future interest payments relating to existing bonds. Receipts and payments for the swaps and the underlying bonds are exactly matched and in accordance with IAS 39 any gain or loss that is deferred to equity is recognised in profit or loss over the period that the floating rate interest payments impact on profit. In September 2012 the Company issued a £300m 12 year fixed rate bond. Prior to the bond issue, from July to August 2012 the Company entered into six floating to fixed rate 10 year swaps of £25m each, to hedge the fixed interest rates prevalent in the market. After the issue of fixed rate bonds, the floating to fixed rate swaps were cancelled and a loss of £8.2m was recognised. The swaps were entered into to hedge future interest outflows on the bond and therefore were effective hedging instruments. In accordance with the requirements of IAS 39 the loss arising on settlement of the swaps has been recorded in equity. The loss will be recycled to profit and loss account over 10 years. As at 31 March 2018 the unamortised hedge loss balance in equity was £2.9m. The movement before deferred tax taken to equity in respect of cash flow hedges in the year was a £2.0m loss (2017: £6.6m loss). The hedge reserve movement is expected to unwind in profit or loss over the life of the swaps. The notional principal amount of the outstanding cashflow hedges at 31 March 2018 was £80.0m (2017: £80.0m). At 31 March 2018 the fixed interest rate is 6.6% and floating rate 1.6%, three month Libor plus 100bp. Movement in derivatives included in profit and loss account The net movement included within interest in the profit and loss account for financial derivatives is as follows:

Net fair value gain/(loss) Net amounts received/(paid) Net movement in financial derivatives

2018 £m

2017 £m

(4.5)

(9.0)

0.6

4.9

(3.9)

(4.1)

In addition the movement on onerous swap contracts in the year was a loss of £0.1m (2017: loss of £1.8m) included in interest payable.

20. Provisions for liabilities Environmental £m

Deferred tax £m

Other provisions £m

Total £m

766.1

Group At 1 April 2017

38.9

720.4

6.8

Arising during the year

3.4

1.8

5.2

Utilised during the year

(0.6)

(0.6)

Net movement in deferred tax Amortisation of discount At 31 March 2018

21.5

2.0

0.3

21.5 2.3

44.3

741.9

8.3

794.5

Environmental The environmental provision represents the Directors’ best estimate of environmental restoration costs, where the Group has a legal obligation to restore sites at the balance sheet date. The provision has been discounted and is stated at the present value of the estimated expenditure to settle the obligation. This provision is expected to be utilised over the next thirteen years.


SGN Annual Report & Financial Statements 2018

77

Deferred tax The net movement on the deferred tax provision has arisen mainly as a result of the movement on cash flow hedges during the year, offset by other movements in the year of which £8.0m (2017: £67.7m) is recorded as a credit to the profit and loss account and £29.6m (2017: £11.1m) is recorded as a loss (2017: gain) to the statement of comprehensive income. The Company has no provisions in either year. Deferred tax recognised in the financial statements is as follows: Group 2018 £m

(729.0)

Accelerated capital allowances Deferred tax on cash flow hedges Other timing differences Retirement benefit obligations

Company 2017 £m

2018 £m

2017 £m

10.9

10.3

9.2

8.5

(738.4)

(33.0)

(0.8)

(741.9)

(720.4)

The movement in provision for deferred tax is as follows: Group 2018 £m

(720.4)

At 1 April

2017 £m

(799.2)

8.1

Credited to profit and loss account

67.7

(29.6)

Credited/(charged) to other comprehensive income

(741.9)

At 31 March

11.1 (720.4)

The Group has unrecognised deferred tax assets in respect of unutilised tax losses of £239.2m (2017: £285.3m). Deferred tax assets have been recognised in respect of tax losses to the extent that it is considered probable that these assets will be recovered. The Company has not recognised deferred tax on £239.2m (2017: £285.3m) of unutilised tax losses. Deferred tax has been measured based upon corporation tax rates substantively enacted at the balance sheet date (information regarding rates of corporation tax can be found in note 9 to the financial statements).

21. Share capital 31 March 2018

31 March 2017

Number

Value £m Number

Value £m

‘A’ ordinary shares of 42.55p (2016: 42.55p) each

235,025,002

100.0 235,025,002

100.0

‘B’ ordinary shares of 42.55p (2016: 42.55p) each

117,512,501

50.0 117,512,501

50.0

‘C’ ordinary shares of 42.55p (2016: 42.55p) each

117,512,501

50.0 117,512,501

50.0

470,050,004

200.0 470,050,004

200.0

Allotted, called up and fully paid shares

Total

The ‘A’, ‘B’ and ‘C’ ordinary shares rank pari passu in all respects.

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Other provisions Other provisions includes asbestos related liabilities. The provision has been discounted and is stated at the present value of the estimated expenditure to settle the obligation. The provision is expected to be utilised over the next 32 years.


78

SGN Annual Report & Financial Statements 2018

Notes to the financial statements for the year ended 31 March 2018 continued 22. Reserves Hedge reserve Group £m

At 1 April 2017

(50.7)

Profit for the financial year Dividends paid on equity shares (see note 11) Movement on cash flow hedges Deferred tax on cash flow hedges

Group £m

Company £m

493.4

61.4

194.3

1,837.2

(286.0)

(286.0)

(2.0)

0.5

146.9

548.6

1,612.6

2018 £m

2017 £m

Actuarial gain on defined benefit pension scheme  (net of related tax) At 31 March 2018

Profit and loss account

Company £m

(52.2)

23. Reconciliation of movements in Group shareholders’ funds

Profit for the financial year Dividend paid on equity shares (see note 11)

194.3

314.5

(286.0)

(200.0)

(1.5)

Cash flow hedges (net of deferred tax)

146.9

Actuarial (loss)/gain on defined benefit pension scheme (net of related tax)

(5.9) (54.5)

53.7

54.1

Opening shareholders’ funds

642.7

588.6

Closing shareholders’ funds

696.4

642.7

Movement in shareholders’ funds

24. Operating lease commitments Total future minimum lease payments under non-cancellable operating leases are as follows: Other 2018 £m

Land and buildings 2017 £m

2018 £m

2017 £m

0.7

Within one year

2.7

1.7

0.6

Within two to five years

4.3

2.4

1.6

1.8

12.2

12.0

7.0

4.1

14.4

14.5

After five years

The Company has no operating lease commitments in either year.

25. Capital commitments Capital projects contracted for by the Group but not provided in the financial statements amounted to £41.4m at 31 March 2018 (2017: £32.7m). The Company has no capital commitments at 31 March 2018 (2017: £nil).


79

SGN Annual Report & Financial Statements 2018

A significant proportion of the Group’s employees are members of the Scotia Gas Networks Pension Scheme (‘the Scheme’). The Scheme provides final salary defined benefits for employees who joined the Lattice Group Scheme prior to 31 March 2002. A defined contribution section was added to the Lattice Group Scheme from 1 April 2002 for employees joining the Lattice Group Scheme from that date. Employees of the Group who were previously members of the Lattice Group Scheme transferred to the Scotia Gas Networks Pension Scheme on 1 December 2005. a) Defined benefit scheme The Scheme is operated by the Group and is funded with assets held in separate trustee administered funds. It is subject to independent valuations at least every three years, on the basis of which the qualified actuary determines the rate of employers’ contribution, which, together with the specified contributions payable by the employees and proceeds from the scheme’s assets, are expected to be sufficient to fund the benefits payable under the scheme. The latest full actuarial valuation was carried out as at 31 March 2015. In accordance with FRS 102, a limited actuarial review has been carried out by Hymans Robertson at 31 March 2018 using the projected unit method. The following financial assumptions have been used:

2018

2017

2016

2015

As at 31 March Discount rate

2.7%

2.7%

3.6%

3.3%

Retail price inflation

3.2%

3.3%

3.1%

3.2%

Consumer price inflation

2.2%

2.3%

2.1%

2.2%

Rate of increase of salaries

3.0%

3.1%

2.9%

3.9%

Rate of increase of pensions payment

3.2%

3.3%

3.1%

3.2%

The discount rate is based on the return of high quality corporate bonds. The assumptions relating to longevity underlying the pension liabilities reflect the characteristics of the Scheme membership (‘VitaCurves’) for base mortality with an allowance for further improvements in life expectancy in line with the medium cohort adjustments subject to a 1.5% p.a. underpin in the longevity assumption. The assumed life expectancy in years for a member once they reach age 65 is as follows: 2018 Male

2017 Female

Male

2016 Female

Male

Female

As at 31 March Members currently aged 65

22

24

24

25

24

25

Members currently aged 45

24

26

27

28

27

28

2018 £m

2017 £m

The fair value of the assets in the scheme and the present value of the liabilities in the scheme were: As at 31 March Equities

262.1

303.1

Government bonds (2)

352.7

295.7

Corporate bonds

282.3

375.3

Property

22.1

55.0

Cash

34.1

35.3

81.0

90.8

Total market value of assets

1,034.3

1,155.2

Actuarial value of liabilities

(840.3)

Surplus/(deficit) in scheme

194.0

Insurance contracts

(1,150.6) 4.6

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26. Pension commitments


80

SGN Annual Report & Financial Statements 2018

Notes to the financial statements for the year ended 31 March 2018 continued 26. Pension commitments (continued) The fair value of scheme assets at 31 March 2018 are based on the bid price where available. The fair value of property is based on the mid price and the value of the single unit price funds is based on the single unit price. To reduce the risk of volatility in the Scheme’s funding level, a liability driven investment (LDI) strategy forms part of the assets employed within the investment strategy of the Scheme. The LDI strategy provides c71% interest rate protection and c81.5% inflation protection as at 31 March 2018 with respect to the pension scheme liabilities of c.£1.34bn (valued using a UK government bond yield curve). The Scheme assets which provide this interest rate and inflation protection are managed by BlackRock and Goldman Sachs and include a variety of instruments e.g. UK government bonds (gilts), interest rate swaps, inflation swaps, gilt repos and corporate bonds. The Scheme has implemented a pensioner buy in which also contributes to the total interest rate and protection ratios referred to above. (2) Including LDI repurchase agreement liabilities

Movement in fair value of scheme assets At 1 April

2018 £m

2017 £m

1,155.2

1,042.0

Interest income

27.6

36.6

Contributions from the Group

35.3

40.7

Actuarial gains/(losses) Benefits paid As at 31 March Movement in fair value of scheme liabilities

20.1 (203.9)

197.6 (161.7)

1,034.3

1,155.2

2018 £m

2017 £m

(1,150.6)

(990.7)

Current service cost

(23.1)

(24.6)

Administration cost

(0.4)

(0.5)

(27.0)

(34.0)

Actuarial (losses)/gains

156.9

(262.5)

Benefits paid

203.9

At 1 April

Interest cost

At 31 March

(840.3)

161.7 (1,150.6)

The Group’s contribution rate during the year was 37.3% of pensionable earnings. Additionally, the Group made special pension contributions to repair the deficit amounting to £22.4m. The expected contributions to be made in the year to 31 March 2019 are 37.3% of pensionable salary. The actual gain on scheme assets was £41.7m. The cumulative amount of actuarial gains recognised in the statement of comprehensive income since adoption is £71.4m (2017: loss of £99.6m). Analysis of the amounts recognised in the profit and loss account

2018 £m

2017 £m

Current service cost

(23.1)

(24.6)

Administration cost

(0.4)

(0.5)

Amount charged to operating profit:

Analysis of the amount credited/(charged) to finance income/expense: Interest income on pension scheme assets

27.6

36.6

Interest cost on pension scheme liabilities

(27.0)

(34.0)

Net finance income/(charge) Net charge to the profit and loss account

0.6

2.6

(22.9)

(22.5)


SGN Annual Report & Financial Statements 2018

Actual gains/(losses) on scheme assets

2018 £m

20.1

2017 £m

197.6

Actuarial (losses)/gains on obligations

156.9

(262.5)

Gain/(loss) recognised in other comprehensive income

177.0

(64.9)

2018 £m

2017 £m

5.7

4.6

b) Defined contribution schemes The amounts recognised in the profit and loss account are as follows:

Amount charged in respect of defined contribution schemes

27. Related parties The Company is owned by a consortium consisting of Scottish and Southern Energy plc (33.3%), OTPPB Investments (UK) Limited (25.0%), which is owned by 2465817 Ontario Limited, Borealis Infrastructure Europe (UK) Limited (25.0%), which is indirectly wholly-owned by OMERS Administration Corporation, and Blue Spyder B 2016 Limited (16.7%), which is owned by Abu Dhabi Investment Authority. It is the opinion of the Directors that the Group and Company have no single controlling party as the Company is controlled jointly by the consortium. Transactions with shareholders Amounts owed to shareholders and loans from shareholders are set out below: Group 2018 £m

2017 £m

Shareholders’ loans: 109.2

177.9

81.9

133.4

2465817 Ontario Limited(2)

81.9

133.4

Blue Atlas ZA 2014 Limited Partnership

54.6

88.9

327.6

533.6

SSE plc Borealis SGN Holdings BV(1)

Interest owed to shareholders: 3.1

5.1

Borealis SGN Holdings BV(1)

2.4

3.8

2465817 Ontario Limited(2)

2.4

3.8

Blue Atlas ZA 2014 Limited Partnership(3)

1.5

2.6

9.4

15.3

13.6

12.7

SSE plc

Other amounts owed to shareholders: SSE plc (1) Borealis SGN Holdings BV is an affiliate of Borealis Infrastructure Europe (UK) Limited. (2) 2465817 Ontario Limited is wholly owned by OTPPB. (3) Blue Atlas ZA 2014 Limited Partnership is owned by Abu Dhabi Investment Authority.

The aggregate interest expense charged to the profit and loss account in respect of shareholders’ loans was £45.6m (2017: £45.8m). During the year, £206m has been repaid to shareholders. Interest accrues on the shareholders’ loans at a fixed rate of 8.6% per annum and is payable semi-annually in arrears on 30 November and 31 May each year. The Company may, upon giving due notice, elect to pay some or all of the interest payable through the issuance of further loans to its shareholders.

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Analysis of the amount recognised in other comprehensive income

81


82

SGN Annual Report & Financial Statements 2018

Notes to the financial statements for the year ended 31 March 2018 continued 27. Related parties (continued) Other than interest charges relating to shareholder loans, the following transactions took place during the year between the Group and the SSE plc group of companies (SSE). 2018 £m

Sales of goods and services Purchase of goods and services Sale of tax losses

144.8 (41.4)

2017 £m

156.5 (45.3)

Sales of goods and services to SSE primarily represent gas transportation services. At 31 March 2018 an amount of £nil (2017: £0.3m) was owed by SSE in relation to these services and is included within trade debtors. SSE provides services to the Group in the form of a management services agreement for corporate services. The Group also purchases certain items such as consumables stock, shrinkage gas and public liability insurance from SSE. Included within purchases of goods and services are direct costs in relation to tangible fixed asset and acquisitions projects incurred by SSE which have been recharged to the Group and capitalised. During the year, the Group surrendered tax losses of £nil to SSE (2017: £nil) for an aggregate cash consideration of £nil (2017: £nil). Transactions with other related parties During the year, SGN Smart Limited, a wholly owned subsidiary of Scotia Gas Networks Limited, sold goods and services amounting to £6.4m to MapleCo1 Limited. These goods and services were purchased on an arm’s length basis. At 31 March 2018 an amount of £0.2m was receivable from MapleCo1 Limited and is included within trade debtors. The company contributed £35.3m (2017: £40.7m) to Scotia Gas Networks Pension Scheme during the year.

28. Subsequent events There are no subsequent events to report.


Glossary

ADIA – Abu Dhabi Investment Authority AFS – Available-for-Sale AGSM – Association of Gas Safety Managers BEIS – Department for Business, Energy and Industrial Strategy

FRS 102 – The Financial Reporting Standard applicable in the UK and Republic of Ireland FVTPL – Fair Value Through Profit or Loss GB – Great Britain

NPV – Net Present Value Ofgem – Office of Gas and Electricity Markets Ofgem is responsible for regulating the gas and electricity markets in the UK to ensure customers’ interests are protected

GDN – Gas Distribution Network

OGM – Opening up the Gas Markets

CAP – Community Action Programme

GFG – Gas Futures Group

CEM – Customer Experience Management

GLA – Growth and Infrastructure Forum

OMERS – Ontario Municipal Employees Retirement System

CEO – Chief Executive Officer

Green Gas – Biomethane

CFO – Chief Financial Officer

The Group – The Company and its subsidiary undertakings (together the Group)

CIRRIS XI™ – Repair Robot that provides a structural assessment of a pipe wall CISBOT – A cast iron pipe-repair robot that seals joints in natural gas pipelines from the inside CitNOW – Used to record video on a smartphone CNI – Critical National Infrastructure

HLSP – High-Level Security Principles HR – Human Resources HSE – Health and Safety Executive iCore – Mains replacement insertion system IGEM – Institution of Gas Engineers and Managers

OTPPB – Ontario Teachers’ Pension Plan Board RAV – Regulated Asset Value Regulated businesses – Consists of Scotland Gas Networks plc, Southern Gas Networks plc, and SGN Natural Gas Ltd RIIO-GD1 – The price control period that will run from 1 April 2015 to 31 March 2023; the first gas distribution price control that will use the RIIO framework for setting allowances

INWED – International Women in Engineering Day

RIIO-GD2 – The next price controls for the network companies running the gas and electricity transmission and distribution networks

KPI – Key Performance Indicator

RPI – Retail Price Index

LCV – Locking Cooker Valve LDI – Liability Driven Investment

RRES – Robotic Roadworks and Excavation System

LSBUD – Line Search Before You Dig

RVS – Royal Voluntary Service

MHCLG – Ministry of Housing, Communities and Local Government

SIUs – Scottish Independent Undertakings

MNC – M Number Creation

SRUC – Scotland’s Rural College

MPRN – Meter Point Reference Number

STEM – Science, Technology, Engineering, and Mathematics

DRS – Discretionary Reward Scheme

NCA – National Crime Agency

TNI – Total Network Investment

EMEA – Europe, the Middle East and Africa

NCSC – National Cyber Security Centre

UREGNI – Utility Regulator for Northern Ireland

ENA – Energy Networks Association

NPV – Net Present Value

ESC – Engineering Safety Committee

NFUS – National Farmers’ Union of Scotland

CO – Carbon Monoxide Consolidated MidCo group – Consists of SGN MidCo Ltd, Scotland Gas Networks plc, Southern Gas Networks plc, SGN Natural Gas Ltd, and SGN Contracting Ltd CPNI – Centre for the Protection of National Infrastructure DCLG – Department of Communities and Local Government Note: Department for Communities Local Government (DCLG) has been renamed as the Ministry of Housing, Communities and Local Government (MHCLG)

FIFO – First-in, First-out FPNES – Fuel Poor Network Extension Scheme

NIA – Network Innovation Allowance NIC – Network Innovation Competition

Designed and produced by Thunderbolt Projects


SGN St Lawrence House Station Approach Horley, Surrey RH6 9HJ Customer Service enquiries Freephone 0800 912 1700 www.sgn.co.uk

This report is printed onto paper that contains 25% recycled fibre. It is also certified in accordance with the FSC ÂŽ (Forest Stewardship Council).

If you smell gas or are worried about gas safety you can call the National Gas Emergency Number on 0800 111 999 Carbon monoxide (CO) can kill. For more information: www.co-bealarmed.co.uk

SGN Annual Report 2018  

Our annual report contains all the relevant financial information and statistics about our company's performance and details of our Board, s...

SGN Annual Report 2018  

Our annual report contains all the relevant financial information and statistics about our company's performance and details of our Board, s...

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