Report from the Supervisory Board

As the Supervisory Board (hereafter Board), we supervise and give advice (both solicited and unsolicited) to the management of N.V. Nederlandse Gasunie, hereafter also referred to as Gasunie or the company, with regard to formulating and achieving the company’s objectives, strategy and policy. We act as the employer of the Executive Board.

Our work

The most important topic appearing in all sorts of forms on the agenda in 2018 was ‘how is Gasunie preparing itself for the future’. The report from the Executive Board contains a great deal of information on this. There are also more or less clear-cut ideas and plans, such as the efforts to realise an LNG terminal near Hamburg, a possible participation in a large heat grid in Zuid-Holland, on and offshore hydrogen production, transport and storage and CO2 transport and storage. As a board, we take the position that the energy transition will inevitably result in an energy system in which traditional natural gas plays an increasingly smaller role and will, in the long term, be used more as a raw material in industry than as a fuel for heating or electricity generation. Nonetheless, renewable gases, such as green gas and hydrogen, but possibly also carbon dioxide (CCS, CCUS), will increasingly play a larger role. Careful utilisation of both the available gas stocks and of our resources (knowledge, pipeline network, gas storage, nitrogen production units) should culminate in an energy system that is reliable, sustainable and affordable during the transition and even beyond, once the system is stable. These characteristics have long been typical of the way in which Gasunie performs its public duty. In our view, this is how the value development of the company in the long term can best be served. It has now been shown that the pipeline network and gas storage facilities can be made suitable for the transport and storage of renewable gases, with relatively little investment. It would be bad policy to fail to make the most of that.

The energy transition is urgently needed in order to limit climate change as much as possible, even though we realise that the Netherlands’ share at global level is very limited. The need to design the energy system on the scale of north-western Europe is therefore equally urgent, because this is the only way to have a perceptible impact on the outcomes, i.e. a move towards sustainability. With the position that Gasunie holds in the Netherlands and Germany, and in the context of the international collaborations in the sector, an optimum structure could be designed for the Netherlands, Belgium, Luxembourg, France and Germany, and perhaps the United Kingdom, together with the gas transport companies established in those countries. This would be a structure that does justice to both the natural opportunities (large-scale North Sea wind, hydroelectric power) and the existing resources, such as wind-on-land, solar power plants, hydrogen applications and green gas, with optimum utilisation of the infrastructure already available.

Alongside these wider views, we also dealt with many other topics in 2018, such as initiatives and regulations for promoting the liquidity of the virtual gas market TTF, involvement in developing new supply routes for gas from the eastern Mediterranean Sea basin and the Middle East, a possible role in a consortium that wants to realise a large heat grid in the province of Zuid-Holland, achievements in relation to safety and reliability, adapting the workforce to the new reality of reduced transport volumes and lower replacement investments, strong performance in designing, installing and putting into use a new operating system for the Dutch gas transport network, and more routine topics such as periodic management and financial reports, the annual report and the financial statements for 2017, the proposed dividend and budget for 2019, including the investment plan and the financing plan.

Worth a mention in their own right are the accelerated phase-out of the production of Groningen gas and the investment in a new nitrogen production installation for the purposes of that reduction. As a board, we grappled with the question of how the company’s interest could be aligned with the national interest of reducing the risk of earthquakes in Groningen. This sizeable investment should be accompanied by supplementary measures that should adequately mitigate the financial risk for Gasunie. That is why we have formulated a number of conditions which, after intensive consultation with the Ministry of Economic Affairs and Climate and the regulatory authority ACM, prompted a legislative amendment and indemnification for the detrimental effects when determining the cost benchmark in comparison with other European gas transport companies. After all, these companies have no similar conversion obligation.

Late last year, one of GTS’ customers drew a certain volume of gas from the system, but failed to comply with the corresponding obligation to ensure new feed-in. GTS subsequently bought in gas itself, but the customer did not pay the invoice (for € 16 million). GTS has reported this to the police, and revoked the licence of the customer concerned. The exact chain of events is under investigation with external support, and GTS has taken measures to prevent a recurrence. We are also claiming damages from the perpetrator.

In the course of 2017, a policy was started whereby maintenance investments and programmes are assessed for effectiveness, with attention to preserving the existing levels of safety and security of supply. Whereas these decisions used to be taken on the basis of the technical lifespan of components or materials, reliability is now determined based on inspections and verifications, culminating in a decision on whether or not to make (full or partial) replacements. This working method results in substantially lower investments and, alongside constant cost-efficiency measures, makes it possible to largely offset the declining revenues (decreasing rates as the result of regulation and benchmarking). This way Gasunie retains adequate resources to finance its investment programmes in the Netherlands and Germany in a balanced way. As a board, we monitor the indicators in relation to safety and security of supply. These indicators have been part of the performance-based pay of the Executive Board for years.

HR

The need for the energy transition results in a reduction in the demand for natural gas. Although we must beware of unrealistic estimates of how quickly the Dutch energy system will be able to function reliably and affordably without natural gas, a noticeable decline in work volumes has become visible at Gasunie, thanks in part to the amended policy with regard to replacement investments. At the end of 2017, a broad agreement was reached with employee organisations and the Works Council on modernising the employment conditions and making employees more resilient when facing the demands of the external labour market in exchange for four-year agreements on income development and the commitment not to push through any compulsory redundancies until the end of 2020. The reduction in work volumes and demand for new skills (energy transition) mean that in the course of 2018, a solution had to be found for how the organisation could still be deployed effectively. To that end, the Executive Board put together a voluntary severance scheme for which employees could register from 1 December 2018. This severance scheme includes robust financial components, but also a number of conditions, for instance that employees must have been with the company for a certain number of years and that the number of employees participating in the scheme was capped at a certain percentage. The scheme served its purpose and resulted in approximately 15% of Gasunie’s Dutch workforce preparing to leave the company, largely in the first quarter of 2019. This will rejuvenate the organisation, introduce more focus and therefore also more effectiveness in terms of deployment. This in turn results in more efficiency and helps permanently satisfy the ongoing social requirement of efficient deployment. Since the scheme could potentially concern a substantial percentage of the Dutch workforce, we were involved with the proposals from the beginning and we approved the scheme that was ultimately arranged.

Members of our board also conducted consultation with the Works Council on various occasions in 2018. All the elements from the paragraphs above were discussed at these meetings and we shared our views on the future of Gasunie. This served to clarify the opinions on both sides and also fostered more understanding for the background and motivation for the decisions and positions taken. This dialogue was conducted in this way for several years and we are content with how it all took place.

2018 financial statements

The Board discussed the 2018 annual report, and upon receipt of the positive recommendation given by the Audit Committee and the unqualified auditor’s report from the external auditor PwC, it decided to submit the 2018 financial statements for adoption to the Annual General Meeting of Shareholders. In addition, the Board proposes that, of the net profit, an amount of € 228.0 million be paid as dividend and that € 97.2 million be added to the General Reserve.

Way of working, composition and organisation

We exercise our supervision through frequent, intensive meetings with the management of Gasunie, both in plenary sessions and through the two committees. These meetings are structured in such a way that the maximum amount of time can be spent discussing substantive matters, usually with the attendance of managers and employees involved in the topics being discussed. There is also sometimes direct contact in the preliminary process, if it is deemed useful to ‘immerse’ one or more supervisory directors in the topic in depth, so as to be able to profit from their knowledge and experience as well.

We held thirteen meetings in 2018, five of which took the form of a conference call. Two meetings were held without the Executive Board, one of which in the form of a conference call. Most of the meetings took place at the head office in Groningen, one took place at Schiphol, one in Amstelveen and one on location at SCW BV, a participation in Alkmaar, which was also linked to a working visit where explanation was provided on their activities in relation to green gas. The physical meetings were regular consultation meetings, while the conference calls addressed special topics, such as progress and/or decision-making on major investments or particular developments in relation to operations. In addition to the regular consultation meetings, a separate meeting was devoted to the strategy. In a meeting not attended by the Executive Board, we discussed the Executive Board’s performance and our own performance and then shared our findings and recommendations in a joint discussion. Ms Poots-Bijl was unable to attend one meeting due to other commitments. Where relevant, she provided her input in advance.

Gasunie complies with the Dutch Corporate Governance Code. The Corporate Governance section indicates where necessary why Gasunie does not or cannot comply with certain best practices. The chair of the board is Rinse de Jong and the vice-chair is Dirk Jan van den Berg. Our Board is diverse and balanced. All Supervisory Board members are independent.

After the General Meeting of Shareholders (AGM on 24 April 2018), Jean Vermeire resigned after approximately ten years as a supervisory director at Gasunie. Jean Vermeire brought with him a great deal of knowledge about gas and infrastructure. We owe him a debt of gratitude for his inexhaustible dedication and critical advice during his long service to the company. Mr Ate Visser succeeds him and was appointed by the shareholder with effect from 6  uly 2018. Ate Visser brings with him a great deal of international knowledge and experience in relation to natural gas, LNG and hydrogen and the related infrastructure. We opted to continue the ‘gas profile’ because we believe that knowledge of and experience with Gasunie’s core activities are of unabated importance for our supervisory and advisory duties. We used an external search agency in the process of appointing him.

We nominated Dirk Jan van den Berg for reappointment for a period of four years as of the AGM of 21 March 2019. As of the same AGM, Ms Jolanda Poots-Bijl will resign as supervisory director since her term will have ended. She played a major role in professionalising our financial supervision and also provided the company with a great deal of valuable advice on the financial reporting of value developments in assets and business processes, on internal and external reporting and operational audit and the monitoring of the corresponding findings. The process to find a successor was started at the end of 2018. Details on the individual supervisory directors are listed in the Composition of the Supervisory Board.

Our Board has two committees. The Audit Committee consists of Ms Jolanda Poots-Bijl (chair), Ate Visser and Willem Schoeber. Rinse de Jong has temporarily joined the committee for the sake of continuity. The Remuneration, Selection and Appointment Committee is chaired by Ms Martika Jonk and further consists of Dirk Jan van den Berg and Rinse de Jong. The work of these two committees is reported on below.

Evaluation

With the changes in the composition of the board in mind, the internal evaluation at the end of November 2018 took a different approach. The question ‘how did we, as the board, help Gasunie to achieve its objectives in 2018’ shifted, during the course of the evaluation, to ‘how are we, as the board, going to help Gasunie achieve its objectives in 2019’. The related discussion touched on individual contributions, how the board could be used more effectively, how the continuity of various dossiers could be safeguarded and what focal points deserve more attention. The outcomes of this evaluation will also be included in the profiles of the supervisory directors still to be sought.

Good employment practices

We have the role of employer with respect to the members of the Executive Board according to the articles of association, but are of course also responsible for the good performance of the Executive Board as a whole. To that end, the members of the Remuneration, Selection and Appointment Committee periodically conduct formal performance reviews with all members of the Executive Board, most recently in January 2019. From the extensive contact we have with the members of the Executive Board, but also with other parties such as the Works Council, we have plenty of other input for forming an opinion on how the Executive Board manages the business.

The outcomes of the annual evaluation have a major impact on the amount of the variable remuneration to be paid out. In our view, this is consistent with the importance that the achievement of the company’s long-term goals must have as opposed to the more short-term operational matters, which really simply need to be properly in order. Key figures for these goals are agreed on annually when the annual plan is adopted. The variable remuneration to be paid is determined by the full board on the advice of the Remuneration, Selection and Appointment Committee.

Audit Committee

The Audit Committee assists the Supervisory Board in supervising matters such as the set-up and proper functioning of the internal risk management and control systems, the financial reporting process and setting up and maintaining associated internal procedures, the financing of the company and the relationship with the internal and external auditors. The Audit Committee met four times in 2018. Besides the members of the Audit Committee (the chair was absent on one occasion), the CFO, the operational auditor and the external auditor were all present on all occasions, as was the group controller. The agenda included regular items, such as periodical internal and external financial reporting, the business plan, taxation, financing, the weighted average cost of capital, profit appropriation and dividend, the operational auditor’s periodical reports and working schedule, the external auditor’s audit plan, the management letter and the auditor’s report, the Executive Board’s Document of Representation, the risk matrix and the control of the main risks, IT developments and the organisation and effectiveness of security with a view to safe and reliable gas transport/corporate security. Before the meetings of the Audit Committee, the chair of the Audit Committee speaks directly with the external auditor, usually in the presence of the CFO. The discussions and findings of the Audit Committee are reported in the plenary meetings of the Supervisory Board. The committee’s minutes are made available to all Supervisory Board members.

Remuneration, Selection and Appointment Committee

The committee held three conference calls and one physical meeting in 2018 to discuss regular items, such as the achievement of the objectives for the purposes of determining the variable remuneration for 2017, the adoption of new collective and individual targets in line with the budget for 2018, the 2017 annual report and the remuneration section with regard to 2017. The committee also discussed the vacancy that will open up on our board in 2019 when Ms Jolanda Poots-Bijl resigns at the end of her term of office. Since the chair of the board is leaving in 2020 for the same reason, the entire profile of the board is being scrutinised. We noted in this respect that given Gasunie’s ambitions for accelerating the energy transition, reinforcement in this area would be advisable. The increased political attention to energy and, by extension, Gasunie’s activities require specific knowledge and experience, which is why we have engaged an external search agency to help find two new supervisory directors (temporary expansion of the board). The committee’s minutes are made available to all Supervisory Board members.

Supervisory Board remuneration structure

The remuneration received by members of the Supervisory Board for exercising their duties is given in the following table. The remuneration is linked to the structural increases in the collective labour agreement that applies to Gasunie. These amounts exclude reimbursement of travel costs and other expenses.

Position Remuneration per year  
  As of 1-1-2017 As of 1-1-2018
(in euros)    
     
Chair of the Supervisory Board (or Interim Chair) 30,908  31,652 
Vice-Chair of the Supervisory Board 22,668  23,216 
Member of the Supervisory Board 20,608  21,104 
Chair or member of the AC 5,152  5,276 
Chair or member of the BBC 2,064  2,116 

Word of appreciation

We would like to thank the members of the Executive Board, the management and the employees for their commitment and dedication.

Groningen, 26 February 2019

Supervisory Board of N.V. Nederlandse Gasunie

Rinse de Jong, Chair
Dirk Jan van den Berg, vice-chair
Martika Jonk
Jolanda Poots-Bijl
Willem Schoeber
Ate Visse