Price controls and rate plans

The prices we charge for use of our electricity and gas transmission and distribution networks are determined in accordance with regulator approved price controls in the UK and rate plans in the US. The terms of these arrangements have a significant impact on our revenues.

Their duration is significant in providing stability, allowing us to plan and invest with confidence that we will obtain financial returns.

Our price controls and rate plans contain incentive and/or penalty arrangements that can affect us financially based on performance targets.

Multi-year contracts

Revenues in our Long Island electricity distribution and generation operations are subject to long-term contracts with the Long Island Power Authority.

In addition, revenues in our UK metering services businesses and our Grain LNG importation terminal are determined by contractual arrangements that are long term with ‘blue chip’ customers.

Safety, reliability and efficiency

Our ability to operate safely and reliably is of paramount importance to us, our employees, our contractors, our customers, our regulators and the communities we serve. Our financial performance is affected by our performance in these areas.

Operating efficiently allows us to minimise prices to our customers and improve our own financial performance to benefit our shareholders.

Customer service

The quality of the service we deliver to customers, and the experiences they have when dealing with us, is important as it feeds through to the attitudes of regulators and is also linked to our financial performance.

Capital investment

Capital investment is a significant driver for organic growth.

In our regulated energy networks, the prices we charge include an allowed return for capital investment determined in accordance with our price controls and rate plans. These provide incentives for us to enhance the quality and reach of our networks through capital improvements.

Capital investment in non-regulated assets allows us to develop new revenue streams or to increase revenues from existing assets.

Other investment

Investment in new businesses is also a significant driver of growth, provided we can create value through operational improvements, synergies and financial benefits.

Disposals can crystallise value for shareholders, where the price on offer is better than the long-term return we can obtain ourselves or where a business does not fit with our principal operations.

Inflation and deflation

During periods of inflation, without action to improve efficiency, our operating costs increase each year as a result of wage increases and inflation in external costs. In general, our revenues also increase each year, although not necessarily at the same rate, depending on our regulatory or contractual arrangements. Correspondingly, during periods of deflation our revenues can decrease, the timing and extent of which may not be offset by equivalent reductions in our operating costs. Consequently, our ability to control costs and improve efficiency is important in order to maintain and increase operating profits.

Our price controls in the UK and a proportion of our UK borrowings are linked to retail price inflation, while certain of our electricity and gas regulatory settlements in the US allow us to recover additional distribution revenues if there is a significant change in inflation.

Relationships and responsibility

Our reputation is critical to us. Delivering sustainable value depends on the trust and confidence of our stakeholders and this can only be earned by conducting our business in a responsible manner.

Weather and volumes

In the US, changes in the quantities of electricity and gas delivered through our transmission and distribution networks may result in an increase or decrease in our revenues. Volumes are affected by weather, consumer demand and network availability as well as other factors. The impact of changing volumes may sometimes be offset by changes in costs or may sometimes result in an under- or over-recovery against our allowable revenues, with a corresponding increase or decrease in revenues in future periods.

Seasonality

Revenues from our gas distribution networks in the US are weighted towards the end of the financial year, as gas demand is typically higher during the winter. In the UK, revenues from our gas transmission and distribution networks are less affected as under our current price control agreements the volume driven component of revenue is relatively small. Seasonality does not have a significant impact on revenues from our other operations.

With the exception of commodity and other volume related costs passed through to customers, our operating costs are generally not seasonal.

Exchange rates

The reported results, cash flows and financial position of our US operations are affected by movements in the US dollar to sterling exchange rate. However, we hedge a proportion of this exposure through the use of US dollar debt and derivative financial instruments.

Commodity and other pass-through costs

We are allowed to recover commodity costs in the US and certain other direct costs in both the UK and the US, through charges to customers. The timing of recovery of these costs can vary leading to an under- or over-recovery within any particular financial period.

We are affected by commodity prices to the extent that they affect our own energy requirements, most significantly gas purchases for the operation of our gas transmission and gas distribution networks. In the US, we are exposed to potential bad debts related to commodity costs, although under the majority of our rate plans our exposure is either fully or partially mitigated by the recovery of such costs in current or future revenues.

Certain US commodity contracts are recorded in our balance sheet at their fair values. Although remeasurements of these are reflected in our income statement, we expect to recover the actual costs incurred from customers in the current or future periods.

Interest rates

The costs of financing our operations are affected by changes in prevailing interest rates, as some of our debt is at floating rates. We hedge some of our exposure to interest rates with fixed-rate debt and derivative financial instruments to maintain a proportion of our debt at fixed interest rates. The cost of funding our future growth is dependant upon future interest rates and the rate at which we can issue debt.