National Grid 2008 Annual Report Download - page 519

BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 11844
Name: NATIONAL GRID
Date: 17-JUN-2008 03:10:51.35Operator: BNY99999TPhone: [phone]Site: BOWNE OF NEW YORK
Y59930.SUB, DocName: EX-15.1, Doc: 16, Page: 8
Description: EXHIBIT 15.1
0/9204.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/204/9*
BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 11844
Name: NATIONAL GRID
Date: 17-JUN-2008 03:10:51.35Operator: BNY99999TPhone: [phone]Site: BOWNE OF NEW YORK
Y59930.SUB, DocName: EX-15.1, Doc: 16, Page: 8 Description: EXHIBIT 15.1
0/9204.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/204/9*
Table of Contents
16
About National Grid continued
National Grid plc
Business drivers, risks and opportunities
Business drivers
Our principal activities include the operation of highly complex
energy infrastructure networks. As a consequence, there are many
factors that influence the financial returns we obtain.
We consider the following to be our principal business drivers:
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 negotiation of these
arrangements has a significant impact on our
revenues.
Their duration is significant in providing stability
to our operations, allowing us to plan ahead 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 agreed
p
erformance tar
g
ets.
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 import
terminal are determined by contractual
arrangements, which are long term and with
‘blue chi
p
’ customers.
Safety,
efficiency
and reliability
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.
Our objective is to deliver services as efficiently
as possible. This allows us to limit price
increases or to reduce prices to our customers
and improve our own financial performance to
the benefit of our shareholders.
Customer
service
The quality of the service we deliver to
customers, and the experiences that they have
in dealing with us, whether through routine
interactions or when problems arise, is
important as it feeds through to the attitudes of
regulators and is also linked to our financial
p
erformance.
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.
For other businesses, our capital investment in
new 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 we believe the price on offer is better than
the long-term return we can obtain ourselves or
where a business does not fit with our long-term
strate
gy
.
Relationships
and
res
p
onsibilit
y
Our reputation is vitally important 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 res
p
onsible manner.
A number of other factors also affect our financial performance but
are either less significant than our principal business drivers, or are
mitigated by the way our operations are structured:
Weather and
volumes
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
p
eriods.
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 months. This has also been the
case for our gas transmission and distribution
networks in the UK, but our current price control
arrangements are less seasonal in nature.
Otherwise, seasonality does not have a
significant impact on revenues.
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
between financial periods 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 UK.
The discontinued Ravenswood generation
station was also affected by commodity prices,
in particular the spreads between prices for the
electricity it generates and the prices of the gas
and oil it uses as fuel.
Certain US commodity contracts are recorded in
our balance sheet at their fair values. Although
remeasurements of their contract values are
reflected in our income statement, we expect to
recover the net costs incurred under these
contracts from customers in current or future
p
eriods.
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. As a consequence, our ability to
control costs and improve efficiency is
important to our ability to increase operating
profits.
Our price controls in the UK are linked to retail
price inflation, as is a proportion of our UK
borrowings, while certain of our electricity and
gas regulatory settlements in the US allow us to
recover additional distribution revenues from
customers if there is a significant change in the
rate of inflation.
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