Operating and Financial Review
Financial Review
- Introduction
- Operating Review
- Financial Review
- Basis of accounting
- Financial performance
- Segmental reporting
- Dividends
- Dividend policy
- Liquidity, resources and capital expenditure
- Treasury policy
- Commodity price hedging
- Commitments and contingencies
- Critical accounting policies
- Related party transactions
- Changes and developments
- Going concern
- US GAAP reporting
- Other matters
Other matters
Inflation
In the UK, the Group's operating costs may be affected by inflation both in terms of potential cost increases and in terms of the regulatory revenue control, which is influenced by, among other things, movements in the UK Retail Price Index. While higher inflation would tend to increase the Group's cost base, this impact would be more than offset by increased revenue allowed under the Group's regulated revenue controls.
Higher inflation would increase the cost base of the Group's US businesses. However, if there is a significant change in the rate of inflation, as measured by the change in the Gross Domestic Product Implicit Price Deflator, the regulatory settlements in Massachusetts, Rhode Island and New York allow for additional distribution revenue to be recovered from customers. In recent years, inflation in the UK and US has been relatively stable and has not significantly affected the period under review.
Seasonality
Although demand for electricity and gas can vary on a seasonal basis, the Group's UK electricity and gas transmission turnover and adjusted earnings are not, generally speaking, subject to substantial seasonal variations, because the largest elements of UK electricity and gas transmission turnover relate to customers' use of the transmission systems. Customers are charged for these services in a number of ways, some giving rise to variation in income over a financial year, but overall this typically provides for a relatively constant revenue stream over the course of the financial year.
UK gas distribution is subject to regulatory agreements governing the maximum revenue that should be billed in a financial year. The timings of the recognition of these revenues are such that typically 60% of total revenue would be recognised in the second half of the financial year.
US electricity transmission would normally provide for a relatively constant revenue stream over the course of a financial year.
US electricity and gas distribution would usually expect total revenues in the second half of the financial year to be higher than in the first half, as a result of a higher demand for energy in the winter months.