Common use of Capital Expenditure Sharing Scheme Clause in Contracts

Capital Expenditure Sharing Scheme. The Capital Expenditure Sharing Scheme (CESS) will operate in the following way: i The annual efficiency gain or loss under the scheme will be calculated by subtracting AGN’s actual capital expenditure from the approved capital expenditure allowance (net of contributions and expenditure related to connecting customers1) in each year of this Access Arrangement. For the final year (and in some instances the penultimate year) an estimate of actual capital expenditure will be used. ii For the purpose of calculating the annual efficiency gain or loss the approved capital expenditure allowance is to be adjusted to take into account a change in scope of activities in accordance with the approach outlined below or an approved Cost Pass Through Event. a The efficiency gain for year one is calculated as: Year 1 efficiency gain = capital expenditure allowance for year 1 – actual capital expenditure in year 1 b The efficiency gain for each year will be discounted into its Net Present Value (NPV) at the end of the Access Arrangement Period. In doing so it is assumed that capital expenditure occurred in the middle of the year. To calculate the total efficiency gain the annual efficiency gains in NPV terms are added. 1 i. e. connections capex under Chapter 12A of the National Gas Rules Total efficiency gain = NPV year 1 efficiency gain + NPV year 2 efficiency gain + NPV year 3 efficiency gain + NPV year 4 efficiency gain + NPV year 5 efficiency gain c The above calculations are represented by the following equation: where: n is the Access Arrangement year WACC is the average of the nominal weighted average cost of capital that are applied during each year of the Access Arrangement Period p is the length of the Access Arrangement Period Fn is the capital expenditure allowance for year n An is the actual capital expenditure for year n. d A sharing factor 30 per cent will apply to the total efficiency gain/loss. This means that AGN will bear 30 per cent of any loss and will retain 30 per cent of any gain. The remaining 70 per cent will go to gas pipeline users. AGN sharing factor = 30% AGN share = total efficiency gain x 30% e The CESS takes into account benefits or costs that have already accrued to AGN during the Access Arrangement Period in order to ensure that the power of the incentive is the same in each year. This is the financing benefit of any underspend and the financing cost of any overspend. f Capital expenditure is assumed to be incurred in the middle of each year and would be adjusted to end of year terms. In the case of an underspend, AGN will recover a financing benefit (in the year following an underspend) equal to the underspend, in the preceding year, multiplied by the WACC.

Capital Expenditure Sharing Scheme. The Capital Expenditure Sharing Scheme (CESS) will operate in the following way: The annual efficiency gain or loss under the scheme will be calculated by subtracting AGN’s actual capital expenditure from the approved capital expenditure allowance (both net of contributions) in each year of this Access Arrangement. For the final year (and in some instances the penultimate year) an estimate of actual capital expenditure will be used. i The annual efficiency gain or loss under the scheme will be calculated by subtracting AGN’s actual capital expenditure from the approved capital expenditure allowance (both net of contributions and expenditure related to connecting customers1) in each year of this Access Arrangement. For the final year (and in some instances the penultimate year) an estimate of actual capital expenditure will be used. ii For the purpose of calculating the annual efficiency gain or loss the approved capital expenditure allowance is to be adjusted to take into account a change in scope of activities in accordance with the approach outlined below or an approved Cost Pass Through Event. a The efficiency gain for year one is calculated as: Year 1 efficiency gain = capital expenditure allowance for year 1 – actual capital expenditure in year 1 b The efficiency gain for each year will be discounted into its Net Present Value (NPV) at the end of the Access Arrangement Period. In doing so it is assumed that capital expenditure occurred in the middle of the year. To calculate the total efficiency gain the annual efficiency gains in NPV terms are added. 1 i. e. connections capex under Chapter 12A of the National Gas Rules . Total efficiency gain = NPV year 1 efficiency gain + NPV year 2 efficiency gain + NPV year 3 efficiency gain + NPV year 4 efficiency gain + NPV year 5 efficiency gain c The above calculations are represented by the following equation: where: n is the Access Arrangement year WACC is the average of the nominal weighted average cost of capital that are applied during each year of the Access Arrangement Period p is the length of the Access Arrangement Period Fn is the capital expenditure allowance for year n An is the actual capital expenditure for year n. d A sharing factor 30 per cent will apply to the total efficiency gain/loss. This means that AGN will bear 30 per cent of any loss and will retain 30 per cent of any gain. The remaining 70 per cent will go to gas pipeline users. AGN sharing factor = 30% AGN share = total efficiency gain x 30% e The CESS takes into account benefits or costs that have already accrued to AGN during the Access Arrangement Period in order to ensure that the power of the incentive is 1 i.e. connections capex under Chapter 12A of the National Gas Rules the same in each year. This is the financing benefit of any underspend and the financing cost of any overspend. f Capital expenditure is assumed to be incurred in the middle of each year and would be adjusted to end of year terms. In the case of an underspend, AGN will recover a financing benefit (in the year following an underspend) equal to the underspend, in the preceding year, multiplied by the WACC.

Capital Expenditure Sharing Scheme. The Capital Expenditure Sharing Scheme (CESS) will operate in the following way: i The annual efficiency gain or loss under the scheme will be calculated by subtracting AGN’s actual capital expenditure from the approved capital expenditure allowance (both net of contributions and expenditure related to connecting customers1) in each year of this Access Arrangement. For the final year (and in some instances the penultimate year) an estimate of actual capital expenditure will be used. ii For the purpose of calculating the annual efficiency gain or loss the approved capital expenditure allowance is to be adjusted to take into account a change in 1 i.e. connections capex under Chapter 12A of the National Gas Rules scope of activities in accordance with the approach outlined below or an approved Cost Pass Through Event. a The efficiency gain for year one is calculated as: Year 1 efficiency gain = capital expenditure allowance for year 1 – actual capital expenditure in year 1 b The efficiency gain for each year will be discounted into its Net Present Value (NPV) at the end of the Access Arrangement Period. In doing so it is assumed that capital expenditure occurred in the middle of the year. To calculate the total efficiency gain the annual efficiency gains in NPV terms are added. 1 i. e. connections capex under Chapter 12A of the National Gas Rules . Total efficiency gain = NPV year 1 efficiency gain + NPV year 2 efficiency gain + NPV year 3 efficiency gain + NPV year 4 efficiency gain + NPV year 5 efficiency gain c The above calculations are represented by the following equation: where: n is the Access Arrangement year WACC is the average of the nominal weighted average cost of capital that are applied during each year of the Access Arrangement Period p is the length of the Access Arrangement Period Fn is the capital expenditure allowance for year n An is the actual capital expenditure for year n. d A sharing factor 30 per cent will apply to the total efficiency gain/loss. This means that AGN will bear 30 per cent of any loss and will retain 30 per cent of any gain. The remaining 70 per cent will go to gas pipeline users. AGN sharing factor = 30% AGN share = total efficiency gain x 30% e The CESS takes into account benefits or costs that have already accrued to AGN during the Access Arrangement Period in order to ensure that the power of the incentive is the same in each year. This is the financing benefit of any underspend and the financing cost of any overspend. f Capital expenditure is assumed to be incurred in the middle of each year and would be adjusted to end of year terms. In the case of an underspend, AGN will recover a financing benefit (in the year following an underspend) equal to the underspend, in the preceding year, multiplied by the WACC.

Capital Expenditure Sharing Scheme. The Capital Expenditure Sharing Scheme (CESS) will operate in the following way: i The annual efficiency gain or loss under the scheme will be calculated by subtracting AGN’s actual capital expenditure from the approved capital expenditure allowance (both net of contributions and expenditure related to connecting customers1) in each year of this Access Arrangement. For the final year (and in some instances the penultimate year) an estimate of actual capital expenditure will be used. ii For the purpose of calculating the annual efficiency gain or loss the approved capital expenditure allowance is to be adjusted to take into account a change in scope of activities in accordance with the approach outlined below or an approved Cost Pass Through Event. . 1 i. e. connections capex under Chapter 12A of the National Gas Rules a The efficiency gain for year one is calculated as: Year 1 efficiency gain = capital expenditure allowance for year 1 – actual capital expenditure in year 1 b The efficiency gain for each year will be discounted into its Net Present Value (NPV) at the end of the Access Arrangement Period. In doing so it is assumed that capital expenditure occurred in the middle of the year. To calculate the total efficiency gain the annual efficiency gains in NPV terms are added. 1 i. e. connections capex under Chapter 12A of the National Gas Rules . Total efficiency gain = NPV year 1 efficiency gain + NPV year 2 efficiency gain + NPV year 3 efficiency gain + NPV year 4 efficiency gain + NPV year 5 efficiency gain c The above calculations are represented by the following equation: where: n is the Access Arrangement year WACC is the average of the nominal weighted average cost of capital that are applied during each year of the Access Arrangement Period p is the length of the Access Arrangement Period Fn is the capital expenditure allowance for year n An is the actual capital expenditure for year n. d A sharing factor 30 per cent will apply to the total efficiency gain/loss. This means that AGN will bear 30 per cent of any loss and will retain 30 per cent of any gain. The remaining 70 per cent will go to gas pipeline users. AGN sharing factor = 30% AGN share = total efficiency gain x 30% e The CESS takes into account benefits or costs that have already accrued to AGN during the Access Arrangement Period in order to ensure that the power of the incentive is the same in each year. This is the financing benefit of any underspend and the financing cost of any overspend. f Capital expenditure is assumed to be incurred in the middle of each year and would be adjusted to end of year terms. In the case of an underspend, AGN will recover a financing benefit (in the year following an underspend) equal to the underspend, in the preceding year, multiplied by the WACC.