NatWest Group Annual Report 2011

FY2011 Annual Report · NatWest Group

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Northumbrian
Water Group plc
Annual Report and
Accounts 2011

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Annual report
and financial
statements

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Northumbrian Water Group plcNorthumbrian Water Group plc
is an independent company
quoted on the FTSE 250 Index
of the London Stock Exchange.
The Group principally works in
the provision of water and
waste water services.

Our vision
To be the national leader in the
provision of sustainable water
and waste water services.

Contents

Directors’ report – business review

Financial statements

85 Statement of directors’ responsibilities in relation

to the Group financial statements

86 Report of the auditors on the Group financial

statements

88 Consolidated income statement
89 Consolidated statement of comprehensive income
90 Consolidated statement of changes in equity
91 Consolidated balance sheet
92 Consolidated cash flow statement
93 Notes to the consolidated financial statements
132 Statement of directors’ responsibilities in relation
to the parent Company financial statements
133 Report of the auditors on the Company financial

statements

135 Company balance sheet
136 Notes to the Company financial statements
140 Shareholder information

01 Highlights
02 NWG at a glance
04 Chairman’s statement
06 Chief executive officer’s review
10 Our corporate responsibility
12 Our performance measures
14 Our market
16 Our financial performance
22 Our operating performance
50 Our risks and uncertainties
52 Appendix to the directors’ report – business review

Directors’ report – governance

54 Board directors’ biographies
56 Statutory disclosures
58 Corporate governance statement

Remuneration

71 Directors’ remuneration report

All corporate responsibility related sections
throughout the report are highlighted with
a green shaded box.

Cautionary statement
This annual report contains certain statements with respect to the future operations, performance
and financial condition of the Group. By their nature, these statements involve uncertainty since
future events and circumstances can cause results and developments to differ materially from those
forecast. Such statements reflect knowledge and information available at the date of preparation of
this annual report and the Company undertakes no obligation to update such statements. Nothing
in this annual report should be construed as a profit forecast. Certain regulatory performance data
contained in this annual report is subject to regulatory audit.

Highlights

The directors of Northumbrian Water
Group (NWG or the Company) are
pleased to present their report on
the affairs of the Company, along
with the audited financial statements
and the auditors’ report for the year
ended 31 March 2011.

Revenue 2011

£738.1m

2010: £704.7m

Profit before interest 2011

£304.2m

2010: £275.8m

Profit before tax 2011

£181.0m

2010: £170.2m

Profit for the year 2011

£178.4m

2010: £122.9m

Financial highlights
– Strong financial performance with
a 6.3% increase in profit before tax

– Regulated business operating
costs are better than target
reflecting good progress on our
efficiency programme and fixing
of power prices to March 2015

– Net interest charges increased by £17.4
million, largely reflecting RPI increases
on index linked bonds; net cash interest
charges increased by £2.6 million

– Capital investment in the period
of £219.9 million for the Group;
capital investment for the regulated
business of £221.5 million

– New loan facilities in place; £100.0
million US private placement
completed for the Company in April
2011 and £150.0 million approved
by the European Investment Bank
(EIB) for the regulated business

– Funding and approved facilities in
place to meet the requirements
of the business to March 2014;
cash and short term deposits at
31 March 2011 £141.7 million

– Proposed final dividend of 9.57

pence (2010: 8.85 pence) per share
to be paid on 9 September 2011,
giving a full year ordinary dividend
of 14.29 pence (2010: 13.24 pence)
per share, an increase of 7.9%

Operational highlights
– Continued high levels of
customer satisfaction

– Excellent levels of drinking water quality

– Water resource situation is good with
no plans for restrictions; expansion
of Abberton reservoir to secure
supplies for the Essex region for
25 years is progressing well

–

Industry-leading waste water compliance

– Construction commenced on advanced
anaerobic digestion plant at Howdon,
on Tyneside, a further step towards our
target of generating 20% of our energy
from renewable sources by 2015

– Achievement of Government’s
Skills Pledge with 90% of the
workforce trained to at least National
Qualification Framework Level 2

Revenue

£m

Proﬁt before tax

£m

670.4

633.5

694.1

704.7

738.1

170.3

170.2

181.0

147.8

152.7

2011

Dividend per share

pence

12.79

13.24

14.29

12.07

11.27

2011

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NWG at a glance

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Northumbrian Water Group plc
NWG owns a number of companies which, together
with NWG, form the Group. The largest of these
companies, Northumbrian Water Limited (NWL), is one
of the ten regulated water and sewerage businesses
in England and Wales. The emphasis given to NWL
throughout this report, reflects its importance to the
overall performance of the Group.

Northumbrian Water Limited
NWL operates in the north east of England, where it
trades as Northumbrian Water, and in the south east
of England, where it trades as Essex & Suffolk Water.
Northumbrian Water currently provides water and
sewerage services to 2.7 million people and Essex
& Suffolk Water provides water services to 1.8 million
people in a combined area of over 12,260 square
kilometres.

impounding reservoirs
water treatment works
water pumping stations
water service reservoirs

Key facts
47
57
346
338
25,624km water mains
414
731
16,181km sewers

sewage treatment works
sewage pumping stations

NWL is licensed to provide these services and currently
supplies over 1,250 megalitres of water per day. This
water is drawn from reservoirs, where it is collected and
stored, rivers and groundwater sources. It is treated at
our works before it is delivered by a network of pipes to
homes and businesses.

In the north east of England, where NWL also provides
sewerage services, waste water is then collected from
these properties via the sewerage network and treated
at our works before it is returned to the environment as
either clean water or sludge which can be recycled as
fertiliser or used to generate energy.

Our water and sewerage services in the north east cost
an average householder 92 pence per day and in Essex
and Suffolk area, 66 pence for a water only service.

The Water Services Regulation Authority (Ofwat), as the
economic regulator, sets price limits for companies in
England and Wales every five years. 2010/11 was the
first year in the current five year investment plan. This
regulation is performance based and companies are
measured in terms of efficiencies related to operating
costs, capital programmes and financing as well as
their general operations. The regulated revenue of the
company is set by reference to the rate of inflation,
measured by the Retail Price Index (RPI), as well as an
adjustment factor referred to as ‘k’. The profile of ‘k’
for the current five year period is shown below:

2010/11

2011/12

2012/13

2013/14

2014/15

k (%)

5.0

3.8

0.9

0.0

(1.0)

NWL has a long term agreement with RWE npower
for it to operate and sell the energy from NWL’s
hydroelectric power station at Kielder Water, which
is the largest in England.

Water and waste water contracts
NWG controls a number of special purpose companies
which have water and waste water contracts in
Scotland, Ireland and Gibraltar.

Other
SA Agrer NV (Agrer) carries out project work in
developing countries through a number of overseas
aid-funded agencies.

Revenue

£m

40.0

8.7

689.4

NWL
Water and waste
water contracts
Other

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Great Yarmouth

Lowestoft

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North east England
Northumbrian Water provides water and
sewerage services to 2.7 million people
in the north east of England. The major
population centres of Tyneside, Wearside
and Teesside are in our area but we also
serve large rural areas in Northumberland
and County Durham (provision of waste
water services only in Hartlepool).

Berwick

Alnwick

Norwich

Kielder

Morpeth

Hexham

Derwent

Newcastle

R i v e r T y n e

Gateshead

Sunderland

Head Office

Durham

Cow Green

River Wear

Hartlepool

Darlington

River Tees

Middlesbrough

SUFFOLK AREA

Barsham

Walpole

Aldeburgh

Ipswich

South east England
Essex & Suffolk Water provides water
services to two separate supply areas.

Our Essex area, which has a population
of 1.5 million, is part rural and part urban
with the main areas of population being
in Chelmsford, Southend and the London
Boroughs of Barking and Dagenham,
Havering and Redbridge.

We serve a population of 0.3 million in
our Suffolk area, which is mainly rural
with the biggest towns being Great
Yarmouth and Lowestoft.

ESSEX AREA

Romford

Barking

Chelmsford

Brentwood

Tilbury

Norwich

Colchester

Abberton

Clacton

Langford

Hanningfield

Basildon

Southend

Great Yarmouth

Lowestoft

SUFFOLK AREA

Barsham

Walpole

Southwold

Aldeburgh

Ipswich

ESSEX AREA

Colchester

Abberton

Clacton

Langford

Hanningfield

Chelmsford

Brentwood

Tilbury

Romford

Barking

Basildon

Southend

Chairman’s
statement

This was the first year of the five year regulatory
cycle 2010-2015. We have made a good start,
delivering value for shareholders and customers.
Equally important, we have established plans
and taken actions to ensure we can deliver over
the whole period and beyond.

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The new regulatory cycle introduces new performance
standards for the period and, in this report, we indicate
the substantial progress we are already making.
Profit has improved, as is needed to ensure we can
attract the funding required to deliver our ambitious
investment programme.

This was also the first year with Heidi Mottram as our
Chief Executive Officer (CEO). Heidi’s review of the year
is in pages 6 to 9 of this report. It gives a sense of the
energy and determination she has brought to the
Group. Our strategy has been reviewed and our values
reset. All our employees have been engaged in the
work. The result is not a change in our direction. Rather,
it is a change in the pace and scale of improvements
sought and in our ambition against benchmarks.

We are building on strengths developed over many
years but we recognise that the future will pose new
challenges and uncertainties, often outside our control.
An example is the weather and its impact on our
environment. Another is possible reform to the
regulatory regime although, in that case, we are seeking
to influence change to ensure the company can deliver
its, and the Government’s, objectives efficiently and
effectively. The Board reviews all identified strategic
risks regularly; they are detailed on pages 50 and 51 of
this report. We seek to judge and to manage the impact
of risk on the business, financially and operationally.

The strong financial performance, delivered in difficult
and uncertain economic conditions, has enabled the
Board to recommend a dividend for the year in line
with the objective we established in 2005. Annual real
increases of 3.0% have consistently been provided
since then. The economic climate remains uncertain
although we were pleased to note the agreement by
Sahaviriya Steel Industries (SSI) to take over the Corus
plant on Teesside and Hitachi’s decision to build its
high speed train assembly plant in Durham. These,
and other developments, should help us to stabilise
our demand in the future.

Yet again, the weather had a huge impact on our
operations during the year. The worst winter in over
100 years posed many challenges for us. Due to the
extraordinary work of teams across the company,
supplies to our customers were not affected. I must
pay tribute to those who worked in exceptionally hard
conditions to guarantee supplies and to deal with the
inevitably increased leakage quickly, although, in these
circumstances, it was not possible to achieve our
leakage target in the north.

A number of reviews of our regulators are under
consideration. We also expect a White Paper for Water.
This does create uncertainty for the industry. We believe
that, overall, the model for the industry has worked well.
Much of the necessary change can be made by the
industry in association with Government and regulators
without potentially disruptive change. Regulatory
change must not undermine the confidence of
our investors.

Our focus remains on our customers and the trust they
put in us to deliver for them each and every day and
for the long term. Ofwat has introduced the Service
Incentive Mechanism (SIM) in this five year period and
in the two year trial period we have improved our score
significantly. Our aim is to improve much further. We
monitor the company’s performance closely and, in
this report, show the balanced scorecard we have
introduced to do that. It is also the base against which the
remuneration of all senior management will be assessed.

Our long term commitment to service to customers,
and to achieving efficiency and environmental targets,
requires long term investment. The extension of
Abberton reservoir is a perfect example and there is a
case study of the project on page 43. It will help secure
the long term supply of water to our customers in
Essex. Also worthy of note is the commencement of
work on our second advanced anaerobic digestion
plant, at Howdon, on north Tyneside. This follows the
successful operation of the plant at Bran Sands, on
Teesside. Together they will significantly increase our
use of renewable energy.

The work of our people during the winter was
exceptional. Their unstinting efforts throughout the year
are always evident and are the basis of our successes.
We thank them for all they do and we seek to ensure
they have the right environment and personal
development opportunities. We were listed as a
‘company to watch’ in the Sunday Times ‘Best
Companies to work for’ survey. This was a significant
result as it was the first time we had taken part.
However, this was not a surprise as our employee
survey showed that levels of satisfaction are high.

Our employees are active in our ‘Just an hour’
volunteering scheme, working in the communities we
serve. These communities are important to us and we
have developed significant partnerships to ensure that
we support and help to sustain them. That work is part
of a corporate responsibility programme covering all
aspects of our business and seeking to embed
sustainability at all levels.

I must thank my fellow directors for their support
during the year. I would particularly like to thank Claude
Lamoureux, who leaves the Board after this year’s
Annual General Meeting (AGM), for his five years on
the Board. He has provided us with wisdom and an
international dimension. Anita Frew and Alastair Balls
both left the NWL board after nine years of dedicated
service. We wish them all well. We have welcomed
Paul Rew to the Board since last year’s AGM as well
as Simon Lyster, who has been a member of the NWL
board for five years. The board has considerable
strength, drawn in part from the diverse backgrounds
and experience of the directors.

Sir Derek Wanless
Chairman
31 May 2011

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Chief executive
officer’s review

This review highlights our business activity during
my first year as CEO of NWG.

It has been a hugely enjoyable year, and also a
very interesting one, as I took time to understand
the business, listen to its stakeholders and
employees and work with them to develop
a way forward.

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I joined a company which already had a good
reputation and I was impressed immediately by the
loyalty and commitment of the workforce. It was the
start of a new five year investment period for NWL and
I have taken the opportunity to couple that plan with
a review of our strategy, vision and values.

Environment is critical to us and our stakeholders
and we acknowledge our responsibilities to protect
and enhance the natural environment. Our carbon
management plan will help reduce our carbon footprint
and we will adopt good environmental practice in all
aspects of our activity.

NWL had previously stated its vision to ‘be the national
leader in the provision of sustainable water and waste
water services’, and our commitment to this is
reaffirmed. We want to continue to deliver value to
customers and other stakeholders by focusing on
our core competencies of water and waste water
management. We underpin our drive to be the best
with five strategic themes containing goals and targets
that, when reached, will see our vision and our values
delivered. In the autumn, ‘Our Vision Our Values Our
Way’ was introduced to all our employees during a
series of interactive roadshows and, as a result, there
is clarity and energy throughout the company which
is driving the business forward.

Communities are important to us and we want to
build strong relationships with the communities we
serve. We will ensure that corporate responsibility is
embedded in performance management and that we
benchmark ourselves against the best companies.

We have agreed specific goals to help us achieve
our vision against these themes, and have clear
accountability for their achievement throughout
the company. These are measured in a balanced
scorecard which assesses our performance against
key performance indicators (KPIs). This is reviewed
by the Board, management team and all employees
on a monthly basis.

The five themes described below are mutually
supportive and achieving the right balance between
them is essential to our success and reputation.

Customer focuses on delivering industry-leading
customer service. Our relationship with customers is
core to the success of our business and it is essential
that they trust our service. Customer service is at the
heart of the company and all employees have a clear
focus on getting things ‘right first time every time’.
Although we are required to meet regulated standards
for customer service, this should not define our
aspiration as the quality of our service must go
beyond that.

Competitiveness will drive us to greater efficiency
and, indeed, to be the most efficient water company.
It is not just about driving cost down but using
innovation to support our activity.

People are our greatest asset and we want to be
recognised as a great company to work for with high
levels of satisfaction from our employees. We will
provide support and training and promote excellent
employee relations.

I believe that clear direction and goals are key to
success, but just as important is a clear sense of
values, and how we do things ‘around here’. So at
the same time as reviewing our vision, we have
made a clear commitment to five core values.

One team – we work together consistently, promoting
co-operation, to achieve our corporate objectives.

Customer focused – we aim to exceed the
expectations of our external and internal customers.

Results driven – we take personal responsibility for
achieving excellent business results.

Creative – we continuously strive for innovative and
better ways to deliver our business.

Ethical – we are open and honest in meeting our
commitments, with a responsible approach to the
environment and our communities.

Vision

Reputation

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Values

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Chief executive officer’s review
continued

2010/11
The company was successful in meeting many of the
targets in its balanced scorecard during the year. Out
of 26 targets we improved in 18, which is a very good
start. Most notable were the improvements in sewer
flooding, our SIM score for customer service as well as
the reduction in the number of interruptions to supply.
We were also very proud to retain our industry-leading
position in sewage treatment. Our independent
customer satisfaction scores still show that customers
are satisfied with the service we provide as well as value
for money although we were disappointed that this
was not reflected at the same level in the research
undertaken by the Consumer Council for Water
(CCWater) this year.

The report will also focus on many highlights throughout
the year but the development of our work to extend
Abberton reservoir and commence our second
advanced anaerobic digestion plant at Howdon, after
the successful operation at Bran Sands, are particularly
notable. The worst winter for over 100 years challenged
our employees but they responded magnificently
ensuring that no supplies were interrupted. This was a
fantastic achievement and I am very proud and grateful
for the commitment and hard work of so many of our
employees in truly dreadful weather conditions.

The company also continued to receive external
recognition for its activity. This year, Ethisphere listed
NWG in its top 110 most ethical companies in the world,
one of only five companies chosen in the UK. This
recognises the impact we have on underpinning the
communities in which we operate and also recognises
our longstanding relationships with key industrial and
commercial customers.

We continue to be actively involved in the business
community in all operating areas through direct
membership and involvement in the councils/boards
of the Confederation of British Industry (CBI), Chambers
of Commerce and other similar organisations. For
my part, I have been getting involved in a number of
organisations which I believe can influence the future
of the company and locally I am a member of the
CBI Council and have been asked to join their
national Infrastructure Group. I have also joined the
Government’s Green Economy Council as the water
industry representative and I hope that the Council
can bring a real influence to the development of
policy relating to a low carbon economy.

This year, industrial demand has stabilised and we were
particularly pleased with the signing of the agreement
by SSI from Thailand to secure the future of the Corus
plant on Teesside. There is evidence of some industrial
growth particularly with the confirmation that Hitachi will
develop a site in Durham to assemble its high speed
trains. Metering of our domestic customers continues
to increase, although at a different pace in our various
areas of supply, and domestic demand is also steady.
The collection of income remains a key focus for us,
particularly in a difficult economic climate.

Private drains and sewers
One of the major challenges we face in 2011/12 is the
transfer of private drains and sewers to the industry in
October. This will almost double our sewerage network
overnight and much work is already in hand to assess
what is needed in terms of staffing, building effective
data, information sharing and communications to
customers. We don’t fully know the impact of the
transfer yet, but it will lead to higher costs, in the order
of £20 million a year initially, which we will need to
recover in this five year investment period. The industry
has worked well in partnership, via Water UK, to come
up with the most practical cost effective way forward
for customers.

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Legislative changes
We look forward to publication of the Government’s
White Papers on Water and the Natural Environment later
this year. The former should bring greater clarity in areas
such as water resource planning, metering, social tariffs
and broader market reform. We have worked with the
industry, through Water UK, to set out a vision of how the
Government can achieve many of its objectives without
legislation or with only minor legislative changes. NWL
has held frequent meetings with Defra and contributed
ideas on water trading and abstraction reform including
a joint project (‘Trading theory for Practice’) with Anglian
Water, Cambridge Water and Veolia. We remain
committed to any moves that can deliver clear and
demonstrable improvements for customers, other
stakeholders and the wider environment.

The Water White Paper will be an opportunity to end
unhelpful speculation around the future regulatory
regime and provide a clear vision for the future of the
water industry that retains the confidence of customers
and investors alike.

In addition, we await the publication for consultation
of draft Regulations from Defra to introduce a duty
on landlords to provide water companies with relevant
details so that accurate bills can be issued to tenants.
This should assist in collecting income from the
private rented sector where bad debts have been
relatively high.

Regulatory reform
We welcome the conclusions of the Defra review of
Ofwat and CCWater conducted by David Gray. We
also welcome the view that the overall regulatory
framework, including the continued role for a separate
customer body, is generally fit for purpose. We support
the call for regulatory simplification and a reduced
reporting burden which is already being championed
enthusiastically by Ofwat. We also support further
clarification of the respective roles of Government
and regulators and a call for more transparency
in consultation processes.

We strongly support the move by Ofwat to significantly
reduce the burden of regulatory reporting and move
towards risk-based regulation. A useful start was
made in the simplified 2011 June Return reporting
requirements but we support the proposal for more
radical change in 2012. We have been working in
partnership with Ofwat to pilot a set of high level KPIs
to be reported by companies in place of the current
detailed and prescriptive reporting requirements.

Ofwat has published a series of consultation and
discussion papers on the subject of ‘Future price limits’.
We have responded to these papers and also engaged
in a range of workshops, meetings and informal
discussions with Ofwat. We believe the more focused
approach to regulation should be reflected in the
approach to future price reviews as well as the annual
reporting cycle. We welcome Ofwat’s intention to adopt
a more outcome-focused approach to price setting and
have made suggestions as to how the price setting
methodology could be simplified and made more
transparent. We look forward to responding to Ofwat’s
formal consultation paper outlining its proposals for
future price reviews later in the year.

The Office of Fair Trading has announced a market
study looking at whether the market for treatment of
organic waste is working effectively to deliver the best
outcomes for customers. NWL was an early investor
in advanced anaerobic digestion technology and we
welcome this review as it should provide the clarity
required to inform investment decisions.

Summary
This has been a very good year for the Group. We are
reporting a strong set of results, we have a clear vision
and goals to deliver and have made good progress in
performance in many areas. There is a strong sense of
energy, commitment and accountability in the business
and I am confident of further success in 2011/12.

Heidi Mottram
Chief Executive Officer
31 May 2011

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Our corporate
responsibility

In previous years, in line with many other companies,
we have reported on corporate responsibility
separately within this report. During the year, a review
of our vision, values and strategy has given us the
opportunity to truly embed sustainability throughout
our business. Reflecting the importance of
sustainability to our business we believe that we
should report sustainability issues alongside our core
business activities and we have decided to highlight
sustainability areas throughout our annual report in
green. We recognise that this is an innovative
approach and would welcome any feedback. This
activity is extensive and it is not possible to include
everything here. As a result, key sustainability issues
appear in green boxes and are linked to our
Sustainability Highlights document, a partner
document to this annual report, which contains more
detailed information on our responsible business
practice policies, plans, KPIs and case studies.

NWL is expected to provide a secure supply of water,
a basic necessity for health, and to protect or enhance
the environment when we return waste to it. Our
stakeholders also expect us to:
−
behave fairly and responsibly;
−
use resources wisely;
−
improve quality of life; and
−
contribute to economic development.

We believe that sustainability helps to improve the
performance of the company and to achieve our
business strategy and objectives. This is reflected
in our business plan where our sustainability
objectives are woven into our core business strategy.
Our credentials for our work have been recognised
and these are outlined on page 44. Business in
the Community (BITC) has highlighted that those
companies participating in their Corporate
Responsibility Index outperform other FTSE 250
companies and Ethisphere highlights similar
outperformance for ethical companies. NWG’s share
price has outperformed against the FTSE 250 over
the last five years as highlighted on page 78.

Our customer research also highlights that customers
value the work of NWL in the community and for
the environment and it helps to build their trust in
our work. Each aspect of the highlighted work in
this report has a direct benefit to the company, its
community and its environment, such as cost saving,
carbon reduction, environmental impact, skills
development or leverage. Case studies throughout
our annual report, for example on advanced anaerobic
digestion or use of reed beds in water treatment,
demonstrate the tangible business benefits such
as reduced costs and power consumption.

To ensure that sustainability runs throughout the
business, all parts of the Company are involved from
the Board through to all employees. Governance of
our sustainability activity is led by our Corporate
Responsibility Committee (CRC), a subcommittee of
the NWL board. The CRC comprises non-executive
directors, executive directors, the CEO (who is directly
accountable to the NWL and NWG boards for both the
environment and sustainable development policies)
and senior managers from across the business. In
addition, a CR Advisory Group (CRAG) acts as a
critical friend, helping to validate, guide and challenge
NWL’s sustainability strategy and activities. The CRAG
is made up of senior representatives from partner
organisations to reflect the key areas of our
communities strategy.

“ Northumbrian Water Group’s driving commitment
to sustainability demonstrates that strong leadership
and ambition can make a tangible difference to
communities and the environment.”
Simon Lyster, Chair, CRC.

“ Northumbrian Water Group has an open and
inclusive approach to working with a wide array of
external partners to develop extremely impressive
social and environmental initiatives.”
Norma Hope, Chair, CRAG.

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Our performance
measures

The Group monitors performance using a range of financial and non-financial KPIs. Performance against these
indicators is reported within the ‘our financial performance’ and ‘our operating performance’ sections later in
this report.

Looking forward, the financial KPIs remain unchanged for 2011/12. However, in order to measure delivery of the
Company business plan and goals, a balanced scorecard of KPIs has been introduced, which replaces the
existing non-financial KPIs. These indicators are spread across the themes of customer, competitiveness, people,
environment and communities and targets have been set on a trajectory to deliver the company vision of being
‘the national leader in water and waste water services’.

In order to ensure alignment of the management team, this balanced scorecard now represents 80% of the criteria
contributing to their annual bonus, with a further 20% available for the achievement of bespoke personal targets.

The table below details those KPIs and the targets that have been set for 2011/12. A full explanation of each
target follows.

Scorecard measure

Target 2011/12

% Contribution to
available bonus

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Strategic theme

Customer

Customer satisfaction
– SIM quantitative score
– SIM qualitative score
Unplanned interruptions >6 hours
– north
– south
Coliform incidents (no.)

174
4.4

900
600
15

Competitiveness

Profit before tax
Capital efficiency

Set by Board
Set by Board

People

Environment

Communities

Engagement and satisfaction index (%)
Lost time reportable accidents (no.)

Leakage (Mld)
– north
– south
Sewage treatment works compliance (%)
Pollution incidents (categories 1 & 2)

FTSE4Good accreditation
BITC Platinum Plus accreditation

Personal targets

Bespoke

81
11

147
66
100
3

Retain
Retain

Bespoke

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Measure

Definition of measure

Customer
Customer satisfaction –
SIM quantitative score

Customer satisfaction –
SIM qualitative score

Unplanned interruptions
>6 hours

Coliform incidents

Competition
Profit before tax

Capital efficiency

People
Engagement and
satisfaction index (%)

Lost time reportable
accidents (no.)

Environment
Leakage (Mld)
Sewage treatment works
compliance (%)
Pollution incidents
(categories 1 & 2)

Communities
FTSE4Good accreditation

BITC Platinum Plus
accreditation

SIM quantitative measure, based on customer contacts. Contacts are normalised per thousand
connected properties and multiplied by a weighting factor for each ‘unwanted’ category.
Categories include unwanted customer calls, abandoned calls, first stage written complaints,
second stage written complaints and CCWater investigations. The lower the score the higher
the customer satisfaction.
SIM qualitative measure, assessing satisfaction of consumers across their experience from first
correspondence to final resolution, through independent surveys. Surveys are carried out four
times a year for water, waste water and billing contacts and the average score taken. A score of
5 indicates maximum satisfaction.

A weighted scoring of the number of properties affected by interruptions to supply of more than
six hours’ duration which are unplanned, unwarned (excluding overruns of planned and warned
interruptions) except for those caused directly by third parties. It includes interruptions for which
customers are notified less than 48 hours in advance. The scoring weights interruptions which
exceed 12 hours, and heavily weights those which exceed 24 hours.
Total number of coliform failures in regulatory samples at water treatment works and service
reservoirs. One coliform or more is a failing sample.

Actual profit before tax compared to the budget approved by the Board, adjusted for the impact
of variances related to indexation on index linked bonds, which depends on the July RPI in the year.
Profit before tax has been chosen because it is a primary financial measure for the Group for which
the executive directors are accountable.
An annual assessment of the efficiency of the NWL capital investment programme is undertaken
by the Board.

The Engagement and Satisfaction Index is calculated from scores for 13 items selected from the
annual employee survey. These items align to the Sunday Times Best Companies survey and give
a measure of employee satisfaction.
Accidents reportable to the Health and Safety Executive resulting in more than three days lost
from work.

Water network leakage for the financial year, as reported to Ofwat.
Percentage of population equivalent served by sewage treatment works compliant with
Environment Agency (EA) look-up table consents.
Number of category 1 and 2 pollution incidents in the calendar year, as defined by the EA. Category
1 is a major water pollution incident and category 2 is a significant water pollution incident.

Accreditation by FTSE4Good index series, which has been designed to objectively measure the
performance of companies that meet globally recognised corporate responsibility standards.
Accreditation by BITC at Platinum Plus level, the highest level in their corporate responsibility index.
BITC is a national business-led charity which advises, challenges and supports its members to
create a sustainable future for people and the planet and to improve business performance.

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Our market

The largest of NWG’s businesses,
NWL, operates in the north east and
south east of England. The two
areas have very different economic,
demographic and water resource
characteristics.

Our external environment
In the north east, there has been a gradual fall in
overall water demand in recent decades as a
consequence of a reduction in industrial demand
for water. This trend is expected to continue but the
pace of decline has now stabilised after some
industrial closures during the economic recession.
The north east compares well to the rest of the
country as far as water resources are concerned
and our major regional rivers can all be supported
by Kielder Water. This provides very high security
of supply for our customers. We also provide the
highest levels of compliance for waste water across
this area ensuring that we can return the water
and sewage sludge to the environment satisfactorily
whilst meeting the demands of all customers.
Bran Sands is particularly important in this respect
as it supports the heavily industrialised area within
Teesside by treating its waste. The advanced
anaerobic digestion plant there is now operating
effectively and helping us to build our use of
renewable energy.

NWL’s southern operating area is in a water scarce
region that is forecast to experience further
economic and population growth in the medium
term. While this area has also seen a reduction in
demand from heavy industry, and the recession
is likely to dampen housing growth in the near future,
we have a current deficit, meaning supplies are
not secure in a severe drought. Future growth will
intensify the pressure on the balance between
supply and demand. NWL is implementing long
term plans to ensure the availability of water supplies
to meet both current and future demand in the
region. After approval from the EA, the project
to increase the capacity of Abberton reservoir,
near Colchester, coupled with ongoing demand
management measures, will secure supplies to
the Essex area for the foreseeable future.

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The current pressures within financial markets have
been well documented and the credit crunch has
resulted in reduced availability of certain types of
finance. It is highly unlikely there will be a return to the
exceptionally low cost of debt experienced from late
2005 to early 2007. Although market conditions have
improved in recent months, some uncertainty remains.
With the financing we have already put in place, we are
sheltered from this uncertainty in the short term as we
will not need to raise any new debt before March 2014.

Regulatory and legislative framework
As a monopoly supplier of an essential public service,
the UK water industry operates within a demanding
regulatory environment.

Ofwat regulates prices and levels of customer service,
while the Drinking Water Inspectorate (DWI) monitors
drinking water quality and the EA covers environmental
protection. Customers’ interests are represented
by CCWater.

NWL aims to maintain good working relationships with
its regulators and with regional organisations, such as
local authorities, which have an interest in the services
it provides and can influence the company’s business.
This is particularly important following Government
reviews of the regulators, changes in regulatory
reporting and proposals to legislate in the sector
following the publication of a White Paper later in
the year.

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Our financial
performance

NWG and NWL use a range of financial KPIs to monitor
the financial standing of the businesses and to ensure
that strong credit ratings are maintained. The definition,
purpose and source of each KPI are shown on page 52.

Performance against the financial KPIs is set out below:

Target

Current year

Previous year

Performance

KPI

Gearing to RCV (%)

Cash interest cover (times)

Cash flow to net debt (%)

NWG

<75

>2.5

>13

NWL

<701

>3.0

>13

NWG

632

3.2

NWL

563

4.0

NWG

3.3

NWL

3.9

Notes:
1. Less than 65% for the regulated business of NWL.
2. NWG’s pro forma Regulatory Capital Value (RCV) at 31 March 2011 was £3,643.1 million (2010: £3,420.5 million) (see below).
3. NWL’s RCV, as advised by Ofwat, at 31 March 2011 was £3,318.4 million (2010: £3,095.0 million).

Gearing to RCV

Cash ﬂow to net debt

65
59

67
61

66
61

NWG

NWL

2011

NWG

NWL

2011

Cash interest cover

3.9

3.8

3.9

4.0

smaller data adjusted so ﬁgures ﬁt

3.3

3.2

3.1

3.6

2.9

smaller data adjusted so ﬁgures ﬁt

NWG

NWL

2011

The pro forma Group RCV includes £219.1 million (2010:
£218.8 million) and £105.6 million (2010: £106.7 million)
for the Kielder securitisation and private finance initiative
(PFI) contracts, respectively. Adding these to NWL’s
RCV of £3,318.4 million (2010: £3,095.0 million), results
in a pro forma Group RCV of £3,643.1 million (2010:
£3,420.5 million).

Operating costs increased by £5.0 million (1.2%) to
£433.9 million, principally reflecting movements at NWL,
which are detailed below, and the one-off recovery of
claim costs by Caledonian Environmental Services
(CES) in the prior year. Profit on ordinary activities
before interest for the year was £304.2 million (2010:
£275.8 million), an increase of 10.3%.

The Group’s gearing on this pro forma basis has
decreased from 66% to 63%, with net debt increasing
by £41.1 million (1.8%) to £2,303.5 million over the year,
while pro forma Group RCV has increased by 6.5%
due principally to the increase in RPI.

Gearing at NWL, and for the regulated business, has
reduced to 56% from 61% and 60% respectively. This
is due to the impact of the high RPI increase on the
RCV and a reduction in net debt reduced over the
period of £28.5 million to £1,868.3 million, due to the
timing of intra-Group dividends which were paid after
the balance sheet date.

Net interest charges increased by £17.4 million within
which net cash interest charges increased by £2.6
million. The non-cash element of the increase principally
reflects inflation of the principal on the index linked
bonds (£28.5 million) and an increase in the interest
cost of pension plan obligations (£7.2 million). These
were partially offset by better than expected returns
on pension assets (£13.9 million) and one-off credits
in respect of the acquisition of the remaining 25.0%
subordinated loan stock in CES not already held by
the Group (£4.6 million) and a termination discount on
the transfer of a finance lease to a new counterparty
(£2.9 million).

The Group also prepares detailed medium term
business plans and annual budgets, which are reviewed
and submitted to the Board for approval. Targets are
set to measure performance and regular financial
forecasts are made. Business plans and budgets
include an assessment of the key risks and success
factors facing each business unit. On a monthly basis,
management compares the actual operational and
financial performance of each business with plan and
budget and this is reported to the Board.

Financial results and dividends

Profit on ordinary activities before tax for the year
was £181.0 million, 6.3% higher than the previous year
(2010: £170.2 million). The current tax charge reduced
to £33.1 million (2010: £37.8 million) principally reflecting
increased profitability more than offset by adjustments
in respect of prior periods.

The deferred tax credit of £30.5 million (2010: charge of
£9.5 million) reflects a decrease in the Group’s deferred
tax liability of £46.3 million following the enactment of a
reduction in the UK corporation tax rate from 28.0% to
26.0% with effect from 1 April 2011.

Profit for the year
Interim dividend paid (ordinary – 4.72 pence

per share)

Final dividend proposed (ordinary – 9.57

pence per share)

Year to
31.3.2011
£m

178.4

24.5

49.6

NWG
Revenue for the year ended 31 March 2011
increased by 4.7% to £738.1 million (2010: £704.7
million). Water and sewerage charges at the Group’s
principal subsidiary NWL, increased in line with the
price review (final determination) allowance of 5.0%
plus the November 2009 RPI of 0.3%. Income from
the Group’s water and waste water contracts
increased by 4.4%.

The effective tax rate for the period was 1.4% (2010:
27.8%) reflecting the impact of the deferred tax rate
change. In the absence of the rate change, and
other prior year items, the effective rate would
have been 28.5%.

Capital investment for the Group was £219.9 million
(2010: £236.3 million restated), including recognition
of £13.9 million for assets adopted at £nil cash
consideration, as required under IFRIC 18 Transfers
of Assets from Customers (2010: £14.0 million).

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Our financial performance
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NWL
Revenue was £689.4 million for the year ended 31
March 2011 (2010: £657.8 million). The increase is
mainly due to the application of the final determination
increase of 5.0%, and 0.3% in respect of RPI, on water
and sewerage charges. Demand from both domestic
and industrial customers has remained steady.

Operating costs increased by £2.9 million (0.7%) to
£391.8 million, principally reflecting increases in
depreciation, pension charges and water efficiency
costs, partially offset by savings on power (£6.1 million),
other efficiencies and one-off charges in the prior
year both for restructuring costs (£5.4 million) and for
bad debt relating to the closure of a major customer
(£1.7 million).

Profit on ordinary activities before interest for the year
was £297.6 million (2010: £268.9 million).

Capital investment in the regulated business for the
period was £221.5 million, under regulatory accounting
guidelines (2010: £218.3 million). This is slightly lower
than the final determination profile, deflated by the
Construction Industry Price Index (COPI), due to some
delays in maintenance investment as a result of the
severe winter weather, but this should be recovered
in future years. It is difficult to assess any potential
outperformance over the AMP5 period at this early
stage given the volatile nature of COPI but we remain
focused on delivering our regulatory programme.

We have recently tendered our major procurement
arrangements covering water treatment, waste water
treatment and waste water networks and have
appointed 19 contractors and consultants to framework
agreements covering an estimated £1.5 billion of
investment over the next ten years, commencing 1 April
2011. In addition, we are currently undertaking a tender
process to appoint additional contractors in readiness
for the transfer of responsibility for private drains and
sewers on 1 October 2011.

Early in the year, we instigated an efficiency programme
focused on identifying and implementing sustainable
operating cost efficiencies in order to achieve our
medium term goal of being in the top efficiency band for
both water and sewerage, as measured by Ofwat, by
2013/14. This programme has progressed well and, as
a result, we are ahead of our final determination profile.
Further information on this programme is provided on
page 28.

Water and waste water contracts
Our water and waste water contracts in Scotland, Ireland
and Gibraltar are all performing well and are in line with
expectations. Revenue for the contracts increased to
£40.0 million for the year ended 31 March 2011 (2010:
£38.3 million), principally as a result of the settlement of
outstanding claims and indexation on revenue tariffs,
both at CES. Profit on ordinary activities before interest
was £9.5 million (2010: £10.2 million), reducing as a result
of a one-off recovery of claim costs in the prior year,
partially offset by the increased revenues.

The Group is involved in two projects to deliver long
term PFI contracts with Scottish Water for waste water
treatment. In April 2010, the Group acquired the
remaining 25% non-controlling equity interest in CES
for a nominal sum resulting in an increase of £0.6 million
in equity shareholders’ funds. It also purchased the
remaining 25% subordinated loan stock for a
consideration of £0.4 million which, when compared to
the book value of the loan stock of £5.0 million, resulted
in a £4.6 million gain that has been recognised in net
finance costs in the period.

At CES, the Group now has a 100% shareholding in
both project and operating companies and the benefit
of a 40 year contract. Funding was provided through
a 37 year fixed interest rate corporate bond with the
principal amortising from 2008.

In Ayrshire, the Group has a 75% shareholding in the
project company and a 100% shareholding in the
company that operates the three effluent treatment
plants that comprise this 30 year contract. Finance was
provided through a 27 year loan on a fixed interest basis
with the principal amortising from 2003.

In Ireland, the Group is part of a contractual consortium
that designed and built a waste water treatment plant
for Cork City Council. Under the consortium agreement,
the Group has responsibility for a 20 year contract for
the operation and maintenance of the plant. During the
year, the Group added to its Irish project portfolio by
signing a 20 year operation and maintenance contract
for the Fermoy and Mallow waste water treatment
works, with Cork County Council, commencing in
May 2011.

AquaGib Limited, which is two thirds owned by the
Group in a joint venture with the Government of
Gibraltar, operates Gibraltar’s dual drinking water
and sea water distribution systems under its 30 year
contract with the Government of Gibraltar.

Other
Agrer
Revenue for the year to 31 March 2011 was £8.3 million
(2010: £8.5 million). During the year, Agrer has signed
new contracts and extensions with a total gross margin
of €1.7 million. At 31 March 2011, the gross margin of
the order book is in excess of €2.1 million.

The most significant new contracts signed during the
year include: provision of technical assistance to a local
development and management of natural resources
programme in Chad (€1.3 million – 54 months);
improvement of the agricultural products value chains
in Mali (€0.5 million – 20 months); a country evaluation
of Nepal, Nicaragua and Tanzania (€0.5 million –
six months) and a new Framework contract for the
European Commission Lot 1: Studies and technical
assistance in all sectors (four years). In the technical
assistance to the Good Governance programme in
Burundi, a significant extension has been signed
(€0.9 million – 28 months).

Earnings per share and dividends
Basic and diluted earnings per share (EPS) for the year
were 34.44 pence and 34.38 pence respectively (2010:
23.67 pence and 23.62 pence respectively).

The directors consider that EPS adjusted for the
volatility inherent in some deferred tax items gives a
better indication of the Group’s underlying performance.
In previous years, an adjustment has been made
for total deferred tax. However, the directors have
concluded that the ongoing deferred tax charge
forms part of underlying performance and it is more
appropriate to only adjust for significant non-recurring
deferred tax items. For the current period, EPS from
continuing operations, adjusted for the deferred tax
credit relating to the corporation tax rate reduction,
were 25.50 pence (2010 restated: 23.67 pence).

A final dividend of 9.57 pence per share for the year
ended 31 March 2011 will be recommended by the
Board to shareholders at the AGM on 28 July 2011
and, if approved, will be paid on 9 September 2011 to
shareholders on the Company’s Register of Members at
the close of business on 12 August 2011. Together with
the ordinary interim dividend of 4.72 pence per share,
the ordinary dividends paid and proposed for the year
will be 14.29 pence per share (2010: 13.24 pence per
share). This represents an increase of 7.9%, based on
average inflation over the year of 4.9%, on the ordinary
dividends for the previous year and is consistent with
the Board’s decision to maintain a progressive dividend
policy with real increases of 3.0% per annum. The
dividend cover for the year, excluding significant,
non-recurring deferred tax, was 1.9 times (2010:
1.8 times).

The board of our main subsidiary, NWL, has proposed
a dividend policy consistent with the underlying growth
assumptions adopted by Ofwat at the price review
in 2009.

Northumbrian Water Share Scheme Trustees Limited,
which at the date of this report held 765,962 shares to
be used in the future to satisfy the vesting and exercise
of awards under the Company’s Long Term Incentive
Plan (LTIP), has waived the right to all dividends on the
shares it holds. Further details of the LTIP can be found
in the directors’ remuneration report.

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Our financial performance
continued

Accounting policies
The consolidated financial statements have been
prepared in accordance with International Financial
Reporting Standards (IFRS) as adopted by the
European Union as it applies to the financial statements
of the Group for the year ended 31 March 2011.

Capital structure and liquidity
As at 31 March 2011 the Group and NWL’s regulated
business debt structure remain largely unchanged from
the previous year end date.

In February 2011, the Group agreed a new £100.0 million
US private placement with a ten year maturity at a
coupon of 5.82%, the proceeds of which were received
on 14 April 2011. On the same date, this and existing
cash reserves were used to refinance £125.0 million of
holding company debt maturing in May 2011. NWL has
also received approval for a new £150.0 million facility
from the EIB which will be drawn in three £50.0 million
tranches, in the calendar years 2011 to 2013, at interest
rates to be determined at the time of drawdown.

The Group and NWL’s regulated business debt
structure remain largely unchanged with 74% (NWL:
70%) fixed at an average rate of 5.80% (NWL: 5.96%),
20% (NWL: 23%) index linked at an average real rate of
1.85% (all NWL) and 6% (NWL: 7%) on a variable rate
basis. The blended average rate for the Group and
NWL’s regulated business for the year ended 31 March
2011 was 5.80% and 5.93% (2010: 4.62%, 4.45%),
respectively, reflecting increased RPI.

Cash interest cover has remained stable for the year as
have the credit ratings for NWL at BBB+ stable (Fitch
and Standard & Poors) and Baa1 stable (Moody’s).

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NWG’s interest structure

Fixed
Index Linked
Floating

NWG’s funding source

Bonds
EIB
Bank
Lease

NWG’s gross debt
maturity proﬁle

£m

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Group
NWL
appointed

Yearly

Five year periods

Following the 2004 actuarial valuation the Group
prepaid contributions for the period to 31 December
2010. In place of recommencing regular contributions
from 1 January 2011, the Group agreed to pay
further advance contributions to the scheme totalling
£70.0 million for the period to 31 March 2015. Amounts
totalling £22.9 million were paid in the period to
31 March 2011 and a further £47.1 million was paid
in April 2011. These payments comprise employers’
contributions and the deficit recovery funding
assumed in the final determination.

A full actuarial valuation of the scheme as at
31 December 2010 is underway.

Total cash, cash equivalents and short term cash
deposits available at 31 March 2011 amounted to
£141.7 million. This, and the new EIB facility, is sufficient
to meet the requirements of the business through to the
end of March 2014.

Treasury policy
The main purposes of the Group’s treasury function
are to assess the Group’s ongoing capital requirement,
to maintain short term liquidity, ensuring access to
medium term committed back up facilities, and to
raise funding, taking advantage of any favourable
market opportunities.

It also invests any surplus funds the Group may have,
based on its forecast requirements and in accordance
with the Group’s treasury policy. On occasions,
derivatives are used as part of this process, but the
Group’s policies prohibit their use for speculation.
Full details are provided in note 20 to the financial
statements. The Group is operating in compliance
with its policies.

Pensions
The Group operates both a defined benefit pension
scheme, which is closed to new entrants, and an
occupational defined contribution arrangement.

The deficit (under International Accounting Standard
(IAS) 19 Retirement Benefits) of the defined benefit
scheme has decreased from £133.1 million, at 31 March
2010, to £46.0 million at 31 March 2011. This is due to
a reduction in the liabilities of the scheme (£37.2 million)
and an increase in the value of scheme assets (£49.9
million). The valuation of the scheme liabilities has taken
account of legislative changes which mean that future
statutory deferred revaluations and statutory pension
increases will be linked to the Consumer Price Index
(CPI). As a consequence, CPI increases have been
applied for deferred pensions in all sections of the
scheme and to those sections where the scheme rules
link increases to the Government’s pension increase
orders. This has given rise to a reduction in the scheme
liabilities of around £36.0 million.

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Our operating
performance

We use a range of KPIs to measure non-financial
performance in the business and these indicators are
reviewed by the management team each month.
Performance for the year is reported in this section.
The definition, purpose and source of each KPI are
shown on pages 52 to 53.

These measures have been reviewed in the year, as
outlined in ‘our performance measures’ on page 12,
and a new balanced scorecard of KPIs has been
introduced for 2011/12.

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Customer

Putting customers first
Customer service is at the heart of the company
and the culture of getting things ‘right first time
every time’ is embedded in the business. We keep
customers informed about our activities through
leaflets with bills and our websites at www.nwl.co.uk
and www.eswater.co.uk. The sites include information
about our services and now allow customers to ask
questions and investigate work being carried out in
their area. If customers are directly affected by any
work, we give advance warning and explain the need
for the timing of such work. We also communicate
more broadly with local communities through public
meetings and customer information events.

Customer satisfaction
We measure the views of our customers with quarterly
tracking research alongside qualitative work in focus
groups. This helps us to understand their views on
service, value for money and other issues as well
as their general perception of the company. NWL
measures its performance for domestic customers in
two key ways, customer research and performance
against standards.

Customer research is carried out each quarter in the
regions served and the table below shows the key
results for overall satisfaction with service and value
for money.

Overall service (%)1
Value for money (%)1

Note:
1. Satisfaction measured on a net basis (see appendix to the directors’ report – business review).

Customer service
The performance against standards of service is shown below.

Properties at risk of low pressure

Properties subject to unplanned interruption of six hours or more

Properties subject to hosepipe bans at any time during the year

Properties subject to sewer flooding (other causes)

Properties at risk of sewer flooding (once in ten years or twice in ten years)

Billing contacts responded to (within five working days) (%)

Written complaints responded to (within ten working days) (%)1

Bills based on meter readings (%)

Note:
1. New SIM measures were introduced in 2010/11, which incorporate this KPI, therefore no separate target set.

Target
2010/11

Performance
2010/11

91
87

89
85

North (N)
South (S)

Target
2010/11

Performance
2010/11

N
S

N/S

N
S

256
55

1,700
1,100

150

688

99.3
99.3

n/a
n/a

99.9
99.9

230
41

1,573
700

253

487

99.3
99.7

99.9
99.8

99.87
99.83

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Our operating performance
Customer continued

In addition, Ofwat introduced the SIM in the year,
which monitors both quantitative and qualitative
aspects of customer service. This new mechanism
financially incentivises the best performing companies
and penalises the worst, endeavouring to simulate
competition and encourage excellent service
throughout the industry. Our aim is to be the
leading company for SIM.

The quantitative aspect of SIM includes metrics for all
lines busy and abandoned calls, unwanted calls, written
complaints and CCWater investigations, each of which
are worth a number of penalty points depending upon
the severity. Results across all metrics improved during
the year, customer complaints continue to reduce and
our quantitative SIM score for 2010/11 was 211, a
significant improvement compared to 2009/10 when
our score equated to 331.

The qualitative aspect of SIM takes the form of a survey,
which is conducted each quarter across every water
company and asks customers who have made contact
with us about their experience. Our cumulative score
for the four quarterly surveys was 4.14 out of 5, an
improvement on the previous year’s score of 4.10.

The way we handle customer complaints is reviewed
annually by CCWater who assess cases against a range
of criteria. During 2010/11, 96% of all cases reviewed
were assessed as good. We value the feedback
CCWater provide us and actively use their suggestions
to further improve the customer experience.

Affordability
We aim to provide accurate, clear and timely bills
which encourage prompt payment. Customers
who deliberately avoid paying charges are actively
pursued. In the current economic climate, we
know that affordability continues to be a genuine
concern for many customers and we continue to
be considerate of their circumstances, ensuring they
can choose suitable payment options and that our
recovery techniques are appropriate and effective.
However, customers who deliberately avoid paying
charges are actively pursued and we are working
closely with Ofwat and Defra to seek changes to
legislation which will assist the industry to identify
those responsible for charges more easily.

The Flood and Water Management Act 2010
outlines how sewerage service providers may
operate concessions for surface water drainage
charges, to protect certain community groups
and premises from unaffordable charges. We have
decided to introduce an interim concessionary
charge for the charging year 1 April 2011 to 31
March 2012 and will carry out consultation with
CCWater to determine the longer term future of
any concessions in the coming months.

Business customers
The economic situation has had a significant impact
on some business sectors which are important in our
operating regions and NWL has been working closely
with major customers in those sectors to mitigate the
impact where possible. NWL has always tried to

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work with its major customers in partnership and
the case study on page 27 highlights such work
at KP Foods. While economic conditions remain
challenging, industrial demand has stabilised this
year following, for example, the development of the
former Artenius site by Lotte Chemical UK Limited.
The agreement for the takeover of the Corus site
by SSI should help stabilise industrial demand
going forward.

NWL is active in the business communities where it
operates as a member of the CBI and Chambers of
Commerce. By supporting these and smaller groups
NWL can help business growth and development in
the areas it serves as well as retaining contact with
organisations which represent customers. Business
customer satisfaction is also tracked on a regular
basis and levels of satisfaction are high.

Leisure customers
NWL continues to develop its leisure facilities at all
strategic sites including investment in fishing facilities,
holiday accommodation and supporting ‘access
for all’. Occupancy of the log cabins at Kielder was
85% and we have 5,814 fishing members registered.
The combined activity of our reservoirs rates this
business the largest of its kind in the UK, with a high
customer satisfaction at all sites. NWL is also an
active member of the Kielder Water & Forest Park
Development Trust.

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Strategy in action – Customer

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Working in
partnership

We always aim to exceed the expectations of our customers by
taking personal responsibility for delivering and communicating
a good service and keeping promises. We have many examples
of ‘right first time every time’, two of these are outlined below.

Many of our domestic customers have meters and pay bills based upon how much
water they use. Having a meter can help save money, however, for those who have
larger families, big gardens or use lots of water, this can be more difficult.

This was exactly the case for the Young family from Stockton-on-Tees. Father of two
Stephen Young contacted us to discuss his metered bill and seek advice about ways
to reduce his charges. Stephen already used water butts to store rainwater, however,
following our advice, Stephen and his family made some simple changes including
turning off the tap while brushing their teeth, taking shorter showers and using NWL’s
water efficiency pack containing a variety of water saving devices.

Commenting on the help and advice he received, Stephen said: “Getting in touch
with NWL is easy. I know my call will be answered straight away, which is amazing
these days that I will be able to speak to someone who cares and relates to my
concerns.” Vikki Anstey, our customer advisor who talked to Stephen, said: “It’s all
about listening to each customer’s concerns and then making sure you meet their
needs and go the extra mile to help them.”

We aim to work in partnership with our major business customers as we know that
a key factor for them in their business is reliability and security of our services.

Tees Valley crisp manufacturer KP Foods (KP) is a major customer of NWL’s
Billingham sewage treatment works. To improve KP’s economic performance and
enhance the sustainability of its operations, KP proposed to construct a membrane
bioreactor to enable water to be treated and re-circulated at its plant. NWL’s account
manager worked with KP to ensure that the proposed development did not
detrimentally impact on NWL’s sewage treatment works compliance while providing
advice and support. Both parties have benefited from the close, honest working
relationship which has resulted in a great deal of trust and respect:
−

water consumption has been reduced meaning less abstraction, treatment and
pumping for NWL and lower water bills for KP; and
the trade effluent discharge is cleaner and requires less treatment, reducing the
cost of power and de-sludging for NWL, resulting in lower trade effluent discharge
costs for KP.

−

NWL and KP have each increased their competitiveness by improving their efficiency.

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Our operating performance

Competitiveness

Early in the year we instigated an
efficiency programme focused
on identifying and implementing
sustainable operating cost
efficiencies in order to achieve
our medium term goal of being
in the top efficiency band for
both water and sewerage,
as measured by Ofwat.

Efficiency programme
The efficiency programme has identified around 100
projects and initiatives from across the whole business,
ranging from large scale strategic reviews to smaller
improvements at a local level. Examples of some of the
changes underway include consolidating all chemical
analysis for our northern operating region at one
laboratory; the implementation of site-specific energy
management plans to reduce energy usage; increasing
the capability of our website to enable improved
customer self-service; investigating opportunities for
co-digestion of external waste streams at our advanced
anaerobic digestion plant at Bran Sands and insourcing
activities where it is more efficient and effective to
do so.

These efficiencies are additional to the benefits already
secured through procuring our full energy requirements
to March 2015 and the headcount reductions resulting
from severances and early retirements, for which
provision was made last year.

Delivery of the programme is on schedule and, as a
result, we are ahead of the final determination profile.
However, these benefits are partially offset by the
impact of the changes to the Carbon Reduction
Commitment Energy Efficiency Scheme announced by
the Government in its Comprehensive Spending Review
in October 2010, which is expected to increase energy
costs by around £3.0 million next year with further
increases of up to £1.5 million by 2014/15, and which
was not funded in the final determination.

Other aspects of performance in relation to our
competitiveness theme are included in ‘our financial
performance’ on pages 16 to 21.

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Research and development
As part of its competitiveness theme, NWL runs a
programme of research and development linked to
its operations, which includes the development of
technical solutions for water and waste water
management, collaborative research within the
sector and partnerships with academic and research
organisations and actively encourages innovation.
This has supported the invention, development, trial
and/or implementation of:
−

advanced automatic control systems for waste
water treatment process;
a device for reducing flooding and pollution;
microbial fuel cells and electrochemical cells,
which, respectively, generate electricity or
hydrogen from waste water;
novel instruments for monitoring the quality of
waste water effluent;
beneficial re-uses for water treatment sludge;
low power de-watering and thickening of water
treatment sludge;
internal inspection of water distribution pipes
while in service;
lining systems for extending the life expectancy
of water distribution pipes;
water efficient and rapid disinfection of water mains;
novel processes for drinking water production and
waste water treatment;
renewable energy production using biogas;
regeneration of brownfield land using water
treatment by-products;
early warning system for leaks and bursts; and
remote pipeline condition assessment.

−
−

−

−
−

−

−
−

During the year, the Group invested £2.3 million
(2010: £2.1 million) in research and development.

Research carried out by London Economics for
Professor Martin Cave’s ‘Independent Review of
Competition and Innovation in Water Markets’ found
that, in terms of innovation infrastructure, NWL was one
of the companies best equipped to promote innovation
in terms of the resources it dedicates.

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Strategy in action – Competitiveness

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World
first at
Hanningfield

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An initial stage of water treatment involves removing silts and algae
from raw reservoir water, a process which creates around two
million litres of a ferric (iron) based liquid sludge every day. Around
99.8% of this is water which, once separated, can be recycled
back to the reservoir for re-use. In this case, innovation is clearly
linked to our competitiveness.

Traditionally, sludge was discharged into lagoons storing the solids whilst allowing
clear water to overflow back into the reservoir. At Hanningfield, our largest water
treatment works, the last lagoon was near the end of its life and although it would
have been quicker and easier to have specified traditional mechanical treatment,
a considerable amount of work over three years was undertaken to prove that reed
beds could provide a sustainable and effective alternative for water sludge treatment
– a world first for a project of this scale.

Natural England strongly supports the reed bed project at Hanningfield reservoir
because it will provide a sustainable, energy and carbon-efficient solution to the
long-term disposal of water treatment sludge. It will also create a significant reed bed
within a few hundred metres of Hanningfield reservoir which will be designated as a
site of special scientific interest that will be of use in its own right for a variety of
wildlife, including reed bed invertebrates, birds and foraging bats. It will also provide
a regular water supply for a disused sludge lagoon within the site of special scientific
interest which the company has recently restored very successfully as a wildlife-rich
mosaic of reed bed, open water, wet scrub and woodland.

Our operating performance

People

Employee policy
Each company within the Group has developed its
own employee policies, reflecting the framework
set out in NWG’s ‘Our Code of Conduct’. These
policies are tailored to specific business objectives
and operating environments. Each company aims
to recruit and retain the best people, with a diverse
range of skills, experience and backgrounds, who are
committed to making the company successful. In
return, each company aims to provide opportunities
and training for employees to develop their skills and
capabilities to equip them to meet the challenges of
their roles, while rewarding the contributions of both
teams and individuals. The CEO has responsibility at
Board level for human resources issues. The Human
Resources Director, Sarah Salter, reports directly to
the CEO.

Employees
Throughout the Group we employ 3,031 people, as
set out below:

Group business unit

NWL
Water and waste water contracts
Other

Total employees

Average
number of
employees

2,875
132
24

3,031

95
4
1

100

NWG ensures its terms and conditions both attract
and retain the best people in the areas it serves. NWL
employee turnover is relatively low at 5.8%, below the
UK water industry average of 9.4%.

NWL’s current level of sickness absence is 3.1%,
which is well below the norm for the sector.

Target
2010/11

Performance
2010/11

Employee turnover (%)

Lost time reportable accidents

(per 1,000 employees)

Sickness absence (%)

9.41

4.3

2.9

5.8

4.1

3.1

Notes:
1. No target set, industry average provided for information.

The active involvement and engagement of everyone
across the business is an important part of delivering
performance and NWL continues to seek the views of
employees through an annual employee engagement
survey. This year’s survey had the largest response rate
ever, at 75%, and the feedback covered working life,
training, communications, managers and the company.
All employees were invited to workshops to consider
the results and identify areas for improvement in their
working practices and environment, the outputs
contributing to the development of departmental action
plans. In addition, 80% of respondents told us they
are proud to work for the company, 81% would
recommend working for the company and 77% believe
that NWL is a great organisation to work for.

For the first time NWL took part in the Sunday Times
Best Companies survey and achieved ‘one to watch’
status, an excellent achievement on first time entry.

NWL employees also have access to a scheme which
provides a wide range of benefits including tax efficient
benefits such as childcare vouchers, water services,
cars for personal use and discounted store vouchers.
Currently 73% of employees participate in the scheme,
up from 72% last year.

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Equality and diversity
The Group operates an equal opportunity policy
designed to ensure that no job applicant or employee
receives less favourable treatment on the grounds of
age, gender, marital status, disability, race, ethnic or
national origin, religion or sexual orientation. NWL
monitors its workforce profile against census and
sector data and aims to be recognised as an employer
of choice within the diverse communities it serves,
ensuring it takes full advantage of the rich backgrounds
and abilities of current and potential employees.

NWL welcomes employment applications from
people with disabilities and, where existing employees
develop disabilities, they are supported to remain
in employment, wherever practicable, by providing
appropriate adjustments to their roles and/or effective
redeployments. Occupational health physicians assist
this process with professional medical advice.

Consultation and engagement
Each Group company engages with its employees
through a variety of means appropriate to its working
environment. The importance of an inclusive and
engaging management style is fully recognised.

In 2010, NWL continued to build on its award-winning
approach by engaging with all employees over some
120 departmental workshops facilitated by senior
managers and 51 interactive roadshows facilitated
by the directors. These were all structured to outline
our vision and values, encourage a dialogue on
improvements to working practices and environment
and to seek views on its people strategy. This has
been further developed to include leadership events
held bi-annually engaging the most senior managers
in the continuous development of plans to enable the
achievement of the vision.

Training and development
All Group companies train and develop their
employees to benefit both the company and the
individual. Annual appraisals are given high priority,
as is the identification of training needs, in recognition
of the importance of training and development in
achieving the Group’s goals and policies. In NWL,
a 360° feedback mechanism, which evaluates
performance against the company values, has been
introduced for all senior managers. The results of the
feedback are discussed at annual appraisal meetings.

3
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Our operating performance
People continued

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Our people are the key to our business success.
Our aim is to build and maintain a culture which
values, encourages and recognises outstanding
performance, where we share a commitment to our
objectives and to delivering our personal best. From
corporate induction days and induction planning, to
individual coaching, accreditation of skills through
national vocational qualifications, and management
and leadership programmes, we provide the resources
needed to help employees reach their full potential.

We signed the Government’s Skills Pledge at the end
of 2007, publicly committing to develop 90% of the
workforce, around 2,600 employees, to at least
National Qualification Framework (NQF) Level 2 – the
equivalent of five GCSEs at grades A to C – by the end
of 2010. This was achieved by July 2010 with 90.2%
qualified to NQF Level 2 or above. National Vocational
Qualifications continue to be delivered in customer
and operational areas. In addition, we currently have
seven graduates on our Graduate Development
Programme and 29 apprentices.

NWL continues to implement its Management
Development Framework which is structured (see
diagram on page 33) to cover the training needs of
those who show the potential for management right
through to development at director level. As part of
this framework we are working in partnership with
Newcastle Business School to provide qualifications,
from a Diploma to a Masters degree, in leadership
and management. In 2010, we introduced our
LEADer programme, which is the next step in our
Management Development Framework, to some of
our operational departments. This development
programme for supervisors, team leaders and works
managers includes assessment against NQF Levels 2,
3 and 5 management standards, as appropriate,
supported by formal development and coaching.

Recognising our employees’ academic achievements,
the fifth annual skills awards were celebrated this
year. Attended by senior managers from around the
business, and with guest speaker Kriss Akabusi, the
events were again motivational and memorable.

Communication
The Group uses a wide range of communication
methods including magazines, brochures, leaflets,
newsletters, intranet, notice boards and regular team
meetings. NWL issues all employees with a series of
information booklets clearly explaining areas such as
the company’s vision and values, terms, conditions
and benefits of employment, and occupational health
and wellbeing programmes.

Disclosure (Whistleblowing)
The Group encourages open feedback and is
committed to protecting employees who wish to voice
concerns about behaviour or decisions that they
believe to be illegal or unethical. The Audit Committee
regularly reviews the disclosure policy.

Health and safety
NWG places great emphasis on health and safety and
a safe working environment. Employees are actively
encouraged to be involved in identifying and eliminating
hazards in the workplace. This has resulted in a
significant reduction in accidents over recent years.

A health and safety policy is maintained and
implemented at each subsidiary.

Our emphasis on the importance of health and safety
within NWL has resulted in major improvements
to our safety record in recent years. This year we
experienced nine reportable accidents and incidents
per 1,000 employees, which continues the improving
trend achieved over the last seven years.

We have established a medium term plan for taking
health and safety forward in the company to 2015. We
aim to further reduce the number of accidents by 10%
each year and to maintain and improve the safety
culture in the company.

Employee Share Incentive Plan (SIP)
The directors believe that employee investment
strengthens the ties between the Group and its
employees. More than a third of employees participate
in the SIP, and together have an interest in 0.6% of the
issued share capital. The scheme provides one free
matching share for every three shares bought by an
employee. Shares for the SIP are purchased at market
price by the Trustee and dividends are paid in cash
directly to participants. There are no performance
conditions attached to the SIP, but free shares not held
in trust for at least 12 months are forfeited. Employees
participating in the SIP are given the opportunity to
exercise their voting rights through the Trustee.

NWL proactively supports and encourages
employees to strive for high standards of health
and wellbeing by providing a wide range of services,
support and resources relating to occupational
health, with the Group’s medical advisor providing
comprehensive occupational health services, general
health promotion and stress management. NWL
employees also have on and off-site access to
specialist advice and treatment to support recovery
from musculoskeletal disorders (MSD). We have
reduced sickness absence due to MSD by 39% over
the year. In 2010, we introduced NWL Support. Part
of this service is an Employee Wellbeing Programme
which gives employees and their immediate family
access to face to face or telephone counselling on
a range of subjects regardless of whether or not the
issues are work related. In addition, it also provides
a telephone based case management service for
employees who have either a stress related or mental
health condition. We have reduced stress related
sickness absence by 16% in the first year.

We continue to promote healthy eating, hydration
and to discourage smoking in our workforce
and offer excellent health screening and medical
insurance schemes. Around 2,200 employees have
been through our health screening and fitness
standards programmes, both of which now include
lifestyle advice elements.

Quality
The company has successfully extended its scope of
certification to the international occupational health
and safety management standard OHSAS 8001:2007
to include Scientific Services, thus now ensuring
company-wide coverage.

C
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Strategy in action – People

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Growing
in water –
investing in
our people

As a company we are committed to investing in training and
development to ensure that our people are competent and safe
in their current roles, to support them to develop skills and
knowledge to help take the business forward and, where people
are career orientated, to help them develop for future roles. We
have many examples of our people in the business who have
developed their career within NWL.

Tony Erskine, our customer manager, joined us aged 17 on the young person’s
development programme, a youth training scheme, and began studying for a higher
national certificate qualification. He is now in his final year of NWL’s bespoke BA
(Hons) in Leadership and Management and will graduate in July.

Tony said: “The BA course is the best thing that I have ever done. It has been a real
eye opener and enabled me to learn new skills, get different perspectives and learn
from others. It’s been a massive benefit to me as a manager and I believe makes me
a more effective leader. It’s been a lot of hard work but I have gained a lot from it and
so will the company”.

Chris Loftus, leakage assistant, was unemployed and not sure of what he wanted to
do with his life when he saw the poster advertising The Prince’s Trust Get into Water
programme in the window of his local Jobcentre. He found his age and lack of
experience a real hindrance until he joined us on a three week course designed to
provide unemployed 16-25 year olds with the opportunity to learn about the water
industry and get some valuable hands-on work experience, before hopefully moving
into employment. He has now been with NWL for three years and has become a
young ambassador for the Princes Trust while receiving the Essex Young Achiever
of the Year Award.

Kathryn Waugh, distribution operations controller, joined the accelerated graduate
development programme in 2001 following her degree in physical geography. She
undertook a series of strategic projects and business support placements to develop
her knowledge of business processes and gain a broad overview of the company
and its operations. After further development roles in water and waste water works
management, she has now taken a senior role in operations. Kathryn said: “I find
working with people to make positive improvements to the operations and maintenance
side of the business very rewarding. I really enjoy my job and working for NWL.”

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Our operating performance

Environment

Water quality
The quality of water is critical to our customers and
samples are taken on a daily basis for analysis under
regulations monitored by the DWI. The quality in all
areas served remained high.

North (N)
South (S)

Target
2010/11

Performance
2010/11

DWI Mean Zonal
Compliance (%)

DWI Operational

Performance Index (%)

Distribution

Maintenance Index (%)

N
S

99.85
99.95

99.65
99.98

99.70
99.85

99.95
99.94

99.84
99.97

99.70
99.93

Compliance at water treatment works has improved
significantly in 2010 with fewer microbiological failures
than any previous year. This reflects the work being
undertaken to achieve internal medium term targets for
performance. In addition, service reservoir maintenance
has been enhanced, with inspection rates now three
times higher than historical frequencies. The aim of this
work is to sustain a higher level of microbiological
compliance while ensuring the integrity of the asset
base for the long term.

Work using new cleaning techniques to refurbish more
than 150 kilometres of the large diameter pipe network
is well advanced. The network supplies drinking
water to over half a million customers in south east
Northumberland and parts of Tyneside. The majority
of the cleaning works have now been delivered and
the programme is due to be completed in June 2011,
achieving a significant reduction in customer
complaints of discoloured water. Progress has been
maintained despite the unusually harsh winter.

Water resources
Water resource availability is a key issue in our Essex
and Suffolk areas. Work continued throughout 2010
on increasing the capacity of Abberton reservoir, near
Colchester, by 58%. Good progress was made and
the project remains on programme.

In early 2011, construction of two new pipelines to
bring water from Norfolk commenced. The one
remaining part of the overall Abberton Scheme that
requires permissions is the variation of abstraction
licences at Denver and Blackdyke, in Norfolk, and we
are working closely with the EA on progressing this.
Once this scheme is operating, in 2014, we do not
expect to have to develop further major resources
in Essex for the next 25 years.

In addition to improving the supply of water, we believe
it is important to manage the demand for water so that
it does not exceed levels that can be supplied in a
sustainable way. Metering has an important role to
play in this regard. For several years we have been
installing water meters upon change of occupier in
properties in the Essex area. This is in addition to the
optional metering scheme available to all customers.
Around 48% of domestic households in Essex and
60% in Suffolk are now metered. In the north east,
where supplies are more plentiful, 24% of households
are metered.

New water efficiency targets were introduced in
2010/11 to reduce per capita consumption across
the company’s domestic customers by one litre per
property per day. These targets apply in all areas
served and the award-winning work previously carried
out in Essex was extended to the rest of the company.
New initiatives have been developed, including an
innovative theatre production called ‘Little Green
Riding Hood’ with Fame Factory Spotlight, which
took the water efficiency message to 36,500 school
children over the last year. NWL met its water
efficiency targets early, before the end of the year.

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We continue to monitor the weather patterns and
the early part of 2011 has proved to be dry with little
rainfall. The resource situation is still good with
adequate resources in storage to meet demand. There
are no plans for restrictions although the company will
continue to use awareness campaigns to encourage
customers to control demand in dry periods.

Our assets, once again, proved very resilient during
the most severe December weather for more than
100 years in the north east of England. It proved very
challenging but we were able to maintain supplies to
customers largely due to the exemplary efforts of our
employees who worked tirelessly in difficult conditions.
The severe freeze and subsequent thaw, inevitably
resulted in a significant increase in burst pipes and
leakage both on our own network and customer
premises. As a result, in our northern operating region,
the water lost over the winter period meant we, along
with other companies, did not meet our annual
leakage target. In our southern region, conditions were
not quite so severe and we achieved our target. We
have recovered from the effects of the winter through
implementing an action plan which will position us well
to meet the target in the following year.

Waste water
NWL’s exceptional performance for sewage treatment
works continued with all numerically consented works
again remaining compliant for the year.

(Northern operating area only)

Sewage treatment works (%)

Bathing waters Mandatory

Standard (%)

Pollution incidents (category 1,

2 and 3)

Target
2010/11

Performance
2010/11

100

102

100

101

The advanced anaerobic digestion plant at Bran
Sands is now fully operational and generating the
expected volumes of biogas and electricity. The
re-organisation, to operate the plant at much lower
manning levels than previously, has been successfully
implemented. Construction is now underway on a
similar plant at Howdon, on Tyneside, to process the
remainder of NWL’s sludge.

A total of 33 of the 34 bathing waters in the north
east passed the required mandatory standard and
28 met the more demanding guideline standard. The
single mandatory failure was Saltburn and NWL is
carrying out a detailed investigation on whether any of
our assets could be contributing to this and is working
with other agencies to determine how they may be
impacting on this bathing water.

The number of properties experiencing internal
flooding due to hydraulic overloading reduced
significantly in 2010/11. This can be attributed to a
combination of less frequent and intense summer
storms in 2010 and the cumulative effect of our sewer
flooding investment programme. Enhanced resolution
rain radar has now been in place in the north east
since 2009 allowing us to identify severe weather
across the region.

During 2010/11 we completed 43 schemes at a cost
of £17.5 million that resulted in the removal of 178
properties from flooding registers. Planning to identify
schemes for coming years forms a key part of our
investment programme and is well advanced, with
a further 270 properties to be addressed in 2011/12.
Additionally, in line with our serviceability action
plan for sewer flooding, we have embarked on a
programme of increased mitigation. This covers not
only properties where a scheme is not cost beneficial
but also properties where a solution may not be
implemented quickly.

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Our operating performance
Environment continued

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The number of properties flooded due to other causes
also reduced significantly in 2010/11. This reduction
has been influenced by increased sewer cleansing
activity as well as better weather.

−

Carbon management plan
The water industry is one of the largest users of
energy in the UK and we aim to play a full part in
support of Government’s plans to reduce emissions.
We have been working hard over recent years to
reduce our carbon footprint while preparing ourselves
for the future challenges of a change in climate and
the weather events we may face as a consequence.

NWL has published its carbon management plan to
meet its target of a 35% reduction in operational
emissions by 2020, from a 2008 base.

The carbon management plan includes energy
efficiency, renewable energy generation and water
efficiency and supports our activities to help us adapt
to a changing climate. It represents a sustainable
and responsible way forward for the business, our
customers and the environment. The projects which
will help us to achieve our carbon reduction target
are outlined below:
−

our £33.0 million investment in thermal hydrolysis
advanced anaerobic digestion at Bran Sands,
which provides 50% (c.4.7 MW) of the energy
requirements of the site. This enables waste water
sludge to generate methane to fuel gas engines
and produce green electricity. A similar plant will
be constructed at Howdon, which is planned for
completion in 2013/14. Together these plants will
help meet our target of generating 20% of our
energy needs from renewable energy, as well
as reduce our overall energy demand;

hydroelectric installations at five reservoirs including
the UK’s largest man-made reservoir, Kielder Water.
A recently commissioned £2.5 million hydroelectric
project at our Selset reservoir that will generate up
to 750 kilowatts of electricity – 4,000 megawatt
hours a year. Renewable energy is also being
generated with hydroelectric plants at Derwent,
Lartington and Wear Valley reservoirs in addition
to biogas combined heat and power plants at
Stressholme, Hexham and Aycliffe;
limiting tertiary ultraviolet disinfection outside the
bathing water season at five major works reduces
energy consumption and carbon emissions with no
detrimental effect on the marine environment; and
encouraging customers, through our ‘using water
wisely’ campaign, to recognise that if they waste
water, they also waste energy (information and tools
are available for customers on our websites).

−

Through these projects, and by reviewing the efficiency
of our pumps across the business, we have reduced
the amount of energy used by almost 9% over the
last five years.

NWL has successfully achieved the Carbon Trust
Standard for its efforts in reducing greenhouse gas
emissions. The standard provides an objective
benchmark against which our commitment and
success in addressing our climate change impact
was assessed and is significant as it demonstrates
progress against our ambitious carbon
management plan.

S
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More positively we have found that the anticipated
drier summers of the future are less of a concern for
NWL than for many other companies in our industry.
The ongoing investment to increase the capacity of
Abberton reservoir plays a big part in this for our
Essex operating area. Work is now underway on this
project that has been in development for over 15
years, a reflection of the long lead times for such
environmentally sensitive schemes. The presence
of Kielder Water helps protect the north east region
to an even greater extent. Despite this, we anticipate
that we will need to monitor and formally update our
understanding of the threat from the changing
weather at regular intervals.

Quality
NWL has maintained its certification to the international
quality standard ISO 9001:2008 and to the international
environmental standard ISO 14001:2004 across all
areas of the business, including operational sites and
office based teams.

Changing weather patterns
The water cycle and the changing weather have a
direct influence on the provision of water and waste
water services. NWL’s employees are experienced in
managing the effects of too much or too little rainfall,
but changing weather patterns will present a growing
challenge for the business.

In past years, we have carried out research into the
likely impact of climate change on all our assets and
water resources and this has been incorporated in
our climate change policy as part of our corporate
responsibility work. This work is continuing, based on
the latest UKCP09 projections published in 2009 by
the UK Climate Impacts Programme.

Over the course of the past year we have incorporated
this work into our response to the new adaptation
reporting power granted to the Government by the
2008 Climate Change Act. This work has highlighted
that increasing rainfall intensity is the most significant
short term threat that we will face as a result of the
changing climate. This represents a serious challenge
if we are to manage successfully the higher level of risk
of sewer flooding that will result. We have already
begun to take actions that will better prepare us for
this challenge, including investment in weather radar,
remote monitoring of the sewer network and joint
working with other drainage agencies. These will
all contribute to our better understanding and
management of the threat.

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Strategy in action – Environment

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Good
progress
for the
Abberton
Scheme

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Essex is the driest county in the UK. In a dry year demand already
outstrips supply and due to population rise this situation is
expected to get worse.

After 17 years in the planning the £150 million Abberton construction scheme to
help secure water supply to 1.5 million customers in Essex made good progress
in its first year.

The reservoir, near Colchester, will be enlarged by 58% with its footprint extended
by 40%, and the increased capacity will be in service in 2014. Over the last year,
significant progress has been made and two important milestones have now been
reached. Water is now flowing into the reservoir via the newly completed reservoir
inlet structure at Broadmeadows and work has begun on the construction of two
major raw water pipeline routes. These 1.2 metre diameter, 16 kilometre long, steel
pipelines will transfer water from the River Stour at Wormingford to Abberton.

Abberton is a site of international environmental significance, designated under the
Ramsar convention on wetlands. In designing our proposals, working closely with
Natural England, the RSPB and Essex Wildlife Trust, we have gone beyond what is
required to not only maintain the environmental significance of the site but to enhance
it. The new reservoir will have existing concrete edging removed, will include more
marginal shallow waters, as well as a new re-sited visitor centre and an extensive
wetland area at the western end of the reservoir. The new proposals will improve
biodiversity as well as enhance the amenities for visitors.

Our operating performance

Communities

Community Foundations covering our areas of supply
hold endowment funds totalling nearly £1.0 million
contributed by NWL over the last 19 years. These
are long term investments with the income from the
funds used to support community and environmental
initiatives. Community groups are chosen by
committees of our own employees (44 recipients
this year).

In addition to cash donations, NWL seeks to support
many projects through in-kind giving and support.
Through ‘Good Moves’ we aim to put NWL estates
into productive community use. Working in partnership
with artist groups CoExist and Metal, we have
developed a temporary art project at our empty
Southend complex to provide space for a temporary
gallery, studio and small creative business complex.

We have focused on developing affordable rural
housing to contribute to the sustainability and vitality
of those communities, including support of the Prince
of Wales’ Affordable Rural Housing Initiative since it
was launched in 2003. As part of this commitment
we are working with Hastoe Housing on a project
for 12 houses on land close to Hanningfield water
treatment works in Essex and these are due for
completion in 2011.

NWL supports the communities we serve in a number
of different ways. We have been widely recognised as
leaders in our support for projects that make the areas
we serve better places in which to live, work or invest.
This year the company has been re-accredited by
FTSE4Good and is awaiting re-accreditation as a
Platinum Plus company by Business in the Community.
The Queens Award for Industry is still in place as it is
awarded for a five year period. This year, the company
was also recognised by Ethisphere, an American-
based international think-tank, as one of the 110 most
ethical companies in the world and was one of only
five UK-based companies.

The support we give to our communities focuses on
five broad areas.

Investment in our communities
This year the Group made charitable donations
totalling £152,000. In addition, and in line with previous
years, we have contributed resources with a value
equivalent to at least 1% of our annual pre-tax profits
(through cash, employee time and expertise, or use of
our facilities) to projects which benefit the communities
we serve. Our employees fundraised £69,000 for
charities this year.

The ‘Care for safety’ scheme, which encourages
employees to reduce accidents and associated lost
time, has triggered payments over £16,000 for our
charities nominated by employees (Great North Air
Ambulance Service, Royal National Lifeboat Institution
(RNLI), Myelin Project, Zoe’s Place, Macmillan Cancer
Support, St Cuthbert’s Hospice and East Anglian
Children’s Hospice). Since it began in 2004 over
£326,000 has been raised for charity.

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The Kielder Partnership was created in 1994 and
consisted of private, public and voluntary sector
partners committed to the development of Kielder
Water & Forest Park as a tourism, leisure and
recreation destination. Activity has focused on
delivering the Partnership’s vision –‘Kielder Big Picture’
– including the use of the fabulous tracks and trails
developed in 2008/09.

The 26 mile Lakeside Way, a multi-user track, is now
used by 45% of all visitors. This trail was used for the
first Kielder Marathon in October 2010, dubbed the
most beautiful in Britain, organised by Olympic athlete
Steve Cram. This, combined with other activities
including the development of mountain bike trails and
the increasingly popular Kielder Observatory, has
helped to increase visitor numbers between 2008 and
2010 by 9.4% to 306,250, creating an additional 66
direct and indirect jobs and boosting the spend in the
local economy by 20% to £15.5 million.

In December 2010, the structure of the Partnership
was formalised by forming a registered charity
called the Kielder Water & Forest Park Development
Trust which will continue to deliver the vision and
25 year investment plan for the area. The website
www.visitkielder.com provides further details of
all facilities.

Participation in our communities
As part of NWL’s in-kind giving, we encourage
employees to volunteer their time, skills and expertise
through our ‘Just an hour’ volunteering scheme.
We support our people to actively participate in
their local communities by giving them work time to
volunteer in projects of their choice. During the year
our people have helped hundreds of community
projects, completing tasks as varied as beach clean
ups, organising charity balls and taking on ambitious
gardening and decorating challenges.

For example, a group of employees volunteered their
time to support people with disabilities to participate
in an activity weekend organised by the charity
Leonard Cheshire Disability. Together, volunteers and
service users enjoyed outdoor activities including
abseiling and taking a zip wire across a river. Further
highlights came from the Essex based employees
who collected over 1,000 boxes of food supplies as
part of the Harvest for the Hungry campaign 2010.
This important contribution helped the humanitarian
campaign to provide an essential lifeline to villages
and communities scattered across Eastern Europe.

Currently 27% of employees participate in the ‘Just
an hour’ volunteering scheme and last year gave over
7,600 hours to the community. Over 870 different
organisations were given financial and in-kind support
during the year.

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Our operating performance
Communities continued

Educating our communities about their
environment
Key partnerships have been developed by NWL to
help the conservation of biodiversity on our sites, to
facilitate public access and to develop conservation
education. Our contribution includes funding project
officers and providing expertise to the organisations.
Our current partnerships include:
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Northumberland Wildlife Trust (Kielder and Bakethin);
Durham Wildlife Trust;
Essex Wildlife Trust (Hanningfield);
Broads Authority (Lound and Trinity Broads); and
Davy Down Trust (North Stifford, Essex).

A wide range of targeted educational materials are
available on our websites for children and teachers.
We promote the use of these materials and celebrate
innovative approaches to environment and health
education via our support of the Northumbrian Water
Schools Awards in the north east and Cash for
Schools Awards in Essex.

We also lead on specific environmental education
initiatives such as the innovative ‘Northumbrian Water
GLOBE’ project. This year the project, in collaboration
with The Climate Change Schools Project, ClimateNE,
EA and GLOBE UK, is supporting five schools to take
control of capturing and analysing local weather data,
patterns and extreme events (using weather stations
and training provided by NWL). Ultimately, children
involved will become ‘community scientists’ to drive
behavioural change at local levels.

Supporting healthy communities
NWL continues to promote the health benefits of
drinking tap water and our ‘Water for health’ campaign
aims to encourage people to lead a healthy lifestyle.
To date, over £341,000 has been provided to fund free
mains-fed water coolers in schools and around 740
have been supplied in nearly 410 schools. We also
continue to promote bottle-free water coolers as a
sustainable alternative to bottle-fed coolers. Similarly,
we use our ‘tap into’ initiative to donate bottled tap
water to community sporting events in order to
promote the importance of rehydration during
exercise. This year we donated 82,300 bottles
of tap water to events.

Working with a wide and diverse range of sporting
partners is a natural extension of our ‘Water for
health’ campaign and we work with them to support
grassroots sporting activities to get people active
as well as educating them on healthy eating and
good hydration.

Through our partnerships we have reached over
96,000 children and adults. We provide:
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links and networks to enable sporting partners
to get together to share ideas and resources;
financial support of approximately £50,000 per
annum which then levered over £600,000 from
other sources;
advice and marketing support on programme
development;
bottled tap water, sports bottles, water jugs or
mains-fed bottle-free coolers to reinforce the
importance of drinking tap water to rehydrate
during sporting activities; and
help with fundraising and raising the profile of the
partnerships to attract additional investment.

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We have linked our ‘Good moves’ initiative and our
‘Water for health’ campaign to develop Healthworks.
This is a unique project utilising one of our redundant
buildings to help tackle the poor long term health of
the residents in Easington, County Durham, by
granting a 99 year lease to County Durham Primary
Care Trust and working in partnership to develop
services for the local community in an area where
census records show one of the worst health
records in the country.

We are represented on the steering group for
Healthworks and provide research, marketing and
communications support. The centre has received
almost 20,000 visits to date and now provides over
58 health and community support services including
a GP led walk-in health centre open 8am to 8pm 365
days a year. It acts as a community focal point where
service providers and community groups can come
together to address issues that affect the quality
of life in their local community.

Supporting developing communities through
WaterAid
NWL has continued to raise funds and awareness for
the work of WaterAid which brings sustainable water
and sanitation solutions, as well as hygiene education,
to the poorest parts of Africa and Asia, as it has since
the charity was formed by the water industry in 1981.

The employee fundraising committee has raised
more than £4 million, since 1997, with the help of the
company and last year focused its fundraising support
on specific projects in Ethiopia. We support our
employees to become ambassadors for the charity
and encourage annual supporter trips to see WaterAid
projects. This year, Asset Manager Craig Holliday
visited Bangladesh and saw first hand how our
adopted international charity saves lives.

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Strategy in action – Communities

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A*
performance
at Castle
View

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Castle View Enterprise Academy, in Sunderland, completed its
first year of operations during the year.

NWL is the lead sponsor and wanted to create a centre of excellence with a clear
focus on raising standards of academic performance to enable every student to
achieve their personal best in all areas of academy life within a safe, secure and
stable environment. NWL formed a new trust board to govern the school, recruited
an inspirational head teacher and helped her to form a new leadership team, design
an engaging curriculum and implement a set of new policies which would
fundamentally change and improve school life for the students.

During the first year, Castle View Enterprise Academy students achieved 43% A*– Cs
in GCSEs English and Maths (up from 26% in the old Castle View School) and 86%
five or more GCSEs A*– Cs (up from 63%). Persistent absences decreased from 10%,
in the old Castle View school, to 6.3% in the new academy’s first year of operation.
In March 2011, the new academy undertook Ofsted assessment and from being a
failing school previously is now a school making good progress.

Indeed, sixteen students at Castle View Enterprise Academy have gained amongst
the highest grades possible in the January 2011 GCSE Mathematics examinations –
six months ahead of schedule. Eight of the sixteen gained grade A* and the other
eight gained grade A.

In addition to the excellent teaching in the academy and after school tutorials,
these more able students were also coached by one of our graduate trainees,
David Bullin, who has a maths degree. David has given his time under our employee
volunteering scheme, Just an hour, on Wednesdays after school and more recently
on Saturday mornings.

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Our risks and
uncertainties

The NWG Board requires all
subsidiaries within the Group to
identify and assess the impact
of risks to their business using
a standard risk model. For each
risk identified, the model records
the uncontrolled magnitude and
likelihood of the risks occurring
as well as the controls in place
to mitigate those risks before
assessing the controlled magnitude.
The Board’s view of acceptable
risk is based on a balanced view
of all of the risks in the operating
environment. It aims to ensure
an appropriate balance between
risk aversion and opportunities.

The Board sets the tone for risk management within the
Group and determines the appropriate risk appetite.
The Board monitors the management of fundamental
risks and approves major decisions affecting the
Group’s risk profile. Senior management implements
policies on risk management and internal control.

For NWL, the management team reviews the approach
to risk management in detail every year and the Audit
Committee considers the outcome. The management
team reviews the significant risks every month and a
full review of the model for emerging significant risks is
carried out quarterly. Any issues that arise from these
management team reviews are reported by the CEO
to the board.

Apart from NWL, none of the subsidiaries has risks
considered to be significant to the Group’s short and
long term value.

The system of internal control incorporates risk
management. It encompasses a number of elements
that together facilitate an effective and efficient
operation, enabling the company to respond to
a variety of risks. These elements include:

Policies and procedures
Attached to fundamental risks are a series of policies
that underpin the internal control process. Written
procedures support the policies where appropriate.

Business planning and budgeting
The business planning and budgeting process is used
to set objectives, agree action plans and allocate
resources. Progress against meeting business plan
and budget objectives is monitored regularly.

Risk register
The risk register identifies key risks, each with a risk
owner who is responsible for evaluating the risk on
a regular basis. As a way of ensuring that risk
management is embedded into the business, the risk
owners have the management of these risks as a
personal KPI.

Strategic risk model
Risks that are known but not yet well defined enough
for the likelihood and consequence to be reasonably
foreseen are included in a strategic risk model.

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Audit Committee
The Audit Committee reports to the Board on internal
controls and alerts the Board to any emerging issues.
In addition, the Audit Committee oversees internal audit,
external audit and management, as required, in its
review of internal controls.

Last year, the Audit Committee commissioned an
additional risk and assurance mapping report from

Ernst & Young, the objective of which was to provide
NWL management and the Audit Committee with
a view of the different assurance functions within
the company and the extent to which they provide
assurance that the control activities are operating.
An assurance map now forms a permanent part of
the process and, for each risk, highlights who provides
assurance that the control activities are in place and
operating effectively.

Risk description

Mitigation measures

Funding and liquidity risk

Unfavourable changes to
the regulatory structure,
as a result of the Water
White Paper
Unfavourable changes to the
regulatory structure or price
setting mechanism by Ofwat
Impact of the transfer of
private drains and sewers is
greater than anticipated

Unexpected shift in climate
change impact
Loss of supply due to failure
of strategic water main.
This covers catastrophic
failure that is greater than
the response capability
of the company
Sewer flooding failures

Pesticides lead to prescribed
concentration or value
failure and possible
enforcement action

Loss of income through
closure of large customers
or lower industrial volumes
Incident at Bran
Sands waste water
treatment works causes
business interruption
Risk of increasing pension
contributions resulting
from increasing longevity
and the impact of
economic conditions
on investment returns
Health and safety
prosecution

The financial ratios, financial results, liquidity position and credit ratings are described in the
financial performance section on pages 16 to 21. In addition, note 20 to the financial statements,
on pages 118 to 123, includes details on the Group’s strategy and treasury operations for
managing its capital; its exposures to liquidity risk, interest rate risk, foreign currency risk and
counterparty risk; and details of its financial instruments. The Board reviews the treasury strategy
periodically and approves specific proposals.
We play a leading role in the policy debate, through Water UK, direct lobbying and forging positive
relationships with relevant parties. We respond positively to consultation papers.

We play a leading role in consultation groups with Ofwat and other stakeholders. We respond
positively to consultation papers.

An internal project team has been established to understand and prepare the business for the
transfer. We maintain sound financial documentation to support a future claim for tariff increases in
order to recover additional costs borne. We maintain close liaison with the rest of the industry and
have had constructive dialogue with Ofwat regarding the process.
We have processes in place to anticipate and plan for the impact of climate change. While these
have long time horizons, they are reviewed regularly to ensure that any changes are identified early.
In most cases, duplicate mains and diversion of supplies would limit supply consequences.
Comprehensive plans exist to provide a minimum emergency service to customers until repairs are
completed, including mutual aid arrangements with other water companies. A proactive inspection
regime is in place along with longer term reviews of network resilience.

A sewer flooding group, comprising stakeholders from various teams, is responsible for managing
the process, flood reporting, network capacity studies and prioritisation of investment to reduce
risk. Significant additional capital expenditure has been invested to address affected properties.
The recently constructed rain radar station for the region is now operational and provides improved
data. However, controls are not yet sophisticated enough to predict or prevent consequences of
severe rainfall.
Undertakings have been agreed with the DWI to carry out certain actions to mitigate pesticide
issues (metaldehyde and clopyralid). While specific treatment processes, such as carbon dosing,
are undertaken at treatment works, proactive catchment management is also being carried out.
This involves working with farmers, regulators and other stakeholders to advise on improved
storage and application techniques for such pesticides. This is a more sustainable solution than
the alternative of constructing major new treatment processes.
It is not possible to directly influence industrial volumes, however, our account managers liaise
closely with significant customers to provide support where possible.

We have a number of contracts to treat industrial waste streams at our Bran Sands works. The
liability under each contract is capped except, in certain cases, where NWL is in willful breach.
A site-specific management regime is in place incorporating additional monitoring and a greater
amount of standby assets.
The defined benefit scheme was closed to new entrants, benefits restructured and employee
contributions increased in 2008. Advance contributions have been made to the scheme, including
deficit funding allowed in the final determination. The scheme Trustee determines investment policy
and monitors performance of investment managers. Triennial actuarial valuations of the scheme
are carried out, with the latest currently underway.

Our health and safety policy and safety management system define clear arrangements and
responsibilities for implementation and management throughout the Company. This is audited as
part of our quality and environmental management system. Visible high level support for health and
safety is provided by the Board and management team. Long term plans and targets are set to
promote continuous improvement.

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Appendix to the
directors’ report –
business review

Financial KPIs
Gearing to RCV (NWG)
Definition and calculation: The ratio of Group net
debt to a pro forma RCV, calculated as NWL’s RCV
plus the level of debt associated with the Kielder
securitisation and the PFI contracts. The NWL RCV
represents the total capital value of the appointed water
and sewerage business on which Ofwat allows a rate
of return at price reviews.
Purpose: The RCV generates most of the revenue
stream of the Group and regulatory gearing is an
important factor in credit ratings.
Source of underlying data: NWL’s RCV is calculated
by Ofwat and published each year. Ofwat also
publishes anticipated values up to five years ahead,
based on its last price determination. Group net debt
is disclosed in the audited financial statements.

Gearing to RCV (NWL)
Definition and calculation: The ratio of NWL net
debt to NWL’s RCV. The NWL RCV represents the total
capital value of the appointed water and sewerage
business on which Ofwat allows a rate of return at
price reviews.
Purpose: The RCV generates most of the revenue
stream of the Group and regulatory gearing is an
important factor in credit ratings.
Source of underlying data: NWL’s RCV is calculated
by Ofwat and published each year. Ofwat also
publishes anticipated values up to five years ahead,
based on its last price determination. NWL’s net debt
is disclosed in the audited regulatory accounts.

Cash interest cover (NWG and NWL)
Definition and calculation: Cash generated from
operations less tax divided by net interest paid.
Purpose: Measures the ability of the Group or
company to service its debt.
Source of underlying data: Audited
financial statements.

Cash flow to net debt (NWG and NWL)
Definition and calculation: Cash generated from
operations less tax paid divided by net debt.
Purpose: Indicates the Group’s, or company’s, ability
to reduce debt in the absence of need for additional
investment, without resorting to asset disposal.
Source of underlying data: Audited
financial statements.

NWL non-financial KPIs
Customer satisfaction
Definition and calculation: Domestic customers’
satisfaction with overall service and overall value for
money, expressed as satisfaction averaged over the
surveys carried out during the year. Average satisfaction
is based on a scale of 1 to 10 using the score of 6 and
above as satisfied. Net scores are used to show true
satisfaction by taking into consideration those who
are dissatisfied who score between 1 and 3.
Purpose: To enable tracking of perception of
reputation, service and value for money over time.
Source of underlying data: Independent surveys
of 500 customers (300 north, 200 south) chosen at
random, but representative of the customer base,
carried out each quarter – a total of 2,000 customers.

Customer – levels of service
Definition and calculation: Customer service
standards are established by Ofwat and calculated
using source data in the company.
Purpose: To monitor customer service performance
of NWL.
Source of underlying data: Information collected
by the company and submitted to Ofwat. It is
independently certified.

Employee turnover
Definition and calculation: Number of leavers within
the year as a percentage of average headcount.
Purpose: To track the employee turnover within the
business to ensure that it is within benchmark data.
Source of underlying data: Current employees’
details are held within the human resources
management system – reports show leavers
against headcount.

Lost time reportable accidents
Definition and calculation: Injury accidents that are
reported to the Health & Safety Executive as required
by the Reporting of Injuries, Diseases and Dangerous
Occurrences Regulations 1995. Calculated as the
number of accidents reported in financial year per
1,000 employees.
Purpose: To monitor the safety performance of NWL
over time.
Source of underlying data: Completed NWL
accident/incident report forms. Employee numbers
are provided by the human resources department.

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Sickness absence
Definition and calculation: Sickness absence days
as a percentage of total working days multiplied by the
end of month headcount.
Purpose: To track and trend sickness absence levels
across the organisation.
Source of underlying data: Statement of Fitness for
Work (fit note), return to work interviews and weekly
returns by managers.

Water quality
Definition and calculation: Compliance with drinking
water regulations as monitored by the DWI.
Purpose: To monitor drinking water quality.
Source of underlying data: Samples recorded by
NWL and audited by the DWI.

Sewage treatment works
Definition and calculation: Percentage of population
equivalent served by non-compliant works failing
look-up table consents, as defined by the EA.
Purpose: To monitor the performance of NWL’s
sewage treatment works and their impact on
the environment.
Source of underlying data: Information recorded by
NWL and the EA and reported on by the latter.

Bathing waters Mandatory Standard
Definition and calculation: Percentage of bathing
waters complying with Mandatory Standards.
Purpose: To monitor the impact of NWL’s coastal
treatment works on the environment.
Source of underlying data: Information recorded and
reported by the EA.

Pollution incidents
Definition and calculation: Number of category 1, 2
and 3 pollution incidents in the calendar year as defined
by the EA.
Purpose: To monitor the performance of NWL’s
sewerage system and its impact on the environment.
Source of underlying data: Information recorded and
reported to Ofwat by the EA.

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Board directors’
biographies

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1. Claude Lamoureux
Non-executive Director
Claude Lamoureux was appointed
to the boards of NWG and NWL
on 1 December 2006. Claude
was, until 1 December 2007,
President and CEO of the Ontario
Teachers’ Pension Plan Board
(OTPP). Previously, he spent 25
years as a financial executive with
Metropolitan Life in Canada and
the US. He is a Director of Xstrata
plc, Industrial Alliance Insurance
and Financial Services Inc., Maple
Leaf Foods Inc., Atrium Innovations
Inc., The Learning Partnership and
the York University Foundation.
OTPP holds 27% of the issued
share capital of NWG and Claude
is, therefore, not regarded as an
independent Director. Claude will
retire from the boards of NWG
and NWL on 28 July 2011.

2. Paul Rew (from
1 October 2010)
Independent Non-executive
Director
Paul Rew was appointed to
the boards of NWG and NWL
on 1 October 2010. Paul is
a member of the Audit and
Nomination Committees and of
NWL’s Corporate Responsibility
Committee. Paul, a chartered
accountant, was a partner in

PricewaterhouseCoopers LLP
(PwC) from 1987 until March
2010 and was lead partner
for a diverse range of FTSE
100 clients and for PwC’s UK
energy, utilities and mining sector
practice. Most recently, he was
PwC’s sustainability and climate
change assurance leader and
renewables leader. He is a Non-
executive Director of both the
Met Office and the Sustainable
Development Commission and
chairs their Audit Committees.

3. Martin Nègre
Independent Non-executive
Director
Martin Nègre was appointed to
the Board in May 2003 and to the
board of NWL in January 2006
and is a member of the Audit,
Remuneration and Nomination
Committees. He was, between
April 2000 and April 2001, the
CEO of the former Northumbrian
Water Group plc and the chief
corporate representative of its
parent company, Suez, in the UK.
He currently chairs Ecofin Global
Utilities Hedge Fund Limited,
Ecofin Special Situations Utilities
Fund, Ecofin North American
Hedge Fund and Ecofin China
Power & Infrastructure Fund. His
other directorships include Ecofin

Water & Power Opportunities
plc, Hansen Transmissions
International NV, Bolux Utilities
(Sicav Luxembourg), Mercurius
Utilities (Liechtenstein), EFMI
Funds plc and Ecofin Global
Long/Short Fund. All the above
funds are focused on utilities. In
2005, he became a Director of
Promethean plc, an AIM-listed
investment company and sits on
the supervisory board of Banque
Jean-Philippe Hottinguer & Cie.

4. Simon Lyster (from
1 April 2011)
Independent Non-executive
Director
Simon Lyster was appointed to
the Board of NWG on 1 April 2011,
having joined the board of NWL
in September 2006, is a member
of the Nomination Committee
and chairs NWL’s Corporate
Responsibility Committee. Simon
is a lawyer by training, qualified
in both the UK and the USA and
has been Chief Executive of LEAD
International since 2005. Before
joining LEAD (which he will leave
during July 2011), Simon was
Director General of The Wildlife
Trusts, one of the largest nature
conservation organisations in
the UK, for seven years. Before
that, Simon worked for World

Wildlife Fund (WWF) for nine
years, where he was responsible
for WWF’s global policy work on
international conventions. Simon
is a Trustee of Conservation
International – UK, the World
Land Trust and the Kilverstone
Wildlife Conservation Trust.

5. Margaret Fay CBE
(from 1 June 2010)
Independent Non-executive
Director
Margaret Fay was appointed to
the boards of NWG and NWL on
1 June 2010 and is a member of
the Remuneration and Nomination
Committees. She is also a member
of NWL’s Corporate Responsibility
Committee. Margaret was formerly
Managing Director of Tyne Tees
Television until she took early
retirement in December 2003
to become Chairman of One
North East, a position she held
until August 2010. She is Deputy
Chairman of The Sage Gateshead,
a Governor of the University of
Sunderland, Patron of Tees Valley
Community Foundation and the
Prince of Wales’ Ambassador
for the north east of England.
Margaret was awarded an OBE
for services to broadcasting in
2004 and, in 2010, a CBE for
services to regional development.

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6. Heidi Mottram OBE
Chief Executive Officer
Heidi Mottram was appointed to
the boards of NWG and NWL on
1 March 2010 and became CEO
on 1 April 2010. Heidi is a member
of the Nomination Committee and
NWL’s Corporate Responsibility
Committee. Heidi was Commercial
Director for Arriva Trains Northern
from January 2004, before joining
Serco-NedRailways in November
2004 as Managing Director,
Northern Rail Limited. She was
named Rail Business Manager
of the Year in 2009 and was
awarded an OBE for services
to the rail industry in 2010.

7. Sir Derek Wanless
Chairman
Sir Derek Wanless was appointed
to the Board as an Independent
Non-executive Director in
December 2003. He joined the
board of NWL in January 2006
and, in July 2006, became
Chairman of NWG and NWL.
Sir Derek chairs the Nomination
Committee and is a member of
the Remuneration Committee.
He became a director of National
Westminster Bank in 1991 and its
Group Chief Executive in 1992.
He retired from that position
in 1999. Sir Derek is currently

Chairman of Legal and General
plc’s Longevity Science Advisory
Panel and a member of the Board
for Actuarial Standards at the
Financial Reporting Council.

8. Chris Green
Finance Director
Chris Green was appointed
to the boards of NWL in April
2000 and NWG in May 2003.
Chris qualified as a chartered
accountant and after ten years
in the accounting profession he
joined the former Northumbrian
Water Group plc in January
1990. He was initially involved in
the Group’s diversified business
activities before being appointed
as Group Finance Director in
1997. Chris is Chair of Trustees
for the Northumbria Calvert Trust,
a charity devoted to providing
outdoor activities for the disabled,
and is Deputy Chair of Governors
at the University of Sunderland.

9. Alex Scott-Barrett
Independent Non-executive
Director
Alex Scott-Barrett was appointed
to the Board of NWG in September
2006, having joined the board
of NWL in November 2005.
He chairs the Remuneration
Committee and is a member

of the Audit and Nomination
Committees. Alex qualified as
a chartered accountant in 1981
and joined Cazenove, a city
corporate stockbroker, in 1982.
He worked initially as an analyst
and transferred to the corporate
finance department in 1986,
becoming a partner in 1988.
In 1996, he became a director
of the firm’s fund management
division and, from 2000 to
2003, was the Chief Operating
Officer of that division. Alex left
Cazenove in 2003. He is a Non-
executive Director of Lighthouse
Group plc and is a Trustee of
L’Arche and Help for Heroes.

10. Sir Patrick Brown
Senior Independent
Non-executive Director
Sir Patrick Brown was appointed
to the Board in May 2003 and
to the board of NWL in January
2006. Sir Patrick chairs the Audit
Committee and is a member of
the Nomination and Remuneration
Committees. He held various
positions in the Department of
Transport and the Department
of the Environment, becoming
Second Permanent Secretary and
Chief Executive of the Property
Services Agency in 1990. He
was Permanent Secretary for

the Department of Transport from
1991 to 1997. Sir Patrick became
a Non-executive Director of the
Go-Ahead Group plc in 1999
and its Chairman in 2002. He is
also Chairman of the Advisory
Committee of Alexander Proudfoot
UK and a Non-executive Director
of Camelot UK Lotteries Limited.

11. Martin Parker (not pictured)
General Counsel and
Company Secretary
Martin Parker was appointed
as Company Secretary of NWG
in May 2003. Martin joined the
former Northumbrian Water Group
plc in 1990, concentrating on
acquisitions, overseas projects
and contracts with industrial
customers, before being appointed
Head of Group Legal Services
in 1998 and General Counsel
and Company Secretary of NWL
in 2000. Martin is Secretary of
all the Board committees.

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Statutory disclosures

Directors’ report – business review and governance
In accordance with s417 of the Companies Act 2006, the directors’ report – business review, on pages 1 to 53,
contains a review of the performance of the Group’s business during the year and the position at the end of the
year with analysis using KPIs. A description of the Group’s future prospects, research and development, the
principal risks and uncertainties facing the business and details of the Group’s use of financial instruments are also
contained within the business review.

Pages 54 to 70 of this section of the directors’ report contain the Board of directors’ biographies, together with
such other statutory disclosures, as required by s416 and s418 of the Companies Act 2006 and Schedule 7 to the
Large and Medium sized Companies and Group’s (Accounts and Reports) Regulations 2008, as are not already
referred to in the business review section of the report. The corporate governance statement explains how the
Company has applied the principles of the Combined Code during the year and also complies with the
requirements of Disclosure & Transparency Rule 7.2.

Principal activities
The principal activities of the Group during the year were the provision of water and waste water services.

Political
During the year, the Group has worked with politicians of all major parties, officials and opinion formers. This work
has included making representations on issues which NWL feels are important to our customers and communities
such as competition, the review of regulators, the Water White Paper, adoption of private sewers, ‘Water for health’,
climate change, the Water Framework Directive and other legislative issues which could affect our customers.

We do not support any political party and we do not, directly or through any subsidiary, make what are commonly
regarded as donations to any political party or other political organisation. However, the wide definition of
donations in the Political Parties, Elections and Referendums Act 2000 covers activities which form part of the
necessary relationship between the Group and political parties and political organisations. These activities include
attending party conferences, as these provide the best opportunity to meet a range of stakeholders, both national
and local, to explain our activities, as well as local meetings with MPs, MEPs and their agents. The costs
associated with these activities during 2010/11 were as follows:

Name of political party

Conservative
Labour
Liberal Democrats

Total

6,845
8,208
3,312

18,365

Shareholder authority to permit the Company to continue with these activities until the 2012 AGM will be sought at
this year’s AGM.

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Creditors
The Company’s policy is to agree payment terms with suppliers and to pay on time according to those agreed
terms. The Company’s policy is to make payment not more than 30 days after receipt of a valid invoice, except as
otherwise agreed. The ratio, expressed in days, between the amount invoiced by its suppliers during the year and
the amount owed to its trade creditors at 31 March 2011, was 30 days (2010: 21 days).

Directors’ remuneration and interests
Information about directors’ remuneration and their interests in the shares of the Company is contained in the
directors’ remuneration report.

Indemnification of directors
The Company has in place directors’ and officers’ insurance and, on 28 November 2005, entered into a deed of
indemnity to grant the directors further protection against liability to third parties, subject to the conditions set out
in the Companies Act. Such qualifying third party indemnity provision remains in force as at the date of approving
the directors’ report.

Auditors
Ernst & Young LLP has indicated its willingness to continue in office and a resolution proposing its re-appointment
as auditors will be put to shareholders at the AGM.

Directors’ declaration
As required under s418 of the Companies Act 2006, so far as each current director is aware, there is no relevant
audit information of which the Company’s auditors are unaware and each director has taken all the steps that he
or she ought to have taken as a director in order to make himself or herself aware of any relevant audit information
and to establish that the Company’s auditors are aware of that information.

Going concern
The Group has sufficient funding and facilities in place to meet its requirements to March 2014. The directors
believe that the Group is well placed to manage its business risks successfully and, accordingly, they continue
to adopt the going concern basis in preparing the annual report and financial statements.

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Corporate governance
statement

The Board believes best practice in corporate governance is an important tool in helping it meet its responsibilities.
The Board considers that, during the year and up to the date of this report, it has complied with the main principles
and provisions of the Combined Code 2008 (the Code). The Code is available to download from the Financial
Reporting Council’s (FRC) website at www.frc.org.uk/corporate/ukcgcode.cfm or, alternatively, printed copies can
be obtained free of charge from FRC publications, tel: 020 8247 1264, email: customer.services@cch.co.uk and
online at www.frcpublications.com.

This statement, together with the directors’ remuneration report, describes how the Company has applied the
principles of the Code during the year. The board of NWL also maintains high standards of corporate governance
and endeavours to comply with the Code, wherever practicable.

In June 2010, the FRC introduced a new UK Corporate Governance Code, which will apply to the Company’s
financial year ending 31 March 2012. The Board has considered the requirements of the new code and believes
that the Company is well positioned to achieve compliance. Some of the main principles, such as the annual
re-election of all directors, have already been implemented.

The Board has a code of ethics, ‘Our Code of Conduct’ which is available on the Company’s website, covering
its relationships with customers, employees, suppliers, local communities, shareholders, other investors
and regulators.

Board composition
As at 31 March 2011, the directors of the Company were Sir Derek Wanless, Sir Patrick Brown, Heidi Mottram,
Chris Green, Claude Lamoureux, Martin Nègre, Alex Scott-Barrett, Margaret Fay and Paul Rew, who all served
throughout the year, except for Margaret Fay and Paul Rew who were appointed on 1 June and 1 October
2010, respectively.

Simon Lyster, who has been a Non-executive Director of NWL since 26 September 2006, was appointed as a
Non-executive Director of NWG on 1 April 2011.

In accordance with the Company’s Articles of Association (the Articles), Paul Rew and Simon Lyster, having been
appointed as directors by the Board since the last AGM, will be eligible for election at this year’s AGM. All other
directors holding office on the day of the notice convening the AGM will retire from office and offer themselves
for re-election, with the exception of Claude Lamoureux who will retire from office at the end of this year’s AGM.

NWL’s Instrument of Appointment (usually called its ‘Licence’) requires NWL to have at least three independent
directors with an understanding of the interests of customers and a connection with the areas in which the company
operates. Until 31 March 2011, these roles were held by Anita Frew, Alastair Balls and Simon Lyster, none of whom
were directors of NWG. Prior to the retirement of Anita Frew and Alastair Balls from the NWL board on 31 March
2011, NWL and Ofwat agreed that the independent directors of NWL, for the purposes of the Licence, may also
be non-executive directors of NWG. Ofwat considered that, given NWG’s focus on the core business, such cross-
directorships would not create a conflict of interest. Ofwat will review its position on this if the nature of NWG’s
business changes significantly. The directors in question must still, of course, demonstrate the necessary experience
and understanding. Ofwat agreed that Margaret Fay and Alex Scott-Barrett would be suitable for these roles, in
addition to Simon Lyster. Anita Frew and Alastair Balls have, therefore, not been replaced on the NWL board.
Apart from streamlining the work of the two main boards, which now have common non-executive membership,
this reduction in the number of non-executive directors brings a significant saving in fees and expenses.

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Board responsibilities and processes
The Board sets and implements the Company’s strategy and ensures compliance with Group policies and legal
and regulatory obligations. The Group’s vision, values and strategy are set out in the Chief Executive Officer’s
review. Board agendas are proposed by the CEO and Company Secretary, with input from NWL’s management
team, for approval by the Chairman.

The Company has adopted terms of reference which set out the matters reserved to the Board for approval and
matters which are, or can be, delegated to the committees and management. The Company has also adopted
financial approval rules which set out the authorisation processes and financial limits to be applied to financial
transactions within the Company. NWL has adopted its own version of these guidelines. Standing or Executive
Committees can take decisions not delegated to specific committees between Board meetings. All directors
receive notice of Standing Committee meetings and may participate if they wish. Decisions taken by the
Standing or Executive Committees are reported at the next Board meeting.

The following table sets out the attendance of directors at Board and committee meetings during 2010/11:

Number of meetings

Sir Derek Wanless
Sir Patrick Brown
Margaret Fay2
Chris Green
Claude Lamoureux
Heidi Mottram
Martin Nègre
Paul Rew3
Alex Scott-Barrett
Jenny Williams4

Board

Nomination Remuneration

Audit

6
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4
6
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4
6
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4
4
3
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11
4
4
2
4
1

3
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2
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31
3
–
3
–

31
3
–
31
–
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1
2
3
1

Notes:
1. Not a member, but attended at the invitation of the Committee chairman.
2. Appointed to the Board on 1 June 2010.
3. Appointed to the Board on 1 October 2010.
4. Retired from the Board on 29 July 2010.

The NWG Board meets at least every two months, usually immediately following meetings of the NWL board.
As NWL is so significant within the Group, it may be helpful to provide an insight as to how the NWL board works.
Typically, the CEO provides an overview of performance since her last report, highlighting issues to which the
board needs to pay particular attention. She also reports on regulatory and other developments affecting the
sector. NWL’s performance is captured by means of a balanced scorecard which shows performance against a
series of KPIs. Achievement against this scorecard will also be a key element of NWG and NWL directors’ bonuses
in 2011/12 and future years. The CEO’s overview also contains detailed reports on finance, regulation, operations
and human resources. Reports are provided from chairmen of committees which have met since the last board
meeting. Health and safety performance is addressed at each meeting. The NWL board considers papers seeking
approval of contracts worth over £2.0 million and capital projects (which may in time require a series of contracts)
over £5.0 million. Papers seeking investment approval are required to contain sections on sustainability and risk.
For example, a paper seeking investment approval for a scheme to alleviate sewer flooding would need to
demonstrate that the solution proposed is sustainable.

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Corporate governance statement
continued

As well as the reports described above, the NWL board receives risk reports and approves budgets, financial
plans, reports to Ofwat, accounts, dividends payable and a range of other matters. The NWL board also sets time
aside during its meetings to consider forward-looking strategy, and meets on separate strategy days to develop
that work. The papers submitted to the board are used as the basis for discussion, rather than as an end in
themselves. The Chairman ensures that, wherever possible, the board avoids becoming too immersed in detail
and that the meetings are used to generate ideas and to constructively challenge the management. Non-executive
directors readily question the assumptions of the management team and bring new perspectives from their
experience elsewhere.

Non-executive directors are encouraged to meet employees in order to gain a closer understanding of the
issues they face. On 30 March 2011, six of NWG’s non-executive directors (and the CEO) held an open forum
with employees at NWL’s offices at Hanningfield, in Essex. This event was successful and will be repeated
at other venues.

The NWG Board works in a very similar way. The members of the NWG Board all sit on the NWL board, and
therefore the NWG Board does not need to become too involved in NWL’s operational issues. The NWG Board’s
focus is strategic. It sets the future direction of all Group companies, with a particular emphasis on the medium
and long term, including funding.

The NWG Board also oversees the non-NWL businesses, and particularly the PFI contracts in Scotland, the
operating contracts in Ireland, AquaGib and Agrer.

During the year, the non-executive directors met formally once without the executive directors and are in regular
contact with each other throughout the year. The non-executive directors also met once without the Chairman
but did not consider additional formal meetings to be necessary.

Authorisation of directors’ conflicts of interest
Directors have a statutory duty, under s175 of the Companies Act 2006, to avoid a situation in which they have, or
could have, a conflict of interest with the Company’s interests. However, there is no breach of this duty if the Board
has authorised the matter in question. The Articles permit directors (other than the director having the interest in
question) to authorise any situation giving rise to a known or potential conflict. A register of the interests which have
been authorised is maintained by the Company Secretary and is available at every Board meeting. The Company
will follow emerging best practice in line with the General Counsel 100’s guidance paper.

Board balance and independence
Ten directors served during the year – the Chairman, two executive directors, the Senior Independent Non-
executive Director and six other non-executive directors. Sir Derek Wanless is the non-executive Chairman. The
executive directors are Heidi Mottram (CEO) and Chris Green (Finance Director). Sir Patrick Brown is the Senior
Independent Non-executive Director and the other independent non-executive directors who served during the
year were Margaret Fay, Martin Nègre, Paul Rew, Alex Scott-Barrett and Jenny Williams. Claude Lamoureux is also
a Non-executive Director but is not independent as he was, until 1 December 2007, President and CEO of OTPP,
which holds 27% of the issued share capital of the Company. Jenny Williams retired from the boards of NWG and
NWL on 29 July 2010.

The Company complies with the Code’s requirement that half of the directors, excluding the Chairman, are
independent non-executive directors. The Chairman was independent on appointment. Biographical details of the
directors appear on pages 54 and 55 and details of their service contracts are in the directors’ remuneration report.

The Chairman and CEO have clearly defined written responsibilities which have been agreed by the Board.
The Chairman leads the Board and creates the conditions for overall Board and individual director effectiveness,
both inside and outside the boardroom. The CEO is responsible for running the Company’s business on a day
to day basis.

Sir Patrick Brown, as Senior Independent Non-executive Director, is available to shareholders who wish to raise
any concerns and leads the non-executive directors in their evaluation of the Chairman’s performance.

The non-executive directors bring to the Board many years of business experience as well as financial expertise
and the ability and willingness to challenge and support the executive directors.

The General Counsel and Company Secretary, Martin Parker, assists the Board to ensure that good corporate
governance compliance is achieved. He is also Company Secretary of NWL and is secretary to all Board committees.

The NWG Board supports the findings of Lord Davies’ recent review, ‘Women on Boards’. Over the coming
months the Board will review its procedure for the appointment of directors (including the impact of the approach
taken to management development at a less senior level) and consider which of the Davies recommendations
should be adopted, whether or not they become formally binding on companies. Following this year’s AGM,
if Heidi Mottram and Margaret Fay are re-elected, two (22%) of the nine directors will be female.

Information and professional development
All directors have access to independent professional advice to assist them in the performance of their duties,
at the Company’s expense, and to the Company Secretary for advice and assistance. The Chairman, with the
assistance of the Company Secretary, monitors the induction and training requirements of directors. All new
directors receive an induction information pack and are encouraged to make site visits and to arrange meetings
with managers. Since joining the Company in June 2010, Margaret Fay has visited Birtley sewage treatment works
(STW), Lumley water treatment works (WTW) and Bran Sands STW. Since joining in October 2010, Paul Rew has
visited Bran Sands STW, Lumley WTW, Kielder, Hanningfield and Abberton reservoirs and the Pity Me customer
contact centre.

Managers from within the Group submit papers or give presentations at Board meetings. Water industry
representatives meet the NWL board to discuss current issues.

The Company Secretary ensures that directors are kept informed and that information flows effectively within the
Group by:
−
−
−
−

keeping in regular contact with directors;
sending Board papers to directors before each Board meeting;
sending briefing packs to directors in the months when Board meetings are not held; and
providing a directors’ team room intranet site containing Board and committee papers, minutes, analysts’
reports and reference and regulatory documents, to which all directors have access.

Directors attend conferences and seminars where this will help them in the performance of their duties.

Performance evaluation
A full evaluation of the performance of the Board and its committees was conducted during the year by an external
consultant, who observed board meetings of NWG and NWL, and a meeting of the Audit Committee. Each
director completed a detailed questionnaire prior to a one-to-one meeting with the consultant. The questionnaire
was designed to address strategic issues and succession planning, as well as the approach of the Board to
operational and financial matters, the role of the non-executive directors and the quality of information received by
the Board. The performance of NWL’s board and its committees was evaluated at the same time. The Chairman
used the evaluation to assist with his evaluation of each director.

The results of the external evaluation were generally very positive and a number of actions were agreed, with a
view to further improving the performance of the boards. Although the Board discussions are already lively and
vigorous, the consultant encouraged directors to be even more challenging in their approach.

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Corporate governance statement
continued

In relation to Board papers, it was agreed that some could be a little more incisive and state their main points
more clearly.

As well as commenting on the contributions from the directors and the processes adopted at Board and
committee meetings, the consultant made certain practical observations. The consultant felt, for example, that
a meeting of the Audit Committee was hampered by the fact that some people (who were not members of the
Committee) participated by video conference. It was agreed that this was not helpful and the schedule of
meetings was immediately adjusted to avoid the need for this in future.

It was agreed that the Board’s time would be more tightly focused on strategic issues, so that maximum value
is added.

The Board has also considered the FRC’s ‘Guidance on Board Effectiveness’, published in March 2011. The
directors consider that the work of both the NWG and NWL boards and the roles played by the Chairman, the
Senior Independent Non-executive Director and the other directors are consistent with both the practical content
and underlying philosophy of the Guidance.

The Chairman’s comments on the evaluation of the directors seeking election and annual re-election at the AGM
are provided in the Notice of Meeting. The comments of the Senior Independent Non-executive Director on the
evaluation of the Chairman are also provided in the Notice.

External appointments
Executive directors have generally only accepted non-executive positions outside the Group where this would
benefit either the Group or the local community. These positions have tended to be with educational institutions,
economic regeneration groups or similar bodies. The Board has agreed that executive directors of the Company
who are appointed to non-executive directorships of a more commercial nature may retain the fees, subject to
obtaining the Chairman’s consent before an appointment is accepted. Only one such external appointment per
director will generally be permitted.

Board committees
The Board has Audit, Nomination and Remuneration Committees to assist it in the performance of its duties.
The Board sets the terms of reference of the committees and receives regular reports from their chairmen at
Board meetings. The terms of reference of committees are available on the Company’s website or from the
Company Secretary.

Remuneration Committee
The work of the Remuneration Committee, and details of the directors’ remuneration, are set out in the directors’
remuneration report.

Nomination Committee
The main duty of the Nomination Committee is to identify and nominate candidates to fill Board vacancies for
approval by the Board. The Committee also reviews succession planning for the Board, NWL board and senior
appointments and will make recommendations to the Board when appropriate. The Committee’s usual policy
is to use external recruitment consultants or to advertise in order to identify suitable candidates.

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During the year, the Committee recommended to the NWG and NWL boards the appointments of Margaret Fay
and Paul Rew, as additional independent non-executive directors. The Committee felt that an additional non-
executive with strong business and political contacts, especially in the north east, would be a valuable addition
to the boards. Margaret Fay was regarded by the Committee as an ideal candidate for this role and she was,
therefore, approached by the Company to discuss the opportunity. Paul Rew was appointed for his first class
finance skills and experience and particular expertise in sustainability. The Committee considered that these
attributes and Paul Rew’s all-round understanding of business made him an excellent addition to the two principal
boards. Leading executive search consultants assisted the Committee with Paul Rew’s appointment. Simon Lyster,
a Non-executive Director of NWL since 26 September 2006, was appointed to the NWG Board on 1 April 2011.
Simon Lyster brings very significant experience of sustainability issues, as well as excellent analytical skills and a
first-hand understanding of NWL’s Essex operating area.

The Committee also considered extensions to the appointments of non-executive directors on the NWG and NWL
boards whose contracts for services expired during the year. Non-executive directors are appointed for a term of
one year and all directors are subject to annual re-election at the AGM.

The members of the Nomination Committee are now Sir Derek Wanless (Chairman), Sir Patrick Brown, Margaret
Fay, Heidi Mottram, Martin Nègre, Paul Rew, Alex Scott-Barrett and Simon Lyster, and the membership is
compliant with the Code.

Audit Committee
The Audit Committee members during the year were Sir Patrick Brown (Chairman), Martin Nègre, Alex Scott-
Barrett, Paul Rew (from 1 October 2010) and Jenny Williams (until 29 July 2010). Paul Rew and Alex Scott-Barrett
are chartered accountants and the Board is satisfied that they both have recent and relevant financial experience.
It is proposed that Paul Rew will take over as Chairman of the Audit Committee on 28 July 2011, following the
AGM. Paul Rew was a senior partner with PwC until March 2010. The Committee’s membership complies with
the Code. The Chairman and executive directors are invited to Audit Committee meetings, with the permission
of its Chairman, but have no right of attendance. Managers from within the Group are invited to Audit Committee
meetings to discuss issues relating to their areas of the business. During the year, the Committee met with both
the external Audit Partner and Internal Audit Manager to discuss audit business, without the executive directors
being present. The Committee remains satisfied that the internal audit function is able to operate with
independence and is not under any pressure from the executive management of the Company to produce
particular results.

The Committee members receive regular briefings from the external auditors to enable them to keep up to date
on financial reporting standards.

The purpose of the Audit Committee is to assist both executive and non-executive directors of NWG to discharge
their individual and collective responsibilities in relation to:
−

ensuring the financial and accounting systems of NWG and its subsidiaries are providing accurate and up to
date information on their current position;
ensuring NWG’s published financial statements represent a true and fair reflection of this position; and
assessing the scope and effectiveness of the Group’s risk management systems and the integrity of its internal
financial controls.

−
−

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Corporate governance statement
continued

During the year its work included:
−
−

monitoring the integrity of the financial statements of the Company;
reviewing the Company’s internal controls (both financial and information systems) by considering reports of
both the internal and external auditors, directing questions to management and reviewing the financial risks and
controls information provided to them on an annual basis;
monitoring and reviewing the effectiveness of the internal audit function by reviewing the scope of the annual
audit plan, the results of those audits and monitoring the completion of actions identified during the audits;
monitoring and reviewing the performance and effectiveness of the external auditors, in particular, by reviewing
the scope and costs of the audit process;
reviewing the external auditors’ independence by monitoring the extent of the provision of non-audit services
and receiving reports from the external auditors;
monitoring the potential impact and management of significant risks to the business using a risk methodology
(meeting the recommendations of the 2005 Turnbull Review Group guidance) which sets out and rates all
identified risks, including operational, external, financial, environmental, social and governance risks;
reviewing the Committee’s terms of reference;
reviewing the Group’s financial approval rules;
reviewing the Group’s tax strategy;
reviewing NWL’s contract terms;
reviewing the Group’s accounting and treasury policies; and
reviewing the Company’s interim management statements, half-yearly and preliminary results announcements
and final published annual report and financial statements.

−

−
−
−
−
−
−

The Committee has now assumed responsibility for the practical work being done to ensure that the Group’s
procedures designed to prevent bribery are adequate (having regard to the provisions of the Bribery Act 2010 and
the official guidance published in relation to that Act). This builds on significant work done by the NWG Board, with
advice from the Company Secretary and Internal Audit Manager, to assess the bribery risk faced by the Group,
clarify policies and map the procedures to be put in place.

Given the importance of NWL to the Group’s business, the Committee works closely with the Audit Committee of
NWL. In particular, both committees review significant regulatory reports for Ofwat and regularly review NWL’s debt
recovery strategy and performance. In addition, meetings were held with the Ofwat Reporter during the year to
discuss the June Return process.

The Audit Committee Chairman reports to the Board following each meeting of the Committee and Committee
minutes are circulated to the Board.

External auditors
Ernst & Young LLP have been the Group’s auditors since 2003. The audit engagement partner is subject to
change every five years and was last changed in 2008.

Non-audit services
The Committee has approved a procedure for the approval of non-audit services to safeguard the objectivity and
independence of the external auditors, which complies with the requirements of the Auditing Practices Board’s
revised Ethical Standard No. 5. The external auditors are not permitted to provide bookkeeping, financial information
systems design and implementation, or internal audit outsourcing services. Permitted services require prior approval,
either from the Audit Committee Chairman, if under £50,000, or from the Audit Committee, if over £50,000. The
Company requires the auditors to report annually details of all non-audit services provided. A breakdown of the
cost of audit and non-audit services provided by the auditors is set out in note 4 to the financial statements.

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On 25 May 2011, Ernst & Young LLP confirmed to the Audit Committee, in accordance with ISA 260 (Communication
of audit matters to those charged with governance), that they have considered their relationship with the Company
and that, in their professional judgement, the objectivity of the audit engagement partner and audit staff is
not impaired.

Review of internal control
The Board believes that, as explained below, there are effective systems in place to identify and manage significant
risks and that it receives sufficient information to enable it to assess these risks.

The Board has overall responsibility for maintaining a sound system of internal control and for reviewing its
effectiveness. The system is designed to manage rather than eliminate the risk of failure to achieve business
objectives. Regular reviews of the effectiveness of the internal control system are carried out in accordance with
the 2005 Turnbull Review Group guidance. The actions necessary to address weaknesses and otherwise improve
the system of internal control are communicated to management. Internal audit monitors implementation of these
actions and reports back to the Audit Committee. This process has been in place throughout the year and up to
the date of approval of the 2010/11 annual report and financial statements. There are inherent limitations in any
system of internal control and even the most effective system can only provide a reasonable, and not absolute,
assurance against material mis-statement or loss.

The use of our standard accounting manual by finance teams throughout the Group ensures that transactions and
balances are recognised and measured in accordance with prescribed accounting policies and that information is
appropriately reviewed and reconciled as part of the reporting process. The use of a standard reporting pack by all
entities in the Group ensures that information is gathered and presented in a consistent way that facilitates the
production of the consolidated financial statements.

The Board has reviewed the effectiveness of the Group’s system of internal control, as follows, during the year.
The internal audit team manages a process whereby all of the financial controls within the Group are identified
and certified by the relevant manager as having operated for the full year. As part of a programme of work, which
is agreed with the Audit Committee, these controls are tested throughout the year. A report detailing any areas of
concern is produced after each audit. As part of the same process all of the key business risks are identified. Each
risk is assessed on an unmanaged basis, the controls in place to mitigate the risks are detailed and the risk is then
re-assessed after these controls.

Internal audit’s findings and recommendations are presented to the Audit Committee along with agreed actions.
Internal audit updates progress against any agreed actions until the control weakness is resolved.

Organisational structure
The trading subsidiaries have their own boards of directors (the Subsidiary Boards) which are responsible for the
operational and financial control of their own businesses. The Subsidiary Boards report to the executive directors
and to the Company’s Board on matters including major strategic, financial, organisational, compliance and
regulatory issues.

The NWL management team manages the major business of the Group and consists of Heidi Mottram (CEO),
Chris Green (Finance Director), Graham Neave (Operations Director and on NWL board), Ceri Jones (Regulation
& Scientific Services Director and on NWL board), John Devall (Water Director), Ian Donald (Customer Services
Director), Sarah Salter (HR Director from 4 January 2011), Colin Price (Technical Director) and Henry Wilson
(Wastewater Director). NWL’s former HR Director, Diane Morton, resigned on 30 September 2010. The NWL
management team meets monthly to consider and discuss progress against annual and monthly financial and
operational targets. It prepares an annual budget and business plan for consideration and approval by the NWL
board. NWL operates a balanced scorecard which monitors progress against KPIs and which covers all areas
of operation of the business.

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Corporate governance statement
continued

The Board is able to monitor the impact of environmental, social and governance matters on the Group’s business,
to assess the impact of significant risks on the business and to evaluate methods of managing these risks through
reports it receives from the Subsidiary Boards and the Audit Committee. The environmental risks considered to be
significant by the Board are described on page 51, together with a summary of how NWL is managing these risks.

For a number of years, the Subsidiary Boards have performed a full annual business risk analysis to meet the
recommendations of the 2005 Turnbull Review Group guidance. This methodology is described above in relation
to the work of the Audit Committee. The results of the risk reviews are reported in detail to the Audit Committee
and a summary is reported to the Company’s directors. Accompanying the risk model is a detailed review of each
company’s internal financial controls along with either confirmation that the controls have operated throughout the
year or details of any exceptions. Action points arising from these reviews are followed up as part of the internal
audit process.

Some subsidiaries, such as NWL, consider risks more frequently. The executive directors consider significant
risks in a structured way on a monthly basis, assessing the likelihood and potential impact of the relevant risks
both before and after risk management measures have been put in place. Further details about how risks and
uncertainties facing the Group are assessed and managed are included in the directors’ report – business
review on pages 50 and 51.

On a monthly basis, the executive directors compare the actual operational and financial performance of each
business with its plan and budget. Targets are set to measure performance and regular forecasts are made.

Information and reporting system
Each Subsidiary Board holds a copy of the Company’s financial approval rules and terms of reference, which
contain full details of the procedures for distribution of information and financial reporting. Each Subsidiary Board
has developed financial control systems appropriate to its activities.

Budgets and business planning
The Group prepares detailed medium term business plans and annual budgets which are reviewed by the
executive directors and submitted to the Board for approval. Business plans and budgets include an assessment
of the key risks and success factors facing each business unit.

The approval of the Board is required for major investments, including those in new markets, and large capital
expenditure programmes. The treasury strategy, which is approved by the Board, requires that investments are
limited to certain money market and treasury instruments, and that the Group’s exposure to any single bank,
building society or market is controlled, with maximum deposits allowed with any single counterparty. The Group’s
investment strategy aims to fix interest rates for part of the Group’s borrowings and investments for periods
determined by the forecast cash flow of the individual businesses. This manages the exposure to the risk of
changes in short term interest rates. Foreign currency exposure is also managed as part of the treasury strategy
approved by the Board.

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Investor relations
The Company welcomes constructive communication with all its shareholders. Our main communication with
shareholders is through the publication of the annual report and financial statements, half-yearly financial report,
interim management statements and through information on the Company’s website. In addition, the executive
directors have regular contact with the Company’s large institutional investors, as well as giving presentations to
analysts and stockbrokers. During the year, the executive directors held 36 meetings with a range of institutional
investors. Investor feedback reports from investor meetings, prepared by the Company’s advisers, are considered
at Board meetings and analysts’ notes on the Company are made available to all directors on the Board’s intranet
team room. The Board believes that these methods of investor feedback provide the Senior Independent Non-
executive Director and the other non-executive directors with a balanced understanding of the issues and
concerns of major shareholders. The Senior Independent Non-executive Director is available to shareholders
who wish to raise any matters of concern and the Chairman welcomes contact with any shareholders who have
matters they wish to discuss. The Company has not received any requests from institutional shareholders to
meet with non-executive directors.

All shareholders are encouraged to contact the Company with queries or suggestions. A welcome letter is sent
to all new non-corporate shareholders, which includes information on services available to shareholders.

AGM
Shareholders are encouraged to attend the Company’s AGM at which they can meet and question the directors.
The Company will make a presentation at the AGM to highlight the key business developments and events during
the year. The full Board is expected to be available at the AGM to answer shareholders’ questions. Voting at the
AGM will be on a show of hands but the proxy votes cast on each resolution will be displayed after each resolution
has been voted on. If the voting on a show of hands produces a different result from that which would have been
achieved on a poll, the Chairman will call a poll so that the result of the voting on that resolution reflects the wishes
of the majority of shareholders. The proxy votes cast at each AGM are disclosed on our website. The notice
convening the AGM, to be held on 28 July 2011, has been sent to shareholders together with an explanation
of the business to be conducted at the meeting and a form of proxy.

Information pursuant to the Takeovers Directive
Structure of the Company’s share capital
As at 31 March 2011, the Company had 518,623,845 ordinary 10 pence shares admitted to trading.

Rights and obligations attaching to the shares
The rights attaching to the shares in the Company are set out in the Articles and may be changed with the
approval of the shareholders. Subject to the provisions of the Companies Acts, shares may be issued with or have
attached thereto such preferred, deferred, qualified or other rights or such restrictions, whether in regard to
dividend, voting, return of capital or otherwise, as the Company may by ordinary resolution determine or, if there
has not been any such determination, as the Board may determine.

Shareholders are entitled to requisition a general meeting of the Company and to attend, vote and speak at
general meetings, in accordance with the Companies Acts and the Articles. Shareholders have the right to
appoint proxies.

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Corporate governance statement
continued

Restrictions on the transfer of shares
Any shareholder may transfer a certificated share, as defined in the Articles, by an instrument of transfer in the
usual form or in such other form as the Board may approve. However, the transfer of an uncertificated share, as
defined in the Articles, need not be in writing and shall comply with any rules adopted by the Board under Article
13.7. The Board may, however, in its absolute discretion and without assigning any reason, decline to register any
transfer of any share that is not a fully paid up share or on which the Company has a lien, provided that such
discretion may not be exercised in such a way as to prevent dealings in the shares from taking place on an open
and proper basis. The Board may also decline to register any transfer unless:
−

in the case of a certificated share, the instrument of transfer, duly stamped, is lodged with the Company
accompanied by the certificate for the shares to which it relates and such other evidence as the Board may
reasonably require to show the right of the transferor to make the transfer;
in the case of a certificated share, the instrument of transfer is in respect of only one class of share; and
in the case of a transfer to joint holders of a certificated or uncertificated share, the number of joint holders to
whom the share is to be transferred does not exceed four.

−
−

If the share to be transferred is an uncertificated share, the Board may refuse to register a transfer if the
Uncertificated Securities Regulations 2001 allow it to do so.

Additionally, where a member or other person on whom a Disclosure Notice has been served (pursuant to s793
of the Companies Act 2006) and has not, within the period specified, supplied to the Company the information
required in respect of any shares, the Board may impose a sanction declining to register any transfer of shares,
other than a sale to a bona fide unconnected third party.

Significant shareholdings
Details of shareholders with significant holdings in the Company’s issued share capital are set out below:

Ontario Teachers’ Pension Plan Board
Pictet Asset Management Ltd
Artemis Investment Management LLP
Legal & General Investment Management Ltd. (UK)

Number of
shares at
31.3.2011

% share
capital

Number of
shares at
31.5.2011

138,776,864
38,770,495
Below 3%
16,319,467

26.76 138,776,864
40,787,412
15,654,522
15,573,103

7.48
–
3.15

% share
capital

26.76
7.86
3.02
3.00

The holdings include, where applicable, the aggregate of investment management clients’ interests within the
respective asset management companies and may have since changed without triggering a further notification.

Restrictions on voting rights
In accordance with the Articles, no member shall, unless the Board otherwise determines, be entitled to be
present or to vote, either personally or by proxy, unless all calls or other sums presently payable by him in respect
of shares in the Company have been paid.

Additionally, where a member or other person on whom a Disclosure Notice (pursuant to s793 of the Companies
Act 2006) has been served and has not, within the period specified, supplied to the Company the information
required in respect of any shares, the Board may impose a sanction preventing the member from attending and
voting at any general meeting.

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Shares required to fulfil vested awards made under the Northumbrian Water Group plc Employee Trust are
acquired through Northumbrian Water Share Scheme Trustees Limited. In line with Association of British Insurers
(ABI) Guidelines, dividends and voting rights are waived on these shares. At 31 March 2011, the Employee Trust
held a total of 765,962 shares.

The deadline for delivering either written or electronic proxy voting forms is 48 hours before the appointed time of
the meeting.

Appointment and replacement of directors
The Company may, by ordinary resolution, appoint any person to be a director. The Board may also appoint
directors, either to fill casual vacancies or as an addition to the Board, but any director so appointed shall hold
office only until the next AGM and shall then be eligible for election. Paul Rew and Simon Lyster, who were
appointed to the Board since the last AGM, will be eligible for election at this year’s AGM. Additionally, the Articles
provide for the annual re-election of all directors. Details of all the directors seeking re-election at this year’s AGM
are set out in the Notice of Meeting.

The main duty of the Nomination Committee is to identify and nominate candidates to fill Board vacancies for
approval by the Board. The work of the Nomination Committee is described above.

The Company may, by special resolution, or by ordinary resolution of which special notice has been given in
accordance with the provisions of the Companies Acts, remove any director before the expiration of his period
of office and may, by ordinary resolution, appoint another person in his place. Any person so appointed shall be
subject to retirement at the same time as if he had become a director on the day on which the director in whose
place he is appointed was last appointed a director.

Amendments to the Company’s Articles
The Company may amend its Articles by passing a special resolution of its members.

Powers of the Board
The Articles provide that the business of the Company shall be managed by the Board, which may exercise all
such powers of the Company as are not required (by the Companies Acts or the Articles) to be exercised by the
Company in general meeting. Subject to the Companies Acts, the Articles and any directions given by special
resolution, the Board may, inter alia:
−

establish local or divisional boards or agencies to manage any of the Company’s affairs and appoint any
persons to be members of such local or divisional boards, or agents, and fix their remuneration;
appoint attorney(s) for such purposes and with such powers, authorities and discretions, and for such period
and subject to such terms and conditions, as it may think fit;
delegate its powers to any director;
sign, draw, accept, endorse or otherwise execute all cheques, promissory notes, drafts, bills of exchange and
other instruments and all receipts for moneys paid to the Company in such manner as the Board shall from time
to time determine; and
exercise all of the powers of the Company to grant and pay pensions, annuities, gratuities, superannuation or
other allowances and benefits in favour of any person.

−

−
−

−

Allotment of shares
Subject to the provision of the Companies Acts, the Articles and any authorising resolutions passed in general
meeting, the shares of the Company shall be at the disposal of the Board, which may offer, allot, grant options
over or otherwise dispose of them to such persons, at such times, for such consideration and upon such terms
and conditions as the Board may determine. The directors will again be seeking authority from shareholders at
this year’s AGM for the directors to allot shares during the ensuing year although, at present, the Company has
no intention of doing so.

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Corporate governance statement
continued

Purchase of own shares
Subject to the provisions of the Companies Acts and the Articles and to any confirmation or consent required by
law, the Company may from time to time purchase its own shares. The Company will again be seeking authority
from shareholders at this year’s AGM to purchase its own shares during the ensuing year although, at present,
the Company has no intention of doing so.

Significant agreements
As at 31 March 2011, NWL had £344.7 million of loans provided by the EIB and the applicable terms include
change of control clauses. If, after consultation with NWL, the EIB is of the opinion that a change of control has
had, or is likely to have, a material adverse effect, then the EIB could give 30 days notice of requesting early
repayment of the loans plus, in certain circumstances, a premium depending on prevailing market interest rates.

By order of the Board

Martin Parker
General Counsel and Company Secretary
31 May 2011

Northumbrian Water Group plc
Registered office: Northumbria House, Abbey Road, Pity Me, Durham, DH1 5FJ
Registered in England and Wales No. 4760441

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Directors’ remuneration
report

In this report, which will be submitted for approval at the AGM on 28 July 2011, we describe how the Chairman,
executive and non-executive directors are remunerated. Those parts of the remuneration report which are subject
to audit by Ernst & Young LLP are marked ‘audited’.

The Remuneration Committee
The role of the Remuneration Committee
The Remuneration Committee of the Board (the Committee) determines the remuneration and terms of
employment of the Chairman of the Company, executive directors of NWG and NWL and a further six senior
managers, in accordance with a remuneration policy approved by the Board. The terms of reference of the
Committee are published on our website at www.nwg.co.uk (in the ‘about us: corporate governance’ section)
or a copy can be requested from the Company Secretary.

The Committee is always available to engage with major shareholders and their representatives to discuss
remuneration matters.

Remuneration Committee members
The Committee members are Alex Scott-Barrett (Committee Chairman), Sir Patrick Brown, Martin Nègre
and Margaret Fay, who are all considered by the Company to be independent, and Sir Derek Wanless. The
membership of the Committee was, therefore, compliant with the Code throughout the year. Martin Parker,
the Company Secretary, is secretary to the Committee.

External advice
The Committee continued to receive advice during the year from its appointed advisers, Hewitt New Bridge Street
(HNBS), and also from the CEO (although never about her own remuneration). The Human Resources Director,
Sarah Salter, who joined the Group on 4 January 2011, also attends Committee meetings to provide expert advice.
HNBS was paid £33,399 for these services in 2010/11 and continues to assist the Committee in maintaining best
practice in relation to remuneration. HNBS did not provide any other services to the Company during the year.

The Committee’s work over the past year
The Committee met three times during the year with 100% attendance by all members, except for Sir Patrick
Brown who was not present at the March 2011 meeting and Margaret Fay who did not join the Committee until
June 2010, to:
−
−
−
−

agree bonus payments for 2009/10;
set performance targets for executive directors and senior managers;
agree salaries for 2011/12;
determine the vesting percentage to be applied to the LTIP awards made on 13 December 2007 which
vested on 13 December 2010;
grant LTIP awards on 8 December 2010 (to vest, subject to performance and continued service, on
8 December 2013);
consider the impact of changes to the tax treatment of pensions; and
review the pension contributions payable in respect of executive members of the Company’s defined
contribution pension scheme.

−

−
−

Following the year end, the Committee wrote to its largest shareholders and the major representative bodies to
consult on a number of changes to executive remuneration arrangements for 2011/12. In summary, these changes
were to introduce an executive tier to the defined contribution pension scheme, expand the range of annual bonus
metrics to include a balanced scorecard, increase maximum bonus potential for executive directors from 70% to
100% of base salary and introduce bonus deferral and clawback. Further details of the changes are set out below.
No changes were made to long term incentive provisions.

As the Committee works closely with NWL’s remuneration committee, Committee papers and minutes are
circulated to all NWG and NWL non-executive directors, who can give their views direct to the Committee
Chairman and can attend meetings if they wish.

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Directors’ remuneration report
continued

Remuneration policy
The Committee considers the principles and provisions of the Code when setting its policy and believes it is fully
compliant. The policy of the Company is to provide remuneration that is sufficient to attract, retain and motivate
directors of the quality required to run the Company successfully, while paying fairly. Although HNBS provides
the Committee with detailed comparative data on other companies in the utilities sector and more widely, the
Committee uses this data with caution given the lack of direct comparators and to avoid remuneration being
ratcheted up as a result of benchmarking exercises.

Consistent with its fair pay policy, when considering the remuneration packages of senior executives and directors,
the Committee takes into account the pay and employment conditions of other employees in the Group. However,
it does not consider that a formulaic approach to the pay differentials between directors and other employees
would, of itself, be helpful. It recognises, however, that excessive pay differentials would be divisive and would
undermine the Group’s core value of working as ‘one team’. The Committee is determined to ensure that
executive’s remuneration continues to be set at a level which is reasonable and appropriate. The directors
have been awarded the same 3.71% increase in their basic pay as nearly all other employees for 2011/12.

The Committee also considers environmental, social, risk management and governance issues when setting
remuneration terms.

The remuneration policy of the Committee is that:
−

the setting of base salaries is largely influenced by individual contributions and internal relativities rather
than external comparators (although for 2010/11 and 2011/12 the Committee was influenced by general
economic conditions);
the annual bonus plan recognises the interests of all of the Company’s stakeholders (including shareholders,
customers and employees) rather than being focused solely on profit; and
management shares in the longer term value created for the Company’s investors and the serviceability
of the Company’s regulated assets.

−

Elements of remuneration
The remuneration of the executive directors comprises:
−
−
−
−

basic salary;
benefits (including pension and participation in the Company’s SIP);
a performance related annual bonus; and
annual LTIP awards.

In addition to reviewing each constituent element, the Committee reviews the remuneration packages as a whole to
ensure that they remain appropriate in terms of structure and quantum. The chart below shows the composition of
the CEO’s remuneration (as a percentage of basic salary) both at ‘target’ and ‘maximum’ levels of performance.
Maximum performance assumes the achievement of maximum bonus and full vesting of LTIP awards.

Fixed pay

Variable pay

Total

Maximum

50%

100%

150%

200%

250%

300%

350%

Basic salary

Pension & beneﬁts

Annual bonus

LTIP

Basic salary and benefits
Basic salary is reviewed annually based on individual contributions and internal relativities. The Committee also has
regard to market practice in other quoted water companies and similar sized companies more generally.

Current basic salaries, together with the previous year’s salaries, are set out below:

Heidi Mottram
Chris Green

As at
1.4.2011

As at
1.4.2010

As at
1.4.2009

£331,872
£236,459

£320,000
£228,000

n/a
£225,000

For 2011/12, salaries for senior executives have been increased by 3.71%. This is the same as for nearly all
other employees.

Benefits provided to the executive directors comprise membership of pension schemes (as detailed below),
car allowance and healthcare.

Pensions
The main features of the Northumbrian Water Pension Scheme are set out in note 24 to the financial statements.
Basic salary is the only pensionable element of the executive directors’ remuneration packages.

The executive directors’ pensions were modified with effect from 1 January 2008, in line with the changes
proposed for the pension scheme as a whole, and the executive pension arrangements were closed to new
entrants on that date. In 2010/11, Heidi Mottram received an employer’s contribution of 8% of salary to the defined
contribution section of the Northumbrian Water Pension Scheme and made an employee contribution of 5%. The
employer’s contribution of 8% was the same as was available to any other employee making a 5% contribution
during 2010/11. Following consultation with the Company’s largest shareholders and major representative bodies,
the employer contributions on behalf of executive members of the defined contribution scheme have been
increased from 8% to 15% of salary, with employee contributions increased from 5% to 8%, from 1 April 2011.
This was thought necessary in order to make the remuneration packages available for senior recruits market
competitive. Heidi Mottram is the only executive director of the Company in the defined contribution scheme.

Annual bonus
The annual bonus plan has been designed to reflect the interests of all of the Company’s stakeholders.
The maximum annual bonus potential for the executive directors for 2010/11 was 70% of salary:

20%

40%

Shareholders – proﬁt before tax
Customers – Ofwat’s overall
performance assessment rating
Employees – percentage lost
time through
Bespoke personal

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Directors’ remuneration report
continued

Actual performance against the 2010/11 targets was as follows:

Bonus metric

Profit before tax (PBT)1
Overall performance assessment (OPA) rating2
Percentage time lost through sickness3
Bespoke personal targets4

Total

Maximum
bonus
(% of salary)

Chris Green
actual bonus
(% of salary)

Heidi
Mottram
actual bonus
(% of salary)

40
5
5
20

39
2
–
20

Notes:
1. The PBT bonus is based on actual PBT performance compared to the budget PBT set by the Board at the beginning of the year. PBT has been chosen because it is a
primary financial measure for the Company, for which the executive directors are accountable. The calculation of PBT performance is adjusted to exclude the impact of
any variance between the actual and budget interest charge on index linked bonds issued by Northumbrian Water Finance plc, which depends entirely on RPI in July of
each year and is, therefore, outside of management control.

2. The directors’ remuneration report for 2009/10 stated that the bonus metrics to be used in 2010/11 would be the same as in the previous year. Therefore, although

Ofwat no longer publishes an OPA rating, the Committee has estimated NWL’s OPA score for 2010/11, on the same basis as before, as 362. This has been placed in a
range for bonus purposes of 351 to 426, being the published range of performance across the 10 water and sewerage companies in 2009/10.

3. The year end percentage of time lost through sickness was 3.1%, against a range for bonus purposes of 2.7% to 2.99%.
4.

In 2010/11, Heidi Mottram’s personal targets related principally to maintaining key financial ratios and measures, ensuring that good relationships were maintained with
major investors and analysts, increasing operating and capital maintenance efficiencies, identifying business development opportunities, ensuring that investment needs
were properly quantified, refreshing the risk model and preparing a high level strategic risk matrix. Chris Green’s personal targets were focused mainly on maintaining
key financial ratios and measures, maintaining good relationships with major investors and analysts, ensuring treasury management achieved an appropriate balance
between risk and reward, reviewing and developing strategy in relation to market reform and competition, identifying business development opportunities, ensuring that
investment needs were properly quantified, refreshing the risk model, preparing a high level strategic risk matrix and identifying further opportunities to impact the cost
base and investment programme of NWL.

Following consultation with the Company’s largest shareholders, the range of annual bonus metrics has been
expanded to include a balanced scorecard to align annual incentive pay more closely with stakeholders’ wider
interests for 2011/12. In addition to the introduction of the balanced scorecard, the maximum annual bonus
potential for the executive directors in 2011/12 will be increased from 70% to 100% of salary and will be
apportioned as follows:

Bonus metric

PBT
Balanced scorecard measures
Bespoke personal targets

Total

(% of salary)

36
44
20

100

The new metrics are firmly linked to the Company’s strategic goals (customer, competitiveness, people, environment
and communities). The PBT performance metric reflects ‘competitiveness’, along with an assessment of capital
efficiency, while the other elements of the balanced scorecard are linked to the other strategic goals. The ‘customer’
goal underpins targets based on customer satisfaction, unplanned interruptions and water quality. The ‘people’ goal
is reflected in targets for employee engagement and lost time reportable accidents. The ‘environment’ goal targets
comprise leakage, sewage treatment performance and pollution incidents, while ‘communities’ targets are based on
external recognition of the Group’s corporate social responsibility achievement. Definitions of these measures are
outlined on pages 12 and 13.

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The PBT element of the bonus will be scored on a sliding scale around the target figure. A simple pass/fail
measure will apply to the other targets and most of the targets have been set at levels which would require
significant improvements over the 2010/11 actual results. The Remuneration Committee considers the overall
bonus metrics to be appreciably more stretching than before, and that they reflect operational performance and
delivery to customers in a more structured way. A similar approach has been adopted in relation to executives
below board level and senior managers, albeit at varying levels of bonus opportunity.

Bespoke personal targets have been set for Heidi Mottram and Chris Green for 2011/12. For Heidi Mottram these
include maintaining key financial ratios in line with the NWG and NWL approved budgets, maintaining good
relationships with investors and analysts, delivering the operating efficiency plans for 2011/12 (and keeping the
remainder of the plans for 2014/15 on track) and progressing the Group’s strategy on advanced anaerobic
digestion, co-digestion and renewable energy. Chris Green’s targets include maintaining key financial ratios,
maintaining good relationships with investors and analysts, refreshing the risk model and preparing a high level
strategic risk matrix and work on current cost depreciation and its impact on return on capital employed.

Bonus deferral
Following the increase in bonus potential, the Company has introduced bonus deferral for executive directors. Of
the total bonus awarded, 70% will be payable in cash and 30% will be payable in shares, deferred for three years.

Bonus and LTIP clawback
As part of the changes introduced for 2011/12, the Committee has introduced a clawback provision which will
apply in the event that results on which bonuses are paid, or LTIPs are awarded, are subsequently found to be
inaccurate or there has been relevant misconduct on the part of the employee.

LTIP
Under the LTIP, executive directors and senior managers may receive, at the discretion of the Remuneration
Committee, annual conditional awards of shares in the Company worth up to 100% of annual salary at grant,
although only the executive directors of NWG participate at the 100% level. All awards have three year pre-vesting
performance conditions.

Conditional awards made on 8 December 2010 to Heidi Mottram and Chris Green were:

Heidi Mottram

Chris Green

Note:
1. Based on a closing share price on 7 December 2010 of 328.5 pence.

Number of
conditional
awards
granted

Value of
awards
granted as a
% of salary1

96,212

68,551

99%

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Directors’ remuneration report
continued

Details of the pre-vesting performance conditions for awards made during 2010 are:

Performance metric Weighting

Description

Calibration

50%

Total
shareholder
return (TSR)

20%

Return
on capital
employed
(ROCE)

Serviceability 20%

Customer

10%

Relative TSR against the FTSE 250
excluding investment trusts and companies
in the following sectors: banks, financial
services, life insurance, non-life insurance,
real estate investment and services and
real estate investment trusts, oil and gas
producers and oil equipment and services.
In addition, awards will only vest if the
Committee is satisfied that the Company’s
TSR performance is consistent with the
underlying business performance of
the Company.

Average absolute ROCE for NWL over the
three financial years starting from 1 April
immediately preceding grant date.

Ofwat serviceability targets for the four
asset classes (i.e. water non-infrastructure,
water infrastructure, sewerage non-
infrastructure and sewerage infrastructure)
in the final year of the relevant three year
performance period. Serviceability is
measured by Ofwat based on a number
of indicators which include asset
performance indicators, water quality
compliance, environmental compliance
and consumer service.

Results of NWL’s independently run
customer satisfaction index, measured
as the average score for the surveys
carried out during the relevant three
year performance period.

30% of this part of an award (i.e. 15% of the
total award) will vest for median performance
increasing on a straight line so that 100%
(i.e. 50% of the total award) vests for upper
quartile performance.

30% of this part of an award (i.e. 6% of the
total award) will vest for average three-year
ROCE of 6.3%, increasing on a straight line
so that 50% (i.e. 10% of the total award) will
vest for average three year ROCE of 6.45%
and on a straight line so that 100% (i.e. 20%
of the total award) will vest for an average
ROCE of 6.75%.

50% of this part of an award (i.e. 10% of the
total award) will vest for ‘stable’ assessments
in three out of the four asset classes. 100%
of this part of an award (i.e. 20% of the total
award) will vest for ‘stable’ assessments in
all four asset classes. No awards would vest
under this part of an award for less than three
‘stable’ assessments.

30% of this part of an award (i.e. 3% of
the total award) will vest for a customer
satisfaction index of 83%, increasing on a
straight line so that 100% of this part of an
award (i.e. 10% of the total award) vests for a
customer satisfaction index of 93% or above.

The Committee is satisfied that the above metrics and targets remain appropriate for the following reasons:
−
−

a significant part of the award based on TSR ensures alignment with investors;
the use of an absolute ROCE target for part of the awards ensures that reward is directly linked to the
management’s delivery of the business plan;
the serviceability targets recognise that the maintenance of NWL’s regulated assets is critical to the longer term
returns for shareholders; and
customer satisfaction is a key objective for NWL and customers are important stakeholders.

−

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In the event of a change of control, the Committee would determine the extent to which the performance
conditions had been met and the proportion of the performance period that had elapsed in deciding whether
or not any vesting of awards would take place.

The LTIP award granted on 13 December 2007 became available to vest on 13 December 2010. The Committee
instructed HNBS to assess the level of vesting of this award. HNBS reported that 48.84% of the award was
available to vest (being 97.68% of the award relating to the Company’s TSR performance against the FTSE 250
Index and 0% of the award relating to the Company’s ROCE performance against the other water companies).
Prior to vesting, the Committee satisfied itself that the recorded TSR performance was a genuine reflection of
the Company’s underlying performance. Details of the number of awards which lapsed and those which were
exercised by the directors of the Company are shown in table 3.

Full details of past award levels and performance conditions are shown in table 2.

Share ownership guidelines
The NWG Board has introduced a guideline requesting NWG directors to build up (over a maximum of five years)
shares in the Company with a value equal to one year’s basic salary (in the case of the executive directors) or one
year’s fees (in the case of non-executive directors).

Responsible investment
The Committee is aware of Guideline 3.2 of the ABI Guidelines on Responsible Investment Disclosure and is
satisfied that neither the executive directors’ annual bonus targets nor the LTIP performance conditions are likely,
inadvertently, to motivate irresponsible behaviour.

Non-executive directors’ fees
The Company’s remuneration policy is that the Chairman and the non-executive directors should receive a fixed
fee for their normal duties. Reflecting the added responsibilities and time commitment, chairing the Remuneration
and Audit Committees attracts an additional fee over the non-executive directors’ standard base fee.

Fees payable during 2010/11 and the Company’s policy from 1 April 2011 (in line with the approach taken in
respect of the salaries of NWG executives) are:

Chairman
Non-executive director base fee
Audit Committee chairing fee
Remuneration Committee chairing fee

2011/12
£

2010/11
£

165,434 159,516
38,601 37,220
11,029 10,634
5,317

5,514

The Chairman and the non-executive directors do not receive benefits in kind and do not participate in bonus,
pension or share schemes operated by the Company. Further details of non-executive directors’ remuneration
are set out in table 1.

Directors’ interests in LTIP awards
The directors’ conditional interests in the ordinary 10 pence shares of the Company, awarded in accordance with
the terms of the LTIP as at 31 March 2011, are set out in table 3.

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Directors’ remuneration report
continued

Ordinary 10 pence shares required to fulfil LTIP awards which have vested may be provided by the Northumbrian
Water Group plc Employee Trust, through Northumbrian Water Share Scheme Trustees Limited. The Trustees are
Sir Patrick Brown, Martin Nègre and Kate Alsop. Anita Frew and Alastair Balls stood down as Trustees when they
retired as non-executive directors of NWL on 31 March 2011. At that date, the Trust held a total of 765,962 ordinary
10 pence shares. This represents 0.1% of the Company’s total issued share capital, so is substantially less than the
5% limit on shares that can be held in trust. In line with the ABI Guidelines, dividends are waived on these shares
and the voting rights attached to these shares will not be exercised at the AGM.

Share dilution
The Company’s share plans contain dilution limits that comply with the ABI Guidelines. Shares for both the LTIP
and SIP schemes are provided by purchase on the market. There has, therefore, been no dilution to date and
there is no commitment to issue new shares in relation to either scheme.

Performance graph
The graph below shows a comparison between the TSR for the Company’s shares for the five year period to
31 March 2011, and the TSR for the companies comprising the FTSE 250 Index (excluding investment trusts)
over the same period. This index has been selected as the Company is a constituent of the FTSE 250.

200

180

160

140

120

100

0
1-Apr-06

135

126

158

103

172

108

141

31-Mar-07

31-Mar-08

31-Mar-09

31-Mar-10

31-Mar-11

NWG

FTSE 250 (excluding investment trusts)

Note:
This graph shows the value, by 31 March 2011, of £100 invested in NWG on 1 April 2006 compared with the value of £100 invested in the FTSE 250 Index (excluding
investment trusts) over the same period.

Source: Thomson DataStream

Service contracts
All non-executive directors are appointed for a term of 12 months with a six month notice period for the Company
and the director. The executive directors have service contracts with 12 months notice periods and which expire
when the directors reach normal retirement age. No special arrangements apply if there is a change of control. The
contracts do not contain any liquidated damages clauses or provide explicitly for termination payments. If a contract
is to be terminated, the Committee will determine the compensation to be paid. There is no automatic entitlement to
bonus payments and LTIP vesting is at the discretion of the Committee. The Committee will apply such mitigation to
any contractual obligations as it considers fair and reasonable, taking into account the best practice provisions of the
Code. Details of the contracts of the executive and non-executive directors who served during the year are shown in
table 4.

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Terms and conditions of appointment of non-executive directors are available for inspection at the Company’s
registered office during normal business hours and at the AGM. The terms of appointment set out the expected
time commitment for each non-executive director.

External appointments of executive directors
The Board’s position on external appointments is described in full in the corporate governance statement but,
in summary, the Board has agreed that executive directors of the Company who are appointed to non-executive
directorships which pay a fee may retain the fees, subject to obtaining the Chairman’s consent before an
appointment is accepted. Only one such external appointment per director will generally be permitted. Heidi
Mottram is a Board member of Yorkshire Forward for which she is paid and retains an annual fee of £8,666.

Directors’ interests in shares
The directors’ beneficial interests in the ordinary 10 pence shares of the Company, as at 31 March 2011, are set
out in table 6.

Directors’ interests in shares under the SIP
The Company SIP is open to UK employees with more than three months service. Further details of the SIP are
set out in the directors’ report – business review. During the year, the executive directors had the opportunity to
participate in the SIP and their interests in the ordinary 10 pence shares of the Company, purchased and held in
accordance with the terms of the SIP, are set out in table 7.

This directors’ remuneration report has been produced in accordance with the Companies Act 2006 and
Schedule 8 of the Large and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008.
It was approved by the Board and signed on its behalf by the Chairman of the Remuneration Committee. It will
be put to the shareholders for approval at the Company’s AGM.

Alex Scott-Barrett
Chairman of Remuneration Committee
31 May 2011

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Directors’ remuneration report
continued

These tables form the part of the directors’ remuneration report which are audited (except for tables 2 and 4 which
do not require auditing).

Table 1
Directors’ emoluments (audited)
The emoluments of the directors of the Company for their services as directors of the Company and (where
relevant) its subsidiaries, are set out below, rounded to the nearest thousand pounds:

Fees
£000

Basic salary
£000

Benefits1
£000

Bonus2
£000

Total for the
year ended
31.3.2011
£000

Total for the
year ended
31.3.2010
£000

Executive directors
John Cuthbert
Heidi Mottram
Chris Green

Non-executive directors
Sir Derek Wanless
Sir Patrick Brown3
Margaret Fay
Claude Lamoureux
Martin Nègre
Alex Scott-Barrett4
Paul Rew
Jenny Williams

Total remuneration

–
–
–

–
320
228

–
11
12

–
195
139

160
48
31
37
37
43
19
12

387

–
–
–
–
–
–
–
–

–
526
379

160
48
31
37
37
43
19
12

429
38
323

158
47
–
37
42
37
–
37

548

334

1,292

1,148

Notes:
1. The remuneration of each executive director includes non-cash benefits comprising the provision of car allowances and healthcare.
2. The annual bonus is payable in June 2011, for performance during the year ended 31 March 2011.
3.
4.

Includes additional fee paid as Chairman of the Audit Committee.
Includes additional fee paid as Chairman of the Remuneration Committee.

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Table 2
Summary of LTIP performance conditions (unaudited)

LTIP award made 13 December 2007 and 15 December 2008

Maximum award

Performance conditions

Vesting schedules

100% of salary permitted and actual grants to executive directors
related to shares worth 100% of salary.

(1) 50% of award depends on NWL’s return on capital employed relative to
that of the other water and sewerage companies of England and Wales.
(2) 50% of award depends on the Company’s TSR performance against

the FTSE 250 Index, excluding investment trusts.

(1) 30% vests at median performance. At upper quartile or above, all
of this element of the award will vest. Between median and upper
quartile, straight line pro-rating will apply. Where the return on capital
employed performance is below the median, none of this element of
the award will vest.

(2) 30% vests at median performance with straight line pro-rating of TSR
performance against the members of the FTSE 250 Index, excluding
investment trusts, to 100% for upper quartile performance. Where
the Company’s TSR performance is below the median, none of this
element of the award will vest.

LTIP award made 4 January 2010 and 8 December 2010

Maximum award

Performance conditions and
vesting schedules

100% of salary permitted and actual grants to executive directors
related to shares worth 100% of salary.

Please refer back to the remuneration report for performance conditions.

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Directors’ remuneration report
continued

Table 3
Directors’ interests in LTIP awards (audited)
As at 31 March 2011, the directors had the following conditional interests in the ordinary 10 pence shares of the
Company, awarded in accordance with the terms of the LTIP:

Heidi Mottram

Totals

Chris Green

Totals

Award date

8.12.20105

Awards
held at the
start of
the year

Awarded
during
the year

– 96,212

–

96,212

Awards
lapsed
during
the year

–

Awards
vested
during
the year

Awards
held as at
31.3.2011

– 96,212

–

96,212

13.12.20071
15.12.20083
4.1.20104
8.12.20105

61,620
78,650
83,240
–

–
–
–
68,551

31,525
–
–
–

30,0952
–
–
–

–
78,650
83,240
68,551

223,510

68,551

31,525

30,095 230,441

Notes:
1. The market value of the shares on the date of the award was 334.0 pence per share. The three year performance period ran from 1 October 2007 to

30 September 2010.

2. Shares vested on 13 December 2010 and the closing price on that date was 332.0 pence per share.
3. The market value of the shares on the date of the award was 251.5 pence per share. The three year performance period runs from 1 October 2008 to

30 September 2011.

4. The market value of the shares on the date of the award was 272.5 pence per share. The three year performance period runs from 1 October 2009 to

30 September 2012.

5. The market value of the shares on the date of the award was 328.7 pence per share. The three year performance period runs from 1 October 2010 to

30 September 2013.

6. The cost of conditional awards is charged to the income statement over the three year performance period to which they relate after taking account

of the probability of performance criteria being met. In the year, £0.1 million was charged to the income statement (2010: £0.4 million).

7. Details of the performance conditions are shown at table 2.
8. The market price of the shares on 31 March 2011 was 332.2 pence per share. During the year, the highest market price was 364.0 pence per share

and the lowest market price was 245.1 pence per share.

9. Aggregate gross gains made by directors on exercise of awards at date of vesting was £99,915 (2010: £103,955).

Table 4
Directors’ service contracts (unaudited)
Details, as at 31 May 2011, of the contracts of the directors who served during the year are shown below:

Executive directors2
Heidi Mottram
Chris Green

Non-executive directors3
Sir Derek Wanless
Sir Patrick Brown
Margaret Fay
Claude Lamoureux
Martin Nègre
Alex Scott-Barrett
Paul Rew

Initial
appointment

Contract
start date

Unexpired
term1

Notice period
by either party

Current contract end date

1.3.2010

1.3.2010 Not fixed term 12 months Normal retirement age (65)
23.5.2003 23.5.2003 Not fixed term 12 months Normal retirement age (65)

1.6.2010

1.12.2003 1.12.2010
12.5.2003 12.5.2011
1.6.2010
1.12.2006 1.12.2010
12.5.2003 12.5.2011
26.9.2006 26.9.2010
1.10.2010 1.10.2010

6 months
11 months
–
2 months
11 months
4 months
4 months

6 months
6 months
6 months
6 months
6 months
6 months
6 months

30.11.2011
11.5.2012
31.5.2011
28.7.2011
11.5.2012
25.9.2011
30.9.2011

Notes:
1. Calculated as at 31 May 2011 and rounded to nearest whole month.
2. The service contracts of the executive directors do not contain provisions relating to compensation for termination. In the event of termination by the Company, the

Remuneration Committee would make recommendations to the Board on what payments, if any, should be made to the director, depending on the circumstances of the
termination, taking into account the Code which discourages payment for failure. The Company would also expect directors to seek to mitigate their loss.

3. Contracts do not provide for compensation for loss of office in excess of fees accrued.

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Table 5
Directors’ pensions and pension benefits (audited)
The accrued defined benefit pensions and corresponding transfer values for the executive directors are set
out below:

Defined contribution scheme

Heidi Mottram

Defined benefit scheme

Employee
contributions
during the
year
£000

Employer
contributions
during the
year
£000

–1

43.6

Accrued
pension at
31.3.2010
£000

Accrued
pension at
31.3.2011
£000

Increase
in accrued
pension
£000

Transfer
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increase
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pension less
directors’
contributions
£000

Increase
in accrued
pension net
of inflation
£000

Transfer
value of
accrued
pension at
1.4.2010
£000

Transfer
value of
accrued
pension at
31.3.2011
£000

Total change
in transfer
value less
directors’
contributions
£000

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104.3

110.7

6.4

0.9

18.9 2,111.4 2,281.3

169.9

Notes:
1. The directors participate in a salary sacrifice arrangement and, therefore, paid no contributions to the schemes during the year.
2. Accrued pensions shown are the amounts that would be paid annually at the normal retirement age based on service to the end of the year.
3. Voluntary contributions paid by the directors and resulting benefits are not shown.
4. The change in transfer value reflects fluctuations in the transfer value due to factors beyond the control of the Company and directors, such as changes in stock

market conditions.

5. The transfer values have been calculated in line with the relevant legislation and using actuarial assumptions agreed by the Trustee.

Table 6
Directors’ interests in shares (audited)
The directors had the following beneficial or family interests in the ordinary 10 pence shares of the Company as at
31 March 2011:

Number
of shares
held at the
start of
the year

Number
of shares
held as at
31.3.2011

Number
of shares
held as at
31.5.2011

Sir Derek Wanless
Chris Green
Sir Patrick Brown
Claude Lamoureux
Martin Nègre
Alex Scott-Barrett
Jenny Williams4

65,000 65,000 65,000
169,3391 199,4342 199,434
43,000 43,0003 43,000
25,000 25,000 25,000
70,000 20,000 20,000
20,000 20,000 20,000
–

6,000

–

Notes:
1. At 1 April 2010, 139,339 of these shares were beneficially owned by Mrs G Green, and 10,000 were beneficially owned by each of Miss P J Green, Mr M F Green and

Mr J M Green.

2. At 31 March 2011, 139,434 of these shares were beneficially owned by Mrs G Green, and 20,000 were beneficially owned by each of Miss P J Green, Mr M F Green and

Mr J M Green.

3. At 31 March 2011, the 43,000 shares were beneficially owned by Lady Brown.
4. Jenny Williams retired from the Board on 29 July 2010.

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Directors’ remuneration report
continued

Table 7
Directors’ interests in shares under the SIP (audited)
The directors who held office as at 31 March 2011 had the following interests in the ordinary 10 pence shares of
the Company, purchased and held in accordance with the terms of the SIP:

Heidi Mottram
Chris Green

Notes:
1. These figures include the shares paid for by the participant and the free shares granted by the Company.
2. A summary of the SIP can be found in the directors’ report – business review.

Number of
SIP shares
held at the
start of
the year1

Number of
SIP shares
held as at
31.3.20111

Number of
SIP shares
held as at
31.5.20111

–
5,653

606
6,372

606
6,936

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Statement of directors’ responsibilities in relation
to the Group financial statements

The directors are responsible for preparing the annual report and the Group financial statements in accordance
with applicable United Kingdom law and those International Financial Reporting Standards (IFRSs) as adopted by
the European Union.

The directors are required to prepare Group financial statements for each financial year. Under Company Law, the
directors must not approve the financial statements unless they are satisfied that they present fairly the financial
position of the Group and the financial performance and cash flows of the Group for that period. In preparing those
Group financial statements the directors are required to:
−

select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting
Estimates and Errors and then apply them consistently;
present information, including accounting policies, in a manner that provides relevant, reliable, comparable and
understandable information;
provide additional disclosures when compliance with specific requirements in IFRS is insufficient to enable users
to understand the impact of particular transactions, other events and conditions on the Group’s financial
position and financial performance;
state that the Group has complied with IFRSs, subject to any material departures disclosed and explained in the
financial statements; and
make judgements and estimates that are reasonable and prudent.

−

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the
Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and
enable them to ensure that the Group financial statements comply with the Companies Act 2006 and Article 4 of
the IAS Regulation. They are also responsible for safeguarding the assets of the Group and, hence, for taking
reasonable steps for the prevention and detection of fraud and other irregularities.

Responsibility statements
We confirm that to the best of our knowledge:
−

the financial statements, prepared in accordance with IFRSs as adopted by the European Union, give a true and
fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in
the consolidation taken as a whole; and
the directors’ report and business review includes a fair review of the development and performance of the
business and the position of the Company and the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties that they face.

−

By order of the Board

Sir Derek Wanless
Chairman

Heidi Mottram
Chief Executive Officer

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Report of the auditors on the
Group financial statements

Independent auditors’ report to the members of Northumbrian Water Group plc
We have audited the Group financial statements of Northumbrian Water Group plc for the year ended 31 March
2011 which comprise the consolidated income statement, consolidated statement of comprehensive income,
consolidated statement of changes in equity, consolidated balance sheet, consolidated cash flow and the related
notes 1 to 28. The financial reporting framework that has been applied in their preparation is applicable law and
International Financial Reporting Standards (IFRSs) as adopted by the European Union.

This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members
those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and
the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditor
As explained more fully in the Statement of Directors’ Responsibilities set out on page 85, the directors are
responsible for the preparation of the Group financial statements and for being satisfied that they give a true
and fair view. Our responsibility is to audit the Group financial statements in accordance with applicable law and
International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing
Practices Board’s Ethical Standards for Auditors.

Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to
give reasonable assurance that the financial statements are free from material misstatement, whether caused by
fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s
circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant
accounting estimates made by the directors; and the overall presentation of the financial statements. In addition,
we read all the financial and non-financial information in the annual report to identify material inconsistencies with
the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies
we consider the implications for our report.

Opinion on financial statements
In our opinion the Group financial statements:
−

give a true and fair view of the state of the Group’s affairs as at 31 March 2011 and of its profit for the year
then ended;
have been properly prepared in accordance with IFRSs as adopted by the European Union; and
have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the
IAS Regulation.

−
−

Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
−

−

the information given in the directors’ report for the financial year for which the financial statements are prepared
is consistent with the Group financial statements; and
the information given in the corporate governance statement set out on
control and risk management systems in relation to financial reporting processes and about share capital
structures is consistent with the financial statements.

pages 58 to 70 with respect to internal

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Matters on which we are required to report by exception
We have nothing to report in respect of the following:

Under the Companies Act 2006 we are required to report to you if, in our opinion:
−
certain disclosures of directors’ remuneration specified by law are not made;
−
we have not received all the information and explanations we require for our audit; or
−
a corporate governance statement has not been prepared by the Company.

Under the Listing Rules we are required to review:
−
−

the directors’ statement, set out on
the part of the corporate governance statement on
the nine provisions of the June 2008 Combined Code specified for our review.

page 57, in relation to going concern; and

pages 58 to 70 relating to the Company’s compliance with

Other matter
We have reported separately on the parent Company financial statements of Northumbrian Water Group plc for the
year ended 31 March 2011 and on the information in the Directors’ Remuneration Report that is described as
having been audited.

Debbie O’Hanlon (Senior statutory auditor)
For and on behalf of Ernst & Young LLP
Statutory Auditor
Newcastle upon Tyne
31 May 2011

8
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Consolidated income statement
For the year ended 31 March 2011

Continuing operations
Revenue
Operating costs

Profit on ordinary activities before interest
Finance costs payable
Finance income receivable
Share of profit after tax of jointly controlled entities

Profit on ordinary activities before taxation
– current taxation
– deferred taxation

Profit for the year

Attributable to:
Equity shareholders of the parent Company
Non-controlling interests

Basic earnings per share attributable to ordinary equity holders of the

parent Company

Diluted earnings per share attributable to ordinary equity holders of the

parent Company

Adjusted earnings per share attributable to ordinary equity holders of the

parent Company

Adjusted diluted earnings per share attributable to ordinary equity holders

of the parent Company

Ordinary final dividend proposed per share
Dividend paid per share

Year to
31.3.2011
£m

Year to
31.3.2010
£m

Notes

738.1
(433.9)

304.2
(178.8)
54.9
0.7

181.0
(33.1)
30.5

178.4

178.3
0.1

178.4

704.7
(428.9)

275.8
(143.7)
37.2
0.9

170.2
(37.8)
(9.5)

122.9

122.5
0.4

122.9

34.44p

23.67p

34.38p

23.62p

25.50p

23.67p

25.45p
9.57p
13.57p

23.62p
8.85p
12.89p

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Consolidated statement of comprehensive income
For the year ended 31 March 2011

Profit for the year
Other comprehensive income
Actuarial gains
Gains/(losses) on cash flow hedges taken to equity
Translation differences
Tax on items charged or credited to equity

Total other comprehensive gain/(loss)

Total comprehensive income for the year

Attributable to:
Equity shareholders of the parent Company
Non-controlling interests

Notes

Year to
31.3.2011
£m

Year to
31.3.2010
£m

178.4

122.9

74.0
2.6
0.2
(23.1)

53.7

1.1
(0.8)
(0.3)
(0.1)

(0.1)

232.1

122.8

232.0
0.1

232.1

122.4
0.4

122.8

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Consolidated statement of changes in equity
For the year ended 31 March 2011

Equity share
capital
£m

Share
premium
reserve
£m

Cash flow
hedge
reserve
£m

At 1 April 2009

51.9

446.5

Profit for the year
Other comprehensive

income

Total comprehensive

income and expense for
the year

Share-based payment
Exercise of LTIP awards
Equity dividends paid

–

–
–
–
–

–

–
–
–
–

At 1 April 2010

51.9

446.5

Profit for the year
Other comprehensive

income

Total comprehensive

income and expense for
the year

Share-based payment
Exercise of LTIP awards
Deferred tax related to
share-based payment

Acquisition of non-

controlling interest in
subsidiaries

Equity dividends paid

–

–
–
–

–

–
–

–

–
–
–

–

–
–

(7.6)

–

(0.6)

(0.6)
–
–
–

(8.2)

–

1.6

1.6
–
–

–

–
–

–
–
0.3
–

(2.0)

–

–
–
0.3

–

–
–

Treasury
shares
£m

(2.3)

–

Currency
translation
£m

1.0

–

Retained
earnings
£m

(234.5)

122.5

Total
equity
£m

255.0

122.5

(0.3)

0.8

(0.1)

(0.3)
–
–
–

0.7

123.3
0.4
(0.3)
(66.7)

(177.8)

–

178.3

122.4
0.4
–
(66.7)

311.1

178.3

Non-
controlling
interests
£m

2.4

0.4

–

0.4
–
–
–

2.8

0.1

Total
£m

257.4

122.9

(0.1)

122.8
0.4
–
(66.7)

313.9

178.4

0.2

51.9

53.7

–

53.7

0.2
–
–

230.2
0.1
(0.3)

232.0
0.1
–

–

–
–

0.1

0.6
(70.3)

0.1
–
–

–

232.1
0.1
–

0.1

(0.6)
–

2.3

–
(70.3)

475.9

At 31 March 2011

51.9

446.5

(6.6)

(1.7)

0.9

(17.4)

473.6

9
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Consolidated balance sheet
As at 31 March 2011

Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Investments in jointly controlled entities
Financial assets
Amounts receivable relating to consortium relief

Current assets
Inventories
Trade and other receivables
Short term cash deposits
Cash and cash equivalents

Total assets

Non-current liabilities
Interest bearing loans and borrowings
Provisions
Deferred income tax liabilities
Pension liability
Other payables
Grants and deferred income

Current liabilities
Interest bearing loans and borrowings
Provisions
Trade and other payables
Interest rate swaps
Income tax payable

Total liabilities

Net assets

Capital and reserves
Issued capital
Share premium reserve
Cash flow hedge reserve
Treasury shares
Currency translation
Retained earnings

Equity shareholders’ funds
Non-controlling interests

Total capital and reserves

Note:
1. The prior year balance sheet has been restated to reflect the impact of IFRIC 18 Transfers of Assets from Customers.

Approved by the Board on 31 May 2011 and signed on its behalf by:

Sir Derek Wanless
Chairman

Heidi Mottram
Chief Executive Officer

Year to
31.3.2011
£m

Notes

Year to
31.3.2010
restated1
£m

3.6
64.2

3.6
64.2
10
11 3,626.8 3,518.9
4.1
4.0
12
12.9
12.0
1.7
1.7

3,712.3 3,605.4

3.3
153.9
1.4
141.7

300.3

3.3
136.4
15.8
174.8

330.3

4,012.6 3,935.7

17 2,295.8 2,433.9
2.2
2.4
19
606.1
598.7
133.1
46.0
7.8
6.8
233.5
255.1

3,204.8 3,416.6

163.7
0.2
155.6
9.8
2.6

331.9

33.1
0.2
151.2
12.5
8.2

205.2

3,536.7 3,621.8

475.9

313.9

51.9
446.5
(6.6)
(1.7)
0.9
(17.4)

473.6
2.3

475.9

51.9
446.5
(8.2)
(2.0)
0.7
(177.8)

311.1
2.8

313.9

9
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Consolidated cash flow statement
For the year ended 31 March 2011

Operating activities
Reconciliation of profit before interest to net cash flows from

operating activities

Profit on ordinary activities before interest
Depreciation
Other non-cash charges and credits
Net credit for provisions, less payments
Difference between pension contributions paid and amounts recognised in the

income statement
Increase in inventories
Increase in trade and other receivables
Increase in trade and other payables

Cash generated from operations
Advanced contributions in respect of retirement benefits
Interest paid
Income taxes paid

Net cash flows from operating activities

Investing activities
Interest received
Capital grants received
Proceeds on disposal of property, plant and equipment
Dividends received from jointly controlled entities
Short term cash deposits
Maturity of investments
Purchase of property, plant and equipment

Net cash flows from investing activities

Financing activities
Dividends paid to equity shareholders
Repayment of borrowings
Payment of principal under hire purchase contracts and finance leases
Acquisition of externally held loan stock issued by a subsidiary

Net cash flows from financing activities

(Decrease)/increase in cash and cash equivalents
Cash and cash equivalents at start of year

Cash and cash equivalents at end of year

Cash and cash equivalents at end of year
Short term cash deposits

Total cash, cash equivalents and short term cash deposits

Year to
31.3.2011
£m

Year to
31.3.2010
£m

Notes

304.2
111.6
(8.9)
0.2

11.5
–
(14.7)
5.2

409.1
(22.4)
(116.1)
(38.7)

275.8
105.5
(5.7)
(0.3)

10.3
(0.1)
(5.0)
0.4

380.9
–
(114.8)
(35.7)

231.9

230.4

4.7
13.2
1.3
0.8
14.4
1.1
(202.9)

(167.4)

(70.3)
(19.5)
(7.3)
(0.4)

(97.5)

(33.0)
173.3

140.3

140.3
1.4

141.7

8.8
10.1
0.3
0.6
144.8
1.4
(220.6)

(54.6)

(66.7)
(20.9)
(7.2)
–

(94.8)

81.0
92.3

173.3

173.3
15.8

189.1

9
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Notes to the consolidated financial statements

1. Accounting policies
(a) Statement of compliance
The consolidated financial statements have been prepared in accordance with IFRS as adopted by the European
Union as it applies to the financial statements of the Group for the year ended 31 March 2011 and in accordance
with the Companies Act 2006.

The financial statements have been prepared on a going concern basis which assumes that the Group will have
adequate funding to meet its liabilities as they fall due in the foreseeable future. As at 31 March 2011 the Group
had net current liabilities of £31.6 million (2010: net current assets of £125.1 million). The directors have reviewed
cash flow requirements and are confident that they will be able to meet these from funds available and new
financing facilities. Accordingly, the directors believe it is appropriate to prepare the financial statements on a going
concern basis.

The directors consider the following accounting policies to be relevant in relation to the Group’s financial
statements. The financial statements of the Group for the year ended 31 March 2011 were authorised for issue
by the Board of directors on 31 May 2011 and the balance sheet was signed on the Board’s behalf by Sir Derek
Wanless (Chairman) and Heidi Mottram (Chief Executive Officer).

The Group has adopted the following standards and interpretations during the year:
−
−
−
−
−
−
−

IFRS 3 Business Combinations (Revised)
IAS 27 Consolidated and Separate Financial Statements (Amendment)
IAS 32 Financial Instruments: Classification of Rights Issues (Amendment)
IAS 39 Financial Instruments: Recognition and Measurement – Eligible hedged items (Amendment)
IFRIC 17 Distributions of Non-cash Assets to Owners
IFRIC 18 Transfers of Assets from Customers
Improvements to IFRS 2009

The adoption of IAS 27 Consolidated and Separate Financial Statements (Amendment) has required the
reclassification of minority interests as non-controlling interests. Also, any transactions with non-controlling
interests that do not result in gaining or losing control will be accounted for as equity transactions.

IFRIC 18 Transfers of Assets from Customers was adopted in the period. IFRIC 18 is effective for accounting
periods beginning on or after 31 October 2009, applicable to transactions effected on or after 1 July 2009. This
has required the prior year balance sheet to be restated resulting in the balances of property, plant and equipment,
and grants and deferred income, each increasing by £14.0 million at 31 March 2010. The impact on profit for both
the current period and prior periods is £nil.

The adoption of the other standards and interpretations listed above do not have a material impact on the Group.

The guidance provided in the Urgent Issues Task Force Draft Abstract: Accounting Implications of the
Replacement of the Retail Prices Index with the Consumer Prices Index for Retirement Benefits has also been
applied in the period.

Northumbrian Water Group plc is a public limited company incorporated and domiciled in England and Wales.
The Company’s ordinary shares are traded on the London Stock Exchange.

The Group financial statements are presented in sterling and all values are rounded to the nearest one hundred
thousand pounds (£0.1 million) except where otherwise indicated.

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Notes to the consolidated financial statements
continued

1. Accounting policies continued
(b) Basis of consolidation
The consolidated financial statements include the Company and its subsidiary undertakings. The results of
subsidiaries acquired during the period are included from the date of their acquisition. The results of subsidiaries
disposed of during the period are included to the date of their disposal. Inter-segment sales and profits are
eliminated fully on consolidation. Where, for commercial reasons, the accounting reference date of a subsidiary
is a date other than that of the Company, management accounts made up to the Company’s accounting reference
date have been used. In accordance with SIC 12 ‘Consolidation – Special Purpose Entities’, the financial
statements of two companies are consolidated as special purpose entities, with effect from 12 May 2004,
the date of the transaction which utilised these entities.

Where necessary, adjustments are made to bring the accounting policies used under relevant local GAAP in the
individual financial statements of the Company, subsidiaries and jointly controlled entities into line with those used
by the Group under IFRS.

Non-controlling interests represent the portion of profit or loss and net assets in subsidiaries that is not held
by the Group and is presented within equity in the consolidated balance sheet, separately from parent
shareholders’ equity.

(c) Associates and jointly controlled entities
Investments in associates and jointly controlled entities in the Group financial statements are accounted for using
the equity method of accounting where the Group exercises significant influence over the associate. Significant
influence is generally presumed to exist where the Group’s effective ownership is 20% or more. The Group’s share
of the post tax profits less losses of associates and jointly controlled entities is included in the consolidated income
statement and the carrying value in the balance sheet comprises the Group’s share of their net assets/liabilities
less distributions received and any impairment losses. Goodwill arising on the acquisition of associates and jointly
controlled entities, representing the excess of the cost of investment compared to the Group’s share of net fair
value of the associate’s identifiable assets, liabilities and contingent liabilities, is included in the carrying amount of
the associate and is not amortised. Financial statements of jointly controlled entities and associates are prepared
for the same reporting period as the Group. Where necessary, adjustments are made to bring the accounting
policies used into line with those of the Group to take into account fair values assigned at the date of acquisition
and to reflect impairment losses where appropriate. Adjustments are also made to the Group’s financial statements
to eliminate the Group’s share of unrealised gains and losses on transactions between the Group and its jointly
controlled entities and associates.

(d) Goodwill
Goodwill arising on the acquisition of subsidiary undertakings and businesses represents the excess of the fair
value of the consideration given over the fair value of the identifiable assets and liabilities acquired. Following initial
recognition, goodwill is measured at cost less any accumulated impairment losses. Prior to 1 April 2004, goodwill
was amortised over its estimated useful life; such amortisation ceased on 31 March 2004. Goodwill relating to
acquisitions since 1 April 2004 is not amortised. Goodwill is reviewed for impairment annually or more frequently
if events or changes in circumstances indicate that the carrying value may be impaired. For the purposes of
impairment testing, goodwill is allocated to the related cash-generating units monitored by management.
Where the recoverable amount of the cash-generating unit is less than its carrying amount, including goodwill,
an impairment loss is recognised in the income statement. The carrying amount of goodwill allocated to a cash-
generating unit is taken into account when determining the gain or loss on disposal of the unit, or of an operation
within it.

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1. Accounting policies continued
(e) Intangible assets other than goodwill
Other intangible fixed assets represent the right to receive income under the operating agreement with the
Environment Agency in respect of the Kielder Water transfer scheme. The value of this intangible asset has been
assessed with reference to the net monies raised in accordance with the Kielder securitisation on 12 May 2004.
The term of the operating agreement is in perpetuity and, accordingly, no amortisation is provided. The value of
this intangible is assessed for impairment on an annual basis in accordance with IAS 36 ‘Impairment of Assets’.

Expenditure on internally developed intangible assets, excluding development costs, is taken to the income
statement in the year in which it is incurred. Intangible assets acquired separately from a business are carried
initially at cost. An intangible asset acquired as part of a business combination is recognised outside goodwill if
the asset is separable or arises from contractual or other legal rights and its fair value can be measured reliably.
Development expenditure is recognised as an intangible asset only after its technical feasibility and commercial
viability can be demonstrated, the availability of adequate technical and financial resources and an intention to
complete the project have been confirmed and the correlation between development costs and future revenues
has been established.

(f) Property, plant and equipment
Property, plant and equipment and depreciation
Property, plant and equipment, including assets in the course of construction, comprise infrastructure assets
(being mains and sewers, impounding and pumped raw water storage reservoirs, dams, sludge pipelines and
sea outfalls) and other assets (including properties, overground plant and equipment).

Property, plant and equipment are included at cost less accumulated depreciation and any provision for
impairment. Cost comprises the aggregate amount paid and the fair value of any other consideration given to
acquire the asset and includes costs directly attributable to making the asset capable of operating as intended.

Freehold land is not depreciated. Other assets are depreciated evenly over their estimated economic lives, which
are principally as follows: freehold buildings, 30-60 years; operational structures, plant and machinery, 4-92 years;
infrastructure assets 13-200 years (see below); and fixtures, fittings, tools and equipment, 4-10 years.

The carrying values of property, plant and equipment are reviewed for impairment if events or changes in
circumstances indicate the carrying value may not be recoverable and are written down immediately to their
recoverable amount. Useful lives and residual values are reviewed annually and, where adjustments are required,
these are made prospectively.

Assets in the course of construction are not depreciated until commissioned.

Infrastructure assets
In the regulated water services business, infrastructure assets comprise a network of systems being mains and
sewers, reservoirs, dams and sea outfalls.

Infrastructure assets were measured at a date prior to transition to IFRS (23 May 2003) at their fair value, which
was adopted as deemed historical cost on transition to IFRS. The assets and liabilities were measured at fair value
as a result of the acquisition on 23 May 2003.

Expenditure on infrastructure assets which enhances the asset base is treated as fixed asset additions while
maintenance expenditure which does not enhance the asset base is charged as an operating cost.

9
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Notes to the consolidated financial statements
continued

1. Accounting policies continued
Infrastructure assets are depreciated evenly to their estimated residual values over their estimated economic lives,
which are principally as follows:

Dams and impounding reservoirs
Water mains
Sea outfalls
Sewers
Dedicated pipelines

150 years
100 years
60 years
200 years
4-20 years

(g) Financial assets
Financial assets comprise loans to third parties recoverable in more than one year and include cash held on
long term deposit as a guaranteed investment contract relating to the Kielder securitisation. These assets are
recognised at cost and are measured annually based on the ability of the borrower to repay. Any impairment is
taken to the income statement in the period in which it arises. Loans and receivables are measured at amortised
cost using the effective interest rate method. The Group assesses at each balance sheet date whether a financial
asset or group of financial assets is impaired.

(h) Foreign currencies and foreign currency transactions
Transactions in foreign currencies are initially recorded in the functional currency by applying the spot exchange
rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are
re-translated at the functional currency rate of exchange ruling at the balance sheet date. The functional and
presentational currency of Northumbrian Water Group plc is United Kingdom sterling (£). Assets and liabilities
of subsidiaries and jointly controlled entities in foreign currencies are translated into sterling at rates of exchange
ruling at the end of the financial period and the results of foreign subsidiaries are translated at the average rate
of exchange for the period. Differences on exchange arising from the re-translation of the opening net investment
in subsidiary companies and jointly controlled entities, and from the translation of the results of those companies
at average rate, are taken to equity. All other foreign exchange differences are taken to the income statement in
the period in which they arise.

Unrealised gains and losses arising from changes in foreign currency exchange rates are not cash flows. However,
the effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency is reported
in the cash flow statement in order to reconcile cash and cash equivalents at the beginning and the end of the
period. This amount is presented separately from cash flows from operating, investing and financing activities,
where material, and includes the differences, if any, had those cash flows been reported at end of period
exchange rates.

(i) Inventories
Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where
applicable, direct labour costs, as well as an element of overheads that have been incurred in bringing the
inventories to their present locations and condition.

(j) Revenues
Provision of services
Revenue, which excludes value added tax, represents the fair value of the income receivable in the ordinary course
of business for services provided. Revenue is recognised to the extent that it is probable that the economic
benefits will flow to the Group and the revenue can be reliably measured.

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1. Accounting policies continued
Revenue is not recognised until the services have been provided to the customer. Revenue for services relates
to the year, excluding any amounts paid in advance. Revenue for measured water and waste water charges
includes amounts billed plus an estimation of the amounts unbilled at the year end. The accrual is estimated using
a defined methodology based upon daily average water consumption, which is calculated based upon historical
billing information.

Dividends
Revenue is recognised when the shareholders’ right to receive the revenue is established.

(k) Grants and contributions
Grants are recognised at their fair value where there is reasonable assurance that the grant will be received and
all attaching conditions will be complied with. Revenue grants are credited to the income statement in the period
to which they relate. Capital grants and contributions relating to property, plant and equipment are treated as
deferred income and amortised to the income statement over the expected useful economic lives of the related
assets. Deferred income relating to assets adopted from customers, recognised in accordance with IFRIC 18,
is amortised to the income statement over the expected useful economic lives of the related assets.

(l) Leases
Where assets are financed by leasing arrangements which transfer substantially all the risks and rewards of
ownership to the Group, the assets are treated as if they had been purchased at their fair value or, if lower, at the
present value of the minimum lease payments. Rentals or leasing payments are treated as consisting of a capital
element and finance charges, the capital element reducing the outstanding liability and the finance charges being
charged to the income statement over the period of the leasing contract at a constant rate on the reducing
outstanding liability.

Rentals under operating leases (where the lessor retains a significant proportion of the risks and rewards
of ownership) are expensed in the income statement on a straight line basis over the lease term.

(m) Pensions and other post-employment benefits
Defined benefit scheme
The cost of providing benefits under the defined benefit scheme is determined using the projected unit credit
method, which attributes entitlement to benefits to the current period (to determine current service cost) and to
the current and prior periods (to determine the present value of defined benefit obligation) and is based on
actuarial advice. Past service costs are recognised in the income statement on a straight line basis over the vesting
period or immediately if the benefits have vested. When a settlement (eliminating all obligations for benefits already
accrued) or a curtailment (reducing future obligations as a result of a material reduction in the scheme membership
or a reduction in future entitlement) occurs, the obligation and related plan assets are re-measured using current
actuarial assumptions and the resultant gain or loss recognised in the income statement during the period in which
the settlement or curtailment occurs.

The interest element of the defined benefit cost represents the change in present value of scheme obligations
resulting from the passage of time, and is determined by applying the discount rate to the opening present value
of the benefit obligation, taking into account material changes in the obligation during the year. The expected
return on plan assets is based on an assessment made at the beginning of the year of long term market returns
on scheme assets, adjusted for the effect on the fair value of plan assets of contributions received and benefits
paid during the year.

The service cost is disclosed in employment costs and the expected interest income and interest cost on
obligations are disclosed within finance costs payable/(income receivable).

Actuarial gains and losses on experience adjustments and changes in actuarial assumptions are recognised
in full in the period in which they occur in the consolidated statement of comprehensive income.

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Notes to the consolidated financial statements
continued

1. Accounting policies continued
Defined contribution scheme
The Group also operates a defined contribution scheme. Obligations for contributions to the scheme are
recognised as an expense in the income statement in the period in which they arise.

(n) Share-based payments
The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at
which they are granted and is recognised as an expense over the vesting period, which ends on the date on which
the relevant employees become fully entitled to the award. Fair value is determined by an external valuer using the
Monte-Carlo simulation model. In valuing equity-settled transactions, no account is taken of any vesting conditions,
other than conditions linked to the price of the shares of the Company (market conditions) or those not related to
performance or service (non-vesting conditions).

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional
upon a market or non-vesting condition, which are treated as vesting irrespective of whether or not the market
or non-vesting condition is satisfied, provided that all other performance conditions are satisfied.

At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which
the vesting period has expired, management’s best estimate of the achievement or otherwise of vesting conditions
and the number of equity instruments that will ultimately vest or, in the case of an instrument subject to a market
or non-vesting condition, be treated as vesting as described above. This includes any award where non-vesting
conditions within the control of the Group or the employee are not met. The movement in cumulative expense
since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity.

Where the terms of an equity-settled award are modified or a new award is designated as replacing a cancelled
or settled award, the cost based on the original award terms continues to be recognised over the original vesting
period. In addition, an expense is recognised over the remainder of the new vesting period for the incremental fair
value of any modification, based on the difference between the fair value of the original award and the fair value of
the modified award, both as measured on the date of the modification. No reduction is recognised if this difference
is negative.

(o) Taxes
Current tax
Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be
recovered from, or paid to, the taxation authorities. The tax rates and tax laws used to compute the amounts are
those that are enacted or substantively enacted by the balance sheet date.

Deferred tax
Deferred tax is provided using the liability method on temporary differences at the balance sheet date between the
tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences except:
−

where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a
transaction that is not a business combination and, at the time of the transaction, affects neither the accounting
profit nor taxable profit or loss; and
in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests
in jointly controlled entities, where the timing of the reversal of the temporary differences can be controlled and it
is probable that the temporary differences will not reverse in the foreseeable future.

−

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1. Accounting policies continued
Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits
and unused tax losses, to the extent that it is probable that taxable profit will be available against which the
deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be
utilised except:
−

where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of
an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects
neither the accounting profit nor taxable profit or loss; and
in respect of deductible temporary differences associated with investments in subsidiaries, associates and
interests in jointly controlled entities, deferred tax assets are recognised only to the extent that it is probable that
the temporary differences will reverse in the foreseeable future and taxable profit will be available against which
the temporary differences can be utilised.

−

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that
it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to
be utilised. Unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to
the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the
asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted, or substantively
enacted, at the balance sheet date.

Deferred tax is recognised in the income statement unless it relates to items accounted for outside profit or loss, in
which case it is recognised in correlation with the underlying transaction either in other comprehensive income or
directly in equity.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current
tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same
taxation authority.

Value added tax
Revenues, expenses and assets are recognised net of the amount of value added tax except:
−

where the value added tax incurred on a purchase of assets or services is not recoverable from the taxation
authority, in which case the value added tax is recognised as part of the cost of acquisition of the asset or as
part of the expense item as applicable; and
receivables and payables.

−

The net amount of value added tax recoverable from, or payable to, the taxation authority is included as part of
receivables or payables in the balance sheet.

(p) Derivative financial instruments
The Group utilises interest rate swaps, forward rate agreements and forward exchange contracts as derivative
financial instruments.

A derivative instrument is considered to be used for hedging purposes when it alters the risk profile of an
underlying exposure of the Group in line with the Group’s risk management policies. Interest rate swap agreements
are used to manage interest rate exposures. Derivative financial instruments are stated at their fair value.

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Notes to the consolidated financial statements
continued

1. Accounting policies continued
Under IAS 39, derivative financial instruments are always measured at fair value, with hedge accounting employed
in respect of those derivatives fulfilling the stringent requirements for hedge accounting as prescribed under IAS
39. In summary, these criteria relate to initial designation and documentation of the hedge relationship, prospective
testing of the relationship to demonstrate the expectation that the hedge will be highly effective throughout its life
and subsequent retrospective testing of the hedge to verify effectiveness.

The fair value of forward exchange contracts is calculated by reference to current forward exchange rates for
contracts with similar maturity profiles. The fair value of interest rate swaps is determined by reference to market
values for similar instruments.

Hedging transactions undertaken by the Company are classified as either fair value hedges when they hedge the
exposure to changes in the fair value of a recognised asset or liability; or cash flow hedges where they hedge
exposure to variability in currency cash flows that is either attributable to a particular risk associated with a
recognised asset or liability or a forecast transaction.

In relation to fair value hedges, which meet the conditions for hedge accounting, any gain or loss from re-
measuring the hedging instrument at fair value is recognised immediately in profit or loss. Any gain or loss on the
hedged item attributable to the hedged risk is adjusted against the carrying amount of the hedged item and
recognised in the income statement. Where the adjustment is to the carrying amount of a hedged interest bearing
financial instrument, the adjustment is amortised to the net profit and loss such that it is fully amortised by maturity.

In relation to cash flow hedges to hedge firm currency commitments which meet the conditions for hedge
accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge
is recognised directly in equity and the ineffective portion is recognised in the income statement.

When the hedged firm commitment results in the recognition of a non-financial asset or a non-financial liability
then, at the time the asset or liability is recognised, the associated gains or losses that had previously been
recognised in equity are included in the initial measurement of the acquisition cost or other carrying amount of the
asset or liability. For all other cash flow hedges, the gains or losses that are recognised in equity are transferred to
the income statement in the same periods in which the hedged firm commitment affects the net profit and loss.

For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are
taken directly to the income statement.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no
longer qualifies for hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument
recognised in equity is kept in equity until the forecast transaction occurs. If a hedged transaction is no longer
expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement.

(q) Interest bearing loans and borrowings
All loans and borrowings are initially stated at the amount of the net proceeds, being fair value of the consideration
received net of issue costs associated with the borrowing. Finance costs (including issue costs) are taken to the
income statement over the term of the debt at a constant rate on the balance sheet carrying amount. The carrying
amount is increased by the finance charges amortised and reduced by payments made in respect of the
accounting period. The carrying amount of index linked borrowings increases annually in line with the July RPI,
with the accretion being charged to the income statement as finance costs payable. Other borrowing costs are
recognised as an expense when incurred.

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1. Accounting policies continued
Loans and borrowings acquired at acquisition are restated to fair value. The adjustment arising on acquisition
is amortised to the income statement on the basis of the maturity profile of each instrument. Realised gains
and losses that occur from the early termination of loans and borrowings are taken to the income statement
in that period.

Net debt is the sum of all current and non-current liabilities less cash and cash equivalents, short term cash
deposits, financial investments and loans receivable.

(r) Borrowing costs
Borrowing costs are generally expensed as incurred. Borrowing costs that are directly attributable to the
acquisition or construction of an asset that necessarily takes a substantial time to prepare for its intended use
are capitalised while the asset is being constructed as part of the cost of that asset.

Capitalisation ceases when the asset is substantially ready for its intended use or sale. If active development is
interrupted for an extended period, capitalisation is suspended. When construction occurs piecemeal and use
of each part ceases upon substantial completion of that part, a weighted average cost of borrowings is used.

The Group capitalises borrowing costs for all eligible assets when construction commenced on or after
1 April 2009, and continues to expense borrowing costs relating to construction projects that commenced
prior to that date.

(s) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted
in an active market, do not qualify as trading assets and have not been designated as either fair value through
profit and loss or available for sale. Gains and losses are recognised in income when the investments are de-
recognised or impaired, as well as through the amortisation process.

(t) Cash and cash equivalents and short term cash deposits
Cash and cash equivalents disclosed in the balance sheet comprise cash at bank and in hand and short term
deposits with a maturity on acquisition of three months or less, which are held for the purpose of meeting short
term cash commitments rather than for investment or other purposes. Cash equivalents are readily convertible
to a known amount of cash and subject to an insignificant risk of changes in value.

Short term cash deposits disclosed in the balance sheet comprise cash deposited with a maturity of greater than
three months on acquisition, a fixed interest rate and which do not constitute cash equivalents under IAS 7
‘Statement of Cash Flows’.

For the purpose of the consolidated cash flow statement, cash and cash equivalents are as defined above,
net of outstanding bank overdrafts.

(u) Trade and other receivables
Trade receivables are recognised and carried at original invoice amount less an allowance for any uncollectable
amounts. Invoices for unmeasured water and waste water charges are due on fixed dates; other receivables
generally have 30 day payment terms. An estimate for doubtful debts is made when collection of the full amount
is no longer probable. Bad debts are written off when identified. Trade and other receivables do not carry
any interest.

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Notes to the consolidated financial statements
continued

1. Accounting policies continued
(v) Investments
Investments are initially recorded at the fair value of the consideration given including the acquisition charges
associated with the investment. Subsequent to initial recognition, they are valued at original cost less
any impairment.

(w) Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past
event, it is probable that an outflow of resources will be required and a reliable estimate can be made of the
amount of the obligation.

(x) Impairment of assets
The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any
such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate
of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating
unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset
does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where
the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written
down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their
present value using a pre-tax discount rate that reflects current market assessments of the time value of money
and the risks specific to the asset. Impairment losses on continuing operations are recognised in the income
statement in those expense categories consistent with the function of the impaired asset.

An assessment is made at each reporting date as to whether there is any indication that previously recognised
impairment losses may no longer exist or may have decreased. If such indication exists the recoverable amount is
estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates
used to determine the asset’s recoverable amount since the last impairment loss was recognised. If that is the
case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot
exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been
recognised for the asset in prior years. Such reversal is recognised in the income statement unless the asset is
carried at revalued amount, in which case the reversal is treated as a revaluation increase. After such a reversal the
depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual
value, on a systematic basis over its remaining useful life.

(y) De-recognition of financial assets and liabilities
A financial asset or liability is generally de-recognised when the contract that gives rise to it is settled, sold,
cancelled or expires.

Where an existing financial liability is replaced by another from the same lender on substantially different terms,
or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a
de-recognition of the original liability and the recognition of a new liability, such that the difference in the respective
carrying amounts together with any costs or fees incurred are recognised in the income statement.

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1. Accounting policies continued
(z) Accounting standards
During the year, the International Accounting Standards Board and International Financial Reporting Interpretation
Committee (IFRIC) have issued the following standards and interpretations with an effective date after the date of
these financial statements:

International Accounting Standards (IAS/IFRS)

IFRS 1: Amendment to IFRS 1 – Limited Exemption from Comparative IFRS 7 Disclosures
IFRS 7: Amendment to IFRS 7 – Financial Instrument Disclosures
IFRS 9: Financial Instruments: Classification and Measurement
IFRS10: Consolidated Financial Statements
IFRS11: Joint Arrangements
IFRS12: Disclosure of Interests in Other Entities
IFRS13: Fair Value Measurement
IAS 24: Related Party Disclosures (Revised)
Improvements to IFRS 2010

IFRIC

IFRIC 14: Amendment: Prepayments of a Minimum Funding Requirement
IFRIC 19: Extinguishing Financial Liabilities with Equity Instruments

Effective for accounting
periods beginning

on or after:

1.7.2010
1.7.2011
1.1.2013
1.1.2013
1.1.2013
1.1.2013
1.1.2013
1.1.2011
1.7.2010, 1.7.2011

Effective for accounting
periods beginning

on or after:

1.1.2011
1.7.2010

Given the recent publication of IFRS 10,11,12 and 13, the directors are still evaluating the impact of these standards
on the Group’s financial statements in the period of initial application.

(aa) Key assumptions
The directors consider that the key assumptions applied at the balance sheet date, which may have a significant
risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial
year are:
−

those assumptions used in arriving at the pension asset/liability under IAS 19. These key assumptions and their
possible impact are disclosed in note 24, ‘Pensions and other post-retirement benefits’;
the bad debt provision which is calculated by applying a range of percentages to debt of different ages. These
percentages also vary between different categories of debt. Higher percentages are applied to those categories
of debt which are considered to be of greater risk and also to debt of greater age. The value of the bad debt
provision is sensitive to the specific percentages applied; and
the asset lives assigned to property, plant and equipment, details of which can be found in

−

note 1(f).

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Notes to the consolidated financial statements
continued

2. Segmental analysis
For management purposes, the Group is organised into business units according to the nature of its products and
services and has three reportable operating segments. The trading of the business is principally carried out within
the UK. Profit is measured at profit on ordinary activities before interest.

Northumbrian Water Limited
NWL is one of the ten regulated water and sewerage businesses in England and Wales. NWL operates in the north
east of England, where it trades as Northumbrian Water, and in the south east of England, where it trades as
Essex & Suffolk Water. NWL also has non-regulated activities closely related to its principal regulated activity.

Water and waste water contracts
NWG owns a number of special purpose companies for specific water and waste water contracts in Scotland,
Ireland and Gibraltar.

Other
Agrer provides overseas aid funded project work in developing countries through a number of funding agencies.
Central unallocated costs and provisions are also included in this segment.

Transfer prices between business segments are set on an arm’s length basis in a manner similar to transactions
with third parties. Segment revenue, segment expense and segment result include transfers between business
segments. Those transfers are eliminated on consolidation.

Revenue

Year ended 31 March 2011
Segment revenue
Inter-segment revenue

Revenue from external customers

Year ended 31 March 2010
Segment revenue
Inter-segment revenue

Revenue from external customers

Northumbrian
Water
Limited
£m

Water and
waste water
contracts
£m

689.4
–

689.4

657.8
–

657.8

40.0
–

40.0

38.3
–

38.3

Other
£m

Total
£m

14.1
(5.4)

8.7

14.8
(6.2)

8.6

743.5
(5.4)

738.1

710.9
(6.2)

704.7

1
0
4

F
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s

N
o
r
t
h
u
m
b
r
i
a
n
W
a
t
e
r

G
r
o
u
p
p
c

A
n
n
u
a

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p
o
r
t
a
n
d
fi
n
a
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c
a

s
t
a
t
e
m
e
n
t
s
2
0
1
1

w
w
w
.
n
w
g
.
c
o
.
u
k

2. Segmental analysis continued
Profit on ordinary activities before interest

Year ended 31 March 2011
Segment profit on ordinary activities before interest
Net finance costs
Share of profit from jointly controlled entities

Profit on ordinary activities before taxation
Taxation
Profit for the year from continuing operations

Year ended 31 March 2010
Segment profit on ordinary activities before interest
Net finance costs
Share of profit from jointly controlled entities

Profit on ordinary activities before taxation
Taxation

Profit for the year from continuing operations

Assets and liabilities

Northumbrian
Water
Limited
£m

Water and
waste water
contracts
£m

Other
£m

Total
£m

297.6

9.5

(2.9)

268.9

10.2

(3.3)

304.2
(123.9)
0.7

181.0
(2.6)
178.4

275.8
(106.5)
0.9

170.2
(47.3)

122.9

31.3.2010
restated
£m

Northumbrian Water Limited

31.3.2011
£m

31.3.2010
restated
£m

Water and waste
water contracts

Other

Total

31.3.2011
£m

31.3.2010
£m

31.3.2011
£m

31.3.2010
£m

31.3.2011
£m

Segment assets
Segment liabilities

3,709.6 3,517.6
458.5

422.3

123.6
18.0

Other comprises taxation, interest and net debt.

130.6

287.5 4,012.6 3,935.7
22.9 3,096.4 3,140.4 3,536.7 3,621.8

179.4

Property, plant and equipment additions
Depreciation

Northumbrian Water Limited

31.3.2011
£m

219.6
105.8

31.3.2010
restated
£m

230.9
99.5

Water and waste
water contracts

Total

31.3.2011

31.3.2010

31.3.2011

£m

0.3
5.8

£m

5.4
6.0

£m

219.9
111.6

31.3.2010
restated
£m

236.3
105.5

IFRIC 18 Transfers of Assets from Customers was adopted in the period. This has required the prior year segment
assets and property, plant and equipment additions to be restated by £14.0 million for transactions effected on or
after 1 July 2009.

Geographical information
Revenue from external customers from the UK was £714.8 million (2010: £680.0 million). Revenue from other
countries was £23.3 million (2010: £24.7 million).

Non-current assets for operations in the UK were £3,700.7 million (2010: £3,592.1 million). Non-current assets for
operations in other countries were £11.6 million (2010: £13.3 million).

1
0
5

F
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s

N
o
r
t
h
u
m
b
r
i
a
n
W
a
t
e
r

G
r
o
u
p
p
c

A
n
n
u
a

r
e
p
o
r
t
a
n
d
fi
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s
2
0
1
1

w
w
w
.
n
w
g
.
c
o
.
u
k

Notes to the consolidated financial statements
continued

3. Operating costs

Materials and consumables
Manpower costs (see note 5)
Own work capitalised
Depreciation of property, plant and equipment
Profit on disposal of property, plant and equipment
Amortisation of capital grants
Costs of research and development
Operating lease payments
Bad debt charge
Other operating costs

Operating costs

4. Auditors’ remuneration

Audit of the financial statements1

Other fees to auditors:
Other services

Note:
1. £97,000 of this relates to the Company (2010: £95,000).

5. Employee information
The total employment costs of all employees (including directors) of the Group were:

Wages and salaries
Restructuring cost – wages and salaries
Restructuring cost – defined benefit pension service cost (see note 24)
Social security costs
Defined benefit pension service cost (see note 24)
Other pension costs

Total employment costs

Total employment costs were charged as follows:
Capital schemes and infrastructure renewals
Manpower costs

Year to
31.3.2011
£m

Year to
31.3.2010
£m

25.6
110.6
(28.7)
111.6
(0.9)
(4.6)
2.3
1.2
17.8
199.0

433.9

23.7
111.4
(27.0)
105.5
(0.2)
(5.0)
2.1
1.2
19.6
197.6

428.9

Year to
31.3.2011
£m

Year to
31.3.2010
£m

0.3

0.1

0.3

–

Year to
31.3.2011
£m

Year to
31.3.2010
£m

87.6
–
–
7.3
13.9
1.8

87.1
0.9
4.8
7.3
9.7
1.6

110.6

111.4

25.4
85.2

23.1
88.3

110.6

111.4

Included in wages and salaries is a total expense of share-based payments of £0.4 million (2010: £0.7 million)
which arises from transactions accounted for as equity-settled share-based payments.

1
0
6

F
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s

N
o
r
t
h
u
m
b
r
i
a
n
W
a
t
e
r

G
r
o
u
p
p
c

A
n
n
u
a

r
e
p
o
r
t
a
n
d
fi
n
a
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c
a

s
t
a
t
e
m
e
n
t
s
2
0
1
1

w
w
w
.
n
w
g
.
c
o
.
u
k

5. Employee information continued
The average monthly number of employees of the Group during the year was:

Northumbrian Water Limited
Water and waste water contracts
Other

Year to
31.3.2011
Number

Year to
31.3.2010
Number

2,875
132
24

3,031

2,930
151
24

3,105

The information required by Schedule 5 of the Large and Medium-sized Companies and Groups (Accounts
and Reports) Regulations 2008 is contained in the directors’ remuneration report under directors’ emoluments,
directors’ pensions and benefits, directors’ interests in shares and debentures, directors’ interests in LTIP awards
and directors’ interests in shares under the Share Incentive Plan.

6. Finance costs payable/(income receivable)

Finance costs payable on debentures, bank and other loans and overdrafts
Amortisation of discount, fees, loan issue costs and other financing items
Accretion on index linked bonds
Interest cost on pension plan obligations
Finance costs payable on hire purchase contracts and finance leases

Total finance costs payable
Expected return on pension plan assets
Finance income receivable
Acquisition of CES loan stock
Finance lease termination discount

Net finance costs payable

Year to
31.3.2011
£m

Year to
31.3.2010
£m

112.9
(4.4)
21.9
43.3
5.1

178.8
(45.5)
(1.9)
(4.6)
(2.9)

123.9

114.7
(4.5)
(6.6)
36.1
4.0

143.7
(31.6)
(5.6)
–
–

106.5

During the period, the Group acquired the subordinated loan stock issued by CES from an external party. This was
acquired at below book value leading to a gain of £4.6 million. In addition, the Group transferred a finance lease to
a new counterparty with a termination discount valued at £2.9 million.

1
0
7

F
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s

N
o
r
t
h
u
m
b
r
i
a
n
W
a
t
e
r

G
r
o
u
p
p
c

A
n
n
u
a

r
e
p
o
r
t
a
n
d
fi
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s
2
0
1
1

w
w
w
.
n
w
g
.
c
o
.
u
k

Notes to the consolidated financial statements
continued

7. Taxation
(a) Tax on profit on ordinary activities

Current tax:
Current income tax charge at 28%
Income tax recycled from equity on cash flow hedges
Adjustment in respect of prior periods

UK corporation tax
Overseas tax

Total current tax

Deferred tax:
Origination and reversal of temporary differences in the year at 26% (2010: 28%)
Effect of changes in tax rates and laws:
– Impact of reduction in rate of UK corporation tax
Adjustment in respect of prior periods

Total deferred tax (credit)/charge

Tax charge in the income statement

Year to
31.3.2011
£m

Year to
31.3.2010
£m

42.3
0.1
(9.5)

32.9
0.2

33.1

9.0

(46.3)
6.8

(30.5)

38.9
–
(1.3)

37.6
0.2

37.8

9.2

–
0.3

9.5

2.6

47.3

The rate of UK corporation tax was reduced from 28% to 27% by the Finance (No. 2) Act 2010 with effect from
1 April 2011. The rate was further reduced to 26%, with effect from the same date, on the passing of a resolution
under the Provisional Collection of Taxes Act 1968 on 23 March 2011 at which point the new rate was
substantively enacted. As a result, deferred tax was re-measured at the rate at which timing differences are
expected to reverse. Adjustments in respect of prior periods arise from revisions to UK tax returns.

(b) Tax relating to items charged or credited outside of profit or loss

Current tax:
Current tax recycled to income statement on cash flow hedges
Deferred tax:
Actuarial gains and losses on pension schemes
Interest rate swaps
Impact of reduction in rate of UK corporation tax

Tax charge in the statement of comprehensive income

Deferred tax:
Share based payment

Tax credit in the statement of changes in equity

Year to
31.3.2011
£m

Year to
31.3.2010
£m

(0.1)

–

19.4
0.7
3.1

23.1

(0.1)

0.3
(0.2)
–

0.1

–

1
0
8

F
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s

N
o
r
t
h
u
m
b
r
i
a
n
W
a
t
e
r

G
r
o
u
p
p
c

A
n
n
u
a

r
e
p
o
r
t
a
n
d
fi
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s
2
0
1
1

w
w
w
.
n
w
g
.
c
o
.
u
k

7. Taxation continued
(c) Reconciliation of the total tax charge

Accounting profit before tax

Accounting profit multiplied by standard rate of corporation tax (28%)
Effects of:
Expenses not deductible for tax purposes
Depreciation in respect of non-qualifying items
Non-taxable income and enhanced tax reliefs
Non-taxable amortisation of financing items
Adjustment to tax charge in respect of prior periods
Other

Effect of changes in tax rates and laws:
– Impact of rate reduction on opening deferred tax
– Impact of rate reduction on movement in deferred tax

Total tax expense reported in the income statement

Year to
31.3.2011
£m

Year to
31.3.2010
£m

181.0

170.2

50.7

47.7

2.1
1.1
–
(1.4)
(2.7)
(0.2)

1.8
0.9
(0.5)
(1.5)
(1.0)
(0.1)

49.6

47.3

(46.3)
(0.7)

–
–

2.6

47.3

The effective tax rate for the year to 31 March 2011 was 1.4% (2010: 27.8%). The decrease of 26.4% is mainly due
to the impacts of the reduction in the rate of UK corporation tax and prior year items. In the absence of the rate
change and prior year items, the effective rate would have been 28.5%.

(d) Deferred tax
The movements in deferred tax liabilities/(assets) are as follows:

At 1 April 2009
Charge/(credit) in the income

statement

Charge/(credit) in other
comprehensive income

At 1 April 2010
Charge/(credit) in the income

statement

Charge in other comprehensive

income

Reported in equity on share-based

payment

Accelerated
tax
depreciation
£m

671.4

Deferred
income
£m

(58.9)

Retirement
benefit
obligations
£m

Fair values
interest rate
swaps
£m

Business
combinations
£m

Tax losses
£m

(5.1)

(34.2)

(3.3)

11.3

15.5

(1.3)

(0.6)

(4.2)

–

(0.4)

–

0.3

686.9

(60.2)

(5.7)

(38.1)

(43.5)

13.8

0.2

(0.4)

–

22.1

–

(0.2)

(3.5)

–

1.0

–

(1.0)

–

10.9

15.8

606.1

Other
£m

15.3

0.5

–

Total
£m

596.5

9.5

0.1

0.4

0.1

(30.5)

23.2

(0.1)

16.2

(0.1)

598.7

At 31 March 2011

643.4

(46.4)

(5.5)

(16.4)

(2.5)

9.9

The Group has tax losses of £7.0 million (2010: £7.1 million) which have arisen in its Gibraltar subsidiary for which
a deferred tax asset has not been recognised as they may not be used to offset taxable profits elsewhere in the
Group and it is not expected that the subsidiary will utilise significant amounts in the foreseeable future. The losses
are, however, available for offset against future taxable profits arising in the subsidiary without time limit.

1
0
9

F
n
a
n
c
a

s
t
a
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e
m
e
n
t
s

N
o
r
t
h
u
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b
r
i
a
n
W
a
t
e
r

G
r
o
u
p
p
c

A
n
n
u
a

r
e
p
o
r
t
a
n
d
fi
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s
2
0
1
1

w
w
w
.
n
w
g
.
c
o
.
u
k

Notes to the consolidated financial statements
continued

7. Taxation continued
(e) Factors that may affect future tax charges
The Government has stated its intention to reduce the UK rate of corporation tax to 23% by 1 April 2014. Had that
rate applied in 2010/11 the closing deferred tax liability would have been reduced by £69.1 million to £529.6 million
and the current year’s corporation tax charge would have been reduced by £7.6 million to £34.7 million.

The Group expects to continue to incur high levels of capital expenditure during NWL’s 2010-15 regulatory period
and be able to claim tax reliefs in excess of depreciation. However, it is expected that capital allowances will be
claimed at a slower rate in future because Finance (No.3) Bill 2011 contains clauses to reduce rates from 20% to
18% (general plant pool) and from 10% to 8% (special rate pool) with effect from 1 April 2012.

8. Earnings per share
Basic EPS is calculated by dividing the profit attributable to ordinary equity holders of the parent Company by the
weighted average number of ordinary shares in issue during the year. Treasury shares held are excluded from the
weighted average number of shares for basic EPS.

The weighted average number of shares for diluted EPS is calculated by adding the weighted average number of
ordinary shares in issue during the year and the weighted average number of ordinary shares that would be issued
on the conversion of all the dilutive potential ordinary shares into ordinary shares.

Basic EPS
Diluted EPS

Weighted
average
number
of shares
31.3.2011
million

517.8
518.6

Profit
31.3.2011
£m

178.3
178.3

Earnings
per share
31.3.2011
pence

34.44
34.38

Profit
31.3.2010
£m

122.5
122.5

Weighted
average
number
of shares
31.3.2010
million

517.6
518.6

Earnings
per share
31.3.2010
pence

23.67
23.62

The directors consider that EPS adjusted for the volatility inherent in some deferred tax items gives a better
indication of the Group’s underlying performance. In previous years, an adjustment had been made for total
deferred tax. However, the directors have concluded that the ongoing deferred tax charge forms part of underlying
performance and it is more appropriate to only adjust for significant non-recurring deferred tax items. For the
current period, the deferred tax credit relating to the corporation tax rate reduction has been adjusted and the prior
year adjusted EPS has been restated with no element of deferred tax removed. The deferred tax charge now
included in adjusted EPS for the current period is £15.8 million (2010: £9.5 million) and has an impact on the
adjusted EPS of 2.80 pence (2010: 1.84 pence per share).

Basic EPS
Deferred tax – effect of changes in tax rates

Adjusted EPS

Diluted adjusted EPS

Weighted
average
number
of shares
31.3.2011
million

517.8

518.6

Profit
31.3.2011
£m

178.3
(46.3)

132.0

Earnings
per share
31.3.2011
pence

34.44
(8.94)

25.50

25.45

Profit
31.3.2010
restated
£m

122.5
–

122.5

Weighted
average
number
of shares
31.3.2010
million

517.6

518.6

Earnings
per share
31.3.2010
restated
pence

23.67
–

23.67

23.62

1
1
0

F
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s

N
o
r
t
h
u
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b
r
i
a
n
W
a
t
e
r

G
r
o
u
p
p
c

A
n
n
u
a

r
e
p
o
r
t
a
n
d
fi
n
a
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c
a

s
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a
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m
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s
2
0
1
1

w
w
w
.
n
w
g
.
c
o
.
u
k

9. Dividends paid and proposed

Declared and paid during the year:
Equity dividends on ordinary shares:
Final dividend for 2009/10: 8.85 pence (2008/09: 8.50 pence)
Interim dividend for 2010/11: 4.72 pence (2009/10: 4.39 pence)

Dividends paid

Proposed for approval by shareholders at the AGM:
Final dividend for 2010/11: 9.57 pence (2009/10: 8.85 pence)

10. Intangible assets

Cost:
At 1 April 2009, 1 April 2010 and 31 March 2011

Impairment:
At 1 April 2009, 1 April 2010 and 31 March 2011

Net book value at 31 March 2011

Net book value at 1 April 2009 and 31 March 2010

Year to
31.3.2011
£m

Year to
31.3.2010
£m

45.8
24.5

70.3

44.0
22.7

66.7

49.6

45.8

Goodwill

£m

Other
£m

Total
£m

3.8

64.2

68.0

(0.2)

3.6

–

64.2

(0.2)

67.8

As from 1 April 2004, the date of transition to IFRS, goodwill is no longer amortised but is now subject to an annual
impairment review.

Goodwill has been allocated to the water and waste water cash-generating unit and the other intangible asset has
been allocated to the Northumbrian Water Limited cash-generating unit, which are also the operating segments.

The other intangible asset represents the right in perpetuity to receive income under the operating agreement
with the Environment Agency in respect of the Kielder Water transfer scheme and, therefore, the directors consider
the asset has an indefinite life. Accordingly, future cash flows, which increase in line with inflation, have been
discounted at a rate of 6.44% in perpetuity. This represents a long term nominal gilt yield and an assumed credit
spread. This calculation satisfied the Group that the carrying value at 31 March 2011 had not been impaired.
Furthermore, it is improbable that the discount rate would increase to such a level that the carrying value would
be impaired.

1
1
1

F
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s

N
o
r
t
h
u
m
b
r
i
a
n
W
a
t
e
r

G
r
o
u
p
p
c

A
n
n
u
a

r
e
p
o
r
t
a
n
d
fi
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s
2
0
1
1

w
w
w
.
n
w
g
.
c
o
.
u
k

Notes to the consolidated financial statements
continued

11. Property, plant and equipment

Cost:
At 1 April 2009
Additions (restated)
Schemes commissioned
Reclassifications
Disposals

At 1 April 2010 (restated)
Additions
Schemes commissioned
Reclassifications
Disposals

At 31 March 2011

Depreciation:
At 1 April 2009
Charge for the year
Reclassifications
Disposals

At 1 April 2010
Charge for the year
Reclassifications
Disposals

At 31 March 2011

Net book value at 31 March 2011

Net book value at 31 March 2010 (restated)

Net book value at 1 April 2009

Freehold land
and buildings
£m

Infrastructure
assets
£m

Operational
structures,
plant and
machinery
£m

Fixtures,
fittings,
tools and
equipment
£m

Assets in the
course of
construction
£m

Total
£m

95.3 1,702.9 2,125.0
18.7
1.6
132.9
96.7
(2.0)
–
(3.2)
(6.6)

–
6.9
13.4
–

115.6 1,811.7 2,254.3
1.2
14.5
73.7
76.3
(2.5)
–
(2.4)
(6.8)

–
3.7
2.8
(0.5)

121.6 1,895.7 2,324.3

34.0
1.9
0.1
–

36.0
2.2
–
–

38.2

83.7
22.8
–
(6.6)

99.9
25.2
–
(6.8)

118.3

640.7
71.8
–
(3.1)

709.4
72.8
(0.3)
(2.5)

779.4

83.4 1,777.4 1,544.9

79.6 1,711.8 1,544.9

61.3 1,619.2 1,484.3

180.9
0.3
38.3
(11.4)
–

208.1
0.4
13.1
(0.3)
–

221.3

128.0
9.0
(0.1)
–

136.9
11.4
0.3
–

148.6

72.7

71.2

52.9

170.5 4,274.6
236.3
215.7
–
(274.8)
–
–
(9.8)
–

111.4 4,501.1
219.9
203.8
–
(166.8)
–
–
(9.7)
–

148.4 4,711.3

–
–
–
–

886.4
105.5
–
(9.7)

982.2
111.6
–
(9.3)

– 1,084.5

148.4 3,626.8

111.4 3,518.9

170.5 3,388.2

Operational structures, plant and machinery include an element of land and buildings dedicated to those assets.
The Group has applied IAS 23 Borrowing Costs (Revised) in the year and has capitalised £1.9 million for the year to
31 March 2011 (2010: £1.2 million). The capitalisation rate used to determine the amount of borrowing costs eligible
for capitalisation was 5.96% (2010: 5.96%). IFRIC 18 Transfers of Assets from Customers was adopted in the
period. This has required prior year additions to be restated by £14.0 million for transactions effected on or after
1 July 2009.

The net book value of property, plant and equipment held under hire purchase contracts and finance leases was
as follows:

Infrastructure assets
Operational structures, plant and machinery

31.3.2011
£m

31.3.2010
£m

47.3
22.0

69.3

47.8
23.6

71.4

1
1
2

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1
1

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o
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12. Investments

Investments in jointly controlled entities

31.3.2011
£m

31.3.2010
£m

4.0

4.1

(a) Investments in jointly controlled entities
The Group, through Northumbrian Services Limited, holds 50% of the nominal value of issued ordinary £1 shares
in Vehicle Lease and Service Limited (VLS), the Group’s principal jointly controlled entity. VLS was incorporated in
England and Wales and undertakes the business of hiring, leasing and servicing of vehicles and plant.

The Group, through Agrer, also holds a 50% interest in Agreco, a jointly controlled entity incorporated in Belgium.

Revenue
Operating costs

Profit on ordinary activities before interest
Finance costs payable

Profit on ordinary activities before taxation
Current taxation

Profit for the year

Non-current assets
Current assets

Share of gross assets

Current liabilities
Non-current liabilities

Share of gross liabilities

Share of net assets

VLS
31.3.2011
£m

Agreco
31.3.2011
£m

VLS
31.3.2010
£m

Agreco
31.3.2010
£m

6.7
(5.7)

1.0
(0.5)

0.5
(0.1)

0.4

8.4
7.7

16.1

(4.9)
(7.8)

(12.7)

3.4

3.2
(2.9)

0.3
–

0.3

–
1.4

1.4

(0.8)
–

(0.8)

0.6

6.9
(5.9)

1.0
(0.6)

0.4
(0.1)

0.3

7.9
7.9

15.8

(4.6)
(7.9)

(12.5)

3.3

3.1
(2.5)

0.6
–

0.6

–
3.6

3.6

(2.8)
–

(2.8)

0.8

1
1
3

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1
1

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Notes to the consolidated financial statements
continued

12. Investments continued
(b) The Group’s interests in principal subsidiaries at 31 March 2011 were as follows:

Name of undertaking

Country of incorporation or
registration and operation

Description of shares held

Proportion
of nominal
value of issued
shares held by
Group (%)

Business activity

Northumbrian Services

England and Wales

Ordinary shares of £1 100

Holding of investments and

Limited

loans

Northumbrian Water

England and Wales

Ordinary shares of £1 100

Water and sewerage services

Limited

Northumbrian Water

England and Wales

Ordinary shares of £1 100

Holding of finance

Finance plc

instruments

Caledonian Environmental

Scotland

Ordinary shares of £1 100

Waste water services

Services plc

Caledonian Environmental
Levenmouth Treatment
Services Limited

Scotland

Ordinary shares of £1 100

Waste water services

Ayr Environmental Services

Scotland

Ordinary shares of £1

Waste water services

Limited

Ayr Environmental Services

Scotland

Ordinary shares of £1 100

Waste water services

Operations Limited

AquaGib Limited
Northumbrian Water

Projects Limited

SA Agrer NV

Gibraltar
England and Wales

Ordinary shares of £1
67
Ordinary shares of £1 100

Water and sewerage services
Waste water services

Belgium

Ordinary shares of £1 100

Aid funded project work

In 2010/11 the Group increased its shareholding in both Caledonian Environmental Services plc and Caledonian
Environmental Levenmouth Treatment Services Limited from 75% to 100%.

All subsidiaries listed above are indirectly held. The directors consider that to give full particulars of all subsidiary
and associated undertakings would lead to a statement of excessive length. The above information relates to those
subsidiary and associated undertakings or groups of undertakings whose results or financial position, in the
opinion of the directors, principally affect the figures of the Group. A full list of the Company’s subsidiaries is
attached to the Company’s latest annual return filed at Companies House.

13. Inventories

Stores

31.3.2011
£m

31.3.2010
£m

3.3

1
1
4

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1
1

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14. Trade and other receivables

Trade receivables
Amounts owed by jointly controlled entities
Prepayments and accrued income
Financial assets
Other receivables

31.3.2011
£m

31.3.2010
£m

78.2
0.6
60.3
3.8
11.0

72.2
0.5
53.4
1.1
9.2

153.9

136.4

As at 31 March 2011, trade receivables at nominal value of £44.5 million (2010: £37.1 million) were impaired.
Movements in the provision for impairment of trade receivables were as follows:

At 1 April 2009
Charge for the year
Utilised

At 1 April 2010
Charge for the year
Utilised

At 31 March 2011

£m

31.7
19.6
(14.2)

37.1
17.8
(10.4)

44.5

At 31 March, the analysis of trade receivables overdue but not impaired is as follows:

2011
2010

0-3
months

£m

0.6
0.5

3-12
months
£m

26.8
24.9

12-24
months
£m

12.4
11.8

24-36
months
£m

6.4
5.8

36-48
months
£m

2.5
2.7

>48
months
£m

–
0.6

Total
£m

48.7
46.3

15. Cash and cash equivalents and short term deposits
For the purposes of the consolidated cash flow statement, cash and cash equivalents comprise the following at
31 March:

Cash at bank and in hand
Cash equivalent deposits

Bank overdrafts

Cash and cash equivalents

Short term cash deposits >3 months
Short term cash deposits <3 months

Short term cash deposits

31.3.2011
£m

31.3.2010
£m

76.7
65.0

141.7
(1.4)

140.3

66.1
108.7

174.8
(1.5)

173.3

31.3.2011
£m

31.3.2010
£m

1.4
–

1.4

1.1
14.7

15.8

Short term cash deposits of £nil (2010: £14.7 million), with a maturity of less than three months, represent amounts
on deposit at fixed rates with the Northumbrian Water Pension Scheme.

1
1
5

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A
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2
0
1
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1
1
6

F
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a
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c
a

Notes to the consolidated financial statements
continued

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16. Trade and other payables

Trade payables
Other payables
Interest payable
Accruals and deferred income

17. Interest bearing loans and borrowings

Current:
Bank overdrafts
Current instalments due on borrowings (principal £150.4 million, 2010: £19.7 million)
Current obligations under finance leases and hire purchase contracts (see note 18)

Non-current:
Non-current obligations under finance leases and hire purchase contracts (principal

£103.5 million, 2010: £104.1 million) (see note 18)

Non-current instalments on borrowings (principal £2,166.9 million, 2010: £2,300.2 million)

Borrowings comprise the following:
Loans (principal £527.1 million, 2010: £546.6 million)
Subordinated loan stock (principal £1.9 million, 2010: £6.8 million)
Eurobonds – due 11 October 2017 bearing interest rate of 6.0% (principal £300.0 million,

2010: £300.0 million)

Eurobonds – due 6 February 2023 bearing interest rate of 6.875% (principal £350.0 million,

2010: £350.0 million)

Eurobonds – due 29 April 2033 bearing interest rate of 5.625% (principal £350.0 million,

2010: £350.0 million)

Eurobonds – due 23 January 2034 bearing interest rate of 5.87526% (principal £248.0 million,

2010: £248.0 million)

Eurobonds – due 31 March 2037 bearing interest rate of 6.627% (principal £61.5 million,

2010: £61.6 million)

Index linked Eurobonds – due 15 July 2036 bearing interest rate of 2.033%

(principal £177.6 million, 2010: £169.5 million)

Index linked Eurobonds – due 30 January 2041 bearing interest rate of 1.6274%

(principal £69.8 million, 2010: £66.6 million)

Index linked Eurobonds – due 16 July 2049 bearing interest rate of 1.7118%

(principal £115.7 million, 2010: £110.4 million)

Index linked Eurobonds – due 16 July 2053 bearing interest rate of 1.7484%

(principal £115.7 million, 2010: £110.4 million)

Less current instalments due on bank loans (principal £150.4 million, 2010: £19.7 million)

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31.3.2011
£m

31.3.2010
£m

16.5
17.8
39.1
82.2

11.0
19.4
39.7
81.1

155.6

151.2

31.3.2011
£m

31.3.2010
£m

1.4
155.1
7.2

163.7

1.5
24.6
7.0

33.1

103.5

104.1
2,192.3 2,329.8

2,295.8 2,433.9

530.0
1.9

550.5
6.8

307.5

308.6

384.0

386.8

346.4

346.3

241.4

241.1

58.9

176.6

168.5

69.7

66.5

115.5

110.2

115.5

110.2

2,347.4 2,354.4
(24.6)

(155.1)

2,192.3 2,329.8

17. Interest bearing loans and borrowings continued
The difference between the principal value of £2,166.9 million (2010: £2,300.2 million) and the carrying value of
£2,192.3 million (2010: £2,329.8 million) are unamortised issue costs of £14.1 million (2010: £14.7 million) and a
credit of £39.5 million (2010: £44.3 million) in excess of the original loan proceeds to reflect the fair value of loans
owed by subsidiaries acquired in 2003.

The Eurobonds – due 23 January 2034 are secured on the income receivable under the Kielder Water transfer
scheme for the period to 23 January 2034.

The value of the capital and interest elements of the index linked Eurobonds are linked to movements in the UK RPI
(see note 1(q)).

18. Obligations under hire purchase contracts and finance leases

Amounts due:
Not later than one year
After one year but not more than five years
Later than five years

Less finance charges allocated to future periods

Present value of minimum lease payments

Disclosed as due:
Not later than one year
After more than one year

31.3.2011
£m

31.3.2010
£m

7.2
23.5
151.6

182.3
(71.6)

110.7

7.2
103.5

110.7

7.0
23.5
154.6

185.1
(74.0)

111.1

7.0
104.1

111.1

Lease commitments
The Group has entered into non-cancellable operating leases in respect of land and buildings, plant, machinery
and motor vehicles. The future minimum rentals payable under non-cancellable operating leases are as follows:

Not later than one year
After one year but not more than five years
After five years

31.3.2011
£m

31.3.2010
£m

0.7
2.4
26.6

29.7

0.8
2.6
26.7

30.1

1
1
7

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1
1
8

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N
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a
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G
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A
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a
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d
fi
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a
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c
a

Notes to the consolidated financial statements
continued

19. Provisions

At 1 April 2010
Current
Non-current

At 1 April 2010
Arising during the year
Utilised

At 31 March 2011

Analysed as:
Current
Non-current

£m

0.2
2.2

2.4
0.4
(0.2)

2.6

0.2
2.4

2.6

The provision represents outstanding discretionary pension liabilities. The discretionary pension liabilities have
been calculated by an independent actuary, using the same actuarial assumptions as applied to the defined
benefit pension scheme (see note 24), and are expected to be paid over the remaining lives, which is approximately
11 years.

20. Financial instruments
(a) Group strategy
The level of capital expenditure which the Group is obliged to incur is such that it cannot be wholly financed by
internally generated sources. As a result, the Group must rely upon raising additional finance on a regular basis,
to be principally used to fund the long term assets required in its regulated business. The Group’s strategy is to
finance such investment by raising medium to long term debt, to provide a balance sheet match with long term
assets and to fix a major proportion of interest rates.

(b) Treasury operations
The main purpose of the Group’s treasury function is to assess the Group’s ongoing capital requirement and to
raise funding on a timely basis, taking advantage of any favourable market opportunities. It also invests any surplus
funds the Group may have, based upon its forecast requirements and in accordance with the Group’s treasury
policy. On occasions, derivatives are used as part of this process but the Group’s policies prohibit their use
for speculation.

(c) Risks arising from the Group’s financial instruments
The main risks arising from the Group’s financial instruments are liquidity risk, interest rate risk and foreign currency
risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below.
All treasury activities are conducted in accordance with these policies.

(d) Liquidity risk
As regards day to day liquidity, the Group’s policy is to have available standby committed bank borrowing facilities
with a value of no less than £50.0 million and with a bank agreement availability period of no less than three
months. At 31 March 2011, the Group had £35.0 million of undrawn committed bank facilities (2010: £75.0 million).
A further £70.0 million of committed bank facilities were entered into on 7 April 2011.

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20. Financial instruments continued
(e) Interest rate risk
The Group finances its operations through a mixture of retained profits and bank borrowings. It borrows at both
fixed and floating rates of interest and, accordingly, uses interest rate swaps to generate the desired interest profile
and to manage the Group’s exposure to interest rate fluctuations. The Group’s policy is to keep a minimum 60% of
its borrowings at fixed rates of interest. At 31 March 2011, 74% (2010: 75%) of the Group’s borrowings were at fixed
rates of interest. Index linked borrowings are treated as variable rate debt.

(f) Foreign currency risk
The Group’s policy is that any foreign currency exposure in excess of £100,000 sterling equivalent of a transactional
nature, or £3.0 million sterling equivalent of a translation nature, should be covered immediately on identification. Any
exposures are covered through the use of forward foreign exchange contracts.

(g) Market price risk
The Group’s exposure to market price risk principally comprises interest rate exposures. The Group’s policy is to
accept a degree of interest rate risk. The following table shows the impact on profit and equity of an increase in the
variable cost of borrowing. The range is considered reasonable based on the forecast variable rates of borrowing
and all other elements being consistent for the next 12 months and highlights this is not material to the Group:

Increase in basis points

2011
+50
+100
+150

2010
+50
+100
+150

Effect on
profit/equity
£m

1.3
2.5
3.8

0.9
1.9
2.8

(h) Credit risk
There are no significant concentrations of credit risk within the Group. Management’s assessment of the maximum
credit risk exposure relating to financial assets is represented by their carrying value as at the balance sheet date
(see (o)). A significant proportion of the trade debtor balances are with domestic customers who are unlikely to
have a published credit rating.

(i) Counterparty risk
The treasury strategy, which is approved by the Board, requires that investments are limited to certain money
market and treasury instruments, and that the Group’s exposure to any single bank, building society or market is
controlled, with maximum deposits allowed with any single counterparty. The investment criteria cover credit rating
and asset size, including sovereign and political risk. Current market conditions have resulted in closer monitoring
of counterparties and cancellation or suspension of deposits.

(j) Capital risk
The primary objective of the Group’s capital management is to ensure that it maintains a strong credit rating and
healthy capital ratios in order to support its business and maximise shareholder value.

The Group monitors capital using gearing ratios for the Group and NWL. For NWL, this is net debt divided by
the RCV as determined and published by Ofwat, and for the Group, RCV plus a pro forma RCV for the Kielder
securitisation and the PFI contracts (at the level of associated debt included in the Group’s net debt relating
to those assets). The Group’s policy is to keep the gearing ratio less than 75% and 70% for the Group and
NWL, respectively.

1
1
9

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Notes to the consolidated financial statements
continued

20. Financial instruments continued
For the Group, the pro forma RCV at 31 March 2011 was £3,643.1 million. For NWL, the RCV at 31 March 2011
was £3,318.4 million. On this basis, the gearing ratios were 63% for the Group and 56% for NWL.

(k) Contractual maturity of financial liabilities (principal and future interest payments)
The table below summarises the maturity profile of the Group’s financial liabilities at 31 March based on contractual
undiscounted payments:

Year ended 31 March 2011

Interest bearing loans and borrowings
Trade and other payables

Year ended 31 March 2010

Interest bearing loans and borrowings
Trade and other payables

On demand
£m

1.4
–

1.4

Less than
3 months
£m

162.4
82.3

244.7

On demand
£m

1.5
0.1

1.6

Less than
3 months
£m

40.3
31.3

71.6

3-12 months
£m

1-5 years
£m

More than
5 years
£m

Total
£m

124.6
48.7

173.3

704.5 4,381.8 5,374.7
131.0

–

704.5 4,381.8 5,505.7

3-12 months
£m

1-5 years
£m

More than
5 years
£m

Total
£m

118.0
20.0

138.0

824.4 4,381.8 5,366.0
51.4

–

824.4 4,381.8 5,417.4

(l) Maturity profile of financial assets and liabilities (carrying value)
Year ended 31 March 2011

Within 1 year

£m

1-2 years
£m

2-3 years
£m

3-4 years
£m

4-5 years
£m

More than
5 years
£m

Total
£m

Fixed rate:
Eurobonds
Subordinated loan stock
Bank loans
Obligations under finance leases and hire

purchase contracts

Other loans

(4.2)
–
(24.3)

(2.8)
(0.3)

(4.1)
–
(21.2)

(2.0)
(0.3)

(4.2)
–
(21.1)

(1.5)
(0.3)

(4.2)
–
(21.3)

(1.0)
(0.3)

(4.3) (1,317.2) (1,338.2)
(1.9)
(1.9)
(255.9)
(145.9)

–
(22.1)

(0.5)
(0.3)

(0.4)
(0.9)

(8.2)
(2.4)

Fixed rate at 31 March 2011

(31.6)

(27.6)

(27.1)

(26.8)

(27.2) (1,466.3) (1,606.6)

Variable rate:
Cash and cash equivalents
Financial investments
Eurobonds
Bank loans
Overdrafts
Obligations under finance leases and hire

purchase contracts

Variable rate at 31 March 2011

Net borrowings at 31 March 2011

143.1
0.9
–
(126.3)
(1.4)

(4.4)

11.9

–
0.5
–
(55.4)
–

–
0.2
–
(10.0)
–

–
–
–
(10.0)
–

–
11.3
(477.3)
(60.0)
–

143.1
12.9
(477.3)
(271.7)
(1.4)

(4.4)

(4.5)

(80.2)

(102.5)

(59.3)

(14.3)

(14.5)

(606.2)

(696.9)

(2,303.5)

1
2
0

F
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s

N
o
r
t
h
u
m
b
r
i
a
n
W
a
t
e
r

G
r
o
u
p
p
c

A
n
n
u
a

r
e
p
o
r
t
a
n
d
fi
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s
2
0
1
1

w
w
w
.
n
w
g
.
c
o
.
u
k

20. Financial instruments continued
Year ended 31 March 2010

Within 1 year
£m

1-2 years
£m

2-3 years
£m

3-4 years
£m

4-5 years
£m

More than
5 years
£m

Total
£m

Fixed rate:
Eurobonds
Subordinated loan stock
Bank loans
Obligations under finance leases and hire

purchase contracts

Other loans

(4.0)
–
(17.7)

(2.7)
(0.4)

(4.1)
–
(24.5)

(2.3)
(0.3)

(4.2)
–
(21.1)

(1.7)
(0.3)

(4.1)
–
(21.2)

(1.1)
(0.3)

(4.3)
–
(21.2)

(1,321.0)
(6.8)
(168.0)

(1,341.7)
(6.8)
(273.7)

(0.5)
(0.3)

(0.4)
(1.0)

(8.7)
(2.6)

Fixed rate at 31 March 2010

(24.8)

(31.2)

(27.3)

(26.7)

(26.3)

(1,497.2)

(1,633.5)

Variable rate:
Cash and cash equivalents
Short term cash deposits
Financial investments
Eurobonds
Bank loans
Overdrafts
Obligations under finance leases and

hire purchase contracts

Variable rate at 31 March 2010

Net borrowings at 31 March 2010

174.8
15.8
1.1
–
(2.5)
(1.5)

–
–
0.9
–
(171.7)
–

(4.3)

(4.4)

183.4

(175.2)

–
–
0.5
–
(10.0)
–

(4.5)

(14.0)

–
–
0.2
–
(10.0)
–

(4.5)

(14.3)

–
–
–
–
(10.0)
–

–
–
11.3
(455.4)
(70.0)
–

174.8
15.8
14.0
(455.4)
(274.2)
(1.5)

(4.5)

(80.2)

(102.4)

(14.5)

(594.3)

(628.9)

(2,262.4)

The variable rate net borrowings comprise sterling denominated bank borrowings and deposits that bear interest
at rates based upon up to 12 months LIBOR.

(m) Currency exposures
At 31 March 2011, after taking into account the effects of forward foreign exchange contracts, the Group had no
currency exposures (2010: £nil).

(n) Borrowing facilities
The Group has various undrawn committed borrowing facilities. The facilities available at 31 March, in respect of
which all conditions precedent have been met, are as follows:

Expiring in less than one year

31.3.2011
£m

31.3.2010
£m

35.0

75.0

1
2
1

F
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s

N
o
r
t
h
u
m
b
r
i
a
n
W
a
t
e
r

G
r
o
u
p
p
c

A
n
n
u
a

r
e
p
o
r
t
a
n
d
fi
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s
2
0
1
1

w
w
w
.
n
w
g
.
c
o
.
u
k

Notes to the consolidated financial statements
continued

20. Financial instruments continued
(o) Fair values of financial assets and financial liabilities
A comparison by category of book values, which are all recognised at amortised cost, and fair values of the
Group’s financial assets and liabilities as at 31 March is set out below:

Financial assets:
Cash and cash equivalents
Short term cash deposits
Financial investments
Trade and other receivables

Financial liabilities:
Overdraft
Bank loans (principal of £527.1 million, 2010: £546.6 million)
Subordinated loan stock (principal of £1.9 million, 2010: £6.8 million)
Eurobonds (principal of £1,788.3 million, 2010: £1,766.4 million)
Obligations under finance leases and hire purchase contracts

(principal of £110.7 million, 2010: £111.1 million)

Interest rate swaps
Trade and other payables

Book value

Fair value

31.3.2011
£m

31.3.2010
£m

31.3.2011
£m

31.3.2010
£m

143.1
–
12.9
153.9

174.8
15.8
14.0
136.4

143.1
–
12.9
153.9

174.8
15.8
14.0
136.4

(1.4)
(530.0)
(1.9)

(1.5)
(559.5)
(6.8)
(1,815.5) (1,797.1) (1,899.2) (1,804.0)

(1.4)
(541.3)
(1.9)

(1.5)
(550.5)
(6.8)

(110.7)
(9.8)
(155.5)

(111.1)
(12.5)
(151.2)

(110.7)
(9.8)
(155.5)

(111.1)
(12.5)
(151.2)

(2,314.9) (2,289.7) (2,409.9) (2,305.6)

The fair values of the interest rate swaps and sterling denominated long term fixed rate and index linked debt with
a book value of £1,815.5 million (2010: £1,797.1 million), have been determined by reference to prices available from
the markets on which the instruments involved are traded. All the other fair values shown above have been
calculated by discounting cash flows at prevailing interest rates.

In the absence of an openly traded market value for the index linked bonds with a book value of £477.3 million
(2010: £455.4 million), the fair value at the balance sheet date has been calculated by considering the remaining
debt maturity, the relevant UK index linked gilt rate and an appropriate credit spread by reference to market
evidence for conventional bonds.

The difference between the principal value of £2,428.0 million (2010: £2,430.9 million) and the carrying value of
£2,458.1 million (2010: £2,465.5 million) are unamortised issue costs of £14.3 million (2010: £14.7 million) and a
credit of £44.4 million (2010: £49.3 million) in excess of the original loan proceeds to reflect the fair value of loans
owed by subsidiaries acquired in 2003.

(p) Hedges
Cash flow hedges – currency forward contracts
At 31 March 2011, the Group held no forward exchange contracts (2010: nil).

1
2
2

F
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s

N
o
r
t
h
u
m
b
r
i
a
n
W
a
t
e
r

G
r
o
u
p
p
c

A
n
n
u
a

r
e
p
o
r
t
a
n
d
fi
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s
2
0
1
1

w
w
w
.
n
w
g
.
c
o
.
u
k

20. Financial instruments continued
Cash flow hedges – interest rate swap
At 31 March 2011, the Group held three interest rate swaps, designated as a hedge of future interest cash flows,
for which the Group has firm commitments. The swaps were used to convert variable rate interest payments to a
fixed rate basis. The terms of these swaps were as follows:

Notional amount

GBP 100.0 million
GBP 62.5 million
GBP 62.5 million

Start date

Termination date

15.9.2008
29.1.2009
29.1.2009

15.3.2022
31.5.2011
31.5.2011

Fixed rate
%

4.79
2.345
2.435

The £100.0 million swap was designated as highly effective. The two £62.5 million swaps were not effective.

At 31 March 2010, the Group held three interest rate swaps, designated as a hedge of future interest cash flows,
for which the Group had firm commitments. The swaps were used to convert variable rate interest payments to a
fixed rate basis. The terms of these swaps were as follows:

Notional amount

GBP 100.0 million
GBP 62.5 million
GBP 62.5 million

These hedges were designated as highly effective.

Start date

Termination date

15.9.2008
29.1.2009
29.1.2009

15.3.2022
31.5.2011
31.5.2011

Fixed rate
%

4.79
2.345
2.435

(q) Fair value hierarchy
The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by
valuation technique:
−
−

level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are
observable, either directly or indirectly; and
level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based
on observable market data.

−

All other financial assets and liabilities are carried at amortised cost.

Liabilities measured at fair value
Year ended 31 March 2011

Interest rate swap

Year ended 31 March 2010

Interest rate swap

31.3.2011
£m

Level 1
£m

(9.8)

–

Level 2
£m

(9.8)

Level 3
£m

–

31.3.2010
£m

(12.5)

Level 1
£m

–

Level 2
£m

(12.5)

Level 3
£m

–

During the year to 31 March 2011, there were no transfers between level 1 and level 2 fair value measurements,
and no transfers into and out of level 3 fair value measurements.

1
2
3

F
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s

N
o
r
t
h
u
m
b
r
i
a
n
W
a
t
e
r

G
r
o
u
p
p
c

A
n
n
u
a

r
e
p
o
r
t
a
n
d
fi
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s
2
0
1
1

w
w
w
.
n
w
g
.
c
o
.
u
k

Notes to the consolidated financial statements
continued

21. Authorised and issued share capital

Authorised:
700 million ordinary shares of 10 pence each

Allotted, called up and fully paid:
518.6 million ordinary shares of 10 pence each

31.3.2011
£m

31.3.2010
£m

70.0

51.9

The Northumbrian Water Group plc Employee Trust, through Northumbrian Water Share Scheme Trustees Limited,
currently holds 765,962 (2010: 914,518) ordinary 10 pence shares in the Company for use under the Company’s
LTIP. All of these shares have been conditionally awarded under the LTIP. Details of the main features of the LTIP
and the conditions for vesting can be found in the directors’ remuneration report on pages 71 to 84. As at 31 March
2011, the share price of the ordinary 10 pence shares in the Company was 332.2 pence (2010: 283.1 pence).

22. Additional cash flow information
Analysis of net debt as at 31 March 2011

As at
1.4.2010
£m

Cash flow
£m

Other
non-cash
movements
£m

As at
31.3.2011
£m

Cash and cash equivalents
Short term cash deposits
Financial investments
Loans (principal of £2,317.3 million, 2010: £2,319.8 million)
Finance leases (principal of £110.7 million, 2010: £111.1 million)

173.3
15.8
14.0
(2,354.4)
(111.1)

(2,262.4)

(33.0)
(14.4)
(1.1)
19.9
7.3

(21.3)

–
–
–

140.3
1.4
12.9
(12.9) (2,347.4)
(110.7)

(6.9)

(19.8) (2,303.5)

Non-cash movements on loans relate to the principal uplift on index linked borrowings and amortisation of loan
issue costs offset by the amortisation of debt fair value for the year. Non-cash movements on finance leases relate
to the inception of new finance leases on the acquisition of plant and machinery during the year.

Analysis of net debt as at 31 March 2010

Cash and cash equivalents
Short term cash deposits
Financial investments
Loans (principal of £2,319.8 million, 2009: £2,347.2 million)
Finance leases (principal of £111.1 million, 2009: £111.6 million)

As at
1.4.2009
£m

92.3
160.6
15.4
(2,386.3)
(111.7)

Other
non-cash
movements
£m

As at
31.3.2010
£m

–
–
–

173.3
15.8
14.0
11.0 (2,354.4)
(111.1)
(6.6)

Cash flow
£m

81.0
(144.8)
(1.4)
20.9
7.2

(2,229.7)

(37.1)

4.4 (2,262.4)

1
2
4

F
n
a
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c
a

s
t
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n
t
s

N
o
r
t
h
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b
r
i
a
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W
a
t
e
r

G
r
o
u
p
p
c

A
n
n
u
a

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e
p
o
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t
a
n
d
fi
n
a
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c
a

s
t
a
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m
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s
2
0
1
1

w
w
w
.
n
w
g
.
c
o
.
u
k

22. Additional cash flow information continued
The difference between the principal value of £2,430.9 million (2009: £2,458.8 million) and the carrying value of
£2,465.5 million (2009: £2,498.0 million) are unamortised issue costs of £14.7 million (2009: £15.4 million) and a
credit of £49.3 million (2009: £54.6 million) in excess of the original loan proceeds to reflect the fair value of loans
owed by subsidiaries acquired in 2003.

23. Financial commitments

Expenditure contracted for

31.3.2011
£m

31.3.2010
£m

222.3

85.3

In addition to these commitments, the Group has longer term expenditure plans, which include investment to meet
shortfalls in performance and condition, and to provide for new demand and growth within the water and
sewerage business.

24. Pensions and other post-retirement benefits
The Group operates a defined benefit pension scheme, Northumbrian Water Pension Scheme (NWPS or the
scheme), providing benefits based on final pensionable remuneration to 1,908 active members at 31 March 2011
(2010: 2,033).

The assets of the NWPS are held separately from those of the Group in independently administered funds.

The most recent actuarial valuation of the scheme was at 31 December 2007. At that date the value of assets
amounted to £732.3 million and the funding level was 106.1%.

The future service contribution rate jointly payable by members and the employers from 31 December 2007 was
22.6% of pensionable salaries. Members’ contributions are 7.3% on average with the employers paying 15.3%.

The employer contribution rate was assessed using the projected unit method and the following actuarial assumptions:

Pre-retirement
Post-retirement
Pay increases
Pension increases
Price inflation

6.1
5.2
3.7
3.4
3.4

Following the 2004 actuarial valuation the employers had prepaid contributions to the scheme up to 31 December
2010. The scheme actuary recommended that regular contributions should recommence from 1 January 2011.
However, the Group made an alternative proposal, which was accepted by the NWPS Trustees, to make new
capital injections of £70.0 million to cover the period 1 January 2011 to 31 March 2015. These payments comprise
employers’ contributions and the deficit recovery funding assumed in the final determination. Amounts totalling
£22.9 million have been paid in the period, of which £0.5 million was paid by a jointly controlled entity. The
remaining £47.1 million was paid in April 2011 which, along with other payments of an estimated £1.9 million
relating to early retirements, will bring total contributions to the scheme next year to £49.0 million. A full actuarial
valuation of the scheme as at 31 December 2010 has commenced.

1
2
5

F
n
a
n
c
a

s
t
a
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e
m
e
n
t
s

N
o
r
t
h
u
m
b
r
i
a
n
W
a
t
e
r

G
r
o
u
p
p
c

A
n
n
u
a

r
e
p
o
r
t
a
n
d
fi
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s
2
0
1
1

w
w
w
.
n
w
g
.
c
o
.
u
k

1
2
6

F
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s

N
o
r
t
h
u
m
b
r
i
a
n
W
a
t
e
r

G
r
o
u
p
p
c

A
n
n
u
a

r
e
p
o
r
t
a
n
d
fi
n
a
n
c
a

s
t
a
t
e
m
e
n
t
s
2
0
1
1

w
w
w
.
n
w
g
.
c
o
.
u
k

Notes to the consolidated financial statements
continued

24. Pensions and other post-retirement benefits continued
The scheme also has a defined contribution section which had 460 active members at 31 March 2011 (2010: 389).
Members can choose to contribute either 3%, 4% or 5% of salary, with employers contributing at either 6%, 7% or
8% depending on the member contribution rate. The contributions paid to the defined contribution section by the
Group in the year totalled £0.8 million (2010: £0.6 million).

The additional disclosures regarding the Group’s defined benefit scheme as required under IAS 19 Employee
Benefits, and the relevant impact on the Group’s financial statements are set out below.

A qualified actuary, using revised assumptions that are consistent with the requirements of IAS 19, has updated
the actuarial valuation described above as at 31 March 2011. Investments have been valued, for this purpose, at
fair value.

Pay increases1
RPI inflation
CPI inflation
Pension increases linked to RPI
Pension increases linked to CPI
Discount rate
Mortality assumptions2
– Life expectancy for a member aged 65 – female (years)
– Life expectancy for a member aged 65 – male (years)

Notes:
1.
2. 115% of PCMA00/PCFA00 (year of birth with medium cohort improvements).

Including promotional salary scale.

31.3.2011

31.3.2010

4.5%
3.5%
2.8%
3.5%
2.8%
5.5%
PCMA/PCFA00
23.0
20.7

4.7%
3.7%
n/a
3.7%
n/a
5.5%
PCMA/PCFA00
23.0
20.7

The fair value of the assets in the NWPS, the present value of the liabilities in the scheme and the long term
expected rate of return at 31 March were:

Equities
Corporate bonds
Government bonds
Property
Cash
Loan to scheme from Company

Total fair value of assets
Present value of liabilities

Deficit

Long term
expected
rate of
return
31.3.2011
%

7.3
5.5
4.3
5.8
3.8
–

Long term
expected
rate of
return
31.3.2010
%

7.5
5.5
4.5
6.0
3.9
0.5

31.3.2011

£m

511.8
62.1
63.9
71.6
3.9
–

713.3
(759.3)

(46.0)

31.3.2010
£m

499.3
70.7
27.2
66.6
14.3
(14.7)

663.4
(796.5)

(133.1)

The discount rate at 31 March 2011 has been set by reference to the yield on AA corporate bonds (AA over 15
years) at that date, extrapolated forward to a duration of 18 years which reflect the duration of the expected benefit
payments. The expected rate of return on equities represents a 3% premium of the yield on long term Government
bonds at 31 March 2011. The gross redemption yield on index linked UK Government stocks was 0.7%. The long
term inflation rate implied by these yields is 3.6% which has been reduced by 0.1% to allow for an inflation risk
premium. Mortality rates have been based on the PA00 tables, applying medium cohort adjustment of 115%
loading to mortality rates based on the year of birth of the membership.

24. Pensions and other post-retirement benefits continued
The valuation of the scheme liabilities has taken account of legislative changes which mean that future statutory
deferred revaluations and pension increases will be linked to CPI. As a consequence, CPI increases have been
applied for deferred pensions in all sections of the scheme and to those sections where the scheme rules link
increases to the Government’s pension increase orders. This has given rise to a reduction in the actuarial valuation
of the liabilities of around £36.0 million.

The amounts recognised in the income statement and in the statement of comprehensive income for the year are
analysed as follows:

Recognised in the income statement:
Current service cost
Past service cost

Recognised in operating costs in arriving at profit on ordinary activities before interest

Interest cost on plan obligations
Expected return on plan assets

Recognised in (income receivable)/finance costs payable

Recognised in the statement of comprehensive income:
Actual return on scheme assets
Less expected return on scheme assets

Other actuarial gains and losses

Net actuarial gains

31.3.2011
£m

31.3.2010
£m

13.5
0.4

13.9

43.3
(45.5)

(2.2)

56.2
(45.5)

10.7
63.3

74.0

9.9
4.6

14.5

36.1
(31.6)

4.5

209.0
(31.6)

177.4
(176.3)

1.1

Cumulative amounts recognised since adopting the standard

(6.5)

(80.5)

History of experience gains and losses:

Fair value of assets
Present value of defined benefit obligation

(Deficit)/surplus
Experience adjustments arising on plan assets
Experience adjustments arising on plan liabilities

31.3.2011
£m

31.3.2010
£m

31.3.2009
£m

31.3.2008
£m

31.3.2007
£m

713.3
(759.3)

(46.0)
10.7
–

663.4
(796.5)

(133.1)
177.4
–

478.6
(598.0)

(119.4)
(205.3)
18.7

666.7
(576.2)

710.8
(668.1)

90.5
(93.4)
0.6

42.7
0.6
1.7

Changes in the present value of the defined benefit pension obligations are analysed as follows:

At 1 April
Current service cost
Past service cost
Interest cost on plan obligations
Contributions by plan participants
Actuarial (gain)/loss on obligations
Benefits paid

At 31 March

Present value of funded defined benefit obligations

31.3.2011
£m

31.3.2010
£m

796.5
13.5
0.4
43.3
0.1
(63.3)
(31.2)

759.3

598.0
9.9
4.6
36.1
0.1
176.3
(28.5)

796.5

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Notes to the consolidated financial statements
continued

24. Pensions and other post-retirement benefits continued
Changes in the fair value of plan assets are analysed as follows:

At 1 April
Expected return on plan assets
Actuarial gain on plan assets
Contributions by employer
Contributions by plan participants
Benefits paid

At 31 March

31.3.2011
£m

31.3.2010
£m

663.4
45.5
10.7
24.8
0.1
(31.2)

713.3

478.6
31.6
177.4
4.2
0.1
(28.5)

663.4

The Group through its subsidiary, AquaGib, also operates a non-contributory defined benefit scheme. The deficit
at 31 March 2011, under local GAAP, was £2.1 million (2010: £2.8 million). The Group made contributions
amounting to £1.0 million (2010: £0.8 million) to the defined benefit pension scheme.

Sensitivity to key assumptions
IAS 1 requires disclosure of the sensitivity of the results to the methods and assumptions used.

The costs of a pension arrangement require estimates regarding future experience. The financial assumptions
used for IAS 19 reporting are the responsibility of the directors of the Company. These assumptions reflect market
conditions at the balance sheet date. Changes in market conditions which result in changes in the net discount
rate (essentially the difference between the discount rate and the assumed rates of increases of salaries, deferred
pension revaluation or pensions in payment), can have a significant effect on the value of the liabilities reported.

A reduction in the net discount rate will increase the assessed value of liabilities, as a higher value is placed on
benefits paid in the future. A rise in the net discount rate will have an opposite effect of similar magnitude. The
overall effect of a change in the net discount rate of 0.1% would change the liabilities by around £14.8 million.

There is also uncertainty around life expectancy for the UK population. The value of current and future pension
benefits will depend on how long they are assumed to be in payment.

The disclosures have been prepared using the mortality assumptions adopted for the 2007 formal valuation –
namely the PCMA/PCFA00 tables, applying a medium cohort adjustment with a 115% loading to mortality rates
based on the year of birth of the membership. These assumptions imply an assumed life expectancy for a member
aged 65 at 31 March 2011 of 20.7 years (2010: 20.7 years) for males and 23.0 years (2010: 23.0 years) for females.

The effect of increasing the assumed life expectancies by one year would be to increase the value of liabilities by
around 2.8%.

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25. Long Term Incentive Plan
Under the LTIP, executive directors and senior managers may receive, at the discretion of the Remuneration
Committee, annual conditional awards of shares in the Company. Further details of the LTIP can be found in the
directors’ remuneration report.

The following table illustrates the movements in conditional share awards during the year.

Outstanding at 1 April
Granted during the year
Forfeited/lapsed during the year
Exercised

Outstanding at 31 March

Exercisable at 31 March

31.3.2011
Number

31.3.2010
Number

1,242,293
378,503
(351,299)
(148,556)

1,190,034
414,679
(238,686)
(123,734)

1,120,941

1,242,293

4,649

4,724

The weighted average exercise price throughout the year was £nil (2010: £nil). The fair value of conditional share
awards granted during the year was £nil (2010: £0.1 million).

The weighted average share price at the date of exercise for the conditional share awards is 324.79 pence
(2010: 268.71 pence).

For the conditional awards outstanding as at 31 March 2011, the weighted average remaining contractual life is
1.7 years (2010: 1.8 years).

The fair value of conditional share awards granted was estimated using the Monte-Carlo model. The significant
inputs to the model were as follows:

31.3.2011

31.3.2010

Dividend yield
Expected share price volatility
Share price at award
Expected FTSE 250 Index volatility
Risk free interest rate
Expected life of option (years)

4.0%
28%

4.7%
29%
328.70p 272.50p
24%
2.1%
3

21%
1.5%
3

The expected life of these options is based on historical data and is not necessarily indicative of exercise patterns
that may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future
trends, which may also not necessarily be the actual outcome.

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Notes to the consolidated financial statements
continued

25. Long Term Incentive Plan continued
Share Incentive Plan
The SIP scheme provides one free matching share for every three shares purchased by an employee. Shares for
the SIP are purchased at market price by the Trustee and dividends are paid in cash directly to participants.

The following table illustrates the movements in conditional share awards during the year.

Outstanding at 1 April
Granted during the year
Forfeited during the year
Exercised

Outstanding at 31 March

31.3.2011
Number

31.3.2010
Number

143,201 117,687
115,519 134,397
(1,805)
(95,155) (107,078)

(3,383)

160,182 143,201

26. Special purpose entities
As noted under accounting policy 1(b), under SIC 12, two companies are consolidated as special purpose entities.
The principal special purpose entity is Bakethin Holdings Limited, the shares in which are owned by Bakethin
Charitable Trust. The other special purpose entity is Bakethin Finance plc, which is a wholly owned subsidiary of
Bakethin Holdings Limited.

Bakethin Finance plc was established for the purpose of issuing guaranteed secured Eurobonds. On 12 May 2004,
Bakethin Finance plc issued £248.0 million of guaranteed secured bonds maturing January 2034. Bakethin
Finance plc used the proceeds of the bond issue to make a loan to Reiver Finance Limited to fund the
consideration given by that company to Northumbrian Water Limited for the securitisation of the cash flows
receivable from the EA under the Water Resources Operating Agreement relating to Kielder Water transfer
scheme. The assignment is for a period of 30 years.

The summarised combined financial statements of the special purpose entities are as follows:

Income statement:
Finance costs receivable
Finance costs payable

Balance sheet:
Investments
Current assets
Non-current liabilities
Current liabilities

Net assets

31.3.2011
£m

31.3.2010
£m

14.9
(14.9)

241.4
4.7
(243.2)
(2.7)

241.0
4.7
(242.9)
(2.7)

0.2

0.1

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27. Related parties
During the year, the Group entered into transactions, in the ordinary course of business, with other related parties.
Transactions entered into and trading balances outstanding at 31 March between the Group and its associates
and joint ventures, are as follows:

Trading transactions

Related party:
Jointly controlled entities
2011
2010

Sales to
related party
£m

Purchases
from related
party
£m

Amounts
owed by
related party
£m

Amounts
owed to
related party
£m

0.1
0.1

9.6
10.2

0.6
0.5

8.2
8.7

Purchases from jointly controlled entities include £2.5 million (2010: £3.3 million) in respect of capital purchases
under finance leases, £0.1 million (2010: £0.1 million) in respect of operating leases, £6.3 million (2010: £6.2 million)
in respect of costs payable under finance leases and £0.7 million (2010: £0.6 million) in respect of other purchases.

At 31 March 2011, the Group had a short term cash deposit with the Northumbrian Water Pension Scheme of
£nil (2010: £14.7 million).

Outstanding balances due from related parties are expected to be settled within 60 days and amounts due to
related parties are in respect of leasing arrangements, where the amounts owed will relate specifically to the terms
of the lease.

Remuneration of key management personnel
The remuneration of the directors is included within the amounts disclosed below. Further information about the
remuneration of individual directors is provided in the audited part of the directors’ remuneration report on pages
80 to 84.

Short term employee benefits
Post employment benefits
Share based payments

31.3.2011
£m

31.3.2010
£m

1.4
0.2
0.5

2.1

1.2
0.2
0.2

1.6

28. Post balance sheet event
On 14 April 2011, the Group borrowed £100.0 million through a US private placement facility with a 10 year
maturity at a coupon of 5.82%. On the same date, two £62.5 million loans to Northumbrian Services Limited,
maturing in May 2011, were repaid.

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Statement of directors’ responsibilities in relation
to the parent Company financial statements

The directors are responsible for preparing the annual report and the financial statements in accordance with
applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the
directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards and applicable law). Under Company Law, the
directors must not approve the financial statements unless they are satisfied that they give a true and fair view of
the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing those
financial statements, the directors are required to:
−
−
−

select suitable accounting policies and then apply them consistently;
make judgements and estimates that are reasonable and prudent;
state whether applicable United Kingdom Accounting Standards have been followed, subject to any material
departures disclosed and explained in the financial statements; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the
Company will continue in business.

−

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the
Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company
and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also
responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.

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Report of the auditors on the
Company financial statements

Independent auditors’ report to the members of Northumbrian Water Group plc
We have audited the parent Company financial statements of Northumbrian Water Group plc for the year ended
31 March 2011 which comprise the parent Company balance sheet and the related notes 1 to 10. The financial
reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting
Standards (United Kingdom Generally Accepted Accounting Practice).

This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members
those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than the Company and the
Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors
As explained more fully in the Statement of directors’ responsibilities set out on page 132, the directors are
responsible for the preparation of the parent Company financial statements and for being satisfied that they give
a true and fair view. Our responsibility is to audit the parent Company financial statements in accordance with
applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply
with the Auditing Practices Board’s Ethical Standards for Auditors.

Opinion on financial statements
In our opinion the parent Company financial statements:
−
−
−

give a true and fair view of the state of the Company’s affairs as at 31 March 2011;
have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
−

the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the
Companies Act 2006; and
the information given in the Directors’ report and business review for the financial year for which the financial
statements are prepared is consistent with the parent Company financial statements.

−

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Report of the auditors on the
Company financial statements
continued

Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report
to you if, in our opinion:
−

adequate accounting records have not been kept by the parent Company, or returns adequate for our audit
have not been received from branches not visited by us;
the parent Company financial statements and the part of the Directors’ remuneration report to be audited are
not in agreement with the accounting records and returns;
certain disclosures of directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.

−

−
−

Other matters
We have reported separately on the Group financial statements of Northumbrian Water Group plc for the year
ended 31 March 2011.

Debbie O’Hanlon (Senior statutory auditor)
For and on behalf of Ernst & Young LLP
Statutory Auditor
Newcastle upon Tyne
31 May 2011

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Company balance sheet
As at 31 March 2011

Fixed assets
Investments in subsidiary undertakings

Current assets
Debtors: receivable within one year
Cash at bank

Creditors: amounts falling due within one year

Net current (liabilities)/assets

Total assets less current liabilities
Creditors: amounts falling due after more than one year

Net assets

Capital and reserves
Called up share capital
Share premium account
Treasury shares
Profit and loss account

Equity shareholders’ funds

Approved by the Board on 31 May 2011 and signed on its behalf by:

Sir Derek Wanless
Chairman

Heidi Mottram
Chief Executive Officer

Notes

31.3.2011
£m

31.3.2010
£m

4 1,101.4 1,022.6

1,101.4 1,022.6

3.5
59.1

62.6
(93.2)

(30.6)

4.3
12.0

16.3
(2.8)

13.5

1,070.8 1,036.1
(491.9)

(490.0)

580.8

544.2

51.9
446.5
(1.7)
84.1

580.8

51.9
446.5
(2.0)
47.8

544.2

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Notes to the Company financial statements

1. Accounting policies
(a) Basis of accounting
The financial statements have been prepared in accordance with applicable United Kingdom law and accounting
standards. The accounting policies have been reviewed in accordance with the requirements of FRS 18: Accounting
Policies. The directors consider the following accounting policies to be relevant in relation to the Company’s financial
statements. The Company’s financial statements are included in the consolidated financial statements of
Northumbrian Water Group plc. Accordingly, the Company has taken advantage of the exemption from publishing
a profit and loss account and cash flow statement and from disclosing related party transactions with its wholly-
owned subsidiaries. The Company is also exempt from disclosing the information otherwise required by FRS 29
Financial Instruments: Disclosures, as the consolidated financial statements, in which the Company is included,
provide equivalent disclosures for the Group under IFRS 7 Financial Instruments: Disclosures.

The financial statements have been prepared on a going concern basis which assumes that the Company will
have adequate funding to meet its liabilities as they fall due in the foreseeable future. As at 31 March 2011 the
Company had net current liabilities of £30.6 million (2010: net current assets of £13.5 million). The directors have
reviewed cash flow requirements and are confident that they will be able to meet these from funds available.
Accordingly, the directors believe it is appropriate to prepare the financial statements on a going concern basis.

(b) Fixed asset investments
Fixed asset investments are stated at their purchase cost, less any provision for impairment.

(c) Taxation
Corporation tax is based on the profit for the year as adjusted for taxation purposes using the rates of tax enacted
at the balance sheet date. Provision is made for deferred tax in respect of all timing differences that have originated
but not reversed at the balance sheet date that will result in an obligation to pay more, or a right to pay less, tax in
future periods. Deferred tax is calculated at the tax rates that are expected to apply in the periods in which timing
differences are expected to reverse, based on tax rates and laws enacted or substantively enacted at the balance
sheet date. Deferred tax assets are recognised only to the extent that the directors consider that it is more likely
than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences
can be deducted.

(d) Interest bearing loans and borrowings
All loans and borrowings are initially stated at the amount of the net proceeds, being fair value of the consideration
received net of issue costs associated with the borrowing. Finance costs (including issue costs) are taken to the
income statement over the term of the debt at a constant rate on the balance sheet carrying amount. The carrying
amount is increased by the finance charges amortised and reduced by payments made in respect of the
accounting period.

2. Auditors’ remuneration
Auditors’ remuneration for the year ended 31 March 2011 was £97,000 (2010: £95,000).

Fees paid to Ernst & Young LLP for non-audit services to the Company itself are not disclosed in the individual
financial statements of the Company because Group financial statements are prepared which are required to
disclose such fees on a consolidated basis.

3. Profit attributable to members of the parent Company
The profit dealt with in the financial statements of the parent Company is £106.9 million (2010: £67.7 million).

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4. Investments in subsidiary undertakings

At 1 April 2010
Additions

At 31 March 2011

£m

1,022.6
78.8

1,101.4

Additions in the year represent the acquisition of shares in a subsidiary company, Atlantic Water Ltd., from a
subsidiary company, Three Rivers Finance Ltd.

During the year, the Company increased its shareholding in both Caledonian Environmental Services plc and
Caledonian Environmental Levenmouth Treatment Services Limited from 75% to 100% at a nominal cost.

Name of undertaking

Country of incorporation or
registration and operation

Description of shares held

Proportion
of nominal
value of issued
shares held by
Group (%)

Business activity

Northumbrian Services

England and Wales

Ordinary shares of £1 100

Holding of investments and

Limited

loans

Northumbrian Water

England and Wales

Ordinary shares of £1 100

Water and sewerage services

Limited

Northumbrian Water

England and Wales

Ordinary shares of £1 100

Holding of finance

Finance plc

instruments

Caledonian Environmental

Scotland

Ordinary shares of £1 100

Waste water services

Services plc

Caledonian Environmental
Levenmouth Treatment
Services Limited

Scotland

Ordinary shares of £1 100

Waste water services

Ayr Environmental Services

Scotland

Ordinary shares of £1

Waste water services

Limited

Ayr Environmental Services

Scotland

Ordinary shares of £1 100

Waste water services

Operations Limited

AquaGib Limited
Northumbrian Water

Projects Limited

SA Agrer NV

Gibraltar
England and Wales

Ordinary shares of £1
67
Ordinary shares of £1 100

Water and sewerage services
Waste water services

Belgium

Ordinary shares of £1 100

Aid funded project work

5. Debtors

Amounts owed by subsidiary undertakings
Other

31.3.2011
£m

31.3.2010
£m

3.3
0.2

3.5

4.0
0.3

4.3

Amounts owed by subsidiary undertakings include amounts receivable for the provisional surrender of tax losses
amounting to £1.6 million (2010: £2.3 million).

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Notes to the Company financial statements
continued

6. Creditors: amounts falling due within one year

Trade creditors
Amounts owed to subsidiary undertakings
Accruals and deferred income

7. Creditors: amounts falling due after more than one year

Amounts owed to subsidiary undertakings

Loans are repayable as follows:
Not wholly repayable within five years

31.3.2011
£m

31.3.2010
£m

0.1
93.0
0.1

93.2

–
2.6
0.2

2.8

31.3.2011
£m

31.3.2010
£m

490.0

491.9

31.3.2011
£m

31.3.2010
£m

490.0

491.9

The loan bears a rate of interest linked to LIBOR. The loan will continue until such time as terminated by
mutual agreement.

8. Authorised and issued share capital

Authorised:
700 million ordinary shares of 10 pence
Allotted, called up and fully paid:
518.6 million ordinary shares of 10 pence

31.3.2011
£m

31.3.2010
£m

70.0

51.9

70.0

51.9

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9. Reserves

At 1 April 2009
Profit for the year
Share-based payment
Exercise of LTIP awards
Dividends paid

At 31 March 2010
Profit for the year
Exercise of LTIP awards
Dividends paid

At 31 March 2011

Treasury
shares
£m

(2.3)
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–

(2.0)
–
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–

(1.7)

Share
premium
account
£m

446.5
–
–
–
–

446.5
–
–
–

446.5

Profit and
loss account
£m

47.0
67.7
0.1
(0.3)
(66.7)

47.8
106.9
(0.3)
(70.3)

84.1

10. Commitments
The Company has issued letters of continuing support to subsidiary companies with net liabilities amounting to
£11.9 million (2010: £8.3 million) and net current liabilities of £nil (2010: £nil). These subsidiary companies are
expected to meet their working capital requirements from operating cash flows.

The Company is guarantor to the EIB in respect of borrowings by Northumbrian Water Limited. The loan principal
outstanding at 31 March 2011 amounted to £344.7 million (2010: £362.4 million).

The Company is party to a cross guarantee arrangement with other Group companies in respect of bank
facilities. Overdrafts outstanding at 31 March 2011 in respect of the arrangement amounted to £27.2 million
(2010: £0.9 million). The directors do not expect any loss to arise as a result of this arrangement.

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Shareholder information

Financial calendar
2011
July

AGM

Interim Management Statement

Ex-dividend date

Record date

28 July

August

10 August

12 August

September

09 September Final dividend payment

November

30 November Half-yearly announcement

December

14 December

Ex-dividend date

16 December Record date

2012
January

27 January

Interim dividend payment

Share portal (www.capitashareportal.com)
You can manage your shareholding
online, through the website of our
registrar, Capita Registrars, by
registering for the share portal.
This provides free, secure, online
access to your shareholding.
Facilities include:

Electronic communications
This allows you to register your email address to enable
you to receive shareholder communications such as
annual reports via the internet rather than by post.

Account enquiry
You can access your personal shareholding, including
share transaction history, dividend payment history
and to obtain an up-to-date shareholding valuation.

Amendment of standing data
This allows you to change your registered postal
address and add, change or delete dividend
mandate instructions.

You can also download from this site forms such
as change of address, stock transfer and dividend
mandates and buy and sell shares in the Company.

To use any of these facilities, please log on to Capita
Registrars’ website at www.capitashareportal.com.

If you have any queries about the above facilities,
please contact the Capita share portal helpline on
0871 664 0391 (calls cost 10 pence per minute plus
network extras) overseas +44 (0)20 8639 3367, or
by email at shareportal@capita.co.uk.

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Capita share dealing services
Capita Registrars provides a low cost share
dealing service. Further information is available at
www.capitadeal.com, or by telephoning 0871 664 0445
(calls cost up to 10 pence per minute plus network
extras). This enables you to deal in the shares of the
Company and other companies for which Capita acts
as registrar, provided you are already a shareholder in
the relevant company, and it offers the share deal
facility to its shareholders.

International payment services
Capita Registrars has partnered with Travelex, the
world’s largest specialist provider of commercial
international payment services, to provide a service
that will convert your sterling dividends into your local
currency at a competitive rate. They can either arrange
for these funds to be sent to you by currency draft or
can pay them direct into your bank account. For further
information telephone +44 (0)20 8639 3405 (from
outside the UK) or 0871 664 0385 (from within the UK)
between 9.00am and 5.30pm in the UK. Calls cost
10 pence per minute plus network extras.

Shareholder analysis

Number of shareholders by size of holding
as at 31 March 2011

2 1

Shareholders with 1–1,000 shares
Shareholders with 1,001–5,000 shares
Shareholders with 5,001–10,000
shares
Shareholders with 10,001–100,000
shares
Shareholders with 100,001–1,000,000
shares
Shareholders with over 1,000,000
shares

Breakdown of shareholdings by type
as at 31 March 2011

ShareGift
You may donate your shares to charity free of
charge through ShareGift. Further details are
available at www.sharegift.org.uk or by telephoning
+44 (0)20 7930 3737.

Individuals
Ontario Teachers’ Pension Plan Board
Nominee accounts
Investment trusts, pensions funds and
other institutions
Banks and bank nominees

Dividend re-investment plan
The Company receives occasional requests from
shareholders wishing to receive their dividends in the
form of shares instead of cash. There are costs involved
in providing this service, and at present it would not be
cost effective. This issue is kept under regular review.

Beneficial owners of shares with
‘information rights’
Please note that beneficial owners of shares who have
been nominated by the registered holder of those
shares to receive information rights under section 146
of the Companies Act 2006 are required to direct all
communications to the registered holder of their shares
rather than to the Company’s registrar, Capita
Registrars, or the Company.

Disability Discrimination Act
If you wish to receive a copy of our report on audio
tape, in braille or in a large text version, please
telephone us on +44 (0)191 301 6701, or email us
at shareholders@nwl.co.uk.

For general queries about your shares, please
contact Capita Registrars:
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Tel: 0871 664 0300 (calls cost 10 pence per minute plus
network extras)
From overseas: +44 (0)20 8639 3399
Fax: +44 (0)1484 600 911
Email: ssd@capitaregistrars.com
Web: www.capitaregistrars.com

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Shareholder information
continued

For general shareholder queries please contact
Secretariat:
Tel: +44 (0)191 301 6701
Fax: +44 (0)191 301 6705
Email: shareholders@nwl.co.uk

If you deal with an unauthorised firm, you will not be
eligible to receive payment under the Financial Services
Compensation Scheme. The FSA can be contacted by
completing an online form at http://www.fsa.gov.uk/
Pages/Doing/Regulated/Law/Alerts/form.sthml.

To request financial statements and other
Company literature please contact
Communications:
Tel: +44 (0)191 301 6734
Email: shareholders@nwl.co.uk

Annual General Meeting
The Notice of Meeting, information about the AGM to
be held on 28 July 2011 and the proxy voting card are
enclosed with these financial statements. Shareholder
questions and special needs requests should be
addressed to Secretariat at our registered office
address, raised by telephone on +44 (0)191 301 6701,
or sent by email to shareholders@nwl.co.uk.

Warning to shareholders – boiler room scams
In recent years, many companies have become aware
that their shareholders have received unsolicited phone
calls or correspondence concerning investment
matters. These are typically from overseas based
‘brokers’ who target UK shareholders, offering to sell
them what often turn out to be worthless or high risk
shares in US or UK investments. These operations are
commonly known as ‘boiler rooms’. These ‘brokers’ can
be very persistent and extremely persuasive, and a
2006 survey by the Financial Services Authority (FSA)
has reported that the average amount lost by investors
is around £20,000.

It is not just the novice investor that has been duped
in this way; many of the victims had been successfully
investing for several years. Shareholders are advised
to be very wary of any unsolicited advice, offers to buy
shares at a discount or offers of free company reports.
If you receive any unsolicited investment advice:
−

make sure you get the correct name of the person
and organisation;
check that they are properly authorised by the FSA
before getting involved by visiting www.fsa.gov.uk/
register/ and contacting the firm using the details
on the register;
report the matter to the FSA either by calling 0845
606 1234 or visiting www.fsa.gov.uk/pages/
consumerinformation; and
if the calls persist, hang up.

−

Details of any share dealing facilities that the Company
endorses will be included in company mailings.

More detailed information on this or similar activity
can be found on our Consumer Information section
at www.fsa.gov.uk/pages/consumerinformation.

General Counsel and Company Secretary
Martin Parker

Registered office
Northumbrian Water Group plc
Northumbria House
Abbey Road
Pity Me
Durham, DH1 5FJ
Tel: 0845 604 7468

Group websites
www.nwg.co.uk
www.nwl.co.uk
www.eswater.co.uk
www.nw-ss.co.uk
www.nwpropertysolutions.co.uk
www.visitkielder.com
www.agrer.com

Northumbrian Water main switchboard
Tel: 0845 604 7468

Northumbrian Water customer queries
Customer services: 0845 717 1100
Customer accounts: 0845 733 5566

Essex & Suffolk Water customer queries
Customer services: 0845 782 0999
Customer accounts: 0845 782 0111

Notes

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Notes

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This annual report has been printed using vegetable
based inks on uncoated recycled paper stock. All
paper stock used for the production of this annual
report is environmentally-friendly ECF (elemental
chlorine free) wood free paper and board with a high
content of selected pre-consumer recycled material
and post-consumer reclaimed material. This product
is completely bio-degradable and recyclable.

www.nwg.co.uk

Northumbrian Water Group plcNorthumbria HouseAbbey RoadPity MeDurham DH1 5FJTel: 0845 604 7468Fax: 0191 301 6202Registered in England & WalesRegistered number 4760441