NORTHUMBRIAN WATER GROUP LIMITED
ANNUAL REPORT AND FINANCIAL STATEMENTS FOR
THE YEAR ENDED
31 MARCH 2012
Registered Number 4760441
Contents
Directors’ report
Business overview
Business strategy and objectives
Performance measures
Financial performance
Operating performance
Corporate governance
Risks and uncertainties
Statutory disclosures
Appendix to the directors’ report
Financial statements
Statement of directors’ responsibilities in relation to the Group financial statements
Independent auditor’s report to the members of Northumbrian Water Group Limited
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated statement of changes in equity
Consolidated balance sheet
Consolidated cash flow statement
Notes to the consolidated financial statements
Statement of directors’ responsibilities in relation to the parent Company financial statements
Company balance sheet
Notes to the Company financial statements
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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.
Directors’ report
The directors of Northumbrian Water Group Limited (NWG or the Company) are pleased to present
their report on the affairs of the Company, along with the audited financial statements and the
auditor’s report for the year ended 31 March 2012.
Business Overview
Change of controlling party
On 14 October 2011, Northumbrian Water Group plc was acquired by UK Water (2011) Limited
(UKW), its shares were de-listed from the London Stock Exchange and it was re-registered as a
private limited company. UKW is indirectly wholly owned by a consortium comprising Cheung Kong
Infrastructure Holdings Limited, Cheung Kong (Holdings) Limited and Li Ka Shing Foundation
Limited.
Directors
The directors who served during the year were as follows:
A J Hunter
H Mottram OBE
C M Green
M Fay CBE
Dr S Lyster
L S Chan
F R Frame
T C E Ip
H L Kam
S H Luk
D N Macrae
M A B Nègre
P F Rew
Sir D Wanless
A J Scott-Barrett
Sir A P Brown
C R Lamoureux
Non-Executive Chairman (appointed 14/10/11)
Chief Executive Officer
Finance Director
Independent Non-Executive Director
Independent Non-Executive Director (appointed 1/4/11)
Alternate Director (appointed 14/10/11)
Non-Executive Director (appointed 4/11/11)
Non-Executive Director (appointed 14/10/11)
Non-Executive Director (appointed 14/10/11)
Alternate Director (appointed 14/10/11)
Non-Executive Director (appointed 14/10/11)
Non-Executive Director
Independent Non-Executive Director
Non-Executive Chairman (resigned 14/10/11)
Independent Non-Executive Director (resigned 14/10/11)
Non-Executive Director (resigned 20/10/11)
Non-Executive Director (resigned 28/7/11)
The Board is very sorry to report the untimely death of Sir Derek Wanless, who died on 22 May 2012,
after a short illness. Sir Derek joined the board of NWG in December 2003 and chaired its board
between July 2006 and October 2011. The Board wishes to express its thanks for Sir Derek’s
tremendous contribution during a time of significant change.
Principal Activities
Northumbrian Water Group
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
1
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
NWL operates an extensive asset base, which includes:
44
57
344
338
25,545km water mains
418
765
29,724km sewers, including the transfer of 13,510km of private drains and sewers on 1 October
sewage treatment works
sewage pumping stations
2011
NWL currently supplies over 1,150 megalitres of drinking quality 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 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.
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.
Our market
In the north east, NWL’s business comprises the supply of both potable and raw water and the
collection, treatment and disposal of sewage and sewage sludge. In this region, there has been a
gradual fall in overall water demand in recent decades as a consequence of a reduction in industrial
demand for water and this trend is expected to continue. 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 (AAD)
plant there is now operating effectively and helping us to build our use of renewable energy. A
second AAD plant at Howdon in Tyneside will come into operation in 2012.
In the south east, NWL supplies potable water only. This is a water scarce region that is forecast to
experience further economic and population growth in the medium term. This area has also seen a
reduction in demand from heavy industry, but there has been an increase in population with further
increases forecast. Supplies are currently not secure in a severe drought but the project to increase
the capacity of Abberton reservoir, near Colchester, coupled with ongoing demand management
2
measures, will secure supplies to the Essex area for the foreseeable future. The Abberton scheme
will be complete in 2013 and the additional capacity available for supply the following year.
Our water and sewerage services in the north east will cost, in 2012/13 prices, an average
householder 96 pence per day and, in Essex and Suffolk, 60 pence for water only.
The Water Services Regulation Authority (Ofwat), as the economic regulator, sets price limits for
companies in England and Wales every five years. 2011/12 was the second 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 NWL 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:
k (%)
2010/11 2011/12 2012/13 2013/14 2014/15
0.9
(1.0)
5.0
3.8
0.0
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 Environment Agency (EA) covers environmental protection.
Customers’ interests are represented by the Consumer Council for Water (CCWater).
We aim to maintain good working relationships with our regulators and with regional organisations,
such as local authorities, which have an interest in the services we provide and can influence our
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
during the period.
We are an active member of Water UK, the industry association which represents all UK water and
waste water service suppliers at national and European level. It provides a very effective framework
for the industry to engage with Government, regulators, stakeholder organisations and the public and
helps to develop policy and improve understanding of the industry. We also meet regularly with
national, regional and local authorities and other appropriate organisations to explain our activities
and related issues.
2011/12 Review
NWL was successful in meeting many of the targets in its detailed balanced scorecard during the
year. We improved in 26 of our 28 targets and achieved or exceeded 19 of them. Most notable were
the improvements in our Service Incentive Mechanism (SIM) score for customer service, the
reduction in the number of interruptions to supply and our position on leakage. We were also very
pleased to remain amongst the industry leaders in sewage treatment performance.
This report will focus on many highlights throughout the year but the development of our work to
extend Abberton reservoir and the construction of our second AAD plant at Howdon, after the
successful operation at Bran Sands, are particularly notable.
We also continued to receive external recognition for our activities. For the second year running, the
Ethisphere Institute listed NWG as one of the most ethical companies in the world, one of only seven
3
UK only companies chosen and the only water utility selected worldwide. This recognises the impact
we have on underpinning the communities in which we operate and also recognises the 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. Our Chief Executive Officer (CEO), Heidi
Mottram, is involved in a number of organisations which we believe can influence the future of the
Company and locally, she is Deputy Chair of the CBI Council and a member of its national
Infrastructure Board. Heidi has also joined the Government’s Green Economy Council as the water
industry representative and we 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 deteriorated, with some prolonged shutdowns as a result of the
economic situation and lower volumes at many of our smaller commercial customers. Domestic
demand has also started to reduce in some areas, as customers have become aware of the
restrictions in other parts of the country and the importance of using water wisely. We continue to
monitor the situation and work closely with our key industrial customers. The collection of income
remains a key focus for us, particularly in a difficult economic climate.
Transferred drains and sewers
Water and sewerage companies were required to adopt certain drains and sewers on 1 October
2011, which were previously in private ownership. For NWL, the estimated length of adopted assets
is 13,510km, nearly doubling the length of sewers to be operated and maintained. Whilst the transfer
took place smoothly, this generated a major increase in activity for the business which, in turn,
increased operating costs. Although customer contact and job volumes were initially lower than
anticipated, they have been gradually increasing month on month. Positive feedback has been
received from our customers via our customer feedback surveys. We are continuing to work closely
with other water companies to share information and experiences to ensure we deliver the most
practical and cost effective solutions for customers. The transfer was valued at a nil fair value, as the
net present value of the incremental cash flows arising as a result of the adoption were considered
insignificant.
Legislative changes
We broadly support the Government’s policy intention for the water industry, as laid out in the Water
White Paper – ‘Water for life’. We welcome the desire to build on the strengths of the current industry
structure and strongly agree that a stable business and regulatory environment is vital if investor
confidence is to be retained, so that the investment required over the coming decades can continue
to be financed at a cost our customers can afford.
NWL is very keen to work closely with Defra and the industry regulators to ensure the Government’s
policies are implemented successfully.
We are pleased to have had the opportunity to contribute to the consultation on draft regulation from
Defra to introduce a duty on landlords to provide water companies with relevant details so that
accurate bills can be issued to tenants. Applying section 45 of the Flood and Water Management Act
2010 should assist in collecting income from the private rented sector where bad debts have been
relatively high.
Regulatory reform
NWL strongly supports Ofwat’s newly introduced proportionate and risk-based approach to
regulation. The decision to end the requirement for water companies to submit a lengthy annual
report to Ofwat (the ‘June Return’), and replace this with a Regulatory Risk and Compliance
4
Statement (RRCS) and a set of high level key performance indicators (KPIs), will significantly reduce
the burden of regulatory reporting whilst enhancing companies’ accountability.
This set of high level KPIs was published along with the RRCS on the NWL’s website. To deliver the
Company’s vision of being ‘the national leader in water and waste water services’, we have
incorporated these targets within our own internal targets.
Ofwat has recently published its ‘Future price limits - statement of principles’ document setting out the
high level principles it intends to use to set price limits in the future. We welcome the six key
principles: targeted price controls; proportionate price setting; effective incentives; ownership,
accountability and innovation; flexibility and responsiveness; transparency and predictability.
Establishing these principles should help to provide stable and predictable regulation in the longer
term.
NWL particularly welcomes the continued commitment to the Regulatory Capital Value for the long
term and confirmation that RPI remains the most appropriate index to use for tariff setting and
strongly supports the focus on outcome based regulation and the increased role for customers at
price reviews. We support the introduction of separate wholesale and retail price controls in line with
the White Paper.
Some of Ofwat's more detailed proposals, including a water service network plus non-binding price
control, require further justification. The additional incentive mechanisms proposed, including the
totex mechanism, add substantial complexity and a lot of work is required to develop these concepts
into a workable methodology. We have signalled our willingness to work constructively with Ofwat
and offer any assistance we can in developing a practical and robust price review methodology that
will deliver the right outcome for customers.
5
Business Strategy and Objectives
Our vision
The Group’s vision is to be the national leader in the provision of sustainable water and waste water
services.
Strategic direction
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. ‘Our Vision Our Values Our Way’ has been shared with all our employees during a series
of annual interactive roadshows and, as a result, there is clarity and energy throughout the Group
which is driving the business forward.
The five themes described below are mutually supportive and achieving the right balance between
them is essential to our success and reputation.
focuses on delivering
Customer
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 activities.
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.
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 activities.
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 KPIs. This is reviewed by the Board,
management team and employees on a monthly basis.
We 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’. We have made a clear commitment to five core values.
One team – we work together consistently, promoting co-operation, to achieve our corporate
objectives.
6
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.
Corporate Responsibility
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 Group 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 our customer research also highlights that customers value our work 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 Group, its community and its environment,
such as cost saving, carbon reduction, environmental impact, skills development or leverage.
To ensure that sustainability runs throughout the business, we ensure that all parts of the Group are
involved from the Board through to all employees.
Up to the point of the change of control, governance of our sustainability activity was led by our
Corporate Responsibility Committee, a subcommittee of the NWL Board. From October 2011,
governance was led by our Corporate Responsibility Management Group (CRMG) a sub-committee
of the NWL Management Team. The CRMG will meet four times a year and non-executive directors
and the CEO (who is directly accountable to the NWL and NWG boards for both the environment and
sustainable development policies) will attend at least once to develop strategy and to inform the
Board.
In addition, two Corporate Responsibility Advisory Groups (CRAGs) (one for each of Northumbrian
and Essex & Suffolk regions) act as ‘critical friend’, helping to validate, guide and challenge NWL’s
sustainability strategy and activities. The CRAGs are made up of senior representatives from key
stakeholder organisations to reflect the main areas of our environment and communities’ strategy.
7
Performance measures
In order to measure delivery of our business plan and goals, the Group monitors performance using a
balanced scorecard of 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’.
Performance against additional financial KPIs is reported within the financial performance section
later in this report.
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 performance in 2011/12 against those KPIs and the targets that have been
set for 2012/13. Performance in 2011/12 is discussed within the operating performance section later
in this report. The definition of each measure is set out on pages 28 and 29.
Scorecard measure
Customer
Customer satisfaction
- SIM quantitative score
- SIM qualitative score
Unplanned interruptions >6 hours
- north
- south
- combined
Coliform incidents (no.)
Competitiveness 1
Profit before tax
Capital efficiency
Earnings before interest and tax
Cash available for distribution 1
People
Engagement and satisfaction index (%) 2
Employee engagement score 2
Lost time reportable accidents (no.)
Environment
Leakage (Mld)
- north
- south
Sewage treatment works compliance (%)
Pollution incidents (categories 1 & 2)
Communities
FTSE4Good accreditation 3
BITC Platinum Plus accreditation
Just an Hour participation (%) 3
Target
2011/12
Performance
2011/12
Target
2012/13
174
4.40
900
600
n/a
15
162
4.33
445
161
n/a
21
115
4.50
n/a
n/a
1,500
7
set by Board
set by Board
n/a
n/a
achieved
removed
n/a
n/a
n/a
n/a
set by Board
set by Board
81
n/a
11
147
66
100
3
78
n/a
8
130
59
99.4
11
n/a
1* best
companies
10
147
66
100
3
retain status
retain status
n/a
n/a
retained
n/a
n/a
retain status
50
1 The competitiveness KPIs have been revised to take account of the new owners’ objectives. During the year, the
capital efficiency target was removed.
2 The engagement and satisfaction index is derived from an internal employee survey. The employee engagement
score is derived from the Sunday Times Best Companies survey. These surveys are carried out in alternate years.
3 FTSE4Good accreditation is no longer possible due to the Group’s de-listing, therefore, it has been replaced by a new
KPI of ‘Just an Hour participation’.
8
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 of each measure is shown on page
29.
Performance against the financial KPIs is set out below:
KPI
Gearing to RCV (%)
Cash interest cover (times)
Cash flow to net debt (%)
Target
NWG
NWL
<75
>2.5
>13
<701
>3.0
>13
Performance
Current year
NWG
NWL
74
3.3
15
64 2
4.2
18
Previous year
NWG
restated
68
3.2
16
NWL
56
4
20
Notes:
1. Less than 65% for the regulated business of NWL.
2. NWL’s RCV, as advised by Ofwat, at 31 March 2012 was £3,550.0 million (2011: £3,318.4 million).
The basis of the Group gearing to RCV ratio has been revised to reflect net debt, excluding the fair
value of loans acquired in 2003, divided by NWL’s RCV, because the directors believe this is a better
measure of the Group’s credit risk. The prior year measure has been restated on a consistent basis.
The Group’s gearing on the revised basis has increased from 68% to 74%, with net debt increasing
by £352.9 million (15.6%) to £2,651.5 million over the year, while RCV has increased by 7.0% due
principally to the increase in RPI.
Gearing at NWL, and for the regulated business, has increased to 64% and 63%, respectively, from
56%. This is principally due to increased net debt as a result of the payment of intra-Group dividends
after the previous balance sheet date and a special dividend of £232.0m which was paid during the
year, following the change of control.
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
NWG
Revenue for the year ended 31 March 2012 increased by 7.0% to £789.5 million (2011: £738.1
million). Water and sewerage charges at the Group’s principal subsidiary, NWL, increased in line
with the price review (final determination) allowance of 3.8% plus the November 2010 RPI of 4.7%.
Income from the Group’s water and waste water contracts increased by 5.3%.
Operating costs increased by £24.6 million (5.7%) to £458.5 million, principally reflecting movements
at NWL, which are detailed below. Profit on ordinary activities before interest for the year was £331.0
million (2011: £304.2 million), an increase of 8.8%.
Net interest charges increased by £14.0 million within which net cash interest charges increased by
£12.0 million. The non-cash element of the increase principally reflects inflation of the principal on
9
the index linked bonds (£1.9 million) and the non-recurrence of one-off credits in the prior year
relating to the acquisition of subordinated loan stock in CES and a termination discount on a finance
lease (£7.5 million). There were partially offset by lower interest relating to the pension scheme (£5.8
million), higher capitalised interest (£1.3 million) and lower amortisation of fees and fair value
adjustments (£0.3 million).
Profit on ordinary activities before tax for the year was £193.9 million, 7.1% higher than the previous
year (2011: £181.0 million). The current tax charge reduced to £30.8 million (2011: £33.1 million)
reflecting a reduction in the tax rate from 28% to 26%.
The deferred tax credit of £23.3 million (2011: £30.5 million) reflects a decrease in the Group’s
deferred tax liability of £43.1 million following the enactment of a reduction in the UK corporation tax
rate from 26% to 24% with effect from 1 April 2012.
The effective tax rate for the period was 3.9% (2011: 1.4%) 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 26%.
Capital investment for the Group was £310.2 million (2011: £219.9 million), including recognition of
£23.0 million for assets adopted at £nil cash consideration, as required under IFRIC 18 Transfers of
Assets from Customers (2011: £13.9 million).
NWL
Revenue was £737.4 million for the year ended 31 March 2012 (2011: £689.4 million). The increase
is mainly due to the application of the final determination increase of 3.8%, and 4.7% in respect of
RPI, on water and sewerage charges, which has been partially offset by lower demand from industrial
customers.
Operating costs increased by £6.8 million (1.7%) to £398.6 million, principally reflecting increases in
depreciation, manpower costs and carbon reduction commitment charges, partially offset by lower
power commodity prices and the benefits of an efficiency programme.
Profit on ordinary activities before interest for the year was £338.8 million (2011: £297.6 million).
Capital investment in the regulated business for the period was £292.0 million, under regulatory
accounting guidelines (2011: £221.5 million). This is slightly higher than the final determination
profile, deflated by the Construction Industry Price Index, as a result of increased maintenance
investment recovering from severe winter weather experienced the previous year. The construction
works for the £150.0 million Abberton scheme, to secure water supply to 1.5 million customers in
Essex, continued to make good progress and the scheme is ahead of schedule.
The efficiency programme instigated in the previous year progressed well, focussing 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.
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 £42.1 million for the year ended
31 March 2012 (2011: £40.0 million), principally as a result of higher volumes in Gibraltar and
Ayrshire. Profit on ordinary activities before interest was £10.0 million (2011: £9.5 million), due to the
increased revenue partially offset by higher operating costs, particularly power.
10
The Group is involved in two projects to deliver long term PFI contracts with Scottish Water for waste
water treatment. At CES, the Group 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. In May 2011 the Group
commenced a new 20 year operation and maintenance contract for the Fermoy and Mallow waste
water treatment works, with Cork County Council.
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.
Dividends
A final dividend of 9.57 pence per share for the year ended 31 March 2011 was paid on 9 September
2011, prior to the de-listing of the Group. Following the change of control, a special dividend of 44.73
pence per share was paid reflecting the Group’s past outperformance. The directors recommend a
final dividend of £nil.
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. In addition, NWL paid
a special dividend reflecting past outperformance.
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 2012.
Capital structure and liquidity
In April 2011 the Group received the proceeds of a new £100.0 million US private placement with a
ten year maturity at a coupon of 5.82%. The receipts, plus existing cash reserves, were used to
refinance £125.0 million of intermediate holding company debt maturing in May 2011.
In June 2011 NWL agreed a new £150.0 million facility from the European Investment Bank (EIB)
and the first £50.0 million tranche was drawn on a variable rate basis in November 2011. The
remainder of the facility will be drawn in two further £50.0 million tranches in 2012 and 2013 at
interest rates to be determined at the time of drawdown.
NWL, through its finance subsidiary, Northumbrian Water Finance plc (NWF), issued £360.0 million
Guaranteed Eurobonds in January 2012, maturing January 2042, with an annual coupon of 5.125%.
The Group and NWL’s regulated business debt structure remain largely unchanged with 75% (NWL:
70%) fixed at an average rate of 5.73% (NWL: 5.80%), 18% (NWL: 22%) index linked at an average
real rate of 1.85% (all NWL) and 7% (NWL: 8%) on a variable rate basis. The blended average rate
for the Group and NWL's regulated business for the year ended 31 March 2012 was 5.53% and
5.54% (2011: 5.80%, 5.93%), respectively, reflecting reduced RPI.
11
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).
Total cash, cash equivalents and short term cash deposits available at 31 March 2012 amounted to
£172.8 million. In addition to the undrawn element of the EIB facility, the Group has substantial
undrawn committed five year bank facilities, amounting to £450.0 million at 31 March 2012, available
to maintain general liquidity. These resources are sufficient to meet the requirements of the business
through to July 2016.
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 increased from £46.0 million, at 31 March 2011, to £84.1 million at 31 March
2012. This is due to an increase in the liabilities of the scheme (£63.1 million), partially offset by an
increase in the value of scheme assets (£25.0 million).
With the agreement of the Scheme Trustee, the Group has made capital contributions to the scheme
totalling £70.0 million for the period to 31 March 2015. These payments comprise employers’
contributions, the deficit recovery funding assumed in the final determination and employees
contributions under a salary sacrifice arrangement.
The most recent actuarial valuation of the scheme was as at 31 December 2010. The results of the
valuation are reported in note 25.
12
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 has been reported in
the performance measures section on page 8 but is discussed in more detail in this section.
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. We also communicate more broadly with local communities through public meetings
and customer information events.
Customer satisfaction
Ofwat introduced the SIM in 2010/11, which monitors both quantitative and qualitative aspects of
customer service. This 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 attract a number of penalty
points depending upon the severity. Results across all metrics improved during the year and our
quantitative SIM contact levels score reduced to 162 for 2011/12 from 212 for 2010/11.
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 4.33 out of 5, an improvement on the
previous year’s score of 4.14.
Affordability
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 pursued for payment. 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. We are also working with credit reference agencies to improve
the quality of our customer information and enhance the effectiveness of our collection processes.
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 and a
sustained level of compliance has been achieved with fewer failures at customer taps and a reduction
in the number of health-related failures at water treatment works and service reservoirs.
Significant improvements have been seen in iron and manganese compliance in 2011. In addition,
there has been a further reduction in customer contacts relating to discoloured water. This has been
helped by the cleaning of 150km of large diameter water mains in Tyneside and South East
Northumberland, which was completed in June 2011. A similar three year programme of work was
13
started in 2012, this time targeting larger mains in Gateshead and Newcastle as part of an ongoing
strategy to improve the acceptability of water to consumers.
Business customers
The economic situation has had a significant impact on some business sectors in our operating
regions and we have been working closely with major customers to mitigate the impact where
possible. Due to the challenging economic conditions a number of large industrial customers
temporarily ceased production for periods during the year whilst a number of other smaller
commercial customers have ceased trading altogether. This has led to a downturn in water demand
from industrial and commercial customers. However, this should be partially offset in 2012/13 largely
due to SSI UK restarting steel production on Teesside.
We are active in the business communities where we are a member of the CBI, Chambers of
Commerce and North East of England Process Industry Cluster. By supporting these and other
smaller groups, NWL can help business growth and development in the areas we serve as well as
retaining contact with organisations which represent customers. Business customer satisfaction is
tracked on a regular basis and levels of satisfaction are high.
Competitiveness
We have 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 identified around 100 projects and initiatives from across the whole
business, ranging from large scale strategic reviews to smaller improvements at a local level. These
efficiencies are in addition to the benefits already secured through buying our full energy
requirements to March 2015 in advance. Delivery of the programme continues to be on schedule
and, as a result, we are ahead of the final determination profile.
Other aspects of performance in relation to our competitiveness theme are included in the financial
performance section on page 9.
Research and development
We invest in a programme of research and development to ensure we can meet the needs of our
customers and to support the sustainable and cost effective operation of our business, now and into
the future. Our research and innovation activities include the development of technical solutions for
water and waste water management, collaborative research within the sector and partnerships with
suppliers, universities and research organisations.
During the year, the Group invested £1.1 million (2011: £2.3 million) in research and development.
People
People strategy and policy
Our approach to strategy development focuses on achieving the medium term goals and specific
business objectives in all parts of the Company. Our policies aim to nurture a mindset where our
people will consistently choose to go the extra mile in delivering great service to customers every
day. People are clear about our vision and values and the Code of Conduct sets out our approach to
doing business. The CEO has responsibility at Board level for the People strategy and policy.
14
We aim to recruit and retain the best people, with a diverse range of skills, experience and
backgrounds, who are committed to our vision and values. In return, we aim to provide opportunities
for people to develop their skills and capabilities and fulfilling and challenging work in a supportive
culture which recognises, celebrates and rewards the contribution made by both teams and
individuals.
We understand that having a diverse workforce enhances our performance, fostering innovation and
creativity and helping us better understand how to serve the needs of our customers. Our equal
opportunity policy seeks to ensure that all our current employees and potential employees are treated
with respect. We welcome job applications from all parts of the community. It is our intention that all
job applicants and employees are treated equally, regardless of their age, ability, marital or
partnership status, race, religion or belief, sex or sexual orientation. We monitor our workforce profile
against census and sector data and aim to be recognised as an employer of choice within the diverse
communities we serve, ensuring we take full advantage of the wide range of backgrounds and
abilities of current and potential employees.
Engagement
Actively involving and engaging our people is a fundamental building block to delivering strong results
and improving our performance. Every other year we seek their views through an annual employee
engagement survey and this year’s survey had the largest response rate ever with 78% of people
taking part. In alternate years we participate in the Sunday Times Best Companies survey. One of
the key measures in our survey is the Employee Satisfaction Index (ESI). Our target is to achieve
and sustain an ESI of 81% and, although we missed the target in 2011/12, we did achieve our
highest ever annual score of 78% and are confident that we will achieve this medium term goal by
2015.
Overall, 83% of respondents told us they are proud to work for the Company, 85% would recommend
working for the Company and 80% believe that NWL is a great organisation to work for. This
commitment is borne out by low employee turnover which, at 4.56% last year, was well below the UK
average of 16%.
To recognise the contribution of our people, who bring our values to life every day in the way they do
their jobs, we have launched our Vision and Values awards, known as the ViVa Awards. In the first
year over 240 people and teams have been nominated by colleagues in the business to celebrate
great ViVa performance against one or more of our five values.
Our constructive employee relations have been further enhanced through collaborative working,
establishing a change management framework which was developed jointly with our trade union
representatives, describing how we involve and engage people affected by change. This has
enabled early involvement of trade union and employee representatives in shaping proposals and
communication plans, even where formal collective consultation is not a requirement.
Supporting wellbeing
It is clear to us that when people are feeling at their best they will give of their best to customers and
colleagues. In 2011, we signed up to the Public Health Responsibility Deal and have further
developed our Wellbeing strategy to promote all aspects of working well.
We actively encourage our people to take care of their health and wellbeing by providing a wide
range of health services, support and resources. The Group’s medical advisor provides
comprehensive occupational health services, general health promotion and stress management. Our
people have access to specialist advice and treatment to support recovery from musculoskeletal
disorders and, in 2010, we introduced NWL Support which gives our people access to face to face or
telephone counselling on a range of personal concerns. We continue to promote healthy eating,
15
hydration and exercise alongside excellent health screening and medical insurance schemes. Our
current level of sickness absence is 3.0%, continuing on a downward trend from 3.2% in 2010 and
3.1% in 2011.
Where employees develop a disability which affects their work we support them to remain in
employment, wherever practicable, by providing appropriate adjustments to their roles and/or
effective redeployment. Occupational health physicians assist this process with professional medical
advice.
Encouraging personal growth
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.
Annual appraisals are given high priority, along with the identification of training needs, recognising
how important technical and personal skills are in seeking to achieve the Company’s vision and
values.
Currently, 75% of our line managers are qualified to at least NQF Level 3. Overall, around 2,600 of
our people, 90% of the workforce, are qualified to at least NQF Level 2, the equivalent of five GCSEs
at grades A to C. Our commitment to skills is delivered through a series of NVQ programmes,
working in partnership with leading providers.
Growing new talent is key to our continued success and, last year, four people were participating in
our graduate development programme, with 18 in our apprentice programme, and plans are being
formulated to increase our development programmes for 2012.
A fair deal
We aim for our terms and conditions to both attract and retain the best people in the areas we serve.
In addition to competitive pay and benefits we also offer a scheme providing a wide range of lifestyle
benefits through salary sacrifice, such as childcare vouchers, water services, cars for personal use
and discounted store vouchers. Around 80% of our people chose to take advantage of the scheme
during the year, up from 73% last year.
Communication
We use a wide range of communication methods including magazines, brochures, leaflets,
newsletters, intranet, notice boards and regular team meetings. We issue 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.
We fully recognise the importance of an inclusive and engaging leadership and management style.
In 2011 we engaged with our people through over 120 departmental workshops facilitated by senior
managers and over 50 participative roadshows facilitated by the CEO and directors. Throughout the
year we share key information through TeamTalk, the CEO’s bi-monthly briefing which is cascaded
through the business, with a wide range of newsletters and briefings also keeping people informed of
more local news.
Disclosure (Whistleblowing)
We encourage open feedback and are committed to protecting employees who wish to voice
concerns about behaviour or decisions that they believe to be illegal or unethical. The Audit
16
Committee regularly reviews the disclosure policy. There were no concerns raised by the Audit
Committee during the year.
Health and safety
We place 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 and, this year, there were only eight
lost time reportable accidents, which continues the improving trend.
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.
Safety information, communication and awareness are critical to creating a positive safety culture. In
2010 we reviewed the consultation process and, this year, introduced a new health and safety
committee structure and a new health and safety forum chaired by the CEO. We are already seeing
the benefits from involving the safety representatives in reviewing and consulting on safety policies
and procedures and in championing the importance of health and safety in the workplace.
Employee Share Incentive Plan (SIP)
Prior to the change of control, we operated a Share Incentive Plan that provided one free matching
share for every three shares purchased by an employee. This plan closed in October 2011 following
the change of control of NWG.
Environment
Water resources
We continue to make excellent progress with the Abberton Scheme. This increases the capacity of
Abberton reservoir by 58% and also includes the construction of two pipelines and a pumping station,
all of which remain on programme. 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 Essex. This is in addition to the optional metering scheme
available to all customers.
Water efficiency targets were introduced in 2010/11 to reduce consumption of water by the
Company’s 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 and Suffolk was extended to the rest of the
Company. We have consistently met our water efficiency targets year on year.
The reporting year was very dry in Essex and Suffolk, where only 83% of the long term average
rainfall was recorded. However, through careful abstraction management, we were on track to fill our
reservoirs to target levels by the end of April and avoided the need to impose a Temporary Use Ban
(previously known as a hosepipe ban). In the north east, for the majority of the year, our storage
position was at or above average. There are no plans for restrictions during 2012/13, although the
Company will continue to encourage customers to use water wisely and control demand in dry
periods.
By March 2011, we had recovered from the previous year’s extremely severe winter which caused
our northern operating area to miss its annual leakage target. Changes were made to leakage
17
operations management and our response to any increase in leakage was quick and thorough to
ensure that we achieved the 2011/12 leakage target regardless of the weather. Throughout 2011/12,
distribution input and leakage levels have been at their lowest ever. Our final reported leakage figure
has met our target comfortably.
Waste water
Our exceptional performance for sewage treatment works continued for a fourth year. All numerically
consented works remained compliant for the year on the basis of routine ‘operator self monitoring’
samples. One works, Bowburn, was non-compliant based on an additional sample taken following
the self reporting of a process issue to the EA.
The AAD plant at Bran Sands has performed well over the last 12 months. Further enhancements to
the site are planned in 2012/13 to increase energy production further. Construction of a second AAD
plant at Howdon, on Tyneside, to process the remainder of NWL’s sludge has gone well and started
commissioning in June 2012.
The number of properties experiencing internal flooding due to hydraulic overloading reduced
significantly for the second year in 2011/12. This can be attributed to a combination of less frequent
and intense summer storms in 2011 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 2011/12, we invested over £22.0m in conventional sewer flood relief projects, resulting in the
removal of 224 properties from our flooding registers. Planning to identify schemes for coming years
forms a key part of our investment programme and is well advanced, with a further 137 properties to
be addressed in 2012/13. Additionally, in line with our serviceability action plan for sewer flooding,
we have embarked on a programme of increased mitigation.
The number of properties flooded due to other causes has increased in 2011/12. A serviceability
action plan has been put in place to reduce this number which includes new and additional
programmes of sewer cleansing, sewer inspection, and sewer rehabilitation. These programmes
form part of our long term policy to prevent unmanaged escapes from the sewer network.
The total number of pollution incidents showed a slight reduction from 2010, however, there was a
significant increase in those classified as serious (categories 1 & 2). While there was no single cause
for these serious events, the programme of installing overflow and sewer level monitoring (Hawkeye)
is continuing. Furthermore, the monitoring has been brought in-house for quicker detection and a
rapid response to warning level alarms, to solve problems before any overflow occurs.
All of the 34 bathing waters in the north east passed the required mandatory standard and 31 met the
more demanding guideline standard.
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 the 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.
We have published our carbon management plan to meet the 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
18
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 include: our investment in AAD at
Bran Sands and Howdon on Tyneside; hydroelectric installations at five reservoirs; improved
metering of electricity to enable us to improve our energy efficiency through site energy management
plans; limiting tertiary ultraviolet disinfection outside the bathing water season at five major works;
and encouraging customers to avoid wastage through our ‘using water wisely’ campaign.
Through these projects, and by reviewing the efficiency of our pumps across the business, we have
progressively reduced the amount of energy used over recent years despite upward pressures as a
consequence of tighter environmental standards.
We have been awarded, for the second time, the Carbon Trust Standard for our 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.
Changing weather patterns
The water cycle and the changing weather have a direct influence on the provision of water and
waste water services. Our 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.
Last year, we incorporated this work into our response to the new adaptation reporting power granted
to the Government by the 2008 Climate Change Act, assessing the risk that climate change presents
to our business. 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, which will increase the risk of
sewer flooding. 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 as a result of our
investment to increase the capacity of Abberton reservoir for our Essex operating area and the
presence of Kielder Water for the north east region.
Quality
We have maintained our certification to the international standards for quality (ISO 9001:2008),
environment (ISO 14001:2004) and occupational health and safety (OHSAS 18001:2007) across all
areas of the business, including operational sites and office based teams.
Communities
We support the communities we serve in a number of different ways and 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 though,
following our de-listing in the autumn, we will not be eligible for this index in future years. We have
also received re-accreditation as a Platinum Plus company by Business in the Community and our
Queen’s Award for Industry is still in place as it was awarded in 2009 for a five year period. For the
second year running, the company was also recognised by Ethisphere, an American-based
international think-tank, as one of the most ethical companies in the world and was one of only seven
UK only based companies and the only water utility worldwide to make the list of 145 companies.
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This year, the Group made charitable donations totalling £155,000. 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 raised £43,667 for charities this year. In addition,
our ‘Care for safety’ scheme, which encourages employees to reduce accidents and associated lost
time, triggered payments of over £28,190 for charities nominated by employees.
The support we give to our communities focuses on five broad areas.
Investment in our communities
Community Foundations covering our areas of supply hold endowment funds totalling nearly £1.0m
contributed by NWL over the last 20 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.
In addition to cash donations, we seek 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 artists’ groups CoExist and Metal, we have developed a temporary art project at our
vacant Southend site to provide space for a temporary gallery, studio and small creative business
complex. We have also 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.
This is the first full operating year for the newly formed Kielder Water & Forest Park (KW&FP)
Development Trust, a registered charity which formalised the original Kielder Partnership founded in
1994. This year, activity has focused on refining the vision, mission and goals of the Trust as well as
ensuring the appropriate governance and financial systems are in place, but this has not stopped the
continued delivery of the 25 year investment plan for the area.
A £10.0m development scheme for the Calvert Trust Kielder site has gained planning permission
which will increase the activity provision and accommodation within the Park. Encouraging and
enabling sustainable development has been a high priority and the development of the local business
forum has been a key facet. We helped the Kielder Observatory secure funding leading to a
significant uplift in observing sessions and visitors. Events and activities have also grown with the
successful delivery of the second Kielder marathon and the Kielder 100 mile mountain bike race
using the new trails across Kielder Forest.
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 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 and employees have
volunteered 15,204 hours in their communities. In 2011/12, 48% of our employees participated in the
‘Just an hour’ volunteering scheme (up from 27% in the previous year) and 1,417 different
organisations were given financial and in-kind support.
We have continued our support for Castle View Enterprise Academy, in Sunderland, for which NWL
is lead sponsor. The school has now completed its second year of operations after opening its doors
in 2009 and has seen considerable improvements in pass rates for students in GCSEs including
English and Maths.
20
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:
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 is 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.
Supporting healthy communities
We continue 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, almost £376,000 has been provided to
fund free mains-fed water coolers in schools and around 800 have been supplied in nearly 465
schools and community groups. We also donated 143,200 bottles of tap water to community sporting
events in order to promote the importance of rehydration during exercise. 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.
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 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.
The centre received 27,500 visits during the year and now provides over 70 health and community
support services including a GP led walk-in health centre open from 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
We continue 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 £5.0m, since 1997, with the help of the
Company and last year focused its fundraising support on specific projects in Ghana and Tanzania.
We support our employees to become ambassadors for the charity and encourage annual supporter
trips to see WaterAid projects.
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Corporate governance
Since de-listing from the London Stock Exchange on 14 October 2011, the Company is no longer
obliged to take account of The UK Corporate Governance Code (the Code). However, the Board
maintains its belief that best practice in corporate governance helps it discharge its duties in the best
interests of the Company. In accordance with the ‘comply or explain’ approach, the Board continues
to comply with the main principles of the Code to the extent considered applicable. The areas where
the Company departs from the main principles of the Code are explained below:
the Company’s immediate parent company, UKW, is a company indirectly wholly owned by a
consortium comprising Cheung Kong Infrastructure Holdings Limited, Cheung Kong (Holdings)
Limited and Li Ka Shing Foundation Limited (together the ‘Ultimate Shareholders’). As a
privately owned Company, the procedure for the appointment of new directors is less formal,
rigorous and transparent than those considered appropriate for listed companies. In addition,
the provisions concerning annual evaluation and re-election of directors are considered less
relevant since the change in legal status; and
dialogue with the Company’s ultimate shareholders is maintained through member-nominated
director representation on not only the Company’s Board but that of several of its subsidiaries.
Annual General Meetings are no longer required since becoming a privately owned company
and the Company’s amended Articles of Associations reflect this position.
The board of NWL also maintains high standards of corporate governance and endeavours to comply
with the main principles of the Code, wherever practicable.
The group has a code of ethics, ‘Our Code of Conduct’, covering its relationships with customers,
employees, suppliers, local communities, shareholders, other investors and regulators.
Board responsibilities and processes
The Board sets and implements the Company’s vision, values and strategy and ensures compliance
with group policies and legal and regulatory obligations.
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 NWG Board meets at least every two months.
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
The Chairman and CEO have clearly defined roles and responsibilities. The Chairman leads the
Board and creates the conditions for overall Board and individual director effectiveness, both inside
22
and outside the boardroom. The CEO is responsible for running the Company’s business on a day to
day basis.
The non-executive directors bring to the Board many years of business experience as well as
financial expertise and the ability and willingness to constructively challenge and help develop
proposals on strategy.
The General Counsel and Company Secretary, Martin Parker, assists the Board to ensure that good
corporate governance compliance is achieved, to the extent considered applicable. He is also
Company Secretary of NWL and is secretary to all Board committees.
Board committees
The Board has Audit 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.
Remuneration Committee
The work of the Remuneration Committee primarily comprises the adoption of principles and
standards for executive remuneration and benefits.
Audit Committee
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.
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.
The Audit Committee Chairman reports to the Board following each meeting of the Committee and
Committee minutes are circulated to the Board.
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 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
23
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 implement 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.
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.
An assurance map 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.
24
Risk description
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
Mitigation measures
The financial ratios, financial results, liquidity position and credit ratings
are described in the financial performance section on pages 9 to 12. In
addition, note 20 to the financial statements, on pages 58 to 63, 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 was established to understand and prepare the
business for the transfer. We maintain sound financial documentation to
support a possible 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 filters, 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 wilful 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
25
of economic conditions on
investment returns
Health and safety prosecution
allowed in the last price review. The scheme Trustee determines
investment policy and monitors performance of investment managers.
Triennial actuarial valuations of the scheme are carried out, with the
latest being as at 31 December 2010.
Our health and safety policy and safety management system define
clear arrangements and responsibilities for implementation and
management throughout the Group. 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.
Statutory disclosures
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 2011/12 were as follows:
Name of political party
Conservative
Labour
Liberal Democrats
Total
£
7,500
13,062
3,720
24,282
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 2012,
was 19 days (2011: 30 days).
Directors’ remuneration and interests
Information about directors’ remuneration is contained in note 5 to the financial statements.
Indemnification of directors
UKW has in place directors' and officers' insurance. On 28 November 2005, the Company 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.
26
Auditors
Deloitte LLP was appointed as auditor in the current year following the resignation of Ernst & Young
LLP. Deloitte LLP has indicated its willingness to continue in office for the ensuing year.
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 for the foreseeable
future. 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.
By order of the Board
Martin Parker
General Counsel and Company Secretary
4 October 2012
Northumbrian Water Group Limited
Registered office: Northumbria House, Abbey Road, Pity Me, Durham, DH1 5FJ
Registered in England and Wales No. 4760441
27
Appendix to the directors’ report
Definition of KPIs
Balanced scorecard KPIs
Measure
Customer
Customer satisfaction – SIM
quantitative score
Customer satisfaction – SIM
qualitative score
Unplanned interruptions >6 hours
Definition of measure
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 or 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.
Coliform incidents
Total number of coliform failures in regulatory samples at water treatment
works and service reservoirs. One coliform or more is a failing sample.
Competition
Profit before tax
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. Profit before tax has been chosen
because it is a primary financial measure for the Group for which the
executive directors are accountable.
Capital efficiency
An assessment of the efficiency of the NWL capital investment programme
undertaken annually by the Board.
Earnings before interest and tax
Actual earnings before interest and tax (EBIT), in the UKW consolidated
accounts, compared to the budget approved by the Board. EBIT has been
chosen because it is a primary financial measure for which the executive
directors are accountable.
Cash available for distribution
Cash available for distributions in the period at UKW, compared to the
budget approved by the Board.
People
Engagement and satisfaction index
(%)
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.
Employee engagement score
The employee engagement score is derived from the Sunday Times Best
Companies survey and gives a measure of employee satisfaction.
28
Lost time reportable accidents (no.)
Accidents reportable to the Health and Safety Executive resulting in more
than three days lost from work.
Environment
Leakage (Mld)
Water network leakage for the financial year, as reported to Ofwat.
Sewage treatment works
compliance (%)
Percentage of population equivalent served by sewage treatment works
compliant with Environment Agency (EA) look-up table consents.
Pollution incidents
(categories 1 & 2)
Communities
FTSE4Good accreditation
BITC Platinum Plus
accreditation
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.
Just an Hour participation
The percentage of NWL employees actively volunteering in their
communities.
Financial KPIs
Measure
Definition of measure
Gearing to RCV
Cash interest cover
Cash flow to net debt
The ratio of net debt, excluding fair value adjustments, to NWL’s RCV. The
RCV represents the total capital value of the appointed water and sewerage
business on which Ofwat allows a rate of return at price reviews. The RCV
generates most of the revenue stream of the Group and gearing is an
important factor in credit ratings. The RCV is calculated by Ofwat and
published each year. Net debt is calculated from the balance sheet in the
audited financial statements, adjusted for the fair value of loans owed by
subsidiaries acquired in 2003.
The ratio of cash generated from operations less tax divided by net interest
paid. This measures the ability of the Company to service its debt. Cash
interest cover is calculated from the audited financial statements.
The ratio of cash generated from operations less tax paid divided by net
debt. This indicates the Company’s ability to reduce debt in the absence of
need for additional investment, without resorting to asset disposal. Cash
flow to net debt is calculated from the audited financial statements.
29
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 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
Heidi Mottram
Chief Executive Officer
30
Independent auditor’s report to the members of Northumbrian Water
Group Limited
We have audited the financial statements of Northumbrian Water Group Limited for the year ended
31 March 2012 which comprise the consolidated income statement, consolidated statement of
comprehensive income, consolidated statement of changes in equity, consolidated balance sheet,
consolidated cash flow and related notes 1 to 29, and the parent Company balance sheet and related
notes 1 to 10. The financial reporting framework that has been applied in the preparation of the
group financial statements is applicable law and International Financial Reporting Standards (IFRSs)
as adopted by the European Union. The financial reporting framework that has been applied in the
preparation of the parent company financial statements 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 auditor
As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for
the preparation of the financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the 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 and the parent company’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 financial statements give a true and fair view of the state of the group’s and of the parent
company’s affairs as at 31 March 2012 and of the group’s profit for the year then ended;
the group financial statements have been properly prepared in accordance with IFRSs as
adopted by the European Union;
the parent company financial statements have been properly prepared in accordance with
United Kingdom Generally Accepted Accounting Practice; and
the financial statements have been prepared in accordance with the requirements of the
Companies Act 2006.
31
Separate opinion in relation to IFRSs as issued by the IASB
As explained in Note 1 to the group financial statements, the group in addition to applying IFRSs as
adopted by the European Union, has also applied IFRSs as issued by the International Accounting
Standards Board (IASB).
In our opinion the group financial statements comply with IFRSs as issued by the IASB.
Opinion on other matter 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 financial statements.
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; or
the parent company financial statements are not in agreement with the accounting records and
returns; or
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.
Paul Feechan (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
Newcastle upon Tyne
5 October 2012
32
Consolidated income statement
For the year ended 31 March 2012
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
Notes
2
3
2
7
7
2
8
8
Year to
Year to
31.3.2012 31.3.2011
£m
£m
789.5
(458.5)
331.0
(189.2)
51.3
0.8
193.9
(30.8)
23.3
186.4
738.1
(433.9)
304.2
(178.8)
54.9
0.7
181.0
(33.1)
30.5
178.4
185.9
0.5
186.4
178.3
0.1
178.4
33
Consolidated statement of comprehensive income
For the year ended 31 March 2012
Profit for the year
Other comprehensive income
Actuarial (losses)/gains
Losses on cash flow hedges taken to equity
Translation differences
Tax on items charged or credited to equity
Total other comprehensive (loss)/gain
Total comprehensive income for the year
Attributable to:
Equity shareholders of the parent Company
Non-controlling interests
Notes
25
Year to
Year to 31.3.2011
restated
£m
178.4
31.3.2012
£m
186.4
(83.5)
(22.5)
-
18.8
(87.2)
74.0
(4.0)
0.2
(22.2)
48.0
99.2
226.4
98.7
0.5
99.2
226.3
0.1
226.4
34
Consolidated statement of changes in equity
For the year ended 31 March 2012
At 1 April 2010
restated
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
At 1 April 2011
restated
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 31 March 2012
Equity
share
capital
£m
Share
premium
reserve
£m
Cash flow
hedge
reserve
£m
Treasury
shares
£m
Currency
translation
£m
Retained
earnings
£m
Total
equity
£m
Non-
controlling
interests
£m
Total
£m
51.9
446.5
(38.7)
(2.0)
0.7
(177.8)
280.6
2.8
283.4
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(4.1)
(4.1)
-
-
-
-
-
-
178.3
178.3
0.1
178.4
0.2
51.9
48.0
-
48.0
0.2
-
230.2
0.1
226.3
0.1
0.1
-
-
226.4
0.1
-
-
0.3
-
(0.3)
-
-
-
-
-
-
-
-
0.1
0.1
-
0.1
-
-
0.6
(70.3)
0.6
(70.3)
(0.6)
-
-
(70.3)
51.9
446.5
(42.8)
(1.7)
0.9
(17.4)
437.4
2.3
439.7
-
-
-
-
-
-
-
(22.4)
-
-
(22.4)
-
-
-
-
-
-
185.9
185.9
0.5
186.4
-
(64.8)
(87.2)
-
(87.2)
-
-
121.1
1.1
98.7
1.1
-
-
51.9
-
-
446.5
-
-
(65.2)
1.7
-
-
-
-
0.9
(1.7)
(281.6)
(178.5)
-
(281.6)
255.6
0.5
-
-
(0.3)
2.5
99.2
1.1
-
(281.9)
258.1
35
Consolidated balance sheet
As at 31 March 2012
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
Hedging instruments
Pension liability
Other payables
Grants and deferred income
Current liabilities
Interest bearing loans and borrowings
Provisions
Trade and other payables
Hedging instruments
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
Year to
Year to
Year to 31.3.2011 31.3.2010
restated1
restated1
£m
£m
31.3.2012
£m
Notes
10
10
11
12
13
14
15
15
17
19
8
20
25
17
19
16
20
21
3.6
64.2
3,822.9
4.3
11.5
1.7
3,908.2
3.2
167.3
4.3
168.5
343.3
4,251.5
2,746.9
2.2
543.9
59.1
84.1
5.1
281.9
3,723.2
89.4
0.2
175.9
4.7
-
270.2
3,993.4
258.1
51.9
446.5
(65.2)
-
0.9
(178.5)
255.6
2.5
258.1
3.6
64.2
3,626.8
4.0
12.0
1.7
3,712.3
3.3
153.9
1.4
141.7
300.3
4,012.6
2,295.8
2.4
586.0
53.7
46.0
6.8
255.1
3,245.8
163.7
0.2
155.6
5.0
2.6
327.1
3,572.9
439.7
3.6
64.2
3,518.9
4.1
12.9
1.7
3,605.4
3.3
136.4
15.8
174.8
330.3
3,935.7
2,433.9
2.2
594.3
48.4
133.1
7.8
233.5
3,453.2
33.1
0.2
151.2
6.4
8.2
199.1
3,652.3
283.4
51.9
446.5
(42.8)
(1.7)
0.9
(17.4)
437.4
2.3
439.7
51.9
446.5
(38.7)
(2.0)
0.7
(177.8)
280.6
2.8
283.4
1. The prior year balance sheets have been restated to reflect the recognition of an inflation hedge (see note 22).
Approved by the Board on 4 October 2012 and signed on its behalf by:
Heidi Mottram
Chief Executive Officer
36
Consolidated cash flow statement
For the year ended 31 March 2012
Notes
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
Decrease 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
New borrowings
Settled hedge instrument
Dividends paid to minority interests
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
Increase/(decrease) 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
15
15
15
15
Year to
Year to
31.3.2012 31.3.2011
£m
£m
331.0
113.8
(5.6)
(0.2)
9.7
0.1
(11.5)
5.8
443.1
(47.1)
(123.2)
(37.2)
235.6
2.1
9.9
1.0
0.5
(2.9)
0.9
(273.3)
(261.8)
510.2
(17.5)
(0.3)
(281.6)
(150.6)
(7.2)
-
53.0
26.8
140.3
167.1
167.1
4.3
171.4
304.2
111.6
(8.9)
0.2
11.5
-
(14.7)
5.2
409.1
(22.4)
(116.1)
(38.7)
231.9
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
37
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 2012 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 2012 the Group had net current
assets of £73.1 million (2011 restated: net current liabilities of £26.8 million). The directors have reviewed cash flow
requirements, including reasonably possible changes in trading performance, and are confident that they will be able to
meet these from funds available and existing financing facilities. Accordingly, the directors believe it is appropriate to
prepare the financial statements on a going concern basis.
The Group is party to an inflation hedge which commenced in May 2004 as part of the issue of the Eurobonds due in
January 2034. The Group has not previously accounted for the fair value of this hedge instrument. However, the
directors have determined that the fair value should be recognised in the consolidated balance sheet in accordance with
IAS 39 Financial Instruments: Recognition and Measurement. The impact of this change is explained in note 22.
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 2012 were authorised for issue by the Board of directors
on 4 October 2012 and the balance sheet was signed on the Board’s behalf by Heidi Mottram (Chief Executive Officer).
The Group has adopted the following standards and interpretations during the year:
IAS 24 (revised), ‘Related party disclosures’
Amendment to IFRS 1, ‘First time adoption’
IFRIC 19, ‘Extinguishing financial liabilities with equity investments’
Amendment to IFRIC 14, ‘Prepayments of a minimum funding requirement’
Annual improvements to IFRSs 2010
The adoption of the standards and interpretations listed above does not have a material impact on the Group.
Northumbrian Water Group Limited is a limited company incorporated and domiciled in England and Wales.
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.
(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
38
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.
(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.
39
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 Limited 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.
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.
(k) Dividends
Dividends payable and receivable are recognised when the shareholders’ right to receive the revenue is established.
(l) 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.
40
(m) 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.
(n) 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.
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.
(o) 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.
41
(p) 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.
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.
(q) 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.
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
42
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.
(r) 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.
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.
(s) 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.
43
(t) 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.
(u) 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.
(v) 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.
(w) 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.
(x) 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.
(y) 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.
(z) 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
44
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.
(aa) Accounting standards
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 - First time adoption
IFRS 7: Amendment to IFRS 7 - Financial instruments: Disclosures
IFRS 9: Financial instruments: classification and measurement
IFRS10: Consolidated financial statements
IFRS11: Joint arrangements
IFRS12: Disclosures of interests in other entities
IFRS13: Fair value measurement
IAS 1: Amendment to IAS 1 - Financial statement presentation
IAS 12: Amendment to IAS 12 - Income taxes
IAS 19: Amendment to IAS 19 - Employee benefits
IAS 27 (revised 2011): Separate financial statements
IAS 28 (revised 2011): Associates and joint ventures
IAS 32: Amendment to IAS 32 - Financial instruments: Presentation
IFRIC
IFRIC 20: Stripping costs in the production phase of a surface mine
Effective for accounting periods
beginning on or after:
1.7.2011; 1.1.2013
1.7.2011; 1.1.2013
1.1.2015
1.1.2013
1.1.2013
1.1.2013
1.1.2013
1.7.2012
1.1.2012
1.7.2012
1.1.2013
1.1.2013
1.1.2013
Effective for accounting periods
beginning on or after:
1.1.2013
(ab) 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 25, ‘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).
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.
45
Revenue
Year ended 31 March 2012
Segment revenue
Inter-segment revenue
Revenue from external customers
Year ended 31 March 2011
Segment revenue
Inter-segment revenue
Revenue from external customers
Profit on ordinary activities before interest
Year ended 31 March 2012
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 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
Assets and liabilities
Northumbrian
Water and
Water waste water
contracts
£m
Limited
£m
737.4
-
737.4
689.4
-
689.4
42.1
-
42.1
40.0
-
40.0
Northumbrian
Water and
Water waste water
contracts
£m
Limited
£m
Other
£m
16.1
(6.1)
10.0
14.1
(5.4)
8.7
Total
£m
795.6
(6.1)
789.5
743.5
(5.4)
738.1
Other
£m
Total
£m
338.8
10.0
(17.8)
297.6
9.5
(2.9)
331.0
(137.9)
0.8
193.9
(7.5)
186.4
304.2
(123.9)
0.7
181.0
(2.6)
178.4
Northumbrian
Water Limited
Water and waste
water contracts
Other
Total
31.3.2012 31.3.2011 31.3.2012 31.3.2011 31.3.2012 31.3.2011 31.3.2012 31.3.2011
£m
4,012.6
3,536.7
£m
3,929.5
495.3
£m
212.1
3,427.8
£m
4,251.5
3,939.0
£m
179.4
3,096.4
£m
3,709.6
422.3
£m
109.9
15.9
£m
123.6
18.0
Segment assets
Segment liabilities
Other comprises taxation, interest and net debt.
Property, plant and equipment additions
Depreciation
Northumbrian
Water Limited
Water and waste
water contracts
31.3.2012 31.3.2011 31.3.2012 31.3.2011 31.3.2012 31.3.2011
£m
219.9
111.6
£m
308.2
107.1
£m
310.2
113.8
£m
219.6
105.8
£m
2.0
6.7
£m
0.3
5.8
Total
Geographical information
Revenue from external customers from the UK was £762.9 million (2011: £714.8 million). Revenue from other countries
was £26.6 million (2011: £23.3 million).
Non-current assets for operations in the UK were £3,896.5 million (2011: £3,700.7 million). Non-current assets for
operations in other countries were £11.7 million (2011: £11.6 million).
46
3. Operating costs
Materials and consumables
Manpower costs (see note 6)
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. Auditor’s remuneration
Audit of the financial statements1
Other fees to auditors:
Other services
Note:
1. £8,000 of this relates to the Company (2011: £97,000).
5. Directors’ Emoluments
(a) Directors’ remuneration
The remuneration of the directors of the Company was as follows:
Emoluments (including benefits in kind)
Year to
Year to
31.3.2012 31.3.2011
£m
25.6
110.6
(28.7)
111.6
(0.9)
(4.6)
2.3
1.2
17.8
199.0
433.9
£m
24.8
115.6
(28.3)
113.8
(0.7)
(4.8)
1.1
1.1
6.4
229.5
458.5
Year to
Year to
31.3.2012 31.3.2011
£m
0.3
£m
0.2
0.2
0.1
Year to
31.3.2012
£000
1,470
Year to
31.3.2011
£000
1,292
One of the directors at 31 March 2012 was a member of a defined benefit pension scheme where the Company makes
contributions towards the cost (2011: 1).
One of the directors at 31 March 2012 was a member of a defined contribution scheme where the Company makes
contributions towards the cost (2011: 1).
Long Term Incentive Plan (LTIP)
Prior to the change of control and de-listing, the company operated a share based Long Term Incentive Plan. Awards
under the LTIP had three year pre-vesting performance conditions. Before the change of control, the Remuneration
Committee determined the extent to which the performance conditions had been met and the proportion of the
performance period that had elapsed in deciding upon how many shares of the remaining three awards would vest.
These shares were transferred to individuals, at market value, on 11 October 2011. The Company was de-listed on 14
October 2011.
The directors who held office as at 31 March 2012 held the following conditional interests in the ordinary 10p shares of
the company, awarded in accordance with the terms of its LTIP:
47
Heidi Mottram
Totals
Chris Green
Totals
Awards
held at the
start
Awarded
during
Awards
lapsed
during
Awards
vested
during
Awards
held as at
Award
date
8.12.2010 3
of the year
96,212
the year
-
the year
11,844
the year
84,368
31.3.2012
-
96,212
-
11,844
84,368
15.12.200
8 1
4.1.2010 2
8.12.2010 3
78,650
83,240
68,551
230,441
-
-
-
-
39,325
18,904
8,439
66,668
39,325
64,336
60,112
163,773
-
-
-
-
-
Notes:
1. The market value of the shares on the date of the award was 251.50 pence per share. Due to the change of control, the
performance period ran from 1 October 2008 to 23 September 2011.
2. The market value of the shares on the date of the award was 272.50 pence per share. Due to the change of control, the
performance period ran from 1 October 2009 to 23 September 2011.
3. The market value of the shares on the date of the award was 328.70 pence per share. Due to the change of control, the
performance period ran from 1 October 2010 to 23 September 2011.
4. The cost of conditional awards is charged to the profit and loss account over the performance period to which they relate after
taking account of the probability of performance criteria being met. In the year, £1.1 million was charged to the income statement
(2011: £0.1 million).
5. The market price of the shares on 11 October 2011 was 464.40 pence per share.
6. Aggregate gross gains made by directors on exercise of awards at date of vesting was £1,152,367 (2011: £99,915).
7. Details of the performance conditions are shown below.
Details of awards and performance conditions are shown below:
LTIP award made 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 (ROCE) 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 awards made 4 January 2010 and 8 December 2010
Maximum award
Performance conditions
100% of salary permitted and actual grants to executive directors related to shares worth
100% of salary.
(1) 50% of award depends on the Company's 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.
(2) 20% of award depends on NWL's average ROCE over the three financial years starting
from 1 April immediately preceding grant date.
48
LTIP awards made 4 January 2010 and 8 December 2010 (continued)
Performance conditions (continued)
Vesting schedules
(3) 20% of the award depends on performance against 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.
(4) 10% of award depends on the 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.
(1) 30% vests for median performance increasing on a straight line so that 100% vests for
upper quartile performance.
(2) 30% vests for average three year ROCE of 6.3%, increasing on a straight line so that
50% will vest for average three year ROCE of 6.45% and 100% will vest for an average
ROCE of 6.75%.
(3) 50% vest for 'stable' assessments in three out of the four asset classes. 100% of this
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.
(4) 30% will vest for a customer satisfaction index of 83%, increasing on a straight line so
that 100% will vest for a customer satisfaction index of 93% or above.
New LTIP
After the change of control, a new cash-based LTIP was introduced with effect from 1 January 2012. The new LTIP
targets relate to financial performance, SIM (customer services performance) and serviceability (asset performance).
Payments which are approved by the Remuneration Committee will be paid three years after the start of the performance
period.
Share Incentive Plan (SIP)
Prior to the change of control and de-listing, the company operated a SIP that provided one free matching share for every
three shares purchased by an employee. The SIP closed in October 2011 following the change of control of NWG and
the participants received cash consideration for both purchased and matching shares.
The directors who held office as at 31 March 2012 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
Number of SIP
shares held at
the start of the
year
606
6,372
1
Number of
SIP shares
held as at
31.3.20121
-
-
Notes:
1. These figures include the shares paid for by the participant and the free shares granted by the Company.
(b) Highest paid director
The amounts for remuneration shown in note 5(a) include the following in respect of the highest paid director:
Emoluments (including benefits in kind)
Year to
31.3.12
£000
595
Year to
31.3.11
£000
526
In 2011/12, the highest paid director was a member of the defined contribution scheme. During the year the company
made payments to that scheme of £64,099 (2011: £43,600).
49
6. Employee information
The total employment costs of all employees (including directors) of the Group were:
Wages and salaries
Social security costs
Defined benefit pension service cost (see note 25)
Other pension costs
Total employment costs
Total employment costs were charged as follows:
Capital schemes and infrastructure renewals
Manpower costs
Year to
Year to
31.3.2012 31.3.2011
£m
87.6
7.3
13.9
1.8
110.6
£m
93.0
7.9
12.8
1.9
115.6
28.3
87.3
115.6
25.4
85.2
110.6
Included in wages and salaries is a total expense of share-based payments of £0.4 million (2011: £0.4 million) which
arises from transactions accounted for as equity-settled share-based payments.
The average monthly number of employees of the Group during the year was:
Northumbrian Water Limited
Water and waste water contracts
Other
7. 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
Capitalisation of interest
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
Year to
31.3.2012 31.3.2011
Number
2,875
132
24
3,031
Number
2,894
156
26
3,076
Year to
Year to
31.3.2012 31.3.2011
£m
112.9
(2.5)
(1.9)
21.9
43.3
5.1
178.8
(45.5)
(1.9)
(4.6)
(2.9)
123.9
£m
124.9
(2.8)
(3.2)
23.8
41.3
5.2
189.2
(49.3)
(2.0)
-
-
137.9
During the prior year, 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.
50
8. Taxation
(a) Tax on profit on ordinary activities
Year to
Year to
31.3.2012 31.3.2011
£m
£m
Current tax:
Current income tax charge at 26% (2011: 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 24% (2011: 26%)
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
31.2
-
(0.6)
30.6
0.2
30.8
42.3
0.1
(9.5)
32.9
0.2
33.1
19.5
9.0
(47.5)
4.7
(23.3)
(46.3)
6.8
(30.5)
7.5
2.6
The rate of UK corporation tax was reduced from 26% to 25% by the Finance Act 2011 with effect from 1 April 2012. The
rate was further reduced to 24%, with effect from the same date, on the passing of a resolution under the Provisional
Collection of Taxes Act 1968 on 26 March 2012 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
Hedging instruments
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
Year to 31.3.2011
restated
£m
31.3.2012
£m
-
(0.1)
(20.0)
(1.3)
2.4
(18.9)
19.4
(1.0)
3.9
22.2
0.1
0.1
(0.1)
(0.1)
51
(c) Reconciliation of the total tax charge
Accounting profit before tax
Accounting profit multiplied by standard rate of corporation tax (26%; 2011: 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
Year to
31.3.2012 31.3.2011
£m
181.0
50.7
£m
193.9
50.4
2.6
1.8
(1.0)
(1.3)
4.1
-
56.6
2.1
1.1
-
(1.4)
(2.7)
(0.2)
49.6
(47.5)
(1.6)
7.5
(46.3)
(0.7)
2.6
The effective tax rate for the year to 31 March 2012 was 3.9% (2011: 1.4%). The increase of 2.5% is mainly due to prior
year items. In the absence of the rate change and prior year items, the effective rate would have been 26%.
(d) Deferred tax
The movements in deferred tax liabilities/(assets) are as follows:
Accelerated
tax
depreciation
£m
686.9
Deferred
income Tax losses
£m
(5.7)
£m
(60.2)
Retirement
benefit
obligations
£m
(38.1)
Fair value
hedging
instruments
£m
(15.3)
Business
combinations
£m
10.9
Other
£m
15.8
Total
£m
594.3
(43.5)
13.8
0.2
(0.4)
-
(1.0)
0.4
(30.5)
-
-
-
22.1
0.1
-
0.1
22.3
-
643.4
-
(46.4)
-
(5.5)
-
(16.4)
-
(15.2)
-
9.9
(0.1)
16.2
(0.1)
586.0
(42.4)
3.2
3.6
12.1
-
(0.9)
1.1
(23.3)
-
-
-
(18.8)
(0.1)
-
-
(18.9)
-
601.0
-
(43.2)
-
(1.9)
-
(23.1)
-
(15.3)
-
9.0
0.1
17.4
0.1
543.9
At 1 April 2010 restated
Charge/(credit) in the
income statement
Charge/(credit) in other
comprehensive income
Reported in equity on
cash flow hedges
At 1 April 2011 restated
Charge/(credit) in the
income statement
Charge in other
comprehensive income
Reported in equity on
share-based payment
At 31 March 2012
The Group has tax losses of £5.3 million (2011: £7.0 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.
The rate of UK corporation tax was reduced to 23% with effect from 1 April 2013 by Finance Act 2012. Had that rate
applied in 2011/12 the closing deferred tax liability would have been reduced by £22.7 million to £521.2 million.
(e) Factors that may affect future tax charges
The Government has stated its intention to reduce the UK rate of corporation tax to 22% by 1 April 2014. Had that rate
applied in 2011/12 the closing deferred tax liability would have been reduced by £45.3 million to £498.6 million and the
current year’s corporation tax charge would have been reduced by £4.8 million to £26.4 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, capital allowances will be claimed at a slower rate in future
52
following the reduction in rates from 20% to 18% (general plant pool) and from 10% to 8% (special rate pool) with effect
from 1 April 2012.
9. Dividends paid and proposed
Year to
Year to
31.3.2012 31.3.2011
£m
£m
Declared and paid during the year:
Equity dividends on ordinary shares:
Final dividend for 2010/11: 9.57 pence (2009/10: 8.85 pence)
Interim dividend for 2011/12: nil (2010/11: 4.72 pence)
Special dividend for 2011/12: 44.73 pence (2010/11: nil)
Dividends paid
Proposed for approval by shareholders at the AGM:
Final dividend for 2011/12: nil (2010/11: 9.57 pence)
10. Intangible assets
Cost:
At 1 April 2010, 1 April 2011 and 31 March 2012
Impairment:
At 1 April 2010, 1 April 2011 and 31 March 2012
Net book value at 31 March 2012
Net book value at 1 April 2010 and 31 March 2011
49.6
-
232.0
281.6
45.8
24.5
-
70.3
-
49.6
Goodwill
£m
Other
£m
Total
£m
3.8
64.2
68.0
(0.2)
3.6
3.6
-
64.2
64.2
(0.2)
67.8
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
5.36% 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 2012 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.
53
11. Property, plant and equipment
Cost:
At 1 April 2010
Additions
Schemes commissioned
Reclassifications
Disposals
At 1 April 2011
Additions
Schemes commissioned
Reclassifications
Disposals
At 31 March 2012
Depreciation:
At 1 April 2010
Charge for the year
Reclassifications
Disposals
At 1 April 2011
Charge for the year
Disposals
At 31 March 2012
Net book value at 31 March 2012
Net book value at 31 March 2011
Net book value at 1 April 2010
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
115.6
-
3.7
2.8
(0.5)
121.6
0.1
0.5
-
-
122.2
36.0
2.2
-
-
38.2
2.3
-
40.5
81.7
83.4
79.6
1,811.7
14.5
76.3
-
(6.8)
1,895.7
13.2
119.8
(0.1)
(7.5)
2,021.1
99.9
25.2
-
(6.8)
118.3
24.3
(7.5)
135.1
1,886.0
1,777.4
1,711.8
2,254.3
1.2
73.7
(2.5)
(2.4)
2,324.3
3.5
92.9
0.1
(2.4)
2,418.4
709.4
72.8
(0.3)
(2.5)
779.4
75.8
(2.1)
853.1
1,565.3
1,544.9
1,544.9
208.1
0.4
13.1
(0.3)
-
221.3
0.6
11.6
-
-
233.5
136.9
11.4
0.3
-
148.6
11.4
-
160.0
73.5
72.7
71.2
111.4
203.8
(166.8)
-
-
148.4
292.8
(224.8)
-
-
216.4
-
-
-
-
-
-
-
-
216.4
148.4
111.4
Total
£m
4,501.1
219.9
-
-
(9.7)
4,711.3
310.2
-
-
(9.9)
5,011.6
982.2
111.6
-
(9.3)
1,084.5
113.8
(9.6)
1,188.7
3,822.9
3,626.8
3,518.9
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 £3.2 million for the year to 31 March
2012 (2011: £1.9 million). The capitalisation rate used to determine the amount of borrowing costs eligible for
capitalisation was 5.96% (2011: 5.96%).
It is not possible to separately identify the value of all land assets.
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
12. Investments
Investments in jointly controlled entities
31.3.2012 31.3.2011
£m
47.3
22.0
69.3
£m
46.8
21.8
68.6
31.3.2012 31.3.2011
£m
4.0
£m
4.3
(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.
54
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
VLS
Agreco
Agreco
31.3.2012 31.3.2012 31.3.2011 31.3.2011
£m
3.2
(2.9)
0.3
-
0.3
-
0.3
£m
3.3
(2.9)
0.4
-
0.4
-
0.4
£m
6.9
(5.9)
1.0
(0.5)
0.5
-
0.5
£m
6.7
(5.7)
1.0
(0.5)
0.5
(0.1)
0.4
8.5
7.2
15.7
(5.8)
(6.5)
(12.3)
3.4
-
3.2
3.2
(2.3)
-
(2.3)
0.9
8.4
7.7
16.1
(4.9)
(7.8)
(12.7)
3.4
-
1.4
1.4
(0.8)
-
(0.8)
0.6
(b) The Group’s interests in principal subsidiaries at 31 March 2012 were as follows:
Name of undertaking
Northumbrian Services Limited
Country of
incorporation or
registration and
operation
England and Wales Ordinary shares of £1 100
Description of shares
held
Proportion of
nominal value
of issued
shares held
by Group (%) Business activity
Northumbrian Water Limited
England and Wales Ordinary shares of £1 100
Northumbrian Water Finance plc
England and Wales Ordinary shares of £1 100
Caledonian Environmental Services
plc
Caledonian Environmental
Levenmouth Treatment Services
Limited
Ayr Environmental Services Limited
Ayr Environmental Services
Operations Limited
AquaGib Limited
Scotland
Ordinary shares of £1 100
Scotland
Ordinary shares of £1 100
Waste water services
Scotland
Scotland
Ordinary shares of £1 75
Ordinary shares of £1 100
Waste water services
Waste water services
Gibraltar
Ordinary shares of £1 67
Northumbrian Water Projects Limited England and Wales Ordinary shares of £1 100
Ordinary shares of £1 100
Belgium
SA Agrer NV
Holding of
investments and loans
Water and sewerage
services
Holding of finance
instruments
Waste water services
Water and sewerage
services
Waste water services
Aid funded project
work
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
31.3.2012 31.3.2011
£m
3.3
£m
3.2
55
14. Trade and other receivables
Trade receivables
Amounts owed by jointly controlled entities
Prepayments and accrued income
Financial assets
Other receivables
31.3.2012 31.3.2011
£m
78.2
0.6
60.3
3.8
11.0
153.9
£m
84.4
0.6
67.9
2.0
12.4
167.3
As at 31 March 2012, trade receivables at nominal value of £50.8 million (2011: £44.5 million) were impaired.
Movements in the provision for impairment of trade receivables were as follows:
At 1 April 2010
Charge for the year
Utilised
At 1 April 2011
Charge for the year
Utilised
At 31 March 2012
£m
37.1
17.8
(10.4)
44.5
17.8
(11.5)
50.8
At 31 March, the analysis of trade receivables overdue but not impaired is as follows:
2012
2011
0-3 months 3-12 months
£m
29.7
26.8
£m
0.3
0.6
12-24
months
£m
13.8
12.4
24-36
months
£m
7.1
6.4
36-48
months >48 months
£m
-
-
£m
3.0
2.5
Total
£m
53.9
48.7
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
16. Trade and other payables
Trade payables
Other payables
Interest payable
Accruals and deferred income
31.3.2012 31.3.2011
£m
76.7
65.0
141.7
(1.4)
140.3
£m
75.3
93.2
168.5
(1.4)
167.1
31.3.2012 31.3.2011
£m
1.4
4.3
£m
31.3.2012 31.3.2011
£m
16.5
17.8
39.1
82.2
155.6
£m
13.6
23.3
46.0
93.0
175.9
56
17. Interest bearing loans and borrowings
Current:
Bank overdrafts
Current instalments due on borrowings (principal £76.2million, 2011: £150.4 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
£105.0million, 2011: £103.5 million) (see note 18)
Non-current instalments on borrowings (principal £2,624.1 million, 2011: £2,166.9 million)
Borrowings comprise the following:
Loans (principal £427.0 million, 2011: £527.1 million)
Subordinated loan stock (principal £1.9 million, 2011: £1.9 million)
Eurobonds – due 11 October 2017 bearing interest rate of 6.0% (principal £300.0 million, 2011:
£300.0 million)
Eurobonds – due 6 February 2023 bearing interest rate of 6.875% (principal £350.0 million,
2011: £350.0 million)
Eurobonds – due 29 April 2033 bearing interest rate of 5.625% (principal £350.0 million, 2011:
£350.0 million)
Eurobonds – due 23 January 2042 bearing interest rate of 5.125% (principal £360.0 million,
2011: £nil)
Eurobonds – due 23 January 2034 bearing interest rate of 5.87526% (principal £248.0 million,
2011: £248.0 million)
Eurobonds – due 31 March 2037 bearing interest rate of 6.627% (principal £61.5 million, 2011:
£61.5 million)
USPP Notes – due 14 April 2021 bearing interest rate of 5.82% (principal £100.0 million, 2011:
£nil)
Index linked Eurobonds – due 15 July 2036 bearing interest rate of 2.033% (principal £186.3
million, 2011: £177.6 million)
Index linked Eurobonds – due 30 January 2041 bearing interest rate of 1.6274% (principal £73.0
million, 2011: £69.8 million)
Index linked Eurobonds – due 16 July 2049 bearing interest rate of 1.7118% (principal £121.3
million, 2011: £115.7 million)
Index linked Eurobonds – due 16 July 2053 bearing interest rate of 1.7484% (principal £121.3
million, 2011: £115.7 million)
Less current instalments due on bank loans (principal £76.2 million, 2011: £150.4 million)
31.3.2012 31.3.2011
£m
£m
1.4
80.7
7.3
89.4
1.4
155.1
7.2
163.7
105.0
2,641.9
2,746.9
103.5
2,192.3
2,295.8
429.1
1.9
530.0
1.9
306.3
307.5
381.1
384.0
346.5
346.4
356.4
-
241.7
241.4
58.6
58.9
100.0
-
185.4
176.6
73.2
69.7
121.2
115.5
121.2
2,722.6
(80.7)
2,641.9
115.5
2,347.4
(155.1)
2,192.3
The difference between the principal value of £2,624.1 million (2011: £2,166.9 million) and the carrying value of £2,641.9
million (2011: £2,192.3 million) are unamortised issue costs of £17.2 million (2011: £14.1 million) and a credit of £35.0
million (2011: £39.5 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(r)).
57
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
31.3.2012 31.3.2011
£m
£m
7.3
25.0
147.5
179.8
(67.5)
112.3
7.3
105.0
112.3
7.2
23.5
151.6
182.3
(71.6)
110.7
7.2
103.5
110.7
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
19. Provisions
At 1 April 2011
Current
Non-current
At 1 April 2011
Utilised
At 31 March 2012
Analysed as:
Current
Non-current
31.3.2012 31.3.2011
£m
0.7
2.4
26.6
29.7
£m
0.8
2.3
31.9
35.0
£m
0.2
2.4
2.6
(0.2)
2.4
0.2
2.2
2.4
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 25), and are expected to be paid over the remaining lives, which is approximately 10 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.
58
(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 2012, the Group had £450.0 million of undrawn committed bank facilities (2011: £35.0 million).
(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 2012, 75% (2011: 74%) 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
2012
+50
+100
+150
2011
+50
+100
+150
Effect on
profit/equity
£m
1.2
2.5
3.7
1.3
2.5
3.8
(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.
59
For the Group, the pro forma RCV at 31 March 2012 was £3,871.4 million. For NWL, the RCV at 31 March 2012 was
£3,550.0 million. On this basis, the gearing ratios were 68% for the Group and 64% 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, including the impact of interest rate swaps:
Year ended 31 March 2012
Interest bearing loans and borrowings
Trade and other payables
Year ended 31 March 2011
Interest bearing loans and borrowings
Trade and other payables
On demand
£m
1.4
-
1.4
Less than 3
months
£m
77.9
101.5
179.4
3-12
months
£m
159.6
51.8
211.4
1-5 years
£m
773.2
-
773.2
More than 5
years
£m
5,084.1
-
5,084.1
Total
£m
6,096.2
153.3
6,249.5
On demand
£m
1.4
-
1.4
Less than 3
months
£m
162.4
82.3
244.7
3-12
months
£m
124.6
48.7
173.3
1-5 years
£m
704.5
-
704.5
More than 5
years
£m
4,381.8
-
4,381.8
Total
£m
5,374.7
131.0
5,505.7
(l) Maturity profile of financial assets and liabilities (carrying value)
Year ended 31 March 2012
Fixed rate:
Eurobonds
USPP notes
Subordinated loan stock
Bank loans
Obligations under finance
leases and hire purchase
contracts
Other loans
Fixed rate at 31 March 2012
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
2012
Net borrowings at 31 March
2012
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
(4.0)
-
-
(20.9)
(2.8)
(0.3)
(28.0)
172.8
0.5
-
(55.5)
(1.4)
(4.2)
-
-
(21.3)
(2.1)
(0.3)
(27.9)
-
0.2
-
(10.0)
-
(4.3)
-
-
(21.3)
(1.9)
(0.4)
(27.9)
-
-
-
(11.7)
-
(4.2)
-
-
(22.1)
(1.3)
(0.3)
(27.9)
-
-
-
(13.5)
-
(5.0)
-
-
(22.0)
(1,668.9)
(100.0)
(1.9)
(124.0)
(1,690.6)
(100.0)
(1.9)
(231.6)
(0.9)
(0.3)
(28.2)
(0.4)
(0.4)
(1,895.6)
(9.4)
(2.0)
(2,035.5)
-
-
-
(13.4)
-
-
11.3
(501.0)
(91.4)
-
172.8
12.0
(501.0)
(195.5)
(1.4)
(4.5)
(4.6)
(4.8)
(4.8)
(4.8)
(79.4)
(102.9)
111.9
(14.4)
(16.5)
(18.3)
(18.2)
(660.5)
(616.0)
(2,651.5)
60
Year ended 31 March 2011
Fixed rate:
Eurobonds
Subordinated loan stock
Bank loans
Obligations under finance
leases and hire purchase
contracts
Other loans
Fixed rate at 31 March 2011
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
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
(4.2)
-
(24.3)
(2.8)
(0.3)
(31.6)
143.1
0.9
-
(126.3)
(1.4)
(4.1)
-
(21.2)
(2.0)
(0.3)
(27.6)
-
0.5
-
(55.4)
-
(4.2)
-
(21.1)
(1.5)
(0.3)
(27.1)
-
0.2
-
(10.0)
-
(4.2)
-
(21.3)
(1.0)
(0.3)
(26.8)
-
-
-
(10.0)
-
(4.3)
-
(22.1)
(1,317.2)
(1.9)
(145.9)
(1,338.2)
(1.9)
(255.9)
(0.5)
(0.3)
(27.2)
(0.4)
(0.9)
(1,466.3)
(8.2)
(2.4)
(1,606.6)
-
-
-
(10.0)
-
-
11.3
(477.3)
(60.0)
-
143.1
12.9
(477.3)
(271.7)
(1.4)
(4.4)
(4.4)
(4.5)
(4.5)
(4.5)
(80.2)
(102.5)
11.9
(59.3)
(14.3)
(14.5)
(14.5)
(606.2)
(696.9)
(2,303.5)
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 2012, after taking into account the effects of forward foreign exchange contracts, the Group had no currency
exposures (2011: £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
Expiring in more than two years but not more than five years
31.3.2012 31.3.2011
£m
35.0
-
£m
-
450.0
61
(o) Fair values of financial assets and financial liabilities
A comparison by category of book values, which are all recognised at amortised cost except for interest rate swaps which
are recognised at fair value, 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
Financial investments
Trade and other receivables
Financial liabilities:
Overdraft
Bank loans (principal of £427.0 million, 2011: £527.1million)
Subordinated loan stock (principal of £1.9 million, 2011: £1.9 million)
Eurobonds (principal of £2,171.4 million, 2011: £1,788.3 million)
USPP notes (principal of £100.0 million, 2011: nil)
Obligations under finance leases and hire purchase contracts (principal
of £112.3 million, 2011: £110.7 million)
Cash flow hedges
Trade and other payables
Book value
Fair value
31.3.2011
31.3.2012
£m
restated 31.3.2012
£m
£m
31.3.2011
restated
£m
172.8
12.0
167.3
143.1
12.9
153.9
172.8
12.0
167.3
143.1
12.9
153.9
(1.4)
(429.1)
(1.9)
(2,191.6)
(100.0)
(1.4)
(530.0)
(1.9)
(1,815.5)
-
(1.4)
(445.7)
(1.9)
(2,474.0)
(111.8)
(1.4)
(541.3)
(1.9)
(1,899.2)
-
(112.3)
(63.8)
(175.9)
(2,723.9)
(110.7)
(58.7)
(155.5)
(2,363.8)
(112.3)
(63.8)
(175.9)
(3,034.7)
(110.7)
(58.7)
(155.5)
(2,458.8)
The fair values of the cash flow hedges and sterling denominated long term fixed rate and index linked debt with a book
value of £2,191.6 million (2011: £1,815.5 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 £501.0 million (2011:
£477.3 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 £2,812.6 million (2011: £2,428.0 million) and the carrying value of £2,834.9
million (2011: £2,458.1 million) are unamortised issue costs of £17.2 million (2011: £14.3 million) and a credit of £39.5
million (2011: £44.4 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 2012, the Group held no forward exchange contracts (2011: nil).
Cash flow hedges – interest rate swap
At 31 March 2012, the Group held one interest rate swap, designated as a hedge of future interest cash flows, for which
the Group has firm commitments. The swap was used to convert variable rate interest payments to a fixed rate basis.
The terms of this swap were as follows:
Notional amount
GBP 100.0 million
The swap was designated as highly effective.
Start date Termination date Fixed rate%
4.79
15.3.2022
15.9.2008
62
At 31 March 2011, 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
Start date Termination date Fixed rate%
4.79
2.345
2.435
15.3.2022
31.5.2011
31.5.2011
15.9.2008
29.1.2009
29.1.2009
The £100.0 million swap was designated as highly effective. The two £62.5 million swaps were not effective.
Cash flow hedges – inflation swap
As at 31 March 2012, 2011 and 2010, the Group held an inflation swap, designated as a hedge of future inflation-linked
cash flows. The swap was used to convert variable inflation-linked revenues on a contract with the Environment Agency,
to fixed.
The cash flow hedge was designated as highly effective. In consequence, the inflation-linked revenues are fixed and are
accounted for in the consolidated income statement on an accruals basis. The inflation swap and the inflation-linked cash
flows occur simultaneously and the amount accumulated in equity is reclassified to profit or loss over the period during
which the inflation-linked cash flows affect profit or loss.
The terms of the swap, including its maturity and the cash value of the annual outflow under the inflation swap based on
current rates, are as follows:
Notional amount
GBP 2.9 million
Annual swap
cash flow paid
0.9 million
Start date Termination date Fixed rate%
2.62
9.1.2034
12.5.2004
(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.
Liabilities measured at fair value
Year ended 31 March 2012
Interest rate swap
Inflation swap
Year ended 31 March 2011 restated
Interest rate swaps
Inflation swap
Year ended 31 March 2010 restated
Interest rate swaps
Inflation swap
31.3.2012
£m
(15.1)
(48.7)
Level 1
£m
-
-
Level 2
£m
(15.1)
(48.7)
Level 3
£m
-
-
31.3.2011
£m
(9.8)
(48.9)
Level 1
£m
-
-
Level 2
£m
(9.8)
(48.9)
Level 3
£m
-
-
31.3.2010
£m
(12.5)
(42.3)
Level 1
£m
-
-
Level 2
£m
(12.5)
(42.3)
Level 3
£m
-
-
During the year to 31 March 2012, 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. All other financial assets and liabilities are carried at amortised
cost.
63
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
31.3.2012 31.3.2011
£m
£m
70.0
70.0
51.9
51.9
22. Prior period adjustment
The Group is party to an inflation hedge which commenced in May 2004 as part of the issue of the Eurobonds due in
January 2034. The Group has not previously accounted for the fair value of this hedge instrument. However, the
directors have determined that the fair value should be recognised in the consolidated balance sheet in accordance with
IAS 39 Financial Instruments: Recognition and Measurement.
Comparative information has been restated in the consolidated balance sheet, consolidated statement of comprehensive
income and consolidated statement of changes in equity and in notes 7 and 20, in accordance with IAS 1 Presentation of
Financial Statements.
The impact of the restatement on the consolidated balance sheet is as follows:
Non-current liabilities
Deferred income tax liabilities
Hedging instruments
Non-current liabilities
Current liabilities
Hedging instruments
Current liabilities
Total liabilities
Net assets
31.3.2011
£m
change
£m
31.3.2011
restated
£m
31.3.2010
£m
change
£m
31.3.2010
restated
£m
(598.7)
-
(3,204.8)
12.7
(53.7)
(41.0)
(586.0)
(53.7)
(3,245.8)
(606.1)
-
(3,416.6)
11.8
(48.4)
(36.6)
(594.3)
(48.4)
(3,453.2)
(9.8)
(331.9)
4.8
4.8
(5.0)
(327.1)
(12.5)
(205.2)
6.1
6.1
(6.4)
(199.1)
(3,536.7)
475.9
(36.2)
(36.2)
(3,572.9)
439.7
(3,621.8)
313.9
(30.5)
(30.5)
(3,652.3)
283.4
Cash flow hedge reserve
Equity shareholder’ funds
Total capital and reserves
(6.6)
473.6
475.9
(36.2)
(36.2)
(36.2)
(42.8)
437.4
439.7
(8.2)
311.1
313.9
(30.5)
(30.5)
(30.5)
(38.7)
280.6
283.4
23. Additional cash flow information
Analysis of net debt as at 31 March 2012
Cash and cash equivalents
Short term cash deposits
Financial investments
Loans (principal of £2,700.3 million, 2011: £2,317.3 million)
Finance leases (principal of £112.3 million, 2011: £110.7 million)
As at
1.4.2011 Cash flow
£m
26.8
2.9
(0.9)
(355.6)
3.2
(323.6)
£m
140.3
1.4
12.9
(2,347.4)
(110.7)
(2,303.5)
Other non-
cash
movements
£m
-
-
-
(19.6)
(4.8)
(24.4)
As at
31.3.2012
£m
167.1
4.3
12.0
(2,722.6)
(112.3)
(2,651.5)
The difference between the principal value of £2,812.6 million (2011: £2,428.0 million) and the carrying value of £2,834.9
million (2011: £2,458.1 million) are unamortised issue costs of £17.2 million (2011: £14.3 million) and a credit of £39.5
million (2011: £44.4 million) in excess of the original loan proceeds to reflect the fair value of loans owed by subsidiaries
acquired in 2003.
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.
64
Analysis of net debt as at 31 March 2011
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)
As at
1.4.2010 Cash flow
£m
(33.0)
(14.4)
(1.1)
19.9
7.3
(21.3)
£m
173.3
15.8
14.0
(2,354.4)
(111.1)
(2,262.4)
Other non-
cash
movements
£m
-
-
-
(12.9)
(6.9)
(19.8)
As at
31.3.2011
£m
140.3
1.4
12.9
(2,347.4)
(110.7)
(2,303.5)
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.
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.
24. Financial commitments
Expenditure contracted for
31.3.2012 31.3.2011
£m
222.3
£m
172.8
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.
25. 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 1,830 active members at 31 March 2012 (2011: 1,908).
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 2010. At that date the value of assets amounted
to £680.1 million and the funding level was 84.7%.
The future service contribution rate jointly payable by members and the employers from 31 December 2010 was 24.2% of
pensionable salaries. Members’ contributions are 7.3% on average with the employers paying 16.9%.
The employer contribution rate was assessed using the projected unit method and the following actuarial assumptions:
Pre-retirement discount rate
Post-retirement discount rate
Pay increases
Price inflation (RPI)
Price inflation (CPI)
Pension increases linked to RPI
Price inflation linked to CPI
%
5.80
4.90
3.85
3.60
2.90
3.60
2.90
With the agreement of the NWPS Trustee, the employers have made capital contributions of £70.0m to cover the period 1
January 2011 to 31 March 2015. These payments comprise employers’ contributions, the deficit recovery funding
assumed in the final determination and employees contributions under a salary sacrifice arrangement. Amounts totalling
£22.9m were paid prior to 31 March 2011 with the remaining £47.1m paid in the current period. Further payments of
£3.1m relating to early retirements were paid in the period bringing total contributions to £50.2m. Contributions for the
next financial period, to 31 December 2012, are expected to be £0.4m, relating to early retirements.
65
The scheme also has a defined contribution section which had 542 active members at 31 March 2012 (2011: 460).
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 Company in
the year totalled £0.9m (2011: £0.8m).
The additional disclosures regarding the defined benefit scheme as required under IAS 19 Employee benefits and the
relevant impact on the 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 2012. 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. Including promotional salary scale.
2. 115% of PCMA00/PCFA00 (year of birth with medium cohort improvements).
31.3.2012
3.85%
3.20%
2.50%
3.20%
2.50%
4.80%
PCMA/PCFA00
24.3
22.0
31.3.2011
4.50%
3.50%
2.80%
3.50%
2.80%
5.50%
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:
Long term
expected
rate of
return
Long term
expected
rate of
return
Equities
Corporate bonds
Government bonds
Property
Cash
Total fair value of assets
Present value of liabilities
Deficit
%
6.3
4.8
3.3
4.8
2.5
31.3.2012 31.3.2012 31.3.2011 31.3.2011
£m
511.8
62.1
63.9
71.6
3.9
713.3
(759.3)
(46.0)
£m
441.8
128.1
80.4
76.0
12.0
738.3
(822.4)
(84.1)
%
7.3
5.5
4.3
5.8
3.8
The discount rate at 31 March 2012 has been set by reference to the yield on AA corporate bonds 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 3.0% premium of the yield on long term Government bonds at 31 March 2012. The
gross redemption yield on index linked UK Government stocks was 3.3%. The long term inflation rate implied by these
yields is 3.3% which has been reduced by 0.1% to allow for an inflation risk premium. Post-retirement mortality
assumptions use a base table of 115% of PCMA00/PCFA00 with an allowance for future improvements in line with the
medium cohort projections, lagged to apply 10 years later, based on each individual’s year of birth. This is subject to a
minimum improvement of 1.0% per annum.
66
31.3.2012 31.3.2011
£m
£m
12.5
0.3
12.8
41.3
(49.3)
(8.0)
7.1
(49.3)
(42.2)
(41.3)
(83.5)
(90.0)
13.5
0.4
13.9
43.3
(45.5)
(2.2)
56.2
(45.5)
10.7
63.3
74.0
(6.5)
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 (losses)/gains
Cumulative amounts recognised since adopting the standard
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
31.3.2012 31.3.2011 31.3.2010 31.3.2009 31.3.2008
£m
666.7
(576.2)
90.5
(93.4)
0.6
£m
738.3
(822.4)
(84.1)
(42.2)
31.0
£m
713.3
(759.3)
(46.0)
10.7
-
£m
478.6
(598.0)
(119.4)
(205.3)
18.7
£m
663.4
(796.5)
(133.1)
177.4
-
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 loss/(gain) on obligations
Benefits paid
At 31 March
Present value of funded defined benefit obligations
Changes in the fair value of plan assets are analysed as follows:
At 1 April
Expected return on plan assets
Actuarial (loss)/gain on plan assets
Contributions by employer
Contributions by plan participants
Benefits paid
At 31 March
31.3.2012 31.3.2011
£m
796.5
13.5
0.4
43.3
0.1
(63.3)
(31.2)
759.3
£m
759.3
12.5
0.3
41.3
0.1
41.3
(32.4)
822.4
822.4
759.3
31.3.2012 31.3.2011
£m
663.4
45.5
10.7
24.8
0.1
(31.2)
713.3
£m
713.3
49.3
(42.2)
50.2
0.1
(32.4)
738.3
The Group through its subsidiary, AquaGib, also operates a non-contributory defined benefit scheme. The deficit at 31
March 2012, under local GAAP, was £3.6 million (2011: £2.1 million). The Group made contributions amounting to £0.9
million (2011: £1.0 million) to the defined benefit pension scheme.
67
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 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 used in the 2010 formal valuation. Specifically, the
post-retirement mortality assumptions use a base table of 115% of PCMA00/PCFA00 with an allowance for future
improvements in line with the medium cohort projections, lagged to apply 10 years later, based on each individual’s year
of birth. This is subject to a minimum improvement of 1.0% per annum. These assumptions imply an assumed life
expectancy for a member aged 65 at 31 March 2012 of 22.0 years (2011: 20.7 years) for males and 24.3 years (2011:
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
3%.
26. Long Term Incentive Plan
Prior to the change of control and delisting on 14 October 2011, the Company operated a share based LTIP.
Accordingly, the accounting treatment is only relevant up to this date and was not in place at the balance sheet date.
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 note 5.
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
31.3.2012
Number
31.3.2011
Number
1,120,941 1,242,293
378,503
(351,299)
(148,556)
- 1,120,941
-
(340,222)
(780,719)
-
4,649
The weighted average exercise price throughout the year was £nil (2011: £nil). The fair value of conditional share awards
granted during the year was £nil (2011: £nil million).
The weighted average share price at the date of exercise for the conditional share awards was 465.00 pence (2011:
324.79 pence).
No conditional awards were outstanding as at 31 March 2012. The weighted average remaining contractual life as at 31
March 2011, was 1.7 years.
68
The fair value of conditional share awards granted was estimated using the Monte-Carlo model. The significant inputs to
the model were as follows:
Dividend yield
Expected share price volatility
Expected FTSE 250 Index volatility
Risk free interest rate
Expected life of option (years)
31.3.2012 31.3.2011
4.0%
28%
21%
1.5%
3
-
-
-
-
-
The expected life of these options was based on historical data and was not necessarily indicative of exercise patterns
that may have occurred. The expected volatility reflects the assumption that the historical volatility was indicative of
future trends, which was not necessarily the actual outcome.
Share Incentive Plan
Prior to the change of control and delisting on 14 October 2011 the Company operated a SIP. Accordingly, the
accounting treatment is only relevant up to this date and was not in place at the balance sheet date.
The SIP scheme provided one free matching share for every three shares purchased by an employee. Shares for the
SIP were purchased at market price by the Trustee and dividends were 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
31.3.2012 31.3.2011
Number
143,201
115,519
(3,383)
(95,155)
160,182
Number
160,182
150,596
(1,497)
(309,281)
-
27. 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
31.3.2012 31.3.2011
£m
£m
14.9
(14.9)
14.9
(14.9)
241.7
4.8
(243.6)
(2.7)
0.2
241.4
4.7
(243.2)
(2.7)
0.2
69
28. 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
2012
2011
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
11.2
9.6
0.6
0.6
8.7
8.2
Purchases from jointly controlled entities include £3.6 million (2011: £2.5 million) in respect of capital purchases under
finance leases, £0.1 million (2011: £0.1 million) in respect of operating leases, £6.7 million (2011: £6.3 million) in respect
of costs payable under finance leases and £0.8 million (2011: £0.7 million) in respect of other purchases.
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 directors is provided in note 5.
Short term employee benefits
Post employment benefits
Other long-term employee benefits
Termination benefits
Share based payments
31.3.2012 31.3.2011
£m
1.4
0.2
-
-
0.5
2.1
£m
1.6
0.2
0.6
0.1
-
2.5
29. Ultimate parent company
The Company’s immediate parent undertaking is UKW, which is incorporated in England and Wales.
In the directors’ opinion, UKW is the Company’s ultimate parent undertaking and controlling party. UKW acquired
Northumbrian Water Group plc on 14 October 2011. UKW is indirectly wholly owned by a consortium comprising Cheung
Kong Infrastructure Holdings Limited, Cheung Kong (Holdings) Limited and Li Ka Shing Foundation Limited.
Copies of UKW’s group financial statements, which include the Company, will be available in due course from
Northumbria House, Abbey Road, Pity Me, Durham, DH1 5FJ.
70
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.
71
Company balance sheet
As at 31 March 2012
Fixed assets
Investments in subsidiary undertakings
Current assets
Debtors: receivable within one year
Debtors: receivable in greater than one year
Cash at bank
Creditors: amounts falling due within one year
Net current assets/(liabilities)
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 4 October 2012 and signed on its behalf by:
Heidi Mottram
Chief Executive Officer
Chris Green
Finance Director
31.3.2012 31.3.2011
£m
£m
Notes
4
5
5
6
7
8
9
9
9
1,101.4
1,101.4
1,101.4
1,101.4
7.1
100.0
13.4
120.5
(8.3)
112.2
1,213.6
(660.0)
553.6
3.5
-
59.1
62.6
(93.2)
(30.6)
1,070.8
(490.0)
580.8
51.9
446.5
-
55.2
553.6
51.9
446.5
(1.7)
84.1
580.8
72
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 Limited. 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 2012 the Company had
net current assets of £112.3 million (2011: net current liabilities of £30.6 million). The directors have reviewed cash flow
requirements and 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 2012 was £8,000 (2011: £97,000).
Fees paid to Deloitte 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 £253.4 million (2011: £106.9 million).
73
4. Investments in subsidiary undertakings
At 1 April 2011
At 31 March 2012
£m
1,101.4
1,101.4
Name of undertaking
Northumbrian Services Limited
Country of
incorporation or
registration and
operation
England and Wales Ordinary shares of £1 100
Description of shares
held
Proportion of
nominal value
of issued
shares held
by Group (%) Business activity
Northumbrian Water Limited
England and Wales Ordinary shares of £1 100
Northumbrian Water Finance plc
England and Wales Ordinary shares of £1 100
Caledonian Environmental Services
plc
Caledonian Environmental
Levenmouth Treatment Services
Limited
Ayr Environmental Services Limited
Ayr Environmental Services
Operations Limited
AquaGib Limited
Scotland
Ordinary shares of £1 100
Scotland
Ordinary shares of £1 100
Waste water services
Scotland
Scotland
Ordinary shares of £1 75
Ordinary shares of £1 100
Waste water services
Waste water services
Gibraltar
Ordinary shares of £1 67
Northumbrian Water Projects Limited England and Wales Ordinary shares of £1 100
Ordinary shares of £1 100
Belgium
SA Agrer NV
Holding of
investments and loans
Water and sewerage
services
Holding of finance
instruments
Waste water services
Water and sewerage
services
Waste water services
Aid funded project
work
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. A full list of the Company's subsidiaries is
attached to the Company's latest annual return filed at Companies House.
5. Debtors
Amounts falling due within one year:
Amounts owed by subsidiary undertakings
Other
Amounts falling due after one year:
Amounts owed by subsidiary undertakings
31.3.2012 31.3.2011
£m
£m
7.0
0.1
7.1
100.0
100.0
3.3
0.2
3.5
-
-
Amounts owed by subsidiary undertakings include amounts receivable for the provisional surrender of tax losses
amounting to £2.8 million (2011: £1.6 million).
6. Creditors: amounts falling due within one year
Trade creditors
Amounts owed to subsidiary undertakings
Interest payable
Accruals and deferred income
31.3.2012 31.3.2011
£m
0.1
93.0
-
0.1
93.2
£m
0.1
5.5
2.7
-
8.3
74
7. Creditors: amounts falling due after more than one year
Loans
Amounts owed to subsidiary undertakings
Loans are repayable as follows:
Repayable after more than five years
31.3.2012 31.3.2011
£m
-
490.0
490.0
£m
100.0
560.0
660.0
31.3.2012 31.3.2011
£m
£m
660.0
490.0
In April 2011 the company issued £100 million USPP notes, maturing April 2021, with an annual coupon of 5.82%.
Amounts owed to subsidiary undertakings bear rates of interest linked to LIBOR. The loans 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
9. Reserves
At 1 April 2010
Profit for the year
Exercise of LTIP awards
Dividends paid
At 31 March 2011
Profit for the year
Share-based payment
Exercise of LTIP awards
Dividends paid
At 31 March 2012
31.3.2012 31.3.2011
£m
£m
70.0
70.0
51.9
51.9
Treasury
shares
£m
(2.0)
-
0.3
-
(1.7)
-
-
1.7
-
-
Share
premium
account
£m
446.5
-
-
-
446.5
-
-
-
-
446.5
Profit and
loss
account
£m
47.8
106.9
(0.3)
(70.3)
84.1
253.3
1.1
(1.7)
(281.6)
55.2
10. Commitments
The Company has issued letters of continuing support to subsidiary companies with net liabilities amounting to £16.0
million (2011: £11.9 million) and net current liabilities of £nil (2011: £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 2012 amounted to £371.7 million (2011: £344.7 million).
The Company is party to a cross guarantee arrangement with other Group companies in respect of bank facilities.
Overdrafts outstanding at 31 March 2012 in respect of the arrangement amounted to £1.0 million (2011: £27.2 million).
The directors do not expect any loss to arise as a result of this arrangement.
75