NORTHUMBRIAN WATER LIMITED
ANNUAL REPORT AND
FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2020
Registered company no: 02366703
2
ANNUAL REPORT AND
FINANCIAL STATEMENTS
FOR THE YEAR ENDED
31 MARCH 2020
CONTENTS
PAGE
STRATEGIC REPORT
Chairman’s statement
Chief Executive Officer’s review
Business overview
Section 172 Statement
Performance review
Financial performance and structure
Risk report
GOVERNANCE REPORT
Chairman’s introduction
Senior Independent Non-Executive Director’s report
Corporate governance
Remuneration Committee report
Directors’ report
FINANCIAL STATEMENTS
Income statement
Statement of comprehensive income
Balance sheet
Statement of changes in equity
Cash flow statement
Notes to the Financial Statements
Independent auditor’s report to the members of Northumbrian Water Limited
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STRATEGIC
REPORT
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CHAIRMAN’S STATEMENT
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Our strong performance is underpinned by our
five strategic themes: Customer, Environment,
Competitiveness, People and Communities. At
each meeting the Board has reviewed
performance against a balanced scorecard of
measures related to these strategic themes in
addition to health and safety, financial
performance and other key factors. A more
detailed overview of our work and
progress on these themes is set out later in this
Strategic Report.
Our Chief Executive Officer (CEO), Heidi Mottram,
describes in her Review our continued strong
performance delivered against existing
commitments but, importantly, we have also tried
to lay solid foundations for the coming years in
our 2020-25 Business Plan (our Plan).
We submitted our Plan in August 2018. This was a
very collaborative and consultative exercise,
conducted in partnership with our customers and
other key stakeholders and we were encouraged
by the very positive response our Plan received,
including 91% customer support. Our Plan
committed to offering significant bill reductions
to our customers alongside real improvements in
service. It was clear from our detailed and
extensive work with customers that they shared
our firm belief that protecting the environment
and ensuring the resilience of our services should
remain two of our key priorities. We were
confident that our Business Plan would have
enabled us to deliver on those fronts in a cost
effective manner, as we evidenced to Ofwat, and
as supported by detailed analysis confirming that
the investment we proposed is in our customers’
best interests for the long term. Contrary to our
customers’ wishes, in its Final Determination of
prices for 2020–25 (FD), Ofwat rejected several
key elements of our Plan, including critical
projects to enhance resilience and reduce sewer
flooding.
The Board assessed the FD in detail, in the
context of the complex environment in which
NWL operates, and the varied risks to which it is
exposed, which are often difficult to forecast
accurately. Although the Board considers that the
Company remains financially viable in the short
term, it unanimously agreed that the FD does not
enable NWL to maintain the sustainable financial
resilience required to ensure that it can continue
over the longer term to provide the reliable and
high quality services that our customers need
and rightly expect of us.
A J Hunter
The Board of
Northumbrian Water
Limited (NWL/the
Company) recognises
that, for most of our
customers, we are the
only available supplier
of water.
The Company therefore carries very significant
responsibilities and must strive to meet the high
expectations of everyone we serve and work
with. As a result, the Board challenges itself and
the Company’s employees, to deliver improved
performance each year, so that our customers’
high expectations can continue to be met. Our
Company’s vision, however, remains the same
– to be the national leader in the provision of
sustainable water and wastewater services.
It is a primary duty of the Board to balance the
interests of all our stakeholders fairly, whilst
meeting our fiduciary duties as directors. As
Chairman, I believe the Board strikes the required
balance very well, assisted by the robust
governance arrangements we have in place,
which are set out in detail in our Corporate
Governance report.
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Therefore, as a measure of last resort, on 14
February 2020, the Company rejected the FD and
asked Ofwat to refer it for redetermination by the
Competition and Markets Authority (CMA). This
process is underway as I write this statement and
we expect to know the outcome no later than
March 2021.
Notwithstanding the CMA appeal, it is our people
that are our ‘front-line’ and NWL’s performance
depends entirely on their continued engagement,
initiative and hard work. I would like to sincerely
thank all our employees for their dedication and
commitment this year, and in particular given the
tremendous challenges posed by Covid-19.
Finally, I would like to welcome Mike Porter, who
joined us on 29 June 2020 as Chief Financial
Officer, and express the Board’s appreciation for
the valuable contributions made by Frank Frame
as a Non-Executive Director (NED) between 2011
and 2019 and Chris Johns as Finance Director
between 2013 and 2020. Frank retired from the
Board at the end of 2019 and Chris stepped down
in May this year. We wish them both well for the
future.
I hope you find our Annual Report and Financial
Statements interesting and helpful.
A J Hunter
Chairman
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CHIEF EXECUTIVE
OFFICER’S REVIEW
Our vision is to be the national leader in the provision
of sustainable water and wastewater services, and
I am delighted that we have made further progress
towards this vision during 2019/20, and remain one of
the leaders in our industry.
to share vital information and a variety of online
tools to bring our people together. Guides such as
the Health & Wellbeing Guide were delivered in
interactive formats to encourage employee take
up.
We understand how difficult this time has been
for many of our customers and we built on our
existing ‘Water without the Worry’ campaign
through direct communications to customers. We
were able to offer payment breaks to over 6,000
customers and apply our social tariffs to 2,000
customers with affordability issues. We also
signed up 4,000 extra customers to our Priority
Services Register to reflect their circumstances.
We have built on other customer messages such
as ‘Bin The Wipe’ to reinforce that, even during
toilet roll shortages, other materials should not be
flushed down the toilet.
Our purpose is not only to deliver this essential
service for customers, but also to make a wider
contribution to support our communities and
enhance the environment we all depend on. The
impact of the pandemic has brought this
responsibility into even sharper focus.
Recognising this we were one of the first
businesses to sign the ‘C-19 Business Pledge’ (see
page 7). This pledge commits us to supporting our
customers, employees and communities as our
part in helping the country pull through the
Covid-19 crisis.
We chose as a business not to furlough any staff,
with those who could not carry on their normal
work either trained to support other parts of the
business or given the opportunity to help others
in our communities. This included delivering
essential food and prescriptions, and making
welfare phone calls to vulnerable, isolated people.
The Covid-19 situation is not over yet and we will
continue to respond to government guidance as it
develops and ensure that we keep delivering our
key services safely, and look after our employees,
customers and communities.
H Mottram
But before I review some of the achievements we
are most proud of this year and look forward to
the year ahead, I would like to talk about the
impact of the current Covid-19 pandemic and
how we have responded to the many challenges
it has created.
COVID-19
During this time the vital importance of
delivering clean water and safely taking away
wastewater has perhaps never been so clear. I am
incredibly proud of how our teams and partners
have come together to continue to provide our
customers with this essential public service in
the face of the pandemic.
Keeping our employees safe was our first priority,
and we were able to quickly enable our customer
and support teams to work from home, in line
with government guidance, as well as taking
measures to ensure that our operational and field
workers could continue to carry out their
essential work safely. We utilised multiple
communication channels to keep our people
informed and engaged, using daily email updates
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OUR C-19 PLEDGE
Making OVER £1,000,000 of support available during
the COVID-19 pandemic
This matches our commitment as one of the first signatories of the C-19 Business Pledge
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Innovate East event with Anglian Water. I am
delighted to see ideas from our earlier events
coming through into practical use within our
business, such as our Digital Twin to help us
better understand our customers’ experience of
our services. We have also gone global this year,
launching our Amplify platform and opening up
real life challenges for people around the world to
work on solutions.
The common theme running through all of these
achievements is that they are the result of the
hard work that our people put in every single day.
Through our Great Place To Work (GPTW) strategy
we aspire for all of our people to have a great
experience at work, to understand the part they
play to achieve our vision and to deliver an
unrivalled customer experience. We were
delighted to be recognised as the top place to
work in our northern operating region at the
North East Best Places to Work awards.
OUR PERFORMANCE IN 2019/20
We have been through a major transformation
programme in our customer teams over the past
few years. This year we followed the
implementation of our new customer contact and
billing system with our new operational contact
and planning system and, at the same time, we’ve
launched our new digital platforms. As with any
major change programme this has required a
huge amount of effort and learning from our
people and I would like to personally thank the
project and business teams for their tremendous
efforts.
These systems give us a much improved platform
to engage with our customers in the way they
choose, but our most important asset in providing
unrivalled customer experience is our people.
With our Just Add You approach, we’re taking
best practice approaches and tailoring them to
deliver what our customers have told us are their
top priorities. I believe this sets us up well to
deliver against, the new more holistic measure of
customer experience (C-MeX).
We made steady improvements across almost all
of our targets in our water business, meeting our
leakage targets again in both of our operating
regions and continuing long term improvements
in reducing contacts related to the appearance
and smell of our water. We have continued to lead
the way on water efficiency adding our ‘Leaky
Loos’ campaign to our existing ‘Every Drop
Counts’ message.
While we continued our strong environmental
performance, we have continued to focus on
sewer flooding, which is one of the worst service
failures our customers can experience. Our Bin
the Wipe campaign is aimed at changing
customer behaviour to avoid blockages and I have
been really impressed by some of the early
results where we have targeted three hot spot
areas with different innovative approaches. We
will look to build on this over the coming year.
I was pleased to have the opportunity to speak at
Water UK’s Delivering a Zero Carbon Water Sector
conference earlier this year. Our business is
embedded in the environment and it is
something we, as an industry, care about
passionately. We met our previous target to
reduce greenhouse gas emissions by 2020 by a
considerable margin, through our investment in
generating energy from sewage sludge and
commitment to sourcing renewable energy. We
have now set ourselves a really challenging
target of being net zero carbon by 2027, but I’m
very pleased with the real progress we are
making.
Innovation remains key to improving our long
term performance. We hosted our third
Innovation Festival in 2019, and also held a joint
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LOOKING FORWARD
We are now entering the next five year cycle of our sector. I am still extremely proud of Our Plan, the
engagement we had with over 400,000 customers in developing it, and of the ambitious goals and
significant bill reductions we set out as a result. However, our Board decided unanimously that Ofwat’s
FD did not adequately reflect what our customers said were their priorities and we asked Ofwat to
refer its FD to the CMA.
This will not distract us from our focus which remains, as always, on our customers and continuing to
deliver an unrivalled service for them. Our goals are ambitious and so we need to push on and put our
efforts firmly on delivering against the outcomes which our customers told us were so important to
them, which are set out on page 16 of this report.
We know we are building on strong foundations in many areas, such as leakage and our
environmental performance, where we have been performing strongly for a number of years. Equally
we know we have to improve our performance across other areas such as water quality and sewer
flooding in order to meet our stretching Performance Commitments (PCs) and industry-leading
ambitions, but our plans are already underway.
We are proud of the improvements we have made over the past five years, but we are never
complacent and are focused on delivering the ambitious goals we’ve set for the next five years and
beyond. I hope you find our Annual Report and Financial Statements helpful and informative.
H Mottram CBE
CEO
This Annual Report and Financial Statements is just one of a suite of documents we have published
to provide our stakeholders with easily accessible information on our performance and governance.
We have also published:
Annual Performance Report: setting out how we have performed against the commitments we
made in our Business Plan for 2015-20 and how we are continually striving to improve the services
we deliver to our customers and our business Outcomes. There is also an accessible summary
version.
Our Contribution Report: presenting the social, environmental and economic impact we have on
the communities we serve.
Data Assurance Summary: explaining how we ensure that the information we report is accurate,
clear and transparent and deliver against the commitments in Our Assurance Plan.
All of these documents are available on our websites at.www.nwg.co.uk.
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BUSINESS OVERVIEW
Our vision is to be the national leader in sustainable
water and wastewater services.
We provide water and wastewater services to our customers in the north east of England, trading as
Northumbrian Water (NW), and water services only to our customers in the south east of England,
trading as Essex & Suffolk Water (ESW).
We employ over 3,000 people
NW supplies water and wastewater services to
2.7 million people in the major population
centres of Tyneside, Wearside and Teesside as
well as the large rural areas of Northumberland
and County Durham. We provide wastewater
services only in Hartlepool.
ESW supplies water services to
1.6 million people in Essex and
0.3 million in Suffolk. Our Essex
area is part rural and part urban
and includes the main population
centres of Chelmsford, Southend
and the London Boroughs of
Barking and Dagenham and
Havering and Redbridge. Our
Suffolk area is mainly rural with
the largest towns being Great
Yarmouth and Lowestoft.
We operate and maintain:
• 53 water treatment works;
• 394 water pumping stations;
• 341 water service reservoirs;
• 26,200km of water mains;
• 410 sewage treatment works;
• 1,007 sewage pumping stations;
and
• 30,106km of sewers.
NWL is part of the Northumbrian Water Group (NWG or the Group). Further information about the
structure and ownership of NWG is provided on page 54 of this report.
Every day we supply 1.1 billion litres of water
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RATED TOP WATER &
SEWERAGE COMPANY
BY CCWATER
Top water and sewerage
company in first CCWater
Water Mark assessment
ONE OF WORLD’S
MOST ETHICAL
COMPANIES
Only water and wastewater
company in the world on
Ethisphere list
EMPLOYER OF THE
YEAR
2019 North East Business
Women of the Year Awards.
BEST PLACE TO
WORK IN THE
NORTH EAST
Number 1 in the Top 50
places to work at the North
East Best Places to Work
awards.
OUR HIGHLIGHTS
SUPPORTING
CUSTOMERS THROUGH
COVID-19
Kept essential services running
and supported customers in
difficult circumstances
THINK DIGITAL
New customer websites
launched during the year
THIRD INNOVATION
FESTIVAL PLUS
INNOVATE EAST
Industry leading approach
to Innovation and first joint
event with Anglian Water
100% OF SEWAGE
SLUDGE CONVERTED
TO RENEWABLE
ENERGY
Benefitting customers and
the environment
NET ZERO CARBON
BY 2027
Programme underway to
deliver challenging net zero
target
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O U R VISION
Our vision is to ‘be the
national leader in the provision
of sustainable water and
wastewater services’. We want
to continue to deliver value to
customers and other
stakeholders by focusing
on our core competencies of
water and wastewater
OUR THEMES
ENVIRONMENT
CUSTOMER
COMPETITIVENESS
PEOPLE
COMMUNITIES
REPUTATION
S
E
U
L
A
V
R
U
O
CUSTOMER
FOCUSED
We aim to exceed
the expectations of
our external and
internal
customers.
CREATIVE
We continuously
strive for
innovative and
better ways to
deliver our
business.
RESULTS
DRIVEN
We take personal
responsibility for
achieving
excellent business
results.
ETHICAL
We are open and
honest in meeting
our commitments,
with a responsible
approach to the
environment and
our communities.
ONE TEAM
We work together
consistently,
promoting co-
operation, to
achieve our
corporate
objectives.
OUR PURPOSE
Water is life. Every living cell on earth needs water to survive. The single most essential
ingredient for human life to thrive, is clean drinking water. Our work is instrumental in
fulfilling our basic human needs and protecting the source of life.
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OUR PURPOSE
Water is life. Every living cell on earth needs water
to survive. The single most essential ingredient for
human life to thrive, is clean drinking water. Our work
is instrumental in fulfilling our basic human needs
and protecting the source of life.
WE ARE CUSTODIANS OF WATER
Delivering reliable and resilient services that are
vital to public health.
We are the caretakers of water in our regions. Our
practical purpose is to supply safe clean water,
and remove and treat wastewater so that our
communities enjoy excellent public health.
Safeguarding the supply for future generations
requires innovation, anticipating and instigating
change and making the right decisions for the
long term. We set effective and sustainable
targets to match our ambition, always
considering the legacy we leave.
WE ARE STEWARDS OF THE
ENVIRONMENT
Valuing the natural capital and ecosystems we
depend on.
We hold ourselves to account on an ambitious set
of indicators designed to protect and improve the
environment within our regions. We recognise
the significant contribution we can make to
reducing pollution, generating renewable energy,
preventing flooding and improving public access
to recreation. Going beyond compensating for
loss of natural resources, our activities should
have a lasting positive impact on the natural
environment.
WE ARE COMMITTED TO DELIVERING
WORLD-CLASS CUSTOMER SERVICE
Giving unrivalled customer experiences
every time.
We strive to lead in customer service in our own
industry and beyond. Customer service is core to
our brand, values and culture. Our customers are
supported to participate fully in our business,
designing the services they receive, while our
people know what is expected of them, and want
our customers to always have complete trust and
confidence in what we do. We own a customer’s
problem, keep our promises and show each
customer that they are special by focusing on
individual needs.
WE ARE THE LIFEBLOOD THAT
FLOWS THROUGH OUR COMMUNITIES
Demonstrating our value and making a wider
contribution to society.
We are integral to our communities, always
listening to our customers so we understand
what matters most to them and their
expectations of us as a business that delivers
public value. We are driven to protect the most
vulnerable people in our society by eliminating
water poverty and reducing any worries they
face. Working, living and volunteering in our
regions helps us to understand and positively
impact the wellbeing of the communities we
serve.
WE ENABLE EXTRAORDINARY
LEADERS
Empowering people to know their purpose.
Working with a sense of purpose gives our people
personal fulfilment. We foster a high performing
culture and value diverse perspectives and skills.
We support our leaders to develop high emotional
intelligence, empowering our people to behave
responsibly. Our people are held to account for
living out our purpose, vision and values.
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TAKING OUR PURPOSE
FORWARD
We want our purpose statement to effectively convey
what we stand for in historical, ethical, emotional and
practical terms.
Our next steps will be to carry out detailed work
involving senior executive leaders and board
members in the business to examine our purpose
statement, and to consult with our employees,
stakeholders and customers on how to keep it
powerful and relevant. As we move beyond our
immediate response to the Covid-19 pandemic,
we will put these actions into place.
We want to be sure it resonates with our
customers, stakeholders and employees not only
now but into the future. This will ensure it
continues to fit with our Vision and Values,
demonstrating to all how we deliver public value.
Over recent months we have further reviewed
best practice, looking not just at corporate
reporting guidance, but considering how other
companies are addressing purpose to ensure we
can demonstrate we are leading in this area. We
have also engaged with organisations that are
driving purpose across the business sector,
including the Confederation of British Industry
(CBI), Business in the Community (BiTC), and This
is Purpose, through the Social Mobility Pledge
and more recently the C-19 Business Pledge.
Through this we have confirmed that our purpose
continues to drive our business effectively, and
also identified how we should look at our purpose
statement to ensure it fully encapsulates and
communicates this ethos.
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OUR OUTCOMES: 2015-2020
THEME
OUTCOME
• We deliver water and sewerage services that meet the needs of current and future
generations in a changing world.
• We supply clean, clear drinking water that tastes good.
• We provide a reliable and sufficient supply of water.
• Our customers consider the services they receive to be value for money.
• Our customers are well informed about the services they receive and the value of
their water.
• We provide a sewerage service that deals effectively with sewage and heavy rainfall.
• We provide excellent service and impress our customers.
• We help improve the quality of rivers and coastal waters for the benefit of people, the
environment and wildlife.
• We protect and enhance the environment in delivering our services, leading by example.
• We are an efficient and innovative company.
• Our finances are sound, stable and achieve a fair balance between customers
and investors.
• Our people are talented, committed and inspired to deliver great services to customers.
• Our people act in line with our values.
• We are seen as a great place to work.
• Our workplaces are healthy and safe.
• We are proud to contribute to the success of local communities.
• We work in partnership towards common goals.
• We are a company that customers trust.
CUSTOMER
ENVIRONMENT
COMPETITIVENESS
PEOPLE
COMMUNITIES
REPUTATION
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OUR OUTCOMES: 2020-25
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UNRIVALLED
CUSTOMER
EXPERIENCE
AFFORDABLE
AND INCLUSIVE
SERVICES
Our customers’ expectations are rising, and what
customers want from us is changing too. We will
deliver a package of measures to support our aim
to deliver an unrivalled customer experience.
Water and sewerage services should be affordable
for all of our customers, whatever their
circumstances, and they should all have equal
access to an unrivalled customer experience.
RELIABLE AND
RESILIENT
SERVICES
We will continue to deliver reliable and resilient
services by anticipating change, planning ahead,
and by making the right long-term decisions
about how to run our business.
LEADING IN
INNOVATION
Super-charging our innovation culture is
essential if we are to continue to deliver
unrivalled experiences within the context
of rising customer expectations, technological
advances and changing political and
physical climates.
IMPROVING THE
ENVIRONMENT
We will create a step change in our
environmental activities, building on our role as
stewards of the environment to demonstrate
leadership, and to protect and improve the
environment within our regions.
BUILDING
SUCCESSFUL
ECONOMIES IN
OUR REGIONS
As a responsible business with a strong track
record, it is important to us that we demonstrate
leadership and make a wider contribution to life
within our regions.
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OUR STAKEHOLDERS
We provide essential services to our customers and,
as a licensed water and wastewater undertaker, we
operate within a strict regulatory environment.
It is very important to us that we understand the
needs of our many stakeholders to ensure that we
continue to provide a great service and deliver
our business Outcomes. We engage proactively
with all of our stakeholders in our continuing
efforts to provide an unrivalled customer
experience.
CUSTOMER VOICE
Customer participation was fundamental to the
development of our Business Plan strategy for the
2020-25 Price Review (PR19), helping us to
understand what matters most to customers
about the services we provide, which areas of the
business they would most like to influence and
the best ways for us to engage with them. We
engaged with over 400,000 of our customers to
help shape our Business Plan through various
means including design sprints, co-creation
workshops and focus groups, with 91% of
customers accepting our Business Plan.
We have continued to engage with our customers
on an ongoing basis, through workshops, surveys,
social media and face to face using Flo, our
customer engagement vehicle. The launch of our
new websites and customer app has created
further engagement channels and we have been
able to act quickly to incorporate feedback from
customers into website enhancements. Examples
of engagement activities which have taken place
this year included our Whole Town Approach in
Ashington and Leigh-on-Sea (see page 30), the
Customer Zone at our Innovation Festival and
Age UK events to share matters such as our
Priority Services Register.
The Water Forum brings together a range of
experts from various stakeholders to challenge
the Company on behalf of our customers. It
informs our approach to customer research and
engagement on matters such as social tariffs
research, attend customer participation
workshops and partnership events as well as
more formal meetings with management.
Through this it provides challenge on areas
where performance and outcomes for customers
could be improved.
On a national and regional basis, customers’
interests are represented by the Consumer
Council for Water (CCWater). We share and review
customer literature with them before publication
and engage on how we support vulnerable
customers, as well as holding quarterly liaison
meetings and attending regional public meetings.
During the year, their Chief Executive attended a
round table on water poverty and we also met to
discuss readiness for the new C-MeX and
Developer Services Measure of Experience
(D-MeX) performance measures.
GOVERNMENT AND REGULATORY
CONTEXT
Ofwat regulates prices and levels of customer
service. We engage on key issues such as market
reform and future price controls as well as the
need to demonstrate strong governance and the
importance of maintaining the trust and
confidence of our customers. This is achieved
through formal processes, such as our Annual
Performance Report (APR) and responding to
consultations, regular account management calls
and participating in the marketplace for ideas. In
2019 we hosted the Ofwat Chief Executive on a
visit to our Innovation Festival and Chair on a
visit to Innovate East. We also participated in
Ofwat’s key campaigns covering innovation,
resilience, customer participation and water
stories.
The Drinking Water Inspectorate (DWI) monitors
drinking water quality and we engage at both an
operational and strategic level to review
performance and promote good practice, in
addition to reviewing specific improvement
schemes. In addition, The DWI Chief Inspector
attended our Innovation Festival.
The Environment Agency (EA) regulates
environmental protection and we liaise on our
environmental performance, discharge
compliance, pollution and sewer flooding. In
addition to regular performance reviews, we have
worked collaboratively through catchment
partnerships and local partnerships such as the
Northumbrian Integrated Drainage Partnership
(NIDP). One particular area of engagement over
the past year has been in relation to Drainage and
Wastewater Management Planning.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT OUR PEOPLE AND SUPPLY CHAIN
PARTNERS
We engage with our employees both through our
Employee Relations Framework and via a range
of communication channels, such as team
briefings, director roadshows and regular internal
communications. This covers a wide range of
subjects from health, safety and wellbeing and
staff benefits to values and behaviours and
diversity. Our approach is described in more
detail in the Performance Review section, under
the People heading on pages 42 to 49.
To meet the challenges of delivering our AMP6
(Asset Management Plan) capital investment
programme as efficiently and effectively as
possible, we implemented a new operating model
with our supply chain, based around collaboration
and co-operation. This involves joint framework
governance groups, integrated programme
delivery teams, joint recruitment campaigns and
a joint framework for Health and Safety (H&S). In
the year we carried out joint initiatives and
approaches to health, safety and welfare, such as
mental health first aiders, fire safety officers and
psychological health checks.
STRATEGIC REPORT
18
CIVIL SOCIETY
We engage with government and policy makers,
through briefings site visits and party conference
events, to ensure there is a good understanding of
the services we deliver and the key issues facing
our sector. We also work closely with local
authorities through regular meetings at a senior
level as well as more technical meetings on
matters such as planning, flooding risk
mitigation and economic development matters.
Activities in the year included our partnership on
developing underground asset map in the North
East and a joint conference with developers to
discuss planning and regulatory issues.
We work closely with many non-government
organisations and charities to deliver our
corporate social responsibility commitments and
build strong relationships with the communities
we serve. Our activity in this area is explained in
detail in Our Contribution Report, available on our
websites, and is summarised on pages 50 and 51
under the Communities heading of our
Performance Review.
We work with the media to help communicate
messages to our customers through news
releases, case studies and social media
messaging. This covers a wide range of subjects
such as the local impacts of capital investment
schemes, environmental and community
investment. Coverage in the year included
campaigns such as Refill and Every Drop Counts
as well as issues such as the flushability of wipes.
INVESTORS
We are conscious of our duty to act in the best
interests of our shareholders and we seek to
achieve a fair balance between them and our
customers and other stakeholders, including debt
investors.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT STRATEGIC REPORT
19
SECTION 172 STATEMENT
The Directors of the Company have a duty to promote
the success of the Company for the benefit of its
members as a whole, as set out in Section 172 of the
Companies Act 2006.
In doing so, the Directors must have regard to the
needs of, and impact on, our many stakeholders
and other matters described in the section. This
Section 172(1) Statement has been prepared in
accordance with new requirement established by
the Companies (Miscellaneous Reporting)
Regulations 2018 to describe how the Directors
have had regard to the matters set out in section
172(1)(a) to (f) of the Companies Act when
performing this duty.
HOW THE BOARD OPERATES
The Governance Report on pages 64 to 104
describes how the Board has operated during the
year, and describes how the Board has:
• established the Company’s purpose, strategy
and values, and is satisfied that these and its
culture reflect the needs of all those it serves;
• taken full responsibility for all aspects of the
Company’s business over the long term;
• demonstrated leadership and an approach to
transparency and governance which engenders
trust and ensures accountability for their
actions; and
• the range of skills and experience, including
strong independent membership, enabling it to
make decisions that address diverse customer
and stakeholder needs.
LONG-TERM PLANNING HORIZON
The nature of our business requires a long term
view to be taken on matters such as water
resources and drainage management planning.
This long term perspective underpinned the
Board’s strategy for the PR19 Business Plan,
which was called ‘Living water: Our plan 2020-25
and beyond’, and shaped the Board’s responses to
the PR19 Draft and Final Determinations (see Key
Decision – CMA Referral below).
During the year, the Board considered delivery
strategies for the ambitious goals set out in the
Business Plan. One example was the approval of
an updated energy strategy which will underpin
delivery of the commitment to be carbon neutral
by 2027, and additional investment in solar power
towards that goal. Another example was the
Board discussion of how the Company is getting
value from innovation to support delivery of
ambitious goals set out in the Business Plan.
The Board, through its Risk & Compliance Sub-
committee (R&CSC), monitors the principal risks
and uncertainties facing the business including
longer-term strategic risks. A detailed review of
the Strategic Risk Register is carried out each
year, most recently in November 2019, which
considers horizon scanning reports from external
sources. This year, two additional longer term
risks were considered related to plastics pollution
and the increasing reliance on global data
platforms.
The Board closely monitors the financial position
of the business through a rolling five year plan,
whilst also considering longer term financial
resilience over a ten year time horizon as
explained in the viability statement on page 102
and 103.
STAKEHOLDER ENGAGEMENT
The Company has a wide range of stakeholders
and we describe how we engage proactively with
these groups in Our Stakeholder section on pages
17 and 18. Engagement with our stakeholders was
Key Decision – Purpose Statement
The Board has discussed and refined the Company’s purpose statement and the updated version is set
out on page 13. This was informed by the extensive consultation process carried out in the
development of the PR19 Business Plan, with responses from over 400,000 customers and well as the
Water Forum stakeholder group, regulators, employees, supplier and other partners. The Board ensured
that the vision, corporate themes and values aligned to the purpose, as visualised in the business model
on page 12.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT central to ‘Living water: Our plan 2020-25 and
beyond’, which was shaped by responses from
more than 400,000 customers as well as our
Water Forum stakeholder, regulators, employees
and other partners. Through this process, the
Board agreed stretching performance
commitments to deliver improved service to
stakeholders across a wide range of measures,
which the Board monitors through the balanced
scorecard (see page 22 and 23).
Much of the stakeholder engagement takes place
at an operational level, the Board receiving
regular reports in respect of customer service,
operational performance, health and safety and
key risks, such as data security of customer and
employee data. However, the Board also takes
steps to engage directly with employees and
customers, as described on page 74, with one
Independent NED (INED),, M Fay, designated to
engage with the workforce and to provide the
Board with a first-hand assessment of the culture
of the business.
The Board reviews company performance across
a wide range of subjects at each meeting through
the balanced scorecard (see pages 22 and 23),
which tracks performance across our corporate
themes of Customer, Environment,
Competitiveness, People and Communities, and
also through management reports on health and
safety, finance, customer, regulation and
operational performance. This provides a
balanced view of performance across matters of
interest to each of our key stakeholder groups.
STRATEGIC REPORT 20
Examples of stakeholder matters considered by
the Board during the year included:
• Customers: updates on the short term impacts
on customer service due to the implementation
of new systems, the benefits from investment
in new digital platforms and efforts to extend
engagement on social tariffs, especially for low
income pensioners (see pages 25 to 33 for more
information on Customer matters);
• Environment: the Board approved the updated
energy strategy to deliver net zero carbon
emissions by 2027 and monitored performance
on a range of environmental performance
targets (see pages 34 to 38 for more
information on Environment matters);
• Employees: the health and safety of employees
is the first matter considered by the Board at
each meeting, including performance against
leading and lagging indicators and progress
against the Everyone Home Safe Every Day
Strategy (see pages 42 to 49 for more
information on Employee matters);
• Community: consideration of sustainability
matters and the impacts on the local
community when approving capital projects
and contracts (see pages 50 to 52 for more
information on Community matters pages);
and
• Suppliers: new contract awards including
extension of long term framework agreements,
value of innovation partnerships and approval
of Slavery and Human Trafficking statement to
ensure transparency in supply chains
Key Decision – CMA Referral
In February 2020, the Board decided unanimously to ask Ofwat to refer its PR19 FD to the CMA for
review. This followed discussions at a series of Board meetings. The Business Plan was developed
taking account of the views of more than 400,000 customers and other stakeholders. Our customers’ key
priorities were efficient costs and assurance that water and wastewater services would be robust,
deliverable and resilient for the future. The Board agreed that the FD did not properly reflect the views
and priorities of customers, or the need for long term operational, environmental and financial
sustainability. The Board took account of the trade off between lower customer bills in the short-term
and long term resilience but felt strongly that the FD fell well short of what customers clearly stated
were their priorities.
S172 DUTY
The Directors of NWL consider, both individually and together, that they have acted to promote the long
term success of the Company for the benefit of its members as a whole during the year ended 31 March
2020, in accordance with their duties under S172 of the Companies Act.
Key Decision – Alignment of Remuneration to Stakeholder Benefits
The Board, through its Remuneration Committee, has agreed changes to the structures of both its short
term and long term incentive plans for senior executives, in order to provide greater alignment to
delivering benefits for customers and other key stakeholder groups. In both cases, with effect from
2020/21, 60% of benefits under the schemes will relate to non-financial measures taken from the
balanced scorecard. These measures align directly to benefit customers, the environment, our
employees and the communities we operate in.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
STRATEGIC REPORT
21
PERFORMANCE REVIEW
In order to measure delivery of the Company
Business Plan and goals, we use a balanced scorecard
of Key Performance Indicators (KPIs) covering the full
range of our strategic themes.
The top section of the Performance table on
pages 22 to 23 (with a blue header block) shows
our performance against the Outcomes, Measures
of Success (MoS) and PCs we agreed in the PR14
price review.
We are pleased that once again we have achieved
the majority of our performance targets in the
period, and shown year on year improvement on
many of our important customer targets,
including leakage, discolouration, mains bursts
and value for money. However, we aim to achieve
all of our PCs and we are always disappointed
when our performance doesn’t meet our targets,
albeit narrowly in some cases. We show ( ) where
we have met our performance against our
promise in that year, ( ) where we have not met
our performance but not incurred a penalty, and
( ) where we have not met our performance and
have incurred a penalty.
The bottom section (with a green header block)
reports our performance against our internal
targets under our Competitiveness, People and
Communities Outcomes.
We have reviewed and revised our Balanced
Scorecard for 2020/21, taking account of the MoS
and PCs set in our PR19 FD. Though we track a
wide number of metrics in our business, we have
reduced the number of key indicators to focus on
the most important matters to our customers.
The new targets are listed on page 24.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
STRATEGIC REPORT 22
ACTUAL PERFORMANCE AGAINST THE KPI TARGETS
SCORECARD MEASURE
UNITS
2018/19
PERFORMANCE
2019/20
PERFORMANCE
PC
ACHIEVED
CUSTOMER
We provide excellent service and impress our customers
score (out of 100)
85.9
>=90
n/a
n/a
Ofwat Service Incentive
Mechanism (SIM)
Independent overall
customer satisfaction
survey
Domestic customer
satisfaction, net promoter
score
Independent survey on
keeping customers informed
score (out of 10)
8.7
>=8.2
score
+43
>=32
%
93
>=94
Our customers consider the services they receive to be value for money
NWL independent value for
money survey
CCWater value for money
survey – Water NW
CCWater value for money
survey – Sewerage NW
CCWater value for money
survey – Water ESW
score (out of 10)
8.2
>=7.9
%
%
%
75
78
71
>=83
>=84
>=73
8.6
+40
93
8.1
79
84
76
We supply clean, clear drinking water that tastes good
Overall drinking water
compliance
Discoloured water
complaints
Satisfaction with taste and
odour of tap water
%
99.949
100
99.915
no. of complaints
2,594
<=2,908
2,349
no. of complaints
1,060
<=987
862
We provide a reliable and sufficient supply of water
Leakage – NW
Leakage – ESW
Interruptions to water
supply for more than 3
hours
Properties experiencing
poor water pressure
Ml/day
Ml/day
average minutes/
property
136.3
<=137
64.2
<=66
09:12
<=05:00
134.8
63.2
06:08
no. of properties
200
<=216
220
Water mains bursts
no. of burst mains
3,853
<=4,586
2,817
table continued…
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
STRATEGIC REPORT
23
SCORECARD MEASURE
UNITS
2018/19
PERFORMANCE
2019/20
PERFORMANCE
PC
ACHIEVED
We provide a sewerage service that deals effectively with sewage and heavy rainfall
Properties flooded
externally
no. of properties
902
<=1,318
1,001
Properties flooded internally
no. of properties
124
<=186
Repeat sewer flooding
no. of properties
60
<=496
139
75
Properties flooded
externally – transferred
network (TDS)
Properties flooded internally
(TDS)
Sewer collapses
Sewer collapses (TDS)
ENVIRONMENT
no. of properties
2,967
<=2,931
3,102
no. of properties
246
<=228
number
number
49
59
<=58
<=84
205
50
63
We help improve the quality of rivers and coastal waters for the benefit of people, the environment and wildlife
Pollution incidents (category
3)
Bathing water quality
compliance
Sewage treatment works
discharge compliance
number
no. sufficient
no. failing works
We protect and enhance the environment
Greenhouse gas emissions
SCORECARD MEASURE
ktCO2e
UNITS
59
33
0
<=115
>=34
0
63
33
2
148
<=150
139
2018/19
PERFORMANCE
TARGET
2019/20
PERFORMANCE
ACHIEVED
COMPETITIVENESS
Gearing: net debt to Regulatory
Capital Value (RCV)
Regulated gearing: net debt to
RCV
Interest cover
PEOPLE
Employee engagement –
trust index
Employee engagement –
external survey
%
%
67.2
<=77.5
66.8
<=70
times
3.6
>=2.4
%
n/a
>=65
67.8
67.2
4.0
62
score
One to Watch
n/a
n/a
n/a
Lost time reportable accidents
number
7
<=3
7
COMMUNITIES
Ethisphere
awarded/not
awarded
awarded
awarded
awarded
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
MEASURES AND KPI TARGETS FOR 2020/21
SCORECARD MEASURE
CUSTOMER
C-MeX: Customer experience
C-MeX: Customer service
D-MeX: Developer services measure of experience
Interruptions to supply > 3 hours
Repeat sewer flooding incidents
Internal sewer flooding incidents
Compliance Risk Index (CRI)I
ENVIRONMENT
Leakage (NW)
Leakage (ESW)
Discharge permit compliance
Pollution events (Category 1&2)
Greenhouse gas emissions
SCORECARD MEASURE
COMPETITIVENESS
Gearing: net debt to RCV
Regulated gearing: net debt to RCV
Interest cover
PEOPLE
Employee engagement index
Lost time reportable accidents
COMMUNITIES
STRATEGIC REPORT 24
UNITS
position
position
position
mm:ss
number
number
score
Ml/d
Ml/d
%
number
ktCO2e
UNITS
%
%
times
%
number
2020/21
TARGET
Top 2
Top 2
Top 2
<=05:24
<=46
<=285
<=2
<=126.5
<=56.4
>=99
<=1
<=57.2
2020/21
TARGET
<=77.5
<=70
>=2.4
>=65
<=3
Trust - BITC Platinum Plus / Ethisphere / CCWater
awarded
awarded
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
CUSTOMER
CUSTOMER EXPERIENCE
Ofwat has used its SIM to measure our customers’
experiences of dealing with us over recent years.
As part of its PR19 FD, Ofwat assessed SIM
performance for the four years from 2015/16 to
2018/19 and we were pleased to receive a positive
outperformance reward of 1.9% of retail revenue.
For future years, Ofwat has introduced a new
customer measure of experience (C-MeX). In
addition to assessing service received, this is a
broader and more representative measure of
customers’ wider experience and perception of
our performance. C-MeX has operated in ‘shadow
year’ for 2019/20, with no reward or penalty
opportunity, to help companies and Ofwat to
understand the new metric, and Ofwat published
updated guidelines as part of its FD. Our ambition
is to be in the top 2 companies for C-MeX. For the
shadow year, we ranked 5 out of 17 water
companies overall.
A separate measure has been introduced as a
developer services measure of experience,
D-MeX, assessing the service that we provide to
developer services customers, including property
developers, self-lay providers and those with new
appointments and variations. This applies similar
principles to C-MeX and has also operated in
shadow reporting this year. Our ambition is to be
in the top position for D-MeX across the AMP. For
the shadow year, based on data shared between
water companies we were very pleased to be
ranked 1 out of 17 for the qualitative score.
“We provide excellent
service and impress
our customers”
STRATEGIC REPORT
25
UNRIVALLED CUSTOMER
EXPERIENCE
Our clear ambition is to provide an unrivalled
customer experience to each and every customer,
whatever their circumstances or needs, and
however they choose to contact us.
Understanding our customers’ preferences and
changing needs is key to our success in providing
an unrivalled customer experience to each and
every one of our customers, whenever they
engage with us. This is encapsulated in our
Unrivalled Customer Experience strategy and
informed by engagement with over 400,000
customers through the development of our PR19
Business Plan.
We have continued to engage across our
customer base, using our mobile customer
engagement vehicle, Flo, to reach different
groups. For example, we’ve attended events at
Newcastle, Durham and Northumbria universities
to understand the needs of our student customers
and, as a result, developed specific web pages to
better engage and inform them. Flo has also been
a proven model to engage more widely in
understanding what our customers are interested
in, such as key parts of our strategies in areas like
water efficiency, and our Every Drop Counts
campaigns, to sewer flooding and our ‘Bin the
Wipe’ message. We’ve also used it as a vehicle to
share more about our inclusivity strategies and to
encourage customers to talk with us about the
things that matter most to them.
We continue to work to evolve our thinking in
line with best practice, using the Institute of
Customer Services’ UKCSI as a benchmark, and
working with organisations like KPMG to
understand some of their international
benchmarking principles and measurements. We
ran an Unrivalled Customer Experience sprint at
our Innovation Festival, bringing together key
speakers from across a number of industries and
from a number of key ‘north east’ companies,
ensuring we were aware of what businesses and
customers expect in 2020 and beyond, in respect
of service, experience and corporate social
responsibility.
Customers in 2020 and beyond are looking for
more and different things and we’re evolving our
thinking in order to reflect these nuanced
changes and providing leading edge thinking and
models. We are developing these ideas and
refreshing our Unrivalled Customer Experience
and Inclusivity strategies to help us continue to
meet our customers developing needs.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
DIGITAL TRANSFORMATION
Over the past few years we have committed a
considerable investment in our transformational
change programme, ONCE (Our New Customer
Experience), including the implementation of our
new Customer Care and Billing system. As with
any significant change programme, the transition
from disparate legacy systems to an holistic suite
of future-proofed and integrated systems
involved a steep learning curve for our people
and took some time to stabilise, during which we
saw some short term impacts on performance.
We invested in extra staff, training and support
as we worked through the changes, and are now
beginning to see the benefits of the increased
capabilities. We are also pleased that these
improvements have been recognised in our
meetings with CCWater and other stakeholders
as well as in customer feedback.
Think Digital is a key component of our overall
Unrivalled Customer Experience Strategy and
one where we’ve driven significant improvement
and engagement across the year. We’ve engaged
with colleagues and customers through a number
of channels, including face-to-face interviews,
A-B testing, digital focus groups, customer
testing, online forum engagement to test ideas
and online digital challenges. We’ve aimed to
engage with different customer groups for this,
working with customers from school work
experience ‘future customer’ groups, to students,
to working customers to customers who have
retired and we engaged with as part of our link
with Age UK.
This culminated in the launch of our new
websites in October 2019, moving to a new and
agile platform with completely new customer
journeys and experiences. This is a key part of
our digitalisation strategy, to give customers
access to channels of choice and the ability to
self-serve and engage with us in a new way. Our
new websites have a completely new look and
feel and customer feedback has been great. Since
go live we have worked to implement over 100
enhancements to the customer experience on the
website, responding to customer suggestions. In
March 2020 we saw a record numbers of
transactions coming through the website and our
new customer app, which we launched in
February 2020.
STRATEGIC REPORT 26
CUSTOMER SATISFACTION AND
VALUE FOR MONEY
Our aim is to deliver an unrivalled customer
experience and, in addition to our C-MeX
performance, we track various measures of
customer satisfaction with the services we provide
and the value for money of those services.
Our own customer satisfaction research is carried
out quarterly by an independent company. Though
our score fell slightly in the year from 8.7 to 8.6,
this remains a strong result and well above our PC.
As an alternative indicator, we use Net Promoter
Score to measure customer advocacy, the loyalty
that exists between a company and its customers,
and our strong positive score of +40 ranks us
alongside leading UK businesses.
Our customers tell us that it is important to keep
them well informed and 93% of our customers
have told us that they were satisfied that they are
supplied with all the information they need to feel
informed about the services we provide. We
engaged with more than 400,000 customers during
the development of our PR19 Business Plan to
Ofwat and continue to engage on an ongoing
basis.
“Our customers consider
the services they receive
to be value for money”
Our customers have also told us that value for
money is very important to them, and this is a key
area where they would like to be involved in
influencing our future plans. We use two surveys
to help us assess whether our customers think we
offer good value for money.
CCWater carries out research with customers
about the value for money of services provided. We
were delighted to see significant increases in our
scores in both our NW region, for water and
sewerage services, and in our ESW region, for
water only, where average bills are higher. We
achieved our PC against two out of three of these
measures, for water services in our ESW area and
wastewater services in our NW area, but were
disappointed not to achieve our PC for water
services in our NW region. We continue to strive to
keep bills at affordable levels and we describe our
work to support customers in vulnerable
circumstance below. We also commission
independent surveys for which the value for
money score reduced marginally to 8.1 out of 10,
remaining above our PC.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
STRATEGIC REPORT
27
Looking ahead, in our Business Plan we
committed to the largest reduction in customer
bills in the country. We will continue to work with
DWP to extend the data sharing initiatives which
will enable us to focus on proactive support and
our customer digital twin project to help target
how we promote our affordability schemes. We
are also working with our credit reference partners
on automating online eligibility for support
schemes and we are exploring a digital banking
income and expenditure initiative. In addition, we
continue to support the work with NEA on water
poverty developing new ways to support
customers save money on both their water and
energy bills.
“Our customers are well
informed about the
services they receive and
the value of water”
SUPPORTING CUSTOMERS IN
VULNERABLE CIRCUMSTANCES
We have committed to eradicate water poverty
across our supply areas, working with the charity
National Energy Action (NEA) in an innovative
research and delivery partnership. We have a
number of arrangements in place already to
support customers who are in vulnerable
circumstances, as set out in our Inclusivity
Strategy, which we developed in partnership with
our customers. Through our strong partnership
with the debt charity StepChange we continue to
assist our customers to receive holistic debt
advice. With the benefit of our data sharing
agreement with StepChange we know which of
our customers are seeking debt advice so that we
can provide them with the breathing space they
need to work through their finances.
We extended our affordability tariff in 2019/20 to
include those in receipt of pension credits,
building on our existing tariff which provides a
discount of up to 50% for low income households
where their water bills represent more than 3% of
net income. We have been working actively with
the Department for Work and Pensions (DWP) to be
able to make use of the powers within the Digital
Economy Act to identify customers who would be
eligible for our financial support schemes. This
will allow us to proactively check eligibility for our
customers and provide support to those who need
it.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
STRATEGIC REPORT
STRATEGIC REPORT
28
28
JUST ADD YOU
We are passionate about water, and understand
its importance to everyday life. Our customers’
expectations are rising all the time.
We’re proud of what we do already but know we
can do more on our customer focus, consistently
creating unrivalled experiences. Making sure we
get it right first time is more important than ever.
We want our customers to know we’ve done a
great job, and that they matter to us.
In 2019 we launched our external customer
campaign across our regions, ‘Just Add Water’, to
remind our customers just how important water
is to everyday life. However, we know that we
can’t give our customers an unrivalled experience
without every one of our team playing a part in
that, so we also created ‘Just Add You’ to
showcase the diverse and brilliant ways our
people help our customers every day.
We asked our customers what was important to
them and focus our service on the five priorities
chosen by our customers:
• Show each customer that they’re important
to us;
• ‘Own’ the customer’s problem;
• Make it easy for them;
• Be proud to promote our great work in local
communities; and
• Keep our promises.
To complement these, and to support in
delivering an unrivalled customer experience
every time, we’ve taken some great learning from
a model developed by KPMG Nunwood; the Six
Pillars of customer experience excellence. The
Six Pillars provide a framework that supports
leading companies around the world in driving
positive change in their businesses. These are:
• Integrity – demonstrating trustworthiness;
• Resolution – putting issues right quickly;
• Expectations – understanding and exceeding
expectations;
• Time and effort – enabling customers to
achieve their objectives quickly and easily;
• Personalisation – understanding and adapting
to a customer’s specific needs; and
• Empathy – relating to a customer’s experience.
Our customers are at the heart of everything we
do and being recognised by our customers for
great customer service is really important to us.
By understanding our five customer priorities,
and using the Six Pillars, whenever we engage
with a customer means we can make sure we are
delivering a world class service that we can be
really proud of, each and every time.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
STRATEGIC REPORT 29
CLEAN CLEAR WATER THAT
TASTES GOOD
We have been working to reduce the number of
discoloured water complaints in our NW area for
more than ten years now and have seen a
significant improvement over this time. Our
performance improved further in 2019 to 2,349
contacts, compared to 2,594 contacts in 2018, the
fifth year in a row we have performed better than
our PC. However, when we compare to other
companies in the industry, we recognise there is
still more to do. We are continuing to make
improvements at our water treatment works and
managing our networks to reduce the
accumulation of discolouration material. To
continue our improvement journey we have
identified a new programme of work, with DWI
support, for our discolouration management
plans for 2020-25.
The drinking water we supply is of a very high
quality but occasionally some of our customers
perceive different tastes or odours. This can
occur as a result of the use of chlorine to
maintain good hygiene in our water supply
network, a change in where a customer’s water
comes from, or how it is treated, or even issues
with a customer’s own plumbing. The number of
contacts we received reduced from 1,060 to 862 in
2019, which represents upper quartile
performance in the sector.
RELIABLE WATER SUPPLY
Delivering a reliable supply of water to customers
is core to what we do and we have delivered
amongst the lowest levels of interruptions to
supply in the industry over a number of years.
After a challenging year in 2018/19, we have
reduced the average interruption time per
property from over 9 minutes to 6 minutes 8
seconds in 2019/20. This has been achieved
through refresher training to our field and office
based staff to refocus our commitment to keeping
interruptions as short as possible, using
temporary supply equipment where possible.
“We provide a reliable and
sufficient supply of water”
WATER QUALITY
The water we supply must meet the stringent
quality standards set by the DWI, to ensure that it
is safe to drink and free of colour and particles,
poor tastes and smells. Our overall drinking water
compliance remains extremely high at 99.915%.
To put this in context, this represented only 58
failures from over 86,000 tests, and it is important
to note that none of the failures represented a
risk to health.
Whilst we do expect some variation in
performance due to samples being taken on a
random basis, we are committed to improving
water quality even further and have been
delivering our long term plans to achieve this. We
have been working end to end through our water
supply system, from protecting raw water by our
catchment management activities through to
investing in improvements to our water
treatment and distribution processes and
systems.
“We supply clean, clear
drinking water that
tastes good”
We are continually evolving our processes to
improve water quality performance over the
longer term through our catchment management
approach. Over the years Catchment Partnerships
have become an essential way of working to
improve the water environment and in 2019 we
have continued our extensive engagement with
the nine Catchment Partnerships in our NW and
ESW regions. We work with a wide range of
partners, including Rivers and Wildlife Trusts,
Local Authorities, the EA and Natural England,
and this has allowed us to pool our activity and
funding in order for us all to make a difference to
the water environment for our customers.
Activities in the year have included hosting and
funding events for farmers and land managers,
and delivering on-farm improvements, and
supporting catchment projects such as the
Pennine-PeatLIFE project.
The DWI introduced a new measure of drinking
water quality in 2017 called the CRI. This uses
information from the whole source to tap journey,
through water treatment works, networks and
customer taps, to make a more exacting
assessment of water quality. The CRI is a risk
calculation and a perfect score is zero, indicating
no failure of any standard within the entire water
supply system. Our ambition is to drive towards a
zero score over time.
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We have maintained our focus on managing
leakage throughout the year, aided by the
relatively mild weather over the year and a
significant reduction in burst mains. Leakage
averaged 134.8 Ml/d in NW and 63.2 Ml/d in ESW,
comfortably achieving our PC level in each of our
operating regions. This performance was
supported by the innovative actions we have
taken over recent years, including using satellite
imaging to help locate leaks and our online
leakage portal to allow customers to report leaks
more easily.
The number of water mains bursts reduced from
3,853 to 2,817. In order to maintain a stable burst
rate we invest in replacing sections of our vast
network of water pipes each year. In 2019/20 we
replaced almost 70km of distribution mains
across our operational areas. We have also been
progressing with an innovative project looking at
how we could further reduce bursts in the future
by better managing ‘pressure transients’ which
are high pressure shocks that reduce the life of
water pipes and cause bursts.
We proactively monitor and investigate water
pressures in the network so that we can identify
customers who are not receiving sufficient
pressure and take action. We have improved the
pressure for 947 customers during the year,
leaving 220 properties on the low pressure
property register at the end of the year.
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WATER EFFICIENCY
In addition to reducing water lost from our
network, in 2019 we adapted and enhanced our
Whole Town Approach to deliver multiple key
campaigns in a community-focused and targeted
programme. We delivered the programme in the
towns of Ashington, Northumberland and Leigh-
on-Sea, Essex, presenting ourselves in their
community in a ‘one-stop shop’ to offer our help
in whatever way we could. In addition to our
Every Drop Counts water efficiency message, we
added our Bring Your Own Bottle environmental
message and Water Without The Worry customer
affordability support. The co-ordinated approach
was a great success in terms of engagement and
customer satisfaction.
“We provide a sewerage
service that deals
effectively with sewage
and heavy rainfall”
Another water efficiency campaign we launched
in the year was our ‘Leaky Loo’ programme. We
know from research that between 5% and 8% of
households have a leaking toilet wasting between
200 and 400 litres a day. For NWL this equates to
approximately 105,000 homes wasting around
23Ml of water each day. We have introduced a
service where we help customers identify if their
toilet is leaking and repair it for them if it is. In
addition to saving our customers money, we are
helping to improve water efficiency towards our
ambitious goal of reducing per capita
consumption.
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31
Communications, including our ‘Bin The Wipe’
campaign (see case study on page 32) aims to
avoid blockages caused by misuse of sewers. Our
newly created focused teams include a mix of
technical and operational resources to respond
to incidents, investigate root causes and fix
problems identified on the network. Operational
planning is identifying improvements in the way
we work to help reduce the number of incidents
occurring which are within our control. The
tactical plan will support our longer term service
delivery strategy for managing sewer flooding.
Occasionally the structure of a sewer can
collapse, which can be due to ground movement,
third party damage or age, and this can cause
flooding or pollution. The number of sewer
collapses remained at similar low levels to the
previous year and well below the PCs.
SEWER FLOODING
Sewer flooding is one of the worst service failures
our customers can experience and reducing this
remains one of our highest business priorities.
Over the past year we have experienced a
number of months where we have had sustained
periods of wet weather, which has impacted our
performance in this area. As a result, while the
total number of properties flooding internally has
reduced from last year, we were disappointed to
see the number of properties flooding externally
or suffering repeat flooding increase slightly.
Four out of our five sewer flooding measures
achieved their PC, with external flooding from
the network of drains and sewers transferred into
our ownership a few years ago missing the PC
slightly. Sewerage investigations, surveying and
mapping of our transferred network continues
to improve each year and this will help us to
further improve our sewer flooding performance
in this area.
We have agreed further challenging targets on
sewer flooding for the next five years. In order
to reduce the risk of sewer flooding and to help
achieve the commitments we have made within
our business plan, a sewer flooding tactical plan
was developed to identify and deliver effective
near term interventions. The sewer flooding
tactical plan includes interventions around
the core themes of customer communication,
focused teams, improved operational
planning, better use of data and an increased
CCTV programme.
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BIN THE WIPE
We have to clean out 15,000 blockages a year from
our sewer network, approximately 64% of which are
caused by people flushing wipes.
These blockages can cause sewage to back up
into customers’ homes or to flood into the
environment, in rivers or even beaches, and we
want to stop that happening. Even brands of
wipes that have the word “flushable” on the
packet can contribute to this problem, so we want
people to dispose of all wipes in bins, not down
the toilet.
Historically, we have tried to encourage people to
only put ‘toilet paper, pee and poo down the loo’.
However, the problem persists and we want to
create sustainable, behavioural change that
protects customers, their homes and the
environment. In November 2019 we launched our
new customer behaviour change campaign ‘Bin
the Wipe’. Alongside this overarching campaign,
we also launched three targeted pilots in hot spot
areas; Newcastle, Stockton and Redcar with the
aim of reducing the amount of blockages caused
by wipes in our sewer network.
Redcar – The Big Bin Giveaway
During our research we found that more than half
of households did not have a bin in any bathroom.
We visited all houses in this area to explain how
flushing wipes can cause sewer flooding and
gave each household a bin to put their wipes in
rather than flushing them down the toilet. We are
carrying out follow up communication and
surveys to reinforce behaviour changes and our
wastewater team is monitoring the network to
see if the number of wipes ending up in our sewer
network has reduced.
Stockton – Making blockages a moment of change
In January 2020 we wrote to all the households in
this area to let them know we would be
monitoring the sewers in the area, using smart
technology to pinpoint which houses are flushing
wipes. We also shared imagery of houses that
have been flooded in the area because of
blockages caused by wet wipes. Our wastewater
team are now carrying out proactive and reactive
work to pinpoint offending streets using our
porcupine equipment, which catches wipes in the
network on its spikes and allows the team to
identify which direction the wipes have travelled
from back to specific houses. We then engage
directly with those customers through a five
stage process.
Newcastle – Getting into good make up habits
Research has shown that over 50% of the wet
wipe blockages we have to clear have been
used for removing make up. We launched a
specific make up focused ‘Bin the Wipe’
campaign in seven Newcastle postcodes, sharing
messages about alternative products people can
use to clean their face using social media
‘influencers’ as part of an integrated
communications campaign.
We have seen a strong start to our social media
campaign with our posts reaching more than
450,000 people and drawing more than 36,500
engagements. We’ve had continued support from
a wide range of partners, including local
authorities who have re-affirmed their support for
#BinTheWipe.
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INTELLIGENT ASSET MANAGEMENT
RESILIENCE FRAMEWORK
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We manage a large and complex asset base
where a failure could have significant impacts on
our customers and the environment. We know
from our research that our customers are
increasingly interested in the reliability and
resilience of their water and wastewater services.
We have a strong track record as a resilient
company. Our water resources are very secure
and we have a security of supply index of 100% in
all of our water resource zones across the full 40
year planning horizon of our water resources
management plan. Our sewer flooding
performance for both internal flooding and repeat
flooding incidents demonstrates a magnitude of
improvement since 2015.
We understand that the uncertainties that exist
in today’s world, such as climate change, will
continue to challenge our business into the
future. To demonstrate that we are moving to a
position of strength in the future we have
developed our own Resilience Framework, an
effective way to show the interdependency and
complexity of our business systems across
corporate, financial and operational aspects. Our
Resilience Framework provides a structure for us
to achieve resilience in the round by taking an
integrated and systematic approach to
understanding risk and resilience challenges
across all of our business areas. More information
on this can be found in our Business Plan at
www.nwgourplan.co.uk
We adopt an integrated approach to managing
our assets, which means finding the right balance
between operational and long-term maintenance
and investing in new assets at the right time, in
the interests of current and future customers. We
have company-wide accreditation to ISO 55001
Asset Management, demonstrating that we follow
best practice in the long-term management of
our assets.
Our Intelligent Asset Management (iAM)
programme is building on this approach and will
deliver both improved systems and processes
and enhanced data and analytics to improve how
we manage our assets. The first two phases of
this programme, covering customer contact for
operational matters, and below ground assets on
the waste water network and water network in
ESW, were implemented successfully during the
year. The roll out for water network in NW was
delayed until summer 2020 as a result of the
Covid-19 pandemic.
ASSET HEALTH
We use the concept of Asset Health to assess the
effectiveness of our long-term stewardship of our
assets, based on two baskets of measures, for
water and wastewater. As asset health is about
the long-term stewardship of our assets, we
assess our performance on a three-year rolling
average basis.
Three out of four of our measures for water
performed better than their PC for the three year
period 2017/18 to 2019/20. However, our PC for
overall drinking water compliance is set at a zero
failure rate and, though we have a very high level
of compliance, we did have a small number of
failures in the year.
Similarly, on wastewater three out of four of our
measures for water performed better than their
PC for the three year period 2017/18 to 2019/20,
but we had a zero PC target for sewage treatment
works discharge compliance failures and have
suffered an average of one failure each year on a
three year rolling basis.
More detail on our asset health performance is
available in our APR.
“We deliver water and
sewerage services that
meet the needs of current
and future generations in
a changing world”
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ENVIRONMENT
We are committed to meeting our ambitious goal
to have zero pollutions as a result of our assets and
operations, and to have the best rivers and bathing
water beaches in the country for the benefit of people,
the environment and wildlife.
POLLUTION INCIDENTS
We manage and maintain a network of almost
30,000km of sewers across the NW region. When
we have problems in our sewerage system, such
as from blockages, mechanical breakdowns or
power outages, untreated sewage can sometimes
escape into watercourses and the sea causing
environmental harm.
We continue to focus our attention on reducing
the risk of this happening but a relatively small
number of these pollution incidents occur. We are
pleased that the number of more serious category
1 and 2 pollution incidents remains low at 2,
down from 9 in 2016. One was related to a sewer
near a watercourse and the other from our water
distribution network. The number of category 3
incidents remained broadly stable and well below
our PC. We continue to proactively self-report a
high proportion of incidents to the EA, 80% in
2019, assisted by our Water Rangers programme.
This performance has been achieved as a result
of our transformative pollution management
programme. We are continuously learning and
improving our pollution performance through our
company-wide zero-tolerance approach. Our
focus is to constantly examine all aspects of
pollution through our Pollution Best Practice
Group and target our efforts to effectively reduce
the number of incidents. We have published a
Pollution Incident Reduction Plan on our website,
setting out our ongoing commitment to reducing
pollution incidents further to 2025.
BATHING WATER QUALITY
COMPLIANCE
Our bathing waters in the NW region continue to
be amongst the cleanest in the country. Our aim
is to contribute to all of the region’s bathing
waters being categorised as ‘Sufficient’ or better
by the EA, working in partnership to make this
happen as we recognise seawater quality can be
affected by a number of sources, such as run-off
from agriculture, urban pollution and from birds
or animals.
“We help to improve the
quality of rivers and
coastal waters for the
benefit of people, the
environment and wildlife”
All bar one of our bathing waters achieved either
the ‘Good’ or ‘Excellent’ standard, with 25 out of
34 achieving the highest standard. However,
one of our bathing waters, at Cullercoats in
North Tyneside, was classified as ‘Poor’ for a
second year.
We continue to work in partnership with the EA
and local authority to understand the reasons for
the localised decline in bathing water quality at
Cullercoats. Since September 2017, an extensive
investigation programme has been carried out
that has ruled out a number of potential factors.
This has included undertaking precautionary
measures and remedial works on parts of our
network together with the resolution of a
number of third party issues. We remain
committed to working with our partners to
improve the seawater quality at Cullercoats,
including investigatory investment in our PR19
Business Plan.
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“We protect and enhance
the environment in
delivering our services,
leading by example”
We are continually evolving our processes and
continuing to work in partnership to attain
the necessary sustainable improvements in
river water quality, supporting a catchment-
based approach to managing the water
environment. We are working within four
catchment partnerships across the north east, in
Northumberland, Tyne, Wear and Tees.
We know that future permits will tighten as
legislation changes. This will introduce new
challenges and standards, as well as tightening
existing permit standards, which will require us
to adopt new treatment technologies and
increases the emphasis on very efficient
operational control. We are also aware that the
pressures of increasing population, new housing,
industrial developments and climate change will
challenge our performance.
SEWAGE TREATMENT WORKS
DISCHARGE COMPLIANCE
The EA sets strict standards for effluent
discharged into rivers, estuaries and the sea.
These standards are specified in environmental
permits for each of our sewage treatment works,
taking into account what is required to protect
the water quality and ecology of the rivers and
bathing waters specific to our region. We have a
very strong discharge compliance record, with
zero failures in 2018, but were disappointed to
have two discharge permit failures in 2019,
against a challenging background of extreme
weather events and third party impacts.
We are continuing our planning to meet future
new and tighter consent standards and to satisfy
our obligations in working towards meeting
‘Good’ Water Framework Directive status in our
rivers. To do this, we will build on our innovative
operational management and early warning
systems, TriM (trigger management system) and
DRIVE (Dynamic Risk Index and Visit
Effectiveness – see case study on page 36), a tool
that allows us to understand real-time
compliance risk across all of our treatment
works. These systems have been adopted both at
works with numeric permits and those with
descriptive permits. Our operators are also
intervening more frequently at our descriptive
works in order to prevent permit non-compliance
and potential resulting pollution incidents.
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DRIVE (DYNAMIC RISK
INDEX AND INTERVENTION
EFFECTIVENESS)
In a business where customer service levels and
standards of service delivery performance are
becoming increasingly demanding, at the same time
as striving for industry-leading cost efficiency, we
need to be much smarter at identifying, predicting
and targeting resources towards risks in a much more
measured and focused way.
The result has been improved performance
through industry-leading sewage treatment
compliance as well as a 30% reduction in
underlying risk score due to improved operational
focus on specific issues.
The DRIVE framework has now been extended
from wastewater treatment into water and
wastewater networks and water supply to create
a common approach to managing operational
risk across the business.
We have always believed that most of the
information we need to run our business is
known to us. The challenge has been to capture it,
determine when we need to act on it and identify
who has the capacity and capability to carry out
those actions.
Systems and processes are usually very capable
of doing what they were designed to do in
isolation. The challenge for our Drive project was
to create an integrated business process which:
• identified the key operational measures from
the vast amount of data points generated every
second across our operational business;
• combined these to create leading indicators at
the asset and operational system level;
• added asset health and criticality weightings to
these measures to allow us to calculate risk;
• created a single business view of where effort
needs to be focused to address these risks
before they impact on performance; and
• communicated a clear enterprise-wide
workflow to ensure that people understand
their responsibilities to execute action plans to
mitigate against these risks.
The DRIVE approach has created a cultural
change to clear, evidence-based decision making,
with discussions based on asset failure rates and
deterioration trends rather than individual
judgements. The increased level of operational
understanding has also reduced dependence on
technical experts.
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Net Zero Emissions
In March our Chief Executive, Heidi Mottram
opened an industry-wide conference, Water UK’s
Delivering a Zero Carbon Water Sector
conference. Representatives from across the
sector came together to discuss the challenge
and share experience as they work to deliver on a
commitment to be net zero carbon by 2030. We
have gone a step further and have set a challenge
of achieving net zero carbon by 2027, three years
ahead of the government target. In addition, we
have committed to creating zero avoidable waste
by 2025
In terms of carbon emissions, we are continuing
to explore renewable energy opportunities
through solar generation, pilots of large scale
battery storage and the production of hydrogen in
hydropower sites that cannot be connected to the
grid. We have begun the process of turning our
vehicle fleet green with the addition of our first
electric vehicles and are investigating the use of
biofuels, while we introduced a new system to
help monitor and reduce the amount of travel we
do. We are extending this to our supply chain, and
have committed to increase the amount we
spend in our operating areas to 60p in every
pound, to reduce transportation, as well as
supporting local economies.
Our commitment on waste will mean eliminating,
re-using or recycling 90% of waste from
operations, and working with partners to
contribute to the circular economy in our regions.
Our Innovation Festivals already operate on a
zero waste basis, with no waste going to landfill,
including all food waste being taken to a local
anaerobic digestion plant to produce gas.
CLIMATE CHANGE
The nature of our business, with our interaction
with the natural environment, means that
climate change presents particular challenges to
us and our customers, and is one of the principal
risks facing our business (see page 61). It also
means we have significant potential to make a
positive contribution to both climate change
adaptation and mitigation. We have sought to
realise that in the past year and in our future
planning, facing up to the challenge of water
resources becoming scarcer and demand
increasing, as set out by EA Chief Executive Sir
James Bevan in a series of speeches in 2019.
Ten years ago we committed to a carbon
management plan with the aim of reducing our
greenhouse gas (GHG) emissions by 35% by 2020
against a 2008 baseline. We were delighted to
achieve this goal ahead of schedule in 2018/19.
This was achieved through a twin focus on
energy efficiency and renewable energy
generation.
Our focus on energy efficiency included investing
in optimisation tools, such as Aquadapt, and the
use of data analytics, site energy audits, trigger
management and investment in energy efficient
assets are all routinely applied to drive down our
underlying consumption. In respect of renewable
energy, we use 100% of the sludge remaining after
sewage treatment to produce renewable energy at
two thermal hydrolysis advanced anaerobic
digestion plants and power all our sites using
renewable electricity, including a long term
commitment to offshore wind power.
In the last year we have installed over 500 new
smart meters to help monitor energy usage at our
treatment works and pumping stations, and
implemented a new travel booking process to
provide insight and support reducing business
travel. We have also signed outline agreements
with a third party to develop solar power at a
number of our sites which will provide
emissions-free, and lower cost, energy.
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We are using innovation to manage flood risk,
including utilising Digital Twin technology to
assess how our assets will respond to extreme
weather events, and deploying fibre-optic sensor
technology enabling us to measure depth flow
and temperature in our sewers, helping us to
predict and resolve incidents before they occur.
We included in our PR19 business plan a
programme to address properties which are at
increased risk of sewer flooding for the first time
due to climate change and the effect of urban
creep. This is distinct from our base programme
which is focused on preventing repeat flooding at
properties which have experienced flooding
previously and reflects strong customer support
for a more proactive approach. This sewer
flooding enhancement scheme forms another
key part of our case at CMA.
Resilience
Over the longer term, climate change could
impact on water resources resilience and the
integrity of our assets. Our Resilience Framework
provides a structure for us to achieve resilience
in the round by taking an integrated and
systematic approach to understanding risk and
resilience challenges across all of our business
areas and how they interact. Resilience was a key
element of our PR19 Business Plan.
Our Water Resource Management Plan has
demonstrated that we have 100% security of
supply index in all of our water resource zones
across the full 40-year planning period. We have
also demonstrated our resilience to a 1 in 200-
year drought scenario.
In our southern operating area the completed
expansion of Abberton Reservoir in 2014 provides
further security in Essex. However, although our
Essex region has robust water resource
availability there are constraints, under certain
circumstances, on our ability to move water to
where it is required for treatment and
distribution. In our PR19 Plan we proposed a new
Essex transfer scheme that would provide
additional flexibility and allow our two key
reservoirs to be kept in balance. There was strong
customer support for investing to enhance the
resilience of supplies in this way and this scheme
forms a key part of our case at CMA.
The security of supplies for customers in our
North East operating area is largely due to the
reserves available from Kielder Reservoir, and the
flexibility provided by the Kielder Transfer
System – a giant pipeline that can feed into the
rivers Tyne, Wear and Tees.
We recognise that this puts us in a position to
contribute to resilience in neighbouring
operating areas as well. We play a full part in
both Water Resource East, which is pioneering a
collaborative approach to water resources
planning across Eastern England, and
Water Resources North, protecting resilience
and supporting sustainable growth in the
Northern Powerhouse.
On the wastewater side, we are also using
industry-leading approaches to reduce the risk of
flooding. Our award-winning NIDP brings 13
Lead Local Flood Authorities across the
North East together with the EA to promote
sustainable drainage.
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COMPETITIVENESS
FINANCIAL PERFORMANCE
INNOVATION FESTIVALS
We drive innovation all year round, but our
festivals are the focal point. The events have
become firmly-established as industry-wide and
attract participants from across the globe. In 2019
we had more than 3,000 people join us from 734
organisations. This diversity represents a huge
breadth and depth of experience that we would
not be able to tap into in business as usual
activities. The professional services value of this
contribution is estimated to be worth c.£5m.
Clearly the main purpose of the event is to create
new ideas to improve our business. We also use it
to rapidly progress existing ideas, or ‘a year’s
worth of work in a week’. We have used this
technique to great effect to drive forward ideas
that require collaboration across organisational
boundaries, such as the Common Underground
Map.
The festival places us firmly at the epicentre of an
innovation ecosystem. There are lots of spin offs
from the event, many of which we get involved
in, some of which happen without us. Our
reputation for being innovative is enhanced
either way. To date, our festivals have attracted
over 6,000 participants generating 132 ideas back
into the business. In 2019 we reached more
people than ever with Twitter messaging,
achieving a reach of 3.6m people.
In September 2019 we held a joint event, Innovate
East, with Anglian Water over three days in
Ipswich, a first of its kind for the industry. The
event had its own character, but was broadly
based on our Innovation Festival format. We
embraced open innovation, attracting
participants from over 250 organisations. We held
nine sprints and three hacks within the context
of four themes: leakage, social purpose, natural
capital and digital twins.
The financial performance of the Company is
detailed in the Financial Performance and
Structure section later in this report.
“Our finances are sound,
stable and achieve a
fair balance between
customers and investors”
INNOVATION
We believe that innovation is the process of
turning ideas into business value, and that this is
everyone’s responsibility. We have engaged with
and empowered our people to develop a culture
which is open to future change and the potential
to improve the lives of our customers and the
environment that we live and work in.
This year has seen the creation of a robust
innovation pipeline and process which is
enabling focus on the big challenges laid out in
the business plan. Central to this are the
innovation ambassadors that are enabling
innovation across the business. These employees
are spreading innovative culture across the
business and driving the implementation of
innovative new ideas so it becomes business as
usual.
“We are an efficient and
innovative company”
In 2019 we launched Amplify which is an idea
management platform that is harnessing the
creativity and expertise of our employees, our
supply chain, eco-system and beyond. This is a
challenge based approach so focus is on solving
big challenges like reducing the use of single use
plastics when there is an interruption to supply,
increasing the number of customers on the
priority register and how to reduce flooding by
changing customer behaviours (see case study on
page 32).
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STRATEGIC REPORT 40
• NWG is a founder member of the national
Digital Twin Hub. We are pleased to work with
this group of developers, owners and users of
digital twins to shape the national landscape
and ensure that digital twins create value for
our customers and stakeholders.
We also work closely in partnership with
colleagues across the water and utilities sector,
including playing an active role in UK Water
Industry Research, which is chaired by our
Wastewater Director, Richard Warneford.
Through our membership of the Cross Utility
Innovation Group (with Northern Gas Networks
(NGN), Northern Powergrid and Yorkshire Water)
we share knowledge and look for opportunities
for collaboration to tackle shared needs on a
regional basis. Most recently, we partnered with
the Energy Innovation Centre to run a series of
open innovation challenges in collaboration with
their other members.
THE POWER OF 5G
In December 2019, we joined forces with telecoms
partners and conducted a series of initial 5G trials
to harness the power of 5G connectivity to
revolutionise the way we operate. Across our
business we require a range of technical skills
and competencies in order to manage the
logistical challenge of maintaining water in our
supply areas and the wastewater services across
the North East region. 5G-enabled augmented
reality technology allows experienced
technicians to remotely guide on the ground
teams through complex tasks by relaying real-
time data and instructions. The technology also
allows multiple experts to join one call
simultaneously, adding valuable second opinions.
The first set of trials will focus on areas including
a home water maintenance app, for consumers to
monitor their home’s water supply and flow to
identify any unusual patterns to flag potential
issues ahead of time. We are also looking to use
5G to power augmented reality to provide a 3D
representation of buried assets for technicians
and to allow field technicians and engineers to
quickly access and upload crucial data from our
central GIS database, without requiring a wi-fi or
cable connection.
INVESTQUEST
It is important that our people have the
opportunity to have their ideas listened to and we
continued our InvestQuest competition, which
allows our employees to say how they would use
an investment of up to £250,000. For the best five
ideas, the individuals and teams were given the
opportunity to pitch their idea to a panel of
directors in a ‘Dragon’s Den’ style. The ideas
covered a diverse range of subjects from
improving customer complaint handling to an
automatic flushing and probe system and
generating more renewable energy from our
anaerobic digesters. The winning idea was a
mobile unit which would provide real time
analysis data, and this is now being progressed
into reality.
RESEARCH AND
INNOVATION PARTNERSHIPS
We are at our best and most innovative when we
combine our people and ideas with those from
the outside world. Accordingly, we have built
strong relationships with organisations and
individuals to support our innovation initiatives.
These innovation partnerships have given us
early sight of latest thinking and product
developments. Some examples of our activities
over the last year are given below:
• We regularly work with inventor in residence,
Andrew Turner Innovation Limited, on a
number of early stage proof of concept projects
including a smart drain pipe, which slows
down the flow of rain water from roofs into
sewers, helping reduce the risk of flooding;
• We are collaborating with Wordnerds, applying
artificial intelligence to linguistics to help us to
interpret how our customers feel about their
experience of NWL, particularly when we are
reading written comments and feedback on
social media;
• Our partnership with Durham University has
continued with our Innovate UK-funded
Knowledge Transfer Partnership, which is
working with affected people to increase flood
resilience in their communities;
• We have also continued our partnership with
Newcastle University with the appointment of
a post-graduate research engineer to
investigate the role of green infrastructure in
reducing urban flood risk, and the expansion of
the BE:WISE wastewater research facility at our
Birtley sewage treatment works;
• Our work on Digital Twins has also continued
apace, focusing on developing digital twins of
water supply systems and biogas production;
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STRATEGIC REPORT
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41
41
GLOBAL INNOVATION
PLATFORM LAUNCHED
It is very important to us to work with and share best
practise where we can. A lot of problems are better
solved together and our Innovation Festival is a great
example of how we bring many people, companies
and industries together to look at big problems.
As part of this we have launched a new ideas
sharing platform ‘Amplify’, opening the
innovation floodgates to the whole world.
Amplify is a shared space where anybody from
across the globe can come together to help solve
big problems, pitch new ideas and innovate
together. We post a series of big real life
challenges and then open them up to the rest of
the world to try and help solve them. As well as
work on these problems, people can suggest
ideas, pitch their products, ask questions and
interact with other innovators and creators all
within the Amplify website.
Each challenge is owned by an expert from the
company and they monitor responses, engage
with users and pick up and run with the most
promising ones. There is potential financial
backing and funding to develop and trial the best
ideas and anyone can register and take part in
the challenges.
At the launch, our Head of Innovation, Angela
MacOscar, said: “We believe whole-heartedly in
open innovation. We love new ideas that will
make a difference to our customers’ lives and
when we find them, we will back them
completely. We’ve seen the benefits of breaking
the rules, doing things differently and innovating
outside of the box. That’s why we’re so excited
about Amplify, the newest tool that will allow us
to connect with every innovator and creative
mind from across the world and to work together
to solve big problems.”
Over the years we’ve heard from lots of small and
medium sized companies and inventors who say
they struggle to get their ideas off the ground or
in front of big companies like ours. This is the
perfect opportunity.
Our first challenge was based around reducing
single use plastics. Specifically, how the water
company can eliminate the use of plastic bottles
when providing emergency water supplies to
customers during an interruption.
Anyone interested in taking part in our
challenges should visit amplifynwg.co.uk and
register on the website to join the discussion.
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STRATEGIC REPORT 42
“Our people are talented,
committed and inspired
to deliver great services
to customers”
In 2019, we used the GPTW employee survey for
the first time. This provides an opportunity for
employees to tell us how they feel about working
here. Managers receive the results for their teams
and involve employees in creating local action
plans. The change in survey provider meant that
we also revised our target measure to achieving a
Trust Index score of 65% or more, which we only
just missed.
In December 2019, we asked the Great Place to
Work Institute to undertake a Best Workplaces
comprehensive culture audit of the business.
Their conclusions were “it is evident that NWG is
an employee, customer and environmentally
centric employer.” Two areas identified as being a
particular strength included how we recruit and
welcome new people into the business and the
way we listen and collaborate. The audit has
given us what we wanted, areas to focus on and
different ideas to consider.
We continue to be accredited as a Living Wage
Employer with the Living Wage Foundation,
which means that every employee in the
Company earns at least the Living Wage, an
hourly rate set independently and calculated
according to the basic cost of living for the UK.
PEOPLE
GREAT PLACE TO WORK
Our aspiration is for all of our people, current and
future, to have a great experience at work and to
understand the part they play to achieve our
purpose, vision, outcomes and to deliver
unrivalled customer experience. We aspire to
have an inclusive and diverse culture where our
people are supported by their managers, feel
confident that their voice is heard and have a
workplace where everyone can thrive and feel
empowered to be the best they can be. We know
from the 84% of employees that took part in our
most recent employee survey that 72% of our
people feel proud to work here.
“We are seen as a great
place to work”
We have continued to develop our employee
engagement through our GPTW programme,
based on the four themes of My Voice, My
Manager, Our Values and Our Shared Story. We
engage with our employees through our
Employee Relations Framework and through a
range of communication channels including
director roadshows, structured Teamtalk
briefings every two months, our weekly H2info
e-bulletin, and digital tools such as our intranet
and Yammer.
Our annual employee roadshows provide an
opportunity for our people to understand our
vision and progress towards this. Our CEO, Heidi
Mottram, attends all of the roadshow sessions
with the relevant director allowing direct
engagement with all staff.
It’s important that people understand the part
they play to achieve our vision and outcomes.
Our bi-monthly Teamtalk events ensure everyone
comes together to discuss performance and key
areas of focus. After a session with our CEO, our
leaders cascade to their teams with the support
of a pack including videos and interactive
activities to bring the message to life. In 2019 we
held a ‘Teamtalk Takeover’ where the whole
session was focused on our customer service and
the change from SIM to C-MeX.
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STRATEGIC REPORT 43
Apprenticeship programmes have given 110 of
our existing employees the opportunity to learn
and grow during 2019. Some have been learning
about data intelligence to help maximise the
strategic and operational benefits from the
increasing data that technology gives us access
to and use their new skills on business
improvement projects. Others have focused on
management or water engineering.
For some of our Water production team, their
personal development has resulted in NWL being
the first in the water industry to achieve the
Licence to Operate Standards for competence.
These Standards are recognised by DWI as
demonstrating that our people are competent to
provide clean, clear water to our customers every
day. Many of the people involved in the
programme have been working in their roles for
many years and after completing the programme
their understanding of the science and
engineering behind why they do what they do
has equipped them to take their contribution in
the business to another level and their hard work
has resulted in a qualification they can all be
proud of.
Our involvement with other utility sector
organisations in a Procurement Skills Accord
ensures that we look wider than just our own
people and help address sector-wide skills gaps
and shortages to improve the future as well as the
present. Our contribution is audited each year,
including how we promote relevant skills
development across our supply chain through our
procurement process.
We continue to look for ways we can develop and
support our managers to be the best they can be
and build trusted relationships with their teams.
Our Leadership and Management Development
Programme for all new people managers within
the Company has continued to evolve to meet
business needs. This has been designed to
provide our managers with a foundation of
excellence in their leadership roles and aims to
enable our managers to lead and manage their
people with confidence whilst delivering a great
place to work and unrivalled customer
experiences for our internal and external
customers.
OUR VALUES AND BEHAVIOURS
Our employee awards scheme, known as ViVa
(Vision and Values), is our way of saying thank
you to our employees for doing a great job or
going the extra mile. Now in its ninth year it is
still as popular as ever with circa 1,700 employees
in 2019 nominating teams and colleagues for
demonstrating our values and behaviours.
Anyone can nominate anyone in the business
that they feel have done a particularly great job or
have gone the extra mile. Prizes are awarded
each month to the top nominations and every
year we hold a ViVa awards ceremony to
celebrate the best across the five categories.
Our overall winners were the Planning and
Scheduling (south) team for the One Team
support they provided to two colleagues who
suffered a serious accident while on holiday.
Special recognition was made to the Leakage
team who used a range of innovative approaches
to deal with extremely challenging weather
conditions and still meet our leakage targets for
2018/19, and laid the groundwork to deliver our
targets again in 2019/20.
“Our people act in line
with our values”
We developed ‘Our Behaviours’ with our people
across the Company to identify the behaviours
we all need to demonstrate to enable us to
achieve our medium-term goals and deliver our
vision of being national leader. We have
continued to embed these through our annual
appraisal process and midyear reviews and using
our Leadership behaviours to inform our
recruitment and selection process including
shortlisting and interviews.
NWG ACADEMY
We recognise that our people are our greatest
asset and we are committed to making sure that
people have the opportunity to develop, have the
chance to achieve their goals potential and make
a difference. Our NWG Academy is a strategy and
plan of activities to ensure we have the skills,
knowledge and talent we need to continue to give
our customers the service they expect and
deserve, sustainably. NWG Academy activities are
focused to raise our profile as an industry and an
employer with the future workforce, develop the
talent already in the business to ensure everyone
is fit for the future and retain knowledge as
people retire.
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STRATEGIC REPORT 44
DIVERSITY AND EQUAL OPPORTUNITIES
We recognise the value and importance of diversity and inclusion in our workforce. Our customers
come from a wide range of backgrounds, and our workforce needs to reflect that.
Research shows that diverse organisations consistently perform better, attracting great people,
making better decisions and successfully innovating and evolving. If we are to achieve our vision, we
need to grasp this opportunity for improving performance through creating an environment where all
our people can be themselves and do their very best each day.
GENDER DIVERSITY AT 31 MARCH 2020
NAME
Board
Executive Leadership Team (ELT)
Full company
FEMALE
2
6
1,005
MALE
9
6
2,079
We operate in an environment where traditional
perceptions of careers and roles persist and
whilst we work hard to attract people from
diverse backgrounds, our business is currently
predominantly male. We are committed to
improving our gender balance and are taking
positive steps to ensure that our roles are
attractive to women as well as men. We’ve used
social media to demonstrate that the water
industry is a place where females can add real
value across all roles, and our #waterwomen
campaign to focus on the themes we know from
research are important to women.
One area of success has been recruitment to our
development programmes where 67% of our
undergraduates in 2019 were female, the majority
involved in science, technology, engineering and
maths roles, and 33% of apprentices, despite most
of their roles being operational.
To encourage more applications from people with
different personal characteristics and to make
sure they are comfortable to be themselves at
work with us, we have partnered with Vercida to
develop an attraction strategy to raise our profile
amongst ethnic minorities and with Stonewall to
better access and support the LGBT community.
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STRATEGIC REPORT 45
and 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, gender or sexual orientation.
We welcome employment applications from
people with disabilities and, where existing
employees develop disabilities, they are
supported to remain in employment, wherever
practicable, by providing appropriate adjustments
to their roles and/or effective redeployments.
Occupational health physicians assist this
process with professional medical advice. Our
work with the North East Local Enterprise
Partnership’s Special Educational Needs and
Disabilities group and our involvement with
Disability Confident is building our network
and understanding to do more to find ways to
offer work experience and create a pathway
into employment.
DIVERSITY AND EQUAL
OPPORTUNITIES (continued)
To drive real change our relationships with
external partners are really important to us. We
work closely with the WISE (Women in Science
and Engineering) campaign and the Energy and
Utility Skills Partnership. Being regional lead on
the WISE North East Hub enables us to promote
networking opportunities and highlight female
role models, through collaboration with other
local businesses. We were delighted to be
awarded Employer of the Year at the 2019 North
East Business Women of the Year Awards.
The objective of our Science, Technology,
Engineering, Arts and Maths (STEAM) activities
at the 2019 NWG Innovation Festival, the
culmination of a year of outreach activity with
schools, colleges and universities, was to
encourage young people to seriously consider a
STEAM career. Circa 1,300 young people joined in
the fun and educational activities. Women
working in science, technology, engineering and
maths careers in the region came to support and
share their stories.
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
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GENDER PAY GAP REPORT
NWG MEAN GENDER PAY GAP 2019
STRATEGIC REPORT 46
We are committed to the principle of equality of
opportunity and equal treatment for all of our
employees. We published our gender pay gap
figures in our Gender Pay Report March 2020,
which is available on our websites. We continue
to make progress and our gender pay gap is
reducing, but we are not complacent and we
know that we have to do more to improve
inclusion at all levels of our organisation.
The gender pay gap is the difference between the
average hourly pay for all the men and women
working for the same organisation. It’s not the
same as equal pay, which is about a man and
woman receiving the same pay for performing
the same or a similar job.
The mean gender pay gap is the percentage
difference in the average hourly pay for women
compared to men. The median pay gap is the
difference between the hourly pay rate for the
median woman compared to the median man.
Our mean and median pay gaps have reduced
from 2018, and we are now below the ONS
average. Although we are proud of our work on
diversity, we know there is more we can do. We
remain committed to meaningful and sustainable
change, through understanding the underlying
issues, enabling progression and development for
all colleagues who want it, and to make sure we
access the best talent possible.
We are constantly working to make NWL a great
place to work. That includes creating a
framework for an inclusive and diverse workforce
who are supported by our benefits programme.
We will continue to update on our progress and
policies to support this.
Over the next year, we will focus on:
• Providing more coaching and mentoring;
• Continuing to ensure that, wherever possible,
shortlists for senior roles have a balance of
genders;
• Utilising role models from inside and outside
the business to inspire and support female
talent;
• Engaging in the wider conversation about
equality in the Utility sector, through our
involvement in initiatives such as EU Skills;
and
• Focusing on departments where gender
balance is more challenging.
Our Mean gender pay gap has reduced by 5% on
last year.
NWG MEAN BONUS GAP 2019
7.7%
-42.6%
NWG MEDIAN GENDER PAY GAP 2019
We are now below the ONS figure of 17.3%.
NWG MEDIAN BONUS GAP 2019
16.8%
0%
PROPORTION OF MEN AND WOMEN
PAID A BONUS
23.2%
25.9%
Females
Males
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PAY QUARTILES BY GENDER
BAND D
BAND A
All employees whose standard hourly rate places
them at or below the lower quartile.
All employees whose standard hourly rate places
them above the upper quartile.
383
783
400
572
783
211
BAND B
All employees whose standard hourly rate places
them at or below median but above the lower
quartile.
OVERALL TOTAL
544
783
239
2117
3132
1015
BAND C
All employees whose standard hourly rate places
them above median but at or below the upper
quartile.
Females
Males
618
783
165
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HEALTH AND SAFETY
WELLBEING
STRATEGIC REPORT 48
We are committed to providing an environment
where people can maintain good physical and
mental health and make informed lifestyle
choices. Our ‘Live Well, Work Well, Be Well’ health
and wellbeing programme continues to evolve
and is driven by our top reasons for absence and
feedback we receive from employees. As part of
our annual wellbeing calendar we hold wellbeing
challenges for individuals or teams focusing on
physical (weight loss and physical activity) and
mental (energy and resilience) challenges, as well
as quarterly wellbeing weeks and monthly
awareness campaigns.
Our network of Wellbeing Champions support our
people by ensuring their teams are aware of our
internal wellbeing support such as our Employee
Assistance Programme for mental health and our
Physiotherapy service for physical health. We
have continued our focus on mental health and
over the last year have trained over 30 Mental
Health First Aiders across the business to support
people who may be struggling with their mental
health. We have also started a new programme
for all people managers to receive mental health
awareness training to equip them to have
conversations with their people and spot signs
and symptoms, and personal resilience
workshops are available to all employees.
It is our aspiration and ethical responsibility to
make sure that everyone goes home safe every
day, which extends to our employees, supply
chain partners and customers. Our Safety
performance improved significantly on the
previous year and we experienced our longest
period of time - almost 100 days - without having
a lost time accident.
To have a truly safe organisation we need to get
four fundamental things right. We need safe
people, a safe way of doing things, safe places and
we need to keep on learning. These are all vital
components of our safety plan to encourage safe
behaviour and help us achieve our aspiration of
Everyone Home Safe Every Day.
“Our workplaces are
healthy and safe”
We continued to work on our safety awareness
within the business and our people carried out
almost 30,000 ‘60 second checks’, a huge increase
compared to the previous year. We encourage
employees to have safety conversations to not
only stop unsafe behaviour but also as a positive
indicator when someone is doing something
right, and completed 3,221 safety conversations
last year.
We also extended our programme of managers’
safety visits, completing over 1,000 in the year.
This shows that our managers are visible and
looking at what’s working well and finding out
what we can do better on our sites. It also
encourages employees to talk about safety and
discuss any issues, concerns or ideas on how to
improve safety on sites.
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STRATEGIC REPORT 49
STRATEGIC REPORT 49
THE POWER OF Z
We have invented a simple but innovative tool which
helps measures the depth of underground water
pipes, to keep our workers safe and speed up the
regions’ roadworks in future.
The ‘Z stick’ idea was first discussed at our
Innovation Festival back in July 2019, to help
workers capture and record the depth of
underground water and sewer pipes across
our networks.
Paddy Garrett our Asset Systems Team Leader,
said: “It’s more important than ever that we know
the depth of our pipes, underneath our pavements
and roads the space is being over crowded with
the ever-increasing number of fibres and cables.
We already know the width and the height,
otherwise known as the X and Y position, of our
assets, but this will help us measure the Z
position, and that’s how the Z stick was born.”
The Z stick, is a colour-coded stick which, when
placed into open excavations, helps to indicate to
our teams how deeply a pipe is buried. The blue,
green and red coloured bands on the tool
categorise the excavation as either shallow,
normal or deep and this information is being
measured and recorded from over 2,000 locations
as part of a pilot project. The data is used to
develop and recalibrate a 3D model of the entire
15,000km long network of water pipes.
This information will keep our people safe by
helping them to avoid accidental strikes to live
cables. It will enable us to despatch teams to
jobs knowing in advance of any specialist
equipment they may need to help dig and locate
the pipe safely and quickly, and complete the
work faster and potentially with less disruption
for our customers.
This shows that innovation comes in all different
shapes and sizes and it’s not just about utilising
the latest new technology. Thanks to the Z stick,
our aim is that in future, any field worker or
planner about to dig, would be able to know
accurately how deep the network is at any
one point.
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50
COMMUNITIES
We know it is important to our customers that we
support our local communities and is something they
want us to do.
We know we can have a positive impact on our
communities and their success. It is important to
us to contribute to the economic wellbeing of the
areas we serve and essential we make a wider
contribution to life within our regions to support
this.
We use our skills, assets and experience to
support communities in areas that our customers
have told us are most important to them. Our
activities have a ‘ripple effect’, going far beyond
our direct investment through trade with local
suppliers to benefit our regional economies. We
see ourselves as part of our communities and
over the years we have developed an extensive
community programme, that includes employee
volunteering, supporting important local events,
engaging and helping to educate young people
around important issues and long standing
partnerships that meet local community needs.
“We are proud to
contribute to the success
of local communities”
We are an integral part of the communities in
which we operate. The health of our customers,
their economic prosperity, and the surrounding
environment all depend on how we deliver our
services. Our reach into communities is
extensive, and we benefit from being one of the
few organisations to have a relationship with all
of the households and businesses in our
operating areas. We take this responsibility
seriously, and our customers agree that we are an
important part of the community.
EMPLOYEE VOLUNTEERING
Our ‘Just an Hour’ employee volunteering scheme
is very important to us and is something we are
immensely proud of. Every year each of our team
have the opportunity to give a minimum of 15
working hours to support community initiatives.
We know our communities can benefit from the
wealth of knowledge, skills and expertise our
employees have to give. The programme is
designed to have an impact on education, the
environment and the general wellbeing of the
community. In 2019, 42% of our people
volunteered their time supporting 989
organisations across our communities.
POWERED BY WATER
Our Powered by Water campaign has been
running for many years, and is designed to teach
young people the importance of staying well
hydrated and avoiding sugary drinks in an
engaging and fun way through our sporting
partnerships. Thousands of young people across
our supply areas, have benefited from the
interactive educational workshop delivered with
our partners Newcastle Eagles Community
Foundation, MFC Foundation in Teesside,
Foundation of Light in Sunderland, Essex Cricket
Foundation and Mowden Park Rugby Club in
Darlington. In 2019 over 27,500 young people
participated in a Powered by Water workshop,
with many more having the opportunity to take
part in 2020.
WATER RANGERS
Our award-winning Water Rangers initiative, set
up in 2014, consists of trained customer
volunteers who act as our eyes and ears on the
ground in the community and raise awareness of
any issues spotted on regular patrols along our
waterways. River guardians and catchment
partners also report any issues they see when
working in the water environment. In 2019
our volunteer Water Rangers carried out over
2,000 patrols.
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BRANCH OUT
COMMUNITY PARTNERSHIPS
STRATEGIC REPORT
51
We look beyond our annual finance and
performance reporting and also report on our
influence and impact in the wider economy, the
environment and society in Our Contribution
report, which is available on our websites. Some
of the highlights are shown below.
• 30,624 customers receiving support to make
their bills more affordable;
• £859,696 financial contribution to
environmental, community and charitable
non-governmental organisations;
• 989 organisations supported;
• 42% of our people volunteered to support
community projects giving 13,992 hours;
• 13,000 young people supported through our
employability activity;
• over 1,200 ‘Refill Stations’;
• 12,000 people given access to clean water and
sanitation through our fundraising for
WaterAid;
• over 850,000 visitors to our historical and
ecological sites; and
• over 2,000 patrols by 78 water ranger volunteers
to help protect our rivers.
Our Branch Out fund helps to deliver projects that
benefit the natural environment and their local
communities. A healthy natural environment is
essential for us today and to make sure we can
continue to supply top quality drinking water and
safely remove wastewater in the future. In
2019/20 we supported 21 Branch Out projects
providing £60,000 in funding. Since 2013, our
Branch Out fund has supported 126 projects and
invested over £470,000 which has been used to
leverage 12 times that amount in funding into our
regions. This has resulted in us being part of, and
helping to enable, an amazing £5.6million
investment in wildlife and people across our
communities.
PARTNERSHIPS
Partnership working is an essential aspect of our
approach as a water and wastewater provider. By
working in partnership with other stakeholders,
we are able to share the costs, risks and benefits
of addressing the challenges and opportunities
faced by our business, and together make a
difference to our customers’ lives.
“We work in partnership
towards common goals”
Our Partnership Strategy sets out how we work
with those whose values align with ours to
achieve the shared goals that are important to
our customers. Our partnerships are governed
through joint steering groups, codes of practice
and charters. We are a trusted partner of local,
national and global strategic partnerships,
influencing water policy and regulation to be
progressive and sustainable.
Many of those partnerships have been described
elsewhere in this report, such as our customer
affordability partnerships, with StepChange and
NEA, and our catchment partnerships on page 27.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
STRATEGIC REPORT
STRATEGIC REPORT
52
52
WORKING TOGETHER FOR
THE FUTURE OF WATER
Water Resources East (WRE) was officially established
as a not for profit, independent company back in
June 2019.
The focus of WRE is simple; recognising the
impact that climate change and population
growth will continue to have on Eastern
England′s finite water supply, combined with the
need to enhance the environment in this region.
WRE is one of five regional water resource
planning groups working as part of the EA′s
development of a national framework for water
resource management, but is the first to set itself
up as an independent legal entity. This has been
formed by a collaborative partnership comprising
Anglian Water; Affinity Water; Cambridge Water;
Essex and Suffolk Water; Severn Trent Water; the
National Farmers′ Union; RWE Generation;
Lincolnshire County Council; Suffolk Growth
Programme Board (on behalf of all Local
Authorities in Suffolk) and Norfolk County
Council. Other organisations are expected to join
over the coming months.
Eliane Algaard, our Water Director said: “We are
excited to be a part of WRE and looking forward
to working in collaboration with the other water
companies and organisations going forward. We
know we face some significant challenges in the
East such as responding to climate change and
population growth, but there are also
opportunities to protect and enhance our water
supply and benefit the wider region. It makes
sense for water companies to come together in
this way to achieve our common goals and
deliver positive solutions for our customers.”
The next phase of WRE′s work will focus on the
delivery of pilot projects within water-stressed
catchments in the region. These pilots will focus
on the links between land management and
water management and will seek to maximise
and account for environmental and Natural
Capital benefits.
As part of one set of pilots, land owners will be
encouraged to develop multi-sector water storage
reservoirs, capturing excess water from winter
rainfall and floods. This water could then be used
to benefit the whole regional economy to bolster
the regions water supply, support agriculture,
enhance fenland conservation and reduce flood
risk. These new reservoirs will be supported by
further interconnecting pipes to enable water to
be moved around the region, irrespective of water
company boundaries.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
STRATEGIC REPORT
53
The report shows that most customers were
generally satisfied with the service they received,
however we know our customers’ expectations
are rising, along with those of our stakeholders,
shareholders and regulators. This report gives us
the opportunity to see how we are performing
against other companies and gives us an insight
into what our customers opinion is and their
perception of the service they receive from us.
BiTC’s RESPONSIBLE BUSINESS
TRACKER®
The BiTC Responsible Business Tracker is a
measurement tool that allows organisations to
fairly assess and benchmark their responsible
business performance within communities and
the environment. Last year we were one of the
first companies to take part in the Tracker in its
pilot year. This year we were one of 94 companies
across all 24 different sectors taking part. We are
delighted to report that we scored 81% overall,
meaning that we are leading our Energy and
Utilities benchmark group and the cohort as a
whole in responsible business practice, including
healthy ecosystems and net zero carbon.
The national insights report has been published
which summarises the key findings and best
practice examples from the 2019/20 Tracker cycle
and what they could mean in the context of the
Covid-19 pandemic.
www.bitc.org.uk/report/2019-20-responsible-
business-tracker-insights-report
REPUTATION
TRUST
Our reputation is extremely important to us and
we are proud to have again been named as one of
the ‘most ethical companies’ in the world by the
Ethisphere institute. Ethisphere promotes best
practices for ethics and compliance globally,
recognising companies for transparency and
standards of integrity. We’re the only water
company in the world to be included in this year’s
World’s Most Ethical Company list and one of
only four UK based companies on the list.
We have worked hard to give our customers a
high level of trust and confidence in our
governance and assurance arrangements. We
published Our Assurance Plan for 2019/20,
following consultation with customers and
stakeholders, setting out how we intend to meet
our obligations and commitments and providing
information of appropriate quality. We have
published a Data Assurance Summary as part of
our suite of annual reporting which describes
what assurance we have carried out on our data
reporting any key findings. This confirms that
that there were no significant issues to report.
Our assurance framework builds upon our
company-wide accreditation to: ISO 14001
Environmental Management; ISO 55001 Asset
Management and our sampling and laboratory
analysis accreditation to the demanding ISO
17025.
“We are a company that
customers can trust”
WATER MARK
CCWater has introduced its Water Mark
assessment, using previously published
information on customers’ views, complaint
numbers and operational performance to
highlight how companies are performing in a
simple table. Every area of performance,
including trust, has been assessed and graded
and companies have been ranked to show overall
performance.
In our Northumbrian area we were 1st of the 11
water and sewerage companies and in our Essex
and Suffolk area we were 8th for water only
companies. We will look at the previous reports
that were combined in this assessment so we can
better understand the scoring and see where the
differences are between the two areas.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
STRATEGIC REPORT
54
FINANCIAL PERFORMANCE
AND STRUCTURE
GROUP STRUCTURE
NWL is a wholly owned subsidiary of
Northumbrian Water Group Limited (NWGL).
NWGL has one other direct subsidiary, NWG
Commercial Solutions Limited, which acts as a
holding company for other non-regulated trading
companies. NWGL also owns 50% of a joint
venture company, Wave Ltd. which, through its
trading subsidiary, carries out Non-household
(NHH) retail activities in England and Scotland.
Note 25 describes the Company’s relationship
with CK Hutchison Holdings Limited (CKHH). The
Company has been informed by CKHH that, by
virtue of contractual arrangements entered into
with other parties, with effect from 30 December
2019 it ceased to have a controlling interest in the
Company as defined by the applicable accounting
standards.
The chart below shows the structure of the Group
and the upstream links to CKHH as at 31 March
2020. The chart shows the principal intermediate
holding companies, which are wholly owned
unless otherwise shown. The 40%/40%/20% split
above NWGL represents the economic rights of
Business Thrive Limited (BTL), CK Infrastructure
Holdings Limited (CKI) and Li Ka Shing
Foundation Limited under NWGL’s Articles of
Association.
CKHH, CKI, BTL and NWGL have provided
Ultimate Controller undertakings to the Company
in accordance with the provisions of the
Company’s Instrument of Appointment (Licence).
CK Hutchison Holdings Limited*
Hutchison
Infrastructure
Holdings Limited
c.72%
Business Thrive
Limited
CK Infrastructure
Holdings Limited*
Li Ka Shing
Foundation Limited
40%
40%
20%
Northumbrian
Water Group
Limited
Northumbrian
Water Limited
NWG Commercial
Solutions Limited
financing
subsidiaries
trading
subsidiaries
* Companies listed on The Stock Exchange of Hong Kong Limited.
50%
Wave Ltd
trading
subsidiary
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL PERFORMANCE
The financial KPIs we report in our balanced
scorecard on page 23 reflect the financial
covenants underpinning our committed bank
facilities and regulatory gearing, which are
reported to each Board meeting. These KPIs all
remained better than the target for the year.
The Company’s income statement, statement of
comprehensive income, balance sheet, statement
of changes in equity and cash flow statement are
set out on pages 106 to 110. The Financial
Statements have been prepared on an historical
cost basis in accordance with Financial
Reporting Standard (FRS) 101, reflecting
International Financial Reporting Standards
(IFRS) with reduced disclosures. The key
accounting policies are summarised in note 1 to
the Financial Statements on pages 111 to 118. A
new accounting standard, IFRS 16 Leases, was
adopted in the year and the impact of transition
to the new standard is explained in note 1(r).
Revenue was £900.4m for the year ended 31
March 2020 (31 March 2019: £869.1m). This reflects
an increase in wholesale charges, set in line with
the revenue allowance from the FD of price
controls for 2015-20, which increased by a ‘K
factor’ of 0.1% plus Retail Prices Index (RPI)
inflation of 3.2%, and an increase in non-
regulated revenue related to the recovery of costs
under the Kielder Water Resources Operating
Agreement (WROA).
Operating costs, including capital maintenance
costs, for the year ended 31 March 2020 were
£541.6m (31 March 2019: £530.3m). The increase of
£11.3m includes a provision of £6.5m to reflect
additional bad debt risk on household revenue as
a result of the economic impact of the Covid-19
pandemic on our customers, and increases in
staff salaries and depreciation charges from
capital investment programme, partially offset by
cost efficiencies.
Net interest payable was £112.4m in the year
ended 31 March 2020 (31 March 2019: £130.9m).
The reduction of £18.5m relates to lower accretion
on index-linked bonds, and smaller adverse
movements on the market valuation of
derivatives compared to the previous year. Profit
before taxation for the year ended 31 March 2020
was £246.4m (31 March 2019: £207.9m).
The current tax charge for the year ended 31
March 2020 was £38.9m (31 March 2019: £33.6m).
The increase in the charge mainly reflects higher
profit before tax. The deferred tax charge for the
year ended 31 March 2020 was £58.9m (31 March
2019: £5.5m). The significant increase in the
charge is due primarily to a restatement of
deferred tax from 17% to 19%. This reflected the
decision by government to reverse the planned
reduction to 17% which had been previously
STRATEGIC REPORT
55
enacted. Further details of the net tax charge are
provided in note 7 to the Financial Statements.
Profit for the year ended 31 March 2020 was
£148.6m (31 March 2019: £168.8m).
A final dividend of £65.0m for the year ended 31
March 2019 was paid in April 2019 and that
comprised the total of dividends paid in the year
ended 31 March 2020 (31 March 2019: £130.0m). No
dividends have been proposed, approved or paid
in respect of the year ended 31 March 2020. The
dividend policy, and how the policy has been
applied in the year, is explained in note 8 to the
Financial Statements.
CAPITAL INVESTMENT
Total fixed asset additions in the year ended 31
March 2020 were £280.4m (31 March 2019:
£279.5m). Around £187m of this investment
related to the maintenance of our asset base to
ensure the continued provision of sustainable
water and wastewater services in the areas we
serve. In addition we have continued to enhance
our asset base, in particular to reduce the risk of
sewer flooding, to improve water and wastewater
treatment compliance and to support new
development activity in our areas of operation.
Significant investments in the year included the
successful first phase of implementation of new
systems under our iAM programme, for
wastewater network and for water network in
ESW, and progress on the upgrade of Horsley
water treatment works, which serves Newcastle.
We also completed our second gas to grid plant at
Bran Sands.
CAPITAL STRUCTURE AND LIQUIDITY
The Company’s long-term debt structure
remained largely unchanged with 61% fixed at an
average rate of 4.44%, 38% index-linked at an
average real rate of 1.27% and 1% on a variable
rate basis, after allowing for hedging instruments.
The slight increase in index-linked debt reflected
the £100m Consumer Prices Index (CPI) linked
issuance, described below. The blended average
nominal rate for the Company for the year ended
31 March 2020 was 4.22% (31 March 2019: 4.19%).
Our committed five year bank facility of £450m,
which is for the purpose of maintaining general
liquidity, was undrawn at 31 March 2020. During
the year, the maturity date of this facility was
extended to December 2024.
In July 2019, the Company placed its first CPI-
linked issuance, as a UK private placement
through its financing subsidiary Northumbrian
Water Finance plc (NWF). This was issued at a
principal of £100m on a forward settlement basis
for a tenor of 20 years, with a coupon of CPI plus
0.242%.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
STRATEGIC REPORT
56
Interest rate risk
The Company finances its operations through
a mixture of retained profits and borrowings.
It borrows at both fixed and variable rates of
interest and, on occasion, uses derivatives to
generate the desired interest profile and to
manage its exposure to interest rate fluctuations.
The Company’s policy is to keep a minimum
50% of its borrowings at fixed rates of interest.
At 31 March 2020, 61% (31 March 2019: 63%) of the
borrowings of the Company were at fixed rates of
interest. Index-linked borrowings are treated as
variable rate debt.
Credit risk
The Company invests surplus cash with banks on
a short-term basis. The treasury policy specifies
which counterparties the Company can invest
with and sets a limit for the maximum exposure
to each counterparty. These limits take account
of published credit ratings. There is no material
customer credit risk as no individual customer
accounts for a significant proportion of income or
debt. Note 1(o) of the Financial Statements sets
out the Company’s bad debt policy.
Foreign currency risk
The Company’s policy is that any foreign
currency exposure in excess of £100,000 sterling
equivalent of a transactional nature, or £3m
sterling equivalent of a translation nature, should
be covered as soon as they are identified. At 31
March 2020, the Company had forward foreign
exchange contracts of £1.8m (31 March 2019:
£4.3m) for the purpose of hedging the foreign
currency risk of committed future purchases.
Market price risk
The Company’s exposure to market price risk
principally comprises interest rate exposure. The
Company’s policy is to accept a degree of interest
rate risk. On the basis of the Company’s analysis,
it is estimated that a 1% rise in interest rates
would not have a significant effect.
The gearing KPI, which is measured per the
financial covenant for the committed facility and
excludes loans receivable, increased slightly from
67.2% to 67.8%, remaining well within target.
Interest cover improved from 3.6 to 4.0, also
remaining comfortably better than target.
Regulatory gearing was 67.2%, also below our
target level of 70.0%.
The Company retains strong investment grade
credit ratings of BBB+ (negative outlook) from
Standard & Poor’s (S&P) and Baa1 (negative
outlook) from Moody’s. The Moody’s outlook
reflects its view on the gearing level of our parent
company, NWGL, whilst recognising the strength
of the regulatory ring-fence. Moody’s has
extended the review period pending the outcome
of the CMA review process. S&P updated its
outlook to CreditWatch negative to reflect the
uncertain outcome of the CMA review. We report
on our financial resilience in our viability
statement on pages 102 to 103.
TREASURY POLICIES
The Board is responsible for the financing
strategy of the Company which is determined
within treasury policies set by NWGL. The
treasury policies set out how the risks associated
with treasury activities are managed, which are
summarised below. On occasion, derivatives are
used as part of this process, but the treasury
policy prohibits their use for speculation.
Funding risk
The level of capital expenditure which NWL is
obliged to incur is such that we cannot be wholly
cash financed by internally generated sources. As
a result, we must rely upon raising additional
finance on a regular basis, to be principally used
to fund the long-term assets required by the
regulated business. In order to raise this finance
efficiently, the Board’s aim is to retain prudent
investment grade credit ratings. A reduction in
the credit rating would likely restrict future
sources of funding, increase the associated cost
of new borrowing and prompt discussions with
the European Investment Bank (EIB) about the
existing facilities in place.
Liquidity risk
The Company’s policy is to have available
standby committed bank borrowing facilities
with a value of no less than £50m and with a
bank agreement availability period of no less
than three months. At 31 March 2020, NWL had
£450m (31 March 2019: £440m) of undrawn bank
facilities, provided by a group of five key
relationship banks, which mature in 2024.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
STRATEGIC REPORT
57
RISK REPORT
RISK MANAGEMENT FRAMEWORK
The Board sets the tone for risk management
within the Company, supported by the R&CSC,
and determines the appropriate risk appetite. The
Board’s view of acceptable risk is based on a
balanced view of all of the risks in the operating
environment and it aims to ensure an appropriate
balance between risk aversion and opportunities.
The Board’s approach to monitoring, managing
and mitigating risk, and the work undertaken by
the R&CSC during the year, is set out in the
Governance Report.
Those risks in the departmental risk registers
with a managed risk score above a defined
threshold are classed as ‘significant risks’ and are
reported in the Corporate Risk Register. This is
reviewed monthly by the ELT and at each
meeting of the R&CSC.
We define strategic risks as those which are
foreseeable, but not with sufficient clarity to be
assessed within the corporate risk model. These
are captured in a Strategic Risk Register and a
sub-group of the Board reviews these strategic
risks annually, most recently in November 2019.
The ELT implements policies on risk
management and internal control, ensuring that
risks are appropriately controlled, managed and
reported and that remedial action is taken as
appropriate. The Company’s approach to risk
management is set out in our Risk Management
Framework, which has been endorsed by the
R&CSC, and is managed through a corporate risk
model.
The Risk Management Framework sets out our
process for identifying, analysing and evaluating
risk across the business. Risk champions within
each area of the business co-ordinate the
identification and assessment of risks for their
area of responsibility and record these in a
departmental risk register. Risk champions meet
on a quarterly basis to share learning and ensure
consistency of approach.
Each risk is assessed against defined likelihood
and consequence criteria on both an unmanaged
and managed basis, producing a risk score. The
management controls and responsibilities are
documented and the effectiveness of the control
assessed. An assurance map details the external
and internal assurance provided over the
controls. We also set a target risk and, where this
is below the current managed risk score, set out
an action plan to achieve the desired risk
reduction.
PRINCIPAL RISKS AND
UNCERTAINTIES
The R&CSC, on behalf of the Board, carried out a
robust assessment of the principal risks facing
the Company, including those that would
threaten its business model, future performance,
solvency or liquidity, taking account of both the
highest rated risks on our Corporate Risk Register
and the Strategic Risk Register identified by the
Sub-committee.
The conclusions of this assessment are
summarised on the heat map below. This shows
the current exposure of each of the principal risks
and an indication of whether the risk is
increasing, stable or reducing. The table on pages
59 to 63 then describes each of the principal risks
in more detail, along with our approach to
mitigating these risks. The risks are not set out in
order of priority. These principal risks have also
been considered in our assessment of financial
resilience, as set out in our viability statement on
pages 102 to 103.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
A. Health & Safety
B. Customer trust and confidence
C. Water service failure
D. Wastewater service failure
E. Impact of pandemic
F. Effect of climate change
G. Cyber security /
Information management
H. Regulatory and political
changes
I. Funding and liquidity
J. Pension contributions
K. Financial performance
STRATEGIC REPORT
58
C
E
K
I
F
A
G
H
J
Operational
Financial
Compliance
Risk increasing
Risk stable
Risk decreasing
B
D
t
c
a
p
m
I
Likelihood
Impact of pandemic
The risk associated with a pandemic has been
identified historically within the Company’s risk
register but has not previously been considered to
be a principal risk. This was because the impact
had been considered to be relatively moderate.
However, the unprecedented impact of the
Covid-19 pandemic and, in particular the
lockdown measures implemented by
government, has clearly demonstrated the
potential scale and wide-ranging effect of such
an occurrence. As a result, the R&CSC has
decided that this should be added to the
principal risks of the business. This is described
on page 60.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
OPERATIONAL RISKS
DESCRIPTION OF RISK
MITIGATION
CHANGE FROM PRIOR YEAR
STRATEGIC REPORT
59
No change (focus on
continuous improvement).
No change (focus on
continuous improvement
against a background of
increasing customer
expectations).
No change.
Health & safety
The nature of our operational and
construction workplaces means
that there is a significant inherent
risk to the health and safety of our
staff and supply chain of which we
are acutely conscious.
Our workplaces are healthy and safe
Customer trust and confidence
Our customers are at the heart of
everything we do and failure to
deliver a consistently unrivalled
customer experience or negative
media coverage resulting in a poor
public perception of our reputation
could damage our customers’ trust
and confidence in our business.
We provide excellent service and
impress our customers
Our customers consider the services
they receive to be value for money
We are a company that customers
can trust
Water service failure
A problem in our water system
could cause either a major loss of
supply or for unfit water to be
supplied.
This could have many potential
causes, including the failure of a
strategic water main or treatment
works, loss of power supply or
contamination of a service
reservoir.
We provide a reliable and sufficient
supply of water
We supply clean, clear drinking
water that tastes good
The health and safety of our staff,
contractors and members of the public
is our highest priority. We are proud of
our record of maintaining a healthy and
safe workplace, but not complacent,
and we are working hard to improve this
further.
Health and safety matters are given a
high priority at all meetings of our ELT
and Board. Long-term planning and
targets are set to drive continuous
improvement. This is underpinned by
our focus on improving behavioural
safety and creating a great safety
culture.
Our health and safety management
system defines clear arrangements and
responsibilities for implementation and
management throughout the Company,
and this is externally audited as part of
our OHSAS 18001 certification.
Our unrivalled customer experience
strategy was co-created with our
customers so that we could understand
what was really important to them. We
continue to involve customers through
active participation and over 400,000 of
our customers helped to shape our
Business Plan for 2020-25.
We have invested in significant
improvements in our customer facing
systems and the digital experience we
offer to our customers.
We continue to improve our support for
customers in vulnerable circumstances,
through our Inclusivity Strategy,
StepChange partnership and new
affordability tariffs. We plan to take this
further through our commitment to
eradicate water poverty across our
supply areas.
We operate a risk-based prioritisation
process for the maintenance and
replacement of our assets. We are ISO
55001 (Asset Management) certified on
a company-wide basis, demonstrating
that we follow best practice in the
long-term management of our assets.
We monitor the effectiveness of our
asset management through a number of
asset health measures.
We have well developed business
continuity plans in place for managing
incidents, down to a site specific level.
These are regularly tested.
We restrict access to our treated water
network through authorisation and
physical security measures.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
DESCRIPTION OF RISK
MITIGATION
CHANGE FROM PRIOR YEAR
STRATEGIC REPORT 60
No change.
New principal risk
We operate a risk-based prioritisation
process for the maintenance and
replacement of our assets. We are ISO
55001 (Asset Management) certified on
a company-wide basis, demonstrating
that we follow best practice in the
long-term management of our assets.
We monitor the effectiveness of our
asset management through a number of
asset health measures.
We continue to invest heavily in
preventing pollution and sewer flooding
and have a pollution management
programme with multiple workstreams
to tackle the root causes.
We engage with our customers and
local communities through initiatives
such as ‘Love Your Drain’ and Water
Rangers and working with partners to
deliver SuDS.
We are also investing significantly in
proactive maintenance and cleaning of
the network, real time monitoring and
analysis, flooding mitigation and
investment to increase network
capacity.
Our response to the Covid-19 pandemic
has demonstrated that we can continue
to operate effectively even under strict
lockdown conditions.
We have well developed business
continuity plans in place which have
been updated through Covid-19
pandemic.
We have been able to quickly enable
large parts of our customer and support
service teams to work remotely from
home, as well as maintaining
operational activities, taking account of
Covid-19 risk assessments and with
appropriate adjustments.
Wastewater service failure
A problem in our wastewater
system could cause either
significant environmental pollution
or flooding of customer properties.
This could have many potential
causes, including insufficient
network capacity to cope with
severe weather events,
misconnected properties and the
consequences of sewer blockages
or collapses.
We provide a sewerage service that
deals effectively with sewage and
heavy rainfall
Impact of pandemic
Unavailability of staff due to a
pandemic outbreak. This could
result in a significant impact on a
number of business areas with
people, service, operational and
financial consequences including
the Company’s ability to deliver
services to customers.
Also, impact of an extended
lockdown or social distancing
measures impacting on our
customers and ability to function
normally.
Financial risks include reduced
revenue from customers, increased
operating costs, impacts on
delivery of capital investment and
potential impacts on PCs.
We provide excellent service and
impress our customers
We provide a reliable and sufficient
supply of water
We provide a sewerage service that
deals effectively with sewage and
heavy rainfall
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
DESCRIPTION OF RISK
MITIGATION
CHANGE FROM PRIOR YEAR
STRATEGIC REPORT
61
Increasing risk over time,
especially in relation to sewer
flooding.
Our approach to mitigating short-term
risks of service failures on our water
and wastewater businesses are set out
in the risks above.
We consider the longer-term impacts of
climate change in our long-term
planning, such as our Water Resource
Management Plan, and identify long
term solutions to future potential
resilience issues well in advance.
Our Resilience Framework provides a
structure for us to achieve resilience in
the round by taking an integrated and
systematic approach to understanding
risk and resilience challenges across all
of our business areas and how they
interact.
Effect of climate change
In the short term, climate change
may cause more volatile weather
conditions which could impact on
customer service through
disrupting water supply or causing
sewer flooding.
Over the longer term, climate
change could impact on water
resources resilience and the
integrity of our assets.
This may be exacerbated by
growing population and ongoing
urbanisation.
We provide a reliable and sufficient
supply of water
We provide a sewerage service that
deals effectively with sewage and
heavy rainfall
We deliver water and sewerage
services that meet the needs of
current and future generations in a
changing world
COMPLIANCE RISKS
DESCRIPTION OF RISK
MITIGATION
CHANGE FROM PRIOR YEAR
Cyber security
Key business systems could be
lost as a result of a malicious
attack or failure of cyber security.
Sensitive data could be released in
breach of the Data Protection Act,
General Data Protection Regulation
(GDPR) or Environmental
Information Regulations (EIR).
May not comply with obligations
under the Networks & Information
Systems Directive.
We are a company that customers
can trust
No change.
Our Information Security policy sets out
our commitment to the continuous
improvement of information security
controls and culture throughout the
business. This is delivered through
software and hardware access controls,
additional levels of security for web-
facing systems and clear policies and
procedures and user awareness,
supported by briefings and training.
We have implemented a resilient
infrastructure which includes full
back-up and recovery, and also
fail-over to other hardware in the event
of a local failure.
Data is protected through access
controls, laptop encryption and
awareness briefings. A ten point data
protection action plan has been
developed to further mitigate the risks.
This activity is supported by a
dedicated team covering security, data
protection and EIR.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
DESCRIPTION OF RISK
MITIGATION
CHANGE FROM PRIOR YEAR
STRATEGIC REPORT 62
Increased regulatory
uncertainty through CMA
referral.
Reduced political uncertainty
after UK General Election.
Externally driven, but we have actively
engaged with Ofwat throughout the
current price review process by
responding to formal consultations and
regular direct dialogue.
The CMA referral will independently
review our PR19 FD providing a further
opportunity to set out and support our
plans.
We continue to engage with all political
stakeholders, both directly and through
Water UK, to ensure that any debate is
well-informed.
This risk is also mitigated by our
excellent performance, behaviours and
values.
Regulatory and political changes
Changes to the Licence or
regulatory methodology could
impact adversely on the balance of
risk and return or reduce investor
confidence in the stability and
predictability of the regulatory
framework.
Outcome of PR19 process remains
uncertain as a result of referral to
CMA.
A change in future government
could introduce significant changes
in policy.
Our finances are sound, stable and
achieve a fair balance between
customers and investors
FINANCIAL RISKS
DESCRIPTION OF RISK
MITIGATION
CHANGE FROM PRIOR YEAR
Risk remains heightened due
to uncertainty in financial
markets as a result of the UK’s
process to exit the EU and
Covid-19 impacts.
No change. Actuarial valuation
in progress.
The Board has approved treasury
policies which set out how we manage
treasury risks (see page 56).
Our five year plans identify future
borrowing requirements and we plan
our financing strategy accordingly over
this time horizon. This is supported by
£450m of standby committed borrowing
facilities, which was fully undrawn at 31
March 2020, and we maintain
substantial headroom in the financial
covenants for these facilities.
We are committed to maintaining our
investment grade credit ratings and
manage our financial plans accordingly.
Our viability statement on pages 102 to
103 reports on the financial resilience of
our plan over a ten year time horizon.
We have an agreed schedule of
contributions from our most recent
actuarial valuation of our defined
benefit pension scheme, as at 31
December 2016. Our employer
covenant remains strong, reflecting the
long-term nature of our business and
25 year rolling term of our Licence.
Funding and liquidity risk
A key funding risk would be an
inability to access future funding at
acceptable rates due to market
uncertainty. Future borrowing costs
could increase as a result of a
credit rating downgrade or the loss
of EIB as a source of low cost
funding, due to Brexit.
Liquidity risk could arise due to
breaching financial covenants on
committed facilities.
Our finances are sound, stable and
achieve a fair balance between
customers and investors
Pensions
Risk of increased pension deficit at
the next actuarial valuation of our
defined benefit pension scheme (at
31 December 2019) as a result of
market conditions, increasing
balance sheet liabilities and some
measures of gearing.
Risk of increased employer
contributions, for either ongoing
service obligations or to repair the
pension deficit.
Our finances are sound, stable and
achieve a fair balance between
customers and investors
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
DESCRIPTION OF RISK
MITIGATION
CHANGE FROM PRIOR YEAR
STRATEGIC REPORT 63
Increased, due to outcome of
PR19 FD and continued
uncertainty through the CMA
referral process.
Financial performance
A failure to deliver our financial
plans could impact on expected
shareholder returns.
This could result from significant
adverse movements on costs,
interest or tax or a failure to deliver
efficiency commitments.
A sustained period of low CPI(H)
inflation could depress RCV,
increasing gearing.
The Board asked Ofwat to refer the
PR19 FD to the CMA as it
concluded that it would adversely
impact the long term financial
resilience of the business.
Our finances are sound, stable and
achieve a fair balance between
customers and investors
We are implementing a range of
efficiency actions for both operating
and capital expenditure and progress is
reported monthly to ELT. We maintain
more than 50% of our borrowings on
fixed rates, providing certainty.
We resubmitted our PR19 Business
Plan in the light of Ofwat’s Initial
Assessment, including additional
evidence supporting our expenditure
plans.
The CMA referral will independently
review our PR19 FD providing a further
opportunity to set out and support our
plans.
Our viability statement on pages 102 to
103 reports on the financial resilience of
our plan over a ten year time horizon.
BREXIT RISK
The R&CSC has considered risks to the business
which could result from the UK leaving the
European Union (EU) without a trade agreement,
but does not consider this to be a principal risk,
other than in relation to future EIB funding as
explained above. We have engaged with
government, our supply chain and other
stakeholders to review potential impacts of
restrictions being placed on trading with the EU.
Whilst NWL operates entirely within the UK, we
are conscious that some of our supply chain does
rely on transportation from Europe. We have
made appropriate preparations to mitigate
against these risks and ensure continuity of
service.
By order of the Board
H Mottram, CEO
15 July 2020
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
GOVERNANCE REPORT 64
GOVERNANCE
REPORT
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
GOVERNANCE REPORT 65
CHAIRMAN’S INTRODUCTION
The Board of NWL recognises that the Company has
a very important role in the lives and wellbeing of its
customers and that it is a privilege to be entrusted
to provide essential public services to millions of
customers.
We also have key
environmental
responsibilities and we
are a significant employer
and buyer of goods and
services. The NWL Board
understands and accepts
its responsibilities and
listened carefully to the
views of our many
stakeholders throughout
A J Hunter
the preparation of our Plan. As I explain in my
statement at page 4, the Company asked Ofwat to
refer its FD of the 2019 Price Review to the CMA
for a redetermination and the outcome of this
process will be known in due course. The Board
remains fully committed to ensuring that NWL
continues to provide excellent customer service,
and is ethical and fair in its relationship with all
stakeholders.
Corporate governance requirements continue to
evolve and, last year, Ofwat prescribed four new
objectives (the 2019 Objectives) which it expects
us to meet. These are set out on pages 74 to 80
below, where we have also explained how we
meet them. The 2019 Objectives have now been
incorporated into each company’s Licence. Along
with most others in the sector, NWL consented to
the change, noting Ofwat’s acknowledgement
that companies will have scope to demonstrate
compliance in different ways. That flexibility is
consistent with the view of the Financial
Reporting Council (FRC) that there is no ‘one-
size-fits-all’ version of corporate governance.
The 2019 Objectives are now the primary
governance framework against which NWL will
report, but the Board has agreed that it would also
be appropriate to report compliance with the
Wates Corporate Governance Principles for Large
Private Companies (the Wates Principles). NWL
has, in prior years, reported compliance with the
UK Corporate Governance Code. Whilst we will
now focus on the 2019 Objectives and the Wates
Principles, our standards of corporate governance
will be at least as high as in previous years and
higher wherever appropriate.
As a private company with NWL’s ownership
structure, we believe it is consistent with good
corporate governance for there to be significant
shareholder representation on the Board,
including the Chairmanship. However, we accept
that there needs to be an appropriate balance.
Currently, there are four INEDs and four further
NEDs (including me as Chairman). This year we
intend to appoint an additional INED which will
make INEDs the largest single group on the
Board.
The INEDs play a very significant role in the
functioning of the Company and are instrumental
in all aspects of the Board’s work, taking a leading
role on the various Committees, which the Board
relies on. The Committees are effectively led by
the INEDs (within agreed parameters) and handle
a very significant volume of important work and
present options and proposals to the Board.
Our four current INEDs are highly experienced,
capable and independently-minded professionals
with a diverse range of experience and talents.
Working with the other NEDs, they scrutinise the
performance of management in meeting agreed
goals and objectives and monitor the reporting of
performance. We believe our current governance
arrangements, with strong INED leadership,
ensure that there is always sufficient
independent membership and judgement on the
Board, further supporting the Board and its
Committees in making high quality decisions
that address diverse customer and stakeholder
needs. This independent voice will be further
expanded when we appoint a fifth INED later this
year. Moreover, in accordance with common
governance practice, all four current INEDs will
step down by the end of 2021 and be succeeded by
new appointees, which will allow new talent and
experience to be brought to the Board.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
GOVERNANCE REPORT 66
I am pleased to report that our recent Board
evaluation exercise delivered very positive
feedback on how the Board operates. We again
engaged Professor Giovanna Michelon (a
specialist in corporate governance and social
responsibility) to facilitate the exercise and her
report concludes that the Board and its
Committees are working effectively, as evidenced
by healthy and challenging discussions, an
appropriate and balanced mix of expertise and
competencies and the high quality work carried
out by the Committees. These findings are
entirely consistent with my own view of how well
the Board works, on behalf of all the Company’s
stakeholders.
A J Hunter
Chairman
As I explained in last year’s report, the Board
functions as an integrated whole. All Directors
have the same legal responsibilities and each
Director understands his or her individual
responsibility to act in the best interests of the
Company, as well as the importance of the
service provided to our customers and our
environmental responsibilities. All Directors play
a full part in Board meetings and shape the
Company’s strategy, as well as ensuring that
customers’ interests are fully considered in any
investment and operational decisions. The
composition of the Board ensures a sound
balance of experience, knowledge and
independence and that decision making is not
dominated by any single group.
Paul Rew, our Senior INED, sets out in his report
(on pages 67 to 68) how the INEDs are fully
involved in all the main aspects of NWL’s
governance and, throughout the year, were
invited to, and participated in, all the Board
meetings of our holding company, NWGL (except
in relation to NHH retail business).
In practice, the Company complies with the 2019
Ofwat Objectives and, with very few exceptions,
the supporting Provisions. The effective
arrangements which the Board and its
Committees have in place to ensure such
compliance are explained in some detail below in
the Corporate Governance Report (on pages 64 to
104).
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
GOVERNANCE REPORT 67
SENIOR INDEPENDENT
NON-EXECUTIVE
DIRECTOR’S REPORT
As Senior Independent Non-Executive Director
(SINED) I am pleased to be able to describe the role of
NWL’s INEDs, and the key role played by the INEDs in
the Board Committees and Sub-committee.
I am happy to endorse the
Chairman’s explanation of
the key role which the
INEDs continue to play in
NWL’s governance,
assurance and decision
making. I chair the Audit
Committee (AC), the
R&CSC and the CMA
Board Sub-group and I
chaired the PR19 Board
Sub-group, which I explain below. Fellow INEDs
sit on all these bodies, as well as on the
Remuneration and Nomination Committees.
INEDs are in the majority on the AC, the R&CSC,
the Remuneration Committee and the
Nomination Committee.
Paul Rew
We are therefore fully involved in all the main
aspects of NWL’s governance and the Board is
satisfied that this enables it to ensure that sound
governance is maintained.
In my recent reports I have explained the role of
the PR19 Board Sub-group, which provided
integrated support to the Board as a whole in
driving forward and assuring preparation of our
Plan. The PR19 Board Sub-group was fully
involved in all aspects of the development of our
Plan and all members reviewed and challenged
both the overall strategy and the detailed
submissions, as well as the re-submissions
following Ofwat’s Initial Assessment of Business
Plans. On the ground, INEDs were involved in
customer focus groups, meetings of the Water
Forum and other stakeholder groups.
As the Chairman explains in his statement (at
page 4), the Board did not consider that Ofwat’s
FD for 2020–25 adequately reflected the clear
guidance provided by our customers and other
stakeholders. This manifested in the
disallowance by Ofwat of schemes to enhance
water supply resilience and reduce sewer
flooding. Moreover, the overall package did not,
in the Board’s opinion, put the Company on a
sustainable footing to meet the very stretching
targets set by Ofwat in an increasingly
challenging operating environment.
The Board therefore agreed, unanimously, to ask
Ofwat to refer the FD to the CMA for
redetermination, which is in progress. In order to
support the Board in managing the CMA referral,
the Board established the CMA Board Sub-group,
which includes all the INEDs, the Executive
Directors and professional advisers. This Sub-
group developed the Company’s Statement of
Case for approval by the Board and submission to
the CMA and the outcome is awaited.
Although the INEDs are not members of the
NWGL Board, we have been present at its Board
meetings this year, which has continued to
encourage a cohesive approach at both Boards
and given us full transparency. We have not,
however, received papers relating to the NHH
retail market or been present when that has been
under discussion.
The INEDs have again all taken part in extensive
sessions with management on business risk and
customer service, have met from time to time
without management or the other Directors being
present (with and without the Company’s
auditors) and attended seminars arranged by
Ofwat and other events relating to the water
sector. Beyond the formal work of the Board and
its various committees, we have also continued
to develop a broader insight into the work of the
Company through other channels such as NWL’s
Innovation Festival, customer focus groups,
meetings on environmental issues, the Water
Forum, chairing internal sprints, and through
discussions with Directors and staff at informal
events.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
GOVERNANCE REPORT 68
In conclusion, I and the other INEDs believe that
the Board and Committees have sufficient
independent membership, and this will be
enhanced by the appointment of a fifth INED this
year. Our INEDs, through their leading role in the
Committees, continue to exert significant
influence in setting the direction which the Board
takes in all key areas of strategy and business
planning, monitoring, governance and reporting.
P Rew
Senior Independent Non-Executive Director
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
CORPORATE GOVERNANCE
GOVERNANCE REPORT 69
H Mottram (CEO) joined
the Board in 2010, when
she was appointed as CEO
of NWL and NWGL. Ms
Mottram is a Non-
Executive Director of
Centrica plc, Vice-Chair of
the North East Local
Enterprise Partnership, a
member of the CBI Board
and Vice-Chair of
H Mottram
Newcastle University Council. Ms Mottram was
named North East Business Executive of the Year
in 2017 recognising her significant contribution to
business in the north east of England. She was
awarded an OBE in 2010 for services to the rail
industry and a CBE in 2018 for services to the
water industry and business community.
Key strengths: Leadership, corporate overview,
infrastructure and customer service.
C I Johns (Finance
Director) joined the Board
in 2013, having served
as Finance Director of
NGN, which is also part of
the Cheung Kong Group,
since 2005. Before joining
NGN, Mr Johns, who is a
Chartered Accountant,
held senior financial
management positions
C I Johns
in the financial services sector, in both Yorkshire
and London. Mr Johns’ previous positions include
being Head of Finance and Accounting within the
UK lending operations of Provident Financial plc,
and a senior management role in the Financial
Reporting and Control Group of Morgan Stanley.
Mr Johns stepped down from the Board on 30
May 2020.
Key strengths: Finance and infrastructure.
BOARD MEMBERSHIP
A J Hunter (Non-
Executive Chairman)
joined the Board in
October 2011. Mr Hunter
is Deputy Managing
Director of CKI, which is
listed on The Hong Kong
Stock Exchange and is a
substantial shareholder
in the Group. Mr Hunter is
an Executive Director of
A J Hunter
Power Assets Holdings Limited, a listed company.
He has been an Executive Director of CKI since
December 2006 and Deputy Managing Director
since May 2010. Mr Hunter acted as the Chief
Operating Officer of CKI from December 2006 to
May 2010. Prior to his appointment to the board
of Power Assets Holdings Limited in 1999, Mr
Hunter was Finance Director of the Hutchison
Property Group. He holds a Master of Arts degree,
a Master’s degree in Business Administration
and is a member of the Institute of Chartered
Accountants of Scotland and of the Hong Kong
Institute of Certified Public Accountants. Mr
Hunter chairs the Remuneration Committee and
Nomination Committee.
Key strengths: Leadership, strategic overview,
finance and infrastructure.
P Rew (Senior
Independent Non-
Executive Director) joined
the Board in 2010. Mr Rew
is a Chartered Accountant
and was a partner in
PricewaterhouseCoopers
LLP (PwC) from 1987
until 2010, where he was
lead partner for a diverse
range of FTSE 100 clients
and for PwC’s UK energy,
P Rew
utilities and mining sector practice. Mr Rew is
a Non-Executive Director of the Care Quality
Commission and chairs its Audit Committee. He
was formerly a Non-Executive Director of the Met
Office and of Defra. Mr Rew chairs the AC, R&CSC
and the CMA Board Sub-group, and chaired the
PR19 Board Sub-group. He is also a member of
the Remuneration Committee and Nomination
Committee.
Key strengths: Finance, risk and
corporate governance.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
A C Jones (Assets and
Assurance Director) joined
the NWL Board in 2004. An
economist by background,
Mr Jones holds an MBA
with distinction from
Warwick and has extensive
experience in dealing with
government and regulatory
bodies. Mr Jones is a
Chartered Environmentalist
A C Jones
and worked as a government economist and
economic consultant before joining the water
industry. He has held non-executive positions at
a number of water industry organisations and
is currently Chair of PNE Group, a social
enterprise company.
Key strengths: Economic regulation and
corporate planning.
M Fay
M Fay (Independent Non-
Executive Director) joined
the Board in 2010. Ms Fay
was Managing Director of
Tyne Tees Television until
December 2003 when she
became Chair of One North
East, a position she held
until August 2010, and was
Deputy Chair of The Sage
Gateshead until March 2018.
Ms Fay is Deputy Chair
of Governors of the University of Sunderland,
Chair of South Tyneside Council’s Economic
Regeneration Board, Chair of the Customs House
South Shields and a Non-Executive Director
of the Tyne and Wear Passenger Transport
Executive (which trades as ‘Nexus’). She was
awarded a CBE in 2010 for services to regional
development and is a Deputy Lieutenant for
Tyne and Wear. Ms Fay is a member of the CMA
Board Sub-group, Remuneration Committee and
Nomination Committee.
Key strengths: Corporate overview and
customer service.
GOVERNANCE REPORT
70
Dr S Lyster
Dr S Lyster (Independent
Non-Executive Director)
joined the Board in 2006.
A lawyer by training, Dr
Lyster qualified in both the
UK and the USA and is the
author of the leading legal
textbook on international
wildlife law. Dr Lyster was
Chief Executive of LEAD
International from 2005
to 2011. Before joining LEAD, he was Director
General of The Wildlife Trusts and previously
worked for World Wildlife Fund for nine years,
where he was responsible for its global policy
work on international conventions. He is
Chairman of Conservation International-UK,
a Trustee of Kilverstone Wildlife Conservation
Trust and the Rural Community Council of Essex,
and a Council member of World Land Trust. In
July 2014, Dr Lyster was appointed to the Board
of Natural England and, in 2020, was appointed
a member of Essex County Council’s Climate
Action Commission. He is a Deputy Lieutenant
for the County of Essex. Dr Lyster is a member
of the CMA Board Sub-group, AC, Remuneration
Committee, Nomination Committee and R&CSC.
Key strengths: Conservation, the environment
and law.
M A B Nègre (Independent
Non-Executive Director)
joined the Board in 2006.
Mr Nègre was, between
April 2000 and April 2001,
the CEO of the former
Northumbrian Water Group
plc and the chief corporate
representative of its parent
company, Suez, in the UK.
Mr Nègre was a founding
Director of NWGL when it
M A B Nègre
acquired the Group from Suez SA in 2003 and
listed it on the London Stock Exchange (LSE). He
currently chairs Ecofin Vista Hedge Fund and
Ecofin Global Renewable and Infrastructure Fund
and is a Non-Executive Director of LSE-listed
Investment Trust EGL plc. Mr Nègre is a member
of the CMA Board Sub-group, AC and R&CSC.
Key strengths: Strategy, utilities
and infrastructure.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
GOVERNANCE REPORT
71
D N Macrae (Non-
Executive Director) joined
the Board in October
2011, and represents CK
Infrastructure Holdings
Limited, where he holds
the position of Head of
International Business.
Mr Macrae has over 25
years’ experience in the
infrastructure investment
field and holds a Bachelor’s and a Master’s degree
in Philosophy, Politics & Economics. He is a
member of the Remuneration Committee and
Nomination Committee.
D N Macrae
Key strengths: Finance, infrastructure and
corporate overview.
L S Chan (Non-Executive
Director) joined the Board
in 2016, having been
appointed by CKH, and
has been an Executive
Director of CKI since
January 2011 and Chief
Financial Officer of CKI
since January 2006. Mr
Chan joined Hutchison
Whampoa Limited,
which is a substantial
L S Chan
shareholder of CKI, in January 1992 and has been
with the Cheung Kong Group since May 1994.
Mr Chan is a fellow of the Hong Kong Institute
of Certified Public Accountants, a fellow of the
Association of Chartered Certified Accountants
and also a member of the Institute of Certified
Management Accountants (Australia). He is a
member of the Audit Committee.
Key strengths: Finance, infrastructure and
corporate overview.
F R Frame (Non-Executive
Director) joined the Board
in November 2011, having
been appointed by Li Ka
Shing Foundation Limited,
a company limited by
guarantee and a charity,
which is a substantial
shareholder in the Group.
A lawyer by profession, Mr
Frame served as Deputy
F R Frame
Chairman of The Hongkong and Shanghai
Banking Corporation; as Chairman of South China
Morning Post Limited and The Wallem Group
Limited; and as a Director of The Weir Group plc,
Swire Pacific Limited, The British Bank of the
Middle East, Edinburgh Dragon Trust plc and
Baxter International Inc. He holds the degrees of
Master of Arts and Bachelor of Laws. Mr Frame
retired from the Board on 31 December 2019.
Key strengths: Corporate overview and law.
H L Kam (Non-Executive
Director) joined the
Board in October 2011,
having been appointed by
Cheung Kong (Holdings)
Limited (CKH), a wholly-
owned subsidiary of
CK Hutchison Holdings
Limited of which he is
the Deputy Managing
Director. Mr Kam is also
H L Kam
Group Managing Director of CKI, a position he
has held since its incorporation in May 1996.
He is the Deputy Managing Director of CK Asset
Holdings Ltd., President and Chief Executive
Officer of CK Life Sciences Int’l. (Holdings) Inc., as
well as Chairman of Hui Xian Asset Management
Limited, which manages Hui Xian Real Estate
Investment Trust, a listed real estate investment
trust. Mr Kam holds a Bachelor of Science degree
in Engineering and a Master’s degree in Business
Administration.
Key strengths: Leadership, strategic overview,
finance and infrastructure.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
GOVERNANCE REPORT
72
Attendance at the five additional Board meetings
held during the year was as follows:
ATTENDANCE
5
5
5
5
5
5
4
5
3
1
5
4
ATTENDANCE AT BOARD MEETINGS
There were five scheduled meetings during the
year and five shorter additional meetings. The
Board considered this sufficient to enable it to
discharge its duties effectively, and will meet out
of the agreed cycle for time-critical matters or
significant matters that arise as necessary.
Attendance at the five scheduled meetings during
the year was as follows:
NAME
A J Hunter
P Rew
H Mottram
C I Johns
NAME
A J Hunter
P Rew
H Mottram
C I Johns
A C Jones
M Fay
Dr S Lyster
M A B Nègre
F R Frame
H L Kam
D N Macrae
L S Chan
ATTENDANCE
A C Jones
M Fay
Dr S Lyster
M A B Nègre
F R Frame
H L Kam
D N Macrae
L S Chan
5
5
5
5
5
5
5
4
4
4
5
5
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
CORPORATE GOVERNANCE
STATEMENT
The Boards of the Company and its holding
company, NWGL, are committed to high
standards of corporate governance. Ofwat has
now embedded the 2019 Ofwat Objectives in the
Company’s Licence, to ensure that governance is
sound and that the Company’s Directors, acting
as such, act independently of parent companies.
The arrangements and functioning of the Board,
its Committees, Sub-committee and Sub-groups
adhere to the Wates Principles and the 2019
Ofwat Objectives, with the latter being subject
to the minor exceptions explained below. As
set out above, there are currently four INEDs, a
further four NEDs (including the Chairman) and
two Executive Directors. These arrangements,
with strong INED input which is expanded
upon in the section below on meeting the 2019
Ofwat Objectives, ensure that there is sufficient
independent challenge and judgement on the
Board. Moreover, the Company will appoint an
additional INED during 2020, making INEDs the
largest single group on the Board.
The Chairman comments in his introduction
to the Governance Report (on pages 65 to 66)
on the balance of the Board, which functions
as an integrated whole, and the quality and
contribution of the INEDs: P Rew, S Lyster,
M Fay and M A B Nègre. Their biographical
details are set out on pages 69 to 71 above. They
were appointed on the recommendation of the
Nomination Committee of Northumbrian Water
Group plc, when it was independently listed.
The Board has rigorously reviewed the re-
appointment of the INEDs and determined that
GOVERNANCE REPORT
73
they are independent, notwithstanding that they
have served on the Board for more than nine
years. However, all four existing INEDs will step
down over the course of 2020 and 2021 and be
succeeded by new appointees, which will
allow new talent and experience to be brought to
the Board.
The Chairman ensures that the Board works
in a collegiate way, in the best interests of the
Company and its stakeholders, and that each
Director has an equal voice. All members of the
Board are content that the balance of the Board is
appropriate, but welcome the decision to appoint
an additional INED during 2020. The Directors
have all been able to allocate sufficient time to
the Company to discharge their responsibilities
effectively.
As the Chairman says in his introduction
(on pages 65 to 66), the INEDs, within agreed
parameters, effectively lead the work of the
Committees, which hold very full meetings with
considerable workloads, to prepare the ground for
the Board.
There is a clear division of responsibilities
between the Chairman and CEO. This has been
set out in writing and agreed by the Board.
The Company has put in place Directors’ and
Officers’ insurance cover for the benefit of all
Directors of the Company. In addition, NWGL
entered into a Deed of Indemnity on 21 March
2017 to provide Directors of NWGL and its
subsidiaries further protection against
potential liability.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
BOARD LEADERSHIP,
TRANSPARENCY AND GOVERNANCE –
THE 2019 OFWAT OBJECTIVES (AND
SUPPORTING PROVISIONS)
We explain below how we meet the Objectives
and supporting Provisions on board leadership,
transparency and governance as published by
Ofwat in January 2019.
Objective 1
The Board of the Appointee establishes the
company’s purpose, strategy and values, and is
satisfied that these and its culture reflect the
needs of all those it serves.
Our comments below on compliance with the
relevant supporting Provisions explain how the
Company meets this Objective:
(i) The Board develops and promotes the
Company’s purpose in consultation with a wide
range of stakeholders and reflecting its role as
a provider of an essential public service.
The Board’s purpose statement (set out on page
13) has been informed by the very extensive
consultation exercise conducted in preparation
for the submission of the Company’s PR19
Business Plan, as well as continuous broadly
based consultation in the normal course of
business and Ofwat’s emphasis on the need for
companies to embed a “public value” ethos.
The consultation underpinning the PR19
Business Plan was comprehensive, with
responses from more than 400,000 customers
as well as from our Water Forum, or regulators,
employees, suppliers and partners.
There is, of course, a comprehensive and
continuous programme of engagement with
customers and full details are set out in the
Company’s APR.
This open and consultative culture is a key
element of how the Company does business. It
is also maintained through a very broad
programme of engagement, including regular
engagement at Chief Executive level with local
authorities across our operating areas, and
participation in regional and national business
organisations. The Company also hosts
numerous site visits by MPs, civil servants, and
senior regulators to encourage open and
transparent debate about the challenges faced
by the sector and to enable the Company to
understand their respective concerns and
priorities.
As explained on page 14, the Company intends
to review its purpose statement over the
coming year, drawing on extensive further
work with senior executives, board members,
employees, customers and other stakeholders.
GOVERNANCE REPORT
74
(ii) The Board makes sure that the Company’s
strategy, values and culture are consistent with
its purpose.
The Board has reviewed and discussed the
Company’s strategy, values and culture and is
satisfied that these are consistent with the
purpose. The Board recognises that the
Company’s strategy needs to reflect the
Company’s purpose, as well as customers’ long
term priorities and to take account of Ofwat’s
emphasis on public value. NWL’s purpose
statement is therefore underpinned by key
principles which demonstrate that NWL:
(a) provides a reliable, resilient, safe and high
quality water and wastewater service for all;
(b) intends to leave the environment in a better
condition for the next generation;
(c) is committed to keeping water affordable
including for those on low incomes; and
(d) acts in the long-term interests of society
and the environment while still providing
the very best service for customers today.
(iii) The Board monitors and assesses values
and culture to satisfy itself that behaviour
throughout the business is aligned with the
Company’s purpose. Where it finds
misalignment it takes corrective action.
(a) The Board has received and discussed
detailed feedback on an extensive employee
engagement survey conducted by “Best
Companies”. This provided a comprehensive
insight into the alignment of behaviour
throughout the business with the purpose.
The survey findings were positive but there
are always areas where there is scope to
improve engagement. Line managers are
being supported to develop action plans to
further improve engagement and ensure
alignment of behaviour with the purpose.
Engagement will be re-assessed later in the
year to measure the improvement achieved
and identify any further steps required.
(b) The Board has designated one of the INEDs,
M Fay, to engage with the workforce and to
provide the Board with a first-hand
assessment of the culture of the business.
Mrs Fay has fed back to the Board on her
experience of employee roadshows and
other site visits and a programme of virtual
(and, if safe, physical) visits will be arranged
during 2020.
(c) P Rew, S Lyster and M A B Nègre (INEDs)
have attended employee roadshows and the
Innovation Festival and fed back their views
to the Board.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT (d) The Human Resources team is reviewing
Company policies and procedures to ensure
that these properly reflect the Company
purpose and to embed it where this is
appropriate.
(iv) Annual reporting explains the Board’s
activities and any corrective action taken. It
also includes an annual statement from the
Board focusing on how the Company has set
its aspirations and performed for all those it
serves.
The Board receives detailed reports from the
Executive Directors in advance of Board
meetings, covering each aspect of the
Company’s activities.
The Chairman leads the Board and ensures
that all items on the Board agendas are
discussed openly and that all Directors have an
opportunity to express their views. He
encourages constructive challenge, so that
ideas and proposals are tested and explored
fully. The Board recognises that customers’
interests are best served when the Company is
flexible and innovative, so the ELT is always
encouraged to think laterally and consider a
range of solutions for each issue.
The Board makes key strategic decisions,
approves the annual budget and notes the
medium-term business plans. It also approves
key regulatory submissions and very
significant investments or expenditure which
is not in the normal course of business.
Investments which form part of projects within
approved business plans are authorised by the
Committees below Board level. Although this
formal framework is very effective, the ELT
takes great care to ensure that matters which
relate to the quality of the Company’s services
to customers, leakage, water quality and
environmental performance are discussed
fully by the Board.
GOVERNANCE REPORT
75
The 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 Company’s Board meets at least
five times each year.
During the year, the Board received regular
detailed updates from the Executive Directors
on each aspect of the Company’s work. There
are also regular reports on each Board agenda
on customer service, operational performance,
health and safety, management of key business
risks, the investment programme and
regulatory matters. There is a strong focus on
the Company’s success in delivering its key
outcomes, as explained in the Strategic Report.
The Chairman of the AC, R&CSC and Sub-
groups reports fully to the Board on their work.
In addition, the following significant matters
were considered by the Board, as a matter of
sound governance:
(a) the Annual Report and Financial
Statements;
(b) the annual business plan;
(c) data security;
(d) decisions on tariffs;
(e) approval of several significant capital
projects;
(f) review of performance commitment targets
and related investment priorities; and
(g) matters relating to PR19, including
addressing Ofwat’s Initial Assessment of
Plans, the Draft Determination and FD and
the decision to ask Ofwat to refer the FD to
the CMA for redetermination.
A Board statement as detailed above is
included in NWL’s APR for the year ended
31 March 2020.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT Objective 2
The Appointee has an effective Board with full
responsibility for all aspects of the Appointee’s
business for the long term.
NWL clearly meets this Objective. The Board sets,
implements and supports the Company’s vision,
values, standards and strategy and ensures
compliance with policies and legal and regulatory
obligations. We comment below on compliance
with the relevant objectives:
(i) The regulated company sets out any
matters that are reserved to shareholders or
parent companies (where applicable) and
explains how these are consistent with the
board of the regulated company having full
responsibility for all aspects of the regulated
company’s business, including the freedom
to set, and accountability for, all aspects of
the regulated company’s strategy.
Although proper regard is given to the
interests of shareholders, in accordance with
company law, NWL’s Board has full
responsibility for all aspects of the
Company’s business, including the freedom
to set, and accountability for, all aspects of
NWL’s strategy. This is evidenced by the fact
that the PR19 Business Plan and actions
taken in response to the Draft and Final
Determinations were developed and
approved entirely by the NWL Board.
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,
Sub-committee, Sub-groups and
management. These are published on the
Company’s website.
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. The terms of reference and
financial approval rules are reviewed
periodically by the Board.
GOVERNANCE REPORT
76
Although certain limited matters (such as
extensions of directors’ appointments, large
contract awards and significant borrowing
arrangements) are referred to the NWGL
Board, this is regarded as a formality. The
NWGL Board accepts that the NWL Board is
required to have full responsibility for all
aspects of the regulated company’s business
and, to that end, has never rejected a
recommendation of the NWL Board.
(ii) Board committees, including but not limited
to audit, remuneration and nomination
committees, report into the board of the
regulated company, with final decisions
made at the level of the regulated company.
All the NWL Board Committees report into
the NWL Board and final decisions are made
at that level.
(iii) The board of the regulated company is fully
focused on the activities of the regulated
company; takes action to identify and
manage conflicts of interest, including
those resulting from significant
shareholdings; and ensures that the
influence of third parties does not
compromise or override independent
judgement.
The Board is absolutely focused on the
sustainable, long-term success of NWL.
Any conflicts of interest are declared and
Directors do not speak or vote on matters
where a potential conflict arises.
It is a key principle of the Cheung Kong
group of companies that the boards of
companies within the group manage their
own affairs. Whilst support and assistance
is provided when asked for, it is recognised
that local management have hands-on
knowledge of the operational business and
of customers’ needs and priorities. The
non-NWL interests of the shareholders are,
therefore, never a factor in decision-making
at the NWL Board and this approach is
regularly re-affirmed by the NEDs in the
clearest possible terms.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
Objective 3
The Board of the Appointee’s leadership and
approach to transparency and governance
engenders trust in the Appointee and ensures
accountability for their actions.
Our comments below on the relevant supporting
provisions explain how the Company meets this
Objective. The provisions require publication of
the following in a clear and accessible manner:
(i) An explanation of group structure.
This is provided at page 54.
(ii) An explanation of dividend policies and
dividends paid, and how these take account
of delivery for customers and other
obligations (including to employees).
The dividend policy, and how the policy
has been applied in the year, is explained
in note 8 to the Financial Statements.
(iii) An explanation of the principal risks to the
future success of the business, and how
these risks have been considered and
addressed.
The Board has ultimate responsibility for
risk management and determines
appropriate risk appetite. The Board’s view
of acceptable risk is based on a balanced
assessment of all of the risks in the
operating environment and aims to ensure
an appropriate balance between risk
aversion and opportunities. The Board
monitors the management of risks and
approves major decisions affecting the
Company’s risk profile. The Board is
supported in this by the R&CSC, from which
it receives regular and detailed reports.
The Board requires management to identify
and assess the impact of risks to the
business using a corporate risk model. In
addition, during the year, a Sub-group of the
Board carried out a review of strategic
risks, which are potentially high-impact
GOVERNANCE REPORT
77
risks which are foreseeable but with a high
degree of uncertainty.
An explanation of principal risks, and our
approach to mitigating these risks, is
provided on pages 57 to 63.
(iv) Details of board and committee
membership, number of times met,
attendance at each meeting and where
relevant, the outcome of votes cast.
Details of Board and Committee
membership and meetings and attendance
is set out at page 72. No votes were held at
any relevant meeting and all decisions
were reached by consensus.
(v) An explanation of the company’s executive
pay policy and how the criteria for awarding
short and long-term performance related
elements are substantially linked to
stretching delivery for customers and are
rigorously applied. Where directors’
responsibilities are substantially focused on
the regulated company and they receive
remuneration for these responsibilities from
elsewhere in the group, policies relating to
this pay are fully disclosed at the regulated
company level.
A detailed explanation of the Company’s
executive pay policy is provided in the
Remuneration Committee Report on pages
88 to 99, including how the criteria for the
short-term incentive plan have significant
linkage to benefits for our customers and
the wider environment. The Remuneration
Committee Report also explains changes
which took effect from 2020 to further
increase the proportion of performance-
related executive pay aligned to delivering
benefits for our customers, in both the
short-term and long-term incentive plans.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
GOVERNANCE REPORT
78
Objective 4
The Board of the Appointee and its committees
are competent, well run, and have sufficient
independent membership, ensuring they can
make high quality decisions that address diverse
customer and stakeholder needs.
Our comments below on the relevant supporting
provisions explain how the Company meets
this Objective.
(i) Boards and committees have the
appropriate balance of skills, experience,
independence and knowledge of the
company. Boards identify what customer
and stakeholder expertise is needed in the
boardroom and how this need is addressed.
The Board has determined that the following
Directors are independent, notwithstanding
that they have served on the Board for more
than nine years:
• M A B Nègre (appointed in 2006). Mr Nègre has
no prior connections with the Group’s
shareholders. He is a very experienced
director and brings to the Board an excellent
understanding of the business coupled with
sound commercial judgement. The Board is
satisfied that he continues to demonstrate a
fully independent approach and to contribute
a constructive and challenging perspective to
Board discussions.
• Dr S Lyster (appointed in 2006). Dr Lyster has
no prior connections with the Group or its
shareholders. He is a very experienced
director, with particular expertise in wildlife,
conservation and environmental matters,
which are central to the Company’s work. He
lives in the Company’s Essex and Suffolk
supply area. The Board is satisfied that Dr
Lyster continues to demonstrate a fully
independent approach and to offer valuable
constructive challenge.
• M Fay (appointed in 2010). Mrs Fay has no
prior connection with the Group or its
subsidiaries. She is a very experienced
director, with very strong connections to
customers in the Company’s north-eastern
service area, where she has lived throughout
her life. The Board is satisfied that she
continues to demonstrate a fully independent
approach and to constructively challenge and
bring fresh and innovative perspectives to
Board discussions.
• P Rew (appointed in 2010). Mr Rew has no prior
connections with the Group or its
shareholders. He brings expertise in finance,
risk, corporate governance and compliance
and has very significant experience as an
audit committee chairman in substantial and
complex organisations. The Board is satisfied
that Mr Rew continues to demonstrate a fully
independent approach and to offer
constructive challenge.
All four INEDs were appointed under the auspices
of NWL’s Nomination Committee while NWGL
(then Northumbrian Water Group plc) was a
separately-listed company with no relationship
with the current shareholders.
As part of her recent review of the effectiveness
of the Board and its Committees and Sub-
committee (as detailed on page 79), Professor
Michelon paid particular attention to the
independence of the INEDs and whether their
long tenure may have raised concerns that the
Board’s decisions are the outcome of group
thinking. She has assessed this aspect by
interviewing both INEDs and other members of
the Board. The interviews specifically covered
board dynamics during challenging decisions
taken over the year, to understand how consensus
was reached. Professor Michelon concluded that
the Board’s capacity to work cohesively, and reach
consensus is not attributable to individual
directors, and the INEDs in particular, lacking
opinions or independent thinking. On the
contrary, she noted that it is not unusual for
Directors to have divergent points of view to start
with, but through discussions in which pros and
cons are considered and evaluated, each Director
is able to share their own personal view before a
consensual conclusion is reached. In Professor
Michelon’s expert opinion, all INEDs demonstrate
the required level of independence to continue to
perform their roles effectively and contribute to a
healthy and constructive debate.
The NWL Board therefore has an excellent
balance of skills, experience, independence and
knowledge of the Company. The Executive
Directors have very significant experience in the
water sector and other utilities, whilst the INEDs
make full use of their individual professional
expertise and personal interests to make a
significant contribution to addressing the needs
of all stakeholders and customers. For example,
Dr Lyster is a board member of Natural England
with a strong interest in the environment and
long-term resilience. This role is directly relevant
to NWL’s position as a custodian of the
environment and Dr Lyster brings an expertise in
environmental protection as well as an
understanding of stakeholder perspectives in this
area. Similarly, P Rew was a Non-Executive
Director of Defra until 2018, enabling him to bring
extensive knowledge of environmental matters
and stakeholders to his role at NWL. M A B Nègre
brings first class knowledge of the global utilities
sector, whilst M Fay champions customers and
has excellent contacts across NWL’s north
eastern operating area.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
The Board therefore believes that the Board and
Committees, Sub-committee and Sub-groups
have sufficient independent membership to meet
the objective but, as outlined above, a fifth INED
will be appointed during 2020 to further
strengthen the independent voice on the Board.
In preparation for the recruitment of further
INEDs during 2020 and 2021, the Board has
conducted a skills audit to ensure that the Board
has all the required expertise, including that
relating to customers and other stakeholders.
This work has guided the planning of the INED
recruitment campaign.
Although INEDs are not yet the largest single
group, they have a strong, influential and
effective voice. Professor Michelon’s Board
performance review has confirmed that, on the
basis of her interviews with Directors, the INEDs
assess problems and express judgement
independently of the shareholders and
management. She reports that there is no
evidence that the long tenure may have impaired
their individual independent thinking, whereas
their extensive experience and deep knowledge
of the Company allow them to act as critical
friends, speaking their minds with constructive
scepticism and professionalism.
The non-independent NEDs bring extensive
knowledge and experience of global
infrastructure, finance and governance.
(ii) INEDs are the largest single group on the
board.
At the time of publishing this report, there
are an equal number of INEDs and NEDs on
the NWL Board. As confirmed in this report,
the Company intends to recruit a fifth INED
during 2020 so that INEDs are the largest
single group, going forward.
(iii) The chair is independent of management
and investors on appointment and
demonstrates objective judgement
throughout their tenure. There is an explicit
division of responsibilities between running
the board and executive responsibility for
running the business.
The Chairman was not independent of
investors on appointment, when the
Company had a single ultimate controlling
shareholder. The Chairman has
demonstrated objective judgement
throughout his tenure, as well as an
empowering approach which has
encouraged all directors to participate fully
in Board discussions.
GOVERNANCE REPORT
79
(iv) There is an annual evaluation of the
performance of the board. This considers
the balance of skills, experience,
independence and knowledge, its diversity,
how stakeholder needs are addressed and
how the overarching objectives are met.
The approach is reported in the annual
report and any weaknesses are acted on
and explained.
There is an annual, independently-
conducted, evaluation of the performance
of the Board. In each of the last three years
this has been conducted by Professor
Giovanna Michelon, a specialist in
corporate governance and social
responsibility, and very good results
achieved.
Since 2018, Professor Michelon (a specialist
in corporate governance and social
responsibility) has conducted independent
annual evaluation processes to assess the
Board’s effectiveness in collectively
working for the long-term success of the
Company and fulfilling its three key roles of
setting the strategic direction of the
Company, monitoring management
performance and providing support and
advice. Professor Michelon had no
connection with NWL prior to conducting
the 2018 evaluation. P Rew is an advisory
board member of the business school at
which Professor Michelon was employed
until May 2019 but was not involved in her
appointment.
Professor Michelon’s 2020 report concluded
that the Board as a whole is able to reach
consensus, yet divergent opinions exist and
constructive discussions are used by
Directors to share their views, highlight
pros and cons and consider all relevant
matters. She further states that the
evidence gathered during the review
process does not suggest that group
thinking is a problem of this Board. More
specifically:
(a) All participating Directors were clearly
satisfied with the mix of skills and
experience of both executive and non-
executive (and independent) Directors,
with the secretarial support and quality
of documentation and Board minutes;
(b) The Chairman’s leadership style was
described as “inclusive and engaging”
and able to create an atmosphere where
all Board members feel comfortable to
comment and are very appreciative of
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
GOVERNANCE REPORT
80
There is a majority of INEDs on the AC,
Nomination Committee and
Remuneration Committee. The latter
two Committees are chaired by the
Company’s Chairman, which the Board
considers appropriate in the context of
the Company’s ownership structure.
The INEDs play a leading part in the
Board committees and sub-
committees. Importantly, the AC is
chaired by the SINED and three of the
four members are INEDs. The R&CSC
is, similarly, chaired by the SINED and
all three members are INEDs. Professor
Michelon has described the AC and
R&CSC focus on ensuring that NWL has
the resilience and long-term financial
and operational stability to provide
customers with a reliable service and
meet the expectations of other
stakeholders. More specifically, the AC
and R&CSC deliver much of the
preparatory work on the Annual Report
and Financial Statements and APR,
review the work of the internal audit
function, review risk management and
advise the Board on risk appetite and
monitoring compliance with covenants
and management of debt. At the AC,
there is a particular focus on matters
which directly impact customers, such
as Guaranteed Standards of Service
compliance, whilst the R&CSC held
‘deep dives’ during the year on cyber
security and the Company’s Intelligent
Asset Management programme. The
AC and R&CSC report fully and frame
proposals on all these matters for the
Board to consider. Therefore, in
addition to their direct input to the
Board, the influence of the INEDs and
their contribution to the running of the
Company, through the AC and R&CSC,
is very significant and highly valued.
other people’s opinions during the
meetings;
(c) The risk management process led by the
Board and its committees was felt to be
very detailed and thorough, and its
strengths were tested in response to the
recent Coronavirus emergency
confirming a solid system; and
(d) Board members fully understand the
Company’s strategic positioning and its
public service role; stakeholder
engagement activities are taking place
regularly and the key issues in the
competitive/institutional environments
and the culture of the Board are aligned
with the values of the organisation.
Recommendations in the 2020 report
focused mainly on the nomination process
for the new INEDs.
(v) There is a formal, rigorous and
transparent procedure for new
appointments which is led by the
nomination committee and supports the
overarching objective.
There is such a procedure in place. The
current recruitment campaign will
involve a leading executive search
agency to ensure that candidates are
drawn from as wide a pool as practicable
and will be consistent with the highest
standards of best practice.
(vi) To ensure there is a clear understanding
of the responsibilities attached to being
a non-executive director in this sector,
companies arrange for the proposed,
final candidate for new non-executive
appointments to the regulated company
board to meet Ofwat ahead of a formal
appointment being made.
The Company will adhere to this.
(vii) There is a majority of independent
members on the audit, nomination and
remuneration committees and the
audit and remuneration committees
are independently led.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
AUTHORISATION OF DIRECTORS’
CONFLICTS OF INTEREST
PR19 BOARD SUB-GROUP/CMA
BOARD SUB-GROUP
GOVERNANCE REPORT
81
As reported in NWL’s last two Governance
Reports, given the critical importance of our Plan
proposals, the Board formed a dedicated PR19
Board Sub-group to provide integrated support
to both the Board and management in producing
and assuring NWL’s Business Plan.
The PR19 Board Sub-group worked closely with
the Company’s full Board, the ELT and relevant
senior managers below that level, as well as
external assurance providers and the Board
approved the submission of the PR19 Business
Plan on 18 July 2018.
On 31 January 2019, Ofwat published its PR19
Initial Assessment of Business Plans. The
Company was disappointed not to receive
‘enhanced’ status and was required to revise
some elements of its Plan and the revised Plan
was submitted on 1 April 2019.
Ofwat published the PR19 FD on 16 December 2019
and this was discussed by the NWL Board on a
number of occasions, culminating in the Board’s
request to Ofwat on 14 February 2020 to refer
the PR19 FD to the CMA for redetermination. In
order to support the Board in managing the CMA
referral the Board established the CMA Board
Sub-group, which includes all the INEDs, the
Executive Directors and professional advisers.
The Sub-group has met regularly to discuss the
referral and to carefully review the Company’s
submissions to the CMA, on behalf of the Board.
The Company’s Statement of Case was approved
by the full Board prior to submission.
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.
WORK OF THE COMMITTEES
Details of the work of the PR19 Board Sub-
group, CMA Board Sub-group, AC, R&CSC and
Nomination Committee are set out below.
During the year, in addition to her review of the
effectiveness of the Board, Professor Michelon
also conducted a review of the effectiveness
of the AC and the R&CSC. The evaluation was
conducted by means of a questionnaire and
a number of one-to-one interviews, following
which Professor Michelon produced a written
report. The main findings were as follows:
• Directors were satisfied with the composition
and chairmanship of the AC and R&CSC;
• Meeting arrangements were deemed
satisfactory and efficient;
• Oversight of external audit, risk management
and internal controls and assurance is
considered to be excellent;
• The AC and R&CSC are working appropriately
despite an increasing workload; and
• The quality of feedback to the Board is high.
Professor Michelon also advised that it is
important to maintain training and technical
updates and to ensure that the number and
timing of meetings is kept under review.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
AUDIT COMMITTEE REPORT
Introduction by the Chairman of the Committee,
P Rew
The role of the AC is to assist both Executive
Directors and NEDs of NWL and its subsidiaries
(the NWL Group) to discharge their individual and
collective responsibilities in relation to:
• ensuring the financial and accounting systems
of each NWL Group company are providing
accurate and up-to-date information on its
current position;
• ensuring the published Financial Statements of
the NWL Group companies represent a true and
fair reflection of this position;
• ensuring the integrity of the Company’s
regulatory reporting systems and the accuracy
of its regulatory reports; and
• assessing the integrity of internal financial
controls.
The Committee also maintains oversight of
internal and external auditors. I have worked
with the members of the Committee and with
management and key advisors to produce an
action plan for the Committee, setting out the
business to be addressed at each meeting. This
plan is dynamic and is updated throughout the
year. The members of the Committee are updated
regularly on developments in financial reporting
requirements and on any changes in NWL’s
regulatory environment.
Members of the Audit Committee
The members of the AC are P Rew (Chairman), Dr
S Lyster, M A B Nègre and L S Chan.
The CEO, Finance Director, Assets and Assurance
Director, Internal Audit Manager and the external
auditor normally attend the Committee’s
meetings by invitation and M Parker is Secretary
to the Committee. Other senior managers,
independent technical auditors and advisers are
invited to attend as appropriate.
The work of the Audit Committee
During the year, and up to the date of approval of
these Financial Statements, the AC assisted both
Executive Directors and NEDs to discharge their
individual and collective responsibilities. Its work
included the following:
External Audit
• reviewing the draft Financial Statements and
APR, considering reports from the external
auditor setting out the audit approach and plan,
significant audit risks and conclusions on the
NWL Group’s internal controls and risk
management;
• considering the key areas of judgement in the
Financial Statements, reviewing reports from
GOVERNANCE REPORT
82
management, and ensuring these are
consistent with those set out in note 1(q) to the
Financial Statements on pages 116 to 117;
• reviewing the appropriateness of accounting
policies and evidence supporting the going
concern basis for the Financial Statements and
recommending approval of the Financial
Statements to the Board;
• reviewing and monitoring the effectiveness of
the audit process, taking into consideration
relevant UK professional and regulatory
requirements; and
• approving the external auditor’s fees for both
audit and non-audit services, by reference to
the agreed policy (see further details below).
The Committee monitors the independence of the
audit through different reviews and actions
including:
• confirmation that the auditor is, in its
professional judgement, independent of the
NWL Group;
• obtaining from it an account of all relationships
which may affect the firm’s independence and
the objectivity;
• rotation of the lead audit partner every five
years. NWL’s current lead audit partner first
signed the Annual Report in 2016 and will rotate
after the 2020 audit;
• maintaining a policy regarding the engagement
of the auditor to conduct non-audit work and
monitoring the level of audit fees compared to
non-audit fees (see further details below);
• considering audit tender requirements, being
tenders every 10 years and mandatory rotation
after 20 years. Deloitte was first appointed in
respect of the 2012 Annual Report;
• considering new accounting standards and
reviewing their applicability to the Company;
• reviewing the approaches taken to bad debt and
taxation provisioning as well as unbilled
revenue recognition; and
• reviewing reporting from management or the
external auditor on the accounting judgements
associated with property, plant and equipment,
and assumptions taken regarding valuing
financial instruments and the defined benefit
pension scheme liability.
In addition, the Committee considers the
effectiveness of the external audit, and considers
the level of experience, industry knowledge and
expertise of the audit team, and its delivery of
appropriate challenge in a knowledgeable and
constructive manner.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
Non-Audit Fees
The Company has adopted a formal policy on the
provision of audit services, which was updated
with effect from 1 April 2017, to reflect the FRC’s
Revised Ethical Standards 2016.
The policy provides for general pre-approval of a
range of services which are generally regarded
as audit related, where the fees are equal to or
less than £50,000. It also sets out a broad range of
prohibited activities.
Services which are not prohibited, but which have
not been pre-approved and in respect of which
the fee is equal to or less than £50,000 can be
approved by the AC Chairman, who reports such
approval to the AC. If the fee for such services will
exceed £50,000 the approval of the AC is required.
The policy imposes a cap on non-audit fees equal
to 70% of average audit fees for the previous three
years.
Where Deloitte LLP is engaged to provide non-
audit services, this results from its extensive
knowledge on NWL’s business and the sector
generally, as well as demonstrating the required
expertise and capability to provide good value for
money.
Non-audit related work undertaken by Deloitte
LLP in 2019-20 amounted to fees of £14,000, which
represents 6% of total fees paid to Deloitte LLP.
The fees paid are set out in note 3 to the Financial
Statements on page 119. The non-audit work in
2019-20 comprised provision of assurance on
third party contracts.
The AC also holds in camera sessions with the
audit partner.
Having considered the effectiveness and
independence assessments above, the AC
agreed to recommend to the Board that Deloitte
continues as external auditor.
Internal Audit
The NWL Group operates a blended model for
its internal audit function. Under this model,
the internal audit team conducts the majority
of the work, including core financial controls
and regulatory reporting reviews. Reviews of
specialist technical areas are outsourced to firms
with appropriate experience and qualifications
when felt necessary.
The Committee reviews and approves the internal
audit plan for the year. Its review is designed to
ensure that focus is given to the areas of highest
risk for the NWL Group and that the audit work
focuses on key controls.
GOVERNANCE REPORT
83
Internal audit reports reviewed by the Committee
during 2019-20 included:
•
April 2019
Process Review – Sewer flooding
Financial Accounting
Wholesale services
Process Review – Service Reservoirs and Water
Tower Inspection Programme
•
June 2019
Process Review - Appointments
• August 2019
Process audit – Customer Complaints and
Account Queries
• January 2020
Asset Investment
Procurement – General policies, purchasing
cards and payment terms
Procurement – Building Maintenance
Customer Accounts
CKI/CKHH audit report – GDPR and its
application within the Customer team and
sewerage network maintenance
In addition, at each of its scheduled meetings the
Committee received reports detailing progress
with implementing recommendations previously
raised by internal audit and is satisfied that
management has taken appropriate steps to
implement the recommendations raised.
The Chair of the Committee, independent of
management, maintains regular and direct
contact with both the internal and external
auditor, allowing open dialogue and feedback.
The Committee has considered the effectiveness
of internal audit. There was also an external
assessment completed by the Chartered Institute
of Internal Auditors during 2018/19 which overall
noted that the function “clearly meets the
expectations of its stakeholders”. The Committee
is satisfied that the current model described
above remains appropriate for the Group.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT GOVERNANCE REPORT
84
Attendance at the five AC meetings during the
year was as follows:
NAME
P Rew
Dr S Lyster
M A B Nègre
L S Chan
ATTENDANCE
5
5
5
1
N Herrington
(as alternate for L S Chan) 4
P Rew
Chairman of the Audit Committee
Work with other assurance providers
Support with data assurance work for the
principal regulatory reporting (including the APR,
Water Resource Management Plan and PR19 in
the year) was provided by Deloitte for financial
tables and PwC or our Internal Audit team for
non-financial tables.
Our overall approach to assurance of regulatory
data has been approved by the Committee and is
described below:
• business as usual assurance for our ongoing
data capture and measurement processes;
• each piece of data must be provided by the
nominated data provider and reviewed before
being audited. This is controlled by a workflow
system; and
• additional independent technical assurance
was procured (from PwC as our External
Technical Auditor) to examine areas that were
identified as being higher risk as defined by
our regulatory data risk management
framework as approved by the Committee. Our
approach is described in our draft and final
assurance plans with the results being
described in our Data Assurance Summary
annually.
Reports from Deloitte, PwC and Internal Audit are
received and reviewed by the Committee.
Further compliance and other matters
• reviewing and commenting on the APR,
including the underlying assurance, reviewing
evidence to support the Condition F6A.2A
certificate (statement of sufficiency of financial
resources) and long-term Viability Statement
and recommending their approval to the Board;
• approving arrangements for monitoring
compliance with the Company’s procedures
designed to prevent bribery, having regard to
the Bribery Act 2010 and the code of conduct
‘Our Way at NWG’, including receiving reports
on any whistleblowing allegations;
• management of tax compliance matters and
other tax issues, including Base Erosion and
Profit Shifting and renewing NWL’s Advance
Thin Capitalisation Agreement and discussing
other key matters with HMRC; and
• reviewing the Company’s Long Term Viability
Statement.
The AC Chairman reports formally to the NWL
Board following each AC meeting, and its minutes
are circulated to both NWL and NWGL Boards.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT RISK & COMPLIANCE
SUB-COMMITTEE REPORT
Introduction by the Chairman of the
Sub-committee, P Rew
The role of the Sub-committee is to assist both
Executive and NEDs to discharge their individual
and collective responsibilities in relation to
assessing the scope and effectiveness of the
NWL Group’s risk management systems and the
integrity of its internal financial controls.
Members of the Risk & Compliance
Sub-committee
The members of the R&CSC are P Rew (Chairman),
Dr S Lyster and M A B Nègre.
The work of the Risk & Compliance
Sub-committee
The ELT implements policies on risk management
and internal control and ensures that risks are
appropriately identified and managed within the
business, to ensure that the Company’s resources
and capacity to deliver services as required by
customers remain resilient. This approach is set
out in a Risk Management Framework, which has
been endorsed by the R&CSC. The ELT reviews the
approach to risk management in detail every year
and reviews the significant risks every month.
Any significant issues are reported by the CEO to
the Board. Senior management implements
policies on risk management and internal control.
The R&CSC, on behalf of the Board, has performed
a robust assessment of the principal risks facing
the Company, including those that would threaten
its business model, resilience, future
performance, solvency or liquidity. These
principal risks, and how they are managed,
are described on pages 57 to 63 in the
Strategic Report.
The internal control framework supports the risk
management process, ensuring that risks are
appropriately managed, that controls are effective
and that appropriate remedial action is taken
where identified. Risks are mapped against the
providers of assurance, whether this be
management, internal or external assurance. The
Board is supported by the AC in monitoring the
effectiveness of the internal control framework
with primary assurance being provided by the
internal audit team.
The R&CSC, on behalf of the Board, has carried out
an annual review of the effectiveness of the
Company’s risk management and internal control
systems. This review confirmed that the
Company has strong systems of internal control
and robust processes in place to enable it to
identify, evaluate and manage the risks it faces
and to ensure that its obligations are met. These
GOVERNANCE REPORT
85
systems and processes are embedded in the
organisation and are reviewed regularly by the
Board, its Committees and Sub-committee. The
annual review confirmed that the risk
management and internal control systems have
operated effectively through the year and that
there have been no significant failings or
weaknesses.
During the year, and up to the date of approval of
these Financial Statements, the work of the
R&CSC included the following:
• reviewing reports at each meeting on the
top-rated managed risks and priorities for
assurance (being those risks with the biggest
reduction between the business (gross) and
managed (net) risk scores), representing key
control areas for the Company;
• reviewing high impact, low likelihood risks
which have a rare to unlikely likelihood of
occurrence but a potentially catastrophic level
of impact;
• reviewing the management of specific areas of
risk in relation to a major business change
project iAM and business continuity
arrangements;
• advising the Board on risk appetite and
exposure and reviewing risk assessment
processes as well as keeping the effectiveness
of the risk and internal control management
systems under review;
• monitoring compliance with covenants and
treasury risks;
• reviewing management of customer debt;
• “deep dives” on cyber security and the iAM
programme; and
• reviewing the risk and control framework and
reporting.
Attendance at the three scheduled R&CSC
meetings during the year was as follows:
NAME
P Rew
Dr S Lyster
M A B Nègre
ATTENDANCE
3
3
3
The Sub-committee holds a special meeting with
other members of the Board each year to conduct
a separate Strategic Risk review exercise.
The Board is able to monitor the impact of
environmental, social and governance matters on
the Company’s business, to assess the impact of
significant risks on the business and to evaluate
methods of managing these risks through reports
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
it receives from the AC and the R&CSC.
Principle Three – Director Responsibilities
GOVERNANCE REPORT
86
The board and individual directors should have a
clear understanding of their accountability and
responsibilities. The board’s policies and
procedures should support effective decision-
making and independent challenge.
The Company has in place clear corporate
governance practices which provide clear lines of
accountability and responsibility. The members
of the ELT have clearly defined responsibilities
and levels of authority are set out in Financial
Approval Rules (as explained in the comments in
relation to Objective 2 of the 2019 Ofwat
Objectives on page 76. The Board’s approach to
conflicts of interest and the relationship between
the Company and its owners is also explained in
that section of the Report.
The Chairman and Company Secretary discuss
governance processes from time to time to
confirm they remain fit for purpose and consider
initiatives which could strengthen governance.
Details of the Board Committees are set out in the
comments on Ofwat’s 2019 Objective 4, on pages
78 to 80.
Details of processes which are in place to ensure
systems and controls are operating effectively
and that information provided to the Board is
robust are set out throughout this document and
in the Company’s APR and Data Assurance
Summary.
Principle Four – Opportunity and Risk
A board should promote the long-term
sustainable success of the company by
identifying opportunities to create and preserve
value, and establishing oversight for the
identification and mitigation of risks.
The Company is a long term business and
ensuring its long term sustainable success is a
key driver underpinning the work of the Board
and Committees, as described in detail in this
Report. The Board’s approach to oversight of the
identification and mitigation of risks is detailed
in the Risk Report on pages 57 to 63.
Principle Five – Remuneration
A board should promote executive remuneration
structures aligned to the long-term sustainable
success of a company, taking into account pay
and conditions elsewhere in the company.
A detailed explanation of the Company’s
executive pay policy is provided in the
Remuneration Committee Report on
pages 88 to 99.
P Rew
Chairman of the Risk & Compliance
Sub-committee
NOMINATION COMMITTEE
The Nomination Committee has wide-ranging
terms of reference which are available on the
Company’s website. The members during the
year were A J Hunter (Chairman), P Rew, M Fay,
Dr S Lyster and D N Macrae. The Committee met
once formally during the year, principally to
discuss the recruitment of a fifth INED and the
plan for the existing four INEDs to step down
during 2020/21 and be succeeded by new
appointees. There were further ad hoc
discussions as required through the year.
COMPLIANCE WITH THE
WATES PRINCIPLES
The Board considers that it complies
substantially with the relevant provisions of the
Wates Principles, through the corporate
governance arrangements described in detail
above, and the further arrangements set out
below.
Principle One – Purpose and Leadership
An effective Board develops and promotes the
purpose of a company, and ensures that its
values, strategy and culture align with that
purpose.
Please see the comments on compliance with
Objective 1 of the 2019 Ofwat Objectives, on pages
74 to 80.
Principle Two – Board Composition
Effective board composition requires an effective
chair and a balance of skills, backgrounds,
experience and knowledge, with individual
directors having sufficient capacity to make a
valuable contribution. The size of a board should
be guided by the scale and complexity of the
company.
Please see the comments on compliance with
Objective 4 of the 2019 Ofwat Objectives, on pages
74 to 80.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT GOVERNANCE REPORT
87
Principle Six – Stakeholder Relationships and
Engagement
Directors should foster effective stakeholder
relationships aligned to the company’s purpose.
The board is responsible for overseeing
meaningful engagement with stakeholders,
including the workforce, and having regard to
their views when taking decisions.
Details of the Company’s extensive stakeholder
engagement programme are set out on pages 17
to 18.
CODE OF CONDUCT
The Group has a code of conduct, ‘Our Way at
NWG’, covering its relationships with customers,
employees, suppliers, local communities,
shareholders, other investors and regulators. This
document provides clear guidance to employees
in relation to personal conduct, conflicts of
interest, the anti-bribery policy and a number of
other matters. As part of the annual staff
appraisal system, all employees are required to
confirm that they have seen the code of conduct
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT GOVERNANCE REPORT
88
REMUNERATION
COMMITTEE REPORT
• agreeing STIP payments for the 2019 calendar
year, including reviewing performance against
the balanced scorecard measures;
• agreeing the level at which the LTIP award in
respect of the 2019 calendar year would vest;
• considering and agreeing changes to the
structures of the STIP and LTIP, which increased
the proportion of measures delivering benefits
for customers and other stakeholders, other
than shareholders, to 60%;
• setting performance targets for the STIP for
Executive Directors and senior managers for
the 2020 calendar year in accordance with the
revised structure, reflecting all of the corporate
themes in our balanced scorecard to deliver
benefits for all stakeholders and ensuring that
targets are set at stretching levels aligned to
industry-leading performance; and
• setting performance targets for the LTIP
scheme for the award in respect of the 2020
calendar year in accordance with the revised
structure, reflecting a sub-set of the balanced
scorecard measures which deliver benefits for
our stakeholders.
Decisions in respect of pay awards and STIP and
LTIP were made in January 2020 before the
outbreak of the Covid-19 pandemic. The
Committee will consider at its meetings during
2020/21 whether or not it would be appropriate to
make any adjustments to Directors’ remuneration
in the light of the impact of Covid-19.
A J Hunter
Chairman of the Remuneration Committee
The following report has been produced in
accordance with section 35A of the Water
Industry Act 1991. It also has regard to the
requirements of the Large and Medium-sized
Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013 in respect of
directors’ remuneration reporting for quoted
companies, albeit in the context of a company
which is not a listed public limited company.
ANNUAL STATEMENT
The work of the Remuneration Committee
comprises the adoption of principles and
standards in relation to executive remuneration
and benefits, as well as agreeing individual
remuneration packages. All decisions regarding
Directors’ remuneration are taken by the
Remuneration Committee, other than where
stated.
Members of the Remuneration Committee
The members of the Remuneration Committee
during the year were A J Hunter (Chairman), P
Rew, M Fay, Dr S Lyster and D N Macrae. H
Mottram attends Committee meetings but does
not participate in discussions relating to her own
remuneration. There is a majority of INEDs in
accordance with the Ofwat Principles.
The work of the Remuneration Committee
The Remuneration Committee met twice during
the year, in May 2019 and January 2020. All
members attended the meetings.
The Committee discussed and agreed changes to
the structures of the Short Term Incentive Plan
(STIP) and Long Term Incentive Plan (LTIP), to
take effect from 2020. This will increase to 60%
the proportion of performance-related executive
pay aligned to delivering benefits for our
customers across our stretching balanced
scorecard targets. The changes are described in
more detail on pages 98 to 99.
Set out below is a brief summary of the work of
the Committee:
• reviewing Executive pay and Non-Executive
Directors’ fees, taking account of market data,
and agreed annual pay awards to take effect
from 1 January 2020;
• considering an assurance report from the
Internal Audit Manager on performance against
targets reflected in the 2019 STIP and LTIP;
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT DIRECTORS’ REMUNERATION POLICY
The policy of the Remuneration Committee is to
pay no more than necessary to attract and retain
good quality directors, and to ensure that policy is
aligned with market practice. For Executive
Directors the reward policy is designed to achieve
a balance between attraction, reward for
performance and retention, and salaries are
based on relevant market benchmarks, which are
reviewed typically every three years. For Non-
Executive Directors, fees paid reflect market
practice for similar sized companies, and may be
enhanced for roles leading Board Committees.
Executive Directors
The remuneration of the Executive Directors
comprises:
• basic salary;
• benefits in kind;
• a performance related STIP;
• annual LTIP awards; and
• pension benefits.
GOVERNANCE REPORT
89
In addition to reviewing each constituent
element, the Remuneration Committee reviews
the remuneration packages as a whole to ensure
that they remain appropriate in terms of
structure and quantum. In 2012 the Remuneration
Committee restructured the remuneration of the
Executive Directors, with advice from Hay Group,
independent external reward consultants. This
resulted in a reduction in the value of
performance related STIP and LTIP awards, offset
by an adjustment to basic pay. The Remuneration
Committee is satisfied that this balance between
fixed and performance related remuneration
remains appropriate.
A significant proportion of remuneration is linked
to Company performance through the short-term
and long-term incentive plans, with 50% of the
CEO’s maximum remuneration being linked to
performance and around 40% for the other
Executive Directors, as illustrated on page 92.
The remuneration policy is designed to
incentivise performance across all the full range
of the Company’s strategic themes and not to
over-emphasise short-term financial gains. The
following table describes the policy in more
detail, explaining the purpose of each component,
how the policy operates and, for the variable
elements of remuneration, the maximum amount
payable and how performance is assessed.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT PURPOSE
OPERATION
PERFORMANCE
ASSESSMENT
MAXIMUM PAYABLE
GOVERNANCE REPORT 90
Basic salary
Basic salaries are set at a
level to attract and retain
Directors with the
leadership capabilities to
deliver the Company’s
vision of being the
national leader in the
provision of sustainable
water and wastewater
services and to reflect the
external market.
Benefits in kind
Basic salary is reviewed
annually based on
individual contributions,
periodic benchmarking to
the external market and
with regard to the
expected pay award for
other groups of
employees.
The basic salaries payable to
Directors of NWL are not
directly linked to specific
standards of performance in
connection with the carrying
out of functions of a ‘relevant
undertaker’. There is no
variable performance related
element.
Fixed annual amount
determined annually by
the Remuneration
Committee.
Other employment
benefits provided in
accordance with the
Company’s policy on
provision of benefits to all
staff.
Benefits provided to
the Executive Directors
comprise car and fuel
allowances, healthcare
and professional
subscriptions.
There is no variable
performance related element.
Fixed annual amount set
in accordance with the
Company’s policies on
provision of benefits to all
staff.
The maximum STIP
payable, as a percentage
of basic salary, is 70% for
the CEO and 50% for the
other Executive Directors.
STIP
The purpose of the STIP
is to focus on delivering
key business performance
targets in the year.
The performance targets
are firmly linked to NWL’s
strategic themes
(customer, environment,
competitiveness, people
and communities) as
reported in the balanced
scorecard. Stretching
targets are set which are
aligned to the Company’s
vision of being the
national leader in the
provision of sustainable
water and wastewater
services.
The STIP is assessed on
a calendar year basis.
Awards are paid in cash
with no deferral, other
than for specific reasons,
such as a performance
metric not being finalised
at the point of award.
A clawback applies in the
event that results on
which the STIP is paid are
subsequently found to be
inaccurate or there has
been relevant misconduct
on the part of the
employee.
The STIP is structured with
three elements, determined
by the Remuneration
Committee:
• up to 50% payable on
financial targets;
• up to 40% payable on
balanced scorecard
targets; and
• up to 10% payable on
performance against
personal targets.
The Chairman retains the
right to award an additional
discretionary bonus to the
CEO, taking account of
overall performance.
The structure will change in
2020/21 to:
• up to 40% payable on
financial targets; and
• up to 60% payable on
balanced scorecard
targets.
table continued...
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT PURPOSE
OPERATION
PERFORMANCE
ASSESSMENT
MAXIMUM PAYABLE
GOVERNANCE REPORT
91
The LTIP is structured with
50% related to delivery of
expected distributions to
Group shareholders in line with
the Board approved plan and
50% related to achievement
of the Group profit after tax
target. For each element, there
will be no vesting if less than
97.5% of the target value is
achieved, increasing on a
sliding scale to 50% vesting if
100% of the target is achieved
and 100% vesting if 105% of
the target is achieved.
The structure will change in
2020/21 to:
• up to 40% payable on
financial targets; and
• up to 60% payable on
balanced scorecard targets.
There is no variable
performance related element.
LTIP
Our LTIP is structured
differently from others
in the sector and is
designed to operate
as a modest retention
mechanism only.
The LTIP is a cash
based award, with
deferred payment.
Vesting of the LTIP is
based on performance
in the first calendar year
after award. Payment
is deferred until the
completion of four
years from the start
of the performance
period.
Pension
Pension benefits are
provided at a level
to reflect market
expectations.
The Company operates
the Northumbrian
Water Pension Scheme
(NWPS or the Scheme)
which has defined
benefit and defined
contribution sections.
The defined benefit
section closed to
new entrants on 31
December 2007.
More details of the
NWPS are provided in
note 23 of the Financial
Statements.
The maximum LTIP payable, as
a percentage of basic salary, is
50% for the CEO and 30% for
the other Executive Directors.
H Mottram left the NWPS in 2016
and receives additional salary
payments in lieu of pension
contributions.
C I Johns participates in the
defined contribution section of
the NWPS, making an employee
contribution of 8% of basic
salary (under a salary sacrifice
arrangement) and receiving an
employer contribution of 15% of
salary, up to the annual pension
contribution taxation limit, and
additional salary payments in lieu
of pension contributions.
A C Jones participated in a
defined benefit section during
the year, making an employee
contribution of 8% of pensionable
salary (under a salary sacrifice
arrangement) and receiving an
employer contribution equivalent
to 25.5% of pensionable salary.
Benefits are calculated on a
career average revalued earnings
basis with future accrual at 1/45th
of salary per annum.
A C Jones stopped being an
active member of the NWPS
during the year and now receives
additional salary payments in lieu
of pension contributions.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT ILLUSTRATION OF
REMUNERATION POLICY
The graphs below show for each Executive
Director, for the proportion of their remuneration
borne by the Company:
• the base level of remuneration, which is not
dependent upon performance and comprises
basic salary, benefits in kind and pension;
• the expected level of remuneration, reflecting a
typical level of performance against targets for
the STIP and LTIP; and
• the maximum level of remuneration, if all STIP
and LTIP performance targets were fully
achieved.
GOVERNANCE REPORT 92
For H Mottram, 50% of maximum remuneration is
linked to Company performance through the STIP
and LTIP. For C I Johns and A C Jones, the
equivalent proportions are 40%.
For the purposes of the graph, the expected level
of performance for the STIP has been assumed to
achieve 60% of the maximum potential value and
the LTIP has been assumed to achieve 50% of the
maximum value, though awards are dependent
upon actual performance.
Information on actual awards for the STIP and
LTIP in respect of 2019 is provided on pages 94 to
96.
H MOTTRAM
Base
100%
Expected
64%
23% 13%
Maximum
50%
29%
21%
£k
424
665
855
%ge
Salary, benefits
& pension
%ge
STIP
%ge
LTIP
0
300
600
900
£’000
C I JOHNS
Base
100%
18%
Expected
73%
9%
Maximum
60%
25% 15%
0
300
600
900
£’000
A C JONES
Base
100%
Expected
73%
9%
18%
Maximum
60%
25%
15%
0
300
600
900
£’000
£k
229
315
381
£k
332
455
550
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
NON-EXECUTIVE DIRECTORS
FEES
OTHER COMPONENTS OF
REMUNERATION
REMUNERATION ELSEWHERE IN
THE GROUP
GOVERNANCE REPORT 93
The Company’s policy is that the
Independent Non-Executive
Directors receive fees for their
duties. The level of fees is set by
reference to the market.
The Non-Executive Directors do not
receive benefits in kind and do not
participate in the STIP, LTIP or
pension schemes operated by the
Company.
An additional fee is paid to the Chair
of the Audit Committee to reflect the
additional responsibilities and time
commitment involved.
The INEDs do not receive any other
remuneration from the Company,
the Group or its shareholders.
In respect of the Non-Executive
Directors appointed by the Group’s
shareholders, F R Frame received
the same base fee for performing his
duties as a Director of both the
Company and NWGL. This fee is
shared with NWL paying a 30%
proportion and NWGL paying the
remaining 70%. The other Non-
Executive Directors receive no
remuneration from the Company.
SERVICE CONTRACTS
The service contracts of Executive Directors have
a notice period of six months from either side.
The contracts do not contain any specific
provisions related to payment for loss of office.
Any such payments would be at the discretion of
the Remuneration Committee and would take
account of the contractual notice period and any
STIP payments considered to have been earned.
LTIP awards will typically lapse, although the
Remuneration Committee may approve payment
of outstanding LTIP awards if a Director is
considered to be a ‘good leaver’, for example upon
retirement.
INEDs are engaged on a contract for services with
a notice period of six months from either side. No
payment is made for loss of office other than
accrued fees.
The other NEDs do not have service contracts
with the Company, and receive no payment from
the Company.
APPROACH TO REMUNERATION
ON RECRUITMENT
Newly appointed Directors are remunerated in
accordance with the policy set out in this report.
Service contracts for new Directors have a notice
period of six months from either side.
CONSIDERATION OF
SHAREHOLDER VIEWS
The Remuneration Committee comprises two
shareholder-appointed Directors and three INEDs.
In the context of a private company with NWL’s
ownership structure, this ensures that the views
of the shareholder are taken into account when
setting executive remuneration, whilst also
maintaining a strong independent presence on
the Committee.
CONSIDERATION OF EMPLOYMENT
CONDITIONS ELSEWHERE IN
THE COMPANY
The Remuneration Committee reviews Directors’
pay on an annual basis, taking account of market
trend information and pay awards for the wider
workforce in the Company. Whilst Directors’
remuneration is not specifically consulted on
with employees, in general, annual pay awards
for Directors reflect the target pay awards for the
workforce, which are subject to consultation
under the Company’s Employee Relations
Framework. The incentive pay arrangements for
executives are not mirrored elsewhere, but are
considered to be relatively modest in comparison
with market comparisons.
Directors’ remuneration packages are
benchmarked against market data on a periodic
basis, typically every three years, with support
from external advisers. The salary benchmarking
is reviewed annually for senior managers and
every three years for the wider workforce.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
GOVERNANCE REPORT 94
DIRECTORS’ REMUNERATION IN 2019/20 (AUDITED)
The table below shows the total remuneration paid by the Company to Directors during the year, along
with comparative information for the previous year. The table has been produced in accordance with
the requirements of Large and Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013.
SALARIES
AND FEES
£’000
BENEFITS IN
KIND £’000
STIP
£’000
LTIP
£’000
PENSION
£’000
TOTAL
REMUNERATION
£’000
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
£'000
£'000
£'000
£'000
£'000
£'000
£'000
£'000
£'000
£'000
£'000
£'000
H Mottram
375
366
C I Johns
193
189
9
8
A C Jones
283
276
13
M Fay
F R Frame
Dr S Lyster
M A B Nègre
P Rew
48
11
48
48
65
47
14
47
47
62
-
-
-
-
-
9
10
19
-
-
-
-
-
158
192
46
65
-
-
-
-
-
47
67
-
-
-
-
-
44
14
20
-
-
-
-
-
41
27
44
-
-
-
-
-
40
25
26
-
-
-
-
-
583
274
405
48
11
48
48
65
-
-
-
-
-
651
285
408
47
14
47
47
62
1,071
1,048
30
38
269
306
78
112
91
1,482
1,561
BENEFITS
Taxable benefits provided to the Executive
Directors comprise car and fuel allowance,
healthcare and professional subscriptions. The
values are not significant in the context of overall
remuneration.
STIP
The STIP for the 2019 calendar year was
structured by the Committee in accordance with
the policy outlined above, as follows:
• up to 50% payable on balanced scorecard
financial targets;
• up to 40% payable on balanced scorecard
non-financial targets; and
• up to 10% payable on performance against
personal targets.
The table shows only the proportion of
remuneration borne by the Company. For two of
the Directors, H Mottram and C I Johns, NWL paid
70% of their remuneration and NWGL paid the
remaining 30%. For F R Frame, NWL paid 30% of
his remuneration and NWGL paid the remaining
70%. For the other Directors reported in the table,
NWL paid 100% of their remuneration.
The Executive Directors receive salary payments
in lieu of employer pension contributions. These
payments are reported under the pension
heading in the table.
BASIC SALARY
Basic salary is set by reference to market data
and trends.
For the calendar year 2019, senior executives
were awarded an annual increase in their basic
salaries of 2.5%. This was the same as the level
awarded to other senior managers, but less than
that awarded to other employees of 2.8%.
For the calendar year 2020, senior executives
were awarded an annual increase in their basic
salaries of 2.5%. This was the same as the level
awarded to other senior managers and other
employees.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
GOVERNANCE REPORT
95
The balanced scorecard measures and targets, and performance against the targets in the year, are
shown in the table below. These targets are internal measures set at stretching levels so as to drive
year on year performance improvements on a path to deliver our ‘national leader’ vision. This means
that they are often more stretching than the regulatory PCs reported in the Performance Review
section on pages 22 to 23.
SCORECARD MEASURE
TARGET
PERFORMANCE
ACHIEVED
% OF TOTAL
AWARDED
% OF TOTAL
STIP POTENTIAL
Customer
Customer satisfaction
- SIM qualitative score
>=4.65
- SIM quantitative score
Water supply interruptions
>3 hours (average
minutes per property)
<=75
<=3:45
Mean zonal compliance
>=99.97
Repeat sewer flooding
(properties)
<=60
Environment
Leakage (Mld)
- NW
- ESW
Pollution incidents
category 1 & 2
Sewage treatment works
failing consent
Competitiveness
Group Earnings Before
Interest and Taxes (EBIT)
Group cash available for
distribution
People
Employee engagement
score
Lost time reportable
accidents (no.)
Communities
Ethisphere
4.5
94.19
9:12
99.94
60
136.3
64.2
1
98.84
<=134
<=66
<=1
>=99
budget
not achieved
budget
achieved
>=80
<=3
67
7
no
no
no
no
yes
no
yes
yes
no
no
yes
no
no
-
-
-
-
4
-
2
4
-
-
25
-
-
4
39
3
1
4
4
4
2
2
4
4
25
25
4
4
4
90
award
awarded
yes
Total STIP related to balanced scorecard
The personal targets related to the delivery of strategic objectives relevant to each Director’s role.
A number of these targets related to NWL’s performance as a relevant undertaker. In assessing overall
performance, the Committee takes into account the Company’s position in Ofwat reports.
For the CEO, in addition to the STIP calculation explained above, a further discretionary award was
made by the Committee to reflect the Board’s continued satisfaction with the CEO’s performance. This
remained within the limit of the overall potential maximum STIP award.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
The total STIP awards for 2019 were as follows:
PENSION
GOVERNANCE REPORT 96
Pension arrangements operated in accordance
with the policy outlined on page 91.
A C Jones was an active member of the defined
benefit section of the NWPS until January 2020,
therefore the pension value shown in the table on
page 94 has been calculated in accordance with
the 2013 Regulations and represents the
estimated increase in the capital value of his
pension in the year.
PERCENTAGE CHANGE IN CEO
REMUNERATION
The table below shows the change in
remuneration for 2019/20 compared to 2018/19 for
the CEO and for other employees. In order to
make a meaningful comparison, other employees
includes only those who have been employed for
the full two year period and excludes senior
management whose remuneration is set by the
Remuneration Committee. STIP has been
compared to the annual bonus paid to the senior
management cohort.
CHANGE IN CEO
REMUNERATION
CHANGE
IN OTHER
EMPLOYEES’
REMUNERATION
Salaries and fees
Benefits in kind
2.7%
0.9%
STIP / annual bonus
(18.2%)
4.6%
(0.7%)
(4.0%)
STIP
awarded
(out of
100%)
MAXIMUM
STIP (%
OF BASIC
SALARY)
H Mottram
C I Johns
A C Jones
62.4%
48.0%
48.0%
70%
50%
50%
STIP
AWARDED
(% OF
BASIC
SALARY)
43.7%
24.0%
24.0%
LTIP
A cash LTIP was awarded by the Committee in
2019, structured in accordance with the policy
outlined above, as follows:
• up to 50% payable on achievement of the Group
profit after tax target; and
• up to 50% payable on delivery of expected
distributions to Group shareholders.
The scheme related to the period January 2019 to
December 2022. Performance targets were
assessed in the first year of the scheme with
payment deferred until early 2023, after the end
of the four year scheme period.
The Committee assessed the performance
against the scheme criteria in January 2020 and
determined that neither Group profit performance
or Group distributions should vest. The
Committee therefore approved that the 2019 LTIP
should vest at 0%.
The total LTIP awards for 2019 were as follows:
LTIP
awarded
(out of
100%)
MAXIMUM
LTIP (%
OF BASIC
SALARY)
LTIP
AWARDED
(% OF BASIC
SALARY)
H Mottram
C I Johns
A C Jones
0%
0%
0%
50%
30%
30%
0%
0%
0%
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
GOVERNANCE REPORT 97
CEO PAY RATIO
The Companies (Miscellaneous Reporting)
Regulations 2018 introduced new legislation in
respect of reporting ratio of CEO pay compared to
other employees. The table below shows this
information produced in accordance with the
legislation.
YEAR
METHOD
25TH PERCENTILE
RATIO
MEDIAN PAY RATIO
75TH PERCENTILE
RATIO
2020
2019
Option A
Option A
20:1
22:1
16:1
17:1
12:1
14:1
The Company has chosen Option A (as set out in
the said Regulations) for calculating the pay ratio
on the basis that it represents the most complete
data set. The employees representing each of the
percentiles were based on the full year
remuneration of staff employed throughout the
year. The pension cost for those employees in the
defined benefit section of the pension scheme
have been calculated based on the estimated
employer contributions as applying the method
set out in section 229 of the Finance Act 2004 for
all members would not be practical. Under Option
A, the value of the full-year remuneration of each
relevant employee is listed in order from lowest
to highest and the values at the 25th, 50th and
75th percentile points identified.
£000
25TH PERCENTILE
EMPLOYEE
MEDIAN PAY
EMPLOYEE
75TH PERCENTILE
EMPLOYEE
Salary component of pay and benefits
Total pay and benefits
20
29
28
38
39
48
CEO REMUNERATION OVER TIME
Since the current remuneration policy was put in
place in 2012, the basic salary of the CEO has
increased by the same as, or less than, the
average pay award for the majority of employees
each year, which has been targeted to ensure we
keep pace with the general cost of living. Over the
same period, the maximum potential bonus
available under the STIP and LTIP has remained a
constant proportion of salary and the actual
bonuses awarded have increased year on year by
less than 2%.
RELATIVE IMPORTANCE OF SPEND
ON PAY
The table below shows total staff costs and
dividends paid for the current and prior years,
and the year on year change.
2020
£’M
2019
£’M
CHANGE
%
Staff costs (note 5)
150.1
144.7
3.7%
Dividends (note 8)
65.0
130.0
(50.0%)
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
GOVERNANCE REPORT 98
CHANGES TO FUTURE REMUNERATION POLICY
At its meeting in January 2020, the Remuneration Committee agreed to revise the structures of the
STIP and LTIP, taking effect from 2020, to increase the proportion of performance-related executive pay
which is aligned to delivering benefits for our customers.
For the STIP the 10% proportion related to personal targets will be removed and the proportion linked
to non-financial balanced scorecard measures will increase to 60%. The Remuneration Committee will
review the structure annually and may choose to revise the individual measures within the STIP to
reflect appropriate performance objectives but the 60% weighting for customer-focused measures will
not be reduced.
For the LTIP, the proportion linked to financial metrics, Group profit after tax and Group distributions,
will be reduced to 40% with the remaining 60% linked to customer and environmental balanced
scorecard measures.
STIP
The balanced scorecard targets for 2020/21 are shown in the table below, in accordance with the
revised policy. These are internal measures set at stretching levels so as to drive year on year
performance improvements on a path to deliver our ‘national leader’ vision.
TARGET
%OF TOTAL STIP
POTENTIAL
SCORECARD MEASURE
Customer
C-MeX experience
C-MeX customer service
D-MeX experience
Unplanned interruptions >3 hours (mm:ss per property) 1
Compliance risk index (number) 1
Repeat sewer flooding (number) 1
Internal sewer flooding (number) 1
Environment
Leakage – NW (Mld) 1
Leakage – ESW (Mld) 1
Discharge permit compliance (EPA 1)
Pollution incidents category 1 & 2 1
Greenhouse gas emissions (ktCO2e) 1
Competitiveness
Group EBIT
Group distributions
People
Employee engagement score (Trust Index) (%)
Lost time reportable accidents (number)
Communities
top 2 company
top 2 company
top 2 company
<=5:24
<=2
<=46
<=285
<=126.5
<=56.4
>=99%
<=1
<=57.2
budget
budget
>=65
<=3
2.5
2.5
5
5
5
2.5
2.5
2.5
2.5
5
5
5
20
20
5
5
5
100
BITC Platinum Plus/Ethisphere/CCW ‘Most Trusted Water Company’
awarded
Total
1 Where stretching targets are set which are designed to achieve industry leading performance, the
Remuneration Committee has agreed that if the target score is not achieved but actual performance
is at an industry leading level and has shown an improvement on prior year performance, the target
will be deemed to have been achieved.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
GOVERNANCE REPORT 99
LTIP 2020
The LTIP targets for the 2020 scheme are shown in the table below, in accordance with the revised
policy. These are internal measures set at stretching levels so as to drive year on year performance
improvements on a path to deliver our ‘national leader’ vision. This means that they are often more
stretching than the regulatory PCs reported in the Performance Review section on pages 22 and 23.
SCORECARD MEASURE
Customer & Environment
C-MeX customer service
Unplanned interruptions >3 hours (mm:ss per property)
Compliance risk index (number)
Internal sewer flooding (number)
Leakage – NW (Mld)
Leakage – ESW (Mld)
Pollution incidents category 1 & 2
Competitiveness
Group profit after tax
Group distributions
Total
TARGET
% OF TOTAL LTIP
POTENTIAL
top 2 company
<=5:24
<=2
<=285
<=126.5
<=56.4
<=1 (cat 2)
budget
budget
10
10
10
10
5
5
10
20
20
100
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
DIRECTORS’ REPORT
GOVERNANCE REPORT 100
The Company’s response to the pandemic is
described in the CEO Review. Both the going
concern statement and viability statement, on
pages 102 to 103 of this Directors’ Report, explain
how the impacts of the pandemic have been
taken into account in making the judgements set
out in the statements.
STATEMENT OF CORPORATE
GOVERNANCE ARRANGEMENTS
The Company’s corporate governance
arrangements are described on pages 86 to 87 of
the Governance Report. In accordance with the
requirements of our Licence, we report our
corporate governance arrangements against the
2019 Objectives set by Ofwat. We also report
compliance with the Wates Principles, which are
appropriate for large privately owned companies.
POLITICAL DONATIONS
NWL does 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 Company
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. During the year, no external costs were
associated with these activities, however,
Company representatives attended the party
conferences of the Labour and Conservative
parties.
DIRECTORS
The Directors who served during the year, and to
the date of signing, are listed on pages 69 to 71 of
the Governance Report.
DISCLOSURES PROVIDED
IN THE STRATEGIC REPORT
Future developments which may impact on the
Company are described in the CEO’s Report and
in the Strategic Report.
Our approach to research and innovation is
described in the Performance Review section of
our Strategic Report under the Competitiveness
heading and the costs of research and
development are disclosed in note 3 of the
Financial Statements.
Our policies in respect of the employment of
disabled persons are set out in the Performance
Review section of our Strategic Report under
Diversity and Equal opportunities on pages 44
to 45.
Information on results and dividends and capital
structure and equity are contained in the
Financial Performance and Structure section of
the Strategic Report. Our policies in relation to
the use of financial instruments and treasury
operations are set out in the same section under
the ‘Treasury policies’ heading.
The Companies (Miscellaneous Reporting)
Regulations 2018, effective for years beginning on
or after 1 January 2019, set out revised
requirements for reporting on engagement with
employees, suppliers, customers and others in a
business relationship with the Company. Our
approach to stakeholder engagement is set out in
the Our Stakeholders section of our Strategic
Report on pages 17 to 18, and summarised on our
S172 Statement on pages 19 to 20.
Further information in relation to employee
engagement is set out in the Performance Review
section of our Strategic Report under the People
heading on pages 42 to 49.
EVENTS AFTER THE BALANCE
SHEET DATE
Although the Covid-19 pandemic started before
the end of the financial year, with lockdown
restrictions commencing in the UK on 24 March
2020, the impacts of the pandemic have
continued since the balance sheet date and up to
the signing of the financial statements.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
ENERGY AND CARBON REPORTING
We set out our carbon management plan in 2009
with the aim of reducing our GHG emissions by
35% by 2020 against a 2008 baseline of 303
ktonnes. We achieved this target two years early
in 2018/19 as a result of our investment in
renewable energy and improved energy
efficiency, along with lower emissions linked to
grid electricity. Our approach to reducing energy
emissions is described in more detail in the
Performance Review section of our Strategic
Report under the Environment heading on pages
34 to 38.
Our total net operational GHG emissions for the
year ended 31 March 2020 reduced further to 139
ktonnes CO2e (31 March 2019: 148 ktonnes CO2e),
which was 54% lower than the 2008 baseline. This
included 94 ktonnes CO2e resulting from the
purchase of electricity and 37 ktonnes CO2e
arising from the use of fuels. A total of 532 million
kWh of energy was consumed for these purposes.
The protocol that we use for measuring our
emissions is based on the Carbon Accounting
Workbook developed and updated annually by the
consultants Ricardo, on behalf of the water
industry, and published by UK Water Industry
Research. This is founded on international and
Defra protocols but includes additions that are
specific to the water industry. For the first time
this year, we have obtained external assurance on
our emissions reporting to ISO 14064 standard.
Our energy supply deal and power purchase
agreement with Ørsted provides the company
with energy from wind farms around the UK and
is guaranteed to be emissions free. New protocols
on reporting of emissions from electricity means
that we can reflect that in our reporting. On this
basis our emissions in 2019/20 were just 62
ktonnes CO2e.
In addition to absolute emissions we also monitor
the emissions intensity of our operations using
three measures, one relating to the water service
and two for wastewater. These measures can be
volatile depending upon levels of rainfall and
pumping requirements.
ANNUAL OPERATIONAL GHG
INTENSITY RATIO
2019/20
2018/19
Emissions/Ml of water
Emissions/Ml of sewage treated
(flow to full treatment)
144
185
163
208
Emissions/Ml of sewage treated
(water distribution input)
378
361
Figures in kgCO2e/MI
GOVERNANCE REPORT 101
Having reached our previous target two years
early, we have now set a new ambitious target for
the future and have committed to achieving net
zero emissions by the end of 2027. This will be
delivered through a combination of further
investment in renewable energy and green
vehicles and continued focus on using energy
more efficiently.
DIRECTORS’ INDEMNIFICATION
The Company has maintained Directors’ and
Officers’ (D&O) insurance cover throughout the
year to 31 March 2020, provided under group-wide
D&O insurance placed by CKHH.
On 21 March 2017 NWGL entered into a deed of
indemnity to grant the Directors of NWGL and its
subsidiaries further protection against liability
to third parties, subject to the conditions set
out in the Companies Act 2006, and this remains
in place.
DIRECTORS’ STATEMENT
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 auditor is 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
auditor is aware of that information.
AUDITOR
Pursuant to s487 of the Companies Act 2006,
Deloitte LLP is deemed to be re-appointed as the
Company’s auditor for the ensuing year.
FINANCIAL STATEMENTS
PREPARATION AND GOING CONCERN
The Directors confirm that, in their opinion, the
Company has sufficient financial resources and
facilities available to enable it to carry out its
activities for at least the next 12 months.
Accordingly, they continue to adopt the going
concern basis in preparing the Annual Report and
Financial Statements. In arriving at their
decision, the Directors have taken into account:
• the financial strength of the Company at the
balance sheet date and financial performance,
which is in line with expectations and
reviewed at each Board meeting, most recently
in July 2020;
• the key financial ratios over the next 12 month
planning horizon, as reflected in investment
grade credit ratings;
• the fact that the Company has in place £450m
of committed bank facilities as back up
liquidity, maturing in December 2024, which
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
was undrawn at 31 March 2020; and
• the Company’s formal governance and risk
management arrangements which are
monitored by the Audit Committee, R&CSC and
Board.
The Directors have taken specific account of the
impacts of the Covid-19 pandemic when making
this assessment. The Board has received regular
updates on the operational impacts on the
business and the business continuity
arrangements in place to ensure continuity
provision of service. The Board has also received
regular assessments of the financial risks arising
from the pandemic and has noted the impact on
cash flows from reduced payments from
household customers and non-household
business closures. However, these are not
material in the context of the £450m liquidity
arrangements noted above.
VIABILITY STATEMENT
When considering longer-term viability, the
Directors note that, in their opinion, the PR19 FD
has resulted in a lower cost of capital, significant
totex challenge, stretching PC targets and an
asymmetric penalties and incentives mechanism
which represents a significant challenge to
financeability in AMP7. There is also lower
financial headroom available for management of
downside shocks and there is likely to be
pressure on projected credit ratings, as reflected
in the current negative outlooks, and additional
financial mitigations required in downside
scenarios to support long term viability. This
impact underpins the Board’s decision to appeal
the FD to the CMA and, while the Board are
confident in the Company’s case, uncertainty
around the CMA redetermination has been
considered in the assessment of financial
resilience
There is also additional uncertainty on the
economic impact of the current Covid-19
pandemic. In addition to the short-term impacts
of the Covid-19 pandemic being considered in the
going concern assessment, the Directors note
that the longer-term impacts remain uncertain
and work to assess the Company’s financial
exposure is ongoing. Estimates have been
included in the scenario analysis to reflect the
observed impacts to date.
Financial forecasts over longer-term timeframes
are inherently subject to more risk that the
assumptions adopted will not be realised. As set
out above, the Directors have confirmed that the
business remains a going concern. In considering
the longer-term viability, the Directors note (1) the
uncertainties referred to above and that the
downside stress test scenarios would place
pressure on projected credit ratings in the next
GOVERNANCE REPORT 102
five years and (2) the longer-term view beyond
five years assumes that the 2024 price review will
provide a sufficient rate of return to enable the
Company to finance its functions for the period
2025-30. The Directors have assessed the future
prospects of the Company and consider that the
Company should be able to manage its business
risks, continue to operate and meet its liabilities
as they fall due over the ten years to March 2030
given the long-term nature of the business.
In arriving at their conclusion, the Directors have
taken into account:
• the Licence which is in place on a rolling 25
year basis;
• revenue from wholesale and household retail
price controls to March 2025 provided by the
2019 FD by Ofwat, an assumption which is
subject to revisions by the CMA;
• the financial strength of the Company at the
balance sheet date and the fact that the
Company has a £450m undrawn committed
bank facility as back up liquidity, maturing in
December 2024 with the intention of extending
until 2030 in due course;
• the key financial ratios over the planning
horizon of the Company’s financial forecast to
March 2025 and extended forecast to March
2030, as reflected in investment grade credit
ratings;
• the Board’s flexible dividend policy; and
• the principal risks and uncertainties facing the
Company and the mitigating controls, as
described on pages 57 to 63, which are
monitored by the Audit Committee, R&CSC
and Board.
The Directors have chosen a period of ten years
to March 2030 to assess the viability of the
Company to align with the business planning
process for the regulatory price review period to
March 2025, and the next price review period to
March 2030. Whilst the Directors do not believe
that it is possible to test financial resilience
beyond March 2025 to the same level of robust
detail, given uncertainty of revenue and returns
past this point, they have performed an
assessment of viability beyond five years against
an extended plan applying reasonable
assumptions for the next price review which
includes a sufficient rate of return to enable to
Company to finance its functions..
The financial forecast has been stress tested
under a number of plausible and severe adverse
scenarios. The scenarios were selected by the
Board after considering the principal risks and
uncertainties facing the Company, as set out on
pages 57 to 63 of the Strategic Report, and the key
economic and financial variables which could
impact on the forecast. The combined impact of
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
GOVERNANCE REPORT 103
the Company’s investment grade credit rating or
liquidity position at risk a range of mitigation
measures would be adopted, including
application of the Board’s flexible dividend policy.
While outperformance of the FD allowance would
also help mitigate such an outcome, the Directors
do not consider this to be a key mitigating factor
given the level of challenge and stretch implied
by the FD.
The Board engaged Deloitte LLP to provide third
party assurance, in the form of agreed upon
procedures performed on the calculations and
stress testing of the plan, to provide independent
assurance on the impact of the stress testing
scenarios on the forecast.
FAIR, BALANCED AND
UNDERSTANDABLE
The Directors consider that the Annual Report
and Financial Statements, taken as a whole, is
fair, balanced and understandable and provides
the information necessary for stakeholders to
assess the Company’s performance, business
model and strategy. In reaching this conclusion,
the Board has taken advice from the Audit
Committee which has considered the process by
which the Annual Report and Financial
Statements has been produced as well as
reviewing and commenting on the Report.
multiple scenarios has also been tested.
The stress tests were assessed in the context of
NWL’s overarching financial objective of
maintaining prudent investment grade credit
ratings from S&P and Moody’s, and the Board’s
commitment to retaining regulatory gearing of no
more than 70%. Whilst the viability statement
relates specifically to NWL, both rating agencies
take account of NWGL metrics in their
methodologies, therefore, the impact on both
NWL and NWGL financial plans have been
considered.
The scenarios tested were:
• lower CPIH inflation, leading to reduced
allowed revenue and RCV and therefore lower
profitability and higher gearing;
• increased future borrowing rates for new and
refinanced debt, increasing interest charges
and reducing interest cover metrics;
• increased defined benefit pension scheme
deficit and revised schedule of contributions,
resulting in increased contribution payments
and higher gearing under rating agency
methodologies;
• impact of a credit rating downgrade, causing
increased borrowing costs and potentially
triggering refinancing of existing debt and;
• higher operating and capital investment cost,
causing increased net debt and gearing and
reduced profitability;
• impact of a major incident crystallising one of
the principal risks identified on pages 57 to 63,
causing a significant cash outflow and
increased net debt and gearing; and
• reduced Outcome Delivery incentive (ODI)
rewards or increased ODI penalties as a result
of performance not achieving targeted levels of
performance, reducing future revenues.
A number of combined scenarios were also
tested. These were determined by considering
which scenarios were most likely to occur in
combination. The combined scenarios tested
were:
• adverse economic conditions, comprising
reduced indexation and increased borrowing
costs;
• external impacts, comprising increased
pension payments and credit rating
downgrade; and
• shortfall in operational performance,
comprising higher totex, major operational
incident and reduced ODI rewards or increased
penalties.
To the extent that any of these scenarios, in
isolation or combination, would place retention of
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
GOVERNANCE REPORT 104
The Directors are responsible for keeping
adequate accounting records which 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.
The Directors are responsible for the
maintenance and integrity of the corporate and
financial information on the Company’s website.
Legislation in the UK governing the preparation
and dissemination of financial statements may
differ from legislation in other jurisdictions.
By order of the Board
M Parker,
Company Secretary,
15 July 2020
DIRECTORS’ RESPONSIBILITIES
STATEMENT
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 UK Generally Accepted Accounting Practice
(UK Accounting Standards and applicable law),
including FRS 101 Reduced Disclosure
Framework. 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 these Financial Statements, the
Directors are required to:
• select suitable accounting policies and then
apply them consistently;
• make judgements and accounting estimates
that are reasonable and prudent;
• state whether applicable UK 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.
Registered office
Northumbria House, Abbey Road, Pity Me, Durham, DH1 5FJ
Registered in England and Wales
Registered no: 02366703
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
STRATEGIC REPORT 105
FINANCIAL
STATEMENTS
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
INCOME STATEMENT
FOR THE YEAR ENDED 31 MARCH 2020
FINANCIAL STATEMENTS 106
Continuing operations
Revenue
Operating costs
Operating profit
Finance costs
Profit before taxation
Taxation
Profit for the year attributable to the shareholder of the Company
NOTE
2020 £’m
2019 £’m
2
3
6
7(a)
900.4
(541.6)
358.8
(112.4)
246.4
(97.8)
148.6
869.1
(530.3)
338.8
(130.9)
207.9
(39.1)
168.8
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 107
STATEMENT OF
COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2020
Profit for the year
NOTE
2020 £’m
2019 £’m
148.6
168.8
Items that will not be reclassified subsequently to profit and loss:
Actuarial gain / (loss)
Deferred tax related to actuarial gain / loss
23
7(b)
Items that may be reclassified subsequently to profit and loss:
(Loss) / profit on cash flow hedges taken to equity
Deferred tax on items charged to equity that may be reclassified
7(b)
Other comprehensive income / (loss)
Total comprehensive income for the year attributable to the
shareholder of the Company
17.0
0.5
(1.0)
0.4
16.9
165.5
(20.6)
3.5
2.1
(0.4)
(15.4)
153.4
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
BALANCE SHEET
AT 31 MARCH 2020 (REGISTERED NUMBER 02366703)
FINANCIAL STATEMENTS 108
NOTE
2020 £’m
2019 £’m
Non-current assets
Intangible assets
Property, plant and equipment
Financial investments
Current assets
Inventories
Trade and other receivables
Short-term cash deposits
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Borrowings
Provisions
Non-current liabilities
Borrowings
Provisions
Deferred tax liabilities
Pension liability
Hedging instruments
Grants and deferred income
Total liabilities
Net assets
Capital and Reserves
Share capital
Cash flow hedge reserve
Profit and loss account
Equity attributable to the shareholder of the Company
9
10
11
12
13
14
15
17
15
17
7(d)
23
19
18
20
90.6
74.7
4,573.4
4,452.3
160.9
160.9
4,824.9
4,687.9
4.2
244.4
27.0
4.7
280.3
3.6
182.9
5.0
-
191.5
5,105.2
4,879.4
(170.0)
(177.7)
(41.3)
(0.1)
(51.2)
(0.2)
(211.4)
(229.1)
(2,916.0)
(2,824.3)
(0.9)
(467.0)
(84.1)
(44.1)
(506.1)
(0.9)
(409.0)
(108.5)
(42.2)
(490.3)
(4,018.2)
(3,875.2)
(4,229.6)
(4,104.3)
875.6
775.1
122.7
(10.5)
763.4
875.6
122.7
(9.9)
662.3
775.1
Approved by the Board of Directors on 15 July 2020 and signed on their behalf by: H Mottram
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 109
STATEMENT OF
CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2020
At 1 April 2018
Profit for the year
Other comprehensive income and expense
Total comprehensive income and
expense for the year
Dividends
At 31 March 2019
Profit for the year
Other comprehensive income and expense
Total comprehensive income and
expense for the year
Dividends
At 31 March 2020
NOTE
SHARE
CAPITAL
£’m
CASH FLOW
HEDGE
RESERVE
£’m
122.7
(11.6)
-
-
-
-
122.7
-
-
-
-
8
8
-
1.7
1.7
-
(9.9)
-
(0.6)
(0.6)
-
122.7
(10.5)
RETAINED
EARNINGS
£’m
TOTAL
EQUITY
£’m
640.6
168.8
(17.1)
151.7
751.7
168.8
(15.4)
153.4
(130.0)
(130.0)
662.3
148.6
17.5
166.1
(65.0)
763.4
775.1
148.6
16.9
165.5
(65.0)
875.6
Other comprehensive income and expense taken
to the cash flow hedge reserve arises from the
cumulative amount of gains or losses on hedging
instruments, and associated deferred tax, taken
directly to equity under the hedge accounting
provisions of International Accounting Standard
(IAS) 39.
Other comprehensive income and expense taken
to retained earnings arises from actuarial
revaluations, and associated deferred tax, on the
Company’s defined benefit pension scheme taken
directly to equity.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MARCH 2020
FINANCIAL STATEMENTS 110
2020 £’m
2019 £’m
Operating activities
Reconciliation of profit before interest to net cash flows from operating activities
Profit on ordinary activities before interest
Depreciation and impairment losses
Other non-cash charges and credits
Net credit for provisions, less payments
Difference between pension contributions paid and amounts recognised in the income
statement
Capital grants received
Increase in inventories
Increase in trade and other receivables
Increase in trade and other payables
Cash generated from operations
Interest paid
Income taxes paid
Net cash flows from operating activities
Investing activities
Interest received
Proceeds on disposal of property, plant and equipment
Short term cash deposits
Purchase of property, plant and equipment and intangible assets
Net cash flows from investing activities
Financing activities
New borrowings
Dividends paid to equity shareholders
Repayment of borrowings
Payment of principal in respect of leases
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
Additional cash flow information is included in note 21.
358.8
143.3
(13.6)
(0.1)
(9.6)
14.9
(0.6)
(50.1)
1.2
444.2
(96.9)
(61.0)
286.3
3.3
1.1
(22.0)
(247.6)
(265.2)
99.4
(65.0)
(46.0)
(4.3)
(15.9)
5.2
(0.5)
4.7
4.7
27.0
31.7
338.8
137.9
(15.1)
(0.2)
(8.8)
11.6
(0.5)
(22.1)
14.2
455.8
(97.5)
(39.2)
319.1
3.3
3.3
87.0
(254.5)
(160.9)
10.0
(130.0)
(37.5)
(3.4)
(160.9)
(2.7)
2.2
(0.5)
(0.5)
5.0
4.5
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 111
NOTES TO THE FINANCIAL
STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2020
1. ACCOUNTING POLICIES
NWL is incorporated in the UK under the
Companies Act 2006. The Company is a private
company limited by shares and is registered in
England and Wales. The address of the
Company’s registered office is shown on page
104. The nature of the Company’s operations and
its principal activities are set out in the Strategic
Report on page 10.
These Financial Statements are presented in
pounds sterling and all values are rounded to the
nearest one hundred thousand pounds (£0.1m)
except where otherwise indicated.
These Financial Statements are separate
financial statements. The Company is exempt
from the preparation and delivery of consolidated
financial statements under the terms of section
400 of the Companies Act 2006, because it is
included in the Group Financial Statements of
NWGL (see note 25).
(A) BASIS OF ACCOUNTING
These Financial Statements have been prepared
in accordance with FRS 101, incorporating the
Amendments to FRS 101 issued by the FRC in
July 2015 and the amendments to Company law
made by The Companies, Partnerships and
Groups (Accounts and Reports) Regulations 2015.
The Company adopted the new accounting
standard IFRS 16 Leases in the period. The
amended accounting policy is explained below in
note 1(g) Leases. The approach adopted to
transition to the new standard, and the impact on
the Financial Statements, is described in note 1(r).
As permitted by FRS 101, the Company has taken
advantage of the disclosure exemptions available
under that standard in relation to financial
instruments, standards not yet effective and
related party transactions.
The Financial Statements have been prepared
under the historical cost convention, with the
exception of financial instruments held at fair
value through profit and loss.
The Financial Statements have been prepared on
a going concern basis, having considered the
principal risks and uncertainties, 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 2020, the
Company had net current assets of £68.9m (2019:
net current liabilities of £37.6m). The Directors
have reviewed cash flow requirements and other
factors, as described in the going concern
statement on pages 101 and 102 of the Directors’
Report. Accordingly, the Directors believe it is
appropriate to prepare the financial statements
on a going concern basis.
(B) REVENUE
Revenue, which excludes Value Added Tax,
represents the income receivable in the ordinary
course of business for services provided within
the UK. In accordance with IFRS 15 Revenue from
Contracts with Customers revenue is recognised
as performance obligations to the customer are
satisfied.
The Company’s principal source of revenue is
from water and wastewater charges to customers,
which are recognised over the period which the
services are provided. For volumetric charges to
measured customers, revenue is recognised as
the service is supplied. For measured charges
which have not yet been billed, an accrual is
made based on an estimate of consumption.
Wholesale charges for non-household customers
are estimated on the basis of market information
provided by MOSL.
A secondary source of revenue is contributions to
capital investment, particularly from developers.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 112
Where assets are constructed by a developer and
adopted by NWL at no cost to the Company, the
assets are recognised in the balance sheet at
their fair value on the date of the transfer and an
equivalent value is recognised in deferred
income, in accordance with IFRIC 18 Transfers of
Assets from Customers. The fair value is based on
the average cost to the Company of constructing
an equivalent asset.
Upon their initial recognition, right-of-use assets
are valued at the initial measurement of the
corresponding lease liability (note 1(g)), less lease
payments made at or before the commencement
day, any lease incentives received and any initial
direct costs. They are subsequently measured at
cost less accumulated depreciation and
impairment losses. Right-of-use assets are
presented as a separate line in Note 10.
Freehold land is not depreciated. Other assets are
depreciated evenly over their estimated
economic lives, which are principally as follows:
Freehold buildings
Operational structures, plant
and machinery
30-60 years
4-92 years
Infrastructure assets (see below)
4-200 years
Fixtures, fittings, tools
and equipment
4-25 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.
Right-of-use assets are depreciated over the
shorter period of lease term and useful life of the
underlying asset. The depreciation starts at the
commencement date of the lease.
Assets in the course of construction are not
depreciated until commissioned.
1. ACCOUNTING POLICIES (continued)
For contributions related to the connection of
new properties to the Company’s networks,
comprising infrastructure charges, new
connection charges, requisitioned mains and
sewers and adopted assets, the Company
considers that these activities form a combined
performance obligation that is not distinct from
the ongoing provision of water and wastewater
services through the new connection. On this
basis, these contributions are recognised as
deferred income and amortised to the income
statement over the expected useful life of the
connection, per note 1(f).
For other contributions to capital investment,
most significantly mains and sewer diversions,
the Company considers that the performance
obligation is satisfied upon completion of the
investment, which will typically be the point at
which the associated asset is brought into use.
On this basis, these contributions are recognised
in full in the income statement upon satisfaction
of the performance obligation. Contributions
received before the performance obligation is
satisfied are recorded as receipts in advance.
(C) INTANGIBLE ASSETS
Intangible assets, primarily comprising computer
software, are recognised at cost less accumulated
amortisation and any provision for impairment.
Computer software is amortised evenly over its
estimated economic life of 2 to 25 years.
Intangible assets in development are not
amortised until commissioned. Amortisation is
charged to the income statement through
operating costs.
(D) PROPERTY, PLANT
AND EQUIPMENT
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,
vehicles and above ground plant and equipment).
Purchased property, plant and equipment are
included at cost less accumulated depreciation
and any provision for impairment. Cost
comprises the aggregate amount incurred 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.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 113
1. ACCOUNTING POLICIES (continued)
Infrastructure assets
Infrastructure assets comprise a network of
systems being mains and sewers, reservoirs,
dams and sea outfalls.
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.
Infrastructure assets are depreciated evenly to
their estimated residual values over their
estimated economic lives, which are principally
as follows:
Dams and impounding reservoirs
150 years
Water mains
Sea outfalls
Sewers
Dedicated pipelines
100 years
60 years
200 years
4-20 years
(E) FINANCIAL INVESTMENTS
Financial investments are stated at their
purchase cost, less provision for diminution in
value (note 11).
(F) 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.
Grants and contributions related to the
connection of new properties to the Company’s
networks, comprising infrastructure charges, new
connection charges, requisitioned mains and
sewers and adopted assets, are recognised as
deferred income and amortised to the income
statement over the expected useful life of the
connection, as explained in note 1(b).
Other grants and contributions to capital
investment, most significantly mains and sewer
diversions, are recognised in full in the income
statement upon satisfaction of the performance
obligation to the customer, which is the point at
which the associated asset is brought into use. Up
to this point, any contributions received are
reported as receipts in advance.
(G) LEASES
The Company has adopted IFRS 16 with effect
from 1 April 2019 (note 1(r)).
The Company assesses whether a contract is or
contains a lease, at the inception of a new
contract and recognises a right-of-use asset and
a corresponding lease liability with respect to all
lease arrangements in which it is the lessee,
except for short-term leases (defined as leases
with a lease term of 12 months or less). For these
leases, the Company recognises the lease
payments as an operating expense on a straight-
line basis over the term of the lease.
The lease liability is initially measured at the
present value of the lease payments that are not
paid at the commencement date, discounted by
using the rate implicit in the lease. If this rate
cannot be readily determined, the lessee uses its
incremental borrowing rate.
Lease payments included in the measurement of
the lease liability comprise:
• fixed lease payments (including in substance
fixed payments), less any lease incentives
receivable;
• variable lease payments that depend on an
index or rate, initially measured using the
index or rate at the commencement date;
• the amount expected to be payable by the
lessee under residual value guarantees;
• the exercise price of purchase options, if the
lessee is reasonably certain to exercise the
options; and
• payments of penalties for terminating the
lease, if the lease term reflects the exercise of
an option to terminate the lease.
The lease liability is presented within Borrowings
in the Balance sheet and as a separate line within
note 15.
The lease liability is subsequently measured by
increasing the carrying amount to reflect interest
on the lease liability (using the effective interest
method) and by reducing the carrying amount to
reflect the lease payments made.
The Company remeasures the lease liability (and
makes a corresponding adjustment to the related
right-of-use asset) whenever:
• the lease term has changed or there is a
significant event or change in circumstances
resulting in a change in the assessment of
exercise of a purchase option, in which case
the lease liability is remeasured by discounting
the revised lease payments using a revised
discount rate;
• the lease payments change due to changes in
an index or rate or a change in expected
payment under a guaranteed residual value, in
which cases the lease liability is remeasured
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
1. ACCOUNTING POLICIES (continued)
by discounting the revised lease payments
using an unchanged discount rate (unless the
lease payments change is due to a change in a
floating interest rate, in which case a revised
discount rate is used); or
• a lease contract is modified and the lease
modification is not accounted for as a separate
lease, in which case the lease liability is
remeasured based on the lease term of the
modified lease by discounting the revised lease
payments using a revised discount rate at the
effective date of the modification.
The Company did not make any such
adjustments during the periods presented.
Variable rents that do not depend on an index or
rate are not included in the measurement of the
lease liability and the right-of-use asset. The
related payments are recognised as an expense
in the period in which the event or condition that
triggers those payments occurs and are included
in operating costs in the Income Statement.
(H) INVENTORIES
Inventories are stated at cost less any provision
necessary to recognise damage and
obsolescence. Inventory is charged at average
cost upon use.
(I) PENSION COSTS
The Company is the principal employer of the
NWPS, which has both a defined benefit section
and a defined contribution section.
The cost of providing benefits under the defined
benefit section of the 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. Net interest is calculated by applying the
discount rate to the net defined asset or liability.
The service cost is disclosed in manpower costs
and the net interest expense is disclosed within
FINANCIAL STATEMENTS 114
finance costs.
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 statement of
comprehensive income.
The costs of the defined contribution section are
charged to the income statement in the period
they arise.
(J) TAXATION
Current tax
Current tax liabilities are measured at the amount
expected to be 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
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 and unused tax
losses to the extent that it is probable that taxable
profit will be available against which the
deductible temporary differences 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
where the timing of the reversal of the
temporary differences can be controlled and it
is probable that the temporary differences will
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
1. ACCOUNTING POLICIES (continued)
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
period 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, except when it relates to items that
are recognised in other comprehensive income or
directly in equity, in which case the deferred tax
is also recognised in other comprehensive
income or directly in equity.
(K) FOREIGN CURRENCY
All transactions denominated in foreign
currencies are translated into sterling at the
actual rates of exchange ruling at the date of
transaction. Foreign currency balances are
translated into sterling at the rates of exchange
ruling at the balance sheet date. Exchange gains
or losses are recognised in the profit and loss
account in the period incurred.
(L) RESEARCH AND DEVELOPMENT
Research and development expenditure is
charged to the income statement in the period in
which it is incurred.
(M) DERIVATIVE FINANCIAL
INSTRUMENTS
The Company utilises interest and inflation rate
swaps, gilt locks 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 Company
in line with the Group’s risk management
policies. Derivative financial instruments are
stated at their fair value.
Hedge accounting is employed in respect of those
derivative financial instruments fulfilling the
FINANCIAL STATEMENTS 115
requirements for hedge accounting as prescribed
under IFRS 9. The Company has not applied
hedge accounting criteria under IFRS 9 on a
retrospective basis. Existing derivative financial
instruments, if eligible for hedge accounting,
continue to apply the hedging criteria under the
provisions of IAS 39. Any new instruments will
apply IFRS 9.
Derivative financial instruments are measured at
fair value, which is considered to be the price that
would be received to sell an asset or paid to
transfer a liability in an orderly transaction
reflecting the credit risk of the counterparties in
the principal (or most advantageous) market
under market conditions as at the balance sheet
date.
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 and inflation swaps are 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 the income
statement.
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 the cash flow hedge reserve 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 the
cash flow hedge reserve 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 the cash flow hedge reserve are
transferred to the income statement in the same
periods in which the hedged firm commitment
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 116
1. ACCOUNTING POLICIES (continued)
affects the income statement.
(P) BORROWING COSTS
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 the cash flow hedge reserve is kept
in the cash flow hedge reserve until the forecast
transaction occurs. If a hedged transaction is no
longer expected to occur, the net cumulative gain
or loss recognised in the cash flow hedge reserve
is transferred to the income statement.
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.
(N) 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 relevant RPI,
with the accretion being charged to the income
statement as finance costs payable. Other
borrowing costs are recognised as an expense
when incurred.
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 loans and borrowings
less cash and cash equivalents, short- term cash
deposits, financial investments and loans
receivable.
(0) BAD DEBT PROVISIONING
The bad debt provision 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.
(Q) SIGNIFICANT ACCOUNTING
JUDGEMENTS AND KEY SOURCES OF
ESTIMATION UNCERTAINTY
In the process of applying the accounting
policies, the Company is required to make certain
judgements, estimates and assumptions that it
believes are reasonable based on the information
available. Actual results may have a significant
risk of causing a material adjustment to the
carrying amounts of assets and liabilities within
the next financial year.
The significant accounting judgements were:
• the estimation of income for measured water
and sewerage services supplied but not billed
at the end of the financial period. Consumption
by measured domestic customers is billed in
arrears on quarterly or six-monthly cycles.
Revenue is estimated and accrued using a
defined methodology based upon historical
usage and the relevant tariff per customer.
Consumption by non-household properties is
billed to the relevant retailer under the terms of
the Wholesale Contract and may be either in
advance or in arrears. Revenue billed in arrears
is estimated by reference to wholesale market
settlement reports, adjusted for any additional
information obtained after a settlement report
has been run;
• the estimation of uncertain tax provisions,
which are assessed on advice from
independent tax advisers and the status of
ongoing discussions with the relevant tax
authorities; and
• the asset lives assigned to property, plant and
equipment, details of which can be found in
note 1(d) above.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 117
The significant accounting estimates were:
• those assumptions used in arriving at the
defined benefit pension scheme assets and
liabilities under IAS 19. These key assumptions
and their possible impact are disclosed in note
23; and
• the bad debt provision, which is determined by
estimating expected credit losses based on the
Company’s historical experience of
irrecoverable debts. Debt is segmented
according to the age of the debt, payment
history and type of debt (eg. current or previous
occupier). Higher provisioning percentages are
applied to categories of debt which are
considered to be of greater risk, including those
with a poor payment history as well as to those
of greater age. Bad debt provisioning rates are
reviewed annually to reflect the latest
collection performance data from the
Company’s billing system. Potential impacts of
forward-looking macro-economic factors on
collectability are also considered. A reduction
of 0.1% in the long term collection rate would
increase the provision by £5.9m.
Consider forward looking macro-economic
factors and conclude on appropriate loss rates
The Company’s detailed bad and doubtful debts
provision policy has remained unchanged during
the year and has been consistently applied in the
current and prior periods. The bad debt provision
is charged to operating costs to reflect the
Company’s assessment of the risk of non
recoverability of debtors. It is calculated by
applying expected recovery rates to debts
outstanding at the end of the accounting period.
These recovery rates take into account the age of
the debt, payment history and type of debt.
Higher provisioning percentages are applied to
categories of debt which are considered to be of
greater risk, including those with a poor payment
history as well as to those of greater age. Bad debt
provisioning rates are reviewed annually to
reflect the latest collection performance data
from the Company’s billing system. Actual
amounts recovered may differ from the estimated
levels of recovery which could impact on
operating results.
A comparison of the provision against historical
collection rates is carried out at the end of each
year. This indicated a slight deterioration in the
longer term recovery of debt. In addition, an
assessment has been made of the potential
impact of Covid-19 on the economic
circumstances of our household customers, in
relation to outstanding debt at the balance sheet
date. This assessment was based on cash flow
trends observed after the balance sheet date and
third party modelling of the potential economic
impacts of Covid-19. Based on this assessment, an
additional provision of £6.5m has been made.
Accordingly, the provision has increased from
£85.6m at 31 March 2019 to £104.4m at 31 March
2020. As well as the additional Covid-19 provision
and adjustment for historical collection rates, this
reflects aging of outstanding debt less debt
written off.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 118
Former finance leases
For leases that were classified as finance leases
under IAS 17, the carrying amount of the leased
assets and obligations under finance leases
measured applying IAS 17 immediately before the
date of initial application has been reclassified to
right of use assets and lease liabilities
respectively without any adjustment.
Impact of initial application of IFRS 16
The weighted average incremental borrowing rate
applied to lease liabilities recognised in the
Balance Sheet on 1 April 2019 is 2.6%.
The table below shows the operating lease
commitments disclosed under IAS 17 as at 31
March 2019 discounted using the incremental
borrowing rate at the date of initial application
and the lease liabilities recognised in the Balance
Sheet on 1 April 2019:
Operating lease commitment at
31 March 2019
Effect of discounting the above amount
Lease liabilities recognised at 1 April 2019
£’m
12.6
(9.0)
3.6
The Company has recognised £3.6m as right of
use assets in respect of former operating leases.
(R) TRANSITION TO NEW ACCOUNTING
STANDARDS IN THE PERIOD
IFRS 16 Leasing
The Company adopted IFRS 16 with effect from 1
April 2019 and has applied the standard
retrospectively with the cumulative effect
recognised at the date of initial application. Prior
years have not been restated.
The Company has made use of the practical
expedient available on transition to IFRS 16 not to
reassess whether or not a contract is or contains
a lease. Accordingly the definition of a lease
under IAS 17 will continue to be applied to those
leases entered into before 1 April 2019.
The Company has applied the definition of a lease
as set out in IFRS 16 to all lease contracts entered
into or changed on or after 1 April 2019.
Former operating leases
IFRS 16 has changed how NWL accounts for
leases previously classified as operating leases
under IAS 17. In applying IFRS 16 to these leases,
NWL has:
• recognised right of use assets and lease
liabilities in the Balance Sheet, initially
measured at the present value of future lease
payments, with the right of use asset adjusted
by any prepayments or accruals in accordance
with IFRS 16:C8(b)(ii); and
• recognised depreciation of right of use assets
and interest of lease liabilities in the Income
Statement.
The Company has used the following practical
expedients when applying the cumulative catch
up approach to former operating leases:
• applied a single discount rate to portfolios of
leases with reasonable similar characteristics;
and
• elected not to recognise right of use assets and
lease liabilities to leases for which the lease
term ends within 12 months of the date of
initial application.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 119
2. REVENUE AND SEGMENTAL INFORMATION
The Directors consider that the Company has a single class of business, the provision of water and
wastewater services. All revenue is generated from within the United Kingdom.
Appointed business revenue is generated from the regulated activities of the Company, defined in its
licence of appointment, necessary to fulfil its duties as a water and sewerage undertaker under the
Water Industry Act of 1991.
Non-appointed revenue is generated from the non-regulated activities of the Company.
Household
£’m
Non Household
£’m
Total
£’m
Household
£’m
Non Household
£’m
2020
Wholesale Water
Wholesale Wastewater
Retail
Other appointed business
Total appointed business
Non appointed business
Total revenue
346.8
246.4
59.8
653.0
95.43
442.1
78.1
324.5
-
59.8
173.4
826.4
339.4
237.5
59.6
636.5
30.9
857.3
43.1
900.4
2019
Total
£’m
436.6
316.7
97.2
79.2
-
59.6
176.4
812.9
31.2
844.1
25.0
869.1
3. OPERATING COSTS
Materials and consumables
Manpower costs (note 5)
Own work capitalised
Costs of research and development
Operating lease payments
Bad debt charge
Inventories recognised as an expense
Other operating costs
Depreciation of property, plant and equipment
Amortisation of intangible assets
Profit on disposal of property, plant and equipment
Total operating costs
2020 £’m
2019 £’m
21.0
150.1
(43.7)
0.8
-
21.7
2.8
246.6
134.0
9.3
(1.0)
541.6
19.9
144.7
(41.0)
0.9
2.4
12.4
3.4
252.5
129.7
8.2
(2.8)
530.3
Auditor’s remuneration in respect of the statutory audit of the Financial Statements initially accrued
amounted to £154k (2019: £219k), including fees for a financing subsidiary, NWF, of £7k (2019: £6k). The
prior year costs included fees related to the implementation of new accounting standards and a new
customer billing system. Fees of £78k (2019: £61k) were incurred in respect of the APR, including the
audit of the Regulatory Accounting Statements, and agreed upon procedures in respect of additional
regulatory information, the statement of sufficiency of financial resources and facilities and financial
resilience stress testing.
Fees of £14k (2019: £158k) were incurred for non-audit services comprising provision of assurance on
third party contracts. The prior year costs included work in respect of PR19 submissions and some
consultancy support.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 120
(b) Highest paid Director
The amounts for remuneration shown in note
4(a) include the following in respect of the
highest paid Director:
Emoluments (including benefits
in kind)
2020
£’000
2019
£’000
583
651
The highest paid Director left the defined
contribution section of the NWPS at the
beginning of the year ended 31 March 2017,
therefore no payments were made to the Scheme
in either the current or prior year.
4. DIRECTORS’ EMOLUMENTS
(a) Directors’ remuneration
The remuneration of the Directors of the
Company was as follows:
Emoluments
(including benefits in kind)
2020
£’000
2019
£’000
1,482
1,565
For those Directors holding office with both NWL
and NWGL, or contributing significantly to the
day to day operations of NWGL, costs are
apportioned between the companies to reflect the
level of activity carried out for each company.
This note reflects only the proportion of costs
charged to NWL.
One of the Directors was a member of a defined
benefit section of the Scheme, where the
Company makes contributions towards the cost,
during the year but stopped being an active
member before the year end (2019: 1).
One of the Directors at 31 March 2020 was a
member of a defined contribution section of the
Scheme where the Company makes contributions
towards the cost (2019: 1).
The Directors’ remuneration policy and a detailed
report showing total remuneration for each
Director, for the year to 31 March 2020, are set out
in the Remuneration Committee Report on pages
88 to 99 of the Governance Report.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 121
5. EMPLOYEE INFORMATION
The total employment costs of all employees (including Directors) were as follows:
2020 £’m
2019 £’m
Gross costs charged to the profit and loss account:
Wages and salaries
Social security costs
Other pensions costs
Costs recharged to other Group companies:
Wages and salaries
Net costs charged to the profit and loss account:
Wages and salaries
Social security costs
Other pensions costs
Costs charged to capital schemes:
Wages and salaries
Social security costs
Other pensions costs
82.9
9.1
20.2
112.2
2.3
2.3
80.6
9.1
20.2
109.9
30.3
3.2
6.7
40.2
81.9
8.9
18.7
109.5
2.3
2.3
79.6
8.9
18.7
107.2
28.4
3.1
6.0
37.5
Total employee costs
150.1
144.7
The average monthly number of employees during the year was made up as follows:
Water and waste water services
Customer services and meter reading
Other regulated activities
Non regulated activities
2020
1,295
643
1,081
89
3,108
2019
1,561
569
927
89
3,146
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
6. NET FINANCE COSTS
Finance costs payable:
Bank overdrafts and loans
Receivable in respect of derivatives
Payable to subsidiary Group company
Payable to other Group company
Amortisation of discount, fees, loan issue costs and other financing items
Accretion on index linked bonds
Interest cost on pension plan obligations
Obligations under leases
Less amounts capitalised on qualifying assets
Fair value losses on derivative financial instruments
Total finance costs payable
Finance income receivable:
Bank deposits
Receivable from Group companies
Total finance costs receivable
FINANCIAL STATEMENTS 122
2020 £’m
2019 £’m
11.3
(4.5)
85.7
0.1
2.1
25.9
2.3
2.6
125.5
(10.6)
114.9
0.7
115.6
(0.2)
(3.0)
(3.2)
13.0
(4.9)
85.2
-
2.3
30.2
2.2
3.1
131.1
(8.5)
122.6
11.5
134.1
(0.3)
(2.9)
(3.2)
Net finance costs payable
112.4
130.9
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
7. TAXATION
(a) Tax on profit on ordinary activities
Current tax:
UK current income tax charge at 19% (2019: 19%)
Adjustments in respect of prior periods
Payable in respect of group relief for the year
Adjustments in respect of prior period group relief
Total current tax
Deferred tax:
Origination and reversal of temporary differences in the year at 19%
(2019: 19%)
Impact of increase in rate of UK corporation tax
Adjustments in respect of prior periods
Total deferred tax
Tax charge in the income statement
FINANCIAL STATEMENTS 123
2020 £’m
2019 £’m
26.7
(7.5)
15.2
4.5
38.9
4.7
51.9
2.3
58.9
97.8
18.4
(4.1)
16.5
2.8
33.6
4.5
-
1.0
5.5
39.1
The rate of UK corporation tax for the current year was 19%. The reduction to 17% with effect from 1
April 2020 included in Finance Act 2016 has been cancelled. Accordingly, deferred tax has been
restated from 17% to 19% and all movements have been calculated at the higher rate.
Tax losses have been provisionally claimed as group relief from other group companies in the current
year, for which payment is being made at the full rate of tax.
Net prior year adjustments mainly reflect a revision to the estimate for corporate interest restrictions
and the benefit of improved capital allowances claims (including R&D).
(b) Tax relating to items charged outside the income statement
Deferred tax:
Actuarial gains / (losses) on pension scheme
Impact of increase in rate of UK corporation tax
Financial instruments
Impact of increase in rate of UK corporation tax
Tax credit in the statement of comprehensive income
2020 £’m
2019 £’m
3.2
(3.7)
(0.2)
(0.2)
(0.9)
(3.5)
-
0.4
-
(3.1)
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 124
7. TAXATION (continued)
(c) Reconciliation of the tax charge
Profit on ordinary activities before tax
Profit on ordinary activities multiplied by standard rate of corporation tax of 19% (2019: 19%)
Effects of:
Expenses not deductible for tax purposes
Non-taxable gains and amortisation of capital sums
Depreciation in respect of non-qualifying items
Impact on deferred tax of change in current tax rate
Deferred tax movement not at current tax rate for the year
Adjustments in respect of prior periods
Transfer pricing adjustments
Balancing payment payable
Total tax charge
2020 £’m
2019 £’m
246.4
46.8
207.9
39.5
0.2
(1.5)
1.2
51.9
-
(0.8)
(0.8)
0.8
97.8
1.1
(1.9)
1.2
-
(0.5)
(0.3)
(0.8)
0.8
39.1
The effective rate of tax for the year was 39.7% (2019: 18.8%). The increase of 20.9% is mainly explained
by the restatement of deferred tax from 17% to 19%.
(d) Deferred tax
ACCELERATED
RETIREMENT
FAIR VALUE
TAX
DEFERRED
BENEFIT
HEDGING
BUSINESS
DEPRECIATION
INCOME
OBLIGATIONS
INSTRUMENTS
COMBINATIONS
OTHER
TOTAL
At 1 April 2018
462.2
(57.3)
£’m
£’m
Adoption of IFRS 15
-
12.0
£’m
(17.3)
-
2.2
£’m
(5.5)
-
£’m
5.4
-
£’m
7.1
£’m
394.6
-
12.0
(2.1)
(0.1)
1.2
5.5
7.1
(2.8)
-
-
(3.5)
At 31 March 2019
469.3
(48.1)
(18.6)
64.6
(9.6)
2.9
0.4
(7.2)
(0.7)
-
-
(3.1)
5.3
0.5
8.3
409.0
1.2
58.9
Charge/(credit) in the
income statement
Charge/(credit) in
other comprehensive
income
Charge/(credit) in the
income statement
Credit in other
comprehensive
income
-
-
(0.5)
(0.4)
-
-
(0.9)
At 31 March 2020
533.9
(57.7)
(16.2)
(8.3)
5.8
9.5
467.0
(e) Factors that may affect future tax charges
The Company expects to continue to incur high levels of capital expenditure during the 2020-25
regulatory review period which, under current tax legislation, should result in claims for tax reliefs in
excess of depreciation.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
8. DIVIDENDS
Equity:
Dividends paid:
Final dividend paid for the year ended 31 March 2019 of
53.00p (year ended 31 March 2018: 53.00p) per share on an
aggregated basis
Interim dividend paid for the year ended 31 March 2020
of nil (year ended 31 March 2019: 53.00p) per share on an
aggregated basis
Total dividends paid in the year
Dividends proposed:
Final dividend proposed for the year ended 31 March 2020
of nil (year ended 31 March 2019: 53.00p) per share on an
aggregated basis
Total dividends proposed
FINANCIAL STATEMENTS 125
2020 £’m
2019 £’m
65.0
-
65.0
-
-
65.0
65.0
130.0
65.0
65.0
Dividend Policy
Application of Policy
The Board has a policy which takes into account
the principle of incentive based price cap
regulation, including operating and investment
performance. When declaring dividends, the
Directors consider the Company’s five-year plan
and give due consideration to business
performance, the prospects of the Company and
the principal risks facing the business.
Specifically, the Board determines the level of
dividend declared by reference to:
• the Company’s ability to finance its functions;
• the Company’s cumulative financial
performance and past outperformance; and
• maintaining the Company’s investment grade
credit ratings.
The Directors also have regard to:
• the Company’s operational performance and
the level of service provided to its customers;
and
• employees’ interests and, specifically,
compliance with the pension deficit repair plan
agreed with the Pension Trustee in respect of
the NWPS, as submitted to the Pensions
Regulator.
The Company typically pays an interim dividend
during the year and a final dividend after the year
end, once the Directors have reviewed the
financial position of the Company at the balance
sheet date.
In April 2019, the Board approved the payment of
a final dividend in respect of the year 2018/19. In
reaching this decision, the Board took account of
the Company’s financial position at 31 March
2019, cumulative financial performance in AMP6
and Medium Term Plan projections, which
remained compatible with investment grade
credit ratings. The Board also took into account
the principal risks facing the business; good
performance against most performance
commitments with no significant service failures
to customers; positive ongoing employee
engagement and payments made under the
schedule of contributions for the NWPS.
No dividends have been proposed, approved or
paid in respect of the year ended 31 March 2020.
In deciding this, the Board has taken into account
the impact of the PR19 FD on the financial
position of the Company over a five year time
horizon, especially in relation to the Company’s
credit ratings and regulatory gearing; the need to
retain financial resilience in order to be able to
deliver the Company’s Business Plan
commitments for stakeholders; and the
uncertainty associated with the impacts of the
Covid-19 pandemic on the Company’s future cash
flows.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
9. INTANGIBLE ASSETS
Cost:
At 1 April 2019
Additions
Transfers
At 31 March 2020
Amortisation:
At 1 April 2019
Charge for the year
At 31 March 2020
Carrying value:
At 31 March 2020
At 31 March 2019
FINANCIAL STATEMENTS 126
SOFTWARE
£’m
ASSETS IN
DEVELOPMENT
£’m
97.4
-
33.2
130.6
52.4
9.3
61.7
68.9
45.0
29.7
23.9
(31.9)
21.7
-
-
-
21.7
29.7
TOTAL
£’m
127.1
23.9
1.3
152.3
52.4
9.3
61.7
90.6
74.7
Cumulative borrowing costs capitalised in the cost of intangible assets amount to £5.2m (2019: £4.0m).
The capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation was
4.43% (2019: 4.30%).
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 127
10. PROPERTY, PLANT AND EQUIPMENT
FREEHOLD
LAND AND
BUILDINGS
£’m
INFRASTRUCTURE
ASSETS
OPERATIONAL
STRUCTURES,
PLANT AND
MACHINERY
£’m
£’m
FIXTURES,
FITTINGS,
TOOLS AND
EQUIPMENT
£’m
ASSETS IN THE
COURSE OF
CONSTRUCTION
£’m
TOTAL
£’m
Cost:
At 1 April 2019
158.0
2,877.7
3,044.5
223.4
223.3
6,526.9
Additions
Schemes
commissioned
Reclassifications
Disposals
At 31 March
2020
Depreciation:
At 1 April 2019
Charge for the
year
Disposals
At 31 March
2020
Carrying value:
At 31 March 2020
At 31 March 2019
3.6
2.4
-
-
13.2
81.7
-
(3.3)
0.3
125.7
(2.1)
(2.4)
-
6.7
0.8
-
239.4
256.5
(216.5)
-
-
-
(1.3)
(5.7)
164.0
2,969.3
3,166.0
230.9
246.2
6,776.4
63.3
4.0
-
67.3
96.7
94.7
407.8
1,416.0
187.5
28.9
(3.3)
93.5
(2.3)
7.6
-
433.4
1,507.2
195.1
-
-
-
-
2,074.6
134.0
(5.6)
2,203.0
2,535.9
1,658.8
2,469.9
1,628.5
35.8
35.9
246.2
4,573.4
223.3
4,452.3
Right of Use Assets included above:
Additions in
the year
Depreciation
charge for the
year
Carrying value at
31 March 2020
Carrying value at
31 March 2019
3.6
0.4
3.2
-
-
0.5
43.3
43.8
-
0.7
10.6
11.3
-
-
-
-
-
-
-
-
3.6
1.6
57.1
55.1
Operational structures, plant and machinery include an element of land dedicated to those assets. It is
not possible to separately identify the value of all land assets.
Cumulative borrowing costs capitalised in the cost of property, plant and equipment amount
to £55.5m (2019: £46.1m). The capitalisation rate used to determine the amount of borrowing costs
eligible for capitalisation was 4.43% (2019: 4.30%).
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 128
11. FINANCIAL INVESTMENTS
At 1 April 2019 and 31 March 2020
160.9
LOANS TO GROUP COMPANIES £’m
(a) Loans to Group Companies
In May 2004, the Company made a loan of
£159.0m to Northumbrian Services Limited,
maturing in January 2034. Following a
restructuring of the NWGL group, this loan was
reassigned to NWGL in March 2016 at a variable
interest rate of LIBOR plus 1% calculated on twice
yearly payment dates.
The Boards of NWL and NWGL have agreed to
settle this loan before its maturity date. It is
currently envisaged that this legacy
intercompany loan arrangement will be settled in
2020.
In May 2004, the Company made a loan of £1.5m
to Bakethin Holdings Limited, maturing in
January 2034. The interest on the loan is
capitalised and at 31 March 2020 the balance was
£1.9m (2019: £1.9m).
(b) Subsidiaries
The Company’s interests in subsidiaries at 31 March 2020 were as follows:
NAME OF UNDERTAKING
Northumbrian Water
Finance plc
COUNTRY OF
INCORPORATION OR
REGISTRATION AND
OPERATION
England and Wales
Reiver Finance Limited
England and Wales
Reiver Holdings Limited
England and Wales
DESCRIPTION OF
SHARES HELD
Ordinary shares
of £1
Ordinary shares
of £1
Ordinary shares
of £1
PROPORTION OF
NOMINAL VALUE OF
ISSUED SHARES HELD
BY COMPANY (%)
100
100
BUSINESS ACTIVITY
Holding of finance
instruments
Special purpose
financing vehicle
100
Holding company
The registered office of all subsidiaries listed
above is Northumbria House, Abbey Road, Pity
Me, Durham DH1 5FJ. Holdings are direct other
than Reiver Finance Limited which is indirect.
The Company also has two quasi-subsidiary
special purpose entities, Bakethin Holdings
Limited, which is wholly owned by Bakethin
Charitable Trust, and Bakethin Finance Plc,
which is a wholly owned subsidiary of Bakethin
Holdings Limited. The principal activity of
Bakethin Finance Plc is as a special purpose
financing vehicle.
The registered office of the two quasi-subsidiaries
is c/o Wilmington Trust SP Services (London)
Limited, Third Floor, 1 King’s Arms Yard, London,
United Kingdom, EC2R 7AF.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
12. INVENTORIES
Raw materials and consumables
13. TRADE AND OTHER RECEIVABLES
Trade receivables
Doubtful debt provision
Income tax recoverable
Amounts owed by other Group companies
Other receivables
Prepayments and accrued income
FINANCIAL STATEMENTS 129
2020 £’m
2019 £’m
4.2
3.6
2020 £’m
2019 £’m
205.2
(104.4)
11.2
2.9
15.7
113.8
244.4
170.2
(85.6)
-
2.9
5.7
89.7
182.9
Amounts owed by other Group companies includes interest of £0.1m (2019: £0.2m) in respect of the
financial investment of £159.0m in note 11(a). This loan has a variable interest rate of LIBOR plus 1%
calculated on twice yearly payment dates and matures in January 2034. The remaining amounts
owed by other Group companies include £2.4m due from NWG and £0.4m due from fellow subsidiary
companies, which are due on demand with no fixed repayment date and bear no interest.
14. TRADE AND OTHER PAYABLES
Trade payables
Amounts owed to other Group companies
Taxation and social security
Income tax payable
Other payables
Accruals and deferred income
2020 £’m
2019 £’m
29.1
7.4
3.1
-
33.5
96.9
170.0
26.1
11.4
3.5
7.1
34.2
95.4
177.7
Included in amounts owed to other Group companies is £5.9m (2019: £9.7m) payable in respect of tax
losses surrendered to the Company. The remaining amount of £1.5m is owed to NWG and is due on
demand with no fixed repayment date and bears no interest.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
15. LOANS AND BORROWINGS
Current:
Bank overdrafts
Current instalments due on external borrowings
Current instalments due on leases
Non-current:
Non-current instalments due on external borrowings
Non-current instalments due on internal borrowings
Non-current instalments due on leases
(a) External borrowings
Loans wholly repayable within five years amount to
£18.6m (2019: £38.6m).
Loans not wholly repayable within five years amount
to £520.2m (2019: £538.5m) and bear interest rates in
the range 1.47% to 5.35%.
The fair value loss on the Company’s outstanding
interest rate and RPI swaps in the year to 31 March
2020 was £2.9m (2019: loss of £12.6m) in relation to
interest rate swaps with a notional principal of
£350.0m (2019: £350.0m).
(b) Internal borrowings
NWF issued £200m and £150m Guaranteed
Eurobonds in February 1998 and September 2001
respectively, maturing February 2023, with an annual
coupon of 6.875%. The issues were guaranteed by the
Company who received the issue proceeds by way of
inter-company loans of £194.2m and £163.2m
respectively. Finance costs allocated during the year
amounted to £0.2m (2019: £0.2m). Amortisation of
loan issue receipts during the year amounted to
£0.3m (2019: £0.3m).
NWF issued £250m and £100m Guaranteed
Eurobonds in December 2002 and December 2004,
maturing April 2033 with an annual coupon of 5.625%.
Both issues were guaranteed by the Company who
received the issue proceeds by way of inter-company
loans of £246.6m and £100.8m respectively. Finance
costs allocated during the year amounted to £0.2m
(2019: £0.2m).
NWF issued £150m Guaranteed Index Linked
Eurobonds in September 2005, maturing July 2036,
with a real coupon of 2.033%. The issue was
guaranteed by the Company who received the issue
proceeds by way of an inter-company loan of £149.1m.
Indexation accretion during the year amounted to
£6.2m (2019: £7.0m). Finance costs allocated during
the year amounted to £0.2m (2019: £0.2m)
FINANCIAL STATEMENTS 130
NOTE
2020 £’m
2019 £’m
15(a)
16
15(a)
15(b)
16
-
36.9
4.4
41.3
501.9
2,355.5
58.6
2,916.0
0.5
46.7
4.0
51.2
530.4
2,237.0
56.9
2,824.3
NWF issued £60m Guaranteed Index Linked
Eurobonds in January 2006, maturing January 2041,
with a real coupon of 1.6274%. The issue was
guaranteed by the Company who received the issue
proceeds by way of an inter-company loan of
£60.0m. Indexation accretion during the year
amounted to £2.4m (2019: £2.7m).
NWF issued two £100m Guaranteed Index Linked
Eurobonds in June 2006 with real coupons of
1.7118% and 1.7484% and with maturities of 2049 and
2053 respectively. Both issues were guaranteed by
the Company who received the issue proceeds by
way of two inter-company loans of £100.0m.
Indexation accretion during the year amounted to
£8.1m (2019: £9.1m).
NWF issued £360m Guaranteed Eurobonds in
January 2012, maturing January 2042, with an
annual coupon of 5.125%. The issue was guaranteed
by the Company who received the issue proceeds
by way of an inter-company loan of £339.3m.
Finance costs allocated during the year amounted
to £0.7m (2019: £0.7m).
NWF issued £300m Guaranteed Eurobonds in
October 2016, maturing October 2026, with an
annual coupon of 1.625%. The issue was guaranteed
by the Company who received the issue proceeds
by way of an inter-company loan of £297.6m.
Finance costs allocated during the year amounted
to £0.2m (2019: £0.2m).
NWF issued £300m Guaranteed Eurobonds in
October 2017, maturing October 2027, with an
annual coupon of 2.375%. The issue was guaranteed
by the Company who received the issue proceeds
by way of an inter-company loan of £298.2m.
Finance costs allocated during the year amounted
to £0.3m (2019: £0.3m).
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 131
15. LOANS AND BORROWINGS (continued)
NWF issued £100m Guaranteed Index Linked Private Placement notes in October 2019 with a coupon of
CPI plus 0.242%, maturing October 2039. The issue was guaranteed by the Company who received the
issue proceeds by way of an inter-company loan of £99.6m. Indexation accretion during the year
amounted to £0.5m.
16. LEASES
(a) Lease obligations under IFRS 16
At 1 April 2019, the Company adopted IFRS 16 and
has applied the standard retrospectively with the
cumulative effect recognised at the date of initial
application (note 1(r)). Prior years have not been
restated.
The Company holds leases in respect of land and
buildings, and to acquire plant, machinery and
motor vehicles.
Land and building rent reviews are triggered by
the lessor and typically take place every 3 to 5
years, at which point there may be an increase in
rental payments. There are no purchase options
or escalation clauses in respect of these leases
and the terms of renewal are governed by
Landlord and Tenant legislation. There are no
restrictions imposed by these lease
arrangements. There are no contingent rents,
escalation clauses or material renewal or
purchase options. The leases impose no
restrictions in respect of dividends or raising
additional debt. The obligations are as follows:
MATURITY ANALYSIS:
2020 £’m
Year 1
Year 2
Year 3
Year 4
Year 5
Onwards
4.4
3.7
3.0
2.2
1.5
48.2
63.0
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 132
16. LEASES (continued)
(b) Finance lease and operating lease commitments under IAS 17
Leases previously classified as finance leases under IAS 17:
Future minimum lease payments due:
Within one year
In the second to fifth years inclusive
After five years
Less:
Finance charge allocated to future periods
Present value of minimum lease payments
Present value of minimum lease payments:
Within one year
In the second to fifth years inclusive
After five years
Leases previously classified as operating leases under IAS 17:
The future minimum rentals payable under non-cancellable operating leases:
Not later than one year
After one year but not more than five years
After five years
2019 £’m
6.0
18.9
70.9
95.8
(34.9)
60.9
4.0
10.6
46.3
60.9
2019 £’m
0.5
1.0
11.1
12.6
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 133
£’m
1.1
(0.1)
1.0
0.1
0.9
1.0
It is not currently possible to estimate the
financial effect and likely timing of any
associated outflow of some matters, given that
some are in early stages of discussion, the limited
likelihood of the claims against the Company
being successful, or the potential range of
possible outcomes, and accordingly no provision
has been made in the Financial Statements. No
reasonably possible financial outcome that would
be significant to the Financial Statements has
been identified in relation to these remaining
matters at the date of the issue of these Financial
Statements.
17. PROVISIONS
Pension provision for former employees:
At 1 April 2019
Utilised during the year
At 31 March 2020
Analysed as:
Current
Non-current
The provision mainly represents outstanding
pension liabilities for pensions that have been
awarded on a discretionary basis, mainly to
former employees of water companies which
have since merged with the Company. These
pension liabilities have been calculated by an
independent actuary, using the same actuarial
assumptions as applied to the defined benefit
pension scheme, and are expected to be paid
over the remaining lives, which is approximately
three years.
In the ordinary course of business, the Company
is sometimes subject to claims and potential
litigation, whether from regulatory bodies,
individuals or particular groups, related to one off
matters. The Directors consider that, where it is
possible to be estimated, a reasonable and
appropriate position has been taken in reflecting
such items in these financial statements in note
14 and the note above.
18. GRANTS AND DEFERRED INCOME
At 1 April 2019
Additions
Amortised during the year
At 31 March 2020
CAPITAL GRANTS AND
CONTRIBUTIONS
£’m
PROCEEDS FROM KIELDER
SECURITISATION
£’m
383.6
28.4
(5.5)
406.5
106.7
-
(7.1)
99.6
TOTAL
£’m
490.3
28.4
(12.6)
506.1
The Kielder securitisation involved the assignment of the right to the future income stream associated
with the Kielder WROA until 2034 to Reiver Finance Limited, a subsidiary company, in return for
consideration of £212.1m. This capital sum is amortised to the income statement of the Company over
the life of the assignment.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 134
19. FINANCIAL INSTRUMENTS
Financial liabilities / (assets) that are designated and effective as hedging instruments carried at fair value:
2020 £’m
2019 £’m
Interest rate swaps
Power forward contracts
Foreign exchange contracts
Financial liabilities / (assets) carried at fair value through profit and loss:
Interest rate swaps
Power forward contracts
13.2
-
(0.1)
31.0
-
44.1
10.9
1.3
(0.3)
30.4
(0.1)
42.2
At 31 March 2020, the Company held the following interest rate swaps, designated as hedges of future
interest cash flows, used to convert variable rate interest payments to a fixed rate basis:
NOTIONAL AMOUNT
START DATE
TERMINATION DATE
INDEX LINKED RATE
£100.0m
£150.0m
15 September 2008
15 March 2022
15 October 2015
15 October 2025
4.79%
2.36%
At 31 March 2020, the Company held the following interest rate swaps, designated as hedges of future
interest cash flows, used to convert fixed rate interest payments to an index linked rate basis:
NOTIONAL AMOUNT
START DATE
TERMINATION DATE
INDEX LINKED RATE
£150.0m
£100.0m
15 October 2015
15 October 2025
22 June 2017
22 June 2027
(0.42%)
(1.10%)
At 31 March 2020, the Company held the following forward exchange contracts, designated as hedges
of expected future purchases for which the Company has firm commitments. The forward currency
contracts are being used to hedge the foreign currency risk of the firm commitments. The terms of
these contracts are as follows:
CURRENCY BOUGHT
MATURITY
EXCHANGE RATE
TRANSACTION VALUE £’m
EUR 2,980
USD 1,245,000
USD 1,240,404
9 April 2020
17 April 2020
30 April 2020
1.0932
1.2620
1.4293
-
1.0
0.8
1.8
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 135
19. FINANCIAL INSTRUMENTS (continued)
At 31 March 2019, the Company held the following forward exchange contracts, designated as hedges
of expected future purchases for which the Company has firm commitments. The forward currency
contracts are being used to hedge the foreign currency risk of the firm commitments. The terms of
these contracts are as follows:
CURRENCY BOUGHT
MATURITY
EXCHANGE RATE
TRANSACTION VALUE £’m
USD 1,245,000
USD 1,112,000
USD 1,245,000
USD 1,240,404
USD 1,240,404
4 April 2019
31 May 2019
13 March 2020
30 April 2019
30 April 2020
1.4550
1.2645
1.4600
1.4069
1.4293
0.9
0.9
0.8
0.9
0.8
4.3
20. SHARE CAPITAL
Authorised:
122,650,000 Ordinary Shares of £1 each (31 March 2019:
122,650,000)
Allotted, called-up and fully paid:
122,650,000 Ordinary Shares of £1 each (31 March 2019:
122,650,000)
NWL is a company limited by shares.
2020 £’m
2019 £’m
122.7
122.7
122.7
122.7
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
STRATEGIC REPORT 136
21. ADDITIONAL CASH FLOW INFORMATION
Analysis of net debt as at 31 March 2020
Cash and cash equivalents
Loans receivable
Short term cash deposits
Loans payable
Leases
NOTE
11
15
16(a)
AT 1 APRIL
2019
£’m
CASH FLOW
£’m
OTHER
NON-CASH
MOVEMENTS
£’m
AT
31 MARCH
2020
£’m
(0.5)
160.9
5.0
(2,814.1)
(60.9)
(2,709.6)
5.2
-
22.0
(53.4)
4.3
(21.9)
-
-
-
(26.8)
(6.4)
(33.2)
4.7
160.9
27.0
(2,894.3)
(63.0)
(2,764.7)
Analysis of net debt as at 31 March 2019
Cash and cash equivalents
Loans receivable
Short term cash deposits
Loans payable
Finance leases
AT 1 APRIL
2018
£’m
CASH FLOW
£’m
OTHER
NON-CASH
MOVEMENTS
£’m
AT
31 MARCH
2019
£’m
NOTE
11
2.2
160.9
92.0
15
(2,810.1)
16(b)
(59.5)
(2,614.5)
(2.7)
-
(87.0)
27.5
3.4
(58.8)
-
-
-
(31.5)
(4.8)
(36.3)
(0.5)
160.9
5.0
(2,814.1)
(60.9)
(2,709.6)
22. FINANCIAL COMMITMENTS
(a) Capital commitments
Contractual commitments for the acquisition of property, plant
and equipment and intangible assets
2020 £’m
2019 £’m
120.2
145.3
In addition to these commitments, the Company
has longer term expenditure plans, including
investment to deliver business outcomes,
maintain the health of the asset base and provide
for new demand and growth in the regulated part
of the business.
(b) Foreign currency commitments
At 31 March 2020 the Company held forward
foreign exchange contracts of £1.8m (2019: £4.3m)
for the purpose of hedging the foreign currency
risk of committed future purchases.
(c) Power purchase agreement
In 2018/19 the Company signed a power purchase
agreement with Ørsted, to purchase renewable
energy from an offshore wind farm which will
meet around 25% of the Company’s energy
demand. The agreement is for a 10 year term at a
fixed commodity price, increasing annually by
CPI. The Company has concluded that the ‘own
use exception’ applies, meaning that the power
purchase agreement contract is not within the
scope of IFRS 9 and therefore no further
disclosures are necessary.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 137
Employers’ contributions (including associated
company contributions) of £30.0m were paid in
the year to 31 March 2020, of which £12.2m related
to deficit reduction. For the year to 31 March 2021
employers contributions are projected to be
£29.9m, including £12.5m in respect of deficit
reduction.
Since 1 June 2019, the Company has participated
in the LifeSight master trust, a defined
contribution pension arrangement for non-
associated employers. Prior to 1 June 2019, the
Company contributed to the defined contribution
section of the NWPS. Defined contribution
members and assets were transferred from the
NWPS to LifeSight during 2019. There were 1,989
active members in defined contribution pension
arrangements at 31 March 2020 (2019: 1,957).
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
defined contribution pension arrangements by
the Company in the year totalled £6.7m (2019:
£6.0m).
The additional disclosures regarding the defined
benefit scheme as required under FRS 101 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 FRS 101 has updated the actuarial
valuation described above as at 31 March 2020.
Investments have been valued, for this purpose, at
fair value.
23. PENSIONS
NWL participates in the Group defined benefit
pension scheme, NWPS, providing benefits to 1,117
active members at 31 March 2020 (2019: 1,200).
The assets of the NWPS are held separately from
those of the Group in independently administered
funds.
The most recent actuarial valuation of the NWPS
was at 31 December 2016. At that date, the value of
assets amounted to £954.6m and the liabilities
were £1,245.2m, resulting in a deficit of £290.6m
and a funding level of 76.7%. The next actuarial
valuation has commenced and will be dated as at
31 December 2019.
Under the revised schedule of contributions the
future service contribution rate, jointly payable by
members and the employers, remained at 29.4%
of pensionable salaries until 31 December 2017.
With effect from 1 January 2018, the employers’
contribution was set at £12.3m per annum,
increasing annually by RPI. Employee
contribution rates remained at between 6% and
8% of pensionable salary, dependent upon which
section of the Scheme the employee is a member
of. The Company operates a salary sacrifice
scheme under which members can elect for the
Company to pay employee contributions on their
behalf in place of salary. The Company will
continue to pay the employer NI savings resulting
from the salary sacrifice arrangement as
additional employer contributions to the Scheme.
In addition, the employers continue to make
deficit reduction payments of £11m per annum,
with effect from 1 April 2015, increasing annually
by RPI. Deficit reduction payments will increase
by £2.6m per annum with effect from 1 April 2021.
The deficit reduction payments have been set
with the objective of removing the deficit by 31
March 2031, which has been the Company’s
long-term aim.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
23. PENSIONS (continued)
FRS 101 ACTUARIAL ASSUMPTIONS:
Discount rate
Pay increases1
Price inflation (RPI)
Price inflation (CPI)
Pension increases linked to RPI
Pension increases linked to CPI
Mortality assumptions2
- Life expectancy for a member aged 65 - female (years)
- Life expectancy for a member aged 65 - male (years)
FINANCIAL STATEMENTS 138
2020
2.35%
3.00%
2.50%
2.00%
2.50%
2.00%
24.2
22.4
2019
2.40%
3.15%
3.15%
2.05%
3.15%
2.05%
23.8
22.0
1. including promotional salary scale
2. scheme specific bespoke ‘Vitacurves’ which reflect the characteristics of the Scheme membership
The fair value of the assets in the NWPS and the present value of the liabilities in the Scheme are
shown below:
2020 £’m
2019 £’m
Equities
Corporate bonds
Government bonds
Property related funds
Cash
Other
Total fair value of assets
Present value of liabilities
Deficit
218.4
100.0
483.6
47.8
19.5
151.3
1,020.6
(1,104.7)
(84.1)
293.1
47.0
466.5
56.6
15.4
152.2
1,030.8
(1,139.3)
(108.5)
The amounts recognised in the income statement and in the statement of comprehensive income are
analysed as follows:
RECOGNISED IN THE INCOME STATEMENT:
2020 £’m
2019 £’m
Current service cost
Administration cost
Past service cost
Recognised in operating costs in arriving at operating profit
16.4
2.3
1.5
20.2
15.6
1.9
1.2
18.7
RECOGNISED IN THE INCOME STATEMENT:
2020 £’m
2019 £’m
Net interest cost on plan obligations
Recognised in finance costs
2.3
2.3
2.2
2.2
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 139
23. PENSIONS (continued)
RECOGNISED IN THE STATEMENT OF COMPREHENSIVE INCOME:
2020 £’m
2019 £’m
Changes in demographic assumptions
Changes in financial assumptions
Return on assets (excluding amounts included in finance costs)
Other actuarial gains / (losses)
Net actuarial gains / (losses)
Contributions made by associated company
Net actuarial gains / (losses)
_
26.2
(12.9)
3.6
16.9
0.1
17.0
21.5
(81.4)
40.0
(0.9)
(20.8)
0.2
(20.6)
Changes in the present value of the defined pension obligations are analysed as follows:
At start of period
Current service cost
Administration cost
Past service cost
Interest cost
Contributions by plan participants
Benefits paid
Remeasurement:
Changes in demographic assumptions
Changes in financial assumptions
Other actuarial (gains) / losses
2020 £’m
1,139.3
2019 £’m
1,083.6
16.4
2.3
1.5
26.8
0.1
(51.9)
_
(26.2)
(3.6)
15.6
1.9
1.2
28.1
0.1
(52.0)
(21.5)
81.4
0.9
At end of period
1,104.7
1,139.3
Changes in the fair value of plan assets are analysed as follows:
At start of period
Interest income on scheme assets
Contributions by employers (including associated company)
Contributions by plan participants
Benefits paid
Return on assets (excluding amounts included in finance costs)
2020 £’m
1,030.8
24.5
30.0
0.1
(51.9)
(12.9)
2019 £’m
989.3
25.9
27.5
0.1
(52.0)
40.0
At end of period
1,020.6
1,030.8
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
23. PENSIONS (continued)
Nature of benefits, regulatory framework and
other entity’s responsibilities for governance of
the Scheme
The Scheme is a registered defined benefit
scheme subject to the UK regulatory framework
for pensions, including the scheme specific
funding requirements. The Scheme is operated
under trust and as such, the Trustee of the
Scheme is responsible for operating the Scheme
and it has a statutory responsibility to act in
accordance with the Scheme’s Trust Deed and
Rules, in the best interest of the beneficiaries of
the Scheme, and UK legislation (including Trust
law). The Trustee has the power to set the
contributions that are paid to the Scheme.
Risks to which the Scheme exposes the Company
The nature of the Scheme exposes the Company
to the risk of paying unanticipated additional
contributions to the Scheme in times of adverse
experience. The most financially significant risks
are likely to be:
• members living for longer than expected;
• higher than expected actual inflation and
salary increase experience;
•
lower than expected investment returns; and
• the risk that movements in the value of the
Scheme’s liabilities are not met by
corresponding movements in the value of the
Scheme’s assets.
Asset-liability matching strategies used by the
Scheme or the Company
The Scheme does not currently use any asset-
liability matching strategies. The Trustee’s
current investment strategy, having consulted
FINANCIAL STATEMENTS 140
with the Company, is to invest the majority of the
Scheme’s assets in a mix of equities and
corporate and government bonds, in order to
strike a balance between:
• maximising the returns on the Scheme’s assets;
and
• minimising the risks associated with lower
than expected returns on the Scheme’s assets.
The Trustee is required to regularly review its
investment strategy in light of the revised term
and nature of the Scheme’s liabilities. During the
year, the Trustee chose to de-risk part of its
equity allocation.
Sensitivity to key assumptions
The costs of a pension arrangement require
estimates regarding future experience. The
financial assumptions used for FRS 101 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.
There has been no change in the methodology
used to assess the impact of changes in
assumptions. Approximate adjustments were
made to the defined benefit obligations reflecting
the mean term of the liability.
Impact of changes in assumptions compared with actuarial assumption for the NWPS:
Actuarial value of liabilities on 31 March 2020:
0.25% reduction in discount rate
0.25% increase in inflation
1 year increase in life expectancy
£’m
1,155.5
1,151.4
1,143.4
Maturity profile of the defined benefit obligation for the year ended 31 March 2020:
NUMBER OF MEMBERS
LIABILITY SPLIT (%)
DURATION (YEARS)
Active members
Deferred members
Pensioners
1,404
1,193
3,163
41
14
45
24
21
12
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 141
25. ULTIMATE PARENT
UNDERTAKING AND CONTROLLING
PARTY
The Company’s immediate parent undertaking is
NWGL, which is incorporated in England
and Wales.
The Company has been informed by the former
ultimate parent and controlling party, CKHH
(incorporated in the Cayman Islands) that by
virtue of contractual arrangements entered into
with other parties, with effect from 30 December
2019, it ceased to have a controlling interest in
the Company and, as required by the applicable
accounting standards, it has ceased accounting
for the Company as a subsidiary from that date.
The results of the Company prior to 30 December
2019 are consolidated in the financial statements
of CKHH. The Directors of the Company consider
that CKHH was the ultimate parent and
controlling party of the Company prior to 30
December 2019.
The Directors of the Company consider that, with
effect from 30 December 2019, NWGL has become
the ultimate controlling party of the Company.
The parent undertaking of both the largest and
smallest group of undertakings for which group
Financial Statements are drawn up, and of which
the reporting company is a member, is NWGL.
Copies of NWGL’s group Financial Statements will
be available in due course from its registered
office at Northumbria House, Abbey Road, Pity
Me, Durham DH1 5FJ.
24. RELATED PARTY DISCLOSURES
The Company is a wholly owned subsidiary of
NWGL, whose publicly available consolidated
Financial Statements include the Company.
Accordingly, the Company is exempt under the
terms of FRS101 from disclosing transactions
with other members of the Group headed by
NWGL.
Transactions with related parties outside of the
NWGL group comprised purchases of £13.7m
(2019: £11.4m) and sales of £150.3m (2019: £158.1m).
As at 31 March 2020 £17.9m (2019: £26.8m) is
owed from these companies in respect of sales or
rebates, and £nil (2019: £0.2m) is owed to these
companies in respect of purchases.
The Company acquires vehicles from Vehicle
Lease and Service Limited, an associated
company, on a lease basis. During the year, new
leases of £3.3m (2019: £4.8m) were entered into
and capital repayments of £3.7m (2019: £3.4m)
were made. The year end lease creditor was
£11.6m (2019: £12.0m).
The companies with which NWL had
transactions during the year, included in the
above balances, were as follows:
• Anglian Water Business (National) Limited;
• CKI;
• Eastern Power Networks;
• Hutchison Whampoa (Europe) Limited;
• NGN;
• NWG Business;
• UK Power Networks (Operations) Limited; and
• Vehicle Lease and Service Limited.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 142
INDEPENDENT AUDITOR’S
REPORT TO THE MEMBERS
OF NORTHUMBRIAN WATER
LIMITED
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS
OPINION
In our opinion the Financial Statements of NWL:
• give a true and fair view of the state of the
company’s affairs as at 31 March 2020 and of its
profit for the year then ended;
The financial reporting framework that has been
applied in their preparation is applicable law and
United Kingdom Accounting Standards including
FRS 101 “Reduced Disclosure Framework” (United
Kingdom Generally Accepted Accounting
Practice).
• have been properly prepared in accordance
with United Kingdom Generally Accepted
Accounting Practice including Financial
Reporting Standard 101 “Reduced Disclosure
Framework”; and
• have been prepared in accordance with the
requirements of the Companies Act 2006.
• We have audited the financial statements
which comprise:
• the income statement;
• the statement of comprehensive income;
• the balance sheet;
• the statement of changes in equity; and
• the related notes 1 to 25.
BASIS FOR OPINION
We conducted our audit in accordance with
International Standards on Auditing (UK) (ISAs
(UK)) and applicable law. Our responsibilities
under those standards are further described in
the auditor’s responsibilities for the audit of the
financial statements section of our report.
We are independent of the company in
accordance with the ethical requirements that
are relevant to our audit of the financial
statements in the UK, including the FRC’s Ethical
Standard, and we have fulfilled our other ethical
responsibilities in accordance with these
requirements.
We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a
basis for our opinion.
SUMMARY OF OUR AUDIT APPROACH
KEY AUDIT
MATTERS
The key audit matters that we identified in the current year were:
• Classification of capex, opex and capitalised overheads;
• Provision for bad and doubtful debts;
• Revenue recognition (valuation of unbilled revenue accrual);and
• Going concern and impact of Covid-19.
Within this report, key audit matters are identified as follows: Newly identified
Increased level of risk Similar level of risk Decreased level of risk
MATERIALITY
The materiality that we used in the current year was £9.1m which was determined on the basis
of profit before tax adjusted for movements in certain derivatives charged to the income
statement in the year.
SCOPING
Audit work to respond to the risks of material misstatement was performed directly by the audit
engagement team.
SIGNIFICANT
CHANGES IN
OUR APPROACH
Changes in our approach were limited to adding a new key audit matter in relation to the going
concern assumption. This is due to the Covid-19 pandemic that has had a significant impact on
the UK and a number of countries throughout the world.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
CONCLUSIONS RELATING TO GOING CONCERN, PRINCIPAL RISKS AND
VIABILITY STATEMENT
FINANCIAL STATEMENTS 143
GOING
CONCERN
PRINCIPAL
RISKS AND
VIABILITY
STATEMENT
Going concern is
the basis of
preparation of the
financial
statements that
assumes an entity
will remain in
operation for a
period of at least
12 months from
the date of
approval of the
financial
statements.
We confirm that we
have nothing
material to report,
add or draw
attention to in
respect of these
matters.
Viability means the
ability of the
company to
continue over the
time horizon
considered
appropriate by the
directors.
We confirm that we
have nothing
material to report,
add or draw
attention to in
respect of these
matters.
We have reviewed the directors’ statement in note 1 to the financial
statements about whether they considered it appropriate to adopt the
going concern basis of accounting in preparing them and their
identification of any material uncertainties to the company’s ability to
continue to do so over a period of at least twelve months from the
date of approval of the financial statements.
We considered as part of our risk assessment the nature of the
company, its business model and related risks including where
relevant the impact of the Covid-19 pandemic and Brexit, the
requirements of the applicable financial reporting framework and the
system of internal control. We evaluated the directors’ assessment of
the company’s ability to continue as a going concern, including
challenging the underlying data and key assumptions used to make
the assessment, and evaluated the directors’ plans for future actions
in relation to their going concern assessment.
We state whether we have anything material to add or draw attention
to in relation to that statement that would be required by Listing Rule
9.8.6R(3) if the company had a premium listing and report if the
statement is materially inconsistent with our knowledge obtained in
the audit.
Based solely on reading the directors’ statements and considering
whether they were consistent with the knowledge we obtained in the
course of the audit, including the knowledge obtained in the
evaluation of the directors’ assessment of the company’s ability to
continue as a going concern, we are required to state whether we
have anything material to add or draw attention to in relation to:
• the disclosures on pages 57 to 63 that describe the principal risks,
procedures to identify emerging risks, and an explanation of how
these are being managed or mitigated;
• the directors’ confirmation on page 57 that they have carried out a
robust assessment of the principal and emerging risks facing the
company, including those that would threaten its business model,
future performance, solvency or liquidity; or
• the directors’ explanation on pages 102 and 103 as to how they
have assessed the prospects of the company, over what period they
have done so and why they consider that period to be appropriate,
and their statement as to whether they have a reasonable
expectation that the company will be able to continue in operation
and meet its liabilities as they fall due over the period of their
assessment, including any related disclosures drawing attention to
any necessary qualifications or assumptions.
We also report whether the directors’ statement relating to the
prospects of the company that would be required by Listing Rule
9.8.6R(3) if the company had a premium listing is materially
inconsistent with our knowledge obtained in the audit.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 144
KEY AUDIT MATTERS
Key audit matters are those matters that, in our
professional judgement, were of most
significance in our audit of the financial
statements of the current period and include the
most significant assessed risks of material
misstatement (whether or not due to fraud) that
we identified. These matters included those
which had the greatest effect on: the overall audit
strategy, the allocation of resources in the audit;
and directing the efforts of the engagement team.
These matters were addressed in the context of
our audit of the financial statements as a whole,
and in forming our opinion thereon, and we do
not provide a separate opinion on these matters.
CLASSIFICATION OF CAPEX, OPEX AND CAPITALISED OVERHEADS
Key audit matter
description
The water industry is capital intensive and pipeline assets require regular maintenance
and upgrades. There is an inherent risk in the industry that costs included in property,
plant and equipment are not capital in nature and/or are not in line with the
capitalisation criteria of IAS 16.
Annual capital expenditure across PPE and intangibles spend was £280.4m for the
year ended 31 March 2020 (2019: £269.6m), together with significant spend on
maintenance costs.
The classification of expenditure on capital assets also includes the allocation of
overheads to capitalised amounts, which is judgemental in nature and the amount
capitalised as intangibles. Given the level of capital expenditure forecast by the
company and the prior year adjustment in relation to intangible assets being classified
to PPE, it is important that appropriate policies are agreed in advance and adhered to.
The capitalised labour costs were £43.7m for the year to 31 March 2020 (2019:
£41.0m).
Given the value involved in fixed asset additions, there being a degree of complexity in
what can be capitalised and the allocation to either intangible or tangible assets, we
deemed this as a potential fraud risk for our audit.
Further details are included within the Strategic Report on page 55 and also notes 1(d),
9 and 10 to the financial statements.
How the scope of our
audit responded to the
key audit matter
• We obtained an understanding of management’s relevant controls over the
processing of accounting entries associated with capital and operating expenditure;
• We reviewed the appropriateness of the Company’s capitalisation policies and its
approach to determining which costs should be capitalised and which expensed;
• We compared the actual capitalised expenditure incurred in the period with
regulatory targets and make enquiries of management to understand any under/over
spend;
• We performed substantive testing on both capitalised and expensed amounts to
assess whether these are classified in accordance with the company’s policies and
IAS 16;
• We continued to challenge and understand the levels of capitalisation by comparing
amounts capitalised by department in the current and prior years;
• We performed testing over the completeness of intangibles and additions to this
balance given the prior year error noted in 2019;
• We tested a sample of capitalised overheads by agreeing to timesheets and project
plans to assess whether capitalisation was appropriate and there is consistent
application of the policy year on year; and
• We assessed whether any there are impairment indicators or underutilised assets
exist which would require an impairment to be recognised.
Key observations
The results of our procedures were satisfactory. We concluded that the classification of
capex, opex and capitalised overheads are appropriate.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
PROVISION FOR BAD AND DOUBTFUL DEBTS
FINANCIAL STATEMENTS 145
Key audit matter
description
How the scope of our
audit responded to the
key audit matter
As stated in the critical accounting judgements and key sources of estimation
uncertainty in note 1(o) of the Annual Report, the value of the bad debt provision is
calculated by applying a range of percentages to debt of different ages with higher
percentages applied to different categories of debt depending on an assessment of the
level of risk of default. There is a significant customer base, and regulations do not
allow NWL to interrupt water supply to domestic customers. The valuation of the bad
debt provision is sensitive to the specific percentages applied which are judgemental.
At 31 March 2020 the bad debt provision was £101.8m104.4m (2019: £85.6m) and is
therefore a significant balance. Of this £101.8m104.4m, we note an increase of £6.5m
in the current year due to Covid-19 and expected bad debts as a result.
The provision is based on assumptions made on the forecast and historic collectability
of debts across both invoiced amounts and accrued revenues. There is a significant
customer base and regulations do not allow NWL to interrupt water supply to domestic
customers. The provision for bad and doubtful debts is significantly large and subject
to high amount of management judgement and hence we have considered this to be a
key audit matter.
Due to the complexity in calculating the provision, particularly in the current year with
the additional considerations around Covid-19, we deemed this as a potential fraud
risk for our audit.
Further details are included within the financial performance section of the Strategic
Report, note 1(o) and 13 to the financial statements.
• We obtained an understanding of management’s relevant controls surrounding the
estimate;
• We compared the assumptions made by management in calculating the provision to
evidence provided from historical collection data;
• We tested any bad debt write offs and utilisation of the provision during the year;
• We tested the accuracy of the aged debtor balance and the ageing categories
applied;
• We assessed the reasonableness of any judgements made in respect of likely future
events, including the effects of Covid-19 on debt collectability;
• We tested a sample of credit notes raised to determine whether any were as a result
of an event known but not appropriately provided for;
• We tested a sample of bills included within the bad debt provision to assess the
accuracy of the provision and ageing profile;
• We compared current and prior year bad debt provision balances to assess
completeness;
• We challenged managements assumptions relating to amounts provided in response
to Covid-19, referencing external market information where appropriate;
• We performed sensitivity analysis on the provision to assess the impact of changes
in the cash collection rate; and
• We reviewed the receivables ageing report to help assess whether overdue debtors
are appropriately provided for.
Key observations
The results of our procedures were satisfactory. We have concluded that
management’s judgements are appropriate, including the additional £6.5m provision
made during the year for Covid-19, and that the provision for bad and doubtful debts
was appropriately stated.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 146
REVENUE RECOGNITION (VALUATION OF UNBILLED REVENUE ACCRUAL)
Key audit matter
description
The nature of NWL’s business is such that it is not possible to read all water meters at
year-end. An estimate is therefore made of the unbilled revenue at the year-end. At 31
March 2020 this measured income accrual was £110.3m (2019: £85.8m).
Management estimates the amount of water and sewerage services that have been
supplied to customers and not billed at year end, based on historic water consumption
and default consumption rates. The revenue attributable to this unbilled revenue at
year end is accrued. The accrual is both material and judgemental and is therefore
considered to be a key audit matter.
Towards year-end management were unable to physically visit customers’ houses due
to the UK-wide lockdown and so fewer meter readings were taken than in a normal
year. The result of this has been a decrease in meter readings of 53,337 in the year,
taking the percentage of unread metres in the year from 13% to 40% which has
increased management judgement and estimation included within the balance as at 31
March 2020 compared to previous periods.
Given the value of the accrual, the quantum of data and the level of estimation involved
in calculating it, we deemed this as a potential fraud risk for our audit.
Further details are included within notes 1(b), 2 and 13 to the financial statements.
• We obtained an understanding of management’s relevant controls over the unbilled
revenue accrual;
• We performed substantive testing of the accrued revenue calculation and make an
assessment of the appropriateness of accounting estimates made by management;
• We re-performed management’s retrospective review on the March 2019 balance;
• We reviewed the accrued revenue balance for any potential recoverability issues by
tracing a sample to subsequent bill and cash payment; and
• We performed substantive analytical procedures on the year-end balance by forming
an expectation compared to the prior year.
How the scope of our
audit responded to the
key audit matter
Key observations
The results of our procedures were satisfactory. We concluded that the valuation of the
unbilled revenue accrual is appropriate and concurred with management on the
judgements adopted.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 147
GOING CONCERN AND IMPACT OF COVID-19
Key audit matter
description
During the year there has been the emergence of a global pandemic of a new strain of
Coronavirus. The virus, and responses taken by organisations and governments to
manage its spread in markets to which the company is exposed have led to increased
volatility and economic disruption.
Management have ensured that the measurement of assets and liabilities reflects only the
conditions that existed at the reporting date and as part of their going concern review
have performed procedures to assess the financial and operational impacts of Covid-19,
including:
• An assessment of operational resilience of NWL, challenging internal control and
governance, critical business functions ensuring ongoing water supply is maintained
throughout the crisis;
• An assessment of certain key sources of estimation uncertainty and critical judgements
such as the bad debt provision as discussed above;
• Considerations of solvency and liquidity projections, including an assessment of the
effects on short term and long term cash flow.
In order to fully assess the above, management have made a number of judgements and
considered a range of factors. Management have also ran an extensive series of
sensitivity analyses, taking into account a number of outcomes and the potential
responses to these. Management have placed particular focus on the credit ratings and
regulatory gearing, as these are relevant to assessing the covenants in the group’s
financing arrangements.
From the considerations undertaken, management believes that the company continues
to be a going concern due to having robust plans in place to manage liquidity in the short
and longer term as well as the stable solvency position of the wider Northumbrian Water
Group.
Management has made disclosures throughout the annual report and financial statements
to reflect the results of its assessment, in line with applicable accounting standards, the
company law and corporate governance code provisions. Due to the inherent
management judgement in the financial statement disclosures, particularly those relating
to going concern, and the increased level of audit effort, we considered these to be a key
audit matter. Further details are included in note 1a of the financial statements.
How the scope of our
audit responded to the
key audit matter
• We assessed management’s projected cash flows, which include the impact of
Covid-19, and have performed sensitivity anlaysis;
• We challenged management’s estimations and judgements used in the forecasting of
future cash flows used in the assessment of the company’s liquidity;
• We obtained an understanding of relevant controls implemented when forecasting cash
flows;
• We assessed the operational impact of Covid-19 on the company and have analysed
management’s assessment of the ability of the company to continue as a going
concern;
• We considered whether plans are in place to allow the company to assess whether a
continued supply of water to customers throughout the impact of the pandemic,
including any emergency repair works required;
• We reviewed the most recent Board minutes and regulatory correspondence to identify
items of interest;
• We evaluated management’s assessment of the impact of the significant business
developments, including the spread of Covid-19 and the resulting actions taken by the
UK Government;
• We evaluated management’s assessment of the impact of recent events on the
carrying value of the Company’s assets and liabilities including intercompany
receivables; and
• We assessed the disclosure made by management in the financial statements.
Key observations
The results of our procedures were satisactory. We concluded that the adoption of the
going concern basis of accounting and the disclosures related to the potential impact of
Covid-19 and in respect of the company’s ability to continue as a going concern are
appropriate.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 148
OUR APPLICATION OF MATERIALITY
We define materiality as the magnitude of
misstatement in the financial statements that
makes it probable that the economic decisions of
a reasonably knowledgeable person would be
changed or influenced. We use materiality both in
planning the scope of our audit work and in
evaluating the results of our work.
Based on our professional judgement, we
determined materiality for the financial
statements as a whole as follows:
MATERIALITY
£9.1m (2019: £10.3m)
BASIS FOR DETERMINING
MATERIALITY
5% of adjusted pre-tax profit. This was adjusted to take account of derivative
valuation movements charged to the income statement in the year. This has been
excluded due to the level of volatility of such derivative valuation movements, in
order to provide a consistent basis year on year. This approach is also consistent
with prior year.
RATIONALE FOR THE
BENCHMARK APPLIED
Adjusted pre-tax profit was selected as the appropriate measure on which to
determine materiality as it is considered an area of focus for the users of the
accounts.
Adjusted PBT £182.2m
Materiality £9.1m
Audit Committee
reporting
threshold £0.5m
Performance materiality
Error reporting threshold
We set performance materiality at a level lower
than materiality to reduce the probability that, in
aggregate, uncorrected and undetected
misstatements exceed the materiality for the
financial statements as a whole. Performance
materiality was set at 70% of materiality for the
2020 audit (2019: 70%). In determining
performance materiality, we considered the low
number of corrected and uncorrected
misstatements in the prior years, our cumulative
knowledge of the company and low turnover
within management or key accounting personnel
We agreed with the Audit Committee that we
would report to the Committee all audit
differences in excess of £0.5m (2019: £0.5m), as
well as differences below that threshold that, in
our view, warranted reporting on qualitative
grounds. We also report to the Audit Committee
on disclosure matters that we identified when
assessing the overall presentation of the financial
statements.
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
FINANCIAL STATEMENTS 149
• Audit committee reporting – the section
describing the work of the audit committee does
not appropriately address matters
communicated by us to the audit committee; or
• Directors’ statement of compliance with the UK
Corporate Governance Code – the parts of the
directors’ statement that would be required if
the company had a premium listing relating to
the company’s compliance with the UK
Corporate Governance Code containing
provisions specified for review by the auditor in
accordance with Listing Rule 9.8.10R(2) do not
properly disclose a departure from a relevant
provision of the UK Corporate Governance Code.
We have nothing to report in respect of these
matters.
RESPONSIBILITIES OF DIRECTORS
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, and for such internal control as
the directors determine is necessary to enable the
preparation of financial statements that are free
from material misstatement, whether due to fraud
or error.
In preparing the financial statements, the directors
are responsible for assessing the company’s
ability to continue as a going concern, disclosing
as applicable, matters related to going concern
and using the going concern basis of accounting
unless the directors either intend to liquidate the
company or to cease operations, or have no
realistic alternative but to do so.
AN OVERVIEW OF THE SCOPE OF
OUR AUDIT
Scoping
Our audit was scoped by obtaining an
understanding of the entity and its environment,
including internal control, and assessing the
risks of material misstatement. Audit work to
respond to the risks of material misstatement
was performed directly by the audit engagement
team.
Our consideration of the control environment
We involved our IT specialists to assess relevant
controls over the company’s IT systems. As
planned and reported to the Audit Committee, we
adopted a fully substantive testing approach in
the current and prior years.
OTHER INFORMATION
The directors are responsible for the other
information. The other information comprises
the information included in the annual report
other than the financial statements and our
auditor’s report thereon.
Our opinion on the financial statements does not
cover the other information and, except to the
extent otherwise explicitly stated in our report,
we do not express any form of assurance
conclusion thereon.
In connection with our audit of the financial
statements, our responsibility is to read the other
information and, in doing so, consider whether
the other information is materially inconsistent
with the financial statements or our knowledge
obtained in the audit or otherwise appears to be
materially misstated.
If we identify such material inconsistencies or
apparent material misstatements, we are required
to determine whether there is a material
misstatement in the financial statements or a
material misstatement of the other information.
If, based on the work we have performed, we
conclude that there is a material misstatement of
this other information, we are required to report
that fact.
In this context, matters that we are specifically
required to report to you as uncorrected material
misstatements of the other information include
where we conclude that:
• Fair, balanced and understandable – the
statement given by the directors that they
consider the annual report and financial
statements taken as a whole is fair, balanced
and understandable and provides the
information necessary for shareholders to
assess the company’s position and
performance, business model and strategy, is
materially inconsistent with our knowledge
obtained in the audit; or
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
AUDITOR’S RESPONSIBILITIES FOR
THE AUDIT OF THE FINANCIAL
STATEMENTS
MATTERS ON WHICH WE ARE
REQUIRED TO REPORT BY
EXCEPTION
FINANCIAL STATEMENTS 150
Our objectives are to obtain reasonable assurance
about whether the financial statements as a
whole are free from material misstatement,
whether due to fraud or error, and to issue an
auditor’s report that includes our opinion.
Reasonable assurance is a high level of
assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will
always detect a material misstatement when it
exists. Misstatements can arise from fraud or
error and are considered material if, individually
or in the aggregate, they could reasonably be
expected to influence the economic decisions of
users taken on the basis of these financial
statements.
A further description of our responsibilities for
the audit of the Financial Statements is located
on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This
description forms part of our Auditor’s Report.
REPORT ON OTHER LEGAL AND
REGULATORY REQUIREMENTS
OPINIONS ON OTHER MATTERS
PRESCRIBED BY THE COMPANIES
ACT 2006
In our opinion, based on the work undertaken in
the course of the audit:
• the information given in the Strategic Report
and the Directors’ Report for the financial year
for which the Financial Statements are
prepared is consistent with the Financial
Statements; and
• the Strategic Report and the Directors’ Report
have been prepared in accordance with
applicable legal requirements.
In the light of the knowledge and understanding
of the Company and its environment obtained in
the course of the audit, we have not identified any
material misstatements in the Strategic Report or
the Directors’ Report.
Adequacy of explanations received and
accounting records
Under the Companies Act 2006 we are required to
report to you if, in our opinion:
• we have not received all the information and
explanations we require for our audit; or
• adequate accounting records have not been
kept by the Company, or returns adequate for
our audit have not been received from branches
not visited by us; or
• the Company Financial Statements are not in
agreement with the accounting records and
returns.
We have nothing to report in respect of these
matters.
• Directors’ remuneration
Under the Companies Act 2006 we are also
required to report if in our opinion certain
disclosures of Directors’ remuneration have not
been made.
We have nothing to report in respect of these
matters.
USE OF OUR REPORT
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.
Anthony Matthews FCA (Senior statutory auditor)
for and on behalf of Deloitte LLP
Statutory Auditor
Newcastle Upon Tyne
United Kingdom
15 July 2020
STATUTORY FINANCIAL STATEMENTSGOVERNANCE REPORTSTRATEGIC REPORT
Northumbrian Water Limited
Northumbria House
Abbey Road
Pity Me
Durham
DH1 5FJ
www.nwg.co.uk