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RNS Number:7133Z
South East Water Limited
06 July 2007
SOUTH EAST WATER LIMITED
Preliminary consolidated results
for the year ended 31 March 2007
Contents
Page
3 Chairman's statement
5 Managing Director's report
11 Consolidated income statement
11 Consolidated statement of recognised income and expense
12 Consolidated balance sheet
13 Consolidated cash flow statement
14 Notes to the preliminary consolidated results
The financial information contained in these preliminary results does not
constitute the group's statutory financial statements for the years ended 31
March 2007 and 31 March 2006. The financial information is derived from the
audited statutory consolidated financial statements of the group for the year
ended 31 March 2007 which were approved by the Board of Directors on 5 July
2007. The auditors have reported on those financial statements; their report was
unqualified and did not contain a statement under section 237 of the Companies
Act 1985. The 2007 financial statements will be delivered to the Registrar of
Companies in due course.
For further details please contact:
Paul Butler Managing Director 01444 448222
Jo Stimpson Finance Director 01444 448208
Barrie Watson Director of Corporate Development 01444 448214
Noel Burns Company Secretary 01444 448215
Chairman's statement
This is my first report as Chairman of the Board, an appointment I took up in
the second half of the year. South East Water has had significant challenges to
meet, including the change in ownership of the business and the drought, in
delivering its operational and financial results this year. I take this
opportunity to comment on key issues dealt within the body of this report.
Results
For the 12 month period ended 31 March 2007 the group delivered an operating
profit of #49.2 million (2006: #59.8 million after an exceptional credit of #5.5
million on sale of property in the first half of this year) on turnover of
#110.6 million (2006: #113.7 million).
Water revenues were adversely affected by proper measures taken to reduce demand
and an increase in customers switching to metered supplies. We remain committed
to encouraging water efficiency measures amongst our customers and to the
extension of metered supplies.
Strong cost controls were in place particularly in the latter half of the year
although additional expenditure was needed to service customer enquiries mainly
about the drought and increased calls relating to the implementation of our new
billing system, and also to maintain leakage below our target level. Energy
costs continued to exceed the levels assumed in our Business Plan and remain a
concern for the future.
Investment
Capital investment during the year was #44.6 million (2006: #41.0 million), a
tangible reflection of our commitment to the sustainable development of our
business. Much of our programme has been aimed at improving our water resource
position with a view to improving our Security of Supply for customers.
Key outputs included completion of the #9 million extension to Hazards Green
Water Treatment Works which will increase to 12Ml/d water available from Bewl
Reservoir to our customers in East Sussex, replacement of 18km of mains, and
installation of 15,859 meters.
During the remaining three years of the current five year Asset Management Plan,
the group will continue with our #223 million (2007/8 prices) programme of
capital investment to improve water resources, renew ageing infrastructure and
deliver excellent water quality.
Drought
Throughout the year, the group faced a continuing drought which records show was
the driest period since 1933 and which affected all water companies in the south
east of England. Hose pipe restrictions already introduced in our Kent and
Sussex region were extended in to our Hampshire, Surrey and Berkshire region.
These were the first water restrictions put in place in the company since 1995.
South East Water worked closely with all its statutory stakeholders and
neighbouring water companies to minimise the impact on customers. Amongst other
measures, we captured water which would normally flow to sea as winter run-off
to assist Southern Water's Weir Wood Reservoir; we increased leakage resources
to ensure all leaks were repaired more quickly and I am pleased that the group
has once again met its leakage target. We took a lead role in regional
communication initiatives, which included customer and stakeholder briefings,
and we introduced a dedicated website www.beatthedrought.com. The public
response of reducing consumption, coupled with improved rainfall over the winter
of 2006/7 helped us end restrictions in February 2007.
I take this opportunity to particularly thank the group's staff and management
for their commitment and extra efforts in managing the drought. We strongly
believe that extra reservoir capacity in the south east of England is needed,
amongst other measures, to manage water resources in future drought conditions
which climate change makes even more likely. We continue to monitor closely the
debate on compulsory metering of customers in water-stressed areas and its role
in long-term demand management. We welcome the review of the legislative
framework governing how water restrictions are applied.
Chairman's statement (continued)
Board
Early in the year, Margaret Devlin resigned as Managing Director. Martin Baggs
was appointed to the Board as Managing Director and was subsequently replaced by
our current Managing Director, Paul Butler, on the purchase of the group by the
Utilities Trust of Australia and Hastings Diversified Utilities Fund.
The change in ownership was also the occasion for Peter Dyer to resign as
Non-Executive Chairman, to be replaced by me in that role, and for the
resignations from their non-executive board roles of Howard Higgins, Martin
Stanley and Peter Antolik. I am pleased to welcome Peter Taylor as a
non-executive to the Board. The new Board has been balanced with a greater
representation of executive directors by the appointment of Jo Stimpson, Finance
Director, and David Shore, Operations Director. Our independent non-executives,
Baroness O'Cathain and Keith Henry, have provided valuable continuity in the
year. Our third independent non-executive, Stephen Box, resigned to avoid a
conflict of interest with another role and was replaced by Baroness Cumberlege.
Pension
In common with many pension schemes, that of South East Water is in deficit, and
the group was not fully funded for its pension costs in the regulatory price
review period 2005 to 2010. Our strategy during the period to the next full
valuation is to provide additional funding from the sale of small pieces of
surplus land. I am pleased to note a significant improvement in the FRS17
deficit from #16.8 million at 31 March 2006 to #11.9 million at 31 March 2007,
and in the IAS 19 deficit from #19.9 million at 31 March 2006 to #17.9 million
at 31 March 2007 (the deficit figures are net of deferred tax).
Competition Commission
In the latter part of the year we have, in addition, provided strong
representation to the Competition Commission of the case for merging South East
Water with the adjacent Mid Kent Water. We believed from the outset that the
advantages for water resource management, efficiency, optimising synergies and
customer service far out weigh any potential disadvantage to Ofwat's ability to
operate its comparative model. We are pleased that the Competition Commission,
in its decision issued on 2 May 2007, allowed the merger. An application has now
been made to Ofwat to transfer the operating licences to enable the companies to
operate as a single business. Until the licences are consolidated, it is
impossible to proceed to a full merger and it is a worrying time for our staff,
and for those of Mid Kent Water, as uncertainties about the future persist.
These we shall resolve at the very earliest opportunity through information and
consultation and urge Ofwat to merge the licences without undue delay. We are
grateful to our staff for their professionalism and dedication to maintaining
service standards to customers during this uncertain period.
Prospects
Prospects for the new business are excellent. Our challenge will be to deliver
the full benefits of the merger as early as possible from a larger, more
efficient organisation which combines the best of both companies and builds on
our joint strengths to the advantage of customers, staff, shareholders and all
our stakeholders.
Gordon Maxwell
Chairman
Date: 5 July 2007
Managing Director's report
Introduction
I joined South East Water during the reporting year and found a sound business
facing challenges presented by drought, cost pressures and a new billing system,
but providing our customers with safe, reliable drinking water 365 days a year
and 24 hours a day.
Key Performance Indicators (KPIs)
The group regularly monitors its financial and operating performance through
regular KPI measurement.
Financial KPIs
Financial performance is measured by the ratio of group operating profit before
exceptional items to revenue reflecting control of its costs and cash flows. At
the group level the ratio for 2006/7 was 44.5% (2005/6: 47.8%) indicating margin
reduction largely as a result of reduced revenue reflecting both lower water
usage in a dry year and increased meter optants.
The cash flow measure of net cash generated from operations for the group in
2006/7 of #66.4 million (2005/6: #62.4 million) shows an improvement in the
working capital and is due to cash in advance received from earlier billing in
the run up to the year end.
The outstanding debt to revenue ratio at March 2007 of 24.4% (March 2006: 13.1%)
shows an increase due to the catch up of some back log of invoicing from the
previous year end and some worsening of the debt ageing. The company will
continue to pursue the outstanding debt through debt agency and court actions if
considered appropriate.
Covenant KPIs
The company, under licence condition F, is required to maintain a credit rating
equivalent to investment grade. The company's credit rating is better than
required, and is as follows:
Moody's: Baa2
S&P: BBB
As part of the ring-fenced group for the issuance of the bond by its
wholly-owned subsidiary South East Water (Finance) Limited, the company is
required to comply with financing covenants which include:
* Regulatory Asset Ration (RAR)with a distribution lock-up at 85%
* Interest Cover Ratio (ICR) with a default at 1.4 times cover
* Adjusted ICR with a trigger event at 1.1 times cover
The company was in compliance with its covenants at 31 March 2007. The
introduction of the new accounting standard FRS 26 Financial Instruments:
Measurement will have an impact on the forward looking ratios if included in the
calculations. This is currently being considered by South East Water and the
Security Trustee as provided for in the Bond Financial Covenants.
Operational KPIs
KPIs measuring operational performance are those used by Ofwat and comprise the
following:
* Number of properties experiencing inadequate pressure
* Number of properties suffering unplanned and prolonged interruptions to
supply
* Number of properties subject to water restrictions
* Speed of response to billing contacts
* Meter reading performance
* Ease of telephone contact
* Drinking water quality
* Leakage
* Environmental impacts (pollution incidents)
Managing Director's report (continued)
Whilst measured separately, each of the indicators is weighted by Ofwat and
combined to give an Overall Performance Assessment (OPA) which is compared to
the assessments for other water companies in England and Wales.
Ofwat assessed the OPA in the year ended 31 March 2006 to be 279 (2004/5: 271)
out of a maximum possible score of 288. Ofwat's assessment for 2006/7 will be
published in September 2007.
In addition to regulatory measures, the group monitors other company and
departmental KPIs and relies on external audit of its systems and processes.
Staff absence was 2.3% (2005/6: 2.8%) compared to the national average of 3.1%
and labour turnover was 17.8 % (2005/6: 15%) compared to the national average of
15.5% (national averages taken from CBI's 2006 report).
Through external audit, the group's quality systems were certified to ISO9001
and our safety management systems to OHSAS 18001, the laboratory retained its
UKAS accreditation and our people development processes were re-certified to
Investor in People standard.
Water Resources
2006/7 started as the second consecutive year of very low rainfall following a
second exceptionally dry winter in 2005/6. Over the 24 months from October 2004
only around 75% of average rainfall was received, much of this deficit occurring
in the winter months when stocks are traditionally replenished. As a result of
this extended dry period the group's drought plan was already in action, having
been implemented in November 2004.
In the previous year, we had been able, despite the drought, to start the year
with our reservoirs full; this was not the case for the start of this year, with
significant depletion of both reservoir and groundwater sources from which we
derive some 70% of our supplies.
Continuation of the drought over the summer months heightened concerns about the
adequacy of water resources across the south east of England. Hosepipe
restrictions were implemented by the majority of water companies in the region.
South East Water's hosepipe restrictions in Kent and Sussex were extended in
April 2006 to cover the whole of the group's supply area. The restrictions
remained in place throughout 2006.
An intensive media campaign was launched, in parallel with significant
operational activity and investment to ensure that every possible water source
was fully utilised. The media campaign drew great interest both from local and
national press helping to raise public awareness. Our customers responded,
helping reduce average daily demand on already stretched water resources by
approximately 5% (12% peak day) compared to the previous year.
The winter of 2006/7 has thankfully seen significant rainfall, with six
consecutive months above the long term average to the end of February 2007. This
rainfall enabled full recharge of all our reservoirs and has brought groundwater
supplies to a satisfactory position with the result that hosepipe restrictions
were lifted across our supply area in February 2007.
Investment
Capital investment in 2006/7, the second year of the current five year
programme, was #44.6 million taking total expenditure in the period to #85.6
million. The #223 million (2007/8 prices) programme from 2005 to 2010
demonstrates our ongoing commitment to developing new water resources and
renewing the existing infrastructure.
One third of our programmed investment is allocated to essential new resource
projects, as our supply area is recognised as being water resource deficient, a
position highlighted by the recent two year drought. Much of the expenditure in
the early part of the period has been on the preliminary design, environmental
studies and planning of water resource schemes.
Managing Director's report (continued)
The first phase of the Bewl-Darwell transfer scheme was completed in 2005,
providing an additional 5Ml/d of water to meet growing demand in East and West
Sussex. Construction of a #9 million extension to Hazards Green Water Treatment
Works has now been completed, this being the final phase of the scheme, which
will increase the total additional water available from Bewl-Darwell up to 12Ml/
d.
We continue to plan for the future, and during 2005 we started a major
investigation into the feasibility of a new impounding reservoir near Lewes in
Sussex. Clay Hill Reservoir could provide an additional 18 million litres of
water each day. Investigations continue according to programme.
During the year, we completed appraisal of the pilot desalination plant at
Newhaven. The study demonstrated that the capital costs of this scheme would be
significantly higher than anticipated. Rising electricity prices also make the
scheme less economical than originally forecast. The full-scale scheme has
therefore been deferred indefinitely. Alternative schemes to progress further
groundwater development are being pursued instead.
In our Northern Region, we have also commenced a number of groundwater
development schemes, and completed designs for an expansion of the transfer
capacity from our strategic Bray Water Treatment Works on the River Thames.
As part of our twin track approach to resource planning we have also invested in
demand management. The group continues to view metering as an important tool in
managing demand. 15,859 customer meters have been installed at a cost of #3.1
million.
A further #1.0 million has been spent on leakage control equipment, contributing
to the achievement of our leakage target for the sixth successive year. Leakage
has been maintained below its economic level at 69.17 Ml/day, meeting the Ofwat
target. A performance-based leak detection contract is now in place, which has
optimised resources in maintaining the leakage level.
A large proportion of our programme covers the replacement or refurbishment of
deteriorating assets.
Rehabilitating our ageing mains infrastructure formed a major part of our
capital investment programme during 2006 when 44km of mains were either replaced
or relined at a cost of #3.2 million, completing a 15 year programme upgrading
nearly 1,100km of mains.
In addition to this programme a further 14km of mains were replaced. This
followed an assessment of the likelihood of failure according to customer
performance criteria using the capital maintenance methodology established as
part of the PRO4 process.
A second phase of service reservoir construction has been completed at
Swainshill, near Alton, and work commenced on installation of extended pumping
capacity at Fleet Booster Station.
During the year, over #1.0 million has been invested in increasing security of
supply to customers, including #0.7 million on duplication of a major strategic
main from the key Barcombe Water Treatment Works.
The group has also invested in new software to improve notification and planning
of works with the Highways Authorities, which will allow for better
co-ordination and minimise disruption to traffic.
Water Quality and Supply
The quality of the water supplied by South East Water remains amongst the best
in the world with 99.95% of 72,000 tests complying with EU and UK mandatory
standards. In addition to these regulatory tests we carried out a further
100,000 tests to ensure that our assets consistently performed to deliver
excellent quality water to our customers. Our laboratory testing procedures once
again received UKAS accreditation and were applauded by the assessors as 'one of
the finest water laboratories in the country'.
Managing Director's report (continued)
Our Customers
We have worked hard to ensure our level of customer service is maintained at our
own high standards. We have not always succeeded in achieving our goals and we
acknowledge that more needs to be done in this area.
We remain totally committed to providing an excellent level of customer service
to all of our customers. As part of this continual improvement, the company
implemented a new customer billing system in February 2006.
The group has successfully completed a full cycle of billing for all of our 1.5
million customers. Any system implementation of this magnitude and complexity
comes with some degree of teething problems. The group has experienced
interruptions to billing with some customers receiving their bills late. This in
turn has lead to an increase in customer contacts and peaks of contacts
following the dispatch of customer bills. Despite these issues, the new system
is allowing improved flexibility in handling customer accounts and the new bill
design has been welcomed by our customers.
Following the introduction of a new tariff in 2006/7 for those customers opting
to pay by Direct Debit, over 285,000 customers have benefited from a #5 credit
on their water account having paid by this convenient and safe payment method.
Debt
The group continued to focus on reducing uncollected water revenues. Whilst
taking tough line with those customers who choose not to pay, we also recognise
that some of our customers have genuine difficulties in paying their water
bills. To assist these customers the company makes a financial contribution to
the EOS Foundation, an independent Charitable Trust. To date over 400 customers
of South East Water have benefited from over #150,000 worth of grants.
Where appropriate, we pursue through the county court system those customers who
do not pay in order to obtain settlement of both water and debt charges.
Non Regulated Business
2006/7 has again seen growth in non-appointed business activities. Revenue
performance in particular from the Water Infrastructure Maps was strong as the
demand for this service, provided to prospective home buyers, continues to grow.
The Mast Rentals portfolio showed steady income performance.
South East Water Laboratories continued to offer a comprehensive range of water
sampling and analysis carried out at our state-of-the-art, purpose-built
laboratories, including microbiology, parisitology, inorganic and organic
chemistry. In 2006/7 radiochemistry services were introduced, screening for
gross alpha and beta activity in water. Our clients include major utilities,
supermarkets and a range of environmental consultants all of whom rely on our
expertise, reputation, and speed of service to enable them to make timely and
informed decisions.
Managing Director's report (continued)
Our Staff
Our staff have once again been a source of strength in a challenging year. The
change in ownership of the business, our hosepipe ban, and the introduction of
our new billing system all added to the day to day pressures of maintaining our
services to our customers at a high level. Our staff responded excellently.
The group maintained an active training and development programme, which
delivered 800 days of training, averaging 2 days per employee. Individual
appraisal remains at the heart of our approach to staff development. Training
covered basic job skills, health and safety, new skill development and
sponsorship for gaining professional qualifications in Information Technology,
Human resources, Accountancy and Engineering.
An innovative interactive e-learning programme was developed to deliver health
and safety training.
We have maintained a programme of monthly departmental briefings for all staff
and have held quarterly meetings with elected staff representatives through the
Staff Council which has helped maintain focus on business issues throughout the
year. Our quarterly manager meetings have also demonstrated their value in
maintaining engagement with those with a leadership role in our group. We are
proud to have been re-certified as an 'Investor in People'.
Our health and safety record has remained good, with only one reportable and
four lost time accidents during the year. Our safety management systems are
certified to OHSAS 18001 standard.
Absence has remained low, at 2.3%, better than the national average.
Our approach to rewards is outlined in the report of the Remuneration Committee.
Our Environment
We recognise that the way we operate our business can have both a positive and
negative impact on the environment, which is intrinsically linked with our core
business function. We continue to adopt an environmentally responsible approach
to all aspects of our business.
South East Water own and maintain nineteen Sites of Special Scientific Interest.
We aim to ensure that 90% of company owned SSSIs are in favourable/recovering
condition by 2010. At the end of March 2007, 80% were in favourable/recovering
condition and are on target to meet our 2010 target.
Detailed environmental impact assessments are carried out on major engineering
schemes to ensure that the least environmentally damaging options are chosen.
This is carried out in tandem with survey and mitigation programmes, which are
developed to counteract any environmental damage.
One example of a scheme requiring such work was the upgrade of the Water
Treatment Works at Hazards Green. Wetland areas have been constructed adjacent
to this site to create habitat for great crested newts as part of a scheme to
protect this key species at this site.
Our ecologists pre-screen schemes to highlight environmental issues. This
involves collection of historical ecological data, a site walkover identifying
potential habitat and protected species issues, possible modification to the
scheme, or further surveys and DEFRA consents to ensure that environmental
legislation is respected. During this reporting period surveys have been
undertaken to detect the presence of diverse protected species including
dormice, great crested newts, badgers and bats.
The ongoing drought in the South East has put severe pressure on water
resources. As part of the preparation of the statutory drought plan, in 2006/7,
South East Water commissioned ecological studies and impact assessments of all
potential drought permit application areas. These studies have covered the
Rivers Ouse & Cuckmere, together with abstractions at Cramptons Road and
Greatham.
Throughout the year we have ensured that our land holdings are managed in a way
that develops their environmental potential. Using local volunteers, specialist
contractors and our own staff volunteers we have carried out exciting
conservation initiatives protecting barn owls nesting on company owned reservoir
sites, developing floating reedbed areas for aquatic biodiversity of
landholdings and developing wetland habitats in Sussex and Kent through
sponsorship of Sussex Otters and Rivers Project.
Managing Director's report (continued)
Our Communities
The group continued to maintain close links with the communities we serve.
Public access to a number of our sites, particularly Arlington and Ardingly
Reservoirs, provides facilities much valued by the public for walking, fishing,
horse riding, bird watching and, at Ardingly, water sports. Fishing at Barcombe
Reservoir was discontinued during the year but supervised access has been
maintained for the Sussex Ornithological Society whose records at that site
pre-date the construction of the reservoir.
Our staff were active in fund-raising activities on behalf of local charities.
In our Berkshire, Hampshire and Surrey Region, staff raised #1,980 for the
Phyllis Tuckwell Hospice for the terminally ill. In our Kent and Sussex Region
staff raised #1,010 for the Court Meadow Association, a school for children with
severe learning difficulties.
The continuing drought raised the level of public awareness of water throughout
our supply territory and there was much demand for our staff to talk to local
interest groups on the subject. More than 50 presentations were made to local
councils, schools, clubs and societies on a variety of water-related subjects
amongst which water efficiency and water resources featured strongly. Our
promotional trailer was active over the summer months at festivals and events at
Drusilla's Park, Alfriston, Burgess Hill, Shinewater Park, Eastbourne, Hook
Summer Fair, Uckfield Festival, Hartfield, Arundel and Sheffield Park. Over 500
primary schools received teaching aids in our 'Thirst Aid' programme aimed at
raising awareness of the health value of drinking tap water in school.
The group sponsored many local environmental interests in the year to encourage
a responsible attitude to the environment. We have been for some years a
principal sponsor of the Sussex Wildlife Trust's project to recreate wetland
habitats in the south east, and have also sponsored the Farnham Nature Reserve,
the RSPB, and the Newhaven water efficient roundabout, amongst other causes in
the past year.
Our staff contributed via payroll deduction to Water Aid, a charity bringing
clean water to communities in the third word and, once again, one of our
managers contributed to a drinking water project in Ethiopia under the auspices
of Partners in Water and Sanitation.
Our close relationship with our communities is reciprocal and we gratefully
acknowledge the contribution of over 140 public volunteers who have carried out
conservation enhancement and monitoring work on our Sites of Special Scientific
Interest.
The Year In Summary
I am proud that so much has been achieved against the background of operational
challenges posed by the drought and implementation of a new billing system, the
change in ownership of the business and uncertainties of the application to the
Competition Commission to merge the group with Mid Kent Water. The whole group
remains committed to delivering the best possible service to customers and I
look forward to the coming year.
Paul Butler
Managing Director
Date: 5 July 2007
Consolidated income statement
for the year ended 31 March 2007
2007 2006
Note #000 #000
Continuing operations
Revenue 2 110,564 113,691
Net operating costs - non-exceptional (65,067) (62,711)
Net operating costs - exceptional profit on sale of property 3 - 5,468
Net operating costs 3 (65,067) (57,243)
Other income 4 3,745 3,367
Operating profit 49,242 59,815
Finance costs 5 (30,164) (36,791)
Finance income 6 14,741 14,218
Profit before tax 33,819 37,242
Taxation 7 (9,218) (11,887)
Profit for the year 24,601 25,355
Consolidated statement of recognised income and expense
for the year ended 31 March 2007
2007 2006
Note #000 #000
Profit for the year 24,601 25,355
Actuarial gains on defined benefit pension plans 718 9,802
Movement on deferred tax on actuarial (gains)
on defined benefit pension plans 7 (215) (2,941)
Total income not recognised in the Income Statement 503 6,861
Total recognised income for the year 25,104 32,216
Change in accounting policy on adoption of IAS 32 and IAS 39 (1,538)
Consolidated balance sheet
as at 31 March 2007
2007 2006
Note #000 #000
Assets
Non-current assets
Intangible assets 4,272 2,824
Property, plant and equipment 589,809 561,268
Non-current receivables 190,013 190,013
784,094 754,105
Current assets
Inventories 72 64
Trade and other receivables 33,132 29,096
Current tax receivables 166 -
Cash and cash equivalents 17,738 15,748
51,108 44,908
Liabilities
Current liabilities
Financial liabilities
- Loans and borrowings (1,584) (1,447)
Trade and other payables (50,851) (41,900)
Current tax payables - (963)
(52,435) (44,310)
Non-current liabilities
Financial liabilities
- Loans and borrowings (432,949) (397,211)
- Derivative financial instruments (31,968) (22,248)
Deferred tax liabilities (106,947) (104,150)
Defined benefit pension liability 9 (25,531) (28,416)
Trade and other payables (36,915) (37,014)
(634,310) (589,039)
NET ASSETS 148,457 165,664
Equity
Ordinary shares 5,092 5,092
Capital redemption reserve 4,000 4,000
Retained earnings 139,365 156,572
TOTAL EQUITY 10 148,457 165,664
The accompanying notes are an integral part of this balance sheet.
These preliminary results were approved by the Board of Directors on 5 July 2007
and were signed on its behalf by:
P Butler
Managing Director
5 July 2007
Consolidated cash flow statement
for the year ended 31 March 2007
2007 2006
Note #000 #000
Cash flows from operating activities
Net cash generated from operations 66,412 62,378
Interest received 19,315 25,863
Interest paid (24,352) (23,639)
Issue costs of new listed debt - (71)
Pension contributions paid (2,971) (2,385)
Tax paid (8,541) (5,052)
Net cash from operating activities 49,863 57,094
Cash flows from investing activities
Proceeds from sale of property, plant and equipment 532 7,232
Purchase of property, plant and equipment (39,986) (43,381)
Purchase of intangible assets (2,700) (818)
Fixed asset contributions received 1,040 772
Net cash used in investing activities (41,114) (36,195)
Cash flows from financing activities
Finance lease principal payments (1,448) (1,321)
Proceeds from borrowings 37,000 12,000
Dividends paid to shareholder 8 (42,311) (46,663)
Repayment of debentures - (1,601)
Net cash used in financing activities (6,759) (37,585)
Net increase/(decrease) in cash and cash equivalents 1,990 (16,686)
Cash and cash equivalents at 1 April 15,748 32,434
Cash and cash equivalents at 31 March 17,738 15,748
Notes to the preliminary consolidated results
1. Summary of significant accounting policies
The principal accounting policies are summarised below.
Basis of preparation
The consolidated financial statements for the year ended 31 March 2007 have been
prepared in accordance with International Financial Reporting Standards (IFRS)
and International Financial Reporting Interpretations Committee interpretations
endorsed by the European Union, and those parts of the Companies Act 1985
applicable to groups reporting under IFRS.
The consolidated financial statements have been prepared on a historical cost
basis, except for pension assets and liabilities and certain financial
instruments that have been measured at fair value and property, plant and
equipment which was recognised at the date of transition to IFRS on 1 April 2004
at deemed cost by reference to fair value.
The consolidated financial statements are presented in sterling, the functional
currency of the group.
Basis of consolidation
The consolidated financial statements incorporate the financial information of
South East Water Limited (the company) and its subsidiary South East Water
(Finance) Limited.
Transactions and balances between the company and its subsidiary have been
eliminated fully on consolidation.
Subsidiaries are consolidated from the date on which control is transferred to
the group and cease to be consolidated from the date on which control is
transferred out of the group.
Use of estimates
The preparation of financial statements requires the application of estimates
and judgement by management, which affects assets and liabilities at the balance
sheet date and income and expenditure for the year. Actual results may differ
from those estimates.
Estimates made by the management of South East Water in the preparation of
financial information, affect the remaining useful lives of infrastructure
assets, un-invoiced liabilities at the year end, the provision for doubtful
trade receivables, deferred revenue, pensions and other post retirement
benefits.
Revenue
Revenue is recognised to the extent that it is probable that the economic
benefits will flow to the group, there has been a transfer of risk and control
and the revenue can be reliably measured. All revenue arises within the United
Kingdom and is recorded net of VAT. The following specific recognition criteria
must also be met before revenue is recognised:
Metered and unmetered water income
Revenue is recognised when water has been delivered to the customer. Revenue
includes an estimation of the volume of mains water supplied but unbilled at the
year end. This is estimated using a defined methodology based upon a measure of
unbilled water consumed, which is calculated from historical customer data.
Cash received in advance from customers is not treated as current year revenue,
being recognised as payments received in advance within creditors.
Notes to the preliminary consolidated results (continued)
1. Summary of significant accounting policies (continued)
Other income
Other income includes rechargeable works and infrastructure charges.
Rechargeable works represent payments received from developers for installing
meters and connections to new property developments. Revenue is recognised when
the work is complete.
Infrastructure charges represent 'joining the network fees'. Such fees are
recognised in the Income Statement when the property is first connected to the
network.
Finance income
Finance income is recognised using the effective interest method.
Taxation
Current tax, being UK Corporation tax, is provided at amounts expected to be
paid (or recovered) using tax rates and laws that have been enacted or
substantially enacted by the balance sheet date.
Tax relating to items recognised directly in equity is recognised in equity and
not in the Income Statement.
Deferred tax is provided, using the liability method, on all temporary
differences at the balance sheet date between the tax bases of assets and
liabilities and their carrying amounts in the financial statements.
Deferred tax liabilities are recognised for all taxable temporary differences
except where the deferred tax liability arises from goodwill amortisation or 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 profits nor taxable profit or loss.
Deferred tax assets are recognised for all deductible temporary differences,
carry forward of unused tax assets and unused tax losses to the extent that it
is probable that taxable profits will be available against which the deductible
temporary differences, and the carry forward of unused tax assets and unused tax
losses can be utilised. Deferred tax assets are recognised for the deductible
temporary differences arising 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.
Deferred tax assets and liabilities are measured at the tax rates that are
expected to apply to the year when the asset is realised or the liability is
settled, based on tax rates and tax laws that have been enacted or substantively
enacted at the balance sheet date. In accordance with IAS 12 Income Taxes
deferred taxes are not discounted.
Goodwill
Goodwill on acquisition is initially measured at cost being the excess of the
cost of the acquired subsidiary or business over the net fair value of
identifiable assets, liabilities and contingent liabilities.
Goodwill is not amortised and is reviewed for impairment annually.
Notes to the preliminary consolidated results (continued)
1. Summary of significant accounting policies (continued)
Impairment
Goodwill
Impairment tests on goodwill are made annually. This is carried out by assessing
the recoverable amount of the cash-generating unit, to which the goodwill
relates. Given that the company operates its regions under a single licence for
the whole Water Supply Area and, that operations are monitored on a group-wide
basis, the cash-generating unit for the company is deemed to be the business as
a whole. Where the recoverable amount is less than the carrying amount, the
goodwill asset is reduced to the recoverable amount with an impairment loss
recognised as an operating cost in the Income Statement.
Property, plant and equipment, investments and intangible assets
At each reporting date an assessment is carried out to determine whether there
is any indication that property, plant and equipment, investment and software
intangible assets may be impaired. If there is an indication of impairment, the
recoverable amount of the asset or respective cash-generating unit is compared
to the carrying amount. Where the recoverable amount is less than the carrying
amount, the asset is reduced to the recoverable amount with an impairment loss
recognised as an operating cost in the Income Statement in the year in which the
respective assessment takes place.
Financial assets
At each reporting date an assessment is carried out to determine whether there
is any indication that financial assets may be impaired. Where there is
objective evidence that impairment loss has arisen, the carrying amount is
reduced in accordance with IAS 39 Financial Instruments: Recognition and
measurement, with the loss being recognised in the Income Statement in the year
in which the respective assessment takes place.
Intangible assets
Software
Software intangible assets acquired separately are recognised at cost. They have
finite useful lives and are amortised over 3 to 5 years on a straight line
basis.
Residual values and useful lives of all assets are re-assessed annually and,
where necessary, changes are accounted for prospectively.
Capitalisation of employee and other directly attributable costs
Employee and other costs directly attributable to intangible asset projects are
capitalised in the financial statements as part of the cost of the intangible
asset to which they relate. Training costs, administration and other general
overhead costs including interest are not capitalised.
Derecognition
An intangible asset is derecognised upon disposal or when no future economic
benefits are expected to arise from the continued use of the asset. Any gain or
loss arising on derecognition of the asset, calculated as the difference between
the net disposal proceeds and the carrying amount of the item, is included in
the Income Statement in the year in which the item is derecognised
Property, plant and equipment
Infrastructure Assets
Infrastructure assets comprise a network of systems relating to water
distribution, such as water mains and surface reservoirs. Infrastructure assets
in the course of construction are depreciated from the time they are brought
into use. Infrastructure assets are stated at deemed cost less accumulated
depreciation and any impairment in value. Depreciation is calculated on a
straight-line basis over the estimated useful life of the assets as follows:
Years
Surface reservoirs 250
Mains 20-100
Notes to the preliminary consolidated results (continued)
1. Summary of significant accounting policies (continued)
Property, plant and equipment (continued)
Non - Infrastructure Assets
Freehold land is not depreciated. Assets in the course of construction are
depreciated from the time they are brought into use. All other
non-infrastructure assets are stated at cost less accumulated depreciation and
any impairment in value. Depreciation is calculated on a straight-line basis
over the estimated useful life of the asset as follows:
Years
Freehold buildings 80
Operational structures 60-80
Plant and machinery including telemetry 10-35
Vehicles, mobile plant, office equipment and computers 3-7
Derecognition
An item of property, plant and equipment is derecognised upon disposal or when
no future economic benefits are expected to arise from the continued use of the
asset. Any gain or loss arising on derecognition of the
asset (calculated as the difference between the net disposal proceeds and the
carrying amount of the item) is included in the Income Statement in the year the
item is derecognised.
Residual values and useful lives
Residual values and useful lives of all assets are re-assessed annually and,
where necessary, changes are accounted for prospectively.
Capitalisation of employee and other directly attributable costs
Employee and other costs directly attributable to capital projects are
capitalised in the financial statements as part of the cost of the property,
plant and equipment to which they relate. Training costs administration and
other general overhead costs including interest are not capitalised.
Leased Assets
Property, plant and equipment held under finance leases are capitalised at the
lower of the fair value of the leased asset and the present value of lease
payments. These assets are depreciated over the shorter of the estimated useful
life of the asset or the lease term.
Leases
Finance leases, which transfer to the group substantially all the risks and
benefits incidental to ownership of the leased item, are capitalised at the
inception of the lease at the present value of the minimum lease payments.
Lease payments are apportioned between the finance charges and reduction of the
lease liability so as to achieve a constant rate of interest on the remaining
balance of the liability.
Finance charges are charged directly to the Income Statement.
Operating lease payments are recognised as an expense in the Income Statement on
a straight-line basis over the lease term.
Grants and Contributions
Grants and contributions are received in respect of both infrastructure and
non-infrastructure assets. These are recognised as deferred income and are
released to the Income Statement over the life of the assets to which they
relate.
Notes to the preliminary consolidated results (continued)
1. Summary of significant accounting policies (continued)
Inventory
Inventory is valued at the lower of average cost or net realisable value. No
value is placed upon stocks of treated water in accordance with accepted
practice in the water industry. Consumable chemical purchases are recognised as
an expense in the Income Statement at the point of purchase.
Work in progress for chargeable services is valued at the lower of cost and net
realisable value.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand
and short-term deposits with an original maturity of three months or less.
Included within cash and cash equivalents are amounts that are held in
designated bank accounts as short term deposits in order to meet the interest
and associated swap payments falling due in respect of listed debt.
Pension and other post employment benefits
The group accounts for pensions and other post employment benefits under IAS 19
Employee Benefits. The group operates both defined benefit and defined
contribution pension schemes. Defined benefits are provided using both funded
and unfunded pension plans.
Defined contribution plans
Contributions to defined contribution plans are recognised as an expense in the
Income Statement when the contributions fall due.
Defined benefit plans
The pension scheme liability in the balance sheet represents the net of the
present value of the defined benefit obligation and the fair value of scheme
assets at the balance sheet date. The present value of the defined benefit
obligation is analysed between the funded and unfunded pension plans.
The present value of the defined benefit obligation and the cost of providing
benefits under defined benefit plans is determined on a triennial basis, and
updated to each year end by an independent qualified actuary using the Projected
Unit Credit actuarial valuation method, discounted at an interest rate
equivalent at measurement date to the rate of return on a high quality corporate
bond of equivalent term and currency to the scheme liabilities.
The pension cost in the Income Statement includes current and past service cost
and the effect of any settlements and curtailments.
A net finance charge or credit is recognised within finance cost in the Income
Statement and comprises the net of the expected return on pension scheme assets
and the interest on pension scheme liabilities.
Actuarial gains and losses and the related deferred taxation are recognised
outside the Income Statement in the Statement of Recognised Income and Expense.
Financial instruments
The group's financial instruments comprise fixed and variable rate borrowings,
fixed rate debentures, an interest rate swap, finance leases, loans to parent
and fellow subsidiary undertakings, cash, short term deposits, trade debtors
and trade and other creditors.
Recognition
Financial instruments are recognised in the balance sheet when the group becomes
party to the contractual provisions of the instrument.
Derecognition
Financial liabilities are removed from the balance sheet when the related
obligation is discharged, cancelled or expires.
Financial assets are removed from the balance sheet when the rights to the cash
flows from the asset expire, or when the risks and rewards of ownership of the
asset are transferred or when control of the asset is transferred.
Notes to the preliminary consolidated results (continued)
1. Summary of significant accounting policies (continued)
Financial instruments (continued)
Embedded derivatives
Financial instruments that are not carried at fair value through the profit and
loss account are reviewed to determine if they contain embedded derivatives.
Embedded derivatives are accounted for separately as derivative financial
instruments when the economic characteristics and risks are not closely related
to the respective host financial instrument.
Derivative financial instruments
The group uses an interest rate swap to hedge its risks associated with interest
rate fluctuations. This use does not qualify for hedge accounting. Derivative
financial instruments are recognised initially and subsequently in the balance
sheet at fair value with any movements during the year charged or credited to
the Income Statement. The fair value is determined by reference to market values
for similar instruments.
Interest bearing loans and borrowings
All loans and borrowings are initially recognised at cost, being the fair value
of the consideration received net of issue costs associated with the borrowing.
Interest-bearing loans and borrowings are subsequently measured at amortised
cost using the effective interest method. Amortised cost is calculated by
taking into account any issue costs, and any discount or premium on settlement.
Short-term trade and other receivables
Short- term trade receivables are recognised and carried at original invoice
amount less an allowance for any doubtful debts. An estimate for the provision
for doubtful debts is calculated by the group's management based on applying
expected recovery rates to an aged debt profile and an assessment of current
socio-economic conditions.
Trade payables
Trade payables are carried at payment or settlement amounts.
Assets held for sale
Assets are classified as held for sale when the carrying amount of an asset will
be recovered principally through a sale transaction rather than continuing use.
These assets are held at the lower of carrying amount and fair value less costs
to sell and are no longer depreciated.
Segments
The group operates one business segment being the supply of water and in one
geographic segment, being the United Kingdom.
Dividends
Dividends are recognised as a distribution when paid. Dividends either proposed,
or declared but unpaid at the balance sheet date, are disclosed in the notes to
the financial statements.
Exceptional items
Exceptional items are material items of income and expense disclosed separately
to enable a full understanding of the group's financial performance.
Notes to the preliminary consolidated results (continued)
2. Revenue
2007 2006
#000 #000
Metered water income 45,329 45,243
Unmetered water income 61,847 63,524
Other sales 3,388 4,924
110,564 113,691
All revenue is to customers within the United Kingdom.
3. Net operating costs
2007 2006
#000 #000
Employee benefits expense 10,268 10,022
Asset expense/(income):
Depreciation - owned assets 11,587 11,082
Depreciation - leased assets 518 663
Amortisation of intangible assets 1,249 974
Mains disposals 1,194 1,192
Non-exceptional profit on sale of property, plant
and equipment
(461) -
Goodwill write off - 142
Exceptional profit on sale of property - (5,468)
14,087 8,585
Other operating expenses:
Operating lease rentals:
- vehicles and office equipment 590 806
- land and buildings 499 354
Fees payable to the group's auditors 152 165
Other expenses 42,459 40,246
Other operating expenses charged to capital
projects (2,988) (2,935)
40,712 38,636
65,067 57,243
Exceptional profit on the sale of property of #5,468,000 for the year ended 31
March 2006 arose from the sale of office and laboratory space considered surplus
to the long term requirements of the group. Part of the office space has been
leased by the group under an operating lease at market rates.
Notes to the preliminary consolidated results (continued)
4. Other income
2007 2006
#000 #000
Rental income 550 557
Sundry income 3,195 2,776
Charges to group undertakings - 34
3,745 3,367
Sundry income includes charges for engineering, scientific, laboratory, billing and cash collection services.
5. Finance costs
2007 2006
#000 #000
Debenture interest 1,075 1,231
Effective interest on listed debt 15,801 15,640
Fair value movements on interest rate swap 9,720 16,611
Bank interest and other finance charges 1,382 311
Financing guarantee fees 890 1,020
Interest payable on finance leases 861 912
Pension fund finance charge - 685
Amortisation of issue costs 435 381
30,164 36,791
6. Finance income
2007 2006
#000 #000
Interest receivable from group undertakings 13,166 12,926
On bank balances and short term deposits 1,164 1,292
Pension fund finance credit 411 -
14,741 14,218
Notes to the preliminary consolidated results (continued)
7. Taxation
Major components of the tax expense for the years ended 31 March 2007 and 2006
are:
Consolidated Income Statement
2007 2006
#000 #000
Current tax
Current UK tax charge 6,636 7,386
Deferred tax
Relating to origination and reversal of temporary differences 2,582 4,501
Tax expense reported in the Income Statement 9,218 11,887
Deferred tax charge to equity
2007 2006
#000 #000
Deferred income tax
Deferred tax charge on actuarial gain 215 2,941
Deferred tax credit on change in accounting policy
on adoption of IAS 32 and IAS 39 - (660)
Tax reported in equity 215 2,281
8. Dividends
2007 2006
Note #000 #000
Equity dividends paid during the year:
First interim dividend paid in 2006/7 #3.225 per ordinary share
(paid in 2005/6 and declared but unpaid at 31 March 2005 #3.269) 16,420 16,643
Second interim dividend paid in 2006/7 #3.171 per ordinary
share (paid in 2005/6 #3.704 per ordinary share) 16,143 18,860
Third interim dividend paid in 2006/7 #1.915 per ordinary share
(paid in 2005/6 #2.192 per ordinary share) 9,748 11,160
10 42,311 46,663
Equity dividends proposed for approval
There were no dividends proposed for approval as at 31 March 2007 and as at 31
March 2006.
Notes to the preliminary consolidated results (continued)
9. Retirement benefit schemes
Analysis of pensions liability
2007 2006
#000 #000
Present value of defined benefit obligations 138,747 136,605
Fair value of plan assets (113,216) (108,189)
Net liability 25,531 28,416
10. Changes in shareholders' equity
Share capital Capital Retained
redemption earnings
reserve Total
#000 #000 #000 #000
At 1 April 2005 5,092 4,000 171,019 180,111
Dividends paid - - (46,663) (46,663)
Total recognised income and expense for the year - - 32,216 32,216
At 31 March 2006 5,092 4,000 156,572 165,664
Dividends paid - - (42,311) (42,311)
Total recognised income and expense for the year - - 25,104 25,104
At 31 March 2007 5,092 4,000 139,365 148,457
This information is provided by RNS
The company news service from the London Stock Exchange
END
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