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RNS Number:4211O South East Water Limited 5 July 2005 SOUTH EAST WATER LIMITED Preliminary Consolidated Results for the year ended 31 March 2005 Contents Page 2 Chairman's statement 5 Managing Director's report 12 Consolidated profit and loss account 13 Consolidated balance sheet 14 Consolidated cash flow statement 15 Notes to the preliminary results Chairman's statement South East Water Limited has once again achieved a strong all-round performance in an exceptionally busy year for the company. The strong financial performance of the business is matched by an equally strong operational performance. This was recognised by Ofwat in the price review with an additional 0.2% over all performance assessment included within the first year price limit. Results I am pleased to announce the financial results for the 12 month period ended 31 March 2005 showing an operating profit of #26.4 million (15 months ended 31 March 2004: #40.7 million) on turnover of #95.6 million (15 months ended 31 March 2004: #115.6 million). During the year South East Water continued to drive out inefficient processes and deliver a value for money service to all customers. For South East Water, 2004/05 was dominated by two significant issues: the completion of the Price Review and a major financial restructuring. Price Review In August 2004 Ofwat announced Draft Determinations, followed in December 2004 with the Final Determinations. The company engaged with Ofwat in a number of discussions between the Draft and Final Determinations and the changes made to the Final Determination reflected the outcome of those discussions. Whilst the outcome is challenging, particularly in the area of capital and operating efficiency, the Board did decide that on balance the Determination would enable the company to finance its functions and therefore would not be referred to the Competition Commission. The Board will work closely with the company to deliver the challenges of PR04. For South East Water customers, the average increase over the five-year period is 3.7% above inflation, with an annual profile of: 2005/06 2006/07 2007/08 2008/09 2009/10 15.8% 2.3% 2.2% 0.5% 1.6% Whilst this level of increase is necessary to ensure that the company can finance its functions and maintain its service levels to customers, the company is conscious that any price increase is not welcomed by customers. The company is working closely with WaterVoice and a number of stakeholder groups in providing explanations to South East Water customers. A detailed explanation was also included in the company customer magazine, "The Big Blue", which has been sent out to every customer with their bill for 2005/ 06. Financial restructuring During the year the company carried out a major financial restructuring which includes the financial ring fencing of South East Water. In July 2004, South East Water raised #366m of long-term funds, the proceeds of which were used to refinance the acquisition debt and fund the ongoing capital programme. The new financing structure provides the company with considerable flexibility and a much improved debt maturity profile that is consistent with the long-term nature of the asset base. The financial restructuring has increased the level of debt to the Regulatory Capital Value ratio to 79.3%. The Board considers this level of gearing as appropriate given the future investment requirements and the risk profile of South East Water. Chairman's statement (continued) As part of the refinancing, the company has agreed with Ofwat some changes to the Licence. These modifications principally concern the ring fencing of the regulated business and the management and conduct of the business and the role of Macquarie European Infrastructure Fund Luxembourg Holdings SA ("MEIF LHSA"), the ultimate controlling company at that point. MEIF LHSA is itself a wholly owned subsidiary of Macquarie European Infrastructure Fund LP, which is considered to be the ultimate controlling party. These modifications are broadly similar to those agreed by other water companies who have significantly increased their gearing levels through financial restructuring. They came into force on 12 July 2004. Customer Service The company's record on customer service has improved year on year and the company is currently ranked third out of twenty two in the Ofwat Overall Performance Assessment (OPA) table. To continue building on these successes, the company appointed a Director of Customer Services in May 2004. This appointment recognises the importance of improving our relationship with customers and provides a focus on our task of driving down customer debt. Corporate Social Responsibility South East Water continues to punch above its weight in the arena of corporate social responsibility. It was particularly pleasing that the company's contribution to the Environment and the Sustainable Development Agenda was recognised with the prestigious Sir Peter Parker Award for Business Commitment to the Environment. Of particular interest to the judging panel of this national award was the company staff volunteer days to work on conservation projects across the company region. Our target is at least 10% of staff will participate in these projects. This is complemented by community activities where over 12,000 staff hours have been dedicated to a wide range of community activities from school presentations to local fetes, and support of the Young Enterprise initiative. The Health & Safety campaign, headed by the company Health & Safety mascot, SAM (Safety Always Matters) continues to pay dividends with the company receiving the ROSPA Gold Award for the second year running. Outlook As the pages close on PR04, we must now look to delivering the challenges from the review whilst maintaining our levels of service to our customers. The water market will be further opened to competition with the new licensing regime for new entrants. The company will work with the regulators to ensure that the benefits of competition are maximised and the level of risk minimised. As we look out to 2005/06, the regulatory landscape is changing with the creation of the new Consumer Council for Water and the replacement of the Director General of Ofwat with a regulatory board, Water Services Regulation Authority. The company will work with the various regulators and organisations to assist with a smooth transition from the old to the new. As a company working within a regulatory environment, we welcome the Hampton Review on the Future of Regulation and will watch with interest as the recommendations are implemented. We will continue to work at both a local and national level to promote the issues affecting the water industry and I am pleased that our Managing Director has taken on the role of Chairman of Water UK from 1 April 2005. The Board fully supports this appointment regarding it as a reflection of the reputation of South East Water in the industry. Chairman's statement (continued) Board During the year Angela Knight, independent Non Executive Director, retired from the Board. Keith Henry has replaced Angela, thus maintaining full compliance with our Licence obligations. I would like to thank Angela Knight for her contribution to South East Water during a very busy period and formally welcome Keith Henry to the Board. In addition Andrew Hunter resigned from the Board in the year and Martin Stanley is due to resign with effect from 1 July 2005. I would also like to thank them for their contribution. Management and Staff This was without doubt a busy year for South East Water. It is a testament to the professionalism and expertise of the staff that this challenging agenda was delivered without any detriment to the service delivered to customers, demonstrating the company's vision of "Success as a Service Business through Innovation & Growth" in action. J Craig Chairman Date: 30 June 2005 Managing Director's report All industries have their particular milestones. For the water industry, the completion of the price review is undoubtedly one of our important milestones. This, coupled with a financial restructuring, made 2004/5 a busy and challenging year for South East Water's management and staff. It is a reflection of the professionalism of our team that these challenges were met whilst continuing to improve the service delivery to all our customers across the spectrum of activities, from water supply to response to customer complaints. I would like to highlight some of the significant business issues which have been dealt with successfully, to ensure that we continue to provide our customers with a safe and reliable supply of drinking water 24 hours a day, 365 days a year. Operating costs Having, five years ago, been amongst the lowest-performing water companies in the Ofwat table for operating efficiency, rated as band E, the company has improved its rating to band B. This reflects our commitment to delivering value to our customers and our shareholders. The Chairman has referred to our increase in prices for the next five years. The major part of our increase is applicable in 2005/6 reflecting the fact that, despite significant reductions in our operating cost base, the costs driving prices impact upon us immediately. This has been partly driven by investment costs; in addition, such extra costs as insurance, rising fuel prices, changes in taxation affecting water companies and increased pension contributions, have all been recognised by the regulator in his determination as positive cost drivers. Rising pension costs have been a concern, despite the pension scheme closing to new entrants and employee contributions increasing from 6% to 7%. Company pension costs have risen from 13.8% of pensionable payroll to 30.0% in January 2005. These will need to rise further in the future as mortality rates improve and investment returns remain below their previous levels. South East Water has made a significant contribution to keeping the customer price increase to a level averaging no more than 3.7% over the five year term from 2005 to 2010 by past efficiencies reflected in our band B rating. The outcome of the price review has set the company extremely challenging operating and capital cost efficiency targets. The company will strive to meet these whilst maintaining service to our customers. Investing in the future A part of our increase in prices next year is needed to fund the major capital investment which the company will be making over the next five years - #174 million net of developer receipts. Capital investment in 2004/5 was #44.8 million, the tenth consecutive year that investment will have been greater than pre-tax profits and this position will continue for the next five years. This level of investment demonstrates our commitment in particular, to renewing existing infrastructure and developing new water resources in our licensed area of the south east of England, which is recognised by all our stakeholders as being water resource deficient. A quarter of the total investment programme was spent on projects to improve the quality of the water supplied to our customers. Our major programme of cleaning and relining our water mains continued with some 150km of main being refurbished at a cost of nearly #7.9 million. A further #2.7 million was invested in micro-filtration plants at various locations to further reduce the already low risks of microbial contamination. Some #9.4 million was invested in new water resources and on new mains to cope with the growth in demand. Half of this total was spent on a single scheme, the Bewl-Darwell transfer project. This regional scheme, which involves one other local water company, allows the transfer of surplus water from Bewl Reservoir to Darwell Reservoir. South East Water has constructed a new intake and pumping station at Darwell Reservoir, and a new 14 km long trunk main to carry up to eight million litres of water per day to our water treatment works at Hazards Green. This vital new resource will help safeguard supplies in our Bexhill and Eastbourne area. A pilot desalination plant, the first of its kind in this part of the country, has been under assessment at Newhaven . If successful, this technology will help meet peak demand in dry periods increasingly experienced in the south east of England. Some #20.6 million of our total investment programme was used to replace deteriorating assets. Major refurbishment schemes were carried out at our treatment works at Aldershot, Itchel and Barcombe. Our treated water reservoir at Swaineshill was reconstructed, and a significant programme of work was completed to improve security on our sites. In addition to this a large number of relatively low value essential replacement projects, e.g. pumps, electrical switch gear, control systems, was also completed in the year. Managing Director's report (continued) The impact of the investment programme can be seen in a number of ways. We are pleased to say that our level of compliance with drinking water quality standards has risen yet again this year to 99.84%, while leakage levels of 69.3 megalitres per day from our distribution system, have been reduced to the overall economic level. Meanwhile, the number of properties affected by unplanned interruptions (DG3 0.05%), and those experiencing low pressure (DG2 0.01%), have remained at very low levels, gaining us the Ofwat top assessment rating for these measures. In the current climate of increased terrorist threat, security is high on our agenda. In addition to investing in improved security facilities at our water treatment and treated water storage sites, we continue to test our response to simulated emergencies. Three such exercises were carried out during the year, one of them being in collaboration with the Drinking Water Inspectorate, while another was a joint exercise with local councils in our area. While these exercises were successful, there is always something to be learned from them, so we continue to refine and improve our plans in the light of these experiences. Our capital expenditure, #44.8 million, was amongst the highest in our history. We are rated as band A by Ofwat for effectiveness in managing our capital expenditure which demonstrates that we are amongst the most efficient in the industry in delivering outputs for each capital # spent. We will continue to seek ways of delivering future efficiencies in our capital programme. This is a long term industry and we do have to plan decades ahead, working closely with our regulatory stakeholders; Ofwat, who will be replaced in April 2006 by a regulatory board, the Water Services Regulatory Authority; Water Voice, which will be replaced by a new Consumer Council for Water; the Environment Agency; the Drinking Water Inspectorate; and English Nature to secure a common view of our needs for the future. We are, for the future, and like the rest of the water industry, concerned at the potential implications for capital spend from legislation such as the Water Framework Directive, to be implemented progressively by 2015. Water Supply and Distribution The quality of the water we supply still remains among the best in the world with 99.84% of our 100,613 tests complying with both European Union and UK mandatory standards. In addition to these tests required by the regulations, we also carried out a further 108,000 tests to ensure that our assets were performing in such a way as to deliver excellent quality water to our customers. In 2004 considerable investment was made, not only in maintaining water quality but also in ensuring that we comply with the latest stringent water quality standards regarding the parasite Cryptosporidium. In addition to this we also completed installation of orthophosphate dosing at 23 of our water treatment sites. This will reduce the amount of lead leaching into the water supply from lead pipes, where these remain in the system, mainly on customer premises. It also has the added benefit to our customers of reducing scale build up in domestic appliances. Rehabilitating our ageing mains infrastructure formed a major part of our capital investment programme. During 2004, some 160km of mains were rehabilitated either by direct replacement or via scraping and relining. This work represents the final stage of our rehabilitation programme, which involves the rehabilitation of just under 1,100km of mains. The programme is due to be completed in June 2006 and will maintain water quality and pressure for our customers. We thank our customers in Farnham, Frensham, Crowthorne, Wokingham and Sevenoaks for their patience during the last year while we carried out this essential work in their areas. Water Resources After a dry winter in 2003/4, water supply was sufficient to meet demand in 2004. However, six consecutive months of below average rainfall from November 2004 to April 2005 have been cause for some concern about our ability to meet demand in 2005, unless rainfall improves back to Long Term Averages. We continue to work closely with the Environment Agency in applying the twin track approach of demand management and resource development. Our 25 year Water Resources Plan includes researching the feasibility of building a raw water storage reservoir at Clay Hill, working with all stakeholders at each stage of this project to ensure that the final outcome is sustainable for all stakeholders. In the meantime, we have continued to publicise water efficiency measures to customers, including this year a joint promotion with neighbouring water companies using TV gardener and personality Charlie Dimmock at B&Q stores in our supply area. We have actively pursued demand management initiatives including extending our metering programme throughout the year. Managing Director's report (continued) A number of resource improvements over the year have helped to mitigate our resource deficit including the re-negotiation of the Ouse abstraction licence with the Environment Agency and the construction of the Bewl-Darwell link. The two schemes will provide an additional 13.8 million litres of water per day to customers across Sussex. We reduced our leakage to 69.3 megalitres a day, achieving our economic leakage level. This is also a considerable improvement over the past five years from a leakage level of 97 megalitres a day, the highest percentage improvement in the industry over that period. Metering We maintain our view that metering can be an effective demand management tool, and we continue to promote this through mailings and our website. However, our opinion is that compulsory metering is the only really effective and sustainable option, both economically and as a demand reduction method, and we will continue to lobby Government for a change in its policy on metering. Our customers Customers remain at the very heart of our business. The appointment of a Director of Customer Services acknowledges the importance of all our 1.5 million customers to the business and will ensure that we continually strive to deliver an excellent level of service. We have seen levels of customer contact decrease over the year and the level of written complaints reduce by 34% as a result of improved processes in the business, giving first time resolution to all our customers. We have also seen 50% reduction in the number of customers who have written to WaterVoice. Customer Feedback We value feedback from our customers and have continued to use Customer Contact Surveys as a means of identifying areas that need to be improved. We have carried out three such surveys this year, undertaken by an independent Customer Research Company. These surveys, and the work we carried out in 2003, show a continuing improvement across all areas of customer contact, be it politeness and courtesy of staff at our contact centre, our Distribution Inspectors who visit our customers on a daily basis, and the efficiency of our administration teams - often our unsung heroes. Innovation and New technology We continue to seek new and innovative ways of interacting with our customers to optimise the experience they have. We have recently introduced a fully automated payment line at our contact centre, based on speech recognition software. This has proven hugely popular with our customers, with a 50% increase in the number of 'contacts' over the same period last year. Now that we have proved the concept of this type of technology, we are seeking actively further developments of this service to offer additional self service functions to our customers, such as payment by Direct Debit, or self meter reads. We reported last year on the integration and testing of a completely new customer management system. Due to technical difficulties and delays taken in implementation, the Board reluctantly decided to terminate this project. The matter is, in line with the contract provisions, subject to arbitration procedure to resolve the dispute. The associated assets have been written off within the financial statements. A new billing and customer information management system will be implemented in November 2005. Our Largest Commercial Customers A dedicated team of staff deal with our large user / high consumption users, who use more than 9,000 cubic metres of water per annum, to reflect the different needs of these customers. This helps ensure that we remain efficient and focused in our response to the needs of our high consuming water users. As competition for large users of water opens up, we will be judged very much on our responsiveness and innovative approach to helping these customers. While excellent levels of service are very important to our large user / high consumption users, we also need to remain competitive. We have a number of large user tariffs available to this group of customers, rewarding consumption patterns that result in a lower cost of supply. A full large user tariff review will be carried out in 2005 to develop more innovative tariffs, reflecting seasonal demands. Managing Director's report (continued) A number of value added services are available to large commercial customers. The core offering is the Demand Management Services Suite, comprising four distinct but interlinked services aimed at reducing wastage and thereby cost to the customer. The services available are Water Audits, Leakage Detection, External Pipe Repair and E-metering. Dealing with Debt The whole industry has suffered from increasing levels of customer debt, reflected generally in society by high personal borrowings and credit card debt. South East Water reviewed its internal organisation and procedures to ensure debt was reduced and our income maximised as well as improving our response to customer contacts. The company contributed to the EOS Trust which assists customers with genuine payment difficulties to re-schedule and pay off their debt. We are also able to help customers on benefits apply for Water Direct Payments from the Department of Work and Pensions, where they are eligible for such payments. A rising debt trend was reversed in 2003/4 to end that year with 17.6% of annual turnover as debt; in the past year we have further reduced that to 15.2% of turnover. This remains far too high and we will continue next year to pursue debt vigorously in the interests of fairness to all our customers. WaterVoice carried out an audit on our debt recovery practices during the year. WaterVoice gave us the highest rating possible in the audit, reflecting our firm but fair approach. Our environment South East Water is committed to protecting and improving the environment in everything that we do, and so we were pleased in 2004 to launch our first sustainable development policy and sustainable development report. The purpose of this work was to outline and demonstrate our approach to ensure the long-term sustainability of our business. As a water supply business, our company is more intrinsically linked to the environment than many other businesses. We abstract water from rivers and aquifers and are a significant land-owner. We recognise that the way we operate can impact on the environment and we aim to adopt an environmentally responsible approach to all aspects of our work. This responsible approach has been demonstrated particularly well during this reported period. For example, during this financial year, we began to survey company Sites of Special Scientific Interest (SSSI). During this year 25% of these sites were surveyed, and key management principles established together with a five-year management and monitoring protocol. Such work is part of a long-term company vision to ensure that 95% of our SSSI landholdings are in favourable condition by 2010. Our environmental work has not been restricted just to land management. All major engineering projects were assessed for their environmental impact during 2004/05 to ensure that environmental issues were identified and mitigated before construction work commenced. This proactive work ensured that engineering solutions were developed optimising environmental protection. Once again this year, our environmental management systems were awarded ISO 14001 certification at our Barcombe treatment works. Other highlights for 2004/05 have been: * Winner of the Peter Parker Award at the prestigious Business Commitment to the Environment Award in April 2004; * Erection of dormice nesting boxes as part of the Bewl-Darwell water resource scheme; * Extensive great crested newt mitigation and survey work on numerous engineering schemes; * Over 10% of company staff engaged in our conservation volunteer scheme; * Over 250 members of the public engaged in our community conservation volunteer scheme; * 30% reduction in office waste at two of our water treatment sites. Managing Director's report (continued) Our Communities As a local water company, we have a strong commitment to the communities we serve and have an active programme of engagement with the people and institutions who make up the communities. Our first responsibility is to supply clean safe drinking water and in 2004/05 our water quality once again exceeded the exacting standards of the Drinking Water Inspectorate. We were active in promoting the 'Drink More Water' campaign, particularly in primary schools, extolling the health benefits of drinking water with posters, postcards and water bottles which children could use to bring clean tap water to school with their lunch boxes. Primary schools were a principal focus of another important programme in which we sought to engage with our public - water efficiency. In our 'Use Water Wisely' campaign our staff gave talks at primary schools throughout our supply area to help children at an impressionable age understand that water is a precious resource. We also distributed Hippo bags, water saving devices which reduce the volume of water used in every toilet flush. We co-operated with a number of public libraries in our area to supply posters and promotional materials on the subject. Once again this year, the company promoted water efficiency and conservation at participating B&Q stores in our supply area. Our staff are proud of the service we provide and were happy to show numerous adult groups, ranging from representatives of Uckfield Town Council to the Wokingham Rotarians, around water treatment works at Bray, Hazards Green and Barcombe. Public access to conservation sites and reservoirs is an important facility which South East Water provides to our communities. Walking, birdwatching, sailing, fishing and horse-riding are amongst the recreational pursuits enjoyed on our open-access land. South East Water employ a small dedicated group of fisheries and conservation staff whose role is to keep our public facilities in an attractive and safe condition for members of the public to enjoy the recreational opportunities our sites provide. Over 10% of our staff gave up their time to help in scrub clearance and restoration of our green sites. We are particularly indebted to the 258 members of the public who gave their own time to our conservation volunteer programme helping maintain and improve our public access facilities. 2004 was the 25th anniversary of Ardingly Reservoir and a summer programme of events was laid on to celebrate this important milestone. Our conservation staff held instructional bat-spotting walks around the reservoir and TV presenter Nick Knowles cut the birthday cake at a tea party for local children and members of the public. Like many organisations, South East Water decided not to send out Christmas cards but, instead, we used the resource to provide a permanent wood sculpture at Ardingly for the enjoyment of the public. A fallen tree trunk was carved into a giant stag beetle by Richard Dyer, one of our Conservation Rangers, in his own time, and this now attracts enormous interest and admiration, particularly from the school children who visit Ardingly. We continued our programme of local sponsorships designed to cement a close relationship with community institutions through assistance with the organisation or resources of local events. These covered a range of activities including the Hook Village fete, the Hampshire Museums Trust, The Wivelsfield Village Fun Run, Farnham Heath Nature Reserve, the Eastbourne Victorian Festival, and Haywards Heath Football Club. Numerous charities benefited from a variety of sponsorships and fund-raising events supported by the company and staff. These included Water Aid, to which staff and company contribute through payroll deductions, and which aims to bring to third world countries the clean drinking water and sanitation we take for granted in this country. This year, South East Water sent one of its managers to South Africa under the P.A.W.S. project (Partners in Water and Sanitation ) a government sponsored project in partnership with water companies, to provide technical assistance to improve water operations in Nkumazi , South Africa. The dreadful destruction of communities in Asia by the Tsunami of Boxing Day 2004 also drew on the generosity and public spirit of our staff who made a payroll donation which was matched by the company. The main focus of charitable support, however, is local and our own staff ran hundreds of miles in sponsored marathons and spent many hours in fund-raising to support good causes as diverse as the MS Society , Spinal Research and the Ocklynge Junior School. The charities which we support from year to year are chosen by our Charities Panel comprising staff who dedicate personal time to engaging the interest of their colleagues in organising fund raising events in support of our selected charities. This year, as our Chairman has mentioned, a total of over 12,000 man hours were variously dedicated to South East Water's community engagement programmes. To assist members of the public who are disabled, we amended our website to make it easier to read for people whose vision is impaired, and easier to navigate for those with impaired grip. We are always attentive to the needs of the disabled and, after representations from one disabled visitor to our Arlington Reservoir, we were able to make structural changes to improve access to the disabled toilet and ensure viable access to the bird hide for multi-terrain wheelchairs. Managing Director's report (continued) We take our corporate social responsibility seriously, whether it be through direct community involvement, through responsible environmental guardianship or high standards of corporate governance. Our Staff During the financial year, our average directly-employed headcount grew from 373 to 412 as a result of the absorption into South East Water of Dynamco Limited staff as our in-house Engineering Department. Simplification of the organisation structure has brought a number of benefits, not least the community of interest which has enabled all staff to work in harmony to deliver this year's challenging corporate targets. We were pleased to add to our complement three new apprentice posts enabling these young people to gain experience and qualifications in water production and distribution, helping enhance the skill base available to the company in the future. Training and Development remains fundamental to our approach to developing staff potential and 931 days of training were provided, averaging over 2 days for every member of staff at every level in the business. Regular induction events were held for new starters and many of our staff continued their development through the Career Progression Scheme. Support was provided for the acquisition of professional accountancy, human resources, information services and engineering qualifications and one of our staff qualified as an MBA qualification. A significant amount of health and safety training was carried out. We provided skills training for our managers and the executive team embarked on training which will lead, in the future, to qualification as Chartered Director. The company continued its Learning Support Scheme which enables staff to pursue interests outside their own job for personal development. We regard staff communication as very important and continued to operate monthly briefings and annual performance appraisals throughout the company. The executive team briefed staff face to face twice during the year on topics such as pensions, PRO4, the five year business plan and explaining the planned price increases to customers. There were four issues of our staff magazine, Reflections, and our intranet, The Source, was further developed as an effective communication tool. At year-end, the company set up a Staff Council in order to broaden staff access to a forum of consultation on matters of concern, beyond the exclusively union channels previously used within the company. We were able to enhance our staff benefits package at minimal cost by offering the opportunity to acquire computers through the Government's Home Computer Initiative. Bonus schemes operated for all our staff, providing an incentive to achieve our corporate targets and, fundamental to our reward strategy, a share in the rewards for a successful year. As in all areas of our business, we seek to evaluate the effectiveness of our approach. We were proud to be certified again this year as an Investor in People. Our absence rate, at below 3.0%, and our labour turnover rate, at below 14.0%, both measures commonly used as Key Performance Indicators, were each below the national averages. We managed, with our staff, to maintain a safe work environment with reportable accidents maintained at the level of two for this report year. We aim to reduce this further and have implemented a comprehensive safety management system which has been awarded OHSAS18001 accreditation. Non-regulated business On the non-regulated side of our business, budgeted income has once again been met this year due to the team's concerted efforts. Mast Rental income remains an important contributor to both revenue and profits. A re-negotiation of the billing and metering services agreements with neighbouring water and sewage companies together with the income generated from the acquisition of Dynamco business during the year, has contributed to the 17.1 % non-regulated income growth. Managing Director's report (continued) The real success story for 2004 was the launch of our land searches product, utilising GIS maps to locate and identify underground company infrastructure on land transferring ownership. These searches are scheduled to become part of the home mover packs, so they are not yet compulsory. Our strategy has been to target distribution agreements with both of our neighbouring water companies which have their own formal agreements in place with the Law Society. The final product is then actively marketed to home and property buyers via the packaged services of large and medium size firms of conveyance-solicitors. Income from this sector has grown ten-fold to over #150,000 in 2004. Within Scientific Services, our commercial Cryptosporidium testing business has come under significant pressure during 2004 from increasing competitor activity and reduced compliance site testing by our core customers following their site risk re-assessments. Budgeted income was maintained through increased testing activity in our non-crypto sectors and the success of our land searches product. Non-regulated income from Key Accounts, principally users of 10 megalitres or more of water per annum, continues to show positive growth, with the team working closely with their Engineering colleagues to sell engineering based solutions that meet customer needs. In addition to the legionella risk assessment services introduced during 2002, the team has enhanced its commercial services portfolio to encompass demand management, as well as active leak detection and repair services. This success is all the more pleasing for their simultaneous work on Key Account debt collection, which continues to improve the company's cash flow position in that area, month on month, over the period. The Year in Summary Within South East Water thanks to the contribution made by all the staff, we have dealt successfully with a range of issues to meet the expectations of all our stakeholders. We have a challenging year ahead but are optimistic of our ability to achieve our vision - "Success as a Service Business through Innovation and Growth." In securing the continuous improvements we need to make on behalf of all our stakeholders, we are committed to operating a business which will remain' Fit for Purpose; Fit for the Future.' Margaret Devlin Managing Director Date: 30 June 2005 Consolidated profit and loss account for the year ended 31 March 2005 Year ended 31 15 months ended March 2005 31 March 2004 #000 #000 Note Turnover 2 95,639 115,614 Operating costs 4 (62,225) (75,125) Operating costs - exceptional fixed asset write off 4 (10,302) - Operating costs - exceptional unfunded pension costs 4 - (3,310) Total operating costs (72,527) (78,435) Other operating income 3 3,254 3,482 Group operating profit 26,366 40,661 Profit on sale of subsidiary - discontinued operation - 2,100 Interest receivable and similar income 5 10,212 - Interest payable and similar charges 6 (20,460) (10,609) Profit on ordinary activities before taxation 16,118 32,152 Tax on profit on ordinary activities 7 (5,396) (1,591) Profit on ordinary activities after taxation 11 10,722 30,561 Equity dividends 8 (24,443) (16,330) (Loss) / retained profit for the financial period (13,721) 14,231 Group operating profit relates to continuing operations. There are no material differences between the profit on ordinary activities before taxation and the (loss) / retained profit for the financial period stated above and their historical cost equivalents. The group has no recognised gains or losses other than the profits shown above and therefore no separate statement of total recognised gains and losses has been presented. The accompanying notes are an integral part of this profit and loss account. Consolidated balance sheet as at 31 March 2005 2005 2004 Note #000 #000 #000 #000 Fixed assets Intangible assets 142 - Tangible assets 408,617 389,434 408,759 389,434 Current assets Stocks and work in progress 40 38 Debtors: amounts falling due after more 9 190,013 - than one year Debtors: amounts falling due within one 9 22,389 22,394 year Total debtors 212,402 22,394 Restricted cash 6,931 - Non-restricted cash 25,503 644 Cash at bank and in hand 32,434 644 244,876 23,076 Creditors: amounts falling due within one (52,698) (59,257) year Net current assets / 192,178 (36,181) (liabilities) Total assets less current 600,937 353,253 liabilities Creditors: amounts falling due after more 10 (391,408) (133,668) than one year Provisions for liabilities and (25,422) (24,810) charges Deferred income (8,075) (8,822) Net assets 176,032 185,953 Capital and reserves Called up share capital 5,092 1,292 Capital redemption reserve 4,000 4,000 Profit and loss account 166,940 180,661 Equity shareholders' funds 11 176,032 185,953 The accompanying notes are an integral part of this balance sheet. These preliminary results were approved by the board of directors on 30 June 2005 and were signed on its behalf by: M P Devlin Managing Director Date: 30 June 2005 Consolidated cash flow statement for the year ended 31 March 2005 15 months Year ended ended 31 March 31 March 2005 2004 #000 #000 Net cash inflow from operating activities 12 55,346 53,965 Returns on investments and servicing of finance Interest paid (14,709) (9,410) Interest received 3,578 - Issue costs of new listed debt (5,971) - Interest element of finance lease payments (1,377) (1,217) Net cash outflow from returns on investments and servicing of finance (18,479) (10,627) UK corporation tax paid - (2,223) Capital expenditure and financial investment Purchase of tangible fixed assets (41,095) (47,824) Fixed asset contributions received 1,044 945 Net proceeds / (costs) from disposal of tangible assets 43 (6) Net cash outflow from capital expenditure and financial investment (40,008) (46,885) Acquisitions and disposals Acquisition of fellow subsidiary assets and contracts (250) - Proceeds from disposal of tangible assets and investments - 3,110 Net cash (outflow) / inflow from acquisitions and disposals (250) 3,110 Equity dividends paid to shareholders (13,030) (15,320) Net cash outflow before management of liquid resources and financing (16,421) (17,980) Management of liquid resources: (Increase) in money market deposits (28,613) - Financing Capital element of finance leases (5,254) (1,770) Debenture repayments (3,803) (167) Settlement of long term loans from group undertakings 3,635 - Issue of long term loans to group undertakings (190,013) (381) Loans repaid to group undertakings (126,154) - Issue of new listed debt 366,000 26,850 Proceeds from equity share issues 3,800 - Net cash inflow from financing 48,211 24,532 Net cash inflow from management of liquid resources and financing 19,598 24,532 Increase in net cash 3,177 6,552 Reconciliation of increase in net cash to movement in net debt Net cash at the start of the year 644 (5,908) Increase in net cash (above) 3,177 6,552 Money market deposits 28,613 - Total cash 32,434 644 Opening borrowings (163,537) (144,292) Net increase in borrowings (224,818) (19,245) Other non-cash changes (3,834) - Net debt at the end of the period 13 (359,755) (162,893) Notes to the preliminary results for the year ended 31 March 2005 1. Basis of preparation The financial statements for the year ended 31 March 2005 have been prepared in accordance with the accounting policies set out in the Annual Report and Financial Statements for the period ended 31 March 2004 and the accounting policies outlined below, which are applicable to the Group for the first time this year. Goodwill Purchased goodwill is amortised on a straight line basis over its useful economic life commencing in the first full year post acquisition. Each case is considered on an individual basis. Financial instruments The group's financial instruments comprise cash at bank, short term deposits, fixed and variable rate borrowings and loans, interest rate swaps, fixed and variable rate finance leases and fixed rate debentures. Interest differentials, under interest rate swap agreements used to vary the amount and periods for which interest on borrowings are fixed, are recognised by adjustment of interest payable. Interest rate swaps on principal repayments of RPI linked loans are recognised on an accruals basis over the period of the swap with a corresponding charge included within interest charges. Debt issue costs Debt instruments are stated at the amount of net proceeds received. Issue costs incurred for the purpose of providing future funds are accounted for as a deduction from the amount of consideration received and amortised over the period of the loan to which the issue costs relate. Certain amounts relating to the prior year have been reclassified to conform to the current year presentation. 2. Turnover Year ended 15 months ended 31 March 2005 31 March 2004 #000 #000 Metered water income 37,007 44,849 Unmetered water income 53,735 65,101 Other sales 4,897 5,664 95,639 115,614 All turnover is to customers within the United Kingdom. 3. Other operating income Year ended 15 months ended 31 March 2005 31 March 2004 #000 #000 Rental income 542 729 Charges to group companies 45 275 Sundry income 2,667 2,478 3,254 3,482 Notes to the preliminary results (continued) 4. Operating costs Year ended 15 months ended 31 March 2005 31 March 2004 #000 #000 Other operating costs charged to capital projects (3,198) (3,098) Staff costs 10,980 15,295 Depreciation and other amounts written off tangible fixed assets 24,560 17,112 Other operating costs 40,185 49,126 72,527 78,435 Included within depreciation and other amounts written off tangible fixed assets is an exceptional fixed asset write off of #10.3 million (2004: # nil) relating to a customer billing system. Staff costs for the 15 months ended 31 March 2004 include an exceptional unfunded pension cost of #3.3 million. 5. Interest receivable and similar income Year ended 15 months ended 31 March 2005 31 March 2004 #000 #000 Interest receivable from group companies 8,932 - On bank balances and short term deposits 1,280 - 10,212 - 6. Interest payable and similar charges Year ended 15 months ended 31 March 2005 31 March 2004 #000 #000 Bank interest on overdrafts - 146 Debenture interest 1,611 2,165 Interest on listed debt 10,713 - Interest payable on loans from group undertakings 2,484 6,886 Indexed capital repayment on interest rate swap 3,439 - Interest payable on finance leases 1,380 1,352 Amortisation of issue costs 243 - Financing guarantee fees 492 - Other finance charges 98 60 20,460 10,609 Notes to the preliminary results (continued) 7. Taxation Analysis of tax charge for the period Year ended 15 months ended 31 March 2005 31 March 2004 #000 #000 Current tax UK Corporation tax on profits at 30% 5,193 2,118 (Over) / under provision in prior years (50) 174 Total current tax 5,143 2,292 Deferred tax Origination and reversal of timing differences 610 4,427 Increase in discount (357) (5,128) Total deferred tax 253 (701) Tax on profit on ordinary activities 5,396 1,591 8. Dividends 12 months ended 15 months ended 31 March 2005 31 March 2004 #000 #000 On ordinary shares: First interim dividend paid #0.786 (2004: #6.968) per 4,000 9,000 ordinary share Second interim dividend paid #0.746 (2004: #1.626) per 3,800 2,100 ordinary share Third interim dividend proposed #3.269 (2004: #nil) per 16,643 - ordinary share Final dividend proposed #nil (2004: #4.049) per - 5,230 ordinary share 24,443 16,330 Notes to the preliminary results (continued) 9. Debtors At 31 March 2005 At 31 March 2004 #000 #000 Trade debtors 2,420 5,617 Amounts due from parent and group undertakings 7,099 7,680 Other debtors 1,361 1,544 Prepayments and accrued income 11,509 7,553 Total due within one year 22,389 22,394 Amounts due from parent and group undertakings due after more than one year 190,013 - 212,402 22,394 10. Creditors: amounts falling due after more than one year At 31 March 2005 At 31 March 2004 #000 #000 #000 #000 Irredeemable debenture stock 603 606 Redeemable debenture stock 11,100 11,100 Obligations under finance 13,275 18,045 leases Amounts due to group - 101,890 undertakings Listed debt due after five 366,000 - years Less: unamortised issue (5,728) - costs 360,272 - Indexed capital repayment on interest 3,439 - rate swap 363,711 - Other term loans and 2,179 2,027 creditors Financing guarantee fees 540 - waived 391,408 133,668 On 27 July 2004 the Group carried out a debt refinancing transaction and entered into a series of transactions impacting the Group's long term borrowing arrangements. As part of this refinancing the company's subsidiary South East Water (Finance) Limited, raised #366 million of debt listed on the London Stock Exchange. Notes to the preliminary results (continued) 11. Reconciliation of movements in equity shareholders' funds Year ended 31 15 months ended March 2005 31 March 2004 #000 #000 Opening shareholders' funds 185,953 171,722 Profit for the financial period 10,722 30,561 Dividends (24,443) (16,330) Share capital issued during the year 3,800 - Net movement on shareholders' funds (9,921) 14,231 Closing shareholders' funds 176,032 185,953 12. Reconciliation of group operating profit to net cash inflow from operating activities Year ended 15 months ended 31 March 2005 31 March 2004 #000 #000 Operating profit 26,366 40,661 Depreciation 14,298 17,087 Loss on disposal or write off of fixed assets 10,262 25 Amortisation of infrastructure charges (747) (935) Increase in stocks (2) - Decrease in other debtors 3,552 2,193 Increase / (decrease) in creditors 1,258 (8,634) Increase in pension provision 359 3,568 Net cash inflow from operating activities 55,346 53,965 Notes to the preliminary results (continued) 13. Analysis of movement in group net debt At 31 March Cash Other non-cash At 31 March 2004 flow changes 2005 #000 #000 #000 #000 Cash 644 3,177 - 3,821 Money market deposits - 28,613 - 28,613 Total cash at bank and in hand 644 31,790 - 32,434 Irredeemable debenture stock (606) 3 - (603) Redeemable debenture stock (14,900) 3,800 - (11,100) Obligations under finance leases (19,850) 5,254 - (14,596) Amounts due to group (126,154) 126,154 - - undertakings Listed debt due after five - (366,000) - (366,000) years Less: unamortised issue costs - 5,971 (243) 5,728 Indexed capital repayment on long term - - (3,439) (3,439) loan Other term loans (2,027) - (152) (2,179) Net (163,537) (224,818) (3,834) (392,189) borrowings Net debt (162,893) (193,028) (3,834) (359,755) 14. Pensions The pension costs and liabilities of the group have been accounted, and provided for, in accordance with SSAP24. Using assumptions that are consistent with the requirements of FRS17 ' Retirement Benefits', the fair value of the assets in the Group's defined benefit pension scheme, and the present value of the Group's funded and unfunded pension liabilities at the balance sheet date, were as follows: 31 March 31 March 2005 2004 #000 #000 Total fair value of 89,900 84,600 assets Present value of scheme (124,200) (110,600) liabilities Deficit in the scheme (34,300) (26,000) Related deferred tax 10,300 7,800 asset Net pension liability (24,000) (18,200) The financial information contained in these preliminary results does not constitute the Group's statutory financial statements for the year ended 31 March 2005 or the 15 months ended 31 March 2004. The financial information is derived from the audited statutory consolidated financial statements of the Group for the year ended 31 March 2005 which were approved by the Board of Directors on 30 June 2005. The auditors have reported on those financial statements; their report was unqualified and did not contain a statement under either section 237(2) or (3) of the Companies Act 1985. The 2005 financial statements will be delivered to the Registrar of Companies in due course. For further details please contact: Margaret Devlin Managing Director 01444 448219 Chris Pleass Director of Finance and Investment 01444 448208 Barrie Watson Director of Corporate Development 01444 448214 This information is provided by RNS The company news service from the London Stock Exchange END This information is provided by RNS The company news service from the London Stock Exchange FR EAFXLEANSEFE
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