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| Name | Symbol | Market | Type |
|---|---|---|---|
| Sth.e.wtr.5%db | LSE:53HO | London | Debenture |
| Price Change | % Change | Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0 | - |
From Dec 2019 to Dec 2024
TIDM53HO
RNS Number : 4252K
South East Water Limited
14 December 2018
South East Water Limited
Condensed group financial statements
for the six months ended 30 September 2018
Registered number 02679874
Contents O Chairman's introduction O Statement of directors' responsibilities O Condensed group income statement O Condensed group statement of comprehensive income O Condensed group statement of financial position O Condensed group statement of changes in equity O Condensed group statement of cash flows O Notes to the condensed group financial statements
Chairman's introduction
I am pleased to present our interim report for the six months ended 30 September 2018.
Our vision is to be the water company people want to be supplied by and want to work for. This has been a period of intense activity for the company and its employees as we continue to strive to realise our vision and deliver on the commitments within our 2015 to 2020 business plan, deal with particular operational challenges from this summer's drought, and at the same time look to the future with the preparation of our draft Water Resources Management Plan (WRMP) and our ambitious business plan for the 2019 Price Review (PR19), which will take us through to 2025 and beyond.
Our 2015 to 2020 business plan puts customer satisfaction at the heart of everything we do. Our future plans build on this and on our commitments to both the environment and the communities in which we work, as we aim to take the lead on responsible business practice and to make a positive contribution to wider society.
Customer satisfaction, responsibly delivered
Our business plan for the 2020 to 2025 period was submitted to Ofwat in early September and simultaneously published on our website. This plan has been shaped with strong involvement of customers and community groups throughout the areas we serve and will see the company invest a further GBP472.0 million to improve the local water infrastructure over the five year period.
We have carried out a very extensive programme of research, discussions and consultations with some 13,000 customers, stakeholders, retailers, businesses, employees and an independent Customer Challenge Group chaired by Zoe McLeod. We would like to thank everyone who played a part in helping to shape our plans.
Our plan incorporates a comprehensive suite of ambitious commitments to improve performance in areas such as leakage and interruptions, water quality, greenhouse gas emissions, environmental impact, support for vulnerable customers and, of course, customer satisfaction. These commitments are backed by performance penalties if targets are missed, and rewards for out-performance. As an illustration of the level of ambition implicit in the plan, if we were unable to improve on our current performance levels we would incur a penalty of GBP35.0 million.
While delivering all these improved outcomes, the proposed average annual household bill is maintained at GBP204 before inflation for the next five years.
We now await Ofwat's assessment of our plan through a process which will run to the end of 2019.
Keeping water flowing whatever the weather
By the early summer we were starting to experience above average demand for water leading to the stepping up of our water efficiency messaging and a campaign encouraging customers to use water wisely during the heatwave, a recurring theme for the entirety of the summer in which the whole country experienced hotter than normal conditions for a number of weeks.
During this time our production teams geared up to produce an extra one hundred million litres of drinking water per day at the peak with employees working around the clock to produce the extra water needed.
Although the amount of untreated, raw water, available in reservoirs and aquifers was good for the time of year, and remained so throughout the hot weather, we asked customers to save water in order to help us meet demand for extra supplies of processed drinking quality water at peak times of the day.
We also joined forces with other water companies in the south east of the country to run a water-saving campaign in local media and radio, focussed on water-saving measures and the need for prudence when contemplating the use of such things as paddling pools and garden sprinklers. While demand was higher than normal throughout the summer, we believe the combined effects of our metering programme and customer communications helped keep the demands at manageable levels and we thank everyone who did their bit to save water.
Many of the activities we undertook during the summer, particularly in customer communications, benefited from lessons learned from the extreme freeze/thaw event we experienced at the end of 2017/18. Ofwat completed its own review into the impact of the freeze/thaw event across the whole country and the lessons to be learned. They set out where our plans worked well and where improvements could be made. We published our action plan in response to this on 28 September 2018 which included 61 actions we have agreed to. We will work closely with the industry to ensure best practice approaches are built into our emergency plans for any such future events.
Pure know h(2) ow in action
In May we started construction of the company's largest ever single investment at the Keleher Water Treatment Works at Bray in Berkshire. This GBP21 million project will increase the capacity of the Keleher plant, which treats water extracted from the River Thames to drinking water standards from the current 45 million litres per day to 68 million litres per day.
The work got underway with a site clearance programme involving the removal of approximately 25,000 cubic metres of earthworks. Thanks to the dry summer weather this was completed ahead of schedule.
Within our water quality projects, we are seeing some really encouraging results in reducing what is known as the discolouration contact rate. This is a measure of the number of contacts we get from customers raising concerns over the appearance of their water. Such incidents can be the result of a number of factors but are largely based on the build-up over time of naturally occurring iron and manganese deposits within the distribution pipework network. This is being addressed through a pipework flushing programme and improvements to treatment work performance. In the nine months from January to September 2018 we received 1,042 discolouration contacts whereas, in the same period in 2017 we received 1,413 contacts. We expect further improvement as the programme continues.
Customer engagement and satisfaction
Between February and May 2018 we consulted on our latest draft Water Resources Management Plan, speaking to hundreds of customers and stakeholders across our supply area to gather their thoughts and opinions on our proposal which looks 60 years into the future.
After reviewing the representations alongside new data which has been made available to us we made a number of changes to our plan, including the reduction of leakage by 15 per cent by 2025, halving the amount of leakage from our current position to 44 million litres a day by 2050 and adopting a more ambitious target for water efficiency which, in the long term, could save an extra 150 million litres a day by 2080.
A national survey by the Institute of Customer Service's UK Customer Satisfaction Index (UKCSI), that measures customer satisfaction across the UK, placed us eighth in the utility sector out of 28 organisations surveyed.
Based on 45,000 survey responses from across the country, the UKCSI gives a unique insight into the quality of customer service in the UK, looking at a range of satisfaction measures such as reliability and helpfulness of staff.
We were clearly very pleased our continued success in improving our customer experience has been reflected in the UKCSI. Our work is on-going to make our customer experience a smooth and positive one, and we have recently carried out a number of initiatives such as continued improvements to our responsive website services, and introducing 'One Bill' so we now also bill wastewater charges on behalf of 460,000 customers of Southern Water. This has been an important improvement for customers as many have said they wanted to be able to manage their water and wastewater bill through one account, just as our customers who have Thames Water as their wastewater service provider have done for many years.
Making a positive impact for society
The company has committed to continue to build our environment, social and governance (ESG) framework during the year and we aim to be a recognised leading responsible business. Within the new business plan we have developed a responsible business strategy and 10 new responsible business commitments to reflect the actions and behaviours customers expect a responsible business to display.
Environment
Congratulations are in order for our environmental team for scooping the Water Industry Awards prize for Water Resilience Initiative of the Year for our pioneering water and farming partnership called 'Together we knowh(2) ow'. This project has also recently been shortlisted for the Utility Week Awards.
Working closely with farmers and landowners the initiatives aim is to stop soils, fertiliser and pesticides washing from fields into rivers and groundwater resources. This prevents the expense of removing these substances at the water treatment works, and means farmers and landowners benefit by losing less of these substances to waste.
We are proud of our environmental record and we continue to celebrate our many successes in conserving, protecting and developing wildlife habitats at many of our sites.
20 years of careful habitat management at our Deep Dean Water Treatment Works in East Sussex has paid off for one of Britain's most endangered insects, as the wart-biter cricket makes a successful return to the South Downs. Working alongside Natural England, Buglife, the Zoological Society of London and the South Downs National Park Authority, we carried out our third release of the rare species last year. Now, following two recent surveys, 14 new crickets have been found in the area.
The grayling butterfly, Hipparchia Semele, one of the country's most threatened species has been spotted within the heathland restoration corridor created by South East Water after a five-kilometre strategic water main was laid through Swinley Forest near Bracknell in 2015. As part of the GBP6.5 million project, we formed the wide wildlife corridor to create heathland that enables species, such as the grayling butterfly, to thrive.
Social
This year we became the first water company to achieve the BSI (British Standards Institution) verification certification for BS 18477, demonstrating the organisation provides a comprehensive service for identifying and responding to vulnerable customers, something which is a priority for our business. This includes how our Customer Care Team will provide support if people are in financial difficulty, or need bottled water deliveries during a supply interruption.
As a local water supplier we aim to engage with our customers at every opportunity, a total of 2,400 people interacted with our staff at a wide range of community events during the first half of the year. These events included drop-in sessions for engineering schemes, open days at our reservoirs and water treatment works, school talks, plus fetes, fairs and attendance at other outside events with our trailer unit.
In addition we issued 111,000 letters to customers about forthcoming engineering work's and kept our community leaders informed with news and updates about construction projects and incidents in their areas. Our automated emailing system allows us to track the number of emails opened and see where recipients click on links in the message for further information from the company.
We have a staff council which is a partnership between the company, employee representatives and the trade union, UNISON. This group has worked successfully for a number of years and is always well-informed of any changes taking place. We believe firmly engaged employees go the extra mile to deliver great service.
A new appraisal system entitled iReview has been introduced, which is based on self and manager assessments. The percentage of staff receiving an iReview rating was 87. This is a great start and we hope to increase engagement further.
Governance
The Board is committed to maintaining the highest standards of corporate governance and transparency. We fully comply with Ofwat's defined governance requirements, including maintaining an independent Chairman and having a larger number of independent Non-executive directors (iNeds) than either shareholder representative directors or executive directors.
In July we appointed Célia Pronto as a new iNed, in anticipation of Emma Gillthorpe's retirement after completing six years of service in September. Célia brings extensive relevant experience in customer engagement and digital. I would like to formally welcome Célia to the Board and thank Emma for her contribution over the past six years.
In terms of reporting and transparency, we were pleased that our published Company Monitoring Framework was assessed by Ofwat in November 2017 as being in the highest "Self-assured" category. Only two other of the 18 water utilities were in this category and we are the only one to be assessed at this level for two years running.
Group structure
In April 2017 Ofwat introduced competition in retail activities for Non- Household Customers. This required us to separate our related retail activities into a standalone business which competes with other retailers in our supply area. On 1 July this year we completed the sale of the Non-Household business to Castle Water and hence we no longer provide Non-Household retail services. We have worked closely with Castle Water to ensure a smooth transition for customers.
A significant portion of the group's debt facilities mature in September 2019 and work has now started to put new facilities in place well ahead of that date. The amount payable on maturity will be in the region of GBP311 million. As part of this process the group's gearing ratio will be reduced by the injection of GBP54 million of equity by the group's shareholders. The balance of the repayment will be raised by new loan funding.
Results and key financial performance indicators
The results published in this statement summarise our performance for the six month period to 30 September 2018. The financial statements are prepared under International Financial Reporting Standards ("IFRS") and incorporate the performance of South East Water Limited and our subsidiary, South East Water (Finance) Limited.
Revenue for the period was GBP121.0 million compared with GBP114.5 million for the same period in the previous year. The increase of GBP6.5 million is largely due to the change in our accounting policy for developer contributions and similar receipts following the adoption of IFRS 15 which has led to GBP3.1 million of additional revenue being reported in the income statement. An increase in prices averaging 4.6 per cent for the year amounted to GBP5.1 million of increased revenue coupled with an increase in consumption due to the hot summer weather amounted to GBP0.7 million. This is partially offset by the impact of metering which has reduced revenue by GBP2.0 million and GBP0.5 million less revenue from non-household customers.
Net operating costs for the period to 30 September 2018 were GBP84.9 million, which is some GBP5.9 million higher than the corresponding period last year. This was primarily due to higher contractor and staff costs due to an increase in reactive maintenance, including mains bursts on the network, of GBP1.8 million and the impact of IFRS 15 on the treatment of the costs and associated contributions for properties that are connected to our water supply of GBP1.0 million.
Additionally, increased depreciation due to the continued high investment in the company's assets of GBP1.3 million, additional costs of GBP0.8 million relating to the heatwave during the summer and GBP1.0 million of other inflationary costs added to the higher operation costs in the year when compared to the previous year.
Operating profit was GBP42.4 million for the period to 30 September 2018 which compares with GBP39.3 million in the prior year. Operating profit as a percentage of revenue has increased from 34.3 per cent in the first half of 2017/18 to 35.1 per cent in the current year.
Finance costs have decreased by GBP1.2 million from GBP27.0 million to GBP25.8 million. This reflects the lower fair value charge for our interest rate swap, as it nears maturity, of GBP2.6 million offset by GBP1.4 million of increased indexation on our other loans and bonds due to higher inflation during the period to 30 September 2018.
Profit before tax was GBP27.7 million compared with GBP14.7 million for the same period last year. This represents 22.9 per cent of revenue compared with 12.8 per cent for the corresponding period last year.
The company has incurred a tax charge of GBP2.7 million in the period compared to GBP1.7 million for the period to 30 September 2017, being GBP0.1 million of current tax on our ordinary operations and GBP2.6 million of deferred tax.
As a result of the above, profit after tax has increased from GBP13.0 million to GBP25.0 million for the first six months of the year.
Our dividend policy allows for dividends to be paid to our parent company which ensures that intercompany financial obligations are able to be settled. The increase in dividend this year of GBP5.0m, compared with the same period last year, relates to additional financial requirements of our parent and is in line with our dividend policy. The dividend paid by the Group's ultimate UK parent company was maintained at the same level as the prior year.
Net cash generated from operations was GBP79.4 million for the period to 30 September 2018 compared to GBP64.5 million in the same period for the previous year. This reflects a GBP14.9 million improvement in cash collections across the business, including GBP2.0 million in respect of income from commercial operations, when compared to the prior year.
Interest of GBP9.1 million (2017: GBP8.8 million) due on 30 September 2018 has been paid in October in both the current and previous financial years due to the due date falling at a weekend.
We continue to comply with the financial covenants set out in our securitisation structure and continue to hold ratings from Moody's and Standard & Poor's consistent with the requirements of both our securitisation and our instrument of appointment.
Principal risks and uncertainties
The principle risks and uncertainties facing the business are set out in the Strategic Report within the group's Annual Report for the financial year 2017/18, which can be found on the South East Water website.
Going concern
The directors are satisfied that the group has sufficient resources to continue in operation for the foreseeable future; a period of not less than 12 months from the date of this report.
Looking ahead
For the rest of this year and through 2019 we will continue to focus on delivering improved customer service and successfully closing out the current business plan while devoting increasing attention to developing detailed and innovative proposals for the execution of the next five year business plan. Innovation is key to delivering these ambitious targets and we are working with staff, partners and the supply chain to drive this innovation forward.
On behalf of the Board I would like to thank all the employees and business partners at South East Water who have worked tirelessly over the last six months. It has been an exceptional start to the year and our people have worked with dedication and passion throughout in order to keep delivering great customer service in challenging operational conditions, while also planning ahead for the long-term growth of the south east region and ensuring we maintain an excellent and resilient water service and a sustainable future for the local communities we work for.
Nick Salmon
Chairman
14 December 2018
Statement of directors' responsibilities
The directors confirm that to the best of their knowledge:
-- the condensed group financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as endorsed by the European Union; and
-- the condensed group statements herein include a fair review of the information required by the Disclosure and Transparency Rules 4.2.7R.
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the group and enable them to ensure that the group financial statements comply with the Companies Act 2006. They are responsible for safeguarding the assets of the group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The directors are also responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Paul Butler
Managing Director
14 December 2018
Condensed group income statement
for the six months ended 30 September 2018
Hot Features
Premium
Six months Six months
ended ended
30 September 30 September
2018 2017
Notes GBP000 GBP000
Revenue 4 120,986 114,450
Group net operating costs 6 (84,900) (79,009)
Other income 4 6,336 3,840
Group operating profit 42,422 39,281
Profit on disposal of non-household
customer base 7 8,165 -
Finance costs 8 (25,765) (26,957)
Finance income 9 2,859 2,349
Profit before taxation 27,681 14,673
Taxation 10 (2,715) (1,662)
-------------- ------------------------
Profit for the period 24,966 13,011
-------------- ------------------------
Earnings per share
Basic and diluted from continuing
operations 50.63p 26.38p
-------------- ------------------------
Condensed group statement of comprehensive income
for the six months ended 30 September 2018
Six months Six months
ended ended
30 September 30 September
2018 2017
GBP000 GBP000
Profit for the period 24,966 13,011
---------------------- -----------------------
Items that will not be reclassified
subsequently to profit or loss:
Re-measurement of defined benefit
liability 1,534 (3,159)
Deferred tax on defined benefit
pension schemes (262) 537
1,272 (2,622)
---------------------- -----------------------
Total comprehensive income for the
period attributable to Owners of
the Company 26,238 10,389
---------------------- -----------------------
Condensed group statement of financial position
as at 30 September 2018
30 September 31 March 30 September
2018 2018 2017
Notes GBP000 GBP000 GBP000
Non-current assets
Intangible assets 12 11,137 10,758 10,830
Property, plant and equipment 13 1,528,087 1,501,707 1,480,018
Amount due from parent undertaking 17 189,918 190,013 190,013
Defined benefit pension surplus 25,086 21,229 8,104
1,754,228 1,723,707 1,688,965
------------------------ --------------------- --------------
Current assets
Inventories 334 236 219
Trade and other receivables 14 77,314 78,255 77,336
Cash and cash equivalents 15 26,082 6,528 27,697
103,730 85,019 105,252
------------------------ --------------------- --------------
Total assets 1,857,958 1,808,726 1,794,217
------------------------ --------------------- --------------
Current liabilities
Loans and borrowings 17/18 (219,782) (20,000) (15,000)
Derivative financial instruments 17 (105,143) - -
Trade and other payables 19 (119,806) (94,379) (110,544)
Deferred income (6,714) (7,593) (7,169)
Provisions (2,495) (2,515) (2,361)
(453,940) (124,487) (135,074)
Non-current liabilities
Loans and borrowings 16/17 (708,324) (900,897) (888,586)
Derivative financial instruments 16/17 - (104,169) (104,501)
Trade and other payables 16 (5,791) (5,979) (5,347)
Net deferred tax liabilities (142,895) (140,085) (133,080)
Defined benefit pension liability - - (1,378)
Deferred income 3 (3,690) (74,471) (72,157)
(860,700) (1,225,601) (1,205,049)
------------------------ --------------------- --------------
Total liabilities (1,314,640) (1,350,088) (1,340,123)
------------------------ --------------------- --------------
Net assets 543,318 458,638 454,094
------------------------ --------------------- --------------
Equity
Ordinary share capital 49,312 49,312 49,312
Revaluation reserve 253,820 256,396 258,965
Retained earnings 240,186 152,930 145,817
------------------------ --------------------- --------------
Total equity 543,318 458,638 454,094
------------------------ --------------------- --------------
The notes below are an integral part of these condensed group financial statements.
Condensed group statement of changes in equity
for the six months ended 30 September 2018
Issued Revaluation Retained
share capital reserve earnings Total equity
GBP000 GBP000 GBP000 GBP000
At 31 March 2018 49,312 256,396 152,930 458,638
IFRS 15 adoption (see
note 3) - - 72,442 72,442
--------------- -------------- ------------------ ----------------
At 1 April 2018 49,312 256,396 225,372 531,080
--------------- -------------- ------------------ ----------------
Profit for the period - - 24,966 24,966
Other comprehensive income - - 1,272 1,272
Total comprehensive income - - 26,238 26,238
Dividends (see note 11) - - (14,000) (14,000)
Amortisation of revaluation
reserve - (3,063) 3,063 -
Release revaluation on
disposals - (34) 34 -
Deferred tax on reserve
releases - 521 (521) -
At 30 September 2018 49,312 253,820 240,186 543,318
--------------- -------------- ------------------ ----------------
for the six months ended 30 September 2017
Issued Revaluation Retained
share capital reserve earnings Total equity
GBP000 GBP000 GBP000 GBP000
At 1 April 2017 49,312 261,549 141,844 452,705
--------------- -------------- ---------- -------------
Profit for the period - - 13,011 13,011
Other comprehensive loss - - (2,622) (2,622)
--------------- -------------- ---------- -------------
Total comprehensive income - - 10,389 10,389
Dividends (see note 11) - - (9,000) (9,000)
Amortisation of revaluation
reserve - (3,064) 3,064 -
Release revaluation on
disposals - (43) 43 -
Deferred tax on reserve
releases - 523 (523) -
At 30 September 2017 49,312 258,965 145,817 454,094
--------------- -------------- ---------- -------------
Condensed group statement of cash flows
for the six months ended 30 September 2018
Six months Six months
ended ended
30 September 30 September
2018 2017
Notes GBP000 GBP000
Operating activities
Net cash flow from operating activities 79,424 64,450
Interest received 2,540 2,225
Interest paid (9,120) (6,337)
Group tax relief paid (652) (2,000)
Net cash flow before investing and
financing activities 72,192 58,338
-------------- --------------
Investing activities
Proceeds from sale of property, plant
and equipment 639 103
Purchase of property, plant and equipment (47,224) (47,807)
Purchase of intangible assets (1,927) (1,414)
Sale of non-household customer base 9,665 -
Fixed asset contributions received 388 1,106
Net cash flow used in investing activities (38,459) (48,012)
-------------- --------------
Financing activities
New bank loans received - 15,000
Issue cost of listed debt (179) -
Dividends paid to shareholder 11 (14,000) (9,000)
Net cash flow used in financing activities (14,179) 6,000
-------------- --------------
Increase in cash and cash equivalents 19,554 16,326
Cash and cash equivalents at 1 April 6,528 11,371
-------------- --------------
Cash and cash equivalents at 30 September 15 26,082 27,697
-------------- --------------
Cash flow from operating activities
for the six months ended 30 September 2018
Six months Six months
ended ended
30 September 30 September
2018 2017
GBP000 GBP000
Profit on operating activities 42,422 39,281
Adjustments for:
Depreciation and impairment of property,
plant and equipment 24,184 22,721
Amortisation and impairment of intangibles 1,548 1,642
Profit on disposal of fixed assets in ordinary
course of business (330) (15)
Difference between pension contributions
paid and amounts recognised in the income
statement (2,016) (1,973)
Changes in working capital:
Increase in trade and other receivables (1,049) (5,137)
Increase in inventory (98) (5)
Increase in trade and other payables 14,763 7,936
-------------- --------------
Net cash flow from operating activities 79,424 64,450
-------------- --------------
Notes to the condensed group financial statements
for the six months ended 30 September 2018
1. Basis of preparation
The condensed group financial statements for the six months ended 30 September 2018 are set out on above, and have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and IAS 34 Interim Financial Reporting as endorsed by the European Union. The statements should be read in conjunction with the financial statements for the year ended 31 March 2018, which have been prepared in accordance with International Financial Reporting Standards ("IFRS") endorsed by the European Union.
The condensed group financial statements are presented in sterling.
These interim financial results are neither audited nor reviewed by our auditor. The information for the year ended 31 March 2018 does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 March 2018 were approved by the Board of Directors on 13 July 2018 and delivered to the Registrar of Companies. The report of the auditors on those accounts was not qualified, did not include any reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report and did not contain any statement under section 498(2) or (3) of the Companies Act 2006.
2. Accounting policies
Changes in accounting policies
The accounting policies adopted are consistent with those of the financial statements for the year ended 31 March 2018 as described in those financial statements except for the changes brought about by adoption of IFRS 9 Financial Instruments ("IFRS 9") and IFRS 15 Revenue from Contracts with Customers ("IFRS 15") on 1 April 2018.
Revenue
When recognising revenue, the group applies the five criteria introduced by IFRS 15. Revenue is recognised to the extent that it is probable that the economic benefits will flow to the group, the performance obligations in the contracts with "named" customers have been met and the revenue can be reliably measured. All revenue arises within the United Kingdom and is recorded net of VAT. The company only recognises revenue in respect of "named" customers.
Infrastructure charges
Infrastructure charges represent the fees charged to property developers and others for connecting new properties and water outlets to the group's network. These fees are recognised in the income statement upon completion of the project to which they relate.
Grants and contributions
Grants and contributions are received in respect of both infrastructure and non-infrastructure assets. The receipts are recognised as deferred income on the balance sheet until completion of the work to which they relate, at which time they are released to the income statement.
Financial instruments
The group's financial instruments comprise fixed and variable rate borrowings, index linked loans, fixed rate debentures, an interest rate swap, finance leases, a loan to its parent undertaking, cash, short-term and medium-term bank deposits, trade receivables and trade and other payables.
Recognition
Financial instruments are recognised on the statement of financial position when the group becomes party to the contractual provisions of the instrument. The group determines the classification of its financial liabilities at initial recognition.
A provision for twelve month expected credit loss is recognised in the income statement to establish a loss allowance on initial recognition.
Impairment of financial assets
At each reporting date an assessment is carried out to determine whether there is any indication that the credit risk on financial assets has increased significantly. If this is considered to be the case, full life-time expected credit loss is recognised in the income statement. Where there is objective evidence that an impairment loss has arisen, the loss is recognised in the income statement in the year in which the respective assessment takes place. Impaired debts are derecognised when they are assessed as irrecoverable.
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 the current and future economic conditions.
3. Transition disclosures
The group has adopted IFRS 9 and IFRS 15 in the period. Details of the impact of the adoption of these standards are provided below.
IFRS 9 Financial Instruments
IFRS 9 specifies how the group should classify and measure financial assets and liabilities. In adopting the Standard, the group has assessed the classification of its financial instruments and reclassified assets and liabilities as appropriate (see note 17). The group has also recognised an allowance for credit loss in its income statement on its relevant financial assets. A provision for this allowance has been created and offset against the carrying value of the relevant asset in the group statement of financial position.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 establishes the principles the group applies when reporting information about revenue and the cash flows arising from contracts with customers. In adopting the standard the group has applied the steps for recognising revenue from customers. IFRS 15 has been adopted using the modified retrospective method which has led to the accumulated historic adjustments being made to the opening balances at 1 April 2018.
The impact of the adoption of IFRS 15 on the Group's financial statements in the period has been:
Six months Six months
ended Adjustment ended
30 for the adoption 30
September of IFRS 15 September
2018 GBP000 2018
GBP000 GBP000
Revenue
Unmetered water income 13,433 - 13,433
Metered water income 100,754 - 100,754
Other sales 3,666 3,133 6,799
----------- ------------------- -----------
Total revenue 117,853 3,133 120,986
Group net operating costs (83,941) (959) (84,900)
Other income 6,336 - 6,336
Group operating profit 40,248 2,174 42,422
Profit on disposal of non-household
customer base 8,165 - 8,165
Finance costs (25,765) - (25,765)
Finance income 2,859 - 2,859
Profit before taxation 25,507 2,174 27,681
Taxation (2,522) (193) (2,715)
----------- ------------------- -----------
Profit for the period 22,985 1,981 24,966
----------- ------------------- -----------
The adjustments in the current year to the financial statements as a result of the adoption of IFRS 15 are required because:
-- The adjustment of GBP3.1 million to other sales reflects the deposits and contributions received from developers for contracts where the performance objectives have been met in the period. This has been released from non-current trade and other payables and deferred income respectively in the group statement of financial position.
-- The adjustment to group net operating costs reflects the contributions in the period in excess of the costs taken to fixed assets on new connections. This was previously offset against operating costs but is now included in other sales. This revenue has been taken to deferred income in the group statement of financial position.
-- The adjustment to taxation reflects the additional tax charged on the above adjustments. The additional tax has been relieved against losses in other companies in the HDF (UK) Holdings Limited group of companies and has been added to intercompany creditors in the group statement of financial position.
-- The adoption of IFRS 15 has had no impact on the group statement of changes in equity in the year other than those changes to retained earnings and total equity noted in the table above and to adjust the opening balances on retained earnings and total equity as detailed above.
-- The adoption of IFRS 15 has had no impact on the group statement of cash flows.
The impact of the adoption of IFRS 15 on the Group's opening statement of financial position has been:
Adjustment
1April for the adoption 1April
2018 of IFRS 15 2018
GBP000 GBP000 GBP000
Non-current assets 1,723,707 - 1,723,707
Current assets 85,019 - 85,019
-------------- ------------------ --------------
Total assets 1,808,726 - 1,808,726
-------------- ------------------ --------------
Current liabilities (124,487) - (124,487)
-------------- ------------------ --------------
Non-current liabilities
Loans and borrowings (900,897) - (900,897)
Derivative financial instruments (104,169) - (104,169)
Trade and other payables (5,979) 544 (5,435)
Net deferred tax liabilities (140,085) - (140,085)
Deferred income (74,471) 71,898 (2,573)
(1,225,601) 72,442 (1,153,159)
-------------- ------------------ --------------
Total liabilities (1,350,088) 72,442 (1,277,646)
-------------- ------------------ --------------
Net assets 458,638 72,442 531,080
-------------- ------------------ --------------
Equity
Ordinary share capital 49,312 - 49,312
Revaluation reserve 256,396 - 256,396
Retained earnings 152,930 72,442 225,372
-------------- ------------------ --------------
Total equity 458,638 72,442 531,080
-------------- ------------------ --------------
The adjustments to non-current trade and other payables and non-current deferred income reflect the release of deposits and contributions from developers for contracts that have been completed in prior years. The revenue from these contracts has previously been amortised over the lives of the assets to which they relate.
4. Total income
Six months Six months
ended ended
30 September 30 September
2018 2017
GBP000 GBP000
Revenue
Unmetered water income 13,433 19,083
Metered water income 100,754 92,573
Other sales 6,799 2,794
-------------- --------------
Total revenue 120,986 114,450
-------------- --------------
Other income
Rental income 636 566
Sundry income 5,700 3,274
-------------- --------------
Total other income 6,336 3,840
-------------- --------------
Total income 127,322 118,290
-------------- --------------
All revenue is from customers within the United Kingdom.
5. Segmental analysis
The group's revenue mainly arises from the supply of water and related activities. The activities of the group, for management purposes, fall into three operating areas being the supply of potable water on a wholesale basis, the supply of potable water and waste water services on a retail basis, both of which are governed by the Water Act 2014, and related non-regulated activities.
The group analyses results by segment to operating profits only, therefore no segmental statement of financial position or statement of cash flows are presented.
Period to 30 September Wholesale Retail Other
2018 activities activities activities Total
GBP000 GBP000 GBP000 GBP000
Total income 109,665 11,099 6,558 127,322
------------ ------------ ------------ ---------
Operating profit 37,899 1,309 3,214 42,422
------------ ------------ ------------
Profit on disposal of
non-household customer
base 8,165
Finance costs (25,765)
Finance income 2,859
---------
Profit before taxation 27,681
Taxation (2,715)
---------
Profit for the period 24,966
---------
Period to 30 September
2017
Total income 101,921 12,329 4,040 118,290
------------ ------------ ------------ ---------
Operating profit 36,019 1,725 1,537 39,281
------------ ------------ ------------
Finance costs (26,957)
Finance income 2,349
---------
Profit before taxation 14,673
Taxation (1,662)
---------
Profit for the period 13,011
---------
6. Net operating costs
Six months Six months
ended ended
30 September 30 September
2018 2017
GBP000 GBP000
Employee benefits expenses 15,455 14,662
Asset expenses 25,402 24,348
Other operating expenses 44,043 39,999
-------------- --------------
84,900 79,009
-------------- --------------
7. Profit on disposal
On 1 May 2018, the group sold its rights to the non-household customer base to its fellow wholly owned subsidiary, Invicta Water Limited, for a consideration of GBP10.0 million which has resulted in a profit on disposal of GBP8.2 million. The rights to the non-household customer base are an internally generated intangible asset and, as per IAS 38, these were not recognised on the group's statement of financial position.
Following the sale of the rights to the non-household customer base, an additional charge for the doubtful debts of GBP1.5 million has been provided to reflect the increased risk of non-payment of the outstanding debt at the date of sale following the transfer of the customers to another retailer.
Subsequently Invicta Water Limited was sold to Castle Water Holdings Limited on 1 July 2018.
Six months Six months
ended ended
30 September 30 September
2018 2017
GBP000 GBP000
Proceeds from Sale 10,000 -
Legal Fees (244) -
Bad Debt Provision (1,500)
Consultancy (91) -
8,165 -
-------------- --------------
8. Finance costs
Six months Six months
ended ended
30 September 30 September
2018 2017
GBP000 GBP000
Effective interest on listed debt 11,371 11,129
Fair value movements on interest
rate swap 974 3,585
Indexation on listed debt 2,908 3,143
Interest on index linked loans 6,032 5,810
Indexation on index linked loans 4,208 3,146
Other finance costs 1,315 1,189
26,808 28,002
Less: interest capitalised (1,043) (1,045)
-------------- --------------
25,765 26,957
-------------- --------------
9. Finance income
Six months Six months
ended ended
30 September 30 September
2018 2017
GBP000 GBP000
Interest receivable from group undertakings 2,490 2,210
Pension fund finance credit 314 124
Interest receivable on bank balances and
short term deposits 55 15
2,859 2,349
-------------- --------------
10. Taxation
Six months Six months
ended ended
30 September 30 September
2018 2017
GBP000 GBP000
Current taxation charge 165 940
Deferred taxation charge 2,550 722
2,715 1,662
-------------- -------------------------
The current tax charge is recognised based on management's estimate of the weighted average annual corporation tax rate expected for the full financial year.
11. Dividends
Six months Six months
ended ended
30 September 30 September
2018 2017
GBP000 GBP000
Equity dividends paid during the period
of 28.4p per share (2017: 18.3p) 14,000 9,000
-------------- --------------
12. Intangible assets
GBP000
Net book amount
At 1 April 2018 10,758
Additions for the period 1,908
Reclassification of assets in the period 19
Amortisation for the period (1,548)
------------------------
At 30 September 2018 11,137
------------------------
Net book amount
At 1 April 2017 11,058
Additions for the year 3,554
Amortisation for the year (3,399)
Reclassification of assets in the period (448)
Disposals for the year (1)
Impairment for the year (6)
------------------------
At 31 March 2018 10,758
------------------------
Net book amount
At 1 April 2017 11,058
Additions for the period 1,953
Reclassification of assets in the period (539)
Amortisation for the period (1,642)
------------------------
At 30 September 2017 10,830
------------------------
13. Property, plant and equipment
GBP000
Net book amount
At 1 April 2018 1,501,707
Additions for the period 50,752
Reclassification of assets in the period (13)
Disposals for the period (173)
Depreciation for the period (24,186)
--------------------------
At 30 September 2018 1,528,087
--------------------------
Net book amount
At 1 April 2017 1,455,380
Additions for the year 92,410
Disposals for the year (279)
Reclassification of assets in the period 448
Depreciation for the year (46,233)
Impairment for the year (19)
----------------------------
At 31 March 2018 1,501,707
----------------------------
Net book amount
At 1 April 2017 1,455,380
Additions for the period 46,908
Reclassification of assets in the period 539
Disposals for the period (88)
Depreciation for the period (22,721)
Reclassification of assets in the period -
--------------------------
At 30 September 2017 1,480,018
--------------------------
14. Trade and other receivables
30 September 31 March 30 September
2018 2018 2017
GBP000 GBP000 GBP000
Financial asset receivables
Trade receivables 33,630 34,463 33,580
Accrued income 36,035 35,506 36,879
Amounts due from group undertakings 378 26 273
70,043 69,995 70,732
------------- --------- -------------
Non-financial asset receivables
Prepayments 5,203 5,132 4,727
Other receivables 2,068 3,128 1,877
------------- --------- -------------
7,271 8,260 6,604
------------- --------- -------------
77,314 78,255 77,336
------------- --------- -------------
15. Cash and cash equivalents
30 September 31 March 30 September
2018 2018 2017
GBP000 GBP000 GBP000
Cash at bank and in hand 26,082 6,528 27,697
------------- --------- -------------
16. Non-current financial liabilities
30 September 31 March 30 September
2018 2018 2017
GBP000 GBP000 GBP000
Irredeemable debenture stock 991 991 991
Listed bonds 332,170 529,337 526,284
Index linked loans 375,163 370,569 361,311
------------- ---------- -------------
Loans and borrowings 708,324 900,897 888,586
Derivative financial instruments - 104,169 104,501
Trade and other payables 5,791 5,979 5,347
------------- ---------- -------------
714,115 1,011,045 998,434
------------- ---------- -------------
17. Financial instruments
Fair values of financial assets and financial liabilities
Fair value is the amount at which a financial instrument could be exchanged in an arm's length transaction between informed and willing parties. In the opinion of the directors, the fair values of the financial assets and liabilities of the group (apart from the specific items shown in the fair value table below) are not materially different from the book values.
Book Fair Book Fair Book Fair
Value Value Value Value Value Value
30 September 30 September 31 31 30 September 30 September
2018 2018 March March 2017 2017
GBP000 GBP000 2018 2018 GBP000 GBP000
GBP000 GBP000
Measured at amortised cost
Amounts due from
parent undertaking 189,918 174,736 190,013 142,573 190,013 173,920
-------------- -------------- ---------- ------------ -------------- --------------
Current liabilities
Bank loan 20,000 20,000 20,000 20,000 15,000 15,000
Listed bond 199,782 222,960 - - - -
-------------- -------------- ---------- ------------ -------------- --------------
219,782 242,960 20,000 20,000 15,000 15,000
-------------- -------------- ---------- ------------ -------------- --------------
Non-current liabilities
Irredeemable debentures 991 935 991 862 991 841
Listed bonds 332,170 449,177 529,337 672,137 526,284 631,450
Index linked loans 375,163 677,802 370,569 694,765 361,311 660,655
-------------- -------------- ---------- ------------ -------------- --------------
708,324 1,127,914 900,897 1,367,764 888,586 1,292,946
-------------- -------------- ---------- ------------ -------------- --------------
The following table details the financial instruments that are carried in the group's books at the fair value at 30 September 2018.
Book and Book and Book and
Fair Value Fair Value Fair Value
30 September 31 March 30 September
2018 2018 2017
GBP000 GBP000 GBP000
At fair value through profit
or loss
Derivative financial instruments
- Interest rate swap 105,143 104,169 104,501
-------------- ------------ --------------
The book value of the interest rate swap has been adjusted to reflect its fair value.
Fair value hierarchy
The group held the following financial instruments measured at fair value:
Total Level 1 Level 2 Level 3
GBP000 GBP000 GBP000 GBP000
Financial liabilities at fair value through
profit or loss
-------- ------------ --------
30 September 2018
Interest rate swap (105,143) - (105,143) -
---------------- -------- ------------ --------
31 March 2018
Interest rate swap (104,169) - (104,169) -
---------------- -------- ------------ --------
30 September 2017
Interest rate swap (104,501) - (104,501) -
---------------- -------- ------------ --------
During the reporting period ended 30 September 2018, there were no transfers between Level 1 and Level 2 fair value measurements and no transfers into and out of Level 3 fair value measurements.
The group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:
-- Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
-- Level 2: other techniques for which all inputs with a significant effect on the recorded fair value are observable, either directly or indirectly; and
-- Level 3: techniques using inputs which have a significant effect on the recorded fair value that are not based on observable market data.
18. Current loans and borrowings
30 September 31 March 30 September
2018 2018 2017
GBP000 GBP000 GBP000
Financial liabilities
Bank loan 20,000 20,000 15,000
Listed bonds 200,000 - -
Unamortised costs (218) - -
------------- --------- -------------
219,782 20,000 15,000
------------- --------- -------------
19. Current liabilities
30 September 31 March 30 September
2018 2018 2017
GBP000 GBP000 GBP000
Financial liabilities
Trade payables 11,995 13,610 10,674
Amounts due to group undertakings 15,607 9,217 10,191
Other payables 11,771 1,866 5,119
Accruals 47,525 32,556 46,088
------------- --------- -------------
86,898 57,249 72,072
------------- --------- -------------
Non-financial liabilities
Payments received in advance 31,853 36,118 37,516
Other taxes and social security 1,055 1,012 956
------------- --------- -------------
32,908 37,130 38,472
------------- --------- -------------
119,806 94,379 110,544
------------- --------- -------------
20. Post balance sheet event
On 26 October 2018, the High Court issued a judgment involving the Lloyds Banking Group's defined benefit pension schemes in relation to Guaranteed Minimum Pension (GMP) benefits being calculated differently for men and women. The judgment concluded that the schemes should be amended to equalise pension benefits for men and women in relation to GMP benefits. The issues determined by the judgment arise in relation to many other defined benefit pension schemes.
We are working with the trustees of our pension schemes and our advisers to assess the impact of the judgment on our schemes, but high level estimates based on industry expectations indicate this could be up to around 1 - 2 per cent of accrued liabilities. This issue is being treated as a plan amendment and the impact is expected to be recognised as a past service cost in our 31 March 2019 year-end accounts.
Overall, our pension schemes are appropriately funded and the condensed group statement of financial position shows the defined benefit schemes have a surplus of approximately GBP25.1m on an IAS 19 basis.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
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