Thames Water Utilities Finance Limited. Interim report and financial statements. For the six months ended 30 September 2015

Transcription

1 Registered no: (England & Wales) Thames Water Utilities Finance Limited Interim report and financial statements For the six months ended 30 September 1

2 Contents Pages Directors and advisors 1 Interim management report 2 Statement of Directors responsibilities 4 Independent auditor s review report to the members of Thames Water Utilities Finance Limited for the six month period ended 30 September 5 Condensed income statement 6 Condensed statement of financial position 7 Condensed statement of changes in equity 8 Condensed statement of cash flows 8 Notes to the financial statements 9

3 Directors and advisors Directors A Beaumont S Ledger P Kerr Registered auditor KPMG LLP Chartered Accountants 15 Canada Square London E14 5GL Company Secretary & registered office D Hughes Clearwater Court Vastern Road Reading Berkshire RG1 8DB 1

4 Interim management report This interim management report for the six months ended 30 September has been prepared solely to provide additional information to the Company s shareholders to assess the future outlook of Thames Water Utilities Finance Limited ( the Company ). This report should not be relied on by any other party or for any other purpose. Operations The Company s principal operations are to act as a financing Company to Thames Water Utilities Limited ( TWUL ), the main trading subsidiary of the Kemble Water Holdings Group. The major transactions of the Company are the raising of finance and subsequent lending of debt at mirrored terms to TWUL. The ultimate parent undertaking is Kemble Water Holdings Limited ( the Group ). The Company manages the market risks associated with raising debt using derivative financial instruments and ultimately passes on the proceeds to TWUL. The Company is part of a securitisation group of companies which also comprises of TWUL, Thames Water Utilities Holdings Limited, Thames Water Utilities Cayman Finance Limited and Thames Water Utilities Cayman Finance Holdings Limited ( the securitisation group ). The payment of all amounts owing in respect of the external debt issued by the Company is unconditionally and irrevocably guaranteed by all companies within the securitisation group. A Corporate Family Rating ( CFR ) is assigned by Moody s and reflects the consolidated rating of the different classes of outstanding debt obligations issued by the Company, Thames Water Utilities Cayman Finance Limited and TWUL. TWUL s licence requires an investment grade credit rating of at least Baa3 from Moody s or BBB- from Standard & Poor s ( S&P ) to be maintained, as this ensures the Company can access the debt funding that is needed to support the delivery of the investment programme in an efficient and cost effective manner. In February Moody s affirmed the Baa1 corporate family rating (CFR) of the Company and the A3 senior secured Class A rating and Baa3 subordinated debt Class B rating. The outlook on all Moody s ratings is stable. In September Standard & Poor s (S&P) affirmed the credit ratings and outlook of the Company. The ratings assigned by S&P are A- (Class A) and BBB (Class B) both with negative outlook. During the six months ended 30 September, the Company has repaid a 200.0m 4.90% fixed rate bond that was due in June. Financial results These interim financial statements are prepared in accordance with EU International Financial Reporting Standards ( IFRS ). Details of how the transition to IFRS has impacted financial results previously reported under UK GAAP are shown in note 11. During the period, finance income reduced to 61.1m (six months ended 30 September 2014: 72.6m) arising on interest due from TWUL on intercompany lending. Finance expenses as a result of raising funds on TWUL S behalf amounted to 59.8m for the six months ended 30 September (six months ended 30 September 2014: 68.6m). The decrease from prior year arises as a result of the settlement of the 200.0m bond during the period. During the current period, the Company realised a profit before tax of 3.3m (six months ended 30 September 2014: loss of 19.3m) principally due to a fair value gain of 2.0m on derivatives (six months ended 30 September 2014: loss of 23.3m) which are marked to market through the income statement. The Company uses derivatives to manage inflation risk on non-index linked borrowings. The fair value of the derivatives is predisposed to the inflation rates used in the valuation at balance sheet date. The fair value gain during the current period is due to a decrease in the projected inflation forecast affecting RPI-related transactions. Losses and gains arising from changes in derivative fair value values are not recharged to TWUL as the derivatives are in relation to debt obligations which the Company expects to hold to maturity. The Company did not pay any dividends during the current period (six months ended September 2014: nil) and the Directors do not recommend payment of a dividend (30 September 2014: nil). 2

5 Interim management report (continued) Principal risks and uncertainties The Company is a financing subsidiary of TWUL and is part of the securitisation group. All proceeds from the debt raised by the Company have been lent on to TWUL on equivalent terms by way of an intercompany loan agreement. The Company has entered into derivative financial instrument contracts in order to manage the exposure to certain risk, in accordance with the requirements of the Securitisation. The changes in fair value of the derivatives that are used by the Company to manage market risks associated with the issued debt are included in the statement of comprehensive income in these financial statements. The Directors do not consider that there have been any significant changes to the principal risks and uncertainties of the Company from those contained within the 2014/15 annual report. The Directors consider the Company s principal risk for the remainder of the financial year to be the Company s ability to maintain a positive credit rating. This is essential based on the TWUL s reliance on the Company to have access to future funding that does not create a detrimental pressure on the Group s key financial covenants. As stated in note 1 to these condensed interim financial statements, the Directors are satisfied that the Company has sufficient resources to continue in operational existence for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing these condensed interim financial statements. Future outlook The Company ceased to issue any new external debt in 2006, and continues to hold the debt that was issued and the accompanying intercompany loans lent to TWUL up to maturity. The Company expects to repay its debt as it falls due by way of TWUL repaying the relevant proportion of its intercompany loan with the Company. The next tranche of debt due for repayment is a 200.0m 5.05% fixed rate bond due in June Approved by the Board of Directors on 26 November and signed on its behalf by: A Beaumont Director 3

6 Statement of Directors responsibilities The Directors have complied with the Disclosure and Transparency Rules. However, as the Company does not issue listed shares, DTR 4.2.8R in respect of related party transactions has not been applied. The Directors confirm that to the best of their knowledge: the condensed set of financial statements has been produced in accordance with IAS34 Interim Financial Reporting; and the interim management report includes a fair review of the information required by the DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of interim financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year. The above statement of Directors responsibilities was approved by the Board of Directors on 26 November and signed on its behalf by: A Beaumont Director 26 November 4

7 Independent auditor s review report to the members of Thames Water Utilities Finance Limited for the six months ended 30 September 1. Introduction We have been engaged by the Company to review the condensed set of financial statements in the interim report for the six months ended 30 September which comprises the Condensed income statement, the condensed statement of financial position, the condensed statement of changes in equity, the condensed statement of cash flows and the related explanatory notes. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. This report is made solely to the Company in accordance with the terms of our engagement. Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached. 2. Directors responsibilities The interim report is the responsibility of, and has been approved by, the Directors. As disclosed in the Accounting Policies, the next annual financial statements of the Company will be prepared in accordance with IFRS s as adopted by the EU. The condensed set of financial statements included in this interim report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. 3. Our responsibility Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the interim report based on our review. 4. Scope of review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. 5. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim report for the six months ended 30 September is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU. Robert Brent for and on behalf of KPMG LLP Chartered Accountants 15 Canada Square London E14 5GL 26 November 5

8 Condensed income statement For the six month period ended Period ended 30 September Period ended 30 September 2014 Restated* Year ended 31 March Restated* Note Finance income Finance expense 4 (59.8) (68.6) (145.0) Fair value gain/(loss) on derivatives 2.0 (23.3) (96.8) Profit/(loss) on ordinary activities before taxation 3.3 (19.3) (91.1) Taxation on profit/(loss) on ordinary activities 5 (0.7) Profit/(loss) for the financial period/year 2.6 (15.4) (72.9) * refer to note 1 for details of restatement. The restatements relate to a reclassification between finance income and finance expenses and do not have any impact on loss on ordinary activities before taxation. All of the Company s activities above are derived from continuing activities. The results as stated above for the current and preceding periods are equivalent to the total comprehensive income. The accounting policies and notes on pages 9 to 21 are an integral part of these condensed interim financial statements. 6

9 Condensed statement of financial position As at As at As at 30 September 31 March 31 March 2014 Note Non-current assets Loans receivable from group entities 6 2, , ,826.6 Deferred tax asset , , ,845.3 Current assets Loans receivable from group entities Group relief receivable Total assets 2, , ,891.6 Current liabilities Borrowings 8 (43.4) (308.6) (49.3) (43.4) (308.6) (49.3) Non-current liabilities Borrowings 8 (2,790.7) (2,533.8) (2,773.3) Derivative financial liabilities 9 (201.5) (240.1) (143.3) (2,992.2) (2,773.9) (2,916.6) Total liabilities (3,035.6) (3,082.5) (2,965.9) Net liabilities (144.6) (147.2) (74.3) Equity Share capital Retained losses (144.7) (147.3) (74.4) Total deficit (144.6) (147.2) (74.3) The accounting policies and notes on pages 9 to 21 are an integral part of these condensed interim financial statements. The financial statements were approved by the Board of Directors on 26 November and signed on its behalf by: Andrew Beaumont Director Company registration number (England & Wales) 7

10 Condensed statement of changes in equity For the six month period ended 30 September Share capital Retained earnings Total Balance at 1 April (74.4) (74.3) Total comprehensive expense for the period - (15.4) (15.4) Balance at 30 September (89.8) (89.7) Total comprehensive expense for the period - (57.5) (57.5) Balance as at 31 March 0.1 (147.3) (147.2) Total comprehensive income for the period Balance at 30 September 0.1 (144.7) (144.6) Condensed statement of cash flows For the six month period ended Period ended Period ended Year ended 30 September 30 September March Cash flows from investing activities Interest received Redemption of loans to group companies Net cash inflow from investing activities Cash flows from financing activities Repayment of borrowings (200.0) - - Derivative settlements (38.8) - - Interest paid (67.9) (67.7) (125.2) Net cash outflow from financing activities (306.7) (67.7) (125.2) Net decrease in cash and cash equivalents Cash at the beginning of the period Cash and cash equivalents at 30 September

11 Notes to the financial statements 1 Principal accounting policies The following accounting policies have been adopted in the preparation of these interim financial statements. They have been applied consistently in dealing with items which are considered material except as noted below. (a) General information Thames Water Utilities Finance Limited ( the Company ) is incorporated and domiciled in the United Kingdom under the Companies Act The address of the registered office is Clearwater Court, Vastern Road, Reading, RG1 8DB. The Company s principal activity is to raise finance on behalf of its immediate parent undertaking TWUL. (b) Statement of compliance with International Financial Reporting Standards ( IFRS ) These condensed interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union. These are the Company s first IFRS condensed interim financial statements for the first six months of the period that will be covered by the first IFRS annual financial statements and IFRS 1 First-time Adoption of International Financial Reporting Standards has been applied. An explanation of how the transition to IFRS has affected the reported financial position and financial performance of the Company is provided in note 11. This note includes reconciliations of equity and total comprehensive income for comparative periods and of equity at the date of transition from previous reported numbers prepared under United Kingdom Generally Accepted Accounting Principles ( UKGAAP ) to IFRS. The condensed interim financial statements do not include all of the information required for full annual financial statements and do not comprise statutory financial statements within the meaning of section 434 of the Companies Act They should be read in conjunction with the Annual Report and Financial Statements for the year ended 31 March which have been filed with the Registrar of Companies. Those financial statements were prepared under UK GAAP and the auditor s report on those financial statements was unqualified and did not contain any statement under section 498(2) (accounting records or returns inadequate or accounts), or section 498(3) (failure to obtain necessary information and explanations). The policies applied in these condensed interim financial statements are based on the IFRS, International Accounting Standards ( IAS ) and IFRIC interpretations issued and effective and ratified by the European Union as of 26 November, the date that the Board of Directors approved the statements. Any subsequent changes to IFRS that become effective and are adopted for the 31 March 2016 could result in revisions to accounting policies applied in these interim financial statements, and if applicable, the opening balance sheet and reconciliations included herein. (c) Basis of preparation The condensed interim financial statements for the six month period ended 30 September, set out on pages 6 to 21, have been prepared on the going concern basis, under the historical cost convention and the Disclosure and Transparency Rules ( DTR ) issued by the Financial Conduct Authority, however, as the Company does not issue listed shares, DTR 4.2.8R in respect of related party transactions has not been applied. For the periods 30 September 2014 and 31 March, elements of finance income and finance expenses had been offset against each other. These comparative periods have been restated to reclassify such items in the correct financial statements captions. This has resulted in finance income for 30 September 2014 totalling 72.6m (previously presented as 65.1m) and finance expenses amounting to 68.6m (previously presented as 67.2m) with net impact being nil on loss on ordinary activities before taxation. The restatement has resulted in finance income for 31 March totalling 150.7m (previously presented as 135.8m) and finance expenses amounting to 145.0m (previously presented as 142.3m) with net impact being nil on loss on ordinary activities before taxation. 9

12 1. Principal accounting policies (continued) (d) Going concern The Directors have adopted the going concern basis in preparing these financial statements having given due consideration to the net liabilities of the Company of 144.6m as at 30 September (September 2014: 89.7m) and the requirement for on-going support from TWUL. This is based upon a review of TWUL s (and that of the securitisation group) budget, draft business plan for the five years and investment programme, together with the cash and committed borrowing facilities available. The directors also took into account potential contingent liabilities and other risk factors that would impact the securitisation group. TWUL has confirmed that it will continue to provide support to the Company to enable it to meet its liabilities for a period of at least twelve months from the date of signing these interim financial statements. (e) New accounting policies and future requirements At the date of approval of these financial statements the following standards and interpretations were in issue but not yet effective: IFRS9 Financial Instruments is likely to affect the measurement and disclosure of financial statements. This standard has not yet been adopted by the EU (f) Significant accounting judgements and sources of estimation and uncertainty The preparation of the financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. The Directors consider the valuation of derivatives to be a critical judgement in applying accounting policies that have a significant effect on the amounts recognised in the current and future. The fair value of the derivatives is determined by discounting estimated future cash flows based on the terms and maturity of each contract and using market interest rates at the measurement date. The valuations are tested for reasonableness by comparing these to bank quotes. The fair value calculations have been adjusted to incorporate the Company s own and counterparty s credit risk where appropriate. (g) Finance income and finance expenses Non-derivative financial instruments Financial instruments issued by the Company are treated as a financial liability in accordance with IAS 32: Financial Instruments: Presentation. Non-derivative financial instruments comprise debt securities, interest receivables, cash, loans and borrowings, and interest payable. Fair values Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of a liability reflects its non-performance risk. 10

13 1. Principal accounting policies (continued) (g) Finance income and finance expenses The fair values of financial assets and liabilities are measured as prescribed by IFRS 13 Fair Value Measurement. Fair values are determined according to the following hierarchy: (a) Level 1 quoted market price: financial instruments with quoted prices for identical instruments in active markets. (b) Level 2 valuation technique using observable inputs: financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable. (c) Level 3 valuation technique with significant unobservable inputs: financial instruments valued using models where one or more significant inputs are unobservable. Interest payable and receivable The fair value of interest payable and receivable is estimated as the present value of future cash flows, discounted at the market rate of interest at the balance sheet date if the effect of discounting is material. All interest and debt servicing costs are directly recharged to TWUL under identical terms with the exception of one loan s interest which is recharged at an additional margin (refer to note 3 for details). Fair value movements on assets and liabilities held at fair value through profit and loss are not recharged to TWUL. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Such investments are normally those with less than three months maturity from the date of acquisition and include cash and bank balances and investments in liquid funds. Interest-bearing borrowings The Company s debt arises from secured bonds - the fair value of these is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the balance sheet date net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an amortised cost basis to the income statement using the effective interest method and are added to the carrying value of the instrument to the extent that they are not settled in the year in which they arise. Subsequent to initial recognition borrowings are measured at amortised cost using the effective interest method. The amortisation is included within finance costs in the income statement and is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. Derivative financial instruments Derivative financial instruments are initially recognised at fair value with transaction costs being taken to the income statement. The Company does not apply hedge accounting and gain or loss on re-measurement to fair value is recognised immediately in profit or loss. The Company measures the fair value of interest rate swaps by discounting estimated future cash flows based on the terms and maturity of each contract and using market interest rates at the measurement date. The valuations are tested for reasonableness by comparing these to bank quotes. The fair value calculations have been adjusted to incorporate the Company s own and counter party credit risk where appropriate. 11

14 1. Principal accounting policies (continued) (h) Impairment excluding deferred tax assets A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset s original effective interest rate. Interest on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. (i) Taxation The Company is resident in the UK for tax purposes. The tax credit/expense represents the sum of current tax and deferred tax. Current taxation Current tax is based on the taxable profit or loss for the period and is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted at the balance sheet date. Taxable profit can differ from the net result as reported in the income statement because it may exclude items of income or expense that are taxable or deductible in other periods and it may further exclude items that are never taxable or deductible. Consideration receivable or payable in respect of losses surrendered or claimed by way of group relief is dealt with in the income statement. Deferred taxation Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date, where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. A net deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits against which to recover carried forward tax losses and from which the future reversal of underlying timing differences can be deducted. Deferred taxation is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse based on tax rates and laws that have been substantively enacted by the balance sheet date. (j) De-recognition of financial instruments A financial asset is de-recognised when the rights to receive cash flows from the asset have expired. A financial liability is de-recognised when the obligation under the liability is discharged, cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the income statement. 12

15 1. Principal accounting policies (continued) (k) Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously. (l) Foreign currency Transactions in foreign currencies are translated to the Company s functional currency, Sterling GBP, at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated to the functional currency at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are retranslated to the functional currency at foreign exchange rates ruling at the dates the fair value was determined. Under the terms of the bonds, where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its group, the Company considers these to be insurance arrangements and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee. (m) Financial guarantees The Company raises debt in external debt markets through the issuance of secured bonds and issue of loans. The Company, Thames Water Utilities Holdings Limited, TWUL, Thames Water Utilities Cayman Finance Limited and Thames Water Utilities Cayman Finance Holdings Limited have guaranteed the principal and interest payments due under the terms of the bonds. Where the Company enters into financial guarantee contracts to guarantee the indebtness of other companies within its group, the Company considers these to be insurance arrangements and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such a time as it becomes probable that the Company will be required to make a payment under the guarantee. 2. Segmental analysis The Company's income and results arise solely in the United Kingdom and are attributable to one principal activity of the Company, being the raising of finance and subsequent lending of the debt to TWUL. Consequently there is no detailed segmental information to present. 3. Finance income Period ended 30 September Period ended 30 September 2014 Year ended 31 March Interest receivable on loans to TWUL Interest receivable arises due to the financing costs of the Company being directly recharged to TWUL. Finance income consists of interest receivable on loans to TWUL and interest income due on swaps. 13

16 4. Finance expense Period ended 30 September Period ended 30 September 2014 Year ended 31 March Interest payable borrowings Interest payable on borrowings represents interest payable on fixed bonds, index-linked bonds and interest on swaps held by the Company. 5. Taxation Period ended 30 September Period ended 30 September 2014 Year ended 31 March Current tax: Amounts payable in respect of group relief (0.1) - - Deferred tax: Origination and reversal of timing differences (note 7) 0.8 (4.1) (18.2) Impact on deferred tax asset of tax rate change (note 7) Tax charge/(credit) on profit/(loss) on ordinary activities 0.7 (3.9) (18.2) The tax assessed for the period is equal to (period ended 30 September 2014: higher than) the standard rate of corporation tax in the UK of 20% (: 21%). There are no differences to explain. Period ended 30 September Period ended 30 September 2014 Year ended 31 March Profit/(loss) on ordinary activities before tax 3.3 (19.3) (91.2) Corporation tax on profit/ (loss) on ordinary activities at 20% (period ended 30 September 2014: 21%) 0.7 (4.1) (19.1) Effect of tax rate change Total tax charge/(credit) for the period 0.7 (3.9) (18.2) Factors affecting the future tax rate A reduction in the UK corporation tax rate from 21% to 20% (effective from 1 April ) was substantively enacted on 2 July The deferred tax asset at 30 September has been calculated based on the rate of 20% substantively enacted at the balance sheet date. In the Budget on 8 July, the Chancellor announced additional planned reductions to 18% by This will reduce the Company s future current tax charge accordingly and reduce the deferred tax asset at 30 September by 3.6m. 14

17 6. Loans receivable from group companies 30 September 31 March 31 March 2014 Non-current: Loans receivable from Thames Water Utilities Limited 2, , ,826.6 Current: Interest receivable from Thames Water Utilities Limited Loan receivable from Thames Water Utilities Limited Total loans receivable from group companies 2, , ,872.9 There are no amounts past their due dates (March : none). All receivables relate to intercompany debt owed by a regulated water company therefore the credit risk exposure is deemed insignificant and no amounts are considered irrecoverable. 7. Deferred tax asset The deferred tax asset relates to the cumulative fair value loss as detailed below: 30 September 31 March 31 March 2014 Deferred tax asset at the beginning of the period/year Amounts (payable)/receivable during the period on fair value (0.8) 18.2 (11.6) Impact on deferred tax asset of tax rate changes - - (2.7) Deferred tax asset at the end of the period/year Borrowings 30 September 31 March 31 March 2014 Current liabilities: Secured bonds Interest payable on bonds Interest payable to Thames Water Utilities Limited Total current liabilities Non-current liabilities: Secured bonds 2, , ,773.3 Loan from Thames Water Utilities Limited Total non-current liabilities 2, , ,773.3 Total borrowings 2, , ,822.6 The Company has in issue secured bonds with a total principal value of 2,590.7m (31 March : 2,792.6m) maturing between 2020 and 2055 (31 March : due between and 2055). The fair value of these bonds is 3,251.7m (31 March : 3,608.6m). Interest on the loan from Thames Water Utilities Limited is charged at a floating rate (31 March : nil). 15

18 8. Borrowings (continued) TWUL, Thames Water Utilities Cayman Finance Limited, Thames Water Utilities Cayman Finance Holdings Limited and Thames Water Utilities Holdings Limited have guaranteed the principal and interest payments due under the terms of the bonds. The Company uses derivatives to swap fixed rate debt to index-linked debt, which is then transferred to TWUL, a regulated utility company with index-linked revenues. Details on the derivatives are included in note Financial instruments Fair value measurements The fair value of financial assets and liabilities represents the price that would be received to sell an asset or paid to transfer a liability between informed and willing parties, other than in a forced or liquidation sale at the measurement date. The techniques for determining the fair value of financial instruments are classified under the hierarchy defined in IFRS 13 Fair Value Measurement which categorises valuation techniques into Levels 1-3 based on the degree to which the fair value is observable. All of the Company s valuation techniques are Level 2. The table below sets out the valuation basis of financial instruments held at fair value as at 30 September Level 2 30 September m 31 March m 31 March 2014 m Financial Liabilities Fair value through the income statement: Interest rate swaps Total The fair value of derivative financial instruments is measured using discounted cash flows. The future cash flows are estimated based on forward interest rates from observable yield curves at the period end and discounted at a rate that reflects the credit risk of the Company and the counterparties. Comparison of fair value of financial instruments with their carrying amounts The Directors consider that the carrying amounts of trade receivables and trade payables are not materially different from their fair values. 16

19 9. Financial instruments (continued) The tables below set out a comparison of the carrying values and fair values of the Company s other financial assets and financial liabilities. 30 September m 31 March m 31 March 2014 m Carrying Value Fair Value Carrying Value Fair Value Carrying Value Fair Value Financial Assets Amounts owed by group undertakings 2, , , , , ,275.2 Total financial assets 2, , , , , ,275.2 Financial liabilities Fixed rate bond 1, , , , , ,019.8 Index-linked bond 1, , , , , ,112.1 Amounts owed to group undertakings Total financial liabilities 2, , , , , ,131.9 The primary financial instruments include bonds that are traded on a public market. Fair values for these have been calculated using the 30 September quoted priced. The book value of the bonds represents the amortised cost in line with the measurement principles of IAS 39 Financial instruments: Recognition and Measurement. 10. Immediate and ultimate parent and controlling party The Company s immediate parent undertaking is TWUL, which owns 100% of the Company s share capital. Kemble Water Finance Limited, a company incorporated in the United Kingdom is an intermediate parent company and the smallest group to consolidate these financial statements. The directors consider the ultimate parent company and controlling party to be Kemble Water Holdings Limited, a company incorporated in the United Kingdom and largest group to consolidate these financial statements. Copies of the financial statements of all of the above companies may be obtained from The Company Secretarial Department, Thames Water Group, Clearwater Court, Vastern Road, Reading, Berkshire, RG1 8DB. 11. Adoption of International Financial Reporting Standards This is the first reporting date that the Company has presented its financial statements under IFRS. The policies applied in these condensed interim financial statements are based on the IFRS, IAS and IFRIC interpretations issued and effective and ratified by the European Union as of 26 November, the date that the Board of Directors approved the statements. The Company s previously reported results for the year ended 31 March have been restated, the date of transition to IFRS being 1 April In accordance with IFRS 1 First Time Adoption of International Financial Reporting Standards the Company s accounting policies under IFRS have been applied retrospectively at the date of transition. No exceptions have been taken in the adoption of IFRS. The key areas of impact of the implementation of IFRS are summarised below: 17

20 11. Adoption of International Financial Reporting Standards (continued) Based on the nature of the Company and the preparation of previous financial statements in accordance with FRS 26 Financial Instruments: Recognition and Measurement and FRS 29 Financial Instruments Disclosures, the Directors do not consider there to be any transition adjustments in the adoption of IFRS. The only change identified was presentational and comprises of a reclassification between non-current and current financial assets and finance expense and fair value gain/loss on financial instruments and has a net nil impact as disclosed below: Reconciliation of equity as at 1 April 2014 UK GAAP Reclassification IFRS Non-current assets Loans receivable from group entities 2, ,826.6 Other amounts receivable from group entities 0.1 (0.1) - Deferred tax asset , ,845.3 Current assets Loans receivable from group entities Interest receivable from parent undertaking 46.3 (46.3) - Deferred tax asset 18.7 (18.7) (18.7) 46.3 Total assets 2, ,891.6 Current liabilities Borrowings - (49.3) (49.3) Interest payable on secured bonds (49.2) Other creditors (0.1) (49.3) - (49.3) Non-current liabilities Borrowings (2,773.3) - (2,773.3) Derivative financial liabilities (143.3) - (143.3) (2,916.6) - (2,916.6) Total liabilities (2,965.9) - (2,965.9) Net liabilities (74.3) - (74.3) Equity Share capital Retained losses (74.4) - (74.4) Total deficit (74.3) - (74.3) 18

21 11. Adoption of International Financial Reporting Standards (continued) Reconciliation of equity as at 30 September 2014 UK GAAP Reclassification IFRS Non-current assets Loans receivable from group entities 2, ,600.5 Deferred tax asset , ,623.1 Current assets Loans receivable from group entities Interest receivable from parent undertaking 41.7 (41.7) - Deferred tax asset 22.6 (22.6) (22.6) Total assets 2, ,900.2 Current liabilities Borrowings (200.0) (44.5) (244.5) Interest payable on secured bonds (44.4) Other creditors (0.1) (244.5) - (244.5) Non-current liabilities Borrowings 2, ,578.7 Derivative financial liabilities (2,745.4) - (2,745.4) Total liabilities (2,989.9) - (2,989.9) Net liabilities (89.7) - (89.7) Equity Share capital Retained losses (89.8) - (89.8) Total deficit (89.7) - (89.7) 19

22 11. Adoption of International Financial Reporting Standards (continued) Reconciliation of equity as at 31 March UK GAAP Reclassification IFRS Non-current assets Loans receivable from group entities 2, ,592.6 Other receivables from group 0.1 (0.1) - Deferred tax asset , ,629.5 Current assets Loans receivable from group entities Interest receivable from parent undertaking 47.0 (47.0) - Deferred tax asset 36.9 (36.9) (36.9) Total assets 2, ,935.3 Current liabilities Borrowings (258.8) (49.8) (308.6) Interest payable on secured bonds (49.7) Other creditors (0.1) (308.6) - (308.6) Non-current liabilities Borrowings (2,533.8) - (2,533.8) Derivative financial liabilities (240.1) - (240.1) (2,773.9) - (2,773.9) Total liabilities (3,082.5) - (3,082.5) Net liabilities (147.2) - (147.2) Equity Share capital Retained losses (147.3) - (147.3) Total deficit (147.2) - (147.2) 20

23 11. Adoption of International Financial Reporting Standards (continued) Reconciliation of total comprehensive income for the six months ended 30 September 2014 UK GAAP Reclassification Transition IFRS m Finance income 72.6* Finance expense (91.9)* (68.6) Fair value gain loss on derivatives - - (23.3) (23.3) Loss on ordinary activities before taxation (19.3) - - (19.3) Taxation on loss on ordinary activities Loss for the financial period/year (15.4) - - (15.4) Reconciliation of total comprehensive income for the year ended 31 March UK GAAP Reclassification Transition IFRS m Finance income 150.7* Finance expense (241.8*) (145.0) Fair value gain loss on derivatives - - (96.8) (96.8) Loss on ordinary activities before taxation (91.1) - - (91.1) Taxation on loss on ordinary activities Loss for the financial period/year (72.9) - - (72.9) * Restated finance income and finance expense as disclosed in note 1. 21