Accounting Separation Methodology Section 1: Introduction Section 2: Overview Section 3: Systems and Structures Section 4: Allocation Assumptions

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2 Section 1: Introduction Section 2: Overview Section 3: Systems and Structures Section 4: Allocation Assumptions Section 5: Capital Maintenance Section 6: Improvement Plan Appendix 1: Business Unit Cost Structures Appendix 2: Summary of Support Cost Allocations Appendix 3: Water Operations Boundary Points Appendix 4: Allocation of PR09 Asset Revaluation - Water Appendix 5: Allocation of PR09 Asset Revaluation - Sewerage Appendix 6: Allocation of additions across business units Appendix 7: Allocation Method 3 - Vehicles (including mobile plant) Appendix 8: Allocation Method 4 - Computers Appendix 9: Upstream Services

3 1 Section 1: Introduction Purpose 1 The purpose of this document is to set out our overall approach to accounting separation. This document is required by Ofwat to be submitted as part of the regulatory accounts documentation. 2 The document sets out the approach we have taken to ensure that accounting separation is conducted in a transparent and consistent manner. Scope 3 The document relates to AWS appointed business only. 4 This document should be read in conjunction with the previously issued Ofwat guidance on accounting separation, RAG 2.05 and RAG 4.05, AWS Yearbook (Yearbook Business Management System) and regulatory accounts tables 2B, 2C, 4D. 4E and 4F. 5 This document is supported by further internal documentation which sets out the detailed instructions for completing the required regulatory tables. Governance 6 This document is a controlled document. The primary method of control is via the regulation team with the controlled document available on the Limehouse publishing system. In the limited instances where access to a hard copy is required, a controlled copy will be issued to named individuals by the business performance team. Any other printed or copied versions should not be taken as the current version unless checked against the published document on the Anglian Water website. 7 The document is issued and controlled by the Business Performance Team, and is authorised by the Head of Business Performance. 8 Where clarification is needed, then this should be made via the Head of Business Performance, who will refer to the Head of Planning, Management Accounting & Analysis where interpretation could require a change in policy. 9 All changes in policy are to be agreed by the Head of Planning Management Accounting & Analysis in conjunction with the Regulation Director. 10 This document shall be reviewed annually and any changes approved by the Head of Planning Management Accounting & Analysis in conjunction with the Regulation Director. Section 2: Overview 11 Each company must produce and publish an accounting separation methodology statement as part of its regulatory accounts submission. The purpose of the statement is to enable Ofwat and other stakeholders to understand the systems, processes and allocation methodologies used to populate the accounting separation tables.

4 2 12 Ofwat communicated in their Information Notice 13/01 Revised regulatory accounting guidelines and regulatory reporting requirements for and onwards, that the methodology statement should cover the following areas. We have have noted in brackets the paragraphs in this document where we address each requirement: cost allocation bases (cost drivers) and any changes year on year (37-91) a breakdown of the recharges paid to and received from other business units for the use of fixed assets (49,59) significant changes in costs during the year (16) details of processes and systems and any changes year on year (15-17, 18-28) how companies have applied the principles set out in RAG4 (37-91) any additional analysis or adjustments made to the data from the systems (29-32, 60-91) an explanation of the allocation basis used for each line of the tables, why these allocation bases are considered appropriate and how management is satisfied that they are reasonable (43,49,59, Appendices 2,4,5,7,8) improvements that have been made in the year and any planned improvements in the coming year (15, ) 13 This document also addresses the reporting requirements set out in Ofwat's Disclosure requirements for companies accounting separation and upstream services data methodology statements , specifically: background to the business (18-28) commentary (15-17) billing and collection (33-36) cost allocations (various and appendix 9) 14 This methodology statement forms part of our internal quality assurance process for our regulatory return and forms part of our control and reporting structure as shown below: External guidance Regulatory Accounting Guidelines Internal procedures statement Procedures Work instructions Data outputs Regulatory accounts Business unit records Yearbook 2016 anglianwater.co.uk Changes to the methodology since Our methodology for the completion of the accounting separation tables in respect of wholesale costs is substantially unchanged from last year. We have, however, amended some of our methodologies in respect of the changes to guidance contained in RAG 2.05 and RAG 4.05 and also in respect of retail costs to reflect an improvement in our cost driver information. The changes made have not had a material impact on reported costs. 16 The key variance between our and reports are set out below.

5 3 Key Variances between and (in prices and prior year adjusted to include expensed IRE) Business Unit Operating expenditure Variance m fav/(adverse) Variance % Explanation Water Service charges ( 4.9m) 89% EA rebate in respect of the EIUC charge received in not repeating Power ( 7.0m) 26% IAS39 charge and underlying cost increase Third party services ( 0.9m) 16% Increase in rechargeable works during the year and an increase in bulk supplies. Sewerage Power ( 8.4m) 28% IAS39 charge and underlying cost increase Income treated as negative expenditure 3.4m 65% Additional income from CHP engines and farm sales income now included under this heading Retail No material variances 17 Our retail variance analysis is based on the combined totals for household and non-household costs. There are some variances in excess of 10% on a disaggregated basis, but these are immaterial in absolute terms, and have therefore not been reported separately. Overall retail operating costs have increased by 1.1m (1.4%) in real terms Section 3: Systems and Structures Systems 18 Anglian Water uses SAP as its integrated financial and business management system. The financial system is configured to reflect the way in which we manage our business by business unit, by location and by cost driver. 19 Our business is divided into 13 business units. In terms of the allocation of cost to price controls, the four primary business units are water services, water recycling services, customer services and Anglian Water Business (AWB) with nine support service business units. 20 The water business unit is split into two geographic regions: East and West. Each region is divided into a number of management areas, and within these, costs are charged directly at a site level. Maintenance and repair work on our water network is undertaken primarily by outsourced external contractors. 21 The water recycling business unit is split into four regions (Lincolnshire, Norfolk & Suffolk, Essex and Ruthamford) and separate maintenance, collection and support departments. Each treatment region, maintenance department and collection department

6 4 are divided into smaller geographic areas or patches. Within these regions, costs are charged directly at a site level for our larger sites, and are aggregated for smaller sites (band 4 and below) and network costs. 22 Customer services consists of six individual units: contact centre, billing and collection, resource planning, metering services, developer services and customer experience. Customer services costs make up 80% of total household retail costs. Within customer services, we have off-shored a large part of our back office function. This off-shore service is not customer facing and is primarily responsible for dealing with customer correspondence. 23 Anglian Water Business (AWB) was established in as a separate business unit managing non-household customers ahead of full market opening in Costs allocated directly to AWB account for 66% of total non-household retail costs. A further 25% of total non-household costs reflect the recharge from customer services for billing, collection, debt management and meter reading. 24 The costs within the nine support services business units are charged directly to those business units, and to an individual budget holder. 25 Costs are coded to a number of individual cost codes which are then amalgamated into cost element groups. These groups form our key cost drivers and are the basis of our internal reporting. Key cost element groups are: Employment costs Power Rates Chemicals Tools & materials Hired and contracted services Customer debt 26 The vast majority of our costs are coded at source. This includes payroll costs, purchase requisitions and works orders. The number of costs not coded at source is small and is generally from month end transactions which by their nature are temporary pending a system generated allocation (for example, the coding used when a purchase order is first raised). 27 Support costs allocated to water, sewerage or retail are all reported as 'other operating expenditure' and are not included in direct costs anglianwater.co.uk 28 Appendix 1 gives an example of our overall business unit and cost centre structures. Regulatory accounts costs 29 In order to produce regulatory accounts, and in addition to the accounting structure used for internal management reporting, we have created a separate operational cost centre and account code hierarchy in SAP. This means that directly coded water and sewerage operational costs can largely be assigned to the appropriate regulatory service and cost heading. Further reallocation of costs to service type is required in order to comply with reporting guidelines. Where costs are not directly coded to a specific service, management have assessed the appropriate allocation.

7 5 Support Costs 30 The allocation of support costs into the water and sewerage tables is carried out using a central consolidation model. Each support business unit provides a summary of its costs by cost driver in line with RAG2.05 and RAG4.05 definitions. Where possible, support costs are directly allocated to service and where costs are not directly allocated, an appropriate cost driver or management estimate determines the allocation of costs between services. Allocation assumptions are reviewed annually to ensure that the basis of allocation is still appropriate. Appendix 2 summarises the allocation methodology. Retail Household and Non-Household 31 The reporting structure of our customer services and AWB business units within SAP are closely aligned to the cost drivers on the retail analysis return, table 2C. The vast majority of costs reported in customer services, and AWB and therefore retail are coded at source with the allocation of remaining costs between household and non-household following an appropriate cost driver. Further details on our assumptions can be found in the table in paragraph We allocate a share of all support overheads to the retail functions (for example Human Resources, IT and Finance). Where not directly attributable, these costs are allocated on the most appropriate basis decided by management review. Details of our allocation methodology are in appendix 2. Billing and collection 33 We have billing arrangements in place with a number of other water companies and local authorities that bill on our behalf where we provide the sewerage service in that area. These billing arrangements account for 7.5% of our total revenue. 34 We do not issue bills addressed to 'the occupier'. We only issue a bill when we have a customer name. 35 Where a customer has vacated a property, a provision is made against any debt at an appropriate rate depending on the age of the debt. For the purposes of provisioning, we do not differentiate between vacated and other classes of debt. The debt balance is retained on the account until such time as a write off of the debt is approved. Should the customer re-appear in our region but at a different address, the outstanding debt will be pursued. We do not issue credit notes to cancel debt, but a customer may be entitled to a credit towards outstanding debt via our assistance fund. 36 Our provisioning policy is slightly changed from previous years. We provide by age of debt, with debt over 4 years old attracting our highest provision rate, now 100%, up from 99% previously. We also now apply different provision rates to household and non-household debt. With the exception of debt where a charging order is in place, we do not distinguish between classes or types of customer in our provisioning policy.

8 6 Section 4: Allocation Assumptions Water Services Direct costs 37 The majority of direct costs are coded at source and 79% of total water service costs are directly allocated. 38 Some costs are clearly identifiable as either water resources, raw water distribution, treatment or treated water distribution, but where they are not, our operational managers have assessed the overall site costs by activity. 39 In the absence of directly derived financial information, we believe that this represents a reasonable assessment of the split of costs between these activities. 40 High lift pumps at the end of the treatment process (on site) have been reported as treatment with an allocation made for dual pumping to treated water distribution. Off site high lifts have been reported as treated water distribution. 41 The boundary points used for the allocation of costs between services are in line with Ofwat guidance but for clarity, we use the diagrams shown in Appendix 3 to ensure our assessment of boundary points is made consistently. 42 Recharges are made and received as appropriate for the use of fixed assets. 43 The table below sets out how water services direct costs are allocated in table 2B and to water resources, raw water distribution, water treatment and treated water distribution in table 4D. Allocation cost driver Table Line Allocation to water service Allocation to business unit (column) Power Directly coded to water services Directly coded to site. Where site spans more than one service, then management assessment Income treated as negative expenditure Directly coded to water services Directly coded to site. Where site spans more than one service, then management assessment 2016 anglianwater.co.uk Service Charges Bulk supply imports Other operating expenditure Local authority rates Actual charge from the EA allocated to water Actual charge Costs directly allocated to the water business unit Actual charge Direct allocation to water resources, Water treatment only Employment, materials, HCS and consumables, other - all coded to individual sites. Where site spans more than one service then management estimate Network contractor costs - all treated water distribution Scientific services - pro-rata to the number of samples Management costs and general support costs - allocation based on management estimate Allocation based on GMEAV

9 7 Table Line Exceptional items Allocation to water service Actual charge Allocation to business unit (column) Dependent on nature of cost Third party services Directly coded to water services Non-potable water - all in raw water distribution, Rechargeable works - all in treated water distribution Special agreements - in the same ratio as the works that deliver the bulk supplies. Indirect Costs 44 The methodology for the allocation of indirect and support costs is set out in appendix 2. Sewerage Services Direct costs 45 The majority of direct costs are coded at source and 77% of total sewerage service costs are directly allocated. 46 Some costs are clearly identifiable as either sewage treatment and disposal, sludge treatment, imported sludge and liquor treatment, sludge treatment or sludge disposal, but where they are not, our operational managers have assessed the overall site costs by activity. 47 In the absence of directly derived financial information, we believe that this represents a reasonable assessment of the split of costs between these activities. 48 Recharges are made and received as appropriate for the use of fixed assets. 49 The table below sets out how sewerage services direct costs are allocated in table 2B and to sewage collection sewage treatment and sludge in table 4E. Allocation cost driver Table Line Power Allocation to sewerage service Directly coded to sewerage service Allocation to business unit (column) Directly coded to site. Where site is both sewage and sludge treatment, allocation is based on previous energy audits and management estimate. Income treated as negative expenditure Directly coded to sewerage services Directly coded to site. Where site is both sewage and sludge treatment, allocation is based on previous energy audits and management estimate. Service Charges Actual charge from the EA Direct allocation to sewage collection and sewage treatment Bulk supply imports Actual charge No costs incurred

10 8 Table Line Other operating expenditure Allocation to sewerage service Costs directly allocated to the sewerage business unit Allocation to business unit (column) Maintenance and operational engineering costs - based on time spent Employment, materials, HCS and consumables, other - all coded to individual sites. Where site spans more than one service then management estimate Scientific services - management estimate Other - either management assessment or pro-rata to total costs Local authority rates Actual charge Allocation based on GMEAV Exceptional items Actual charge Dependent on nature of cost Third party services Actual Actual Indirect Costs 50 The methodology for the allocation of indirect and support costs is set out in appendix 2. Retail Services 51 Our total retail costs reported in table 2C are substantially the sum of the customer services, AWB and doubtful debts costs reported internally. 52 Additional specific costs accounted for internally in the wholesale business are transferred to retail in accordance with RAG 4.05 reporting requirements. 53 An appropriate share of general support costs are also allocated to the retail business. 54 The retail business therefore consists of: 2016 anglianwater.co.uk Direct internal customer services costs Doubtful debts IT, data processing, systems support Financial, legal, management, administrative Property costs and utilities Costs that are currently accounted for in wholesale such as customer side leaks. 55 The majority of retail costs incurred are coded at source. The cost drivers listed have been used for those costs not coded directly at source. 56 Costs coded to wholesale and then re-allocated to retail are customer side leaks and network enquiries and complaints:

11 9 Customer side leaks are directly costed to water services and are transferred in their entirety to retail The value of network enquiries and complaints is assessed by reference to jobs undertaken in water and sewerage operations where they are assessed as a customer related job. 57 Indirect costs are allocated on the basis set out in appendix Recharges are made and received as appropriate for the use of fixed assets. 59 The table below sets out how customer services direct costs are allocated between household and non-household in table 2C. Cost drivers and assumptions used to derive the household/non-household allocations Operating Expenditure Activity Driver Rationale for cost driver Customer Services Billing Number of bills raised Rag 2.05 guidance Payment handling, remittance and cash Number of payments received Rag 2.05 guidance Charitable trust donations All household Rag 2.05 guidance Vulnerable customer schemes All household Rag 2.05 guidance Non-network customer queries and complaints Time spent on calls RAG we have developed reports using our telephony system that log the time spent on a call by customer type. Network customer queries and complaints Time spent on calls RAG we have developed reports using our telephony system that log the time spent on a call by customer type. Investigatory visits Debt Management - Debt outstanding > 30 days. RAG 2.05 Doubtful Debts - Direct allocation Actual charge can be calculated by customer category. Meter reading - Number of meter reads Reflective of the cost burden. Services to developers - All non household Rag 2.05 guidance Other operating expenditure Disconnections Number of disconnections - costs are directly attributable to non HH only RAG 2.05 guidance Demand side water efficiency initiatives All household Programme of work is all in household. Customer side leaks Directly allocated Actual costs are directly allocated to HH and non-hh.

12 10 Operating Expenditure Activity Driver Rationale for cost driver Other direct costs Various - either number of bills raised, number of customers or direct allocation The most appropriate driver has been taken. General & support - IT General & support - vehicles General & support - Finance, HR payroll Number of customers Number of customers Number of customers Due to our structures and nature of shared support services between HH and non HH activities, a meaningful FTE split cannot be established between the two retail services. Customer numbers adequately reflect the burden of cost between the two retail services, as they can be taken as a proxy for time spent and the consumption of resource General & support - Exec directors Number of customers General & support - Non-execs Number of customers General & support - Facilities Number of customers General & support - insurance Number of customers Other general and support Number of customers Other business activities - regulation Number of customers Local authority rates Number of customers Third party services - Direct allocation Dependent on service provided. Depreciation - Number of customers See above Section 5: Capital Maintenance Infrastructure Renewals Charge 2016 anglianwater.co.uk 60 The infrastructure renewals charge (IRC) is only applicable for reporting under UKGAAP. Since the adoption of IFRS, an IRC is no longer applicable for statutory accounting as all infrastructure assets are depreciated. 61 For APR table 4G Wholesale current cost financial performance, a notional IRC is required as part of line 3 Capital maintenance charges. As the original method of calculation is no longer valid due to certain activities now being expensed instead of capitalised, we have taken an average of the AMP6 budget figure in accordance with RAG This results in the notional IRC being 61.8m for , instead of the originally assessed value of 93.5m. The difference of 31.7m in IRC is the comparative to 34.7m previously capitalised, now expensed.

13 11 Wholesale totex analysis Tables 4D and 4E 62 All additions and disposals are allocated directly to business units. This is achieved through mapping our Business Investment Category (BIC) coding for asset additions and through reviewing each asset disposal and allocating to business unit for disposals. We currently use about 500 individual BIC codes. Individual projects can have up to five separate codes but are usually proportionally allocated to no more than two or three different categories, and in many cases will be single purpose. 63 Management and General (M&G) additions and disposals during the report year are allocated wherever possible direct to business unit; where this is not possible, they are allocated according to the following hierarchy (in order of preference): 1. To a specific group of business units 2. To a specific service (water / wastewater) 3. To the combined water / wastewater operational service (non retail) 4. To all business units. 64 Assets in item 4 above are allocated to retail (15%) and the remainder (85%) to item 3 (non retail assets). This is based on the ratio of the proportion of AWS employees in Retail to the total AWS employees as at 31 March Assets in item 3 (non retail assets) are allocated to item 2 split 40% water and 60% wastewater. This is our policy split for M&G assets between the water and wastewater services (based on population served) and is consistent with our approach elsewhere in previous June Returns, Regulated Accounts and PR Assets in item 2 (specific service assets) are allocated to business units pro rata to direct employment costs in each business unit. 67 Retail assets (consisting of M&G assets), additions and disposals are allocated to either the retail household business unit or the retail non household business unit, by individual examination. 68 In accordance with Ofwat requirements for table 2A, we allocate all M&G assets to wholesale wastewater, being the highest percentage allocation. We recharge depreciation from wastewater to the other business units for the use of fixed assets. 69 Anglian Water does not maintain a CCA register. For table 4G line 3 Capital Maintenance charges, we include CCD for the previous year inflated by RPI, adjusted for the depreciation for additions and disposals accounted for as described in our methodology above. We add the IRC as outlined above. Section 6: Improvement Plan 70 Our continued involvement in the Regulatory Accounts Working Group will help us to identify more efficient and consistent ways in capturing and reporting accounting separation information. 71 We have made significant progress in the allocation of costs to services since the inception of accounting separation reporting and we will seek to continue to reduce management assessments of cost allocations and employ direct coding wherever possible.

14 12 72 A new cost capture and reporting system is under development, to be delivered early in Sitting outside of SAP, this will enable greater flexibility on in-year analysis of costs and our ability to improve cost driver principles. 73 During , we will be adopting a different cost capture methodology in respect of retail which will enable a more accurate reflection of of costs between household and non-household functions for 2017 reporting anglianwater.co.uk

15 Appendix 1: Business Unit Cost Structures Business Unit Cost Structures 13

16 2016 anglianwater.co.uk 14 Appendix 2: Summary of Support Cost Allocations Summary of support cost allocations Business Unit Asset Management Narrative ADMC AM remainder (SAM / PM / SMT) Asset Planning Facilities (retail occupied) Basis of allocation to Table 2B and 2C (water / sewerage / retail) ADMC oncost credit proportions G&S / total cost percentages Asset Planning Imp percentages Floorspace Basis of allocation to service in 2B (water / sewerage) direct costs direct costs direct costs direct costs Basis of allocation to household / non-household in 2C (retail) Customer numbers, more appropriate driver than previously used generic CS split. Innovation team Based on project direct costs Network contract re-let SCM expenditure direct costs Risk & Value G&S / total cost percentages direct costs SCM excluding FM G&S / total cost percentages direct costs UKWIR subs Equal direct costs Water Resources 100% water Direct Customer Services Customer Services Doubtful debts Direct cost to retail Direct cost to retail See retail appendix See retail appendix Debt management Direct cost to retail See retail appendix Meter reading Direct cost to retail See retail appendix Services to developers (1) Activity Acct Mgt and admin - direct cost retail (2) Activity Water Regulation split between W / WR using number of billed customers (1) (2) direct costs (1) See retail appendix (2)

17 Business Unit Narrative Basis of allocation to Table 2B and 2C (water / sewerage / retail) Basis of allocation to service in 2B (water / sewerage) Basis of allocation to household / non-household in 2C (retail) Disconnection (1) Decision and administration activity - direct cost retail (2) Physical disconnection - direct cost water (1) (2) 100% to treated water distribution (1) See retail appendix (2) Demand side water efficiency initiatives / Other direct costs / General and support expenditure Direct cost to retail See retail appendix Meter maintenance / installation - non capex Direct costs to wholesale 100% to treated water distribution CAM team costs Activity on rota for OMC and fields ops staff so split between W / WR using direct costs direct costs AWB non appointed 100% non appointed Loggers 100% to treated water distribution -all wholesale 100% to treated water distribution Information Services IT costs (1) Costs of application support, software, licences, support & maintenance contract directly attributable to the BU (2) For the rest of the costs split between W / WR / retail based on FTE or users (1) direct salary costs (2) direct salary costs Customer numbers, more appropriate driver than previously used generic CS FTE split. Regulation Business Strategy One ninth to each service One ninth to each service Customer numbers as above Director One ninth to each service One ninth to each service Customer numbers as above Income & Tariffs One ninth to each service One ninth to each service Customer numbers as above Economic Regulation One ninth to each service One ninth to each service Customer numbers as above WQEP Management estimates -all wholesale Management estimates All wholesale CEO Change Retail - Managerial estimate (5%) direct costs Customer numbers as above CEO FTE's direct costs Customer numbers as above 15

18 2016 anglianwater.co.uk 16 Business Unit Corporate Affairs Finance Human Resources Narrative Legal Occ Health & Safety Corporate Affairs Business Performance Rest of BU HR Rest of BU Basis of allocation to Table 2B and 2C (water / sewerage / retail) Retail 25% of KB costs. Retail 100% of OHS Bus Partner for CS. FTE's Directly costed to retail, balance in wholesale FTE's Directly costed to retail, balance in wholesale FTE's Basis of allocation to service in 2B (water / sewerage) direct costs direct salary costs direct costs direct costs direct costs direct salary costs direct salary costs Basis of allocation to household / non-household in 2C (retail) Customer numbers as above Customer numbers as above Customer numbers as above Customer numbers as above Customer numbers as above Customer numbers as above Customer numbers as above Central Central insurance claims Claims split for W / WR split. Management judgement for Retail Direct or management estimate Customer numbers as above Central insurance premium Direct, FTEs, vehicle numbers Direct or management estimate Customer numbers as above Carbon reduction commitment W / WR power costs Power costs GRIR balance Number of invoices by service Number of invoices by service Customer numbers as above Bonus, FRS17 adj, welfare scheme, loyalty, class 1A and PSA direct costs for retail. FTE's for W / WR direct salary costs Customer numbers as above Rates rebates Directly costed Wholesale only On-cost recovery for IS costs Capital salaries Direct employee costs

19 Appendix 3: Water Operations Boundary Points 17

20 anglianwater.co.uk

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22 20 Appendix 4: Allocation of PR09 Asset Revaluation - Water Allocation of PR09 asset revaluation across water business units Asset Type from PR09 Revaluation Business Unit Asset Classification Allocation Method GMEAV Allocation Method NMEAV Group 1 - Water resources Dams and impounding reservoirs Water Resources Infra - infrastructure asset Raw water aqueducts Water Resources / Raw Water Distribution Infra Individually valued assets in each BU can be identified - infrastructure asset Group 2 - Water treatment works SD treatment works Water treatment - Asset type entirely in W1 treatment works Water treatment - Asset type entirely in W2 treatment works Water treatment - Asset type entirely in W3 treatment works Water treatment - Asset type entirely in W4 treatment works Water treatment - Asset type entirely in Group 3 - Water storage Service reservoirs Water distribution - Asset type entirely in Water towers Water distribution - Asset type entirely in Group 4 - Pumping stations Intake pumping stations Water Resources - Asset type entirely in 2016 anglianwater.co.uk Source pumping stations Booster pumping stations Group 5 - Water mains Potable mains (up to 320mm) Potable mains (greater than 320mm) Other mains Water Resources / Raw Water Distribution / Treated Water Distribution Treated Water Distribution Treated Water Distribution Treated Water Distribution Raw Water Distribution Infra Infra Infra Individually valued assets in each BU can be identified (1) See note (2) - infrastructure asset - infrastructure asset - infrastructure asset

23 21 Asset Type from PR09 Revaluation Business Unit Asset Classification Allocation Method GMEAV Allocation Method NMEAV Ancillaries - customer (infrastructure) Treated Water Distribution Infra - infrastructure asset Ancillaries - customer (non-infrastructure) Treated Water Distribution - Asset type entirely in Group 6 - Management and general Offices and laboratories (total area) Water Treatment / Treated Water Distribution / Retail Other tangible assets Allocation method 1 NMEAV split in same proportion as GMEAV Depots and workshops (total area) Water Treatment / Treated Water Distribution Other tangible assets Allocation method 2 NMEAV split in same proportion as GMEAV Vehicles All Business Units Other tangible assets Allocation method 3 Allocation method 3 Telemetry systems All Business Units except Retail Other tangible assets Split pro rata to number of sites in each BU (3) NMEAV split in the same proportion as GMEAV Computers All Business Units Other tangible assets Allocation method 4 Allocation method 4 Other No assets included under this heading No assets included under this heading No assets included under this heading 1. For the PR09 valuation these assets were grouped into 3 asset classes: boreholes - these all sit within the Water Resources BU; high lift PS - these all sit within the Treated Water Distribution BU; raw water PS - with the exception of one site (which sits in the Water Resources BU - Empingham Raw Water Booster) these all sit within the Raw Water Distribution BU 2. NMEAV is available for the total stock of boreholes. These all sit in the Water Resources BU. NMEAV is available for the total stock of High Lift PS - these all sit in the Treated Water Distribution BU. NMEAV is available for the total stock of Raw Water PS, as one site in this asset category sits in the Water Resources BU (Empingham Raw Water Booster) and the rest sit in the Raw Water Distribution BU, the NMEAV will be appointed across the two BUs pro rata to the GMEAV in each BU 3. Assumes each site has an equal telemetry asset cost Allocation method 1: Offices and Labs Sudbury Office allocated to Treated Water Distribution. All staff are Treated Water Distribution. Hartlepool Office allocated according to March 2010 occupation (56 CS staff, 10 Billing staff and 32 Water staff). Therefore 67% Retail (CS and Billing). Split remainder equally between Treated Water Distribution and Water Treatments, gives 16.5% each. Allocation method 2: Depots and workshops Sudbury depot allocated to Treatment Water Distribution. Colchester Stanway depot allocated equally between Water Treatment and Treated Water Distribution based on occupation of depot. Hartlepool depot allocated equally between Water Treatment and Treated Water Distribution.

24 22 Allocation method 3: Vehicles (including mobile plant) See Appendix 7. Allocation method 4: Computers See Appendix anglianwater.co.uk

25 23 Appendix 5: Allocation of PR09 Asset Revaluation - Sewerage Allocation of PR09 asset revaluation across sewerage business units Asset Type From PR09 Revaluation Business Unit Asset Classification Allocation Method GMEAV Allocation Method NMEAV Group 1 - Sewers Critical sewers Sewage collection Infra - Asset type entirely in Non-critical sewers Sewage collection Infra Individually valued assets in each BU can be identified - Asset type entirely in Sewage pumping mains Sewage collection Infra Individually valued assets in each BU can be identified - Asset type entirely in Group 2 - Sewers structures Combined sewer and emergency overflows Sewage collection Infra Individually valued assets in each BU can be identified - Asset type entirely in Other sewer structures (volume m3) Sewage collection Infra Individually valued assets in each BU can be identified - Asset type entirely in Group 3 - Sewage pumping stations In-line pumping stations Sewage collection - Asset type entirely in Terminal pumping stations Sewage collection - Asset type entirely in Group 4 - Sewage treatment works Preliminary treatment only Sewage treatment - Asset type entirely in Primary treatment only Sewage treatment - Asset type entirely in Secondary treatment only Sewage treatment - Asset type entirely in Tertiary treatment only Sewage treatment - Asset type entirely in Group 5 - Sea outfalls Short outfalls Sewage treatment Infra - Asset type entirely in Long outfalls Sewage treatment Infra - Asset type entirely in Group 6 - Sludge treatment facilities Liquid disposal No assets included under this heading No assets included under this heading No assets included under this heading No assets included under this heading

26 24 Asset Type From PR09 Revaluation Business Unit Asset Classification Allocation Method GMEAV Allocation Method NMEAV Cake disposal Sludge treatment - Asset type entirely in Compost disposal Sludge treatment - Asset type entirely in Ash disposal No assets included under this heading No assets included under this heading No assets included under this heading No assets included under this heading Other disposal No assets included under this heading No assets included under this heading No assets included under this heading No assets included under this heading Group 7 - Management and general Offices and laboratories (total area) No assets included under this heading No assets included under this heading No assets included under this heading No assets included under this heading Depots and workshops (total area) No assets included under this heading No assets included under this heading No assets included under this heading No assets included under this heading Vehicles All business units Other tangible assets Allocation method 3 Allocation method 3 Telemetry systems All Business units except Retail Other tangible assets Split pro rata to number of sites in each BU (1) NMEAV split in same proportion as GMEAV Computers All Business units Other tangible assets Allocation method 4 Allocation method 4 Other No assets included under this heading No assets included under this heading No assets included under this heading No assets included under this heading 1. Assumes each site has an equal telemetry asset cost Allocation method 3: Vehicles (including mobile plant) 74 See Appendix anglianwater.co.uk Allocation method 4: Computers 75 See Appendix 8.

27 Appendix 6: Allocation of additions across business units Allocation of additions across business units 25

28 26 Allocation method 5 This will be split between water resources infra and raw water distribution infra (likelihood is that all expenditure will be raw water distribution infra). Projects will be reviewed against this BIC code to identify any relating impounding reservoir refill (which will be allocated to water resources infra). Allocation method 6 All assumed to be treated water distribution. Allocation method 7 This is nearly all treated water distribution operational but the BIC codes used may contain a small element of raw water distribution operational (e.g. Empingham Wing / Saltersford PS). Projects will be reviewed against this BIS code to identify any raw water distribution investment. Allocation method 8 All assumed to be treated water distribution. Allocation method 9 M&G additions will be reviewed individually. They will be allocated to specific business units wherever practical. Where project are apportioned across business units the method will be described anglianwater.co.uk

29 27 Appendix 7: Allocation Method 3 - Vehicles (including mobile plant) PR09 Revaluation 76 For the PR09 revaluation vehicles and plant were valued using values recorded in our historic cost fixed asset register inflated by RPI to current prices. This exercise was completed for each asset in the register. The inflated purchase price provided the Gross Modern Equivalent Asset Value and the inflated net book value provided the Net Modern Equivalent Asset Value. 77 We did not carry out a further revaluation for PR14. Allocation Across Ofwat Business Units 78 The description of each individual asset in the listings was reviewed and each asset then allocated according to the following hierarchy. 1. Specific Ofwat business unit. An example of such an asset would be an air scouring unit (allocated to water distribution) or a jetting unit (allocated to sewage collection). 2. Specific group of Ofwat business units (only for sludge assets, where it could be determined that the asset was used in the treatment or disposal of sludge but could not be allocated to sludge treatment or sludge disposal). An example of such an asset would be one identified as a sludge tanker. 3. Specific sub-service where the asset could be identified as an asset used in the water or wastewater service but not a specific business unit. An example of such an asset would be a mobile pump (allocated to wastewater), or where the capital project code recorded against an asset was a specific water or wastewater project code (as opposed to an M&G project code). 4. (or non-retail) where the asset could be identified as an operational asset but not a specific business unit or sub-service. These are assets that are clearly not used in the retail business unit. Assets included are all previously unallocated mobile plant and equipment, large vans, lorries, trailers etc. 5. All business units the remainder of unallocated cars and small vans. 79 Assets in item 5 above were allocated to water (30%), sewerage (50%) and retail (20%). These percentages were derived from a list of vehicles provided by the Transport department which included the Anglian Water business unit to which they related. 80 Assets in item 4 above were allocated to water (40%) and sewerage (60%). These percentages were obtained from the ratio of water vehicles to wastewater vehicles obtained form the Transport department list of vehicles. 81 Assets in item 3 and the water and sewerage assets from items 4 and 5 were allocated to the Ofwat business units in the following proportions (these proportions were derived from direct employment costs in each business unit): Allocations Sub-service Water Ofwat business unit Water resources Raw water distribution % allocation 11% 3%

30 28 Sub-service Sewerage Ofwat business unit Water treatment Treated water distribution Sewage collection Sewage treatment Sludge treatment Sludge disposal % allocation 39% 48% 31% 42% 22% 5% 82 Assets in item 2 above were allocated between sludge treatment and sludge disposal pro-rata to direct employment costs. 83 The % of GMEAV and NMEAV of each of the items 1 to 5 is provided in the table below: % of GMEAV and NMEAV Item 1 (direct to business unit) Item 2 ("sludge assets") Item 3 (Water / Wastewater) Item 4 () Item 5 (All business units) % GMEAV 57% 5% 1% / 3% 22% 12% % NMEAV 50% 7% 1% / 3% 17% 21% 2016 anglianwater.co.uk

31 29 Appendix 8: Allocation Method 4 - Computers PR09 Revaluation 84 For the PR09 revaluation IT assets were valued using values recorded in our historic cost fixed asset register. The purchase price provided the Gross Modern Equivalent Asset Value and the net book value provided the Net Modern Equivalent Asset Value. 85 We did not carry out a further revaluation for PR14. Allocation Across Ofwat Business Units 86 The description of each individual asset in the listings was reviewed and each asset then allocated according to the following hierarchy. 1. Specific Ofwat business unit. An example of such an asset would be SAP ISU (customer billing system) allocated to retail or computerised water network models (allocated to treated water distribution). 2. Specific group of Ofwat business units. This only applied to sludge assets, where it could be determined that the asset was used in the treatment or disposal of sludge but could not be allocated to sludge treatment or sludge disposal. An example of such an asset would be RTS Sludge collection and delivery scheduling software. 3. Specific sub-service where the asset could be identified as an asset used in the water or sewerage service but not a specific business unit. An example of such an asset would be Drinking water safety plan software (allocated to water). 4. (or non-retail) where the asset could be identified as an operational asset but not a specific business unit or sub-service. These are assets that are clearly not used in the retail business unit. An example of such an asset would be laboratory information systems. 5. All business units the remainder of unallocated IT assets. 87 Assets in item 5 above were allocated to retail (21%), sewerage (59%) and water (20%). The retail split was derived from the proportion of AW employees in the Customer Services department (617 out of 4121 total employees). The remainder was then split across water and sewerage pro-rata to direct employment costs. 88 Assets in item 4 above were allocated to water (25%) and sewerage (75%). The split was pro rata to direct employment costs. 89 Assets in item 3 and the water and sewerage assets from items 4 and 5 were allocated to the Ofwat business units in the following proportions (these proportions were derived from direct employment costs in each business unit): Allocations Sub-service Water Ofwat business unit Water resources Raw water distribution Water treatment Treated water distribution % allocation 11% 3% 39% 48%

32 30 Sub-service Sewerage Ofwat business unit Sewage collection Sewage treatment Sludge treatment Sludge disposal % allocation 31% 42% 22% 5% 90 Assets in item 2 above were allocated between sludge treatment and sludge disposal pro-rata to direct employment costs. 91 The % of GMEAV and NMEAV of each of the items 1 to 5 is provided in the table below: % of GMEAV and NMEAV Item 1 (direct to business unit) Item 2 ("Sludge assets") Item 3 (Water / Wastewater) Item 4 () Item 5 (All business units) % GMEAV 29% 0% * 0% * / 0% * 9% 61% % NMEAV 49% 0% * 1% / 1% 4% 45% * Less than 0.5% 2016 anglianwater.co.uk

33 31 Appendix 9: Upstream Services Overview 92 The purpose of the publication of upstream service costs is on a trial basis in order to understand the approaches and methodologies that companies take to allocate costs to services and also to prepare for price setting at PR Our allocation to upstream services takes our regulatory accounting totals for wholesale services as a start point, and whilst some costs for the upstream services can be readily identified and therefore allocated directly to service, others rely on management estimate or a simple pro-rata where we lack sufficient supporting information to enable a meaningful allocation of costs. 94 Support costs are generally pro-rated according to direct service costs and we will be looking at ways to improve our allocation methodology for 2017 reporting, when upstream services reporting is confirmed. 95 Whilst we have refined our allocation methodology during the year, the costs reported in the supplementary upstream services table should only be relied upon as being indicative of the cost of providing each service. Water Services - total operating expenditure Abstraction licence 96 Total costs charged by the EA less any recharges made through bulk supply agreements. Raw water abstraction 97 Total water resources operating expenditure less abstraction licence costs. Raw water transport 98 The total of raw water distribution operating expenditure. Raw water storage 99 We do not operate a raw water storage system, although some very limited elements of our network may fall into the definition provided. The cost associated with this part of our operation is negligible and therefore is included in raw water transport. Water treatment 100 Direct operating expenditure can be identified by service with an allocation of support costs. Treated water distribution 101 Direct operating expenditure can be identified by service with an allocation of support costs.

34 32 Water Services - capital expenditure 102 We use our business investment code (BIC) code allocations for each capital project to identify business units where possible. Abstraction licence 103 No costs are attributable to abstraction licences. Raw water abstraction 104 Total capital expenditure as reported in the regulatory accounts under raw water abstraction. Raw water transport 105 Total capital expenditure as reported in the regulatory accounts under raw water distribution. Raw water storage 106 We do not operate a raw water storage system, although some very limited elements of our network may fall into the definition provided. The cost associated with this part of our operation is negligible and therefor is included in raw water transport. Water treatment 107 Capital expenditure can be identified by service with an allocation of support costs. Treated water distribution 108 Capital expenditure can be identified by service with an allocation of support costs. Water Services - cash expenditure 109 Pension deficit costs are apportioned on pro-rata of direct employment costs. Sewerage Services - total operating expenditure 2016 anglianwater.co.uk Foul, surface water and highways drainage 110 Pumping Station Costs (power & planned & reactive maintenance) are split between foul, surface & highways based on estimated flows assumed to be 75/12.5/ Our assessment is based on a combination of job volumes, sewer length and management estimate. 112 Support costs are pro-rated to total direct costs excluding power. Sewage treatment and disposal 113 Total cost for sewage treatment less the calculated costs of imported sludge liquor treatment.