Delivering value. Building trust. Annual Report and Accounts 2013/14. through record levels of service and customer satisfaction

Transcription

1 Scottish Water Annual Report and Accounts /14 Delivering value through record levels of service and customer satisfaction Building trust through highest ever drinking water quality and environmental performance Annual Report and Accounts /14

2 Our vital role Scottish Water is always serving Scotland, providing vital services which are essential to daily life. We continue to deliver excellent value for all our customers. We provide clean, safe and high quality drinking water to 2.45 million households and 154,000 business premises across Scotland. Every day we provide 1.3 billion litres of clear, fresh drinking water and take away 842 million litres of waste water, which we treat before returning to the environment. We are delivering one of the largest investment programmes in the UK water industry during This is at a time when our average household charge remains among the lowest in Great Britain 54 lower per year than the average household charge in England and Wales. The quality of our drinking water continues to be at an all-time high and our investment is helping to support jobs and the economy of Scotland, while protecting and enhancing the environment. Your charges go towards maintaining and improving: 256 water treatment works 29,892 miles of water pipes 1,836 waste water treatment works 31,109 miles of sewer pipes 1.3 billion litres of high quality drinking water every day Contents Overview 01 /14 Highlights 02 Chair s statement 03 Our strategy 04 Our vision Strategic report 06 Chief Executive s statement 07 Our business model 09 Our objectives Performance Value for money 11 Performance Customer service and satisfaction 12 Performance Investment overview 14 Performance Group financial summary 16 Performance Scottish Water regulated services 19 Performance Business customers 21 Performance Horizons 22 Performance International 23 Performance Environment 27 People 29 Innovation 30 Looking ahead Governance 32 Board members 34 Corporate governance 37 Audit committee report 40 Remuneration committee report 41 Members remuneration report 51 Members report Financials 54 Independent auditors report 58 Financial statements 62 Notes to the financial statements 92 Direction by the Scottish Ministers

3 Scottish Water Annual Report and Accounts /14 01 /14 Highlights Highest ever drinking water quality 99.91% of samples in complied with strict quality standards, representing the highest ever drinking water quality in Scotland. Customer satisfaction at record levels Our customer satisfaction levels reached a new record high of 90%, up from 88% last year. Best ever environmental performance Our improved performance is protecting and enhancing Scotland s environment, while supporting Scotland s full bathing water compliance. Health and Safety hat-trick For the third successive year we were awarded the industry award for the water sector by the Royal Society for the Prevention of Accidents (RoSPA). Great value for customers The average household charge is 54 lower than the average bill in England and Wales. Looking to the future with customers Working with our customers and stakeholders, we have agreed our prices and priorities until Overview Strategic report Governance Financials

4 02 Scottish Water Annual Report and Accounts /14 Chair s statement Ronnie Mercer, Chair Scottish Water has had another good year, building on our many achievements, with continued investment in Scotland s water and waste water infrastructure and further improvements to customer service. In my role as Chair I witness the commitment of our 3,600 employees to deliver the very best outcomes for all our customers the length and breadth of Scotland. It has been a pleasure to meet many of our customers at community and information events around Scotland in the last year, and see for myself how our work to provide continued high quality drinking water and protect and enhance the environment impacts positively on our customers, communities and the economy of Scotland. From the opening of new treatment works to the upgrading of water mains and sewer pipes, our investment programme has the dual benefits of enhancing service quality for our customers and supporting vital jobs in the Scottish economy. This investment helps deliver enhanced water quality and increased waste water treatment works compliance helping to protect the natural environment of Scotland. At the same time our customers are benefiting from an average household charge which for /15 continues to be lower than the average in England and Wales. A key part of keeping costs low is our approach to efficiency and energy management and so, as one of Scotland s largest users of electricity, we have been working to increase the proportion of self-generated energy at Scottish Water assets. Linked to this we are reducing our carbon footprint, building a sustainable business for the future, and working to protect our water supply sources from the potential impacts of diffuse pollution. It has been a strong year across the board with Scottish Water Business Stream, formed in 2006 to compete in the retail market, delivering benefits to business customers, who are now paying less for water and waste water services. Business Stream is also preparing for the full opening of the English retail market in There is, however, never any room for complacency, and we continue to take steps to ensure we build on Scottish Water s high standards well into the future. An important aspect of this has been an extensive customer engagement programme to inform our future plans and strategies, and I am delighted by the constructive way in which we have worked with the Customer Forum to identify future priorities for services and charges. We reached agreement with the Customer Forum on our proposed Business Plan for the period in January, which has now been formally published following the Water Industry Commission s draft determination of charges. This sets out the proposed actions we will take to continue providing high quality services and improvements in the areas that matter most to our customers. The proposed Business Plan will deliver the first steps of our strategy for future water and waste water services, and builds on the transformation in service levels and efficiency that we are proud to have delivered since our formation in It also cements our commitment to providing our customers with continued stability in water charges while enabling us to maintain investment in our network to build on customer service improvements. In /14 my Board, leadership team and employees have been focused on sustaining momentum to deliver for our customers, while readying ourselves for the future. I am grateful to all for their hard work and dedication, and look forward to continuing our work with customers to ensure we provide great value and quality. I witness the commitment of our employees to deliver the very best outcomes for our customers.

5 Scottish Water Annual Report and Accounts /14 03 Our strategy Always serving Scotland Scottish Water delivers clear, fresh drinking water, safely treats waste water and helps protect the environment across Scotland every day of the year. We do this in an affordable and sustainable way while supporting economic growth. We aim to deliver the very highest standards of service, ensuring our customers turn on their taps and enjoy the highest quality drinking water Scotland has ever had, while we protect and enhance the natural environment of rivers, lochs and beaches across the country. We will continue to deliver the investment Scotland needs and will do so efficiently while building innovation into the business. We aim to deliver the best value for money in the UK water industry. We will continue to improve the performance of the water industry in Scotland, taking into account the new challenges of a changing climate and becoming a low carbon business. Overview Strategic report Governance Financials This annual report highlights our success in achieving these ambitions during /14 and our plans to help us deliver our vision in the future.

6 04 Scottish Water Annual Report and Accounts /14 Our vision Scottish Water s vision is to be Scotland s most valued and trusted business, one that we can all be proud of. This is supported through: Serving Ensuring the customer is at the heart of our business. Always delivering a positive customer experience is a key priority and everything we do links to improving the service and the value we provide to our customers. Responsible Always doing the right thing for Scotland. Our investment supports the Scottish economy, benefits our customers, visitors and local communities the length and breadth of Scotland and helps protect public health and the environment. Committed Ensuring we have the right people, trained, proud to work for Scottish Water and committed to improving the service for our customers across Scotland. The health and safety of our people, the contractors who work for us and our customers is built into everything we do. Ensuring we are a Scottish business that people respect. Leading As we work to become a low carbon business we will ensure that we will be innovative in delivering service and value for our customers, while tackling climate change and taking action to protect the environment for today s customers and future generations. Growing Delivering the investment to help ensure our customers continue to enjoy clear, fresh drinking water from their taps and protect our environment. We will also help communities across Scotland grow and prosper and ensure that we look at innovative and creative ways to improve service and value for our customers. Strong We will maintain our financial strength, continue to explore innovative ways to help deliver the best value for money for our customers and protect Scottish Water for a sustainable future.

7 Scottish Water Annual Report and Accounts / Chief Executive s statement 07 Our business model 09 Our objectives Performance Value for money 11 Performance Customer service and satisfaction 12 Performance Investment overview 14 Performance Group financial summary 16 Performance Scottish Water regulated services 19 Performance Business customers 21 Performance Horizons 22 Performance International 23 Performance Environment 27 People 29 Innovation 30 Looking ahead Strategic report Overview Strategic report Governance Financials

8 06 Scottish Water Annual Report and Accounts /14 Chief Executive s statement Douglas Millican, Chief Executive At Scottish Water, we always put our customers at the heart of our business. In /14 we achieved a record improvement in customer service performance. The level of customer satisfaction has increased to a record 90%, from 88% in the previous year, and Scottish Water has also been named by the Institute of Customer Service (ICS) as one of the best performing water companies in the UK. We have once again out-performed our regulatory target reaching our best ever score of 397 in the customer Overall Performance Assessment (OPA). This represents a 29 points increase on the score achieved in 2012/13. Our customers also expect great value for money. We are pleased that since 2009, charges have reduced by 10.2% relative to the rate of inflation. The average household charge continues to be 54 lower than the average charge in England and Wales. Although household charge increases have been limited, Scottish Water s regulated surplus before tax increased to 60 million (Scottish Water Group surplus before tax 101 million), which is fully re-invested in the delivery of future services to customers. The tax credit of 64.5 million relates mostly to the reduction in long-term tax liability from past capital investment. I am delighted to report that the quality of drinking water enjoyed by customers when they turn on their taps has reached another record high % of samples complied with strict regulatory standards, while we also achieved our best ever environmental performance. Our continued focus on improving all aspects of health and safety has resulted in a 54% reduction in Lost Time Accidents. Furthermore, for the third successive year we were awarded the industry health and safety management award for the water sector by RoSPA. We always look for ways of delivering our services as efficiently as possible to keep costs for customers low, while ensuring Scotland s water and waste water network continues to receive the required level of investment. In /14 we delivered 475 million of investment in the upgrading, creation or maintenance of infrastructure. This is part of our 2.5 billion programme in the regulatory period and is having a positive impact on customers, communities and local economies around Scotland. In Ayrshire, we completed our 51 million environmental improvement scheme, to substantially improve water quality in the River Irvine, Kilmarnock Water, and the bathing waters of Irvine Bay in the Firth of Clyde. And throughout the country we ve been working on Scotland s biggest water mains renewal project to date which, when complete, will have covered 2,700 miles with communities in Aberdeen, Orkney and Dumfries & Galloway among those benefiting from improvements to the water supply network in their local areas. One of the major challenges we face every year is dealing with the costly impact of blockages in our sewer network. Around 80% of these blockages are the result of household waste such as fat, oil and grease and bathroom items, such as wipes. During /14 we launched our Cycle campaign, to highlight the simple but effective things we can all do to save our drains and help the water cycle. In the last year, we ve run 2 phases of national advertising on TV, radio and social media, alongside local community-based advertising and activities in 4 areas to raise awareness of how to help prevent blocked drains and sewers. We continued to support the Government s Hydro Nation agenda, and had the opportunity to highlight some of the work we have been doing on sustainability, carbon reduction, flooding, renewables and building services which are resilient for the future, through our support of Climate Week, a major UK-wide environmental campaign. During the year, we opened our new operations centre and office on the outskirts of Glasgow, where we can monitor assets and maintain the best possible service for our customers. It is, of course, a momentous year for Scotland in, including a number of high profile cultural and sporting events such as the Ryder Cup and the Commonwealth Games. We have been playing an important role in helping to prepare for these major events, for example through a number of projects in Glasgow to improve the water and waste water infrastructure which will also help to boost regeneration in areas of the city. I would like to pay tribute to our highly-engaged workforce. Their hard work and dedication has enabled us to deliver record levels of performance for our customers. Moving forward it is important that we continue to be innovative and work to further improve levels of service, and that s why we ve made a concerted effort to make sure every pound we spend is done with customers firmly in mind. Our customer engagement programme has been a genuine way of enabling customers to shape future service direction and business planning, and this will continue to be a key part of our approach to building value and trust.

9 Scottish Water Annual Report and Accounts /14 07 Our business model Group overview Our vision is to become Scotland s most valued and trusted business, one that we can all be proud of. Consequently, the overarching strategy for the Scottish Water group of businesses is to provide levels of service and value for money which exceed the expectations of customers, regulators and the Scottish Government, while ensuring we maintain our financial strength across all parts of the Scottish Water group. Group structure Scottish Water group principal activities during the year were the supply of water and waste water services to around 5 million customers in homes and businesses across Scotland covering an area of 30,410 square miles. The 4 main trading businesses of the Scottish Water group are: 1. Scottish Water, which supplies households and wholesale licensed providers with regulated water and waste water services; 2. Scottish Water Business Stream Ltd (Business Stream), our licensed retail subsidiary which supplies water and waste water services to business customers; 3. Scottish Water Horizons Ltd (Horizons) which provides non-regulated services to customers; and 4. Scottish Water International Ltd (International) which provides non-regulated services to clients outside Scotland. The Scottish Water group structure is summarised below: Scottish Water is a public sector body, classified as a corporation of a trading nature, and is answerable to the Scottish Parliament through Scottish Ministers. The Members of Scottish Water s Board are accountable to the Scottish Government. The Board includes 8 Non-executive Members. Business Stream was formed in preparation for the opening of the Scottish retail market for water and waste water services to non-household premises to competition in As at March the company was one of 13 (: 8) competing licensed retailers, while Scottish Water is the wholesaler to the non-household market. Business Stream is operated and managed independently of Scottish Water in accordance with the Governance Code (agreed with the Water Industry Commission for Scotland) which sets out the terms of separation to enable the operation of the licensed retail market for business customers. Business Stream has the same Chair as Scottish Water; however, it has its own independent Board and management team. The Board includes 2 independent Non-executive Directors who have no other association with the Scottish Water group. Horizons is a commercial business enterprise which provides waste management and infrastructure development as well as renewable energy development services. Horizons is managed by its own Board of Directors, including 4 Non-executive Directors, 3 of whom are senior managers in Scottish Water. Overview Strategic report Governance Financials 1. Scottish Water Scottish Water Horizons Holdings Ltd Scottish Water Solutions 2 Ltd (51%) 3. Scottish Water Horizons Ltd Scottish Water Business Stream Holdings Ltd 4. Scottish Water International Ltd 2. Scottish Water Business Stream Ltd

10 08 Scottish Water Annual Report and Accounts /14 Our business model continued International was established to develop business opportunities abroad using the skills and expertise in Scottish Water to offer specialist consultancy services to utilities, foreign governments and other international clients. Strategic framework Scottish Water operates within a broad strategic framework set by Scottish Ministers. The targets and milestones that Scottish Water has agreed to meet are set out in our Group Plan. The Group Plan also sets out the resources required and proposals for meeting and out-performing the regulatory targets and delivering on our growth ambitions. Scottish Water aims to maintain a level of financial strength that would be sufficient to enable commercial debt to be secured on cost-effective terms, consistent with the Scotland Act Scottish Water generates value for our customers by planning for, and delivering, continuous efficiency improvements in operational and capital investment activities associated with regulated water and waste water services. The efficiency improvements assumed by the Water Industry Commission for Scotland in its strategic review of charges are passed directly to customers through real reductions in water and waste water charges. The value generated by the out-performance of these efficiency targets is retained in Scottish Water until it is returned to customers through further real reductions in water and waste water charges at the next strategic review of charges, or earlier. The profits generated from the other licensed and commercial activities are all retained within the group and invested in the future development of the business. Business Stream strategy Business Stream s aspiration is to retain a healthy market share in Scotland and acquire a significant, and well-targeted, market share in England. Business Stream s competitors are becoming increasingly active in Scotland and market reform in England still has many uncertainties. A fundamental part of Business Stream s operational strategy is to be great at the basics, offering customers a seamless journey from their initial contact, through on-boarding and contracting, accurate billing and payment processing. Building on this sound foundation, Business Stream will have the flexibility and agility to respond to the evolving behaviours of customers, by providing new products and services in a timely and efficient manner. Principal strategy, risks and uncertainties Principal risks and uncertainties are covered in the following reports for each of the individual companies on pages 18 to 22 and within the Audit Committee Report on pages 37 to 39.

11 Scottish Water Annual Report and Accounts /14 09 Our objectives Scottish Ministers set objectives for Scottish Water for the period 1 April 2010 to 31 March This annual report looks at the fourth year of the delivery period We are continuing to improve the level of service to our customers and our delivery plan details the specific outputs required. These were agreed with the Drinking Water Quality Regulator (DWQR), the Scottish Environment Protection Agency (SEPA) and Consumer Focus Scotland. These outputs will continue to deliver real benefits to our customers across Scotland clearer, fresher drinking water at their taps, protecting the natural environment and improving service levels. To individual customers, this could mean reducing the risk of low pressure which can affect the water-using appliances in their homes, addressing odour issues from waste water treatment works in their local area or reducing the number of customer properties at risk of external flooding from overloaded sewers. We will deliver these benefits to our customers by improving operational practices and processes, maintaining our existing assets and investing in new or enhanced assets. Across Scotland, we are listening to the needs of communities and delivering investment in the water and waste water networks where it is most needed. Our objectives for include: Improving the quality, look and taste of drinking water for around 950,000 customers through a mixed programme of cleaning, upgrading or replacing 2,816 miles of water mains. Investing 1.2 billion to ensure, as a minimum, that the standards of service provided to our customers are maintained across Scotland. Continuing to service new development across Scotland and address water and waste water capacity to allow further growth. Continuing to protect Scotland s natural environment by enhancing the waste water treatment processes at 182 works and making improvements at 223 unsatisfactory intermittent discharges to rivers, lochs and coastal waters. Reducing odour issues at 4 waste water treatment works. Creating and maintaining a register of all properties affected by external sewer flooding. Reducing the number of customer properties that have problems with poor water pressure. Improving the water supply and demand balance to provide security of supply for over 800,000 customers. We will take steps to deliver a lower carbon water service by reducing our demand for energy, driving energy efficiency and developing our renewable energy capacity. Delivering these objectives continues to improve the water environment and water quality in Scotland and provide real value for money for our customers. Overview Strategic report Governance Financials 1 The Ministerial Directions shown reflect the original position. The Directions are subject to ongoing revision through the Technical Expression change process throughout the regulatory period.

12 10 Scottish Water Annual Report and Accounts /14 Performance Value for money Comparison with English and Welsh water companies based on OFWAT published average charge Water & Sewerage companies Average household bill for /15 South West Water 495 Wessex Water 485 Welsh Water 440 Southern Water 437 Anglian Water 431 United Utilities 410 England & Wales average 393 Yorkshire Water 373 Thames Water 370 Northumbrian Water 364 Scottish Water 339 Severn Trent Water 333 Scottish Water customers continue to benefit from an average household charge which is lower than the average charge in England and Wales. In April Scottish Water charges increased for only the second time since The 1.6% increase was below the rate of inflation. This means Scottish Water s average household charge in /15 is around 339 per year less than 1 a day 1. This is 54 lower than the average bill in England and Wales. Since 2009 Scottish Water charges have reduced by 10.2% relative to the rate of inflation. /15 is the final year of the current regulatory period. Through our customer engagement programme we have identified that continued stability in charges, while maintaining investment in our network, is a priority for customers. As a result we have committed, working with the Water Industry Commission for Scotland and the Customer Forum, to maintaining low level increases in charges through our business planning in the regulatory period. Scottish Water operates a huge network of treatment works and pipes. These need to be maintained in order to sustain high levels of performance and customer service. Customer charges enable Scottish Water to deliver investment in the infrastructure to build on service improvements made in recent years. In /14 we invested 475 million 2 the equivalent of around 195 per household in Scotland. This represents a significant programme of investment, enhancing treatment works and pipes to improve drinking water quality, while protecting and enhancing the natural environment of Scotland s rivers, lochs and coastal waters. 1 The average household is between Council Tax Band B and Band C and has a combined bill of less than 1 a day. 2 As measured on a regulatory accounting basis. 1 The average Scottish household continues to pay less than 1 a day 1 with an average bill of 339 a year for water and waste water services.

13 Scottish Water Annual Report and Accounts /14 11 Performance Customer service and satisfaction Every action taken at Scottish Water is focused on meeting the needs of our customers. The approach of putting customers at the heart of everything we do to achieve our vision of being Scotland s most valued and trusted business has seen us record our highest ever customer service levels. One of the expectations of our owners, the Scottish Government, is improved customer service. We agree challenging targets with our regulator the Water Industry Commission for Scotland (WICS) using a measurement called Overall Performance Assessment (OPA) which looks at a range of indicators. Our /14 target was to achieve an OPA score of 380. We out-performed this target by 4.7%, achieving a score of 397. A sample of customers who have been in touch with us in the past year are also contacted to get their views on how we have performed. Our customer satisfaction score using this measurement reached a high of 90.1%, up from over 88% the previous year. We are also looking at new ways of getting customer feedback within hours of a service issue being resolved using telephone, SMS and feedback. Written complaints have been falling steadily, with /14 seeing a 12% reduction from levels in 2012/13. For many customers, receiving information about the work of Scottish Water by letter or telephone continues to be their preference. However, social media is becoming increasingly popular and our customer service Twitter account now has over 8,500 followers. This enables customers to see information using their phone, tablet or computer on services which may affect them and ask questions. A number of community-focused Twitter accounts have also been launched to provide information at a regional level. We could not achieve any of this without the hard work and commitment of our dedicated teams all over Scotland. The Scottish Water Vision Awards recognise the excellence and achievements of our people. Overall Performance Assessment / / / / / / /13 /14 Regulatory targets Reported performance A number of service improvements were achieved in /14: We reduced the number of environmental pollution incidents by 20% on last year. We reduced the average number of properties affected by interruptions to supply lasting longer than 6 hours by 4,148 an improvement of 28% on last year. We reduced the percentage of the population affected by non-compliant waste water treatment works from 1.09% to 0.29%. There continued to be no customer restrictions on water use. We scored maximum OPA points for sludge disposal by ensuring all our sludge is treated according to regulations. The number of incidents of sewer flooding due to overloading was reduced by 54% and the number of incidents due to other causes was reduced by 25%. We maintained maximum points on the Assessed Customer Service indicator, which takes into account our performance on customer-specific activities such as our Additional Assistance Register, Supply Pipe Repair Policy and Compensation Policy. The number of written complaints dropped by 12%. Overview Strategic report Governance Financials In /15, we will continue to build on these successes to make further improvements to the services our customers receive.

14 12 Scottish Water Annual Report and Accounts /14 Performance Investment overview Investment in the essential water and waste water infrastructure of Scotland continued throughout /14, as part of Scottish Water s programme to deliver clearer, fresher drinking water to our customers and improve the natural environment of Scotland. This package of 475 million 1 of regulatory investment improvements saw the upgrading of treatment works, water mains, sewers and networks. Total Quality and Standards (Q&S) Capital Investment / / / / / / / / / / Q&S II Q&S IIIa Q&S IIIb For /14, million is split million for Q&S IIIb, 9.2 million for Q&S IIIa and 0.02 million for Q&S II. A 51 million storm water management scheme, one of the biggest ever of its kind, was completed in Ayrshire in a bid to substantially improve water quality in the River Irvine and Kilmarnock Water and the bathing waters of Irvine Bay. Major upgrades of aqueducts used to supply much of Edinburgh and Glasgow s drinking water were completed, and good progress was made with Scotland s biggest ever water mains renewal project, benefitting communities stretching from Aberdeen to Orkney and Dumfries & Galloway. In the Scottish Borders a new waste water treatment works was opened at Caddonfoot as part of a package of investment aimed at protecting the environment of the River Tweed. A new water treatment works with increased storage capacity and a new filtration system was introduced at Fetlar in the Shetland Islands. The involvement of supply chain partners, contractors and construction companies in many of these projects has helped sustain employment opportunities and support local economies. Work has also been taking place in different areas to increase the size of treatment works or networks, helping to accommodate growth projected in local communities, or to facilitate new development whether for housing or business use. Drinking water quality and standards We invested 58.5 million to continue providing a high standard of drinking water to 2.45 million households throughout Scotland. Environmental quality enhancements To ensure we continue playing a key role in protecting the natural environment of Scotland, we invested 55.5 million on waste water treatment works and infrastructure. Enabling growth and development We invested 40.6 million to increase capacity in our infrastructure and at water and waste water treatment works, as well as reducing water leaking from pipes. This helps support economic growth and development of communities around Scotland. Capital maintenance We invested 285 million in the maintenance of treatment works and infrastructure to help sustain high levels of performance for our customers. Service improvements Investment of 20.2 million was provided to help improve service levels for customers. Completion programme We invested 9.2 million in our completion programme to deliver the remaining projects from the previous Q&S II and Q&S IIIa programmes. Q&SIV early start We invested 6.3 million in early start projects ahead of this upcoming programme of investment. Our customers are enjoying the benefits of our continued improvement in drinking water quality as a result of our ongoing investment programme and our focus on improving operational performance. 1 As measured on a regulatory accounting basis.

15 Scottish Water Annual Report and Accounts /14 13 We are progressing with our 250 million, 5-year programme of investment in the Greater Glasgow area s waste water infrastructure the biggest in more than a century. One year in, this is starting to transform the area s waste water network into a modern, sustainable drainage system which will play its part in improving the environment of the River Clyde and its tributaries and helping tackle flooding and the effects of climate change. Targets specified in Ministerial Objectives Output measure specified in Ministerial Directions Customer service Our investment will benefit Greater Glasgow area s environment and economy for generations to come. We have also been working to support a successful Glasgow Commonwealth Games in, both through our investment programme and liaising closely with partners. The table below shows the performance highlights delivered in /14, the fourth year of our 5 year investment programme. Actual -14 Cumulative Values Ministerial Objectives Number of sites where odour is reduced Number of properties removed from low pressure register 190 2,533 2,309 Number of properties removed from low pressure register (exclusions under Water (Scotland) Act 1980) Number of properties alleviated from external sewer flooding Growth Water strategic capacity (population equivalent) 0 52,210 1 Waste water strategic capacity (population equivalent) 4,720 28,642 1 Overview Strategic report Governance Financials Drinking water quality Number of water treatment works receiving improved disinfection controls Number of zones with reduced lead levels Number of backflow prevention devices installed Number of sites covered by drinking water safety plans Environment Number of unsatisfactory intermittent discharges improved (excluding 7 stage) Number of unsatisfactory intermittent discharges improved (7 stage) Number of waste water treatment works discharges improved to meet new licence requirements Number of waste water treatment works upgraded to meet existing licence requirements Number of waste water pumping stations upgraded to comply with existing licence requirements Number of waste water treatment works brought into compliance with licence non-sanitary requirements Number of waste water network assets made compliant with licence requirements Scottish Water is required to provide new strategic capacity to meet all new housing development and the domestic requirements of commercial and industrial customers.

16 14 Scottish Water Annual Report and Accounts /14 Performance Group financial summary Overview of financials The chart below illustrates the percentage of the group surplus before tax by entity covering the financial years from 2009/10. Surplus before tax % by entity The movement in cash is summarised below: Scottish Water Business Stream group Horizons & SW International group Total Opening balance at 1 April New loan from Scottish Government net 85.0 (58.5) 26.5 Cash (utilised)/ generated (60.2) (25.5) Closing balance at 31 March Cash balances within the Business Stream group of companies decreased by 28.6 million over the year to million after repayment of the 58.5 million loan to the Scottish Government and a strong focus on cash generation. 2009/ / / /13 /14 Scottish Water Business Stream Horizons/International The split of revenue by entity over the same period has remained fairly steady at 67% for Scottish Water, 31% for Business Stream and 2% for Horizons and International. Further coverage of the financial performance by entity is shown on pages 16 to 22. The group surplus before tax for the year to 31 March was million ( restated: 86.2 million). Consolidated revenue in the year increased by 34.0 million to 1,179.7 million (: 1,145.7 million). This benefit was partly offset by a 21.6 million increase in costs to million (: million). Net finance costs of million were 2.4 million lower than in. Since the year end, a total of 109 million of short-term borrowing has been repaid by Scottish Water. Borrowing limit Scottish Ministers set Scottish Water s (consolidated) maximum net new borrowing limit at 26.5 million for /14. Actual net new borrowings in /14 were 26.5 million, reflecting a 85.0 million increase in Scottish Water partly offset by a 58.5 million reduction in Business Stream Holdings Limited. Taxation The consolidated tax credit on the income statement was 64.5 million ( restated: 4.0 million charge). During the year, as a result of the change in the UK corporation tax rate from 23% to 20% that will be effective from April 2015, deferred tax balances have been re-measured which accounts for 53.6 million (: 24% to 23%; 18.5 million) of the tax credit. In the year, consolidated net debt increased by 25.5 million to 2,937.7 million (: 2,912.2 million). The increase was driven by additional borrowing from the Scottish Government of 26.5 million, with cash balances increasing by 1.0 million to million.

17 Scottish Water Annual Report and Accounts /14 15 Other taxes incurred by the group, and included in the cost base, totalled 78.5 million (: 76.8 million) and are summarised in the table below. / /13 National insurance Local Authority rates Carbon reduction commitment Landfill tax Normalised annual cost Group pension arrangements Scottish Water is a participating employer in 3 Local Government Pension Schemes (LGPS) Strathclyde Pension Fund, the North East Scotland Pension Fund and the Lothian Pension Fund. These funds are administered by Glasgow City Council, Aberdeen City Council and Edinburgh City Council respectively. Business Stream is a participating employer in the Strathclyde Pension Fund. The administering authority for each scheme is required to conduct a triennial valuation of the assets and liabilities of the scheme in line with LGPS regulations. This must be conducted by a qualified actuary. The purpose of the valuation is to review the financial position of the fund and specify the employer contribution rates for the next 3-year period. The last full actuarial valuation was carried out as at 31 March 2011 for all 3 funds and this was updated at 31 March by a qualified independent actuary to take account of the requirements of IAS 19 Employee Benefits. Under IAS 19 a snapshot is taken of pension fund assets and liabilities at a specific point in time. Movements in equity markets and discount rates create volatility in the calculation of scheme assets and liabilities. At 31 March, after taking account of deferred taxation, there was a shortfall of assets over respective liabilities of million (: million). Further detail is included in note 22 to the financial statements. Overview Strategic report Governance Financials

18 16 Scottish Water Annual Report and Accounts /14 Performance Scottish Water regulated services Financial framework Scottish Water is subject to incentive-based regulation by the Water Industry Commission for Scotland (the Commission). In 2009, the Commission carried out a 5 year price review for the period, which caps the prices that Scottish Water charge for water and waste water services. The combination of regulated price caps and firm constraints on borrowing from the Scottish Government creates a clearly defined limit on the financing available to Scottish Water. Within this financial framework Scottish Water has an agreed Delivery Plan with Scottish Ministers that sets out Scottish Water s planned level of investment to deliver the required improvements and the expenditure to run our operation. Scottish Water s aim is to out-perform the targets set out in the Delivery Plan and thereby out-perform the regulatory contract. The funding and expenditure model for Scottish Water s regulated services Scottish Water is funded through revenue raised from customer charges and borrowing from the Scottish Government. These finance Scottish Water s capital expenditure programme, operating costs, PFI service fees and interest charges on loans. The diagram on this page (in out-turn prices) illustrates the original funding and expenditure totals agreed in the Final Determination compared to the latest Delivery Plan forecast (March ) for the Regulatory period. The Delivery Plan total funding for the period is lower than the Final Determination due primarily to household charges being frozen for 3 years, enabling an overall real reduction in prices of 10.2% compared to RPI. This compares to the planned reduction in the Final Determination of 5%. In addition, there was an agreed 215 million reduction in the borrowing requirement reflecting the need to fund 260 million of capital investment that will be completed post Scottish Water Funding and Expenditure ,000 6,000 5,000 4,000 3,000 2,000 1,000 5, ,424 2,647 Funding Expenditure Final Determination Funding Net new borrowing Customer charges Post 2015 investment funding , ,500 2,722 Funding Expenditure Delivery Plan Forecast March Expenditure Capital Investment Operating costs & PFI Interest Other Financial performance The surplus before tax in the year for Scottish Water was 5.7 million higher at 60.0 million ( restated: 54.3 million). The surplus made by Scottish Water on core service provision is required to finance our capital investment programme as is demonstrated in the chart on page 17.

19 Scottish Water Annual Report and Accounts /14 17 Scottish Water Funding and Expenditure /14 1,200 1, , Regulated revenue Regulated revenue for the year totalled 1,078.2 million (: 1,053.0 million) and is analysed by category in the table below: / /13 Change Household Wholesale (3.1) Other Total regulated revenue 1, , Funding Expenditure Customer charges Net new borrowing Regulated operating costs PFI Interest Capital Investment Other (incl. change in Working capital) Although headline regulated operating costs of million (: million) were 4.5% or 15.7 million higher than in 2012/13, this increase was due primarily to increased costs impacted by the exceptionally dry weather earlier in the year, increased landfill tax charges, higher Local Authority rates charges and power price increases. However, after adjusting for these specific cost increases and the impact of inflation, like-for-like costs reduced in real terms by 3.5 million or 1.3%. The operating cost of the PFI schemes in the year, including associated depreciation and amortisation charges, was million, 0.4 million higher than in 2012/13. The annual increase in service costs due to contract indexation of 3.0 million was offset by weather related cost savings from reduced flow and load levels. Depreciation and infrastructure maintenance costs increased by 4.9 million to million (: million). Infrastructure maintenance costs were 15.1 million higher than last year, which reflects the phasing of the planned maintenance investment programme for infrastructure assets across the regulatory period. Non-infrastructure depreciation decreased by 2.5 million due to the profile of capital investment and lower levels of accelerated depreciation in the year. The gain on asset sales was 8.2 million higher than in 2012/13 primarily due to the disposal of land at the Fairmilehead site in Edinburgh. Capital investment Reported capital investment under IFRS for Scottish Water in the year was million (: million). However /14 capital investment, as measured on a regulatory accounting basis, was million (: million). The table below reconciles investment as stated in the statutory accounts with investment on a regulatory accounting basis. Overview Strategic report Governance Financials Revenue from services supplied to household customers increased by 28.0 million to million reflecting the 2.8% tariff increase effective from 1 April and the increase in connected properties. Revenue from wholesale services supplied to Licensed Providers decreased by 3.1 million or 1.0% to million primarily due to the planned reduction in tariffs. Revenue from other sales increased by 0.3 million to 5.7 million. Operating costs Total operating costs increased by 21.2 million to million ( restated: million). / /13 /14 investment on a regulatory accounting basis Less base infrastructure maintenance included in operating costs under IAS 16 (111.9) (96.7) Less investment financed by infrastructure charges & contributions (13.2) (8.1) Add PFI capital Company capital additions per note 9 to the financial statements

20 18 Scottish Water Annual Report and Accounts /14 Performance Scottish Water regulated services continued Finance costs As at 31 March, the weighted average interest cost of the outstanding long-term debt was 4.93% (: 5.03%). Net interest payable during the year was million, 1.5 million higher than in 2012/13 and is analysed as follows: / /13 Scottish Consolidated Fund National Loans Fund Public Works Loan Board Other net 0.1 Net interest payable Finance costs associated with finance lease liabilities on PFI assets and the interest on pension scheme net liabilities decreased by 2.9 million to 35.5 million ( restated: 38.4 million). During the year, net debt increased by 60.2 million to 3,084.0 million (being loans of 3,354.3 million less cash balances of million). The increase was driven by a 85.0 million increase in borrowing from the Scottish Government, partly offset by a 24.8 million increase in cash balances. Principal risks and uncertainties Scottish Water has established a risk policy that sets out a consistent approach to the management of risk and the Board has defined its risk appetite. The Board regularly reviews the highest risks and ensures that these are being managed appropriately by the management team. The Board has responsibility for the risk management framework and has delegated review of business risks to the Audit Committee. The Corporate Risk function provides assurance to the Audit Committee on the risk management processes and the effectiveness of the risk processes are independently audited by the Internal Audit function. Further information with regard to risk management is covered in the Corporate Governance section of the report at page 35. The principal risks and uncertainties facing Scottish Water at the time of this report are set out below. This is not intended to be an exhaustive list. At March, our top risks are: Operational As a water business our principal aim is to ensure a continuous supply of high quality water to customers. We do this by monitoring the water in our catchments, monitoring our treatment and distribution activities and carrying out tests on water quality. The resilience of our services is reinforced by robust contingency plans and procedures, however, there are high consequence but low probability events that could impact upon this. In December, the Board considered these events and will be reviewing further in /15 the recommendations for longer term action to improve resilience. Scotland will host 2 high-profile sports events over the coming months the Glasgow Commonwealth Games in July/August and the Ryder Cup at Gleneagles in September. Work has continued over recent months to deliver key projects to ensure smooth continuity of service during these events. Investment In each regulatory period we invest around 500 million per year to maintain and enhance our assets and to provide higher standards of treatment as required by Ministers. There is a risk that the Investment Programme is not delivered within the regulatory investment allowances and timescales committed to in Scottish Water s Delivery Plan. We mitigate this by working collaboratively with our delivery partners with a focus on efficient and effective delivery. Our programme management process and governance arrangements allow for timely management intervention. Financial Our overall financial position has remained stable. As we transition into the final year of the period, our position as we exit this regulatory period will be key to how we enter and perform in We await the Water Industry Commission s Final Determination of Charges for the period

21 Scottish Water Annual Report and Accounts /14 19 Performance Business customers Scottish Water actively supports all entrants to the competitive water market in Scotland as the wholesale supplier of water and waste water services. Wholesale services The retail market for water and waste water services to non-household premises is open to competition, giving the customer choice of provider. In the case of non-household premises, Scottish Water acts as the wholesaler, providing water and waste water services to Licensed Providers who, in turn, provide services to non-household premises. During the /14 financial year, the number of companies licensed to provide water and waste water services to business customers in Scotland increased by 5 to 13. A full list of providers licensed to sell to business customers is available on the website of the Water Industry Commission (the Commission) or the Scotland on Tap website 1. Scottish Water has actively supported the development of the market throughout the financial year, making a number of change proposals which were approved and implemented. The 2 incentive schemes relating to vacant sites, namely the Vacancy Charging Admin Scheme and the Vacant Properties Incentive Scheme, continue to have a beneficial impact on the market. A change to the Gap Site Incentive Scheme was implemented in March. The Open Water programme aims to facilitate the implementation of market reform in the water sector in England. Scottish Water participated in the Open Water Programme Development Board and a number of workshops, as well as in more detailed experiencesharing meetings. Business Stream Business Stream is Scottish Water s licensed retail subsidiary, which supplies water and waste water services to business customers. As well as providing licensed services such as water and waste water billing, Business Stream offers business customers a range of additional services such as water and waste water management, plant hire, and developer solutions. Competition in this industry has increased and this has reduced Business Stream s market share. Business Stream is working hard to retain customers by offering them innovation, tailored solutions and value for money. By introducing innovation, supported by continued investment in customer service improvements, Business Stream has seen an increase in customer satisfaction levels over the past 6 years. This approach has delivered tangible benefits for customers including 35 million in water efficiency savings, more than 30 million in discounts and price savings, over 28,000 tonnes of carbon savings, 5 million in energy efficiency savings and more than 16 billion litres of water conserved. During the last year, Business Stream s successful partnership with the public and third sectors in Scotland was extended for an additional 12 months to million of savings will be delivered to public sector customers over the life of this contract. Overview Strategic report Governance Financials 1

22 20 Scottish Water Annual Report and Accounts /14 Performance Business customers continued Performance review Business Stream s profit before tax in the year was 38.3 million, an increase of 3.0 million from 2012/13 with revenue in the year, after discounts to customers, having increased by 2.7 million to million (: million). Gross profit after discounts, increased by 7.6 million, driven by an increase in gross margin coupled with an increase in the size of the underlying customer base. An additional 4.6 million of gross profit was returned to customers this year in the form of increased discounts or services provided in lieu of discounts. Business Stream s water and waste water solutions business, which provides water and waste water advice and services to a range of customers across the UK, achieved revenue growth of 40% in the year. Economic conditions have remained challenging which has had a continued impact on customers ability to pay, with a consequent increase in bad debt costs which were 3.2 million higher than in 2012/13. After a period of bedding in, Business Stream s new credit management system is now delivering an improvement in collection performance with aged debt at 31 March 0.9 million lower than last year. Strong cash flow performance enabled Business Stream to repay 8.1 million of debt in the year which reduced net interest payable by 1.2 million relative to 2012/13. Business Stream has continued to invest in technology to improve operational efficiency and to provide more innovative services to customers, primarily investing in data quality improvements. Future developments Whilst the business has enjoyed strong financial performance to date, the next 3 year period is likely to be the most challenging in the history of Business Stream. The business is approaching a crossroads with the opening of the English market. In the intervening period, competitors will continue to mobilise and look to take market share in Scotland at a time when Business Stream are unable to fully replace lost profits due to the current market constraints in England. The market in England is currently open to competition for around 27,500 large users, but at significantly lower gross margins than those available in Scotland. The English market currently allows for switching of water only sites with individually negotiated wholesale prices and as a consequence, there has been very little competitive activity to date. The Water Bill, which received Royal Assent in May, set out plans for a restructured retail market with the aim of being fully open to competition from 1 April At this point in time there are still a number of unknowns regarding the English market which may have a significant impact on corporate strategy. Many of these unknowns will be informed by the Water Bill and the OFWAT Price Review which will provide clarity on retail margins; level playing field requirements and the ability or otherwise of incumbents to exit the non-domestic retail market. Whilst this presents a number of challenges for Business Stream, it also presents opportunities, with access to a 2 billion market. The public sector contract in Scotland, which currently accounts for just over 20% of Business Stream s revenue, ends in March Given the scale that this contract provides and its importance to the business growth aspirations, retention will be a key area of focus for next year. Principal risks and uncertainties Financial risk management The company s operations expose it to a variety of financial risks which include credit risk, liquidity risk and interest rate risk. Given the size of the company, the directors have not delegated the responsibility of monitoring financial risk management to a sub-committee of the Board. The policies set by the Board of Directors are implemented by the company s finance department. Liquidity risk Business Stream actively maintains a mixture of long-term and short-term debt finance that is designed to ensure the company has sufficient available funds for operations and planned expansions. Interest rate risk Interest bearing assets include only cash balances, all of which earn interest at a fixed percentage above base rate. The company has a policy of maintaining debt at fixed rate to ensure certainty of future interest cash flows.

23 Scottish Water Annual Report and Accounts /14 21 Performance Horizons Scottish Water Horizons uses innovative ideas, knowledge and assets to encourage economic growth and the use of sustainable technologies across Scotland. A strategic review of Horizons was undertaken during the year to align its activities to support Scottish Water s core objectives, placing greater emphasis on supporting Scottish Water s innovation agenda and renewable energy projects after the withdrawal from the green waste and composting business during. The focus for the business is to identify, develop and deliver innovative, profitable and sustainable growth opportunities for Scottish Water that maximise commercial gain from its intellectual and property assets. By doing so, Horizons will contribute to Scottish Water s key stakeholder requirements including key Scottish Government initiatives such as Zero Waste and the Hydro Nation agenda. Performance review The profit before tax for the year was 0.7 million (: 6.0 million loss). Horizons continues to successfully implement the business recovery plan and has gone through a period of significant change during the year. Horizons working capital requirements and investment plan are financed by organic cash flow, loans from Scottish Water Horizons Holdings, grant funding and asset disposals. The principal activities conducted during the year included capital investment in renewable energy technology, waste management and water infrastructure development consultancy. The business performed well during the year against the key performance indicators set by the Horizons Board. Some of the highlights are summarised below: The Health and Safety (H&S) record of the business was once again excellent with no accidents being reported during the year; Energy output in the year was 5.6 Gigawatt hours (GWh) (: 5.0GWh). This was provided by the company s Deerdykes Anaerobic Digestion (AD) plant, and other renewable energy sources including micro-hydro, photovoltaic and small wind turbine sites. Horizons invested 4.1 million in these areas during the year; and The Deerdykes plant experienced a 64% reduction in odour complaints driven by significant process and operational compliance improvements and the decision made last year to stop the processing of green waste and composting on the site. Principal risks and uncertainties The management of the business and execution of the company s strategy are subject to a number of risks. Risks are formally reviewed by the Horizons Board and the appropriate processes put in place to monitor and mitigate them. The key business risks are set out below: Renewable energy The company s decision to invest significantly in renewable energy projects creates some exposure to the volatile energy price markets and future investment decisions may be affected by changes in government policy. To mitigate this risk, projects, where possible, are being fast tracked to qualify for the fixed subsidy payments prior to any reduction. All investment decisions are subject to meeting specified hurdle rates. Plant resilience In order to reduce the risk of operational down time and process interruptions, further improvements to the Deerdykes plant are planned for the coming year. These, and the associated capital investment, should deliver an operation with a lower risk profile and improved financial and regulatory compliance. Credit risk The business can be exposed to credit risks where customers are unable to meet payments. When entering into business with a new customer an extensive credit rating exercise is undertaken and appropriate safeguards put in place. Overview Strategic report Governance Financials

24 22 Scottish Water Annual Report and Accounts /14 Performance International Our International subsidiary was established to develop business opportunities abroad using the skills and expertise in Scottish Water to offer specialist consultancy services to utilities, foreign governments and other international clients. Performance review In /14, International s second year of operation, the company incurred a loss before taxation of 0.2 million (: breakeven) having generated revenue of 1.2 million. The loss for the year resulted from the investment in new marketing consistent with the growth strategy and ongoing start-up costs. During /14, International continued with its major assignment in Qatar which is overseeing the management of a 5 year programme to transform drainage and waste water services. The assignment with GHD in New Zealand to provide specialist leakage support to the Stronger Christchurch Infrastructure Rebuild Team concluded in June. New assignments during the year were won and delivered in Oman, Australia, Ireland, the Kyrgyz Republic and England. In addition, International was recently successful in bidding for a contract to help review services within the City of Calgary Water Services unit. International was also represented at a number of international events during /14 held in United Arab Emirates, Canada and Spain. A major development in /14 was the creation and population of the Scottish Water International Consulting Team, a group of in-house consultants available for deployment on international assignments that will allow prompt reaction to future opportunities. In the year ahead, International s priority is to build on its successes to date and focus on expanding its reach in a competitive global market. Principal risks and uncertainties The management of the business and execution of the company s strategy are subject to a number of risks. Risks are formally reviewed by the International Board and the appropriate processes put in place to monitor and mitigate them. The key business risks are set out below: Contract performance shortfall International makes regular checks of client satisfaction with service and responds to feedback to ensure that contract requirements are delivered. Exchange rate risk The company is exposed to the risk of currency fluctuations, as most of its contracts are denominated in local currency. It has reviewed policies on the maintenance of cash balances overseas to reduce the risk of future exposures. Credit risk The company s major contracts are all sub-contracts with large international firms who have a good credit rating and a good relationship with Scottish Water. For smaller contracts, it is policy to require part payment in advance if a client is not well known to International.

25 Scottish Water Annual Report and Accounts /14 23 Performance Environment Providing customers with the very best service requires Scottish Water to take water from our supply sources and then, after use, safely return it to the natural environment. It is essential that these activities operate in harmony with our natural surroundings, and that our operations contribute positively to protecting and enhancing Scotland s environment. As a Scotland-wide business serving remote and urban communities of all sizes, we believe that a focus on sustainability can help us to balance the needs of our customers, the economy and environment. Scottish Water Greenhouse Gas Emissions Footprint 2012/13 Process emissions Self-generated 10.5% renewable electricity -1.2% Gas Grid electricity %: 67.1% 10.8% Water network 15.1% Water treatment 20.3% Waste water network 19.4% Waste water treatment 43.2% 8.3% Chemicals Admin 1.9% 3.3% 1.2% Transport and travel Others Climate change We have been continuing our work to better understand the climate challenges we may face in future to help us ensure that our services and networks are resilient for the benefit of our customers in the years ahead. We must be able to adapt to potential changes if we are to continue to meet customers expectations of reliable services. Scottish Water was a supporting partner of Climate Week, a major UK-wide environmental campaign, which was an opportunity to highlight some of the actions we are taking, including our focus on sustainability. A changing climate could impact on water and waste water services in a variety of ways. For example, changing rainfall patterns may affect the available quantity of raw water supplies. Our waste water network has to deal with the alternate pressures of increased rainfall frequency and intensity resulting in more property flooding from sewers, and of periods of dry weather resulting in siltation that leads to blockages in sewers or increased sewer cleaning. We are committed to reducing our greenhouse gas (GHG) emissions while meeting the quality, service and value expectations of our customers. Carbon footprint Our carbon footprint for 2012/13, the most recently reported year, continued to show a downward trend in carbon emissions with a decrease of nearly 5%, or over 22,000 tonnes of CO 2 equivalent (tco 2e), compared to 2011/12. This was due to reduced process emissions, chemicals purchased and increased Renewable Energy Guarantees of Origin (REGO) accreditation of renewable energy. Our water service has one of the lowest carbon intensities in the UK, due to the opportunity to largely use gravity to supply our customers rather than pumping. Renewable energy In providing essential services to customers, Scottish Water is one of Scotland s largest users of electricity, consuming around 450GWh per year. We have a 4-pronged approach to energy management and development: Reducing consumption by improving capability of assets and operations; Increasing self-generation where there is a good return for customers deploying innovation and technologies that maximise value from our asset base; Hosting private renewable energy investment on our land; and Optimising our energy purchasing strategy in terms of price risk mitigation against rising energy costs. We currently generate over 28GWh of the power we need and using the above approach, we expect to be facilitating more energy generation than we consume by This strategy is aligned with the Government s ambitions for a Hydro Nation and is an essential part of our desire to reduce the long-term costs of delivering water and waste water services. Overview Strategic report Governance Financials

26 24 Scottish Water Annual Report and Accounts /14 Performance Environment continued Since last year our own renewable portfolio has increased and diversified to include hydro, wind, photovoltaic and combined heat and power (CHP). We currently have 18 hydro schemes in operation, while 15 other sites are in development. 4 of our treatment works can now be considered self-sufficient in that they are capable of generating at least the equivalent amount of energy which they consume. We have also installed 12 small or medium scale wind turbines and 10 photovoltaic schemes, helping to produce some of the energy needed to power our treatment works. Scottish Water already host third party wind schemes and are working with several developers on other sites with Scottish Water benefiting from either a landlord rental or power purchase agreement. Improving the environment Waste water treatment Scottish Water has a responsibility to ensure that waste water from homes and businesses is treated to the highest standard before being returned safely to the environment. The drier summer of saw reduced run-off from land. This, along with our work to manage society s waste water through the effective operation of our sewers and treatment works, enabled all of Scotland s bathing waters to achieve full compliance. More than half met the highest standards under the EU Bathing Waters directive, as reported by the Scottish Environment Protection Agency (SEPA). With a continued focus on ensuring our waste water operations achieve the best possible performance, we saw a 20% reduction in the number of environmental pollution incidents. We continue to work collaboratively with SEPA as our environmental regulator to focus and target our operational activities in such a way that we continue to improve our environmental performance. Leakage management Scottish Water maintains almost 30,000 miles of water pipes and in recent years we have actively been reducing leakage towards the economic level of leakage (ELL) that is the point where the cost of reducing leakage becomes greater than the savings from reduced water production. In /14, leakage was reduced by around 9.5 million litres a day out-performing our target by 5.6%. This means that leakage has been reduced by around 50% since the introduction of targeted leakage reduction in As a result, we continue to operate at the economic level of leakage a Ministerial Objective we achieved in 2012/13, one year ahead of regulatory expectation. Our teams respond to reported bursts and detect and fix leaks underground, helping to save this valuable resource. We have been working to influence research and development and make increased use of innovative technology to become a recognised leader in the field of leakage management both in the UK and internationally. We have also continued investing in pressure management which will reduce the likelihood of bursts impacting on our customers. Water efficiency We remain committed to ensuring that the protection of Scotland s natural water resources is a key priority. We recognise that there are many steps we can all take to protect this valuable resource. Our Water Efficiency Plan details the key activities we undertake to help improve the security of a sustainable water supply for our customers now and future generations. Our approach to water efficiency is framed around 3 key areas: Improving our assets We remain committed to working to reduce the volume of leakage across our network, while also looking to use water wisely at our assets and offices. Following the completion of a number of water usage audits at our main offices we have initiated a retrofit project which will enable us to reduce water consumption at these sites. In addition, our new operations centre has a rainwater harvesting system and waterless urinals as well as a number of energy efficiency systems.

27 Scottish Water Annual Report and Accounts /14 25 Engaging with our customers We continue to engage with our customers and work in partnership with other water companies throughout the UK to promote simple but effective ways everyone can use water wisely in and around their home. Our website features an interactive online water use calculator, allowing customers to calculate and compare how much water they use at home against the average person in Scotland who uses 150 litres of water a day. We also have a range of water efficiency films that provide advice on how to use water wisely in the kitchen, bathroom and garden. Water efficiency was also an important theme of our major Cycle campaign launched in /14, which included a TV advert encouraging customers to turn off the tap while they are brushing their teeth. This simple action can help save 6 litres of water per minute, which comes out of the tap and goes straight down the plughole. We are also highlighting through other water efficiency activities that, while Scotland has plentiful resources of raw water, the treatment and distribution of water is very energy intensive and the heating of water counts for a sizeable share of energy use. Research by the Department for Energy and Climate Change shows that 18% of domestic energy is used for heating water. By using less water customers can therefore make savings on their energy bill. To increase our understanding of water use in Scotland and how we can help our customers use water wisely we are undertaking a Water Efficiency Trial. The Water Efficiency Trial aims to understand how customer consumption behaviour in Scotland responds to a range of water efficiency measures and to assess the relative cost/benefit of each of these measures and gather robust evidence which may be used to inform future direction and policy appropriate to Scotland. Working with our stakeholders and policy makers We continue to work with key stakeholders, developers and policy makers to help them understand and promote the importance of more water efficient practice. Through our work with the Scottish Government Building Standards Division, a mandatory water efficiency standard was introduced in October. This means that all new buildings in Scotland will include a basic level of water efficiency in the future. In addition, those choosing to build to the Silver and Gold standards will be required to install more advanced water efficiency measures. Cycle campaign In, we launched the first phase of our Cycle campaign to highlight ways in which customers can play a part in helping to keep Scotland s water cycle moving. Scottish Water attends to a significant number of blockages in drains and sewers caused by the wrong items being flushed down toilets or poured down sinks such as baby wipes or cooking fats. Many of these items create solidified fat and material that cause blockages costing over 7 million a year to clear. This can lead to flooding problems for householders and communities, and sometimes pollution of rivers and burns. Through the power of television advertising, local radio, social media and targeted localised activities including school visits the campaign highlights the correct ways to dispose of these items. Phase 2, in early, also highlighted steps that everyone can take to save water in the home through simple actions such as turning off taps while brushing teeth. This campaign, alongside other initiatives to highlight the importance of safety near water and vigilance against bogus callers, has stimulated positive and meaningful engagement with our customers, and we will be evaluating its effectiveness in the year ahead. Sustainable land management Another environmental challenge is ensuring that the quality of water in supply sources such as reservoirs, lochs and rivers is of the highest possible quality before being treated for customer use. Our Sustainable Land Management Scheme, launched in April 2012, aims to help find ways of preventing substances such as pesticides and nutrients from entering a number of key supply sources in Aberdeenshire, Angus, Ayrshire, Dumfries & Galloway and Argyll & Bute. This initiative to mitigate the impacts of diffuse pollution works in partnership with landowners, farmers, and regulators and supports the delivery of practical solutions to improve drinking water quality in these catchment areas. The scheme has supported 128 applicants in /14, supporting measures such as Water Environment Management Plans, fencing to stop livestock access to watercourses and the use of alternative pesticides. By improving the quality of the sources for our drinking water supply we believe we can reduce the costs of treatment while helping the wider environment. Overview Strategic report Governance Financials

28 26 Scottish Water Annual Report and Accounts /14 Performance Environment continued Improving services Drinking water quality The quality of Scotland s public drinking water has reached another all-time high. Throughout we carried out over 318,000 quality tests on regulatory water samples from our water treatment works, service reservoirs and customers taps across Scotland. Of these samples, 99.91% of all tests met the strict microbiological and chemical regulatory standards, improving on last year s performance. During /14 we have replaced, repaired or improved 11 water treatment works and more than 312 miles of water pipes. We are also making extensive improvements in water supply networks and treatment processes to help to reduce discolouration of water supplies as a result of naturally occurring elements, such as iron and manganese, and improve the appearance and taste of drinking water for our customers. We continue to work to ensure all our customers can enjoy the look and taste of their clear, refreshing Scottish drinking water. Clearer, fresher drinking water water quality Overall compliance with microbiological and chemical standards % % % % % % % % % % % % Flooding Scottish Water takes the issue of sewer flooding very seriously. Sewer flooding is caused when a drain or sewer becomes full due to heavy rainfall and overflows either inside a property or outside in the garden, street or other public areas. Drains and sewers can also be affected when something blocks them and they become choked. In /14 the number of incidents of sewer flooding due to overloading because of heavy rain was reduced by 54%. The number of incidents of sewer flooding due to other causes, such as blockages, was reduced by 25%. Like all water companies in the UK, we design our sewers to cope with well above the average rainfall and most customers will never experience flooding from our sewers. If a sewer overflows because it is choked we will seek to attend within 4 hours if the flooding is inside a property, and 24 hours if it is external. We will do whatever we need to clear the public sewer to allow the waste water to flow freely again. If the blockage recurs on our network, we will undertake a CCTV inspection. If this identifies a build up of fat, oil and grease or silt, defective pipework or tree roots on the public sewer network, we will take the appropriate remedial action. For sewers that become full and overflow during prolonged or heavy rainfall we make sure we tackle the problems that have the biggest impact on our customers. We maintain a list of properties that have been affected by sewer flooding from an overloaded sewer. We then use a standard UK water industry method to identify those properties at the highest risk of being flooded again, which is based on the intensity of the rainfall. In our plans for we have proposed million of investment in the sewer network to remove customers from our internal sewer flooding register as quickly as possible. We are also proposing 18.7 million of investment to address external flooding issues.

29 Scottish Water Annual Report and Accounts /14 27 People Scottish Water is committed to playing a positive role in the lives of our customers and our people now and in the future. Customer engagement Boosting awareness of the services we provide and our vital role in public health and the environment helps to demonstrate the extent to which Scottish Water provides great value for money. We also seek to share our knowledge of the many areas of our business, including water and waste water treatment, engineering, science, water efficiency, renewables, innovation and career opportunities. This helps to ensure Scottish Water plays a positive role in the lives of our customers and our employees, both now and into the future. As well as providing us with constructive feedback on future service priorities, customer engagement is an excellent way of increasing awareness about the value of water. Research has highlighted that many customers are keen to receive more information on their water services. Education Our approach to education is focused on: Engaging with our customers now and in future generations through our education programme; Looking at innovative educational opportunities and partnerships; and Promoting the career opportunities in Scottish Water and the water industry. In the last year we have refreshed our package of educational resources for children and young people, with a range of online activities and games based around the theme of water. These have been developed based around the requirements of the Curriculum for Excellence and can be downloaded from our website for use in schools. Our popular Water Ways exhibit at Glasgow Science Centre continues to bring the message of water s journey from source to tap alive in a fun and interactive environment. We are also preparing to launch a set of mobile education materials which can be used in schools and community organisations around Scotland. Our people In providing essential services to the people of Scotland, Scottish Water depends on the skills and expertise of our workforce in a wide variety of roles from engineers, regulatory and customer service specialists, to analysts, planners and technicians. On a daily basis we work in cities, towns and villages the length and breadth of Scotland, and we therefore recognise the role our people play in community life and wellbeing. To deliver great outcomes for customers our leaders are committed to ensuring every Scottish Water employee is developed to their full potential, engaged and aspires to sustain high levels of performance. We are passionate about creating opportunities for young people to learn and build the skills, knowledge and experience that will help them become the next generation of water industry leaders and experts, taking the industry forward. In collaboration with our partners and relevant skills bodies, we have created qualifications, modern apprenticeship frameworks, graduate schemes and other career development opportunities at all levels in the water industry in Scotland. We currently have 67 modern apprentices and 37 graduates on structured development programmes. In the past year, we created openings for 11 new modern apprentices and 10 graduates. We also provided places for 12 interns who gained valuable experience with us and continue to support work experience for secondary school pupils across Scotland. Our investment partners are also committed to providing employment opportunities for young people. Scottish Water and Tigers Carillion reached a milestone with the announcement of the 100th apprentice supported under their partnership agreement to work with Scottish Water s construction delivery partners and sub-contractors to help create opportunities for young people. Volunteering All Scottish Water employees are entitled to up to 2 days paid leave each year to participate in volunteering work which helps develop skills and teamwork, strengthens relationships with local communities, and supports equality and diversity outcomes. Volunteering opportunities are focused on: Education; Environment; and Local community volunteering. The programme has now been running for over 3 years, with more than 1,800 employees involved to date. In /14 employees contributed 11,859 working hours for the benefit of charitable, environment or community work across Scotland. Overview Strategic report Governance Financials

30 28 Scottish Water Annual Report and Accounts /14 People continued This has included promoting our education programme at events in schools, and as education-related activities in communities. Our volunteers have carried out a range of activities in local communities across Scotland to help raise awareness of water-related topics including the water cycle, the vital role of water in daily life, water efficiency and how to avoid blocked pipes by disposing bathroom and kitchen wipes correctly. This work has ranged from our volunteers presenting to community groups and schoolchildren to new parents. This work is essential in helping to educate current and future generations of customers about the crucial role Scottish Water plays in managing this essential resource. Scotland s rich and varied natural environment is one of the country s biggest assets. Scottish Water plays a major part in protecting and enhancing Scotland s rivers, lochs and coastal waters. The volunteering programme is helping to enhance our positive environmental impact by giving employees the opportunity to team up with local organisations on activities such as beach cleans to help make a difference in communities across Scotland. The past year has seen great success in our charity volunteering work. 141 organisations received help from Scottish Water volunteers. This included helping with church renovations in Lossiemouth, creating footpaths at a day centre in Duns, redecorating and cleaning a pig pen at Gorgie City Firm and a beach clean in Ayrshire. Our practical help is greatly appreciated by charities. WaterAid Scotland We also support activities relating to WaterAid Scotland, Scottish Water s charity of choice. Our employees contribute much of their own time to support the charity s efforts to raise vital funding for water, sanitation and hygiene projects in the developing world. In /14, our employees raised in excess of 150,000 which will go directly to supporting WaterAid s project work in Zambia, an incredible achievement thanks to the efforts of Scottish Water employees. Scottish Water Chief Operating Officer Peter Farrer visited Zambia in to see first-hand the life transforming effect of WaterAid s projects on communities there. Employees took part in a variety of activities to mark World Toilet Day and World Water Day while also raising vital funds for WaterAid s work in Zambia. Activities included a bungee jump and a sponsored abseil; fundraising on these 2 days alone brought in over 12,000 towards the total. In addition Scottish Water employees regularly take part in other activities which support WaterAid s work in 26 different countries around the world. For example the popular monthly staff lottery raised over 20,000 throughout the year, funds which enable WaterAid to direct support to wherever it is most needed. Just 15 can enable one person to access a lasting supply of safe water, improved hygiene and sanitation.

31 Scottish Water Annual Report and Accounts /14 29 Innovation Innovation is key to sustaining high performance. We continue to work with academia to develop knowledge to improve services, and with our supply chain to explore better ways to deliver increased value for customers. Our strategic research and innovation programme is progressing and will further improve our services by: Enhancing water quality compliance; Obtaining value recovery from waste water; and Supporting sustainable rural communities. We are pursuing single topic issues such as leakage, sewer flooding and carbon reduction through the UK Water Industry Research (UKWIR) programme. We developed our Innovation Strategy to formalise our strategic approach to research and development, accelerating the adoption of new technologies and developing a corporate culture that supports innovation in all areas of the business. Research engagement During /14, we have continued to develop our research portfolio to support the strategic focus of the business. Working with Scottish and UK universities we are: Supporting 16 engineering doctorate projects through STREAM, the industrial doctorate programme for the water sector led by Cranfield Water Science Institute; Matching waste water works performance to environmental capacity variable consenting University of Exeter; Developing research programmes with Water@Glasgow with University of Glasgow; Developing an optimised flushing programme based on determination of biofilm formation, through PhD with Sheffield University; Assessing novel filter media for water treatment Glasgow Caledonian University; and Undertaking a range of short policy related research projects through CREW. European research programme We continue to seek European partnerships through the EU Framework Programme that support our strategic aspirations. We are engaged in 5 EU funded projects: Transition to sustainable urban treatment systems; Managing water demand through integrated network management including game design thinking; Developing an autonomous ultrasonic unit to manage algal blooms in water sources; Understanding the source and fate of pharmaceuticals from domestic use; and Understanding the effectiveness of vertical wetlands as a low carbon waste water treatment solution for small scale systems. Innovation in action Scottish Water and our customers are already starting to see benefits from some key innovations introduced during /14. We have developed a sustainable land management approach to reduce contamination of water sources. This reduces the amount of treatment required at our treatment works. We have extended the level of renewable energy generation across our asset base. A study into the opportunities to generate value from waste water systems has highlighted energy generation opportunities. We are testing a primary waste water treatment technology that recovers cellulose based material from the waste water. The technology also reduces the downstream load on the waste water treatment works. We are working with a Scottish-based biomimicry treatment company to evaluate their technology for treating waste water streams for beneficial use. Future activity We have identified 2 additional strategic research themes in the period to look at reducing economic levels of leakage and benefiting from developments in automation and control. We are working with Scottish Government and the enterprise community on plans for a water innovation service. Through the UKWIR Programme, we will work collaboratively on research programmes to reduce leakage, prevent sewer flooding and reduce our carbon footprint. Overview Strategic report Governance Financials

32 30 Scottish Water Annual Report and Accounts /14 Looking ahead As we enter the last year of the regulatory period we are on target to deliver significant service improvements for our customers, in line with our Delivery Plan. We are providing services that have reached new heights meaning our service is now comparable with the best in the UK water sector. We have delivered more than 2,000 capital investment projects since April The delivery of our Q&S IIIb investment programme remains on track. Customers are enjoying the benefits of continued improvement in drinking water quality and customer service as a result of an ongoing investment programme and a focus on improving operational performance. Our plans for the future have been informed by extensive research with customers, discussions with the Customer Forum and all our other key stakeholders. This approach ensures the needs of our customers are at the heart of service delivery and that our Business Plan satisfies the requirements of our stakeholders. We have agreed the detail of our Business Plan with the Customer Forum. This agreed plan provides price certainty for our customers as we make further improvements to the services we provide. We are progressing additional Q&S IIIb projects, in order to deliver additional benefits to customers and further continuity of investment delivery across regulatory periods. In /15 we are working closely with Glasgow City Council and others to support delivery of a successful Glasgow Commonwealth Games. We will continue to support the Hydro Nation agenda through utilising our assets to support renewable generation, raising Scotland s profile as a Hydro Nation through our international activities, supporting the development of the Innovation Service and our sustainable rural communities project. Key strands of the Business Plan include: High quality service We will continue to deliver high service levels during so that our customers continue to receive a water and waste water service that is among the best in the UK, with improved service in all priority areas. Customer experience We will further improve customers experience of the service they receive from us. Our customer service will be monitored through the Overall Performance Assessment (OPA) score. We will implement new measures of performance for the period which will include a new Customer Experience Measure which we are developing with the Customer Forum. Household charges WICS draft determination has endorsed our agreement with the Customer Forum that for the 3 years 2015/ /18 there will be a nominal increase in household charges of 1.6% per annum. Within the period, prices will rise by less than inflation. Wholesale charges For our wholesale customers, we are also planning below CPI price increases within the regulatory period. Innovation Our plans are based on a detailed assessment of the most cost effective way to deliver customers expectations and improved compliance. We will continue to develop new and innovative approaches to operating and investment solutions. Delivering value We will build on our leading levels of employee engagement to continually improve the effectiveness and efficiency of our service delivery to customers. Douglas Millican Chief Executive

33 Scottish Water Annual Report and Accounts / Board members 34 Corporate governance 37 Audit committee report 40 Remuneration committee report 41 Members remuneration report 51 Members report Governance Overview Strategic report Governance Financials

34 32 Scottish Water Annual Report and Accounts /14 Board members Executive Members 1. Douglas Millican, Chief Executive Douglas was appointed as Chief Executive on 1 February. Douglas had previously been Finance and Regulation Director since Scottish Water was formed in April He was formerly with East of Scotland Water, initially as Financial Controller and latterly as Commercial Director. Prior to this, he worked with Price Waterhouse and Tyco. He is a Chartered Accountant with a BCom from the University of Edinburgh and is an Associate Member of the Association of Corporate Treasurers. 2. Alan Scott, Finance Director Alan joined Scottish Water in September from Balfour Beatty Regional where he was Finance Director, having previously held the roles of Finance Director and Interim Managing Director of Balfour Beatty Engineering Services. Alan was Finance Director of Miller Construction for 8 years and has also held Finance Director positions in the oil service industry. Alan has an MA in Economics and Accounting from Aberdeen University. He qualified as a Chartered Accountant with Arthur Andersen where he spent 10 years in the Corporate Recovery Services Team. 3. Geoff Aitkenhead, Asset Management Director Geoff was formerly General Manager, Customer Services and Networks, at East of Scotland Water (ESW) where he led the Asset Management Group. Previously, he was Strategic Development Manager, Operations at ESW and Capital Planning Manager at Borders Regional Council. He is a graduate of Newcastle University, a member of the Chartered Institute of Water and Environmental Management and a Fellow of the Institution of Civil Engineers. Geoff is Chairman of Scottish Water Solutions and also sits on the Board of Scottish Canals. Geoff is a former Chairman of WaterAid (Scotland), an organisation dedicated to the provision of clean water and sanitation in the developing world. 4. Peter Farrer, Chief Operating Officer Peter was formerly Customer Service Delivery Director and, prior to that, General Manager of Business and Asset Planning. Prior to this, Peter was General Manager of Operations and has held various other operational and engineering roles within Scottish Water s predecessor organisations, East of Scotland Water and Lothian Water and Drainage. He has 30 years experience in the water industry since graduating from Heriot Watt University as a Civil Engineer in He is a Chartered Civil Engineer, gained an MBA from the Edinburgh Business School in 2001 and is a Fellow of the Institution of Civil Engineers and a Vice- President of the Institute of Customer Service. Non-executive Members 5. Ronnie Mercer CBE Ronnie was appointed Chair of Scottish Water in October 2007 after having been Interim Chair of Scottish Water since April Until his retirement from Scottish Power in March 2006 he was Executive Vice President Operations at Scottish Power s PacifiCorp subsidiary and an Executive Team Member of Scottish Power. Ronnie moved to Scottish Power from British Steel in 1994 as Generation Director. In 1998 he became Managing Director of Scottish Power s Southern Water subsidiary, after which he became a Group Director in the company. 6. Donald Emslie Donald Emslie is Chair of CHMC Ltd, which manages hotels across the UK and Ireland. He is also Chair of Thorpe Hall Leisure Ltd which owns the Lifehouse Spa & Hotel in Essex. He was previously Chief Executive of SMG Plc and Chair of ITV Network Ltd. Donald is a Fellow of the Royal Society of Arts and The Royal Television Society and has been awarded an Honorary Doctorate from Robert Gordon University for his services to television and media.

35 Scottish Water Annual Report and Accounts / James Spowart Jim Spowart was the founder and Chief Executive of Direct Line Financial Services, Standard Life Bank and Intelligent Finance. Jim has considerable corporate experience and retired from Intelligent Finance in He was awarded an Honorary Doctorate from Edinburgh Napier University for his contribution to banking and also to the economic development of the central belt of Scotland where he created over 5,000 banking jobs. Since he retired, he has been involved in various consultancy projects and assisted many companies including providing consultancy advice to various banks located both abroad and in the UK. Jim was also a Commissioner to the Church of Scotland during 2012 and. 8. Alan Bryce Alan was formerly Managing Director of Energy Networks and Generation at Scottish Power, and a Non-executive Director of Iberdrola USA in New York. He is currently Chair of Viking Energy Shetland, a Non-executive Director of Infinis Energy plc, and an advisor in the utilities industry. Alan holds a Masters degree in Electrical Power Engineering from the University of Strathclyde and is a Fellow of the Institution of Engineering and Technology. 9. Andrew Wyllie Andrew is Chief Executive of Costain Group PLC, the worldwide construction and engineering group. Prior to taking up this role in 2005, he worked for Taylor Woodrow where he was Managing Director of the construction business and was a member of the Group Executive Committee. He is a graduate of the University of Strathclyde, has an MBA from London Business School and is a Fellow of the Institution of Civil Engineers. He is also a Fellow of the Royal Academy of Engineering, a member of the CBI Construction Council and a Companion of the Chartered Management Institute. 10. Lynne Peacock Lynne is a former Chief Executive of Clydesdale and Yorkshire Banks, a role that she held from 2004 until She started her career in banking in 1983 with the Woolwich, joining the Woolwich Board in 1996, and became Chief Executive in Lynne became a Non-executive Director of Nationwide Building Society in July 2011 and joined the Board of Standard Life as a Non-executive Director in April Matt Smith OBE Matt was Scottish Secretary of UNISON until 2010 and STUC President in 1999/2000. He serves as a Scottish Human Rights Commissioner, a Member of the Standards Commission for Scotland, a Member of the Employment Appeal Tribunal and a Director of Irvine Bay Urban Regeneration Company. He is an Honorary Fellow of the Scottish Council for Development and Industry and continues to serve on their Executive. Matt has served as a JP for 28 years and continues to work with a range of regulatory and charitable organisations. 12. Douglas Reid Douglas is a former Finance Director of BG Group plc s North Sea business. He joined Scottish Gas in 1979 and held various positions in gas retailing before joining BG Group s exploration and production business unit. He held various senior management positions in Russia, Egypt, Italy, India and Trinidad and Tobago before returning to Scotland in He has gained extensive experience in a capital intensive industry, has worked with government regulators in a number of countries and has extensive corporate governance experience having chaired Audit Committees of various companies. He now manages a training company focussed on the oil and gas industry. Douglas is a Fellow of the Association of Chartered Certified Accountants and a Fellow of the Chartered Management Institute. Overview Strategic report Governance Financials