How we re doing. Our performance for the year to March 2015 including the Directors Report, Non-Statutory Financial Statements and Regulatory Accounts

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1 How we re doing Our performance for the year to March 2015 including the Directors Report, Non-Statutory Financial Statements and Regulatory Accounts

2 We are your local water supplier providing you with drinking water all day, every day. We are locally based and serve nearly half a million residents in our area of supply which extends from Poole in the west to Beaulieu in the east, and north to Salisbury. We were established as the Bournemouth Gas & Water Company in 1863 and for over 150 years, and through successive ownership, we have retained our local identity. We are part of the local community.

3 Contents 2 Chairman s review 4 How we measure and present our performance 5 Creating an excellent customer experience 10 Reliability of our supply 13 Investing in our assets 14 Drinking water quality 16 Managing demand for water 18 Our impact on the environment 20 Conservation and our community 24 Safety and our employees 25 Our financial results 28 Looking ahead 29 Directors Report 37 Corporate Governance 46 Directors Remuneration Report 61 Statement of Directors Responsibilities 62 Independent Auditor s Report to the members of Bournemouth Water Limited 66 Non-Statutory Financial Statements 70 Notes to the Non-Statutory Financial Statements 102 Supplementary Regulatory Accounting Statements 105 Independent Auditor s Report to the Water Services Regulation Authority and Directors of Bournemouth Water Limited 109 Regulatory Historic Cost Profit and Loss Account for the year ended 31 March Regulatory Statement of Total Recognised Gains and Losses for the year ended 31 March Regulatory Historic Cost Balance Sheet as at 31 March Reconciliation between Non-Statutory Financial Statements and Historic Cost Regulatory Accounts 113 Regulatory Historic Cost Accounting Policies 119 Current Cost Profit and Loss Account for the Regulated Business for the year ended 31 March Current Cost Balance Sheet for the Regulated Business, as at 31 March Current Cost Cash Flow Statement for the Regulated Business for the year ended 31 March Current Cost Accounting Policies 123 Notes to the Regulated Business Current Cost Accounts 133 Company information 103 Statement of Directors Responsibilities

4 Chairman s review The past twelve months have seen significant benefit to our customers in terms of both prices and investment for the future. Some eighteen months ago the Board decided to freeze prices on domestic tariffs for 2014/15, as a result of which the turnover from water supply has seen little change from the previous year. With prices frozen, the impact of increases in employment, power and other costs has caused operating profit to fall by just over 1 million to 14.7 million. As a result, profit before tax decreased to 9.8 million. The tax charge on the profit and loss account increased by over 2 million principally because the previous year had benefited from a deferred tax credit as a result of the decrease in the standard rate of UK corporation tax. Tax paid was 1 million. The post-tax profit therefore fell by 3 million to 7.8 million. The 3.2 million dividend, representing a return on net regulatory equity of some 5%, was up 0.2 million from 2013/14 but was significantly lower than in the previous two years. We adopted the new UK accounting framework, based on International Financial Reporting Standards. As a result, the prior year accounts had to be restated to be consistent with the new standard. This resulted in an 8.5 million reduction in net assets at 31 March 2014 but an insignificant fall in net profit for the comparative year. The main changes included (1) grossing up both tangible fixed assets and deferred income for developer charges (2) the removal of special rules previously specified for infrastructure assets and (3) additional deferred tax liabilities for these changes, a new basis for permanent timing differences, and the removal of discounting of these liabilities. Although 2014/15 comparative scores for the revised Service Incentive Mechanism used to judge industry-wide customer service are not available, the Company has continued to be one of the top performers in the sector. Our customers expect an uninterrupted supply of potable water delivered efficiently and at a fair price. Fewer than 1% of our customers experienced an interruption for more than 3 hours and the Company delivered the water to very high quality standards. However, as previously reported, I am very sorry to record that the Company supplied some water containing cryptosporidium some two years ago and in March this year, pleaded guilty to supplying unwholesome water. Immediately after learning of the incident in 2013, the Board sanctioned the investment in new state-of-the-art plant to treat the water with ultra-violet irradiation in order to render any such organisms inactive. Work was completed at the Alderney works in March 2014, and similar plant was installed at Knapp Mill in March 2015 and Beaulieu in June As a result the Company now has 24 hour monitoring of this process at all water treatment works where there is a potential risk of cryptosporidium, which gives us greater confidence in the quality of the water. Inevitably the capital expenditure plans which had been sanctioned by Ofwat were exceeded in performing this work but we firmly believe it was the appropriate and responsible response to the situation. In February we successfully commissioned a new customer relationship management and billing system which will transform the facility for customers to communicate with us electronically in the future whilst maintaining paper based billing and communications for those who prefer it. Significant changes were made to the Company s operations, firstly by introducing a new work management system which will enable us to plan and perform project work much more efficiently, and secondly by inviting tenders for the main contract for maintaining the underground supply network. This contract was awarded to Kier and we look forward to a mutually successful partnership with them. page 2

5 Having submitted the business plan over a year ago, when Ofwat announced the future revenue limits for the Company in December last year, we were pleased to note that they were largely consistent with our submission. These include an initial cut of more than 11% in the average household bill in 2015/16 followed by at-or-near inflation increases for the next four years. In addition, there are financial incentives and penalties for outperformance and failure respectively, which will challenge management to run the business even more efficiently and effectively in the future. Just after the year end Sembcorp announced that it was selling its shareholding to Pennon Group Plc. This transaction is currently subject to a referral to the Competition and Markets Authority (CMA), which has indicated that it intends to report its findings in November In the meantime the Company, as a subsidiary of Pennon Group Plc, is subject to restrictions in respect of communication with our new shareholder. Once the CMA has announced its conclusions we can look forward to a constructive relationship with Pennon Group Plc for the benefit of our customers. During the past year the various issues outlined above have put additional demands, only some of which had been expected, on our people. On behalf of the Board, I would like to thank all our employees for their loyalty, hard work and commitment to provide outstanding service to our customers throughout a very challenging time. The Board of Directors has seen a significant number of changes since last year s Annual Report, two of which had been anticipated as normal retirements. At the end of December, Jim McGown retired after 11 years as Chairman during which he drew on his extensive previous experience of the water industry to lead the Board through some challenging situations. After more than 22 years in senior roles Roger Harrington retired, having successfully steered the Company through the last regulatory period as Managing Director; he was highly respected within both the Company and the UK water industry. We wish both Jim and Roger a long and happy retirement and thank them for their huge contribution. We were delighted to appoint Bob Taylor, previously the Director of Operations, as Managing Director and Liz Catchpole as an independent Non-executive Director and Chairman of the Audit Committee. The Finance Director, Peter Bridgewater, left after three successful years with us to join Welsh Water, and we were also delighted to welcome Philippa Goodwin as his replacement. Since the year end and as a direct consequence of the change of shareholder, Ng Meng Poh and Paul Gavens resigned and we were pleased to welcome Chris Loughlin and Gerard Connell, both of whom are Directors of Pennon Group Plc, to our Board. We look forward to working with them in the future. Peter Millward 29 June 2015 page 3

6 How we measure and present our performance Our aim is to maintain or improve our performance across our operation, from taking water from the environment to delivering it to our customers taps. To do this, we use a range of measures against which we continuously monitor our performance. Some of these measures are water industry standards set by Ofwat, the economic regulator, to allow benchmarking within the industry; others are standards we have set ourselves, based on what our customers have said is important to them. In responding to our customers, we look beyond the water industry to benchmark ourselves against wider standards of excellence and best practice. Our assessment of our performance is reviewed and assured by an independent technical assurance consultant to ensure that our reporting is objective. For transparency, we measure our performance against agreed targets, have the results audited and published, and work to the UK Corporate Governance Code which sets out standards of good practice in relation to board actions and behaviours. Presenting our performance Throughout this report we use traffic lights to show how our performance compares to industry standards defined by Ofwat. Red does not meet the required standard Amber slightly below expectation Green meets or exceeds the required standard To show how we perform against the additional standards we set ourselves, we use a range of graphics. year to March year view performance page 4

7 Creating an excellent customer experience In delivering safe drinking water reliably, we satisfy the core objective of our business, and customers can and do take this for granted. Therefore our aim is to do much more to create an excellent customer experience. This depends not only on the mechanics of customer service, but in the way in which our service is delivered, the choice and flexibility available to our customers, and the attitude, knowledge and responsiveness of our people who provide the service. And so we look beyond Ofwat s Service Incentive Mechanism (SIM), the water industry s customer service measure, and have adopted additional measures to help us to achieve our goal. 454,300 population served In recognising that ours is a business based on people, we recruit people with the right attitude, train and support them throughout their development, and value their contribution. They in turn do their very best to help and support our customers and treat them with care and respect. A key element in customer experience excellence is keeping customers informed at each stage of a process that involves different areas of the business over a period of time, for example, in taking a customer through from requesting a meter to receiving their first metered bill. We have greatly improved our performance in these areas since the introduction of our specialised teams within our local call centre. To further enhance customer experience, this year we implemented a new customer relationship management and billing system. Once all functionality has been deployed, our customers will have more choice in how they interact with us and will be able to pay their bills and manage their accounts via a web-based self-service facility without ever having to call or to write to us. 1,041km 2 area of supply 2,830km water mains We realise that this exciting development in electronic communications won t be received with equal enthusiasm by all our customers and we ll continue to offer paper-based billing and communications to those who prefer this, as we know that our customers value choice. page 5

8 In recognising that ours is a business based on people, we recruit people with the right attitude, train and support them throughout their development, and value their contribution. page 6

9 Creating an excellent customer experience continued Customer service (SIM score out of 100) 88 We view customer service measures as the foundation for creating an excellent customer experience. Ofwat s Service Incentive Mechanism (SIM) comprises two elements; one numerical and one based on customer satisfaction assessed via independent telephone surveys of a sample of customers who contacted us. The numerical element considers the number of calls received which are critical of our service, and the number of written complaints. Written complaints are then further categorised into those resolved on first contact, those resolved on further contact, and those referred to the Consumer Council for Water (the consumer watchdog) and are weighted accordingly. The methodology used by Ofwat for calculating the SIM changed during the year and as such has made it difficult to compare our SIM performance on a like-for-like basis. As we had set ourselves a target, based on the old methodology, of exceeding the previous year s score of 87, for consistency of measurement we have used the old methodology to arrive at the figure of 88 for this year. Using the new methodology, our score was lower at 86. Irrespective of the methodology used, we are one of the top performers in the industry, both this year and over the five-year period as a whole. To ensure we maintain our position as a top performer we set ourselves additional measures, one of which was to maintain our Customer Service Excellence accreditation, and we have now received this award for the 15th year in succession. This award recognises service excellence in terms of timeliness, quality of information, professionalism and employee attitude. Two further measures related to responding promptly to billing enquiries and answering the phone quickly when customers call. We met our target of responding to 99.9% of billing enquiries within five days, but failed to meet our target of answering over 95.5% of calls before the customer hangs up. This was despite 18 seconds being recorded as our average time taken to answer a call this year. This failure was largely due to the demands of the implementation of our new customer relationship management and billing system which required staff to leave their normal work to be trained on the new system and to support the project team. This was not unexpected given this was the biggest and most complex project of its kind that we have undertaken in over 20 years. However, over the five-year period as a whole, we met our targets and are confident that this aspect of our performance will return to its former high levels. year to March 2015 SIM performance Your water bill 5 year view We responded to 99.9% of billing enquiries within 5 days. Target 99.9% 5 year average 99.9% We answered 94.3% of calls quickly. 2014/15 target 95.5% 5 year average 95.4% against a target of 95% page 7

10 Creating an excellent customer experience continued Providing an uninterrupted service As we supply water 24 hours a day, every day, we make sure that our system of plant and mains network is robust and can cope with failures. Our aim is to provide an uninterrupted service as far as possible and most customers won t experience an interruption to their water supply for many years, if ever. Over the years our focus on reducing the likelihood of large-scale interruptions to the water supply, for example, by being able to quickly rezone areas so that they can be fed through an alternative trunk main in the event of a failure, has proved successful. An example of such a scheme is the trunk main we put into service together with our neighbour, Wessex Water, which improves resilience for both companies. This approach has led to us having the second lowest level of service interruptions in the industry. year to March year view supply interruptions performance When customers do experience interruptions, these are usually for very short periods, and except for cases of emergency, they are notified beforehand. We also arrange our essential, planned maintenance work so that any impact is minimised. This year, 1,794 out of 204,800 properties fewer than 1% of our customers experienced an interruption to their water supply lasting three hours or more. Taking the total length of interruptions and dividing them among our whole customer base results in an average of 2.4 minutes per property. Our performance in this area has been steady over the past five years with average figures for the period showing 1% of customers affected by interruptions of three hours or more, and a duration of interruption of 3 minutes per property. Maintaining water pressure We maintained our performance record in this area and continued to supply water at the required pressure level to all properties without exception. The level of pressure required is at least one bar, which is equivalent to the water pressure you d get when releasing water from a tank standing 10 metres above the ground. We supplied 100% of properties with water at a pressure above one bar. Target 100% 5 year average 100% page 8

11 Creating an excellent customer experience continued Complaints While we aim to do things right the first time and deliver quality consistently, we don t always achieve this. When we get it wrong or fail to meet our customers expectations, we listen to what they say and take action to avoid the same issue arising again. We also analyse the complaints we receive and focus on addressing the underlying causes. For example, the introduction of a dedicated team to manage high consumption issues has resulted in the number of related complaints falling dramatically from being disproportionately high during the early years of this five-year period to being the fourth most common cause for complaint this year. This approach has led to steadily reducing numbers of written complaints received each year during the five-year period. In keeping with this trend, this year we received 342 written complaints (which include s) and responded to all of them within 10 working days. When compared to the previous year, this represents a 7% reduction in written complaints. Given the pressure on household incomes, another key cause for complaint over the period has been the action we take to recover unpaid bills, such as sending reminder letters. We are sympathetic to households who have genuine financial difficulties and offer a range of support and payment options through our trained and experienced employees and our association with local debt charities. However, we use all means available to us to recover debt from those who can, but won t, pay their bills. This approach is fair and keeps our bad debt cost and hence our bills, low. Over the five-year period, bad debt cost our paying customers less than 5 a year against an industry average of around 15, making us an industry leader in debt management. Number of written complaints received / / / / /15 We responded to 100% of written complaints within 10 working days. Compensation Target 100% 5 year average 99.9% When we don t meet a standard required by regulation or one which we ourselves guarantee to meet, we make a compensation payment to the customer in line with our schedule of compensation. The full list of the compensation payments we make and the circumstances in which we make them is detailed in both our Business and Domestic customer charters which are available under Publications on our website, or on request. page 9

12 Reliability of our supply To provide a reliable supply of safe drinking water we depend on the quality and availability of our water sources and a well-maintained and managed system of water treatment works and underground mains network. We have readily available, high-quality sources of water from the River Avon in Hampshire and the River Stour in Dorset, and from a series of chalk boreholes which tap into underground water. There s no shortage of water in our area of supply and even in times of drought, we ve been able to take enough water from the environment to meet demand without ever having to impose a hosepipe ban. However, not only do we face a growing population and climate change, we are very conscious that the more water we take the less we leave for the plants and animals that share our natural environment. And so we work to identify and repair leaks quickly from our system and through the support we offer, we encourage our customers likewise to find and fix leaks on their pipework and avoid wasting water. In addition to our high-quality water sources, our water system comprises a series of above-ground assets and our underground mains network. We ensure our plant and mains network are in good condition through a programme of planned maintenance, replacement and improvement. In addition, we monitor the performance of our assets and conduct an annual assessment to determine whether they are stable, deteriorating or improving. Performance monitoring includes the operational sampling of water at various points, from its source as raw water, and as it moves through the treatment process, through our storage reservoirs and through our underground mains network to our customers taps. page 10

13 Reliability of our supply continued Our above-ground assets These include our treatment works, pumping stations, reservoirs, water meters, offices and fleet of vehicles. We have assessed our above-ground assets as being in a stable condition and operating effectively. Our assessment looked at the following: Any bacteria found in the water leaving our treatment works or storage reservoirs The clarity of water leaving our treatment works Any unplanned maintenance required Any enforcement action taken by the Drinking Water Inspectorate year to March year view above-ground assets performance Our underground mains network In assessing the performance of our underground mains network, we looked at the following: Water quality data Water pressure Interruptions to supply The number of burst water mains The amount of leakage from our mains Customers concerns about the appearance or taste of our water Levels of unplanned maintenance Any enforcement action taken by the Drinking Water Inspectorate Our assessment shows that our underground network is providing a reliable and stable service. year to March year view underground mains network performance page 11

14 Ongoing investment in our plant and mains network through a programme of planned maintenance, replacement and improvement has led to us having the second lowest level of service interruptions in the industry. page 12

15 Investing in our assets We are fortunate in that we have readily available, high-quality water sources and our plant and underground mains network have the capacity to supply much more water than we need. As a result, we don t need to build further capacity over the longer term and our investment plan follows a five-year cycle. We close the last cycle, 2010 to 2015, having exceeded our regulatory investment target by over 2.5 million. Total for the 5 years Total planned 2014/ / /15 for the 5 years Capital investment for water supply 12.02m 56.42m 53.91m The greater than planned investment over the period is largely due to the building of two additional ultraviolet plants, at our Knapp Mill and Beaulieu sites, and the major work undertaken at Alderney to upgrade the water treatment process. The decision for these projects was based on a re-evaluation of risk, following a small outbreak of cryptosporidiosis in our community in 2013, which was related to water supplied from our Alderney site. The installation of ultraviolet plants is aligned to a change in our policy from a very low to a zero limit in respect of viable cryptosporidium in our treated water to ensure that such an incident won t happen again. The reconfiguration of the slow sand filter and contact tank at our Alderney site, where an ultraviolet plant was built and put into operation in the previous year, removes any possibility of untreated water contaminating the treated water supply. We fell short of our target to install 18,650 meters during the five-year period, having installed 15,452 by the end of March As we install water meters on request or when an unmetered property changes hands (where it is cost effective to do so) a decline in requests, together with a slow-down in the housing market proved challenging. More generally, work to maintain, replace and upgrade our water pipes, treatment works and business systems was carried out as planned over the year and the five-year period as a whole. A summary of our key investment in 2014/15 is as follows: million UV plant at Knapp Mill 1.20 UV plant at Beaulieu 0.27 Alderney contact tank 1.05 Bournemouth Wessex resilience scheme 0.93 Meter installation 0.46 Domestic meter replacement 0.27 New mains development 1.13 Maintenance and improvement of mains network 2.30 New customer relationship management and billing system 0.94 IT (upgrades, replacements, business system improvements) 0.29 Telemetry/ SCADA upgrade 0.28 Strategic business planning for Replacement of granular activated carbon 0.56 Water treatment works upgrade/equipment replacement 0.70 Pumping plant replacement/upgrades 0.43 *Other items 0.81 Total annual investment *Other items include small plant, equipment and vehicles, and workshop and office upgrades page 13

16 Drinking water quality The quality of the drinking water we supply remains high, with 99.99% of the compliance tests we carried out meeting the standards required by the Drinking Water Inspectorate. Of the 19,000 water samples taken from customers taps (from homes and businesses), one sample tested failed to meet the standard due to a problem with the customer s own plumbing system. This failure was assessed as being well within the parameters for safety and wasn t a cause for concern. In assessing the reliability of our assets, we tested over 15,000 water samples from our treatment works and found cloudiness in one sample, which was deemed to have no impact on the safety of the water. We also tested more than 6,000 samples taken from our storage reservoirs, one of which didn t meet the required standard but fell within the margin for safety and so didn t present a concern % of samples tested met the required standards. 2014/15 water quality target 99.95% 5 year average 99.97% Through this process of rigorous sampling and testing we make sure that our water is safe when it leaves our treatment works, stays safe as it moves through our underground mains network, and is safe when it comes out of our customers taps. We have one of the highest standards of water quality in the industry. Although the quality of our water is high and the risk of contamination is extremely low, we continue to improve and upgrade our water treatment processes to reduce any risk still further. When a small number of our customers were affected by cryptosporidiosis related to water supplied from our Alderney site in the spring of 2013, we realised that the cryptosporidium standard we had been operating to and which we had deemed safe had caused harm, which is unacceptable. We therefore changed our standard from a very low to a zero tolerance level and took immediate action to build and put into operation an ultraviolet plant at our Alderney treatment works last year. To ensure this standard is maintained across our area of supply, we built further ultraviolet plants at our Knapp Mill and Beaulieu treatment works, both of which are now in operation. page 14

17 Through rigorous sampling and testing we make sure that our water is safe when it leaves our treatment works, stays safe as it moves through our underground mains network, and is safe when it comes out of our customers taps. page 15

18 Managing demand for water Our approach to managing demand for water is to reduce the amount we and our customers waste, rather than restricting the amount we supply. We want our customers to enjoy our water, but to act quickly to fix leaks and to make small changes in the way they use water so as to avoid wastage. Acting today will ensure a healthy supply of water for a growing population in the future, and a healthy natural environment. Our customers have been responsive and have helped us to move steadily towards our aim of reducing usage to an average of 130 litres per person per day by 2030, which is the Government aspiration, from the current level of around 138. Over the years we ve seen demand steadily decline as the number of metered households has increased currently over 66% of households are metered. Metering in particular makes an impact as not only do metered households use less water (usually around 10% less), but meters help to identify leaks and less water is wasted as a result. With our campaigns to reduce wastage and increase metering, and the support we ve enjoyed from our customers, we anticipate that demand will continue to fall slowly. Our long-term forecasts therefore indicate that we ll be able to continue to meet demand well into the future. Annual average per capita consumption (litres/person/day) 160 Customer consumption of water is currently 138 litres/person/day. Target 130 litres/person/day by year average 145 litres/person/day We met our target not to impose water restrictions. Target no water restrictions 5 year average no water restrictions imposed / / / / /15 page 16

19 Managing demand for water continued Leakage 14% of the water we supply We met our target to reduce leakage to 21 million litres a day by the end of March This is particularly important to us as both we and our customers agree that leakage is wasteful. We have steadily reduced the amount of water we lose on average each day, over the five-year period, from a starting point of 22 million litres a day, to our current average of 20.9 million litres a day around 14% of the water we supply against an industry average of around 20%, making us the second best performer in the industry. This improvement in our performance was helped by our programme of planned mains renewal which saw us replace 11km of mains this year and 61km of mains over the five-year period. Despite meeting this target, we have more work to do in finding and repairing visible leaks within seven days as we fell well short of our target of achieving this for 85% of visible leaks identified. This was largely due to a change in the way we calculate this figure as we now include the repair times for all leaks and not just leaks on mains. Although this is a much tougher target, our performance since the end of this reporting year shows great improvement and we are on track to meet this target in 2015/16. year to March year view leakage performance We repaired 54% of visible leaks within 7 days of becoming aware of them. Target 85% 3 year average 70% Security of the long-term supply of water 100% We need to ensure we have a safe margin between the amount of water we re able to supply and the demand for water. We measure this using a security of supply index applied to the water industry. Over the five-year period, our index score has been 100%, meaning that we are well positioned to meet demand even under exceptional weather conditions. We ve seen demand decline in recent years as metering has increased, leakage detection and repair have improved and our customers have responded to our campaigns to reduce wastage. Therefore we propose to redouble our efforts to encourage unmetered customers to opt for meters, to continue to promote efficient water use, and further improve our leakage detection and repair techniques to ensure that demand continues its downward trend. In this way, as individual demand decreases, our ability to meet the needs of a growing population will increase and our security of supply will remain stable in the long term. year to March year view security of supply performance page 17

20 Our impact on the environment We are very conscious of the impact of our activity on the natural environment. Therefore we have taken action to reduce the amount of energy we use per unit of water supplied and have increased our use of renewable energy sources. We have set ourselves a challenging target of further reducing the amount of energy we use by around 8% by 2020, with a carbon emissions target of no more than 16,200 tonnes a year. Our greenhouse gas emissions 17,997 tonnes of carbon dioxide or equivalent Our greenhouse gas emissions show a marked increase from last year s figure of 16,305 tonnes of carbon dioxide or equivalent and is largely as a result of an increase in the emissions factor we are required to use to calculate this. To put the scale of the factor change into perspective, this accounted for 1,460 tonnes of the almost 1,700 tonnes of additional carbon dioxide or equivalent calculated this year. In addition, the calculation of greenhouse gas emissions doesn t take into account the source of the energy we use. We buy our energy from a supplier that sources 80% of the energy it provides from renewable energy sources. Our actual energy usage increased slightly this year for two reasons: The introduction of ultraviolet disinfection at our Alderney water treatment works, which provides an effective solution against cryptosporidium, but is an energy-intense process The requirement to pump water over a longer distance to Alderney due to potential water quality issues with the nearby River Stour year to March year view greenhouse gas emissions performance This overall increase in energy usage accounted for 240 tonnes of carbon dioxide or equivalent. With two further ultraviolet plants at our Knapp Mill and Beaulieu water treatment works now in operation, we expect to see a further increase in energy consumption which will not immediately be offset by energy-saving measures introduced elsewhere in our operation. However, most of the energy we use is in moving water around our network. And as water is heavy, our energy use is considerable. To serve our area, which comprises 204,800 properties, we used 86,800 kilowatt hours of electricity each day enough to power around 9,700 average homes a day. We used 595 kilowatt hours/million litres this year. We are still on track to meet our 2020 target of 530 kilowatt hours/million litres. 5 year average 580 kilowatt hours/million litres. page 18

21 Our impact on the environment continued Electricity used in kilowatt hours per day 90,000 88,000 86,000 84,000 82,000 80, / / / / /15 Steadily declining demand has meant that we now pump less water around our system each year. Together with the introduction of data analytics and modelling to minimise energy consumption, this has resulted in our current energy use being less than the amount used at the start of this five-year period, despite the increase in energy usage this year. Pollution We take care not to pollute the environment and are certified to the international ISO standards. The Environment Agency categorises pollution incidents according to their severity Category 1 being the most serious and Category 3 having a minor impact on the environment. We had no incidents in these categories this year and no Category 1 events over the fiveyear period. We operate three small sewage treatment plants at our own water supply sites which don t have a public sewerage service. All three were fully compliant with the discharge consents authorised by the Environment Agency both during the year and the five-year period as a whole. Taking water from our sources We take the water we need from local rivers and underground aquifers under abstraction licences overseen by the Environment Agency. These licences specify the amount of water we may take each year, day, and in cases where river flows are more sensitive, each hour. We complied with the terms of all our licences during the year as we have done for the last five years. With our improved leakage performance and falling demand, we re taking less water from the environment each year despite a growing population. We had no Environment Agency category 1, 2 or 3 pollution events this year. Target no pollution events We had two category 3 events over the 5 year period. page 19

22 Conservation and our community Our business depends on the natural environment. In taking water from the environment, we make sure that in return we promote diversity of wildlife on our sites, and conservation and the efficient use of water in our community. We want our local community to enjoy our natural surroundings and where there s no threat to water safety, we share some of the nature that we re privileged to own. We allow access to some of our properties for quiet pursuits such as walking, bird-watching, fishing or picnicking. Our partnership with the Hampshire and Isle of Wight and Dorset Wildlife Trusts, together with the New Forest District Council and our neighbour Wessex Water, has proved particularly successful in the management, accessibility and wide programme of conservation, educational and recreational activities at Blashford Lakes. We believe we re part of the local community, but need to be more visible within the community, particularly in parts of our area of supply where we ve been less active in terms of establishing community partnerships. Therefore in recent years, we ve changed our approach from making small monetary donations to numerous local charities, to providing support in other ways. Giving our time and expertise to community projects has helped develop relationships, provides greater value to the recipient organisation, raises our profile within the community and creates a more lasting impression. We ve focused on building on long-standing relationships and forging new relationships with organisations with whom we find common cause in either promoting conservation or youth education across our area of supply. Two such organisations are New Forest National Park, whose Living Waters programme we now sponsor both financially and through staff volunteering; and the Avon Tyrell youth centre which we initially supported by providing 90 metres of pipe for the boathouse project and which has since benefited from a number of organised staff volunteering events. We ve promoted our community volunteering initiative widely this past year and have actively encouraged our staff to use the three days they are allowed, to get involved in community projects. This has complemented our presence at local fairs and festivals, where we provide fresh drinking water to the public and put a face to our organisation. And where we re unable to provide our own water for community events, or where water is required in bottled form, we donate bottled water which we source from Belu, a not-for-profit organisation which gives 100% of the profits from the proceeds of bottled water sales to WaterAid, the national charity of the water industry. Consequently, time spent working in the community almost doubled this year to over 130 employee days, which is very rewarding for all concerned. In addition to community volunteering, we support local charities and community events in a number of other ways. For example, we provide design and print services to certain charities; and fundraise for others. We also support our staff in fundraising for charities of their choice, from running marathons and climbing mountains to baking cakes and taking part in quiz nights. This year we joined forces with two other small water companies and hosted our first joint fundraising event for WaterAid, which with the support of our suppliers, was a great success. We d also like to thank the thousands of our customers who ve signed up to regular giving to WaterAid together, we really are making a difference to the lives of some of the world s most deprived people. page 20

23 We focus much of our available resources on education targeting children who not only take important messages home, but who will become our customers in the future. page 21

24 Conservation and our community continued We focus much of our available resources on education targeting children who not only take important messages home, but who will become our customers in the future. This year we extended our long-term relationship with Life Education Wessex and entered into an agreement which saw the charity become our delivery partner for our Waterwise education programme. Life Education Wessex delivers important education on healthy living in an engaging manner to children throughout our area of supply, has a good reputation in the local community and is an excellent fit with our organisation. The first phase of the agreement will see Life Education Wessex deliver a refreshed programme about water, its value and how to use it wisely, to children in Key Stages 1 and 2. While creating an understanding and appreciation of water as a scarce resource is a key aim, we like to see this in the context of supporting a wider programme of engendering safe and healthy living and social responsibility among children and young adults. We therefore also support Streetwise, a local educational charity that focuses on safety, both on the street and in the home. With the aim of promoting social responsibility, we ve worked with the Students Union of Bournemouth University and with their support, have run a successful campaign to engage with students to teach them about the importance of paying their water bills and the consequences of not paying. This has led to an increase of over 173% in the number of student payment arrangements set up and has helped us to maintain low levels of bad debt, which benefits all paying customers. We plan to continue this important work as each year brings a new intake of students into our community. page 22

25 We believe we re part of the local community, but need to be more visible within the community. Consequently time spent working in the community has almost doubled this year to over 130 employee days. page 23

26 Safety and our employees For us, working effectively means working safely with safety never being compromised, no matter how urgent the task. Our employees and those of our contractor partners are well trained to assess risk and observe safety procedures to prevent accidents and injuries and to ensure that our customers, the public and they themselves remain unharmed. We are accredited by the Occupational Health and Safety Advisory Services and have a good safety record supported by a comprehensive training, audit and inspection programme. We had no major injuries this year but lost 61 days as a result of 13 minor injuries, three of which fell within the reporting of injury, disease and dangerous occurrences regulations (RIDDOR). Although our performance was stronger last year, with 14 days lost to minor injuries, our performance this year is in line with the average over the five-year period and is not indicative of an underlying problem. Maintaining employee wellbeing and satisfaction is key to providing an excellent service. We are therefore delighted to have retained our Investors in People gold status, both as a symbol of the calibre of our people and as an endorsement of our training and employment practices. We believe education is invaluable and find that the discipline and rigour involved in seeing a course through to completion are put to good use in the work environment. And so we offer support and encourage our employees to pursue learning both academic and practical. In the previous year, we took on five new apprentices and one trainee and are particularly pleased with their progress and that well over a year later, they are all still with the company. As a local company serving the community, the majority of our employees live locally. In determining salaries and benefits we therefore set these at a level which we believe to be fair and consistent with the local environment. To incentivise our employees to continue to excel, we operate a scheme which rewards outperformance against agreed targets specifically aligned to our aims and our customers priorities. These targets relate to customer service, water quality, leakage, health and safety, environmental performance and cost management. page 24

27 Our financial results A summary of our financial results for the year is shown below. A more detailed set of accounts is presented in the Directors Report, Non-Statutory Financial Statements and Regulatory Accounts for the year ended 31 March 2015 on pages 66 to 132. This year we changed our accounting framework from UK GAAP to FRS 101. This required us to restate our 2013/14 figures, the net effect of which was a million reduction in profit after tax. million 2014/ /14 Change on year Turnover % Operating costs (32.1) (30.8) (4.2%) Operating profit (7.0%) Non-operating income and net interest (4.9) (5.3) 7.5% charges Profit before tax (6.7%) Tax (2.0) 0.4 (600.0%) Profit after tax (28.4%) This year, the volume of water we supplied fell by 0.3% despite the number of properties we serve increasing by 800 to 204,800. This is due to a small increase in metered customers who typically use less water and the positive impact of water efficiency campaigns. In considering the pressure on household incomes in recent years, we took a decision to hold customer prices flat during the year, and for 2015/16 our customers will benefit from a decrease of more than 11% in the average household customer bill. The small increase in turnover shown above largely relates to an increase in consumption by our large users and those with special agreements, and the increase in the number of properties served. Controlling costs is a major part of managing the business responsibly. Overall our costs increased by 4.2% over the previous year, partly due to one-off costs related to the cryptosporidium incident, and increased employment and electricity costs. Increased electricity costs are largely as a result of the ultraviolet disinfection plant which was built at our Alderney site to eliminate the risk of viable cryptosporidium entering our drinking water supply, and the requirement to pump water over a longer distance to Alderney from the Avon river rather than the Stour for a period, to ensure the quality of the raw water. Other operating costs include the cost of maintaining our assets, call centre operation, billing, debt collection and administration page 25

28 Our financial results continued Employment costs including pensions We employed 205 people during the year. Our gross employment cost increased by 4% in the year. This above inflation increase is due to the one-off project to implement our new customer relationship management and billing system, and increased costs for our customer facing staff as we continue to improve customer service. Bonus payments have returned to normal levels this year following a reduction in 2013/14 in payments made to members of the management team as a result of the cryptosporidium incident. During the year, we made payments to reduce the funding deficit of our defined benefit pension scheme which closed to further accrual in Following an interim valuation at 31 March 2015, our defined benefit pension scheme had a funding surplus of 1.8 million, compared to a small deficit of 0.1 million the previous year. We ll continue to make payments in 2015/16 with the aim of the scheme becoming self-sufficient. Interest and liquidity We control interest costs on our borrowing by having our main loan ( 88.4 million) linked to inflation (RPI). This means that we ve benefited from the low level of inflation in recent years and as a result, our interest charges have fallen slightly from the previous year. We had total debt (different types of financial borrowing or loans) of 95.6 million at 31 March In addition to debt, we fund our operations through equity (shares issued by our parent company) and cash. At 31 March 2015, we held cash of 10.3 million. We make sure that we have sufficient cash in the bank to fund our operations, finance planned investment and repay our loans. Tax The total tax charge of 2.0 million shown in the table on the previous page includes a deferred tax charge of 1.2 million reflecting the change in our provision for future tax charges, which we recognise as an amount which will be paid in the future. We paid 1.0 million of corporation tax during the year, which is less than the headline rate of corporation tax, as a result of the payments we made to reduce our pension deficit and the way tax is calculated on capital investments. We don t have any tax avoidance schemes in place, nor do we have loans from other Group companies paying higher than market rates of interest. We were owned by the Sembcorp Group based in Singapore. The Group owns a number of regulated, municipal water businesses around the world and while we benefited from shared expertise, our company is domiciled in the UK for tax purposes and we abide by UK tax laws. We did not receive any specific tax advantages from having a foreign owner. On 16 April 2015, we were acquired by UK-based Pennon Group Plc. page 26

29 Our financial results continued Return on capital 6.3% The way we operate our business allows for a reasonable return on the money provided by banks and our shareholder to fund our on-going investment in water treatment works, pipes and other assets to ensure a reliable supply of good quality water for our customers. The overall return on capital was 6.3% this year. This is higher than the regulator s assumption of 5.5% when it set our prices in 2009 and is as a result of earning more revenue than anticipated and managing our operating costs well whilst providing a good service. Gearing 58.4% Our investments are funded by borrowing from banks (debt) and by shareholder capital (equity). The ratio of debt to equity, known as gearing, is critical to ensuring that the business is financed efficiently without running the risk of becoming bankrupt. We have agreements with our banks which limit our gearing to 70% of the value assigned by the regulator to the assets we use to supply water known as the regulatory capital value or RCV. However, we prudently keep our gearing below this amount, giving us some headroom in managing our borrowing. The gearing level for the company at the end of March 2015 was 58.4%, based on total net debt of 85 million and an RCV of 146 million. Dividend payments Dividends are the return to the shareholder for the use of their capital (equity). Ordinary dividends of 3.2 million were paid in the year, which is 5% of the net regulatory equity. Interest cover 3.5 times We must be able to pay the interest due on all our borrowing or risk causing the banks to demand immediate repayment of the full amount. Failure to meet interest payments would damage our reputation and our ability to borrow money elsewhere to continue to run our business. Therefore, we ensure that interest charges on the borrowing we make is more than covered by the profit we make. The measure of the number of times the profit covers the interest charges is known as the interest cover which was 3.5 times this year. Credit rating investment grade We maintained an investment grade credit rating this year, which is a requirement of our water supply licence. The credit rating presents an independent view of our financial performance and prospects and provides assurance to lenders, which would allow us to borrow more money if we needed to. page 27

30 Looking ahead Building on our solid performance over the past five years, we begin the new five-year period, , with great optimism. Based on extensive engagement with our customers, and the greatly valued insight of the Customer Engagement Planning Forum, an independent customer challenge group, we have a better understanding of what s important to our customers and are pleased to find that what we ve focused on in the past five years is generally consistent with our customers priorities. Recent investment in technology in both the operational and customer relationship management side of our business will position us well to face the challenges of the coming years. In our operations, new technology that uses operational data and modelling to optimise the way we manage water treatment and transport to reduce the amount of electricity we use, is proving beneficial. Together with projects to increase our use of renewable energy sources, and the timing of our energy use, we re beginning to see tangible results. Our investment in a leading, cutting edge customer relationship management and billing system will not only allow us to deliver a better service to our customers, but will future-proof the company against the requirements and challenges of the opening of the non-household retail market to competition from Looking forward, in delivering a reliable, safe supply of drinking water at a fair price and with due regard to our natural environment and the community we serve, we are committed to the following over the next five years: Reducing leakage from our system by a further 5% by 2020 Fixing visible leaks more quickly Helping our customers to save water and metering unmetered homes where practical Further reducing the amount of energy we use in our operations by around 8% by 2020 Increasing our work to promote a diversity of wildlife on our sites Further reducing the risk of large-scale supply interruptions Providing even better customer service, with more choice and greater flexibility Reducing our core operating costs by around 5% (after the effects of inflation) by 2020, providing slightly lower, but fair, profits and returns for our shareholder Investigating whether our customers support special tariffs for those who struggle to pay and implementing a scheme where this is supported Increasing our contribution to our local community through further volunteering and skills-sharing We plan to continue to engage with our customers, and to listen to and act on what our customers have to say. To help us achieve this and to validate our interpretation of what our customers tell us, we ve recently set up Customer View, an independent group which replaces the previous customer challenge group. Customer View will review, and where appropriate, challenge our performance as we work towards delivering what we ve said we ll deliver. We look forward to delivering an even better service to our customers and we ll continue to monitor, audit and communicate our performance at least once a year. page 28

31 Directors Report The Directors Report and accompanying Non-Statutory Financial Statements and Regulatory Accounts are prepared for Bournemouth Water Limited (formerly Sembcorp Bournemouth Water Limited), referred to as the Company throughout. Statutory Accounts are prepared for the year ending 31 December and are filed with the Registrar of Companies at Companies House. This report and the Non-Statutory Financial Statements for the year ended 31 March 2015 are required to support the Company s Regulatory Accounts, which are included on pages 102 to 132. The preparation of Regulatory Accounts is a requirement under the conditions of appointment of the Company under the Water Industry Act The Directors consider that the annual report and the audited financial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for the shareholder to assess the Company s performance, business model and strategy. Principal activities and business review The Company s main business is as a regulated water supplier serving areas of Dorset, Hampshire and Wiltshire. The Company also has a small number of non-regulated businesses that complement its regulated water business. A review of the operations for the year, with comments on the financial results and future developments, is given on pages 2 to 28. Directors and their interests The names of the Directors of the Company who served during the year and at the date that these financial statements were signed are shown on page 133. Mr J F McGown retired as Director and Chairman of the Board on 31 December Mr P J Millward, an independent Non-Executive Director, became Chairman with effect from 1 January Mrs E M Catchpole was appointed to the Board as a Non-Executive Director on 20 August 2014 and became Chairman of the Audit Committee on 1 January Mr R I Harrington resigned as Director of the Board on 31 March On 1 April 2015, Mr C R Taylor was appointed to the Board as Managing Director. Mr P J Bridgewater resigned as Director on 3 July 2014 and Mrs P J Goodwin was appointed to the Board as Finance Director on 5 January Following the acquisition of the Company by Pennon Group Plc, Mr C Loughlin and Mr G D Connell were appointed to the Board as Non-Executive Directors on 16 April On this date, Dr P D Gavens and Mr Ng M P resigned as Non-Executive Directors. Article 14 of the Company s Articles of Association requires that each Director must retire not later than the third Annual General Meeting (AGM) following his last appointment, or re-appointment, in a general meeting. In any event, at every AGM, a minimum of one third of the Directors must retire and that number includes any Directors retiring under this article. page 29

32 Directors Report continued The Directors retiring by rotation are Mr P J Millward and Mrs A C Lane; they are eligible and offer themselves for re-appointment. Mrs E M Catchpole, Mr C Loughlin, Mr G D Connell, Mr C R Taylor and Mrs P J Goodwin will be offering themselves for re-appointment due to their appointments having been made since the last AGM. These Directors are not included in the rotational Directors as they only hold office until the AGM. Dividends The Company s dividend policy is to declare dividends consistent with prudent management, maintaining sufficient cash in the business to cover foreseeable risks and liabilities. Any outperformance of the regulatory cost targets under incentive-based regulation is, in the short-term, beneficial to the shareholder and in the longer term is passed on to customers through reduced prices. Dividends declared and paid in the year amounted to 3.2 million (2014: 3.0 million). Substantial shareholdings At 31 March 2015, the ordinary share capital was 100% owned by Bournemouth Water Investments Limited (previously known as Sembcorp Bournemouth Water Investments Limited), the immediate parent company. The ultimate parent undertaking was Temasek Holdings (Private) Limited, incorporated in Singapore. The largest group in which the results of the Company were consolidated is headed by Sembcorp Industries Limited, which is based in Singapore. The role of the parent company is explained in the Corporate Governance report on page 45. On 16 April 2015, 100% of the share capital of Bournemouth Water Investments Limited was acquired by Pennon Group Plc, which is based in the UK. Financial instruments The Company finances its operations through a mixture of retained profits and borrowings. The Company does not use complex derivative financial instruments. Where it does use financial instruments these are mainly to manage the interest rate risks arising from normal operations and to raise finance for the Company s operations. The Company s financial instruments comprise borrowings, leases, cash and various items such as trade debtors and trade creditors that arise directly from its operations. The Company is exposed to interest rates and liquidity risk. The Board has reviewed the Company s exposure to these risks and has agreed the policies to manage them. These policies have remained unchanged throughout the period. The Directors consider that the Company is a going concern and that it has sufficient financial resources and facilities to enable it to carry out its regulated activities under the terms of its Licence for at least the next 12 months. page 30

33 Directors Report continued Interest rate risk The Company is exposed to interest rates and liquidity risk. The Board has reviewed the Company s exposure to these risks and has agreed the policies to manage them. These policies have remained unchanged throughout the year. The Company continually monitors its exposure to movements in interest rates in order to bring greater stability and certainty with respect to borrowing costs. In 2005 the Company decided to fix the interest on the majority of its long-term borrowings and to index the principal amount of its main loan using the RPI. This effectively provides a partial hedge as most of the Company s revenues and its Regulatory Capital Value are linked to the RPI. Surplus funds are placed on short-term deposit. These deposits have floating rates of interest, and thus there is modest exposure to interest rates. Liquidity risk The Company has strong operating cash flows. For short-term working capital purposes, the Company has access to bank facilities should these be required. The Company currently anticipates that it will be able to finance its entire capital investment programme for the next five years from its operating cash flow. Short-term flexibility is achieved by overdraft facilities whilst long-term finance is used to finance capital assets. Details of the year end position, which is in accordance with this policy, are given in note 18 of the financial statements. Profile of financial liabilities Financial liabilities are classified according to the substance of the contractual arrangements entered into. Cost risk The Company s principal exposures to price changes are in relation to the costs of power, salaries and capital goods. The Company manages its power price risk by entering into long-term contracts when appropriate. Salary awards are normally for one year and standard increases are below RPI levels overall. The cost of pension provision is also a significant factor. The Company closed its defined benefit pension scheme to future accrual from 1 June The scheme closed to new employees in All staff now have access to the same defined contribution pension scheme. The Company procures some of its operational purchases through a consortium, in cooperation with a number of other utility companies. This arrangement achieves lower prices than the Company would be able to negotiate on its own. page 31

34 Directors Report continued Health and safety The Company is committed to achieving high standards of health and safety across its business activities. Its health and safety performance for 2014/15 is discussed on page 24. The Board is aware of and accepts its role in providing leadership, and Board decisions reflect its health and safety intentions as set down in the Company s health and safety policy. The management of health and safety issues operates in the context of the policy and a system of internal control. Information, instruction, training, supervision and review are provided as appropriate. In addition the Company provides occupational health, safety and welfare advisory services to all employees. The Company encourages the reporting of events which have the potential to lead to an accident and these are monitored closely, investigated and reviewed. Health and safety is fundamental to the success of the business and the continuing development of policies and procedures is actively encouraged at all levels. The company sets a series of specific targets for improvements or areas of activity to be reviewed each year. Relationships Customers The Company endeavours to engage with customers through a range of different channels. These include booklets, the Company website ( satisfaction tracking and empathy-based post-contact surveys, along with an active local media programme. Periodically, the Company will establish customer focus groups which discuss and advise on specific issues. These are aimed at being two-way communication processes, so that customers are informed about the business. There has been an extensive programme of customer consultation and engagement in recent years. In 2012 the Company established an independent group, the Customer Engagement Planning Forum (CEPF), to challenge its engagement with customers and the interpretation of any feedback from customer research. This independent group was initially established to ensure that the business plan for the next price review period is based on sound engagement with customers. As a result of this programme the business plan for April 2015 to March 2020 fully takes account of customers views about the service and preferences for the future, and targets investment and service initiatives according to customer priorities. The Company will continue to engage with its customers, and to listen to and act on what its customers have to say during the next five-year period. We have therefore recently set up Customer View, an independent group which replaces the CEPF. Customer View will review the Company s performance as we work towards delivering what we ve said we ll deliver. Customers interests also continue to be represented by the Consumer Council for Water and the Company works closely with this important consumer body. page 32

35 Directors Report continued Customers have indicated that when they need to contact the Company they wish to speak to a person rather than an automated system. The Company is committed to continuing to develop staff and systems to ensure the best possible experience for customers. The Company has again been awarded the Customer Service Excellence standard which is a formal recognition of our commitment to continuous improvement and innovation in customer service. However, we are not complacent about the need to continuously improve customer service. Resolution of any requirements or problems on first contact from the customer remains a high priority. Where a problem cannot be resolved on initial phone contact, we aim to ensure that the customer is kept informed of progress in resolving a problem or completing an action. For a customer with genuine difficulty in paying the water bill, the full range of options is explained and the Company works with each individual to develop a suitable payment plan. As a result, the Company is an industry leader in debt management. Suppliers The Company endeavours to maintain strong, long-term and mutually beneficial arrangements with suppliers, working with them in partnership, and strictly in accordance with its Code of Business Conduct and Ethics. The Company s normal payment terms are to pay approved invoices in accordance with terms agreed with suppliers. The number of supplier days outstanding at the year end was 9 days (2014: 17 days). All supplier relationships are at arm s length and where appropriate, contracts for supply or works are formally announced in the Official Journal of the European Union (OJEU), competitively tendered, or market tested either for single capital projects or for long-term period contracts such as for network maintenance. As part of the risk management processes the Company has identified critical suppliers whose failure to supply could prejudice its ability to run the business. Contingency plans have been developed to mitigate these risks. A group of senior managers regularly reviews supplier performance, the effectiveness of policy and risks. Supplier performance is audited as part of the quality management processes. page 33

36 Directors Report continued Corporate responsibility Employment The Company is a responsible employer and aims to ensure that the workforce is properly trained, competent and motivated whilst being appropriately rewarded for their efforts. The Company uses an appraisal system to assist in the assessment and rewarding of staff. The Company was the first water company to be accredited with the Investor in People standard which has been continuously held since In 2012 the Company attained the gold level of this standard and has since maintained it. The Company has continued to create tailored employment packages where working arrangements and remuneration are as flexible as possible to take into account the individual s personal circumstances and the Company s needs. All staff are eligible for an incentive scheme which rewards financial and service performance compared to target. Staff are consulted on a wide range of issues and the Staff Consultative Group meets at least quarterly. The Company is an equal opportunities employer. No individual is considered less favourably because of their gender, age, physical or mental disability, race, nationality, ethnic origin, religion, marital status or sexual orientation. Individuals are selected and promoted on the basis of their relevant merits and abilities. The Company provides opportunities for training and career development for all employees. Environment The natural environment is central to the Company s business. The Company strives for continuous improvements in performance, the conservation of resources and the adoption of best practice with an overall aim towards sustainable development. The Company operates in a socially responsible manner to protect, conserve and improve the environment. Working practices are continually reviewed and revised to incorporate new techniques into operational activities and to ensure any environmental impact is minimised. The Company has installed photo voltaic (PV) arrays to generate renewable electricity on a number of sites and uses energy efficient equipment at its largest pumping stations. The Company is also pursuing other opportunities to reduce its carbon footprint through further efficiencies in the use of energy and through additional on-site power generation. page 34

37 Directors Report continued The community The Company engages with the local community though a variety of means. These include supporting and participating in local public events, such as providing drinking water or explaining the Company s business to stakeholders. The Company has a community volunteering initiative whereby staff may take up to three days each year from work to carry out activity in support of a range of community projects. Donations During the year the Company made charitable donations of 6,252 (2014: 13,581). In addition the Company sponsored staff and local organisations at a cost of 28,521 (2014: 6,085). No donations were made for any political purposes during the year (2014: nil). Research and development The Company engages in research and development principally through the water industry s jointly owned and funded research facilitator (UKWIR Ltd). In addition the Company commissions specialist work to evaluate or test certain propositions and works closely with academia where possible. The Company s innovations group is a mechanism for promoting and evaluating new and better ways of achieving the Company s objectives of managing costs and providing better service. As a result of research into how it operates its plant and network, the Company anticipates that it will be able to reduce its power consumption in future years. These ambitions are built into forecasts and targets for the Company and staff. Post balance sheet events On 16 April 2015, 100% of the share capital of the Company s immediate parent company, Bournemouth Water Investments Limited, was acquired by Pennon Group Plc. References to Group throughout the Non-Statutory Financial Statements and Regulatory Accounts refer to the Sembcorp Group, being the owners of the Company at the year end. There are no other material post balance sheet events that impact the 31 March 2015 financial statements. page 35

38 Directors Report continued The future The Company s focus for the future is outlined on page 28. Delivering customers priorities of reliable, safe drinking water at a fair price continues to be the key focus, in accordance with the final determination by the industry regulator Ofwat for Our customers top priority has not changed ensuring a safe supply of water for everyone both now and in the future. The Company plans well into the future in respect of ensuring sufficient availability of water. As a statutory requirement water companies are required to make plans for managing the availability of water resources for at least 25 years into the future. During the year the Company updated its long-term plans and is confident there will be enough water for the next 25 years, even though the population served is growing. Disclosure of information to the auditor The Directors who held office at the date of the approval of the Directors Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company s auditor is unaware and each Director has taken all the steps that ought to have been taken as a Director to make themselves aware of any relevant audit information and to establish that the Company s auditor is aware of that information. Auditor Following the change of ownership on 16 April 2015, it was recommended that Pennon Group Plc s group auditor, Ernst Young LLP, be appointed as auditor for Bournemouth Water Limited (formerly Sembcorp Bournemouth Water Limited) for future financial periods. As a result KPMG LLP will not be seeking reappointment as the auditor for the financial period commencing 1 April A resolution proposing the appointment of Ernst Young LLP as auditor and giving authority to the Directors to determine its remuneration will be submitted at a forthcoming Board Meeting. By order of the Board 29 June 2015 Company Secretary A T Ramsey page 36

39 Corporate Governance The Directors are committed to high standards of Corporate Governance and support the principles set out in the UK Corporate Governance Code ( the Code ), which was published in September The Company is a private company and does not list its shares on any stock exchange. However, the Company is required to conduct its regulated business as if it were a public limited company under its licence of appointment as a regulated water supplier. The Company follows the requirements of the Code in the context of being a private company with a single shareholder. As a private company providing an essential service to the public it is very important that stakeholders have confidence in the Company s approach to governance, reporting performance and transparency. Early in 2014, the economic regulator published guidelines it expects regulated companies to follow in respect of leadership, transparency and governance and the Company has published its own Code for compliance with these. Statement of compliance Bournemouth Water Limited complies with the guidelines of the economic regulator and the provisions of the Code, except for the appointment of a Senior Independent Director. Due to the size and composition of the Board, this is currently considered disproportionate. The Board has reported this compliance in detail in Leadership, transparency and governance a code for compliance, which is available on the Company s website: The Board The Board currently comprises an Independent Non-Executive Chairman, two Independent Non-Executive Directors, two other Non-Executive Directors and two Executive Directors. The Board is responsible for the Company s long-term goals and strategy, and provides overall financial and organisational control. This includes having responsibility for the internal control systems and assessing the key issues and risks impacting the business. The Board is primarily accountable to the shareholder of the Company, but also listens to the views of its other stakeholders, including lenders and other providers of capital. However, as a regulated water supplier the Board gives particularly high priority to excellent customer service and value. The Company is required to provide a safe and reliable water supply and service to its customers for the long-term benefit of all of its stakeholders. The Company has a long-term water resources plan and develops a detailed capital investment plan at least every five years to ensure that assets and underground networks are kept in a good condition, thus earning the allowed level of return set by Ofwat. page 37

40 Corporate Governance continued The roles held by the members of the Board are as follows: Name Office Executive / Non- Executive Nomination Committee Audit Committee Remuneration Committee Mr P J Millward Chairman (from 1 Non-Executive* Chairman Alternate Member January 2015) Member Mrs E M Director Non-Executive* Member Chairman Member Catchpole (appointed 20 August 2014) Mrs A C Lane Director Non-Executive* Member Member Chairman Mr C Loughlin Director Non-Executive Member (appointed 16 April 2015) Mr G D Connell Director Non-Executive Member (appointed 16 April 2015) Mr C R Taylor Managing Director Executive (appointed 1 April 2015) Mrs P J Goodwin (appointed 5 January 2015) Finance Director Executive * These are the Independent Non-Executive Directors. The Board retains full and effective control over the Company and monitors the executive management. The Board has clearly defined procedures which govern the way it operates and which outline the matters which need Board approval. The separate roles of the Board and executive management are therefore clearly defined. The Board makes strategic decisions whilst operational decisions are taken by management. There is a schedule of matters reserved for the Board, which includes: The approval of financial statements Major items of capital expenditure Authority levels for other expenditure Risk management process and monitoring of risk Approval of the strategic plan and annual operating budgets page 38

41 Corporate Governance continued The roles of Chairman and Managing Director are separated and clearly defined. The role of Chairman is an independent non-executive role. The Board considers that the Chairman has sufficient time to devote to the Company s activities. The Chairman is also a Trustee Board member of WaterAid, but holds no other significant external commitments. All Board members are required to notify the Company Secretary of other commitments. The Company Secretary keeps a Register of Interests for each Director which is regularly reviewed and updated. The Non-Executive Directors who were not Independent Directors as defined in the Code were Mr Ng M P (Executive Vice President & Head of Utilities of Sembcorp Industries) who resigned on 16 April 2015 and Dr P D Gavens (formerly Managing Director of Sembcorp Utilities (UK) Limited) who resigned on 16 April Following the acquisition of the Company by Pennon Group Plc, Mr C Loughlin (Director of Pennon Group Plc and Chief Executive of South West Water Limited) and Mr G D Connell (Non-Executive Director of Pennon Group Plc), were both appointed on 16 April Non-Executive Directors are initially appointed for a three-year term, after which their appointment may be extended upon mutual agreement. In accordance with the Company s Articles of Association, every Director is submitted for re-election at least every three years and one third of the Directors is submitted for re-election each year. The Directors are also subject to the statutory provisions relating to the removal of a Director. All Directors have access to the advice and services of the Company Secretary. The Board has established a procedure whereby Directors, wishing to do so in furtherance of their duties, may take independent professional advice at the Company s expense. The Company Secretary is also charged with ensuring that all new Board members are properly equipped to fulfil their duties and responsibilities. As part of this process, Non-Executive Directors are encouraged to meet the Executive Directors and other senior managers individually and engage in a programme of visits to all areas of the Company. All Directors are made aware of the requirements and time commitments expected in the Directors Procedures. Performance evaluation The Board undertakes a formal and rigorous evaluation of its own performance and that of its Committees and individual Directors, at least every two years. This evaluation includes individual and peer to peer questionnaires for the Board to complete. The Chairman and the Board then review the findings and agree actions. The Chairman carries out individual performance reviews with the Executive Directors every year. The evaluation of the Board and individual Directors includes consideration of the balance of skills, experience, independence and knowledge of the Company. Any term beyond six years for a Non-Executive Director is subject to a rigorous review and discussion to ensure the appropriateness of the Board. page 39

42 Corporate Governance continued Board committees The Board maintains three standing Committees, each of which operates within documented terms of reference. The terms of reference are published on the Company s website. The minutes of the Committee meetings are circulated for review and consideration by Committee members. The Committee Chairman provides a summary of the meeting at the following Board meeting. Audit Committee The Audit Committee currently comprises the Independent Non-Executive Directors under the Chairmanship of Mrs E M Catchpole. Mrs A C Lane is a member and Mr P J Millward is an alternate member. It normally meets three times a year. The Managing Director, Finance Director and senior representatives from the internal and external auditor also attend some of the meetings, as do senior managers and other staff where appropriate. The principal tasks of the Audit Committee include reviewing the internal controls, risk management processes, internal operational audit reports, external audit reports, statutory annual report and financial accounts, and the regulatory report and accounts. The Audit Committee Terms of Reference is available on the Company s website and explains the role of the Committee and its authority levels. The effectiveness of the external audit process is assessed by the Committee based on discussions with those involved in the process. KPMG were appointed as external auditor of the Company in The Committee meets with them in private, without the Executive Directors or managers, at least twice a year and considers that KPMG are providing a robust and effective review and are reporting clearly to the Audit Committee. The Committee has reviewed the calculation of the income accrual on metered sales to assess the basis of the calculation and the reasonableness of the results. This calculation was also the subject of a critical process review, instigated by the Audit Committee, which found the calculation to be effective but improved some of the controls around the process. In reviewing the recognition of costs designated as either capital or operating expenditure, the Committee has assessed the policy and discussed its application with the Executive Directors. These reviews cover the key balances in the financial accounts. The Audit Committee also considers pensions and deferred tax to be the significant issues in relation to the financial statements. The assumptions used in the calculation of both these items are reviewed by the Committee for reasonableness and consistency. External auditor s opinions on these items are sought and considered as part of that review, for example, it was noted that the assumptions used in calculating the pensions deficit were within KPMG s central estimate expectations and had been calculated by an independent actuarial consultant. No areas of concern have been identified. The Committee also monitors and reviews the effectiveness of the internal audit function, by reviewing reports from Sembcorp Group internal audit and from operational internal audit. The committee ensures that appropriate action is taken. page 40

43 Corporate Governance continued During the year the Committee reviewed the risk management process and compared the output from the risk registers both with matters receiving regular management focus and with the longer-term lower likelihood risks (those which could have a sudden impact and those which build up slowly) to ensure that appropriate prominence was being given to the most important risks. The Audit Committee and the external auditor have safeguards in place to avoid compromising the auditor s objectivity and independence. Non-audit services covering tax services, accounting advice, business planning and reports requested by Ofwat can be provided subject to approval by the Committee. The Committee has received reports from the auditor confirming their independence and objectivity. The Company engages CH2M as its independent auditor of non-financial information and accounting separation methodologies submitted to Ofwat. CH2M presents both written and verbal reports to the Audit Committee on the scope and findings of its work and on its assessment of the general control environment in the Company, as part of the Board s broader assurance of the Company s reporting and performance. The Audit Committee also reviews the Company s policy for staff raising concerns about financial and other matters, including whistleblowing. This policy is contained within the staff handbook. Any concerns are independently investigated, as appropriate. Remuneration Committee The Remuneration Committee comprises the Independent Non-Executive Directors under the Chairmanship of Mrs A C Lane. The Committee, which normally meets at least twice a year, recommends to the Board the Company s policy on Executive Director and senior executive remuneration. The Remuneration Committee Terms of Reference is available on the Company s website, and explains the role of the Committee and its authority levels. The remuneration policy is designed to attract, motivate and retain the senior executives needed and to reward them for improving efficiency, delivering excellent service to customers and enhancing value to the shareholder. The determination of their annual remuneration package is undertaken by the Committee by reviewing data in comparable companies. With approval the Executive Directors can serve as Non-Executive Directors elsewhere, provided this does not impact on their duties to the Company. During the year, the Executive Directors did not hold any remunerated non-executive directorships. The remuneration package for the Executive Directors is detailed in the Directors Remuneration Report on page 47. page 41

44 Corporate Governance continued Nomination Committee The Nomination Committee comprises the Non-Executive Directors and meets as required, but at least once a year. The Nomination Committee Terms of Reference is available on the Company s website, and explains the role of the Committee and its authority levels. The Committee is chaired by the Company Chairman and its primary function is to make recommendations to the Board on all new appointments and succession planning for Directors and other senior executives. The Committee takes into account the challenges and opportunities facing the Company and therefore the skills and expertise that are needed on the Board and in the management team in the future. The Committee also advises generally on issues relating to Board composition and balance. This includes reviewing the diversity of the members of the Board and considering how well they work together. Mr P J Millward, a current Non-Executive Director, was appointed as Chairman following the retirement of Mr J F McGown on 31 December The Nomination Committee engaged an external recruitment consultancy firm for the appointment of the Managing Director and Finance Director during the year. This firm does not have any connection with the Company. The Committee has met twice during the year to consider succession planning for both the Executive and Non-Executive Directors and the appointments to the Chairman, the Managing Director and Finance Director positions. On 16 April 2015, Mr C Loughlin and Mr G D Connell were appointed as Non-Executive Directors of the Board. Neither external search consultancy nor open advertising was used for these appointments since the appointments were to replace Mr Ng M P and Dr P D Gavens to represent the new shareholder following the acquisition of the Company by Pennon Group Plc. page 42

45 Corporate Governance continued Board and Committee attendance The Board normally meets at least six times a year. The attendance by individual Directors at scheduled meetings of the Board, Nomination Committee, Audit Committee and Remuneration Committee during the year ended 31 March 2015 is shown below: Name Board meeting Nomination Audit Remuneration Committee Committee Committee Mr P J Millward 11/11 2/2 4/4 3/3 Mr J F McGown 8/8 1/1 2/2 Mrs E M Catchpole 6/7 2/2 3/3 1/1 Mrs A C Lane 11/11 2/2 3/4 3/3 Dr P D Gavens 10/11 1/2 Mr Ng M P 5/11 0/2 Mr R I Harrington 11/11 Mrs P J Goodwin 3/3 Mr P J Bridgewater 4/4 Internal control The Directors are responsible for the Company s system of internal control. However such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable, but not absolute, assurance against material misstatement or loss. The Board confirms that there is an ongoing process for identifying, evaluating and managing significant risks faced by the Company. The process has been in place for the year under review and up to the date of the annual report and financial statements, which accords with the internal control guidance for Directors in the Code. The key components that have been established to provide effective internal control are as follows: Control environment and procedures The Company has an organisational structure with clearly defined responsibilities and limits of authority. Financial controls and procedures, including those covering information systems, are contained in detailed procedure manuals. There are clearly defined policies for capital expenditure including appropriate authorisation levels. The Executive Directors may approve budgeted capital expenditure below 250,000. All capital expenditure above 250,000 must be approved by the Board along with any forecast material overspends on a capital project. Any contract relating to operating expenditure in excess of 250,000 is also approved by the Board or by the Chairman acting under delegated powers. page 43

46 Corporate Governance continued Financial reporting The Company has a comprehensive system of financial reporting. A five-year corporate plan, including the annual budget, is approved by the Board before the start of each budget year. Monthly trading results are reported against the previous year figures and budget with any variances explained and corrective action taken when appropriate. Every quarter the forecast for the current full year is reviewed and updated. Cash flows for the following 18 months are forecast and monitored each month. Risk management The Board strategy is to follow a prudent risk management policy which manages exposure where appropriate. The identification of major business risks is carried out in conjunction with operating management and appropriate steps are taken to monitor and mitigate risks. This process includes a quarterly review and certification of the risks and mitigating controls by managers. The Board has reviewed its strategy and fully integrated the risk process into the business management planning process. All risk information has been consolidated and allocated to specific sections within the Company. The various auditing results from all internal and external sources are collected into a central compliance management system to ensure visibility and progress reporting for the Board. The Board reviews the key risks facing the business and the control measures in place. These risks are updated and are reviewed by the Board at least every six months. The Managing Director reviews the status of security on a regular basis in response to Government advice and alerts the Board of any unusual circumstances. This review includes enhancing procedures on key sites where necessary and keeping the security of computer systems under review. Monitoring systems The overall system of control is monitored by an internal audit function and a management committee, chaired by the Managing Director, on behalf of the Board. They review the systems and procedures in all aspects of the Company s business with particular focus on the areas of greatest risk to the Company. The Audit Committee reviews internal audit reports and all control recommendations from internal and external sources and approves the annual approach to compliance work. The internal audit work programme is aligned and integrated into the risk management process. Every six months the Audit Committee reports to the Board on the risk analysis and recommendations are reviewed by the Board. The Board regularly reviews the effectiveness of the system of internal control. page 44

47 Corporate Governance continued Matters reserved for the shareholder The ultimate parent of the Company was Temasek Holdings (Private) Limited. Sembcorp Industries Limited was the intermediate parent company and heads the largest group in which the results of the Company were consolidated. The shareholder was represented on the Board by Mr Ng M P. This ensured that the views of the shareholder were shared and understood by the Board. The Board agreed the annual budget and five-year plan with the shareholder. The following specific transactions, should they have occurred, which would have been be rare, would also have been discussed and agreed with the shareholder: Investment in a Company or new business Budgeted investment in single capital projects in excess of 5 million Unbudgeted investment in single capital projects in excess of 2.5 million Impairment or disposal of fixed assets and investments in excess of 1.5 million Individual sales contracts in excess of 25 million Budgeted operating expenditure transactions in excess of 2.5 million Unbudgeted operating expenditure transactions in excess of 1 million None of the above transactions occurred in the year ended 31 March The matters reserved for the shareholder will be reviewed in 2015/16 following the acquisition of the Company by Pennon Group Plc on 16 April page 45

48 Directors Remuneration Report Statement by the Chairman of the Remuneration Committee On behalf of the Board, I am pleased to present our Directors remuneration report that has been prepared in accordance with the reporting regulations for quoted companies which became effective on 1 October 2013 and Ofwat s guidance Board leadership, transparency and governance principles. The Remuneration Committee welcomes these moves towards greater transparency. This report is divided into two sections: a policy report which sets out the approach taken to remuneration; and a remuneration report which details what has been paid to the Directors during the financial year. At the start of each regulatory year, the Remuneration Committee set targets for the annual bonus of Executive Directors. This centred on management leading improvements in customer service, efficiency and operational performance, whilst ensuring financial returns which maintained investor confidence. In the year to March 2015 a number of changes to the Executive Directors have meant that this year no bonus relating to performance was payable. In February 2014 at the Board s request, having indicated his wish to retire in June 2014, Mr Roger Harrington agreed to remain in post as Managing Director until the end of March 2015 to provide continuity at an Executive level during a period without a Finance Director in post. Mr Peter Bridgewater resigned from the Company on 3 July 2014 to take up a new role and Mrs Philippa Goodwin joined the Company as Finance Director at the beginning of January As a result of Mr Harrington postponing his retirement, the Remuneration Committee agreed a terminal bonus in lieu of a performance bonus. It should also be noted that no bonus was payable in the period under review to the Finance Director, as a result of Mr Bridgewater leaving during the year and Mrs Goodwin not yet being eligible for any bonus payment. The terms of the bonus scheme outlined below are in operation for the year ending 31 March 2016 for Mrs Philippa Goodwin and Mr Bob Taylor, who became Managing Director from 1 April However this is likely to be reviewed by Pennon Group Plc following their acquisition of the Company on 16 April Angela Lane Chairman of the Remuneration Committee page 46

49 Directors Remuneration Report continued Directors remuneration policy The Company s remuneration policy is designed to attract, motivate and retain talented and experienced Directors and to reward them for improving efficiency, delivering excellent service to customers and enhancing value to shareholder. In setting the remuneration policy, the Committee takes into account the remuneration practices of similar size UK companies and those operating in the same sector. There are five elements of the remuneration package for the Executive Directors: Basic annual salary Annual bonus payments dependent on improvements in customer service, efficiency and operational performance, financial results and individual performance. The bonus is restricted to a maximum of 37.5% of basic salary Benefits in kind comprising the provision of a car and fuel or car allowance, medical insurance and telephone facilities Pension scheme Long-term incentive plan The remuneration of the Non-Executive Directors is determined by the Board by taking into account fees paid by comparable companies, and additional responsibilities. Non-Executive Directors do not participate in the Company s bonus scheme. They do not have service contracts, are not members of the pension schemes and do not receive any taxable benefits in kind. page 47

50 Directors Remuneration Report continued Executive Directors remuneration policy Purpose and link to strategy Operation Maximum opportunity Performance measures Changes for 2015/16 Salary The Company provides competitive salaries to attract, motivate and retain its Directors. Salaries also reflect experience of the individual and their role in the Company Basic salary is reviewed each year with changes based on an assessment of performance, job responsibilities and comparable pay in selected benchmark companies. The average change in salary of other employees of the Company is taken into consideration. Annual salary increases do not generally exceed the general level of increases for the Company s employees; except for where an individual s role changes or benchmarking suggests realignment is required to remain competitive. No specific performance measures, although performance is a consideration in the annual salary review. No proposed changes. Taxable benefits The Company provides benefits to attract and retain its Directors and to support them in fulfilling their duties. Taxable benefits include the provision of a Company car and fuel or car allowance, medical insurance, telephone facilities and relocation allowance. n/a n/a No proposed changes. page 48

51 Directors Remuneration Report continued Executive Directors remuneration policy continued Purpose and link to strategy Operation Maximum opportunity Performance measures Changes for 2015/16 Bonus The Company rewards the achievement of annual financial and strategic business targets, as well as the achievement of personal objectives. A new bonus scheme was implemented at the beginning of the 2013/14 financial year to reward the performance of the Executive Directors. The bonus scheme takes into account both financial results of the Company and the Sembcorp Group, the service provided to customers, efficiency and operational performance and the performance of individual Directors in achieving their objectives. The scheme assesses financial performance on the basis of the December statutory year end, and service performance for the March regulatory year end. The decision in respect of overall performance, and hence any incentive reward, is made by the Remuneration Committee in June following the completion of the regulatory reporting. The bonus awarded in the financial year is paid out over the following three regulatory years, in order to align with the longer term goals of the Company. The size of potential bonus payments is determined by financial performance, based on a weighting (two thirds to one third) of the Company and Sembcorp Group (excluding Sembcorp Marine) of actual earnings before interest and tax (EBIT) as measured against an approved budget. If both the Company and the Group achieve budget, the bonus pot for each Director is 25% of their prior year base salary. If EBIT performance exceeds budget by up to 12% the bonus pot will be increased to a maximum of 37.5% of prior year base salary. If EBIT performance is below budget by up to 12% the bonus pot will be reduced to zero. Between the budgeted upper and lower limits of 12%, the pot is pro-rated depending on actual performance. Any bonus derived by financial performance is subject to moderation. For each year the Executive Directors have a series of personal, operational, customer service and strategic performance targets which are weighted to reflect their individual roles and responsibilities. These are agreed by the Remuneration Committee. The Executive Directors are appraised at the end of the year against these performance targets and the bonus is moderated to reflect the level of attainment against the targets. The weighted split of the performance targets of the Executive Directors for the year to 31 March 2015 were: Mr R I Harrington (Managing Director): Not applicable due to terminal bonus payment Mrs P J Goodwin (Finance Director): Not applicable due to length of service Mr P J Bridgewater (former Finance Director): Not applicable due to resignation during the year The customer service performance indicators are measured against the data included in the Company s regulatory Annual Return, which replaced the June Return from 2012/13. Operational targets are measured against Company KPIs which are used by the Board to monitor performance. Personal and strategic performance is assessed for each Executive Director by the Chairman of the Board or another senior Executive Director and then reviewed and agreed by Remuneration Committee. This policy will be revised and updated in 2015/16 following the acquisition of the Company by Pennon Group Plc. page 49

52 Directors Remuneration Report continued Executive Directors remuneration policy continued Purpose and link to strategy Operation Maximum opportunity Performance measures Changes for 2015/16 Long term incentives The Executive Directors are members of the Sembcorp Industries Limited 2010 Restricted Share Plan. This emphasises the strategy of the wider Sembcorp Group. The award granted is based on the Sembcorp Group s financial performance for return on total assets and profit from operations compared with the budget in a rolling two year performance period. A minimum threshold of performance must be achieved to trigger an achievement factor which determines the number of shares to be awarded, which is between 0-150% of the conditional restricted shares awarded. There is a three year vesting period after the performance period, during which one third of the awarded shares is released each year. The Director receives the award in an equivalent cash value at the vesting date. The maximum award is 150% of the conditional restricted shares awarded. Targets are set by the Sembcorp Group based on the Group s financial performance. Following the acquisition of the Company by Pennon Group Plc on 16 April 2015, the Executive Directors ceased to be members of the Sembcorp Industries Limited 2010 Restricted Share Plan. Pensions The Company provides benefits to attract and retain its Directors. The Managing Director was a member of the Company s defined benefit pension scheme. This scheme was closed to future accrual on 1 June 2013, with members transferring to the Company s defined contribution pension scheme. The Finance Director is a member of the Company s defined contribution pension scheme from the date of joining the Company. The former Finance Director was an active member of the Company s defined contribution pension scheme up to the date of leaving the Company. He remains a deferred member of the scheme. The terms of the pension schemes are the same for the Executive Directors as for other employees of the Company. There are no individual performance measures. No proposed changes. page 50

53 Directors Remuneration Report continued Executive Directors remuneration policy continued Non-Executive Director fees are not linked to the performance of the Company. The fees paid in respect of Mr Ng M P are paid to Sembcorp Industries Limited (SIL), as part of the management charge paid to SIL, as disclosed in note 28 of the Non-Statutory Financial Statements. Differences in remuneration policy for all employees All employees of the Company are entitled to a salary, benefits and membership to the Company s defined contribution pension scheme. Some employees of the Company may also be members of the Company s defined benefit pension scheme depending on when the employee joined the scheme. The terms of the pension scheme and level of Company contributions are the same for the Executive Directors as for all employees. The employees participate in a separate bonus scheme, which is also linked to the Company s financial and service performance. There is also a separate performance related bonus scheme for the senior management team. The long-term incentive plan is only available to certain members of the senior management team. Policy for new appointments The components of remuneration packages awarded for new Directors will be in accordance with the terms of the remuneration policy detailed in the table above. The Committee s policy is to provide competitive salaries and benefits to attract the right individuals with the experience necessary to fulfil their role in the Company. The Committee will also take into account the individual s existing employment and other personal circumstances. Where the appointment requires an individual to relocate, the Company may provide one-off benefits including relocation expenses. page 51

54 Directors Remuneration Report continued Illustrations of Executive Directors remuneration policy application The bar charts below illustrate the projected remuneration for each of the Executive Directors for 2015/16 at four different levels of performance: 1. Minimum remuneration Fixed remuneration only (salary including 2% pay rise, pension and taxable benefits); no bonus payments are awarded. 2. Base level Fixed remuneration plus bonus payments resulting from the base level of business performance (<12% budgeted EBIT). 3. On-target Fixed remuneration plus bonus payments resulting from performance in line with Company expectations (at a determined percentage of maximum). 4. Maximum Fixed remuneration plus maximum bonus payments based on achieving the highest targets set for business performance (EBIT >12% above budget) and outstanding individual performance. 250 Mr C R Taylor 2015/16 Mrs P J Goodwin 2015/ % 8% 9% 83% 0% 8% 9% 83% 15% 21% 7% 6% 8% 7% 71% 66% % 8% 8% 0% 8% 8% 17% 24% 6% 6% 7% 6% % 84% 70% 64% Minimum 166,000 Base level 166,000 On-target 195,000 Maximum 210,000 0 Minimum 142,000 Base level 142,000 On-target 171,000 Maximum 186,000 Salary Pension Taxable benefits Bonus page 52

55 Directors Remuneration Report continued Service contracts and policy on payment for loss of office Executive Directors are employed with employment contracts of no fixed term and with notice periods of six months by both the Company and the individual. The Chairman and Non-Executive Directors are appointed by letters of appointment, rather than service contracts, which are kept at the Company s registered office. These appointments may be terminated by the Company at any time or by the individual with three months notice. Where an Executive Director s contract is terminated, the individual is contractually entitled to salary, pension and benefit payments in lieu of notice period. The Committee s policy is not to reward Directors for poor performance, and any termination payment would be reviewed in accordance with this policy. The Committee may also reclaim bonus payments in exceptional circumstances of misstatement or misconduct. Executive Directors have no contractual entitlement to bonus payments in the financial year in which termination occurs. The Committee will determine whether an individual is eligible for an annual bonus based on the individual s performance and circumstances. Any payment would normally be reduced to reflect the actual period of service. Long-term incentives under the Sembcorp Industries 2010 Restricted Share Plan are not normally awarded to Executive Directors in the financial year in which termination occurs. On termination, Executive Directors also forego their entitlement to deferred long-term incentive payments, in accordance with the Group s policy. The decision as to whether to make any long-term incentive payments is taken by the Sembcorp Group. However given the acquisition of the Company by Pennon Group Plc on 16 April 2015, this will not be applicable for future accounting periods. Statement of consideration of employment conditions elsewhere in the Company The general terms and conditions of employment are the same for the Executive Directors as the other employees of the Company. The Remuneration Committee did not directly consult the employees of the Company when drawing up the Directors remuneration policy. However the Committee does consider the remuneration of the employees of the Company when setting the policy and rewards for the Executive and Non- Executive Directors. The Committee also reviews the general staff salary increases and takes this into account when setting the increases in Directors pay and other benefits. page 53

56 Directors Remuneration Report continued Consideration by the Directors of matters relating to Directors remuneration The members of the Remuneration Committee and their attendance at Remuneration Committee meetings during the year are listed in the Corporate Governance Report on page 43. All members of the Committee are Non-Executive Directors. The Committee met three times during 2014/15 to determine and approve the remuneration packages of the Directors, including the new appointments in the year. The Committee did not seek external advice or services during the year. Statement of consideration of shareholder views The Chairman of the Remuneration Committee liaises with the Sembcorp Group from time to time to ensure that the Company s policy is in line with the views of the wider Group. The Committee will liaise with the Company s new shareholder, Pennon Group Plc, in respect of its policy for 2015/16 following their acquisition of the Company. Decisions regarding the long-term incentives of the Executive Directors, who are members of the Sembcorp Group s Restricted Share Plan, are made by the Sembcorp Group. page 54

57 Directors Remuneration Report continued Directors remuneration This section has been prepared in accordance with The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations This information has been audited as indicated. The remuneration of the Directors, including pension contributions, for the years ending 31 March 2015 and 2014 was as follows (audited): Salary or fees Taxable benefits Performance related bonus Non performance related bonus Long-term incentives Pensions Total Chairman: Mr P J Millward Mr J F McGown (retired 31 December 2014) Executive Directors: Mr R I Harrington Waived Mrs P J Goodwin (appointed 5 January 2015) Mr P J Bridgewater (resigned 3 July 2014) Non-Executive Directors: Mrs E M Catchpole (appointed 20 August 2014) Mrs A C Lane Dr P D Gavens Total remuneration page 55

58 Directors Remuneration Report continued Directors remuneration continued The non performance-related bonus totalling 43,000 payable to Mr Roger Harrington for the year ending 31 March 2015 represents a terminal payment in respect of his agreement to delay his retirement from June 2014 to March The performance-related bonus of 18,000 in respect of the year ending 31 March 2014 was paid to Mr Peter Bridgewater during 2014/15. Taxable benefits include the provision of a Company car and fuel or a car allowance, medical insurance, telephone facilities and relocation allowance. Pension benefits relate to the Company s defined benefit and defined contribution pension schemes. The values of the benefits are calculated in accordance with the Finance Act 2004 section 229. No payments for loss of office or payments to past Directors were made in the year ending 31 March 2015 (2014: nil). Fees paid in respect of Mr Ng M P to Sembcorp Industries Limited as part of the management charge are disclosed in the Non-Statutory Financial Statements note 28. Directors emoluments are not specifically allocated between the regulated and non-regulated businesses. Annual bonus (audited) In the year ending 31 March 2015, no annual bonus based on performance became payable for the following reasons: Mr R I Harrington (Managing Director): Not applicable due to terminal bonus payment Mrs P J Goodwin (Finance Director): Not applicable due to length of service Mr P J Bridgewater (Finance Director): Not applicable due to resignation during the financial year page 56

59 Directors Remuneration Report continued Long-term incentive plan (audited) The Managing Director was eligible to participate in the Sembcorp Industries 2010 Restricted Share Plan. The Managing Director received his award in a cash amount of equivalent value based on the share price at the vesting date. In March 2015 awards totalling 28,000 (2014: 13,000) vested, in relation to the 2011/12, 2012/13 and 2013/14 performance periods. These awards were paid in April Base value of awards held at 31 March 2014 Revaluation of awards Base value of awards granted during 2014/15 Managing Director 32 (8) 4 Value of awards vested during 2014/15 Base value of awards held at 31 March 2015 (28) Pension benefits (audited) Pension benefits relate to the defined benefit and defined contribution pension schemes. These benefits are calculated in accordance with the Finance Act 2004 section 229. The Managing Director was a member of the Company s defined benefit and defined contribution pension schemes during 2014/15. No contributions were paid in respect of the defined benefit (2014: 8,000) or defined contribution (2014: 20,000) pension schemes during the year and no pension insurance benefits were received (2014: 1,000). At 31 March 2015, the Managing Director had defined benefit pension rights of 42,000 (2014: 41,000), with a normal retirement age of 65. The Finance Director, who was appointed during the year, is a member of the Company s defined contribution pension scheme and received defined contribution pension benefits of 3,000 during 2014/15. The former Finance Director ceased to be an active member of the Company s defined contribution pension scheme during 2013/14. page 57

60 Directors Remuneration Report continued Percentage change in Managing Director remuneration The following table compares the percentage change from the previous year in the Managing Director s remuneration and the average percentage change in remuneration for all employees of the Company, who were employed for the whole of 2014/15: Salary Taxable benefits Bonus Managing Director 11% (a) 19% (b) Employees of the Company 3% 24% 60% (a) The Managing Director was awarded an additional, non-pensionable pay rise of 10% from 1 April 2014 in recognition of his agreement to postpone his retirement and remain as Managing Director until the end of March (b) The Managing Director waived his entitlement to the bonus awarded in the year to 31 March The percentage change in bonus for the employees of the Company excludes the senior management team. Relative importance of spend on pay The following table compares the percentage change in dividend payments to the shareholder (see note 12 of the Non-Statutory Financial Statements) and overall spend on pay (being net employment costs, see note 6 of the Non-Statutory Financial Statements), in the financial year: 2014/ /14 Variance Percentage change Dividend payments 3,200 3, % Employees of the Company 7,272 6, % Statement of implementation of remuneration policy in the following financial year The remuneration policy for 2015/16 has been set by the Remuneration Committee without any change to the current policy disclosed on page 48. However this is likely to be the subject of a review by Pennon Group Plc during the period to 31 March 2016, following their acquisition of the Company on 16 April The Executive Directors ceased to be eligible for long-term incentives under the Sembcorp Group Restricted Share Plan, following the acquisition of the Company by Pennon Group Plc. page 58

61 Directors Remuneration Report continued Executive Directors performance-related bonus targets for 2015/16 The maximum performance bonus pot attainable for 2015/16 is unchanged from the current financial year at 37.5% of prior year base salary. The Executive Directors bonuses for 2015/16 will be based on the following weightings: Mr C R Taylor (Managing Director): 60% service level and 40% personal performance Mrs P J Goodwin (Finance Director): 40% service level and 60% personal performance The service level performance will continue to be based mainly on the following key performance indicators (KPIs), which include Ofwat s required KPIs: Drinking water quality Reducing leakage Reducing interruptions to water supply Metering and consumption Customer service Energy consumption Debt management Supporting the natural environment Community and customer engagement The personal performance targets and weighting for Mr C R Taylor (Managing Director) for the year ending 31 March 2016 will be based on: Managing Director New organisational structure Open Water culture programme AMP6 delivery plan Board interaction with the Executive team Establish the Customer View group Renewal of special agreements Operations and engineering initiatives 15% 15% 20% 10% 10% 25% 5% 100% page 59

62 Directors Remuneration Report continued The personal performance targets and weighting for Mrs P J Goodwin (Finance Director) for the year ending 31 March 2016 will be based on: Finance Director AMP6 delivery model and plan Regulatory annual report Regulatory divisional reporting for Open Water Cost savings in line with the AMP6 plan Cultural change under the new structure Regulation impact of change and reporting requirements 20% 20% 15% 20% 15% 10% 100% page 60

63 Statement of Directors Responsibilities The Directors of Bournemouth Water Limited (formerly Sembcorp Bournemouth Water Limited) ( the Directors ) have accepted responsibility for the preparation of these Non-Statutory Financial Statements for the year ended 31 March 2015, which are intended by them to give a true and fair view of the state of affairs of the Company and of the profit or loss for that period. They have decided to prepare the Non-Statutory Financial Statements in accordance with UK Accounting Standards (UK Generally Accepted Accounting Practice), including FRS 101 Reduced Disclosure Framework and as if applicable UK law applied to them. In preparing these Non-Statutory Financial Statements, the Directors have: selected suitable accounting policies and applied them consistently; made judgements and estimates that are reasonable and prudent; stated whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and prepared the financial statements on the going concern basis as they believe that the Company will continue in business. The Directors have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities. The Directors have decided to prepare voluntarily a Directors Remuneration Report in accordance with Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 made under the Companies Act 2006, as if those requirements were to apply to the Company. The Directors have also decided to prepare voluntarily a Corporate Governance Statement as if the Company were required to comply with the Listing Rules and the Disclosure Rules and Transparency Rules of the Financial Conduct Authority in relation to those matters. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. We consider the Directors report and Non-Statutory Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for the shareholder to assess the Company s position and performance, business model and strategy. page 61

64 Independent Auditor s Report to the members of Bournemouth Water Limited Opinions and conclusions arising from our audit 1. Our opinion on the Non-Statutory Financial Statements is unmodified We have audited the Non-Statutory Financial Statements of Bournemouth Water Limited for the year ended 31 March 2015 set out on pages 66 to 101. These Non-Statutory Financial Statements have been prepared for the reasons set out in note 1 to the Non-Statutory Financial Statements and on the basis of the financial reporting framework of UK Accounting Standards (UK Generally Accepted Accounting Practice), including FRS 101 Reduced Disclosure Framework and as if applicable UK law applied to them. In our opinion the Non-Statutory Financial Statements: give a true and fair view of the state of the Company s affairs as at 31 March 2015 and of its profit for the year then ended; have been properly prepared in accordance with UK Accounting Standards; and have been prepared in accordance with the requirements of the Companies Act 2006, as if those requirements were to apply. 2. Our assessment of risks of material misstatement In arriving at our audit opinion above on the Non-Statutory Financial Statements the risks of material misstatement that had the greatest effect on our audit were as follows: Classification of costs between operating expenditure ( 32.1 million) and capital expenditure ( 10.6 million): Refer to page 40 (Report from the Audit Committee), page 73 (accounting policies) and page 83 (financial disclosures). The risk The recording of costs between operating expenses and capital expenses is one of the key judgemental areas in the preparation of the financial statements because of the significant impact this decision has on both the Company s profit and the balance sheet. In determining whether expenditure should be capitalised, the Company has formal policies in place, which outline the criteria required to be met for costs to be capitalised. These are reviewed on a regular basis by the Directors to check compliance with accounting standards. The Company s tangible fixed assets include both infrastructure and non-infrastructure assets. Initial expenditure, including employee and other internal expenditure, on both infrastructure and non-infrastructure assets is capitalised only if it is directly attributable to a tangible fixed asset, provides probable economic benefit and can be measured reliably. Subsequent expenditure is capitalised only when it is probable that additional future economic benefits will flow to the Company. All other expenditure is expensed immediately. There is therefore a high degree of judgement involved in determining whether costs meet the relevant criteria for capitalisation. page 62

65 Independent Auditor s Report to the members of Bournemouth Water Limited continued Our response In this area our audit procedures included a critical assessment of the Company s capitalisation policy, to check compliance with accounting standards, and the application of this policy to costs incurred in the year. Our testing included selecting a representative sample of projects based on the number of approved projects in the financial year, to check that the classification of expenditure is subject to review and authorisation by the Directors, and that the judgements made are appropriate, based on the nature of expenditure, and lead to an appropriate classification being made under the Company s accounting policy. We performed comparative analysis over the level and nature of employee and other internal expenditure against prior year balances and current year budget information. Revenue recognition for metered sales ( 27.7 million) and resulting accrued income ( 5.4 million): Refer to page 40 (Report from the Audit Committee), page 71 (accounting policies), page 78 and 84 (financial disclosures). The risk Revenue recognition for metered customers and the resulting accrued income is one of the key judgemental areas for the financial statements, particularly in relation to the estimation of the volume of water supplied to metered customers between the last meter reading and the end of the financial year. The calculation of revenue from metered customers and resulting accrued income derives from an estimation of volume of water used in the period, the number of customers on meters and the price per unit of water. Our response In this area our audit procedures included testing whether prices entered into the computerised sales and billing system for calculating revenue were consistent with the amounts agreed by the Company with Ofwat, and whether these amounts had been authorised by the Directors. Discrepancy reports relating to unusual variations on individual meter readings are produced and reviewed which seek to ensure that metered revenue is correctly recorded. We considered how the Company investigated variations recorded on these reports, and assessed whether the rationale outlined for the variances by the Company was appropriate based on previous periods and our knowledge of the Company and the industry. We considered the parameters on which the discrepancy reports were run. We assessed whether the automated controls built into the sales and billing system for calculating and producing sales invoices operated effectively throughout the year by testing the general IT control environment surrounding the automated systems, and observing whether the controls had operated during the year. We critically assessed the metered revenue recognised in the period, by performing analytical procedures based on known key factors including movement in customer numbers, price movements and consumption levels. We agreed that the sales and billing system had been used to calculate the accrued income calculation. We evidenced that a review had been performed by the Directors over the accrued income calculation and whether it had been calculated in accordance with the Company s accounting policies. We critically assessed the accrued income balance by considering the timing differences on a sample of customer accounts since their last meter reading, and undertook analytical procedures which considered key factors including movement in customer numbers, water consumption and price movements in the period. page 63

66 Independent Auditor s Report to the members of Bournemouth Water Limited continued 3. Our application of materiality and an overview of the scope of our audit The materiality for the Non-Statutory Financial Statements as a whole was set at 1.4 million determined with reference to a benchmark of the Company s turnover (of which it represents 3%). We report to the Audit Committee any corrected or uncorrected identified misstatements exceeding 70,000, in addition to other identified misstatements that warrant reporting on qualitative grounds. Our audit of the Company was undertaken to the materiality level specified above and was performed at the Company s head office in Bournemouth. 4. Our opinion on the Directors Remuneration Report is unmodified In addition to our audit of the Non-Statutory Financial Statements, the Directors have engaged us to audit the information in the Directors Remuneration Report that is described as having been audited, which the Directors have decided to prepare as if the Company were required to comply with the requirements of Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (SI 2013 No.1981) made under the Companies Act In our opinion the parts of the Directors Remuneration Report which we were engaged to audit have been properly prepared in accordance with SI 2013 No.1981, as if those requirements were to apply to the Company. 5. We have nothing to report in respect of matters on which we are required to report by exception Under International Standards on Auditing (ISAs) (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the Non-Statutory Financial Statements that contains a material inconsistency with either that knowledge or the Non-Statutory Financial Statements, a material misstatement of fact, or that is otherwise misleading. In particular, we are required to report to you if: we have identified material inconsistencies between the knowledge we acquired during our audit and the Directors statement that they consider that the Non-Statutory Financial Statements taken as a whole is fair, balanced and understandable and provides the information necessary for the shareholder to assess the Company s performance, business model and strategy; or the Audit Committee statement does not appropriately address matters communicated by us to the Audit Committee. In addition to our audit of the Non-Statutory Financial Statements, the Directors have engaged us to review their Corporate Governance Statement as if the Company were required to comply with the Listing Rules and the Disclosure Rules and Transparency Rules of the Financial Conduct Authority in relation to those matters. Under the terms of our engagement we are required to review: the Directors statement, set out on page 61, in relation to going concern; and the part of the Corporate Governance Statement on page 37 relating to the Company s compliance with the ten provisions of the 2010 UK Corporate Governance Code specified for our review. We have nothing to report in respect of the above responsibilities. page 64

67 Independent Auditor s Report to the members of Bournemouth Water Limited continued Respective responsibilities of Directors and auditor As explained more fully in the Statement of Directors Responsibilities set out on page 61, the Directors are responsible for the preparation of the Non-Statutory Financial Statements, which are intended by them to give a true and fair view. Our responsibility is to audit, and express an opinion on, the Non-Statutory Financial Statements in accordance with the terms of our engagement letter dated 22 June 2015 and ISAs (UK and Ireland). Those standards require us to comply with the UK Ethical Standards for Auditors. Scope of an audit performed in accordance with ISAs (UK and Ireland) A description of the scope of an audit of financial statements is provided on the Financial Reporting Council s website at This report is made subject to important explanations regarding our responsibilities, published on our website at which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinion. The purpose of this report and restrictions on its use by persons other than the Company This report is made solely to the Company in accordance with the terms of our engagement. Our audit work has been undertaken so that we might state to the Company those matters we have been engaged to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our audit work, for this report, or for the opinions we have formed. James Ledward for and on behalf of KPMG LLP Chartered Accountants Dukes Keep Marsh Lane Southampton SO14 3EX 29 June 2015 page 65

68 Non-Statutory Financial Statements Profit and Loss Account for the year ended 31 March 2015 Note Turnover 3 46,809 46,539 Operating costs 4 (32,077) (30,789) Operating profit 14,732 15,750 Non-operating income Interest receivable and similar income Interest payable and similar charges (5,120) (5,569) Profit on ordinary activities before taxation 9,842 10,485 Tax on profit on ordinary activities 11 (2,025) 380 Profit on ordinary activities after taxation 7,817 10,865 All of the Company s activities in the above periods are derived from continuing activities. Statement of Other Comprehensive Income for the year ended 31 March 2015 Note Profit for the year 7,817 10,865 Actuarial gain/(loss) on defined benefit pension scheme Movement in deferred tax relating to actuarial gain/(loss) (154) (5,692) 1,138 Other comprehensive income/(loss) for the year 615 (4,554) Total comprehensive income for the year 8,432 6,311 All items of other comprehensive income will not be reclassified to the profit and loss account. page 66

69 Non-Statutory Financial Statements continued Balance Sheet as at 31 March 2015 Fixed assets Intangible assets Tangible fixed assets Current assets Stock Debtors (including 4,379,000 (2014: 4,379,000) due after more than one year) Cash at bank and in hand Creditors amounts falling due within one year 17 Note , , , ,367 10,263 24,796 (10,913) , , , ,717 5,993 19,945 (8,390) Net current assets 13,883 11,555 Total assets less current liabilities Creditors amounts falling due after more than one year Provision for liabilities and charges Pension assets/(liabilities) ,798 (114,269) (18,641) 1, ,749 (112,922) (17,276) (58) Net assets including pension assets/(liabilities) 38,725 33,493 Capital and reserves Called up share capital Profit and loss account ,483 16,242 22,483 11,010 Equity shareholder s funds 38,725 33,493 The Non-Statutory Accounting Policies and notes 1 to 31 are an integral part of these Non-Statutory Financial Statements. Approved by the Board on 29 June 2015 and signed on its behalf by P J Millward Chairman Bournemouth Water Limited Registered Number (England and Wales) page 67

70 Non-Statutory Financial Statements continued Statement of Changes in Equity for the year ended 31 March 2015 At 1 April 2013 Effect of change in accounting policy Share capital 22,483 Revaluation reserve 4,283 (4,283) Profit & loss account 12,134 (4,435) Total 38,900 (8,718) At 1 April 2013 (restated) 22,483 7,699 30,182 Profit for the year Actuarial loss on defined benefit pension scheme Movement in deferred tax relating to actuarial loss Total comprehensive income for the year Dividends paid 10,865 (5,692) 1,138 6,311 (3,000) 10,865 (5,692) 1,138 6,311 (3,000) At 31 March ,483 11,010 33,493 Profit for the year Actuarial gain on defined benefit pension scheme Movement in deferred tax relating to actuarial gain Total comprehensive income for the year Dividends paid 7, (154) 8,432 (3,200) 7, (154) 8,432 (3,200) At 31 March ,483 16,242 38,725 page 68

71 Non-Statutory Financial Statements continued Cash Flow Statement for year ended 31 March Note Net cash inflow from operating activities 26(a) 24,057 23,599 Return on investments and servicing of finance Interest received Interest paid on finance leases Interest paid 91 (145) (2,746) 83 (231) (2,646) (2,800) (2,794) Taxation paid (1,019) (1,443) Capital expenditure and financial investments Purchase of fixed assets Sale of tangible fixed assets: operating Sale of tangible fixed assets: non-operating (11,580) (13,579) 18 (11,327) (13,561) Equity dividends paid (3,200) (3,000) Finance lease capital repaid 26(b) (1,441) (1,334) Increase in cash 26(c) 4,270 1,467 The Cash Flow Statement should be read in conjunction with the notes on page 95. The Non-Statutory Accounting Policies form an integral part of these Non-Statutory Financial Statements. page 69

72 Notes to the Non-Statutory Financial Statements 1. Accounting policies Bournemouth Water Limited (formerly Sembcorp Bournemouth Water Limited) (the Company ) is a company incorporated and domiciled in the UK. The Company is exempt by virtue of s401 of the Companies Act 2006 from the requirement to prepare group financial statements. These financial statements present information about the Company as an individual undertaking and not about its group. (a) Basis of accounting These financial statements have been prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework ( FRS 101 ). The Company has elected to early adopt the new accounting framework issued by the Financial Reporting Council. The Company meets the definition of a qualifying entity under Financial Reporting Standard 100 ( FRS 100 ). Accordingly in the year ended 31 December 2014 the Company adopted FRS 101 for the first time and has ceased to apply all UK Accounting Standards issued prior to FRS 100. The Statutory Financial Statements for the year ended 31 December 2014 were thus first-time adoption accounts that set out the transition to FRS 101. In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements of International Financial Reporting Standards as adopted by the EU ( Adopted IFRSs ), but makes amendments where necessary in order to comply with the Companies Act 2006 and has set out below where advantage of the FRS 101 disclosure exemptions has been taken. Upon transition to FRS 101, the Company applied IFRS 1 whilst ensuring that its assets and liabilities are measured in compliance with FRS 101. As a result of the change in the basis of accounting, the Non-Statutory balances for the year ended 31 March 2014 have been restated. An explanation of how the restatement to FRS 101 has affected the Non-Statutory Financial Statements of the Company is provided in note 31. IFRS 1 grants certain exemptions from the full requirements of Adopted IFRSs in the transition period. The following exemptions were taken in the 31 December 2014 transitional financial statements: Fair value or revaluation as deemed cost At 1 January 2013, previous UK GAAP revaluations were used as deemed cost for some infrastructure assets. In these Non-Statutory Financial Statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures: Comparative period reconciliations for share capital, tangible fixed assets and intangible assets; Disclosures in respect of capital management The effects of new but not yet effective IFRSs; Disclosures in respect of the compensation of key management personnel. The Company s results for the statutory year ended 31 December 2014 are included in the consolidated financial statements of Sembcorp Industries Limited, which are available to the public and may be obtained as detailed in note 27. page 70

73 Notes to the Non-Statutory Financial Statements As the consolidated financial statements of Sembcorp Industries Limited include the equivalent disclosures, the Company has also applied the following disclosure exemptions under FRS 101: Certain disclosures required by IFRS 2 Share Based Payments; Certain disclosures required by IFRS 13 Fair Value Measurement and the disclosures required by IFRS 7 Financial Instrument Disclosures. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these financial statements. Judgements made in the application of these accounting policies, that have significant effect on the financial statements, and estimates with a significant risk of material adjustment in the next year, are discussed in note 2. The Directors have considered the financial position of the Company and have concluded that it will be able to meet its liabilities as they fall due for the foreseeable future. For these purposes the foreseeable future is taken to mean a period of at least 12 months from the date of approval of these accounts. On this basis, the Directors consider it appropriate to prepare the accounts on a going concern basis. (b) Accounting convention The financial statements have been prepared under the historical cost convention as modified by the revaluation of certain financial assets and liabilities at fair value. (c) First time adoption of FRS 101 The Company s date of transition to FRS 101 was 1 January 2013 and the first-time adoption of FRS 101 was reflected in the 31 December 2014 Statutory Financial Statements. As such all comparative information in these Non-Statutory Financial Statements has been restated to reflect the Company s adoption of FRS 101, except where otherwise required or permitted by paragraphs 6 to 33 of International Reporting Standard 1 First Time Adoption of International Financial Reporting Standards (IFRS 1). The effect of this prior year restatement is shown in note 31. (d) Turnover Turnover is measured as the fair value of consideration receivable, excluding value added tax, in the ordinary course of business for services provided. Turnover is not recognised until the service has been provided to the customer. Turnover comprises regulated and non-regulated income. Regulated business turnover includes amounts billed for the year, together with an adjustment for the estimation of amounts unbilled at the year end. This accrual is estimated using a defined methodology based on historical consumption data for each customer. Turnover for the income billed annually is recognised on a time apportionment basis. Where consideration received includes payment for services to be provided in the future, an appropriate amount of monies is treated as deferred income and recognised as turnover over the period to which it relates. page 71

74 Notes to the Non-Statutory Financial Statements (e) Interest receivable and payable Interest income or expense is recognised with reference to the principal amount outstanding and the effective interest rate. (f) Foreign currency transactions Transactions in foreign currencies are translated into sterling, the Company s functional currency, at the rate of exchange on the date of the transaction. Monetary foreign currency assets and liabilities are translated into functional currency at the closing rate, at the balance sheet date. Foreign exchange differences arising on translation are recognised in the profit and loss account, within interest and similar amounts payable or receivable. (g) Taxation Current and deferred tax charges are recognised in the profit and loss, except where the tax charge relates to items which are recognised directly in equity or other comprehensive income. Current tax comprises the expected tax payable or receivable in respect of taxable profits or losses in the year plus any prior year adjustments. It is measured using the UK tax rates and laws enacted or substantially enacted at the reporting date. Deferred taxation is provided in respect of temporary timing differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred taxation is measured on a nondiscounted basis, using the UK tax rates and laws that are enacted or substantially enacted at the reporting date and are expected to apply in the periods in which the timing differences are expected to reverse. Deferred tax assets are recognised only to the extent that it is probable that there will be sufficient future taxable profits against which it can be utilised. Deferred tax assets and liabilities are offset when there is a legally enforceable right to do so, when they relate to income taxation by the same tax authority and the Company intends to settle its current tax assets and liabilities on a net basis. (h) Dividends Dividends are accounted for in the period in which they are declared and are recognised as an equity movement in the profit and loss reserve. page 72

75 Notes to the Non-Statutory Financial Statements (i) Intangible assets Intangible assets relate to computer software, capitalised price review costs and carbon reduction commitment (CRC) allowances. Software assets and price review costs are measured at cost less accumulated amortisation and any accumulated impairment losses. Amortisation is charged on a straight line basis over the useful economic life of the assets. Amortisation charges are recorded in the profit and loss account. Intangible assets are reviewed for impairment where indicators of impairment exist. The useful economic lives are estimated as follows: Software years Price review costs...5 years CRC allowances are held at cost less any accumulated impairment losses. These allowances are not amortised, but are offset against the emissions liability when it falls due. An accrual for the emissions liability is built up on the balance sheet as the emissions occur, with an expense in the profit and loss account. (j) Research and development Expenditure on research activities are expensed in the profit and loss account as they are incurred. Development costs are capitalised as intangible assets and amortised over their estimated useful economic life only if the expenditure can be measured reliably, the product is technically feasible, future economic benefits are probable, adequate resources are available to complete the development, and the Company intends to and is able to use the asset. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads that are directly attributable to preparing the asset for its intended use. Other development expenditure is recognised in profit or loss as an expense as incurred. Development activities involve applying research findings to a plan or design for the production of new or substantially improved profits or processes. The Company s development expenditure is capitalised within tangible fixed assets and intangible assets (k) Tangible fixed assets Tangible fixed assets are measured at cost less accumulated depreciation and any accumulated impairment losses. Costs are capitalised where it is probable that future economic benefits will flow to the Company and when they can be measured reliably. Capitalised costs include materials, direct labour and an appropriate proportion of related overheads, and any other costs directly attributable to bringing the assets to a working condition for their intended use. Where the Company borrows specifically for the purpose of acquiring or constructing a qualifying asset, that takes a substantial period of time to be completed for its intended use, the borrowing costs are capitalised as part of the cost of the asset. The Company ceases to capitalise borrowing costs when the asset is ready for its intended use. Subsequent expenditure relating to tangible fixed assets that have already been recognised is added to the carrying amount of the asset when it is probable that additional future economic benefits will flow to the page 73

76 Notes to the Non-Statutory Financial Statements Company. All other subsequent expenditure is recognised as an expense in the profit and loss account in the period that it is incurred. Infrastructure assets are held at cost (or at deemed cost for certain infrastructure assets as a result of previous transition to FRS 101, see note 31). Investment expenditure is capitalised where it relates to new infrastructure or the expansion of existing infrastructure and as a result it is probable that future economic benefits will flow to the Company. Maintenance and repair expenditure is expensed in the profit and loss account as it arises. Geographic Information Systems infrastructure expenditure is also expensed as it is incurred. Depreciation is charged to the profit and loss account on a straight-line basis over the useful economic life of each asset to reduce its carrying amount to the estimated residual value. Infrastructure assets are estimated to have zero residual value at the end of their useful economic life. Freehold land and easements are not depreciated. Assets in the course of construction are not depreciated until they are commissioned. The useful economic lives of the classes of tangible fixed assets are estimated as follows: Infrastructure assets: Mains...80 years Communication pipes...40 years Boundary boxes...40 years Other assets: Property and service reservoirs years Office equipment years Plant and equipment years Motor vehicles years If different parts of a tangible fixed asset have different useful lives, they are accounted for as separate assets. The useful economic lives and residual values of assets are reviewed at the year end. If any changes are determined these are accounted for as a change in accounting estimate in accordance with IAS 8. Assets are derecognised on disposal or when no future economic benefits are expected to flow to the Company through its use or disposal. Any gains or losses on disposal are determined as the difference between the net disposal proceeds and the carrying amount of the asset, and are recognised in the profit and loss account on the date of disposal. (l) Developer contributions Cash contributions are received from developers in respect of the infrastructure network, including charges made as a result of new connections to the water network. Contributions are recognised as deferred income and released to the profit and loss account as turnover over the useful economic life of the assets to which they relate. Contributions received in respect of expenses incurred by the Company are recognised against the operating costs in the profit and loss account in the period they become receivable. page 74

77 Notes to the Non-Statutory Financial Statements (m) Leased assets Tangible fixed assets acquired under a leasing agreement which transfers substantially all of the risks and rewards of ownership to the Company, as lessee, are treated as a finance lease. These assets are capitalised and the net obligations resulting are shown as liabilities. The assets and liabilities are recognised at the lower of the fair value and the present value of the minimum lease payments, discounted using the interest rate implicit to the lease. The assets are depreciated over their estimated useful lives. The interest element of the lease payments is charged to the profit and loss account so as to produce a constant periodic rate of charge on the outstanding capital balance. A lease which does not transfer substantially all of the risks and rewards of ownership of the assets to the Company is treated as an operating lease. Lease payments arising under operating leases are charged to the profit and loss account in the year they are incurred. (n) Stocks Stocks and work in progress are recorded at the lower of cost, which includes an appropriate proportion of overheads, and net realisable value. In accordance with established practice in the water industry no value has been placed upon the water in reservoirs, mains and in the course of treatment. (o) Financial instruments All of the Company s financial instruments are non-derivatives. The Company has the following financial instruments: Loans and borrowings Loans and borrowings are initially recognised at fair value, net of transaction costs incurred, and are subsequently measured at amortised cost using the effective interest rate method. The Company recognises loans and borrowings on the date that they originate. The Company s loans and borrowings consist of an index-linked loan, fixed rate perpetual debentures, a fixed rate finance lease and a variable rate finance lease. The carrying value of the index-linked loan is adjusted twice a year for the movement in the retail price index. The change in value arising from indexation is recognised in the profit and loss account as it arises. The Company has a loan owed by group undertakings. Interest is charged at commercial rates linked to the Bank of England base rate. Trade and other debtors Trade and other debtors are initially recognised at fair value and subsequently measured at amortised cost using the effective interest rate method, less any impairment losses. The Company recognises trade and other debtors on their trade or issue date. Trade debtors do not bear any interest. A provision for impairment of trade debtors is established based on experience of debt collection for each type of customer and knowledge of individual customers. page 75

78 Notes to the Non-Statutory Financial Statements Trade and other creditors Trade and other creditors are initially recognised at fair value and subsequently measured at amortised cost using the effective interest rate method. The Company recognises trade and other creditors on their trade or issue date. Trade creditors do not bear any interest. Cash and cash equivalents Cash and cash equivalents include short-term bank deposits. The Company derecognises a financial asset when the contractual rights expire or it transfers substantially all of the risks and rewards of ownership and ceases to retain control. The Company derecognises a financial liability when the contractual obligations are discharged, cancelled or expire. Financial assets and liabilities are offset, and the net amount is presented in the financial statements, only when the Company has a legal right to offset the amounts and intends to either settle them on a net basis or realise them simultaneously. (p) Impairment of assets Assets are reviewed for impairment when an indicator of impairment exists. Assets are assessed for indicators of impairment at the end of the reporting period. An asset is impaired if its recoverable amount is estimated to be lower than its carrying amount, and the carrying value is reduced to the recoverable amount. The recoverable amount is the higher of fair value less costs to sell or estimated value in use. Impairments are recognised immediately in the profit and loss account. (q) Retirement benefit obligations Defined benefit pension scheme The Company is the sponsoring employer of the Sembcorp Bournemouth Retirement and Security Scheme (SBRASS) defined benefit pension scheme. The net defined benefit pension asset or liability is disclosed on the balance sheet. Defined benefit pension scheme assets are measured at fair value based on the bid price of the assets. Defined benefit pension scheme liabilities are measured by an independent actuary using the projected unit credit method and discounted to determine the present value, using a rate set with reference to AA rated corporate bonds. Differences between the actual and expected returns on assets and experience gains and losses arising on scheme liabilities during the year, together with differences arising from changes in assumptions and movements in minimum funding requirements are recognised as actuarial gains and losses in other comprehensive income. The current service cost is the increase in the present value of the scheme liabilities expected to arise from employee service in the current period. This is expensed to the profit and loss account as an operating cost, within employment costs. Administration expenses are recorded in operating costs in the profit and loss account. The net interest income or cost is based on the net defined benefit asset or liability and the discount rate. The net amount is recognised within interest payable or receivable. page 76

79 Notes to the Non-Statutory Financial Statements Defined contribution pension scheme Contributions to the defined contribution pension scheme are expensed to the profit and loss account in the period that they fall due. Differences between contributions payable in the period and contributions actually paid are recorded as an accrual or prepayment on the balance sheet. (r) Share based payments Sembcorp Industries Limited operates a share based compensation plan, in which a number of the Company s Directors and employees participate. The scheme is cash-settled for the Company s members. The Company s liability due under the share based payment scheme is measured at fair value at the grant date. The fair value of the liability is remeasured at the end of the reporting period and at the settlement date, with changes in fair value recognised in the profit and loss account. The Company has applied the FRS 101 exemption from disclosing certain requirements of IFRS 2 Share Based Payments. 2. Significant accounting judgements and key sources of estimation uncertainty Judgements and estimates are required in the process of applying the Company s accounting policies based on available information, which may have a significant effect on the financial statements or a significant risk of material adjustment in the following year. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and any future periods affected. Key areas of judgement and sources of estimation uncertainty: Carrying amount of tangible fixed assets and intangible assets The depreciation and amortisation charges, and hence the carrying amount, of tangible fixed assets and intangible assets are determined based on the estimated useful economic lives of the assets. These estimates are based on advice from independent engineers and the Company s experience of similar assets. Unbilled income Turnover is accrued for metered customers water consumption which has not been billed at the year end. Where meter readings have not been taken estimates are made for the number of units of water supplied to each customer between their last meter read and the reporting date. These estimates are based on a defined methodology that includes historic consumption data, knowledge of the customer and the property type. Provisions for recoverability of trade debtors Bad debt provisions for the recoverability of trade debtors are estimated based on experience of recovery of outstanding debts for a particular type of customer and knowledge of individual customers. Defined benefit pension obligations Determining the Company s defined benefit pension obligations and scheme assets requires assumptions to be made including price inflation, pension and salary increases, the level of contributions, the discount rate used in assessing scheme liabilities, mortality and other demographic assumptions. These assumptions are largely dependent on factors outside of the Company s control; further details are included in note 20. page 77

80 Notes to the Non-Statutory Financial Statements 3. Turnover 2015 Measured water supply Unmeasured water supply Other water income Release of deferred income for developer contributions Non-water income Regulated income Non-regulated income 27,654 11,480 5, ,260 1, ,054 12,031 5, ,934 1,605 Total 46,809 46,539 The principal activity of the Company is as a regulated water supplier serving areas of Dorset, Hampshire and Wiltshire. All activities take place within the UK. 4. Operating costs Materials, consumables and other costs Net employment costs Amortisation of intangible assets Depreciation of tangible fixed assets Operating lease rentals Auditor s remuneration Profit on disposal of fixed assets Note ,680 7, , (81) ,006 6, , (18) Total 32,077 30, Auditor s remuneration 2015 Audit of statutory financial statements Audit of regulatory financial statements Non-Statutory assurance services Other Total In 2015 the Non-Statutory assurance services of 21,000 related to the 2014 regulatory price review (2014: 5,000). Other services of 134,000 related to facilitating the development and implementation of the Company s retail strategy for the opening of the non-household water market to competition in page 78

81 Notes to the Non-Statutory Financial Statements 6. Staff numbers and costs 2015 Employment costs Wages and salaries Social security costs Pension costs Gross employment costs Less capitalised to fixed assets 6, ,205 (933) , ,876 (1,239) Net employment cost 7,272 6,637 The average number of employees during the year Average number of employees by category: Customer service Water operations Technical services Finance and support Management Non-regulated Total All employees were based in the UK. 7. Directors remuneration 2015 Directors emoluments Amounts receivable under long-term incentive schemes Pension contributions Total The aggregate emoluments of the highest paid Director were 232,000 (2014: 186,000). The highest paid Director was a member of the Company s defined benefit and defined contribution pension schemes during 2014/15. No contributions were paid in respect of the defined benefit (2014: 8,000) or defined contribution (2014: 20,000) pension schemes during the year and no pension insurance benefits were received (2014: 1,000). At 31 March 2015, the Managing Director had defined benefit pension rights of 42,000 (2014: 41,000). Two Directors have retirement benefits accruing (2014: two). In addition to the emoluments above, the highest paid Director participated in the Sembcorp Group long-term incentive plan and had an accrued benefit with an approximate sterling value at 31 March 2015 of nil (2014: 32,000). The highest paid Director in this period is the same as in the previous period. page 79

82 Notes to the Non-Statutory Financial Statements 8. Non-operating income In 2014/15 the Company recognised income from a non-refundable deposit of 115,000 (2013/14: nil) in respect of a potential sale of land which is not proceeding. The deposit was to ensure exclusivity during discussions. 9. Interest receivable and similar income Short-term and bank deposits Group interest receivable Interest receivable Net interest on defined benefit pension scheme Total Interest payable and similar charges Artesian loan interest Artesian loan indexation Artesian loan amortisation of fees Finance lease agreements interest Finance lease agreements amortisation of fees Perpetual debenture stocks Other 2,735 2, ,648 2, Interest payable 5,109 5,545 Net foreign exchange loss Total 5,120 5,569 page 80

83 Notes to the Non-Statutory Financial Statements 11. Taxation Current tax Corporation tax based on profit for the year at 21% (2014: 23%) Adjustment in respect of prior years Deferred tax Origination of temporary differences Adjustment in respect of prior years Adjustment in respect of corporation tax rate changes ,628 (291) 814 1,337 1,261 (50) (2,550) 1,211 (1,717) Tax on profit on ordinary activities 2,025 (380) The most significant impact of the Company s conversion to FRS 101 is the change in tax treatment for contributions received from developers. Certain amounts that had been taxed in previous years will now be recognised as profits taxed in future periods. To prevent such items being taxed twice, the tax already paid on such items is repayable. This results in a current tax credit of 1,518,000 and a deferred tax charge of 1,412,000, which are included in the above tax charge. The tax assessed for both years is different to the standard rate of corporation tax in the UK of 21% (2014: 23%). The differences are explained below: Profit on ordinary activities before taxation 9,842 10,485 Tax using the standard rate of UK corporation tax of 21% (2014: 23%) Adjusted by: Expenditure not deductible for tax purposes Adjustments to tax charge in respect of prior periods Adjustments in respect of corporation tax rate changes Other 2, (198) 2, (39) (2,550) (288) Current tax charge for the year 2,025 (380) The March 2013 Budget announced reductions to the main rate of UK corporation tax to 20% by A reduction in the rate from 23% to 21% (effective from 1 April 2014) and a further reduction to 20% (effective from 1 April 2015) were substantively enacted on 2 July This will reduce the Company s future current tax charge accordingly. The effect of these reductions has been included in these financial statements, with the deferred tax liability calculated based on the rate of 20% substantively enacted at the balance sheet date. page 81

84 Notes to the Non-Statutory Financial Statements 12. Dividends April (9.8p per share; 2014: nil per share) December (4.4p per share; 2014: 13.3p per share) 2,200 1,000 3,000 Total (14.2p per share; 2014: 13.3p per share) 3,200 3, Intangible assets Cost 1 April 2014 Additions Software 5, Other 1, Total 7,215 1, March ,335 1,940 8,275 Depreciation 1 April 2014 Charge in the year 3, , March , ,895 Net book amount 31 March ,017 1,363 3,380 1 April , ,865 Other assets comprise capitalised cost for the price reviews and carbon commitment certificate allowances. Intangible assets include 1,111,000 relating to assets in the course of construction (2014: 2,064,000). This relates to software nil (2014: 1,352,000) and the 2014 price review 1,111,000 (2014: 712,000). page 82

85 Notes to the Non-Statutory Financial Statements 14. Tangible fixed assets Cost 1 April 2014 Additions Disposals Freehold land 1,306 Property & service reservoirs 37,563 1,640 (17) Plant & equipment 87,791 4,847 (356) Raw water storage 9,497 Infrastructure assets 102,974 3,667 Office equipment 3, Motor vehicles 2, (401) Total 245,119 10,567 (774) 31 March ,306 39,186 92,282 9, ,641 3,760 2, ,912 Depreciation 1 April 2014 Charge in the year Disposals , (12) 53,273 3,958 (319) ,915 1,423 2, , (386) 95,790 7,304 (717) 31 March ,776 56,912 1,680 28,338 3,113 1, ,377 Net book amount 31 March ,306 28,410 35,370 7,817 78, ,535 1 April ,306 27,535 34,518 8,624 76, ,329 Tangible fixed assets include 3,761,000 of assets in the course of construction (2014: 3,910,000). This relates to property and service reservoirs 1,057,000 (2014: 1,293,000), plant and equipment 1,797,000 (2014: 2,499,000), infrastructure 903,000 (2014: nil) and office equipment 4,000 (2014: 118,000). The Directors have reviewed the carrying amounts of tangible fixed assets at 31 March 2015 and do not believe them to be impaired. Included in the above are finance leased assets. Finance leased assets Property & service reservoirs Plant & equipment Office equipment Motor vehicles Total Cost 1 April 2014 and 31 March ,540 8, ,356 Depreciation 1 April 2014 Charge in the year 3, , , March ,306 6, ,614 Net book amount 31 March ,234 2,508 7,742 1 April ,342 2,828 8,170 There are no assets financed by leasing or under construction (2014: nil) in the non-regulated business. page 83

86 Notes to the Non-Statutory Financial Statements 15. Stock 2015 Raw materials and consumables Work in progress Total Debtors 2015 Trade debtors Accrued income Amounts owed by Group companies Other debtors Taxation and social security Corporation tax Prepayments 3,470 5,360 4, ,994 5,004 4, Total 14,367 13,717 Accrued income represents an estimate of the value of water delivered to metered customers but not billed at 31 March Amounts owed by Group companies include a loan of 4,379,000 due after more than one year (2014: 4,379,000). Trading balances owed by Group and related parties are unsecured, interest free and paid in the normal course of events. Loans to Group and related parties are unsecured, bear interest at commercial rates and are repayable on demand subject to the notice period. 17. Creditors: amounts falling due within one year 2015 Net obligations under finance leases Payments on account Trade creditors Amounts owed to Group undertakings Other creditors Taxation and social security Corporation tax Accruals and deferred income 1,508 3, , ,461 2,185 1, ,819 Total 10,913 8,390 Trading balances owed to Group and related parties are unsecured, interest free and paid in the normal course of events. page 84

87 Notes to the Non-Statutory Financial Statements 18. Creditors: amounts falling due after more than one year 2015 Bank loans Net obligations under finance leases Perpetual debentures Deferred income 88,408 5, , ,195 7, ,541 Total 114, ,922 Analysis of borrowings Borrowings are repayable as follows: Due within one year Finance leases Deferred financing costs ,523 (15) ,476 (15) Total due within one year 1,508 1,461 Due within one to five years Finance leases Deferred financing costs 3,084 (60) 3,772 (60) Sub-total due within one to five years 3,024 3,712 Due after five years: instalment debt Finance leases Deferred financing costs Due after five years: non-instalment debt Bank loans Deferred financing costs Perpetual debentures 2,562 (40) 88,892 (484) 162 3,367 (55) 86,705 (510) 162 Sub-total due after five years 91,092 89,669 Total due after more than one year 94,116 93,381 On 20 April 2005, the Company borrowed 65,000,000 from Artesian Finance Plc. The loan is due for repayment on 30 September The loan interest is calculated by adjusting the value of the loan by the movement in the Retail Prices Index (RPI) and charging interest on this amount at 3.084% for the duration of the loan. Interest is payable every six months on 30 September and 31 March. The capital value of the loan is adjusted by the change in the RPI every six months. The Company has a 1,000,000 overdraft facility with Lloyds Bank Plc (2014: 1,000,000). The undrawn facility at 31 March 2015 was 1,000,000 (2014: 1,000,000). This facility is available to 28 February 2016, when it is expected to be rolled over. The Company has a 20-year finance lease with RBS of which 729,000 (2014: 1,481,000) was outstanding at 31 March The lease has one year remaining and repayments of the principal and interest are made annually in January. Interest is based on the three-month LIBOR rate. page 85

88 Notes to the Non-Statutory Financial Statements 18. Creditors: amounts falling due after more than one year continued The Company signed a 10-year finance lease with HSBC in November 2012 of which 6,325,000 (2014: 7,004,000) was outstanding at 31 March The lease has eight years remaining and repayments of the principal and interest are made annually in November. Interest is at a fixed rate of 2.96%. The perpetual debentures consist of 88,000 at 4% per annum and 74,000 at 5% per annum. Interest rate risk and profile of financial liabilities Currency and interest rate profiles of the Company s financial liabilities at 31 March 2015 were: Currency Period Fixed interest rate % Fixed rate Floating rate Total Artesian loan Debentures Debentures RBS finance lease HSBC finance lease Sterling Sterling Sterling Sterling Sterling 19 years Perpetual Perpetual 1 year 8 years , , , ,325 94, ,624 Currency and interest rate profiles of the Company s financial liabilities at 31 March 2014 were: Currency Currency Period Artesian loan Debentures Debentures RBS finance lease HSBC finance lease Sterling Sterling Sterling Sterling Sterling 20 years Perpetual Perpetual 2 years 9 years Fixed interest rate % Fixed rate 86, ,004 Floating rate 1,481 Total 86, ,481 7,004 93,361 1,481 94,842 Floating rate borrowings bear interest based on the short-term LIBOR rate prevailing at the time. The Company s obligations under finance leases are payable as follows: Within one year Within one to five years After five years Minimum lease payments 1,634 3,619 2, Minimum 2014 Interest Principal lease payments Interest ,445 3,084 2,562 1,634 4,386 3, Principal 1,393 3,772 3,367 7, ,091 9,640 1,108 8,532 page 86

89 Notes to the Non-Statutory Financial Statements 19. Deferred tax assets and liabilities Movements in deferred tax assets and liabilities during the year ended 31 March 2015: At 1 April 2014 Recognised in profit or loss Recognised in equity At 31 March 2015 Deferred tax assets Deferred income 2,617 (1,300) 1,317 Deferred tax liabilities Tangible fixed assets Intangible assets Employee benefits 2,617 (1,300) 1,317 (19,668) (237) (64) (225) (154) (19,290) (301) (367) (19,893) 89 (154) (19,958) Total (17,276) (1,211) (154) (18,641) Movements in deferred tax assets and liabilities during the year ended 31 March 2014: Deferred tax assets Deferred income Employee benefits Deferred tax liabilities Tangible fixed assets Intangible assets At 1 April ,911 (999) Recognised in profit or loss (294) (127) Recognised in equity 1,138 At 31 March , ,912 (421) 1,138 2,629 (22,113) 70 2,445 (307) (19,668) (237) (22,043) 2,138 (19,905) Total (20,131) 1,717 1,138 (17,276) page 87

90 Notes to the Non-Statutory Financial Statements 20. Retirement benefit obligations The Company operated two Sembcorp Bournemouth Retirement and Security Scheme (SBRASS) pension schemes; a defined contribution scheme and a defined benefit scheme. (a) Defined contribution scheme The Company s defined contribution pension scheme was set up in February 2003 and is open to all employees of the Company. Following the closure of the defined benefit pension scheme to further accrual, see below, employees were transferred into the defined contribution pension scheme. As a result, defined contribution pension costs charged to the profit and loss account increased to 816,000 (2014: 650,000). At 31 March 2015 there were no accrued pension costs (2014: nil). (b) Defined benefit scheme The Company is the sponsoring employer in the defined benefit SBRASS pension scheme, which includes employees of AquaCare (BWH) Limited, Sembcorp Utilities Services Limited and Sembcorp Industries Limited, therefore it recognises the cost and net pension asset or liability in full. The scheme therefore exposes the Company to actuarial risks associated with current and former employees of other employers. On 17 February 2003 the defined benefit scheme was closed to new entrants and replaced by the Company s defined contribution scheme. On 1 June 2013 the defined benefit section closed to further accrual and an active deferred member category was created for members who chose to retain the salary link. Role of Trustees The Scheme is managed by a board of Trustees which is legally separate from the Company. The Trustees comprise representatives appointed by both the employer and employees. The Trustees are required by law to act in the interest of all beneficiaries and are responsible in particular for the asset investment policy plus the day to day administration of the scheme. They also are responsible for jointly agreeing with the employer the level of contributions due to the Scheme. Funding requirements UK legislation requires that pension schemes are funded prudently (i.e. to a level in excess of the current expected cost of providing benefits). The last funding valuation of the Scheme was carried out by a qualified actuary as at 31 March The next funding valuation is required by law with an effective date no later than 31 March Subsequent valuations are required at intervals of no more than three years thereafter. Following each valuation, the Trustees and the Company must agree the contributions required (if any) to ensure the Scheme is fully funded over time on a suitable prudent measure. Contributions agreed in this manner constitute a minimum funding requirement. Under the current funding plan for the Scheme, additional contributions of approximately 1.3 million per annum are payable towards the deficit until 31 October 2015, with additional contributions of approximately 0.5 million per annum payable until 31 December 2019 and 0.3 million per annum payable until 31 March These contributions reflect the Company s aim for the scheme to move towards a self sufficient level of funding. In the year ended 31 March 2015 the Company paid additional contributions of 1,264,000. Under the governing documentation of the Scheme, any future surplus in the Scheme would be returnable to the Company by refund, assuming gradual settlement of the liabilities over the lifetime of the Scheme. page 88

91 Notes to the Non-Statutory Financial Statements 20. Retirement benefit obligations continued (b) Defined benefit scheme continued Regulation The UK pensions market is regulated by the Pensions Regulator whose key statutory objectives in relation to UK defined benefit schemes are: to protect the benefits of members; to promote, and to improve understanding of good administration; and to reduce the risk of situations arising which may lead to compensation being payable from the Pension Protection Fund (PPF). The Pensions Regulator has sweeping powers including the powers: to wind up a scheme where winding up is necessary to protect members interests; to appoint or remove a trustee; to impose a schedule of company contributions or the calculation of the technical provisions where a trustee and company fail to agree on appropriate contributions; and to impose a contribution where there has been a detrimental action against a scheme. Actuarial assumptions The significant actuarial assumptions in the most recent actuarial valuation were as follows: 31 March September 2011 Valuation method Salary growth Price inflation Investment returns pre retirement post retirement Market value 3.75% per annum 2.50% per annum 4.20% per annum 4.20% per annum Market value 3.45% per annum 2.20% per annum 4.25% per annum 4.25% per annum The actuarial valuation at 31 March 2014, by an independent qualified actuary, showed that the market value of that part of the Scheme assets relating to the business was 76.0 million. The actuarial value of the assets was sufficient to cover 99% of the value of benefits that had accrued to members, allowing for assumed future pay and pensions increases. The following amounts at 31 March 2015 were measured in accordance with the requirements of IAS 19. The main financial assumptions used in the valuation of the liabilities of the Company s pension scheme under IAS 19 are: 2015 Per annum 2014 Per annum 2013 Per annum Rate of increase in salaries Rates of increase to pensions in payment (RPI min 3% max 5%) Rates of increase to pensions in payment (RPI max 2.5%) Discount rate Price inflation RPI Price inflation CPI 3.40% 3.60% 2.20% 3.20% 3.15% 2.15% 3.40% 3.70% 2.10% 4.20% 3.40% 2.40% 3.65% 3.70% 2.10% 4.50% 3.40% 2.40% Other assumptions are in line with the 30 September 2011 actuarial valuation as noted above, as the 31 March 2014 actuarial valuation was not approved until after the 31 March 2015 year end. page 89

92 Notes to the Non-Statutory Financial Statements 20. Retirement benefit obligations continued (b) Defined benefit scheme continued The mortality assumptions are based on standard mortality tables which allow for expected future mortality improvements. The assumptions are that a member currently aged 65 will live on average for a further 22.3 years if they are male and a further 24.3 years if they are female. For a member who retires in 2024 aged 65, the assumptions are that they will live on average for a further 24.0 years after retirement if they are male and a further 26.2 years after retirement if they are female. Defined benefit pension asset/(liability) The fair value of the Scheme assets, a breakdown of the assets into the main classes, the present value of defined benefit obligations (DBO) and the net pension asset/(liability) are set out below: Equities Properties Bonds: corporate Bonds: gilts Cash Fair value of Scheme assets Present value of defined benefit obligation ,490 6,248 19,074 34, ,488 (86,651) ,991 5,786 17,510 26,493 3,350 76,130 (76,188) Net pension asset/(liability) 1,837 (58) All equity securities and government bonds have quoted prices in active markets. All other plan assets are not quoted in an active market. The plan assets do not include any of the Company s own financial instruments or other assets, nor any property occupied by the Company. Changes in the present value of the DBO are as follows: Present value of DBO at 1 April Current service cost Interest cost Contributions by Scheme participants Contributions by Sembcorp Utilities Services Limited Actuarial losses/(gains) arising from: Changes in demographic assumptions Changes in financial assumptions Experience adjustments Benefits paid ,188 3, ,939 (510) (3,636) , , ,468 1,216 (3,456) Present value of Scheme liabilities at 31 March 86,651 76,188 page 90

93 Notes to the Non-Statutory Financial Statements 20. Retirement benefit obligations continued Changes in the fair value of the Scheme assets are as follows: Fair value of Scheme assets at 1 April Expected return on Scheme assets Actuarial gain/(loss) Contributions by the employer Contributions by Sembcorp Utilities Services Limited Contributions by Scheme participants Administration costs Benefits paid ,130 3,148 11,744 1,264 (162) (3,636) ,938 3,417 (2,008) 1, (214) (3,456) Fair value of Scheme assets at 31 March 88,488 76,130 Actual return on Scheme assets 14,892 1,409 Profile of the Scheme The DBO includes benefits for deferred members and current pensioners: Value of current employees benefits Value of deferred members benefits Value of pensioner members benefits ,157 18,435 44, ,489 15,235 40,464 Total 86,651 76,188 The Scheme s duration is an indicator of the weighted-average time until benefit payments are made. For the Scheme as a whole, the duration is around 16 years. page 91

94 Notes to the Non-Statutory Financial Statements 20. Retirement benefit obligations continued (b) Defined benefit scheme continued Risks and sensitivity analysis The Scheme exposes the Company to a number of risks, the most significant of which are: Volatile asset returns: The DBO is calculated using a discount rate set with reference to corporate bond yields. If assets underperform this discount rate, this will create an element of deficit. The Scheme holds a proportion (40%) of assets in growth assets (such as equities) which, although expected to outperform corporate bonds in the long term, create volatility and risk in the short term. The allocation to growth assets is monitored to ensure it remains appropriate given the Scheme s long-term objectives. The Scheme also uses gilts and bonds to partially match the discount rate and mitigate some of the change in the DBO. Changes in bond yields: A decrease in corporate bond yields may increase the value placed on the DBO for accounting purposes, although this will be partially offset by an increase in the value of the Scheme s bond holdings. Inflation risk: A significant proportion of the DBO is indexed in line with price inflation (specifically inflation in the UK Consumer Price Index and Retail Prices Index) and higher inflation will lead to higher liabilities (although, in most cases, this is capped at an annual increase of 5%). Life expectancy: The majority of the Scheme s obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the liabilities. There are a number of other risks of running the Scheme including operational risks (such as paying out the wrong benefits), legislative risks (such as the Government increasing the burden on pension provision through new legislation) and other demographic risks (such as a higher proportion of members dying than assumed with a dependant eligible to receive a survivor s pension from the Scheme). The key assumptions for the DBO are discount rate, inflation and mortality. If different assumptions were used, this could have a material effect on the results disclosed. The sensitivity of the results to these assumptions are as follows: Present value of DBO Present value of DBO following: 0.1% decrease in the discount rate 0.1% increase in the discount rate 0.1% decrease in the inflation assumptions 0.1% increase in the inflation assumptions 1 year decrease to life expectancy 1 year increase to life expectancy ,651 87,858 85,460 86,224 86,876 83,771 89, ,188 77,362 75,032 75,479 76,904 73,736 78,606 page 92

95 Notes to the Non-Statutory Financial Statements 20. Retirement benefit obligations continued (b) Defined benefit scheme continued The expenses recognised in the profit and loss account are as follows: Operating costs: Current service cost Administration expenses Interest and similar charges: Interest on net defined benefit liability (24) (221) Fair value of Scheme assets at 31 March Actuarial gains and losses are reported in the statement of comprehensive income. 21. Share-based payments Some of the Directors and employees of the Company participated in Sembcorp Industries Limited s Restricted Share Plan (SCI RSP 2010). This share plan is intended to increase the Group s flexibility and effectiveness in its continuing efforts to attract, retain and incentivise participants to higher standards of performance. It encourages greater dedication and loyalty by enabling the Group to give recognition to past contributions and service, as well as motivating participants to contribute to the long-term prosperity of the Group. A participant s awards under the 2010 Share Plan are determined at the sole discretion of the Group Committee. In considering an award to be granted to a participant, the Committee may take into account the participant s performance during the relevant period, and their capability, entrepreneurship, scope of responsibility and skill set. The award granted is based on the Sembcorp Group s financial performance for return on total assets and profit from operations compared with the budget in a rolling two-year performance period. A minimum threshold of performance must be achieved to trigger an achievement factor which determines the number of shares to be awarded, which is between 0-150% of the conditional restricted shares awarded. There is a three-year vesting period after the performance period, during which one third of the awarded shares is released each year. For the employees of the Company this is a cash-settled transaction, at the equivalent cash value at the vesting date. page 93

96 Notes to the Non-Statutory Financial Statements 22. Share capital The authorised, issued and fully paid share capital is as follows: Authorised Issued and fully paid Equity interests: Ordinary shares of 1 each 50,000 50,000 22,483 22,483 The Company has 50,000,000 authorised ordinary shares, of which 22,483,492 are issued and fully paid. 23. Profit and loss account 2015 At 1 April Profit for the year Dividends paid Actuarial gain/(loss) on defined benefit pension scheme Movement on deferred tax relating to actuarial gain/(loss) 11,010 7,817 (3,200) 769 (154) ,699 10,865 (3,000) (5,692) 1,138 At 31 March 16,242 11, Operating leases At 31 March the Company had annual commitments under operating leases which expire: Other Within one year In the second to fifth years inclusive Total There are no operating lease commitments after five years (2014: nil) The Company s policy is generally not to lease operating equipment. Operating lease contract commitments are usually short-term in nature and for items such as vending machines. During the year 10,000 was recognised as an expense in the profit and loss account in respect of operating leases (2014: 11,000). 25. Capital commitments Authorised and contracted but not provided 2,640 2,484 page 94

97 Notes to the Non-Statutory Financial Statements 26. Notes to the Cash Flow Statement (a) Reconciliation of operating profit to net cash inflow from operating activities Operating profit Depreciation Amortisation Profit on disposal of fixed assets Decrease/(increase) in stocks (Increase)/decrease in debtors Increase in creditors Foreign exchange losses Pension cash contributions Pension administration expenses ,732 7, (81) 69 (634) 3,235 (11) (1,264) ,750 7, (18) (18) (24) (1,296) 214 Net cash inflow from operating activities 24,057 23,599 (b) Reconciliation of net cash flow movement in net debt 2015 Increase in cash in the year Decrease in debt and lease financing Decrease in net debt from cash flows Increase in net debt non-cash flow Net debt at 1 April 4,270 1,441 5,711 (2,223) (88,849) ,467 1,334 2,801 (2,659) (88,991) Net debt at 31 March (85,361) (88,849) (c) Analysis of cash at bank and in hand shown in the balance sheet Change in year Cash at bank and in hand 10,263 5,993 4,270 (d) Analysis of net debt Cash at bank and in hand Loans Finance leases 1 April ,993 (86,357) (8,485) Cash flow 4,270-1,441 Other non-cash charges (2,213) (10) 31 March ,263 (88,570) (7,054) Net debt (88,849) 5,711 (2,223) (85,361) Non-cash movements relate to loan indexation and the amortisation of finance costs. The cash balance includes 1,393,000 (2014: 1,358,000) which is held specifically for the next half yearly interest payment on the Artesian loan. page 95

98 Notes to the Non-Statutory Financial Statements 27. Ultimate parent undertaking The Company is a subsidiary of Bournemouth Water Investments Limited (formerly Sembcorp Bournemouth Water Investments Limited), which is the immediate parent company. Temasek Holdings (Private) Limited is the ultimate parent company, incorporated in Singapore. The largest group in which the results of the Company are consolidated is that headed by Sembcorp Industries Limited, incorporated in Singapore. Copies of the 31 December 2014 consolidated accounts are available to the public and may be obtained from Sembcorp Industries Limited, 30 Hill Street #05-04, Singapore Related parties (i) The Company incurred management service charges from Sembcorp Utilities Services Limited of 220,000 (2014: 361,000), of which nil (2014: nil) was outstanding at the year end. The Company also made payments on behalf of Sembcorp Utilities Services Limited. These amounts are fully recharged. At the year end 23,000 (2014: 23,000) was outstanding. The Company did not receive rental income from Sembcorp Utilities Services limited during the year (2014: 47,000). (ii) The Company incurred management service charges from Sembcorp Industries Limited of 109,000 (2014: nil), of which 109,000 (2014: nil) was outstanding at the year end. Sembcorp Industries Limited also made payments on behalf of the Company. These amounts were fully recharged. At the year end 5,000 was outstanding (2014: nil). (iii) The Company has a loan outstanding to Sembcorp Holdings Limited, which was previously to Sembcorp Utilities (Bournemouth) Limited. In the period interest of 66,000 was charged to Sembcorp Holdings Limited (2014: 33,000) and nil was charged to Sembcorp Utilities (Bournemouth) Limited (2014: 33,000). At the year end interest of 16,000 (2014: 16,000) and capital of 4,379,000 (2014: 4,379,000) was outstanding. (iv) The Company sold water to Avon Valley Water Limited (formerly Sembcorp Water Services Limited) for 478,000 (2014: 48,000) in the year. At the year end 21,000 (2014: 3,000) was outstanding. The Company provided design services to Avon Valley Water Limited for 1,000 during the year (2014: nil), of which 1,000 was outstanding at year end (2014: nil). The Company also made payments on behalf of Avon Valley Water Limited. These amounts are fully recharged. At the year end 20,000 (2014: 33,000) was outstanding. (v) The Company incurred plumbing services costs of 8,000 (2014: 16,000) from AquaCare (BWH) Limited, of which nil (2014: nil) was outstanding at the year end. The Company charged a management fee to AquaCare (BWH) Limited of 96,000 (2014: 127,000), of which 23,000 (2014: 18,000) was outstanding at the year end. The Company provided goods and services to AquaCare (BWH) Limited to the value of 40,000 (2014: 35,000), of which 13,000 was outstanding at year end (2014: nil). (vi) The Company received customer payments on behalf of AquaCare (BWH) Limited during the year. These amounts are fully recharged. At the year end 3,000 (2014: nil) was outstanding. The Company also made payments on behalf of AquaCare (BWH) Limited. These amounts are fully recharged. At the year end 43,000 (2014: 23,000) was outstanding. page 96

99 Notes to the Non-Statutory Financial Statements 28. Related parties continued (vii) The Company received insurance services from Mill Stream Insurance Limited of 179,000 (2014: 190,000). At year end nil (2014: nil) was outstanding, 35,000 (2014: 7,000) was receivable in respect of outstanding insurance claims and 22,000 (2014: 98,000) was prepaid in respect of future service. (viii) The Company incurred a charge from Sembcorp Utilities Pte Limited of 37,000 (2014: 37,000) for the Parent Company Guarantee in respect of the pension scheme. At the year end nil (2014: nil) was outstanding. (ix) Sembcorp Utilities (UK) Limited made payments on behalf of the Company during the year. These amounts were fully recharged. At the year end 6,000 (2014: nil) was outstanding. (x) The Company did not have any transactions with Pre-Heat Limited in the year (2014: purchased vehicles for 7,000 and received 17,000 for garage and payroll services). The Company did not make any payments on behalf of Pre-Heat Limited (2014: 5,000 was outstanding at year end). (xi) Sembcorp Utilities Services Limited has surrendered nil (2014: 1,145,000) of trading tax losses, which are being used to offset the Company s trading profits. (xii) AquaCare (BWH) Limited has surrendered nil (2014: 106,000) of trading tax losses which are being used to offset the Company s trading profits. (xiii) Pre-Heat Limited has surrendered nil (2014: 943,000) of trading tax losses which are being used to offset the Company s trading profits. 29. Parent Company Guarantee The Parent Company Guarantee (PCG) is in place from Sembcorp Utilities Pte Limited to the Trustees of the Sembcorp Bournemouth Retirement and Security Scheme (SBRASS). The guarantor s aggregate liability under this guarantee is limited to 5,300,000. The guarantee will continue in full force and may not be terminated, without the Trustees consent, before 29 January 2018 or such earlier date if a valuation, calculated in accordance with Part 3 of the Pensions Act 2004, shows that the defined benefit SBRASS pension scheme has moved into surplus on a scheme-specific basis prior to 29 January 2018 (or as a result of any scheme-specific funding valuation carried out before that date). 30. Post balance sheet events On 16 April, 100% of the share capital of Bournemouth Water Investments Limited (formerly Sembcorp Bournemouth Water Investments Limited), the immediate parent of the Company, was acquired by Pennon Group Plc. page 97

100 Notes to the Non-Statutory Financial Statements 31. Restatement of prior year Balance sheet at 31 March 2014 Fixed assets Intangible assets Tangible fixed assets Current assets Stock Debtors (including 4,379,000 due after more than one year) Cash at bank and in hand Creditors amounts falling due within one year As previously reported 129, , ,717 5,993 19,945 (8,015) Effect of restatement 2,865 20,111 22,976 - (375) FRS 101 2, , , ,717 5,993 19,945 (8,390) Net current assets 11,930 (375) 11,555 Total assets less current liabilities Creditors amounts falling due after more than one year Provision for liabilities and charges Pension liabilities 141,148 (93,381) (5,708) (46) 22,601 (19,541) (11,568) (12) 163,749 (112,922) (17,276) (58) Net assets including pension liabilities 42,013 (8,520) 33,493 Capital and reserves Called up share capital Profit and loss account Revaluation reserve 22,483 15,247 4,283 (4,237) (4,283) 22,483 11,010 Equity shareholder s funds 42,013 (8,520) 33,493 page 98

101 Notes to the Non-Statutory Financial Statements 31. Restatement of prior year continued Profit and loss account for the year ended 31 March 2014 As previously reported Effect of restatement FRS 101 Turnover 46, ,539 Operating costs (30,811) 22 (30,789) Operating profit 15, ,750 Interest receivable and similar income Interest payable and similar charges 332 (5,562) (28) (7) 304 (5,569) Profit on ordinary activities before taxation 10, ,485 Tax on profit on ordinary activities 768 (388) 380 Profit on ordinary activities after taxation 10,869 (4) 10,865 The balances reported in the non-financial statements for the year ended 31 March 2014 have been restated to reflect the Company s transition to FRS 101 effective from 1 January The key differences between the amounts previously reported under UK GAAP and those restated in accordance with FRS 101 are as follows: (a) Fixed assets Intangible assets Under IAS 38 Intangible assets computer software and price review costs are classified as intangible assets. Previously these costs were capitalised as tangible fixed assets. This resulted in a reclassification of 2,865,000 at 31 March Infrastructure assets Previously the Company s infrastructure assets were accounted for in accordance with the renewals accounting provisions of FRS 15 Tangible fixed assets. Under renewals accounting the infrastructure network is accounted for as a single asset. Expenditure relating to increases in capacity or enhancement of the network and on maintaining the operating capability of the network in accordance with the defined standards of service is capitalised. Depreciation is charged based on the estimated level of annual expenditure required to maintain the operating capacity of the network, called the infrastructure renewals charge (IRC). Renewals accounting is not permitted under IAS 16 Property, plant and equipment. Therefore under FRS 101, significant parts within the infrastructure network have been identified. Useful economic lives and residual values have been determined so that each significant part is depreciated individually. The significant parts recognised within the water network have been based on asset class as no single pipe is significant compared to the total value of the network. As such, three significant parts have been identified: mains, boundary boxes and communication pipes. These significant parts have been assigned zero residual values at the end of their useful economic lives, which range from 40 to 80 years. page 99

102 Notes to the Non-Statutory Financial Statements 31. Restatement of prior year continued Infrastructure assets continued The reversal of the IRC and recognition of depreciation in accordance with IAS 16 resulted in an increase in tangible fixed assets at 31 March 2014 of 5,150,000 and an 819,000 reduction of the depreciation charge for Maintenance expenditure of the infrastructure network was previously capitalised as infrastructure renewals expenditure (IRE) and charged to the profit and loss account as depreciation within the IRC. Under IAS 16, repairs and maintenance costs, previously included within IRE, are expensed to the profit and loss account in the period in which they are incurred. This resulted in an increase of 552,000 in expenses in the profit and loss account in 2013/14 and a reduction in tangible fixed assets of 8,829,000 at 31 March Developer contributions relating to the enhancement of the infrastructure network were deducted from the cost of the infrastructure assets under UK GAAP, but are held as deferred income under FRS 101 in accordance with IFRIC 18 Transfers of assets from customers. This change in accounting treatment resulted in a gross up of tangible fixed assets of 24,817,000 at 31 March On transition to FRS 101, the Company elected to use previous UK GAAP revaluations of its raw water reservoirs and infrastructure assets acquired prior to 1994 as deemed cost, in accordance with IFRS 1 First-time adoption of International Financial Reporting Standards. All other infrastructure assets are recognised at historic cost, adjusted for the recognition and measurement requirements of IAS 16. As a result of measuring the raw water reservoirs at deemed cost, the revaluation surplus of 4,283,000 relating to these assets, that was held in the revaluation reserve under UK GAAP, was transferred to the profit and loss reserve on transition to FRS 101. Borrowing costs At 31 March 2014, tangible fixed assets included 1,838,000 of capitalised borrowing costs, which were previously expensed. This resulted in a 17,000 reduction in interest payable in 2013/14, but an increase in depreciation charged of 44,000 in 2013/14. The net tax impact was a 60,000 deferred tax credit, which includes the effect of the change in the future rate of UK corporation tax to 20% by 2015 which was substantially enacted on 2 July (b) Deferred income Under IFRIC 18, developer contributions, that were previously recognised within tangible fixed assets, are held as deferred income and are released to the profit and loss account over the useful economic life of the underlying assets. At 31 March 2014, 19,945,000 was held as deferred income, with 404,000 due within one year and 19,541,000 due after more than one year. In 2013/14, 397,000 was released to the profit and loss account, resulting in an increase in turnover under FRS 101, with a related deferred tax charge of 111,000 net of the change in tax rate. page 100

103 Notes to the Non-Statutory Financial Statements 31. Restatement of prior year continued (c) Retirement benefit obligations Under FRS 17 Retirement benefits the deferred tax asset of 12,000 relating to the defined benefit pension deficit at 31 March 2014 was disclosed as a reduction to the pension liability on the balance sheet. Deferred tax assets are shown as a reduction to the deferred tax provision under IAS 19 Employee benefits. The Company recognises the defined benefit pension scheme assets and liabilities in full under IAS 19, as it reported previously. There are differences in the actuarial gain or loss due to the calculation of the current service cost, net interest charge and the treatment of administration costs. This results in increased costs for the Company in 2013/14 of 253,000 net of a deferred tax credit of 51,000 in the profit and loss account and a higher actuarial gain in other comprehensive income of 202,000. (d) Deferred tax The Company applied discounting to its deferred tax liability under FRS 19 Deferred tax, which is not permitted under IAS 12 Income taxes. The removal of discounting resulted in an increase in the deferred tax charge in 2013/14 of 1,545,000 and an increase in the deferred tax liability of 3,287,000. The FRS 101 adjustments relating to infrastructure assets, noted above, resulted in a net increase in deferred tax liabilities of 5,501,000 at 31 March 2014 and a net deferred tax credit of 760,000 in 2013/14. Of this credit, 810,000 was due to the change in the deferred tax rate to 20% in 2013/14. Under IAS 12, deferred tax is recognised for all temporary differences between the carrying amount of an asset or liability and its tax base. Previously under FRS 19 deferred tax was provided for timing differences between the Company s taxable profits and the results it reports in its profit and loss account. The treatment of permanent timing differences, which were not previously provided for, resulted in an increase in the deferred tax liability of 2,330,000 at 31 March 2014 and a deferred tax credit in 2013/14 of 397,000. Of this credit, 358,000 was for the change in the future tax rate. Tax allowances for industrial buildings were abolished in After this date, no deferred tax was required to be recognised under UK GAAP. Under FRS101, a deferred tax liability is recognised on the remaining net book value of these assets. This change in accounting treatment resulted in an increase in deferred tax liability of 224,000 at 31 March The change in accounting treatment for borrowing costs, noted above, increased the Company s deferred tax liability by 369,000 at 31 March 2014 and generated a deferred tax credit of 60,000, of which 57,000 was due to the change in tax rate. The treatment of developer contributions, noted above, resulted in a net reduction in deferred tax liabilities of 131,000 at 31 March 2014 and a deferred tax charge of 111,000, including 33,000 for the change in future tax rate. page 101

104 Supplementary Regulatory Accounting Statements The following Supplementary Regulatory Accounting Statements are published under the terms of the Company s Instrument of Appointment as a water undertaker under the Water Industry Act 1991 and have been prepared in accordance with the requirements of the Regulatory Accounting Guidelines issued by Ofwat. page 102

105 Statement of Directors Responsibilities The Directors are responsible for preparing the Directors Report, Non-Statutory Financial Statements and Regulatory Accounts in accordance with applicable law and regulations. The Directors are responsible under Condition F of the Instrument of Appointment by the Secretary of State for the Environment of the Company as a water undertaker under the Water Industry Act 1991, to prepare Regulatory Accounts for each financial year that give a true and fair view of the state of affairs of the Company as at the end of the financial year, and of the profit or loss of the Company for that year. In preparing these Accounts, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the Non-Statutory Financial Statements comply with the Companies Act They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Disclosure of information to auditor Each of the persons who is a Director at the date of approval of this report confirms that: (a) so far as the Director is aware, there is no relevant audit information of which the Company s auditor is unaware; and (b) the Director has taken all the steps that ought to be taken as a Director in order to become aware of any relevant audit information and to establish that the Company s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act Certificate of Compliance with Licence Condition F6A In arriving at the certificate provided below, the Audit Committee met on 16 June 2015 to consider the Appointee s financial and management requirements over the next 12 months and the available resources. In providing the certificate the Audit Committee and subsequently the Board took into account the 2014 final determination, the Company performance during 2014/15, the Company budget for 2015 and 2016, the detailed 18 month cash flow forecast from April 2015, the level of committed and undrawn working capital facilities available, the current level of gearing and the depth and experience of the executive management team. In addition, compliance with the relevant sections of RAG 5.05 was also reviewed. The Board duly considered these matters on 29 June 2015 and resolved that the certificate would be signed by the Company Secretary on behalf of the Board on an appropriate date. page 103

106 Statement of Directors Responsibilities continued This is to certify that in the opinion of the Directors, as minuted in their meeting of 29 June 2015 the Appointee: will have available to it sufficient financial resources and facilities to enable it to carry out, for at least the next 12 months, the regulated activities (including the investment programme necessary to fulfil its obligations under the Appointment and the payment of dividends in accordance with the policy stated on page 116); will, for at least the next 12 months, have available to it management resources which are sufficient to enable it to carry out those functions; will, for at least the next 12 months, have available to it systems of planning and internal control which are sufficient to enable it to carry out those functions. is in compliance with paragraph 3.1 of Condition K of the Licence; has insured that all contracts entered into with any associated company include all necessary provisions and requirements concerning the standard of service to be supplied to the Appointee, to ensure that it is able to meet all its obligations as a water undertaker. By order of the Board Alison Ramsey Company Secretary 29 June 2015 page 104

107 Independent Auditor s Report to the Water Services Regulation Authority and Directors of Bournemouth Water Limited We have audited the Regulatory Accounts of Bournemouth Water Limited ( the Company ) for the year ended 31 March 2015 on pages 102 to 132 which comprise: the Regulatory Historic Cost Accounting Statements, comprising the Regulatory Historic Cost Profit and Loss Account, the Regulatory Historic Cost Balance Sheet, the Regulatory Historic Cost Statement of Total Recognised Gains and Losses and the Historic Cost Reconciliation between Non-Statutory Financial Statements and Regulatory Accounts; and the Regulatory Current Cost Accounting Statements for the appointed business, comprising the Current Cost Profit and Loss Account, the Current Cost Balance Sheet, the Current Cost Cash Flow Statement and the related notes to the Current Cost Financial Statements, including the Statement of Accounting Policies. These Regulatory Accounts have been prepared in accordance with the basis of preparation and accounting policies set out in the Statement of Accounting Policies. This report is made, on terms that have been agreed, solely to the Company and the Water Services Regulation Authority ( the WSRA ) in order to meet the requirements of Condition F of the Instrument of Appointment granted by the Secretary of State for the Environment to the Company as a water undertaker under the Water Industry Act Our audit work has been undertaken so that we might state to the Company and the WSRA those matters that we have agreed to state to them in our report, in order (a) to assist the Company to meet its obligation under Condition F to procure such a report and (b) to facilitate the carrying out by the WSRA of its regulatory functions, and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the WSRA for our audit work, for this report or for the opinions we have formed. Respective responsibilities of the Directors and Auditor As explained more fully in the Statement of Directors Responsibilities set out on page 103 the Directors are responsible for the preparation of the Regulatory Accounts and for their fair presentation in accordance with the basis of preparation and accounting policies. Our responsibility is to audit and express an opinion on the Regulatory Accounts in accordance with International Standards on Auditing (UK and Ireland), except as stated in the Scope of the audit of the Regulatory Accounts below, and having regard to the guidance contained in Audit 05/03 Reporting to Regulators of Regulated Entities issued by the Institute of Chartered Accountants in England and Wales. Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. page 105

108 Independent Auditor s Report to the Water Services Regulation Authority and Directors of Bournemouth Water Limited continued Scope of the audit of the Regulatory Accounts An audit involves obtaining evidence about the amounts and disclosures in the Regulatory Accounts sufficient to give reasonable assurance that the Regulatory Accounts are free from material misstatement, whether caused by fraud or error. This includes an assessment of whether the accounting policies are appropriate to the Company s circumstances and have been consistently applied and adequately disclosed, the reasonableness of significant accounting estimates made by the Directors, and the overall presentation of the Regulatory Accounts. In addition, we read all the financial and non-financial information in the Regulatory Accounts to identify material inconsistencies with the audited Regulatory Accounts. If we become aware of any apparent misstatements or inconsistencies, we consider the implications for our report. We have not assessed whether the accounting policies are appropriate to the circumstances of the Company where these are laid down by Condition F. Where Condition F does not give specific guidance on the accounting policies to be followed, our audit includes an assessment of whether the accounting policies adopted in respect of the transactions and balances required to be included in the Regulatory Accounts are consistent with those used in the preparation of the Non-Statutory Financial Statements of the Company. Furthermore, as the nature, form and content of Regulatory Accounts are determined by the WSRA, we did not evaluate the overall adequacy of the presentation of the information, which would have been required if we were to express an audit opinion under International Standards on Auditing (UK & Ireland). Opinion on Regulatory Accounts In our opinion the Regulatory Accounts: fairly present in accordance with Condition F, the Regulatory Accounting Guidelines issued by the WSRA and the accounting policies set out on pages and 122, the state of the Company s affairs at 31 March 2015 on an historic cost and current cost basis, and its historic cost and current cost profit and its current cost cash flow for the year then ended; and have been properly prepared in accordance with Condition F, the Regulatory Accounting Guidelines and the accounting policies (including the accounting separation methodology). page 106

109 Independent Auditor s Report to the Water Services Regulation Authority and Directors of Bournemouth Water Limited continued Basis of preparation Without modifying our opinion, we draw attention to the fact that the Regulatory Accounts have been prepared in accordance with Condition F of the Appointment and the Regulatory Accounting Guidelines, the accounting policies set out in the statement of accounting policies and, in the case of the Regulatory Historic Cost Accounting Statements, under the historic cost convention. The Regulatory Accounts are separate from the Statutory Financial Statements of the Company and the Non- Statutory Financial Statements of the Company and have not been prepared under the basis of United Kingdom Generally Accepted Accounting Practice ( UK GAAP ) or International Financial Reporting Standards as adopted by the European Union ( IFRSs ). Financial information other than that prepared on the basis of UK GAAP or IFRSs does not necessarily represent a true and fair view of the financial performance or financial position of a company as shown in statutory financial statements prepared in accordance with the Companies Act Furthermore, the Regulatory Historic Cost Accounting Statements on pages 109 to 118 have been drawn up in accordance with Regulatory Accounting Guideline 3.07, in that infrastructure renewals accounting as applied in previous years should continue to be applied and accordingly, that the relevant sections of UK Financial Reporting Standards 12 and 15 be disapplied. The effect of this departure from UK GAAP and a reconciliation of the balance sheet drawn up on this basis to the balance sheet drawn up and presented in the Non-Statutory Financial Statements on the basis of the recognition, measurement and presentation requirements of UK GAAP is given on page 112. Opinion on other matters prescribed by Condition F Under the terms of our contract, we have assumed responsibility to provide those additional opinions required by Condition F in relation to the accounting records. In our opinion: proper accounting records have been kept by the Appointee as required by paragraph 3 of Condition F; and the Regulatory Accounts are in agreement with the accounting records and returns retained for the purpose of preparing the Regulatory Accounts. page 107

110 Independent Auditor s Report to the Water Services Regulation Authority and Directors of Bournemouth Water Limited continued Other matters The nature, form and content of regulatory accounts are determined by the WSRA. It is not appropriate for us to assess whether the nature of the information being reported upon is suitable or appropriate for the WSRA s purposes. Accordingly, we make no such assessment. Our opinion on the Regulatory Accounts for the year ended 31 March 2015 is separate from both our opinions on the Statutory Financial Statements of the Company for the year ended 31 December 2014 and on the Non-Statutory Financial Statements of the Company for the year ended 31 March 2015, which are prepared for a different purpose. Our audit report in relation to the Statutory Financial Statements of the Company (our statutory audit ) was made solely to the Company s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act Our statutory audit work was undertaken so that we might state to the Company s members those matters we are required to state to them in a statutory audit report and for no other purpose. In these circumstances, to the fullest extent permitted by law, we do not accept or assume responsibility for any other purpose or to any other person to whom our statutory audit report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Our audit report in relation to the Non-Statutory Financial Statements of the Company was made solely to the Company, as a body, in accordance with the terms of our engagement letter in connection with their audit. Our Non-Statutory audit work was undertaken so that we might state to the Company those matters we are required to state to them in that Non-Statutory audit report and for no other purpose. In these circumstances, to the fullest extent permitted by law, we do not accept or assume responsibility for any other purpose or to any other person to whom our Non-Statutory audit report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. 1. The maintenance and integrity of the Company s website is the responsibility of the Directors and the maintenance and integrity of the Regulator s website is the responsibility of the Regulator; the work carried out by the auditor does not involve consideration of these matters and, accordingly, the auditor accepts no responsibility for any changes that may have occurred to the Regulatory Accounts since they were initially presented on the websites. 2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements and regulatory accounts may differ from legislation in other jurisdictions. James Ledward for and on behalf of KPMG LLP Chartered Accountants Dukes Keep Marsh Lane Southampton SO14 3EX 29 June 2015 page 108

111 Regulatory Historic Cost Profit and Loss Account for the year ended 31 March 2015 Turnover Operating costs Infrastructure renewals charge Historical cost depreciation Operating profit Non-operating income Net interest Profit on ordinary activities before taxation Tax on profit on ordinary activities current Tax on profit on ordinary activities deferred Profit on ordinary activities after taxation Dividends paid Regulated Business 44,848 (22,234) (3,008) (5,522) 14, (4,970) 9,229 (1,805) (2,252) 5,172 (3,200) Non- Regulated Business 1,549 (1,165) (98) 286 (24) 262 (60) 202 Total 46,397 (23,399) (3,008) (5,620) 14, (4,994) 9,491 (1,865) (2,252) 5,374 (3,200) Regulated Business 44,537 (20,958) (2,966) (5,717) 14,896 (5,231) 9,665 (1,266) 2,134 10,533 (3,000) Non- Regulated Business 1,605 (1,067) (103) (100) 336 Total 46,142 (22,025) (2,966) (5,820) 15,331 (5,230) 10,101 (1,366) 2,134 10,869 (3,000) Retained profit for the year 1, ,174 7, ,869 See page 112 for reconciliation to the Non-Statutory Financial Statements. page 109

112 Regulatory Statement of Total Recognised Gains and Losses for the year ended 31 March 2015 Profit attributable to ordinary shareholder Actuarial gain/(loss) on defined benefit pension scheme Movement in deferred tax relating to actuarial gain/(loss) Regulated Business 5, (111) Non- Non- Regulated Regulated Regulated Business Total Business Business (11) 5, (122) 10,533 (5,228) 1, (717) 143 Total 10,869 (5,945) 1,189 Total recognised gains/(losses) for the period 5, ,859 6,351 (238) 6,113 page 110

113 Regulatory Historic Cost Balance Sheet as at 31 March 2015 Fixed assets Intangible assets Tangible fixed assets Investments loan to Group company Current assets Stock Debtors Cash at bank and in hand Creditors: amounts falling due within one year Overdrafts Infrastructure renewals accrual Borrowings Other creditors Regulated Business ,617 4, Non- Non- Regulated Regulated Regulated Business Total Business Business 1, ,774 4, ,534 4,379 1,200 Total 129,734 4, ,226 1, , ,913 1, , ,498 13, ,972 13, ,238 8, ,338 8,696 22, ,435 18, ,269 (1,217) (1,508) (9,541) (3,034) (497) (3,034) (1,217) (1,508) (10,038) (516) (1,461) (6,002) (2,703) (552) (2,703) (516) (1,461) (6,554) (12,266) (3,531) (15,797) (7,979) (3,255) (11,234) Net current assets/(liabilities) 10,660 (3,022) 7,638 10,162 (3,127) 7,035 Total assets less current liabilities 146,886 (1,865) 145, ,075 (1,927) 141,148 Creditors: amounts falling due after more than one year Borrowings (94,116) (94,116) (93,381) (93,381) Provision for liabilities and charges Pension assets/(liabilities (7,703) 1, (7,703) 1,470 (5,708) (40) (6) (5,708) (46) Net assets/(liabilities) 46,361 (1,689) 44,672 43,946 (1,933) 42,013 Capital and reserves Called up share capital Profit and loss account Revaluation reserve 22,483 19,595 4,283 (1,689) 22,483 17,906 4,283 22,483 17,180 4,283 (1,933) 22,483 15,247 4,283 Equity shareholder s funds/(deficit) 46,361 (1,689) 44,672 43,946 (1,933) 42,013 See page 112 for reconciliation to Non-Statutory Financial Statements. See page 121 for Regulatory Current Cost Cash Flow Statement. Approved by the Board on 29 June 2015 and signed on its behalf by Bournemouth Water Limited Registered Number (England and Wales) P J Millward Chairman page 111

114 Reconciliation between Non-Statutory Financial Statements and Historic Cost Regulatory Accounts Year ended 31 March 2015 The Company prepares its Non-Statutory Financial Statements in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework. The Regulatory Accounts are prepared on the basis of Regulatory Accounting Guidelines and UK Accounting Standards. The principal differences between the key balances in the Non-Statutory Financial Statements and the Regulatory Accounts are set out below: Non- Statutory Financial Statements Regulatory Accounts Explanation of difference Profit and Loss Account Turnover 46,809 46,397 (412) Amortisation of infrastructure contributions Operating profit 14,732 14,370 (412) (822) Amortisation of infrastructure contributions Difference in depreciation on infrastructure assets Difference in capitalisation treatment of infrastructure assets Difference in treatment of pension administration costs Other Balance Sheet Tangible fixed assets net book value 152, ,774 (25,868) 4,751 (1,794) 3,150 Infrastructure contributions netted against fixed assets Cumulative difference in infrastructure assets net book value as renewals accounting not used under FRS 101 Cumulative difference in capitalisation of interest Classification of assets as intangible page 112

115 Regulatory Historic Cost Accounting Policies Basis of accounting The regulatory financial information on pages 109 to 130 has been prepared in accordance with guidance issued by the Water Services Regulation Authority. The Company has a statutory year-end of 31 December. It has prepared an additional set of accounts at 31 March to enable comparisons with the Regulatory Accounts. These additional accounts are referred to as Non-Statutory Financial Statements. The Regulatory Accounts are separate from the Non-Statutory Financial Statements of the Company. A reconciliation between the Regulatory Accounts and the Non-Statutory Financial Statements is shown on page 112. Information provided in the Regulatory Accounts is in accordance with the Regulatory Accounting Guidelines ( RAGs ), which specify alternative treatment or disclosure in certain respects. Where the RAGs do not specifically address an accounting issue, then in accordance with RAGs, applicable UK accounting standards ( UK GAAP ) is required to be followed. Financial information other than that prepared wholly on the basis of UK GAAP may not necessarily represent a true and fair view of the financial performance or financial position of a company as shown in the financial statements prepared in accordance with the Companies Act The Regulatory Accounts have been prepared in accordance with UK GAAP, with the exception of certain sections of FRS 5, FRS 12 and FRS 15 as applied to infrastructure accounting and the treatment of certain contributions, and with the Companies Act This departure from the Act is in accordance with RAG 1.05 Guideline for Accounting for Capital Maintenance Charges and Current Costs and RAG 3.07 Guidelines for the Format and Disclosures of Regulatory Accounts and the policies have been consistently applied. An explanation of this departure from the requirements of the Act is given in the infrastructure assets section below. Accounting convention The Regulatory Accounts have been prepared under the historical cost convention, as modified by the revaluation of raw water reservoirs. Changes to accounting policies There have been no changes in accounting policies during the year. Regulated and non-regulated activities The regulated (or appointed) business activities are the activities that are necessary in order for the Company to fulfil its functions and duties as a water undertaker. The non-regulated (or non-appointed) business activities are all other activities, including those where the Company is not a monopoly supplier or the activity involves the optional use of assets owned by the regulated business. Basis of allocation of costs and assets between regulated and non-regulated business Costs and assets, where separately identifiable, are charged to the relevant business. Shared costs and assets are recharged from the regulated business using an activity-based method by means of a service charge. The tax charge is allocated on the basis of profit levels. Cash balances are allocated on the basis of the net assets of the relevant businesses. The accounting separation methodology statement, which provides further detail of the method of allocating costs and assets, can be found on the Company s website. page 113

116 Regulatory Historic Cost Accounting Policies continued Capitalisation of costs The allocation of costs between operating expenditure, capital expenditure and capital maintenance is based on the RAGs and normal accounting practice. Costs under 500, or 5,000 for IT costs, are treated as operating expenditure. Fixed assets a) Infrastructure assets Infrastructure assets comprise a network of systems (including mains and impounding and raw water storage reservoirs). Expenditure on infrastructure assets relating to increases in capacity or enhancement of the network is treated as additions and included at cost. Raw water reservoirs are held at valuation as determined by an independent qualified chartered engineer when they are commissioned. Incremental expenditure is treated in the same manner as for other infrastructure assets. Expenditure on maintaining the operating capability of the network in accordance with defined standards of service is expensed as an operating cost. No depreciation is charged on infrastructure assets because the network of systems is required to be maintained in perpetuity and therefore has no determinable finite economic life. The charge for infrastructure renewals expenditure takes account of planned expenditure on maintaining the operating capability of infrastructure assets in accordance with the operational policies and standards underlying the Company s Asset Management Plan. As a result of this policy, the revaluation reserve relating to infrastructure assets is not amortised. The timing of the investment programme and other operational considerations results in uneven patterns of infrastructure renewals expenditure. Charges to the profit and loss account therefore comprise actual expenditure together with accruals or prepayments, which recognise planned expenditure identified in the Asset Management Plan. In 2009/10, this charge was updated to reflect Ofwat s final determination values for the five-year period commencing on 1 April 2010, with an additional charge being made to reflect the 2008/09 revised value. Planned expenditure is based on a five year back, ten year forward calculation. The Regulatory Accounts comply with Ofwat s requirement to disapply certain sections of FRS 5, FRS 12 and FRS 15 with regard to infrastructure accounting. A reconciliation of this departure between the Non-Statutory Financial Statements and the Regulatory Accounts can be seen on page 112. Grants and contributions receivable relating to infrastructure assets have been deducted from the cost of tangible fixed assets. This is not in accordance with the Companies Act 2006, which requires tangible fixed assets to be shown at cost, and hence grants and contributions as deferred income. This departure from the requirements of the Companies Act 2006 is, in the opinion of the Directors, necessary for the financial statements to show a true and fair view as these assets do not have determinable finite economic lives and therefore no basis exists on which to recognise grants and contributions and deferred income, or upon which to reflect their utilisation by amortisation through the profit and loss account. b) Asset revaluation Raw water reservoirs are shown at replacement value on completion. The valuations were carried out by the Company and reviewed by an independent qualified chartered engineer. Deferred tax is only provided on the revaluation amount when there is a firm commitment to sell the assets. There is currently no such commitment. page 114

117 Regulatory Historic Cost Accounting Policies continued c) Other fixed assets Other assets are included at cost less accumulated depreciation. Cost includes direct labour and an appropriate proportion of related overhead. Provision for depreciation is made in respect of all assets other than freehold land and easements. It is based on the historical cost of the assets and is designed to write them off in equal annual instalments over their useful lives, which are estimated as follows: Property and service reservoirs years Office equipment years Plant and equipment years Motor vehicles years d) Leased assets Tangible fixed assets acquired under finance lease agreements are capitalised and the net obligations resulting are shown as liabilities. The fair value of each asset is depreciated over the estimated useful life of the asset. The interest element of the rental charges is charged to the profit and loss account so as to produce a constant periodic rate of charge on the outstanding capital balance. Rental costs arising under operating leases are charged against profits in the year they are incurred. e) Capitalised labour Staff time spent on new assets is capitalised and depreciated over the life of the asset. f) Intangible assets Intangible assets relate to computer software, capitalised price review costs and carbon reduction commitment (CRC) allowances. CRC allowances are held at cost less any accumulated impairment losses. These allowances are not amortised, but are offset against the emissions liability when it falls due. An accrual for the emissions liability is built up on the balance sheet as the emissions occur, with an expense in the profit and loss account. Stock Stock and work in progress are stated at the lower of cost, which includes an appropriate proportion of overheads and net realisable value. In accordance with established practice in the water industry no value has been placed upon the water in reservoirs, mains and in the course of treatment. Deferred taxation Deferred taxation is provided on a discounted basis on all timing differences with the exception of pension timing differences that have originated but not reversed at the balance sheet date. Amounts provided are calculated with reference to tax rates that are expected to apply in the periods in which the timing differences are expected to reverse based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax assets are recognised only to the extent that it is considered more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. page 115

118 Regulatory Historic Cost Accounting Policies continued Retirement benefit obligations For defined benefit schemes, current service costs are charged to the profit and loss account and included as staff costs. The interest cost and expected return on assets are shown as a net amount within interest payable or receivable. Actuarial gains and losses are recognised immediately in the statement of total recognised gains and losses. Pension administration costs are treated as part of the pensions actuarial movement. Pension scheme assets are measured at fair value and liabilities are measured on an actuarial basis using the projected unit method and discounted at a rate equivalent to the current rate of return on a high-quality corporate bond of equivalent currency and term to the scheme liabilities. Actuarial valuations are carried out at least triennially by the pensions actuary and are updated by the Company s actuarial advisors at the balance sheet date. The resulting defined benefit asset or liability, net of the related deferred tax, is presented separately after other net assets in the balance sheet. For defined contribution schemes the amount charged to the profit and loss account in respect of pension costs and other post-retirement benefits is the contributions payable in the year. Differences between contributions payable in the period and contributions actually paid are shown as either accruals or prepayments in the balance sheet. Dividends Dividends are recognised in the financial statements in the period in which they are declared. The Company s policy is to maintain a level of gearing at approximately 60%. Surplus medium-term cash funds are returned to the shareholder through dividends, after taking into account the cash requirements of the business and pension fund, as well as any appropriate sharing of gains with customers. Financial instruments The Company s financial instruments are non-derivatives. The Company initially recognises financial assets or liabilities at fair value less transaction costs. The Company subsequently categorises financial instruments as follows: Loans and borrowings consist of an index-linked loan, fixed-rate perpetual debentures, a fixed-rate finance lease and a variable rate finance lease. They are subsequently measured at amortised cost using the effective interest rate method. The carrying value of index-linked debt instruments is adjusted twice a year for the movement in the Retail Prices Index. The change in value arising from indexation is charged or credited to the profit and loss account in the year in which it arises. At 31 March, the Company had a loan owed by Group undertakings. Interest is charged at commercial rates linked to the Bank of England base rate. Trade and other debtors are subsequently measured at amortised cost using the effective interest rate method, less any impairment losses. Trade debtors do not bear any interest. Trade and other creditors are subsequently measured at amortised cost using the effective interest rate method, less any impairment losses. Trade creditors do not bear any interest. Cash and cash equivalents include short-term bank deposits. page 116

119 Regulatory Historic Cost Accounting Policies continued Charitable trusts Amounts given to charitable trusts are written off in the financial period in which the donation is made. Bad debt policy The bad debt provision is based on historic trends of debt collectability by customer class. Debts are written off after all possible collection processes have been exhausted. Turnover Turnover comprises regulated and non-regulated income. Regulated business turnover includes amounts billed for the year, together with an adjustment for estimation of amounts unbilled at year ends. Where non-regulated business turnover included payment for services to be provided in the future, an appropriate amount of monies was treated as deferred income and recognised over the relevant period. Otherwise turnover is recognised as services are provided. Turnover is recognised to the extent that economic benefits will flow to the Company. Turnover includes charges to and accrued income from customers for water and other services excluding Value Added Tax. Turnover is recognised upon delivery of water or completion of other services. Income from metered supplies is based on actual volumes of water invoiced plus estimated volumes of uninvoiced water delivered to customers during the year. There is no difference between the amounts billed to customers (as adjusted for opening and closing accrual) and the amounts recognised as turnover in the Regulatory Accounts. Charges for unmeasured properties are based on the rateable value at 31 March Revenue is recognised from chargeable properties in accordance with the following policies: Vacant unmetered properties are charged unless the supply is disconnected or if a disconnection is not possible then the property must be unfurnished. Metered properties are chargeable unless the supply is disconnected. Metered vacant properties are not charged. However meter readings are still taken and if any consumption is recorded an occupier account is raised and normal charges apply. A metered customer can request their supply to be temporarily turned off, after which they are not charged until their supply is restored. Disconnected properties are not charged. When a household property is unoccupied due to the customer being hospitalised, or residing in care, or if an estate is in probate, charges do not normally apply. A property which is believed to be occupied, but where the occupier s details are not known, is billed in the name of the occupier and efforts are made to obtain the occupier s details, including visits to the property. Amounts billed in the name of the occupier are not excluded from turnover, as required under FRS 5 Revenue Recognition guidance, on the grounds that these amounts are not material. The Company has multiple measures in place to identify occupiers upon changes in occupancy and actively seeks to avoid billing in the name of the occupier. Void properties are excluded from billing and turnover. If nothing can be collected from a property page 117

120 Regulatory Historic Cost Accounting Policies continued billed in the name of the occupier, the amount will be written-off, as bad debt, after all measures have been taken to collect amounts due. Cash received from charges on income is not treated as revenue but is applied to reduce the outstanding debt derived from the turnover recognition policy (i.e cash received directly from benefit payments reduces debt). When the income is invoiced (or accrued) the revenue is recognised in line with the accounting policy. Debt collection costs billed to customers are netted off against the costs of debt collection and are not treated as turnover. Revenue from new properties is recognised from the date the meter is installed and the property is occupied. Measured income accrual Turnover for 2013/14 included a measured income accrual of 5.0 million. The value of the billing recognised in 2014/15 for consumption in the prior year was 5.0 million. There was no impact on the current year turnover as a result of estimating measured income in the prior year. Revenue reconciliation of price determination projections to actual reported amount Regulated business turnover for 2014/15 of 44.8 million is 1.0 million less than the PR09 final determination target of 45.8 million. The reasons for this under-performance against the final determination are set out in the reconciliation below: 2015 Final determination projection Impact of higher inflation 42,345 3,486 Final determination adjusted for inflation 45,831 Under-collection in tariff basket Large user and special agreement Bulk supply Non-water income Actual reported revenue 44,848 (562) (61) (54) (306) The under-collection in the tariff basket is largely caused by the following variances compared to the draft 2009 Water Resources Management Plan, which formed the basis of the PR09 final determination: the voluntary price freeze in 2014/15; the split of metered and unmetered household customers; the total number of connected properties; and the volume of water consumption by customers. page 118

121 Current Cost Profit and Loss Account for the Regulated Business for the year ended 31 March 2015 Turnover Unmeasured household Measured non-household household non-household Large users and special agreement Third party services Bulk supply Total turnover Current cost operating costs wholesale retail Working capital adjustment Current cost operating profit Non-operating income Net interest payable Financing adjustment Note A B , ,229 9,426 5, ,848 (29,021) (4,698) (32) 11, (4,970) , ,544 9,510 5, ,537 (27,689) (4,496) (83) 12,269 (5,231) 1,930 Current cost profit before taxation 7,023 8,968 Net revenue movement out of tariff basket Back-billing amount identified page 119

122 Current Cost Balance Sheet for the Regulated Business, as at 31 March 2015 Fixed assets Intangible assets Tangible assets Third party contributions since 1 April 1990 Investments loan to Group company Net operating assets Working capital Cash Infrastructure renewals accrual Note C, D F G ,393 (36,788) 4, ,186 (35,420) 4, , ,145 1,091 13,297 (1,217) 3,565 8,696 (516) Total assets 885, ,890 Non-operating liabilities Borrowings Corporation tax payable G (1,508) (1,003) (1,461) (122) Total assets less non-operating liabilities 882, ,307 Creditors: amounts falling due after more than one year Borrowings Provisions for liabilities and charges Deferred tax provision Pension assets/(liabilities) G (94,116) (7,703) 1,294 (93,381) (5,708) (40) Net assets 782, ,178 Capital and reserves Called up share capital Profit and loss account Revaluation reserve Current cost reserve H 22,483 (153) 2, ,881 22,483 (362) 2, ,919 Total capital and reserves 782, ,178 Approved by the Board on 29 June 2015 and signed on its behalf by P J Millward Chairman Bournemouth Water Limited Registered Number (England and Wales) page 120

123 Current Cost Cash Flow Statement for the Regulated Business for the year ended 31 March 2015 Current cost operating profit Working capital adjustment Decrease/(increase) in working capital Current cost depreciation Current cost loss on sale of assets Infrastructure renewals charge Other debtor and creditor movements Additional contributions to the pension scheme , ,427 8,402 (6) 3,008 - (1,093) 12, (163) 8,261 (18) 2, (1,134) Net cash inflow from operating activities 23,867 22,950 Returns on investments and the servicing of finance (2,768) (2,791) Taxation paid (958) (1,343) Capital expenditure and financial investment Purchase of tangible fixed assets Purchase of intangible fixed assets Infrastructure renewals expenditure Contributions received Sale of tangible fixed assets (9,665) (230) (2,307) 1, (11,070) - (3,013) (10,899) (13,243) Equity dividends paid (3,200) (3,000) Net cash outflow from financing (1,441) (1,334) Increase in cash 4,601 1,239 page 121

124 Current Cost Accounting Policies Current cost accounting These accounts have been prepared for the regulated business in accordance with the Regulatory Accounting Guidelines issued by the Director General of Water Services for modified real-term financial statements suitable for regulation in the water industry. They measure profitability on the basis of real financial capital maintenance, in the context of assets which are valued at their current cost value to the business with the exception of certain assets acquired prior to 31 March 1990, the effective commencement date of the new regulatory regime. The accounting policies applied are the same as those adopted in the Regulatory Historic Cost Accounts as detailed on pages 113 to 118 except as set out below: Tangible fixed assets Assets in operational use are valued at their replacement cost as modified for their remaining useful life. To the extent that the regulatory regime does not allow such assets to earn a return high enough to justify that value, this represents a modification of the value to the business principle. Also, no provision is made for possible funding of future replacements of assets by contribution from third parties and, to the extent that some of the tangible fixed assets would on replacement be so funded, replacement cost again differs from the value to the business. Redundant assets are valued at their recoverable amounts. In 2008 an Asset Management Plan (AMP) survey of existing assets as at 31 March 2008 was undertaken. The adjustment to asset values, as a result of this exercise, was included within the tangible fixed asset note in 2009/10. In the intervening years between AMP surveys, values are restated to take account of changes in the general level of inflation, as measured by changes in the RPI, and any other significant changes in asset records identified during the year. Real financial capital maintenance adjustments These adjustments are made to historical cost profit in order to arrive at profit after the maintenance of financial capital in real terms: Depreciation adjustment this is the difference between depreciation based on the current cost value of assets in these accounts and depreciation charged in arriving at the historical cost profit. Working capital adjustment this is calculated by applying the change in the RPI over the year to the opening total of debtors, stock and working cash balances less creditors. Disposal of fixed asset adjustment the difference between the values of realised assets in these current cost accounts and in the historical cost accounts. Grants and third party contributions adjustment this is calculated by applying the change in the RPI over the year to the value of the contributions at the start of the year. Financing adjustment this is calculated by applying the change in the RPI over the year to the opening balance of net finance, which comprises all monetary assets and liabilities in the balance sheet apart from those included in working capital. Non-regulated business The non-regulated business has been excluded from the current cost accounts. page 122

125 Notes to the Regulated Business Current Cost Accounts A. Operating cost analysis for the wholesale business Operating expenditure Power Service charges Other operating expenditure Local authority rates Resources 920 1, Raw water distribution Treatment 1,223 3, Treated distribution 715 5,661 2,355 Water total 3,378 1,015 10,131 3,421 Total operating expenditure excluding third party services 2, ,682 8,731 17,945 Capital maintenance Infrastructure renewals charge Current cost depreciation Recharges to other business units Recharges from other business units ,119 (217) 94 2,788 2,108 (160) 151 3,008 8,106 (377) 326 Total capital maintenance excluding third party services ,996 4,887 11,063 Third party services Operating expenditure Total operating costs 3,028 1,684 10,678 13,631 29,021 page 123

126 Notes to the Regulated Business Current Cost Accounts continued B. Operating cost analysis for the retail business Operating expenditure Customer services Debt management Doubtful debts Meter reading Services to developers Other operating expenditure Local authority rates Total operating expenditure excluding third party services Third party services operating expenditure Household 1, , ,787 8 Nonhousehold Total 1, , ,342 8 Total operating expenditure 3, ,350 Capital maintenance Current cost depreciation Recharges from other business units Total capital maintenance Total operating costs 4, ,698 Debt written off page 124

127 Notes to the Regulated Business Current Cost Accounts continued C. Current cost analysis of fixed assets for the wholesale business Non-infrastructure assets Gross replacement cost At 1 April 2014 RPI adjustment Disposals Additions Resources 25, (6) 252 Raw water distribution 17, (6) 241 Treatment 290,653 2,356 (1,024) 4,447 Treated distribution 68, (6) 1,645 Water total 402,598 3,624 (1,042) 6,585 At 31 March ,958 18, ,432 71, ,765 Depreciation At 1 April 2014 RPI adjustment Disposals Charge in the year 10, (5) 343 4, (5) ,699 1,259 (896) 5,119 55, (5) 2, ,238 1,910 (911) 8,106 At 31 March ,109 4, ,181 58, ,343 Net book amount at 31 March ,849 13, ,251 13, ,422 1 April ,798 13, ,954 13, ,360 Infrastructure assets Gross replacement cost At 1 April 2014 RPI adjustment Additions 18, ,360 6,178 2, ,421 6,296 2,044 At 31 March , , ,761 page 125

128 Notes to the Regulated Business Current Cost Accounts continued D. Current cost analysis of fixed assets for the retail business Non-infrastructure assets Gross replacement cost At 1 April 2014 RPI adjustment Disposals Additions Household 4, (5) 974 Nonhousehold (1) 109 Total 4, (6) 1,083 At 31 March , ,852 Depreciation At 1 April 2014 RPI adjustment Disposals Charge in the year 2, (4) (1) 26 3, (5) 296 At 31 March , ,642 Net book amount at 31 March , ,210 1 April , ,405 page 126

129 Notes to the Regulated Business Current Cost Accounts continued E. Analysis of capital expenditure, grants and land sales Capital expenditure water Base Infrastructure renewals expenditure (IRE) Maintenance non-infrastructure (MNI) Enhancements Infrastructure enhancements Non-infrastructure enhancements Gross 2,307 7,123 2, Grants and contributions (1,050) Net 2,307 7, Gross 3,013 9, Grants and contributions (822) Net 3,013 9,489 Total capital expenditure 12,019 (1,050) 10,969 14,083 (822) 13,261 Grants and contributions water Developer contributions Infrastructure charge receipts new connections Other contributions Total grants and contributions 1,050 1, There were no disposals of protected land in the year ended 31 March 2015 (2014: none) page 127

130 Notes to the Regulated Business Current Cost Accounts continued F. Working capital 2015 Stocks Trade debtors measured household unmeasured household measured non-household unmeasured non-household other Measured income accrual Prepayments and other debtors Amounts owed by Group companies Trade creditors Deferred income receipts from customers in advance Capital creditors Accruals and other creditors 131 2, (453) 5, (505) (3,898) (90) (4,045) , ,004 1, (1,502) (2,185) (43) (2,150) Total working capital 1,091 3,565 Total revenue outstanding household non-household Other trade debtors include the bad debt provision of 907,000 (2014: 739,000). 2, , page 128

131 Notes to the Regulated Business Current Cost Accounts continued G. Analysis of net debt, gearing and interest costs Fixed rate Floating rate Index-linked 2015 Total Total borrowings 6, ,408 95,624 Cash (13,297) Net debt 82,327 Regulatory capital value 146,271 Gearing 56% Full year equivalent nominal interest cost Full year equivalent cash interest payment ,569 2,742 3,772 2,945 Indicative interest rates Indicative weighted average nominal interest rate Indicative weighted average cash interest rate Weighted average years to maturity 3.0% 3.0% 8 0.6% 0.6% 1 4.0% 3.1% % 3.1% 18 H. Movement on current cost reserve 2015 Opening balance Fixed asset adjustment Working capital adjustment Financing adjustment Grants and third party contributions adjustment 750,919 8, (781) (318) ,243 21, (1,930) (826) Closing balance 757, ,919 page 129

132 Notes to the Regulated Business Current Cost Accounts continued I. Transactions with associated companies The table below sets out the transactions with associated companies and non-regulated divisions within Bournemouth Water Limited. Associate company/division Description Terms of supply AquaCare (BWH) Limited Avon Valley Water Limited (formerly Sembcorp Water Services Limited) Sembcorp Utilities Services Limited Sembcorp Industries Limited Sembcorp Holdings Limited Sembcorp Utilities Pte Limited Mill Stream Insurance Limited Moorings Plumbing Sale of water Management charge Management charge Interest income Parent guarantee Insurance Bailiff Competitive letting Other market testing No market No market Other market testing Other market testing Other market testing No market Associate s turnover 1, ,779 56, Trade value 8 (478) (66) Moorings is a division of Bournemouth Water Limited. All associate turnover shown above is for 12 months to 31 December In addition to the above, the regulated business recharged the non-regulated businesses in the Company 446,000, representing office space and support services. The regulated business charged associate companies, Avon Valley Water Limited (formerly Sembcorp Water Services Limited) and AquaCare (BWH) Limited 137,000 for support services. To the best of the Directors knowledge, all appropriate transactions with associated companies were at arms length and have been disclosed. Dividends Under FRS21 dividends are reported in the period in which they are declared. Dividends are paid to Bournemouth Water Investments Limited (formerly Sembcorp Bournemouth Water Investments Limited) and subsequently paid to Sembcorp Holdings Limited. page 130

133 Notes to the Regulated Business Current Cost Accounts continued I. Transactions with associated companies continued Cross-directorships Mr R I Harrington has been a Director of Bournemouth Water Investments Limited (formerly Sembcorp Bournemouth Water Investments Limited) and BWH Enterprises Limited throughout the year. Mrs P J Goodwin has been a Director of Bournemouth Water Investments Limited (formerly Sembcorp Bournemouth Water Investments Limited) and BWH Enterprises Limited since her appointment on 5 January Mr P J Bridgewater was a Director of Bournemouth Water Investments Limited (formerly Sembcorp Bournemouth Water Investments Limited), BWH Enterprises Limited, Pre-Heat Limited, AquaCare (BWH) Limited, Mill Stream Insurance Limited, and Sembcorp Utilities (Netherlands) N.V. and its many major subsidiaries (contact the Company Secretary for a full list) until he resigned as Director on 3 July Mr P J Millward has been a Director of Bournemouth Water Investments Limited (formerly Sembcorp Bournemouth Water Investments Limited) throughout the year. Mr J F McGown was a Director of Bournemouth Water Investments Limited (formerly Sembcorp Bournemouth Water Investments Limited) and BWH Enterprises Limited until he retired as Director on 31 December Mrs E M Catchpole has been a Director of Bournemouth Water Investments Limited (formerly Sembcorp Bournemouth Water Investments Limited) since her appointment on 20 August Mrs A C Lane has been a Director of Bournemouth Water Investments Limited (formerly Sembcorp Bournemouth Water Investments Limited) and BWH Enterprises Limited throughout the year. Dr P D Gavens has been a Director of Bournemouth Water Investments Limited (formerly Sembcorp Bournemouth Water Investments Limited) throughout the year. Mr Ng M P has been a Director of Sembcorp Utilities Pte Limited and its many major subsidiaries throughout the year (contact the Company Secretary for a full list). page 131

134 Notes to the Regulated Business Current Cost Accounts continued J. Non-financial information 2015 Number of properties ( 000s) Households billed Non-households billed Household voids Non-household voids Properties served by new appointee in supply area as at 1 April 2009 Per capita consumption (excluding pipe supply leakage) l/h/d Unmeasured household Measured household Volume (Ml/d) Bulk supply export Bulk supply import Distribution input page 132

135 Company information List of directors Mr P J Millward (appointed as Chairman 1 January 2015) Mr J F McGown (retired as Chairman 31 December 2014) Mrs E M Catchpole (Audit Committee Chairman) (appointed 20 August 2014) Mrs A C Lane (Remuneration Committee Chairman) Mr C Loughlin (appointed 16 April 2015) Mr G D Connell (appointed 16 April 2015) Dr P D Gavens (resigned 16 April 2015) Mr Ng M P (resigned 16 April 2015) Mr C R Taylor (Managing Director) (appointed 1 April 2015) Auditor KPMG LLP, Dukes Keep, Marsh Lane, Southampton, SO14 3EX Bankers Lloyds Bank Plc, City Office, Monument Street, London, EC3R 8BQ Registered office George Jessel House, Francis Avenue, Bournemouth, BH11 8NX Customer Service customerservice@bournemouthwater.co.uk Mr R I Harrington (retired 31 March 2015) Mrs P J Goodwin (Finance Director) (appointed 5 January 2015) Mr P J Bridgewater (resigned 3 July 2014) page 133

136 Company information continued Facts and figures Area of supply 1,041km 2 Length of mains 2,830km Peak day demand 176.6Ml Ml = megalitre (a million litres or 220,000 gallons) Population 454,300 Average daily output 145.9Ml Number of properties served 204,800 page 134