Sumisho Osaka Gas Water UK Limited. Annual Report and Financial Statements for the year ended 31 March Company Number

Transcription

1 Annual Report and Financial Statements for the year ended 31 March 2017 Company Number

2 Page Group Strategic report 3 Directors report 7 Statement of directors responsibilities in respect of the annual report and the financial statements 10 Independent auditor s report to members of Sumisho Osaka Gas Water UK Limited 11 Consolidated statement of Profit and Loss and Other Comprehensive Income 13 Consolidated balance sheet 14 Consolidated statement of changes in equity 15 Consolidated cash flow statement 16 Notes 17 Company Balance Sheet 47 Company Statement of Changes in Equity 48 Notes 49 2

3 Group Strategic Report The directors present the strategic report for the year ended 31 March Principal activities Sumisho Osaka Gas Water UK Limited (SOGWUK) operates as an intermediate holding company for the European subsidiaries of Sumitomo Corporation Japan and Osaka Gas Co. Ltd. The company owns 100% ordinary shares in East Surrey Holdings (ESH), a company with investments in water and other trading and property companies. The main activity of the group is to supply water to the public through Sutton East Surrey Water plc (SESW), which is a regulated public water supply company. Business review and future prospects The Group turnover for the year ended 31 March 2017 was 77,719,000 (: 75,744,000). The Group profit before taxation was 14,452,000 (: 16,149,000). The balance sheet on page 14 shows the Group net assets of 199,207,000 (: 186,687,000). During the year reported, the Group paid dividends to its shareholders, Sumitomo Water Limited (SWL) and Osaka Gas UK Limited (OGUK), of 1,750,000 over this financial year (: 5,000,000). In November, the Group invested in a new subsidiary, The Calcite Factory BV, to establish a pilot plant to process Calcite for use in the water treatment industry. The country is currently in a period of some economic and financial uncertainty following the Referendum decision in favor of leaving the European Union. While it is too early to assess what the impact on the Group will be, the Group expects to be well-placed to respond to such external challenges. The remainder of this report largely covers the business activities of SESW, which is the largest subsidiary of the group. Sutton and East Surrey Water Plc (SESW) SESW supplies water to 269,000 homes and 17,000 businesses in an area extending across the London Boroughs of Croydon, Merton and Sutton, as well as east Surrey and parts of Kent and Sussex. The company serves 688,000 people in an area of 835 square kilometres, including the towns of Redhill, Reigate, Dorking, Leatherhead, Cobham, Sutton, Purley, Caterham, Coulsdon, Edenbridge and Horley, and is also the supplier of water to Gatwick Airport, which is located near the southern boundary of its distribution area. Last year SESW s eight treatment works supplied 161 million litres per day into a mains network owned and managed by SESW. The average domestic consumption rate is 161 litres per head per day, amongst the highest in the country, and reflects the socio-economic profile of the population in the SESW area. SESW s raw sources of water include one surface reservoir, which accounts for 15% of the supply. This is filled from water abstracted from the River Eden, normally from November to April. Underground aquifers yield the remaining 85% of supply via boreholes and wells from which groundwater is extracted. Water quality is generally very good, although the presence of minerals in some places in the area makes the water naturally hard. SESW s treatment processes include softening. SESW is a regulated supplier of water only (it is not responsible for the collection, treatment or disposal of sewage). However, SESW does collect sewerage charges on behalf of Thames Water from those customers that use its water. 3

4 Group Strategic Report Our business Plan was put together after extensive public consultation and makes a number of promises to our customers focused around delivery of key six aims. Meeting operational efficiency targets, delivering our significant investment program and maintaining high levels of service and quality within the allowed price limits is a delicate balancing act. We are determined to succeed and, motivated by the vision, values and aims we introduced in 2014, have made significant progress over the past twelve months. Regulation of Sutton and East Surrey Water plc (SESW) The water industry in England is subject to a range of UK and European laws and is closely regulated by Ofwat for customer service levels and prices, the Environment Agency (EA) for environmental protection and the Drinking Water Inspectorate (DWI) for drinking water quality. In addition, the Consumer Council for Water (CCW) monitors levels of service on behalf of customers. The water industry operates in five-year cycles known as Asset Management Plan (AMP) and as economic regulator, Ofwat fixes the amount that water companies are allowed to charge their customers and sets the standards of service that each company must deliver for each five-year period. The latest package of price and services standards, known as Ofwat s Final Determination, was formally accepted by the Company in February This is the second year of this new AMP period, the key elements of which are an increased focus on delivery of the promises we have made to customers; more focus on longer-term objectives; and ownership of plans and performance by company Boards. On 1 April 2017 the Company sold its right to trade with existing eligible business customers to an associated company, trading as SES Business Water, following the start of retail market competition allowing businesses to choose their water supplier. Financial performance for Sutton and East Surrey Water plc (SESW) SESW financial performance remained good with turnover increasing to 64.7 million (: 63.0 million). Operating costs increased by 1.4% to 43.5 million (: 42.9 million). Interest charges increased by 16% to 9.2 million (: 7.9 million) largely as a result of higher inflation increasing the indexation charge on the 100 million index linked bond. Other interest receivable and similar income increased to 0.9 million (: 0.7 million). Profit on ordinary activities before tax fell by 1.4 million to 12.9 million (: 14.3 million). Due to the impact of the Government s enactment of lower tax rates for future years on the provisions SESW has made for future tax payments, SESW s tax charge was limited to 0.4 million in the year (: 0.4 million credit). Profit after tax was 12.5 million (: 14.7 million). In total SESW invested 23.4 million during the year (: 18.1 million). Key Performance Indicators (KPIs) SESW made a clear promise to its customers to deliver on its aims and uses a variety of KPIs to measure its performance against these targets. Aim 1: To provide a reliable and sufficient supply of safe, high quality drinking water Supply interruptions 30% better than last year Burst mains 10% lower than the long-term average Just two quality failures at customers taps Aim 2: Offer good value for money and keep bills at a fair and reasonable level 4

5 Group Strategic Report Target for customers helped by our Water Support tariff achieved 93.7% of customers consider bills affordable compared with target of 85% Cost of bad debt just 0.67% of turnover, 33% lower than target Aim 3: Increase the resilience of our network to drought, flooding and equipment failure No supply restrictions 36% of properties now supplied by more than one treatment works 11 kilometers of mains replaced Aim 4: Deliver consistently high levels of service Achieved 92.3% customer satisfaction with the water services compared to a target of 89.5% Over 14,000 more customers signed up to paperless billing Achieved a service incentive mechanism (SIM) score of 79.6 points compared to the target of 86.2 points Aim 5: Reduce our impact on the environment while seeking to make a positive contribution to its quality Leakage broadly in line with target Environmental education programme reaches 26% more people than target Greenhouse gas emissions achieve year-on-year reduction Overall Aim: Continue to be a well-run, respected and successful business Employee engagement and overall satisfaction above target Strong community engagement Risk management objectives and policies The company s activities expose it to a number of financial risks and operational risks, which include the following: Investment risk The key factor for the company and its subsidiary undertakings in managing this risk is to maintain and enhance the close relationships with its customers and suppliers. The subsidiary undertakings continue to develop and provide innovative value added services at every stage of the supply chain. Interest rate and liquidity risks The group adopts a policy of ensuring the majority of its exposure to interest rate changes on borrowings is on a fixed rate basis. Majority of the liquidity and interest rate risks are associated with SESW. SESW has controlled its principal interest rate risk by issuing an Index-Linked Bond. The interest rate on this Bond is 2.874% in addition to index-linking of the capital value. The Group manages its liquidity risk through the use of borrowing facilities with the Royal Bank of Scotland. As at 31st March 2017 the Group has a 25 million five-year revolving credit facility of which million remained un-utilised (: 25m) and a 30 million five-year term loan which was fully utilised (: 30m). The interest on the term loan is at a floating rate based on a margin above LIBOR. 5

6 Group Strategic Report Currency risk The Group does not use derivative financial instruments to hedge its exposure to credit and interest rate risks arising in the normal course of its business. The Group has minimal exposure to currency risk since nearly all activities are conducted in the UK and all borrowings are denominated in sterling. Credit risk and counterparty risk The Group s principal financial assets other than investments are bank balances, service and other debtors within the group, and deferred tax assets. Credit risk within the company is managed by using credit insurance where available. Counterparty risk on liquid funds is limited because the counterparties are banks with high credit-ratings assigned by international credit ratings agencies. Regulatory compliance risk The Group s main activity is headed by SESW, which is regulated public water supply company. The water industry in England is subject to a range of UK and European laws and is closely regulated by Ofwat for customer service levels and prices, the Environment Agency (EA) for environmental protection and the Drinking Water Inspectorate (DWI) for drinking water quality. In addition, the Consumer Council for Water (CCW) monitors levels of service on behalf of customers. SESW mitigates the risk by having a stable experienced management team in the company. The internal governance hierarchy and well established procedures also ensure all compliances are met. Operational environment risk The Group s main activity is headed by SESW, which is regulated public water supply company. Incidents such as water supply shortage and water quality failure including by deliberate acts affect SESW s customer satisfaction significantly. Careful measures such as: - Detailed water resource management planning - Improving resilience and flexibility of network - Protection of assets from risk of flooding - Detailed control procedures for all treatment and network activities - 24 hour manned Control room - Extensive sampling regime and in-house quality accredited laboratory are in place to mitigate the risks Major water pipe burst is another risk to be considered as this can cause damages to third party property. Targeted long-term mains replacement program and network operating procedures are in place to prevent such events from happening. SESW has insurance policies covering third party liability and has experienced staff and contractors on 24-hour standby arrangements to engage with such incident. Approved by the Board of Directors and signed on behalf of the Board S Kitajima Director Company Registration No: July 2017 T Kubo Director 6

7 Directors Report The directors are pleased to present their directors report and the audited financial statements for the year ended 31 March 2017 Ownership of the company The company is 50% owned by Summit Water Limited (SWL), a company incorporated at Vintners Place, 68 Upper Thames Street, London, EC4V 3BJ; and 50% by Osaka Gas UK Ltd (OGUK), a company incorporated at 1 st Floor, Carrington House, Regent Street, London, W1B 5SE. Financial results and Dividends The Group s turnover increased to 77,719,000 (: 75,744,000), Operating costs increased to 57,962,000 (: 56,753,000).The group s operating profit increased to 19,757,000 (: 18,991,000). The Group s profit for the financial year is 14,233,000 (: 16,627,000). During the year, the company paid an interim dividend of 0.01 per ordinary share (: 0.02), amounting to 1,750,000 in January Osaka Gas UK Limited and Summit Water Limited received 875,000 each on 16 th January SESW Turnover increased to 64,700,000 (: 63,000,000), Operating costs increased by 1.4% to 43,500,000 (: 42, ) as the company invested in new capabilities to deliver on commitments made to customers. As a consequence, operating profit increased by 1,095,000 to 21,212,000 (: 20,100,000). 7

8 Directors Report (Continued) The directors who held office during the year and up to the date of signing are as follows: G Holman S Hasegawa (appointed 01 April ) S Hasegawa (resigned 30 June 2017) S Kitajima (appointed 1 July 2017) M Kyo (resigned 31 March 2017) T Kubo (appointed 1 April 2017) R Nishida Directors indemnities The company has granted an indemnity to its directors against liability in respect of proceedings brought by third parties, subject to the conditions set out in section 234 of the U.K. Companies Act Such qualifying third party indemnity provision remains in force as at the date of approving the directors report. Charitable and political donations During the year the Group made charitable donations amounting to 9,799 (: 9,009). There were no political donations (: nil). The largest donations to UK charities were 5,748 to Macmillan Cancer Support, 581 to the Defense Medical Rehabilitation Centre at Headley Court, and 535 to WaterAid. Greenhouse gas emissions Greenhouse gas emissions are calculated using the UK Water industry Research Carbon Accounting Workbook which is updated annually to reflect changes to emission factors and carbon reporting guidance from the UK Government. Operational greenhouse gas emissions in 2017 were 25,108 tonnes of carbon dioxide equivalent (tco2eq) (: 27,789 tco2eq), a 9.6% reduction on the previous year. This equates to 420 kgcoceq per million litres of treated water (: 470 kgco2eq) Payment to suppliers Settlement terms are agreed with suppliers as part of the contract terms and it is the company s policy to pay in accordance with these terms. Other creditors are paid in accordance with invoice terms. Creditor days in the year were approximately 29 days (: 26 days) Employees The Group's employees are fundamental to the success of the business, and our achievements to date are a result of their hard work and determination. We are confident that their ongoing commitment will ensure we are able to meet future challenges. We aim to be a responsible employer for whom people choose to work, and to ensure that our employees are well trained, competent and motivated, while being appropriately rewarded for their efforts. We recognise that the health and safety of everyone who works for us or is affected by our activities is critical to the success of our business. Going Concern The Directors assess that there is a reasonable expectation that the company has adequate resources to continue its operational existence for the foreseeable future and for a period of no less than 12 months from the date of approval of the annual report. Accordingly, the financial statements continue to be prepared on a going concern basis. 8

9 Directors Report (Continued) Disclosure of information to auditor The directors who held office at the date of approval of this 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 he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the Company s auditor is aware of that information. Auditors Pursuant to Section 487 of the Companies Act 2006, the auditor will be deemed to be reappointed and KPMG LLP will therefore continue in office. Approved by the Board of Directors and signed on behalf of the Board S Kitajima Director T Kubo Director Company Registration No: Vintners' Place, 68 Upper Thames Street, London, EC4V 3BJ 7 July

10 Statement of directors responsibilities in respect of the annual report and the financial statements The directors are responsible for preparing the Annual Report, the Directors Report and the group and parent company financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare group and parent company financial statements for each financial year. Under that law they have elected to prepare the group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice), including FRS 101 Reduced Disclosure Framework. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit for that period. In preparing each of the group and parent company financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgments and estimates that are reasonable and prudent; for the group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act They have 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 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. 10

11 Independent auditor s report to the members of Sumisho Osaka Gas Water UK Limited (continued) We have audited the financial statements of Sumisho Osaka Gas Water UK Limited for the year ended 31 March 2017 set out on pages 13 to 56. The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice), including FRS 101 Reduced Disclosure Framework. This report is made solely to the company s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act Our audit work has been undertaken so that we might state to the company s members those matters we are required to state to them in an auditor s 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 and the company s members, as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors Responsibilities Statement set out on page 10, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council s website at Opinion on financial statements In our opinion: the financial statements give a true and fair view of the state of the group s and of the parent company s affairs as at 31 March 2017 and of the group s profit for the year then ended; the group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; the parent company financial statements have been properly prepared in accordance with UK Generally Accepted Accounting Practice; the financial statements have been prepared in accordance with the requirements of the Companies Act Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors Report for the financial year is consistent with the financial statements. Based solely on the work required to be undertaken in the course of the audit of the financial statements and from reading the Strategic report and the Directors report: we have not identified material misstatements in those reports; and in our opinion, those reports have been prepared in accordance with the Companies Act

12 Independent auditor s report to the members of Sumisho Osaka Gas Water UK Limited (continued) Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Anna Jones (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL United Kingdom 7 July

13 Consolidated Statement of Profit and Loss and Other Comprehensive Income for the year ended 31 March 2017 Note Revenue 2 77,719 75,744 Operating costs 3 (57,962) (56,753) Operating profit 19,757 18,991 Gain on sale of land - 1,325 Finance income 6 3,879 3,642 Finance expenses 6 (9,184) (7,809) Profit before tax 14,452 16,149 Taxation 7 (219) 478 Profit for the year 14,233 16,627 Other comprehensive income Remeasurements of defined benefit asset 116 3,470 Exchange differences on translating foreign operations (1) - Total comprehensive income for the year 14,348 20,097 Total comprehensive income attributable to: Equity holders of the parent 14,223 19,975 Non-controlling interest The notes on pages 17 to 46 form part of the financial statements. 13

14 Consolidated Balance Sheet as at 31 March 2017 Note Non-current assets Property, plant and equipment 8 285, ,848 Intangible assets 9 117, , , ,024 Current assets Inventories 12 1,411 1,579 Trade and other receivables 13 22,440 20,392 Net pension scheme asset 17 25,163 23,766 Cash and cash equivalents 14 22,557 22,487 71,571 68,224 Total assets 474, ,248 Current liabilities Trade and other payables 16 31,739 29,749 31,739 29,749 Non-current liabilities Interest-bearing loans and , ,698 borrowings Deferred tax liabilities 11 35,857 37, , ,812 Total liabilities 275, ,561 Net assets 199, ,687 Equity attributable to equity holders of the parent Share capital 164, ,550 Translation Reserve (1) - Retained earnings 34,252 21, , ,328 Non-controlling interest Total equity 199, ,687 The notes on pages 17 to 46 form part of the financial statements. These financial statements were approved by the Board of Directors on 7 July 2017 and signed on its behalf by: S Kitajima Director Company Registration No: T Kubo Director 14

15 Consolidated Statement of Changes in Equity Share capital Retained earnings Translation reserve Total parent equity Non-controlling interest Total Balance at 1 April ,550 6, , ,685 Total comprehensive income for the period Profit or loss - 16,505-16, ,627 Re-measurements of defined benefit asset - 3,470-3,470-3,470 Total comprehensive income for the year - 19,975-19, ,097 Transactions with owners recorded directly in equity, Dividends paid - (5,000) - (5,000) (110) (5,110) Other transactions Total transactions with Owners - (4,985) - (4,985) (110) (5,095) Balance at 31 March 164,550 21, , ,687 - Balance at 1 April 164,550 21, , ,687 Total comprehensive income for the period Profit of loss - 14,108-14, ,233 Re-measurements of defined benefit asset Translation Reserve - (1) (1) - (1) Total comprehensive income for the year - 14,224 (1) 14, ,348 Transactions with owners recorded directly in equity Dividends paid - (1,750) - (1,750) (78) (1,828) Total transactions with Owners - (1,750) - (1,750) (78) (1,828) As at 31 March ,550 34,252 (1) 198, ,207 This notes on pages 17 to 46 form part of the financial statements. 15

16 Consolidated Cash Flow Statement for the year ended 31 March 2017 Notes Cash flow from operating activities Profit for the year 14,233 16,627 Adjustments for Depreciation and amortization ,570 10,338 Net interest payable and similar charges 6 5,305 4,169 Gains on sale of assets (167) (1,096) Taxation (478) 15,927 12,933 (Increase)/Decrease in trade and other debtors (2,048) (694) (Increase)/Decrease in stocks 168 (87) Increase/(Decrease) in trade and other creditors 3,523 (826) Increase/(Decrease) in provisions and employee benefits (447) (470) 1,196 (2,077) Interest Paid (4,971) (5,025) Tax Paid (3,035) (1,257) Net cash from operating activities 23,350 21,201 Cash flows from investing operating activities Proceeds from disposal of fixed assets 553 1,500 Interest received Purchase of tangible fixed assets (24,283) (18,396) Net cash from investing activities (23,602) (16,802) Cash flows from financing activities Proceeds from loans 2,150 2,500 Dividends paid (1,828) (5,095) Net cash from financing activities 322 (2,595) Net increase in cash and cash equivalents 70 1,804 Cash and cash equivalents at 1 April 22,487 20,683 Cash and cash equivalents at 31 March ,557 22,487 The notes on pages 17 to 46 form part of the financial statements 16

17 1 Accounting policies Basis of accounting Sumisho Osaka Gas Water UK Limited (the Company ) is a company incorporated and domiciled in UK. The company is a private company limited by shares. The group financial statements consolidate those of the Company and its subsidiaries (together referred to as the Group ). The parent company financial statements present information about the Company as a separate entity and not about its group. The group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU ( Adopted IFRSs ). The Company has elected to prepare its parent company financial statements in accordance with FRS 101; these are presented on pages 47 to 56. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these group financial statements.. Judgements made by the directors, 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 Measurement convention The financial statements are prepared on the historical cost basis unless otherwise stated in these notes to the financial statements. 1.3 Going concern The going concern basis has been adopted for preparing the financial statements. The Directors have considered the financial position of the Group and have concluded that they will be able to meet their 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. 17

18 1 Accounting policies (continued) 1.4 Basis of consolidation Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into consideration potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Losses applicable to the non-controlling interests in a subsidiary are allocated to the noncontrolling interests even if doing so causes the non-controlling interests to have a deficit balance. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated. Unrealised gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. 1.5 Classification of financial instruments issued by the Group Financial instruments issued by the Group are treated as equity only to the extent that they meet the following two conditions: (a) (b) they include no contractual obligations upon the group to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavorable to the group; and where the instrument will or may be settled in the company s own equity instruments, it is either a nonderivative that includes no obligation to deliver a variable number of the company s own equity instruments or is a derivative that will be settled by the company s exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments. To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the company s own shares, the amounts presented in these financial statements for called up share capital and share premium account exclude amounts in relation to those shares. 1.6 Non-derivative financial instruments Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. Trade and other receivables Trade and other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method, less any impairment losses. Trade and other payables Trade and other payables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. 18

19 1 Accounting policies (continued) 1.6 Non-derivative financial instruments (continued) Interest-bearing borrowings Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost using the effective interest method, less any impairment losses. 1.7 Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Tangible fixed assets are stated at deemed cost less accumulated depreciation and accumulated impairment losses. The cost includes the original purchase price of the asset and costs attributable to bringing the asset to its working condition for its intended use. The cost of assets includes directly attributable labour and overhead costs which are incremental to the Company. The Company considers a substantial period of time for the construction of an asset in the water industry to be five years. Fixed assets are capitalised and depreciated when they are considered to be operationally complete, which means that the asset is in the condition necessary for it to be capable of operating in the manner intended by management. Where parts of an item of tangible fixed assets have different useful lives, they are accounted for as separate items of tangible fixed assets. Infrastructure assets mains and fresh water reservoirs Infrastructure assets comprise a network of systems relating to water distribution. Mains repairs, maintenance and replacements The mains network is considered to consist of multiple assets. It consists of different areas and is capable of being separated and divided up. IAS 16 requires all repairs and maintenance to be charged to the profit and loss account. Repairs and maintenance include the day to day servicing of an item. The costs of day-to-day servicing are primarily the costs of labour and consumables, and may include the cost of small parts. The mending of a burst main is considered to be a repair as long as the subsequent work extends to the replacement of no more than one length of pipe. The relining of a main is considered to be maintenance which is the work needed to keep a main in good condition. IAS 16 requires replacements to be capitalised. When more than one length of pipe is laid it is considered a replacement, and not a repair, and it is therefore capitalised. Perished mains replaced during the period are disposed of from the fixed asset records. 19

20 1 Accounting policies (continued) 1.7 Property, plant and equipment (continued) Depreciation is charged to the profit and loss account on a straight-line basis over the estimated useful lives of each part of an item of tangible fixed assets. Freehold land is not depreciated. The estimated useful lives are as follows: Years Infrastructure assets Fresh reservoirs 150 Mains 100 Non infrastructure assets Buildings, boreholes and service reservoirs Plant and machinery Motor vehicles and sundry plant 3-15 Depreciation methods, useful lives and residual values are reviewed at each balance sheet date. 1.8 Business combinations All business combinations are accounted for by applying the acquisition method. Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. 1.9 Intangible assets and goodwill Goodwill Goodwill is stated at cost less any accumulated impairment losses. It is not amortised but is tested annually for impairment. Research and development Expenditure on research activities is recognised in the profit and loss account as an expense as incurred. Expenditure on development activities is capitalised if the product or process is technically and commercially feasible and the Company intends and has the technical ability and sufficient resources to complete development, future economic benefits are probable and if the Company can measure reliably the expenditure attributable to the intangible asset during its development. Development activities involve a plan or design for the production of new or substantially improved products or processes. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads and capitalised borrowing costs. Other development expenditure is recognised in the profit and loss account as an expense as incurred. 20

21 1 Accounting policies (continued) 1.9 Intangible assets and goodwill (continued) Amortisation Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Intangible assets with an indefinite useful life and goodwill are systematically tested for impairment at each balance sheet date. Other intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows: Years Contracts Inventories Inventories are stated at the lower of cost and net realisable value. Cost is based on the first-in first-out principle and includes expenditure incurred in acquiring the stocks and other costs in bringing them to their existing location and condition. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset s original effective interest rate. For financial instruments measured at cost less impairment, an impairment is calculated as the difference between its carrying amount and the best estimate of the amount that the Company would receive for the asset if it were to be sold at the reporting date. Interest on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss Impairment excluding inventories and deferred tax assets Financial assets (including receivables) A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Non-financial assets The carrying amounts of the Group s non-financial assets, other than inventories and deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset s recoverable amount is estimated. For goodwill, and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the cash-generating unit ). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units, or ( CGU ). Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is 21

22 1 Accounting policies (continued) 1.11 Impairment excluding inventories and deferred tax assets (continued) monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. An impairment loss is recognised if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised Employee benefits The Group accounts for pensions and other post-employment benefits under IAS 19(R). The Group operates both defined benefit and defined contribution pension schemes. Defined benefits are provided using both funded and unfunded pension plans. Defined contribution plans obligations for contributions to defined contribution pension plans are recognised as an expense in the profit and loss account in the period during which services are rendered by employees. Defined benefit plans The pension scheme asset or liability in the balance sheet represents the net present value of the defined benefit obligation and the fair value of scheme assets at the balance sheet date. The present value of the defined benefit obligation and the cost of providing benefits under defined benefit plans is determined on a triennial basis, and updated to each year end by an independent qualified actuary using the Projected Unit Credit actuarial valuation method, discounted at an interest rate equivalent at measurement date to the rate of return on a high quality corporate bond of equivalent term and currency to the scheme liabilities. The pension cost in the income statement includes current and past service cost and the effect of any settlements and curtailments. A net finance charge or credit is recognised within finance costs in the income statement and comprises the net of the expected return on pension scheme assets and the interest on pension scheme liabilities. All actuarial gains and losses and the related current and deferred taxation are recognised in the statement of recognised income and expense Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, that can be reliably measured and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pretax rate that reflects risks specific to the liability. 22

23 1 Accounting policies (continued) 1.14 Revenue Revenue represents the income receivable for services provided in the ordinary course of business excluding VAT. The revenue recognition policy is the same in the regulatory and statutory accounts. All water charges billed to customers, exclusive of VAT, are recognised as income at the time they are billed and apportioned over the period to which they relate. For consumption by measured customers which has not yet been billed, an accrual is estimated. The measured income accrual at 31 March 2017 was 6,782,871 (: 6,522,506). Additional charges added to a customer s account as a result of debt recovery activity, such as court costs or solicitors fees, are recognised as turnover when billed. Empty unmetered properties are not billed if the Company has been informed in writing that the supply is not required and the Company is able to attend and turn off the supply. Empty metered properties are billed standing charges only. Meter reading continues for the purpose of highlighting consumption so that volume charges can be billed when the occupier has been identified. Disconnected commercial properties are not billed. If a household property is unoccupied due to the customer being hospitalised or residing in care, and we are informed of this in writing, the property is not billed. New properties are charged from the date a meter is installed, if consumption is being recorded on the meter. If the property is unoccupied but consumption is being registered, the developer will be billed. The developer remains responsible for a property until hand-over details have been provided. If a property is recorded as empty in the billing system, an empty property process is followed. The purpose of this process is to verify whether the property is occupied or is genuinely empty and, if occupied, to identify the person or persons responsible for charges and raise a bill. The empty property process may involve electronic services using third party data as well as visits to properties. No bills are raised in the name of the occupier. Outstanding balances on customers accounts are normally only written off as bad debts when the customer can no longer be located, all means of recovery have been exhausted or the cost of recovery is disproportionate to the value of the debt. There has been no change in this policy in the year. Provision is made for doubtful debt based on its age and the recovery processes already applied and historic recovery rates (from 2009 to 2015) for debt that had been subject to recovery action via the Courts. Provisioning rates for debt that had not been subject to Court action were set at 50% of the comparable age band of Court debt. These rates have been applied to debt 6-12 months old and over 12 months old. No provision is made for debt less than 6 months old that has not been subject to Court action. There has been no material impact on the bad debt charge from the application of this policy during the year Expenses Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense. 23

24 1 Accounting policies (continued) 1.15 Expenses (continued) Financing income and expenses Financing expenses comprise interest payable, finance charges on shares classified as liabilities and finance leases recognised in profit or loss using the effective interest method, unwinding of the discount on provisions, and net foreign exchange losses that are recognised in the income statement (see foreign currency accounting policy). Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that takes a substantial time to be prepared for use, are capitalised as part of the cost of that asset. Financing income comprise interest receivable on funds invested, dividend income, and net foreign exchange gains. Interest income and interest payable is recognised in profit or loss as it accrues, using the effective interest method. Dividend income is recognised in the income statement on the date the entity s right to receive payments is established. Foreign currency gains and losses are reported on a net basis Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the profit and loss account, except to the extent that it relates to items recognised directly in equity or other comprehensive income, in which case it is recognised directly in equity or other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The initial recognition of goodwill is not provided for. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date Adopted IFRS not yet applied The IASB has issued new standards on Revenue (IFRS 15), Financial Instruments (IFRS 9) and Leases (IFRS 16). These have not been applied by the Group in these financial statements. The implications of the new standard are complex and a process will commence in 2017 to evaluate the impact. At this point, their adoption is not expected to have a material effect on the financial statements. 24