Sutton & East Surrey Water plc Financial Statements 2004

Sutton & East Surrey Water plc Financial Statements 2004 Our business objectives are: to maintain the supply of high quality water and a high level o...
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Sutton & East Surrey Water plc Financial Statements 2004

Our business objectives are: to maintain the supply of high quality water and a high level of service to our customers, and to retain our position as one of the most efficient and technically advanced water companies: to conduct all aspects of our operation with regard to the environment.

Sutton and East Surrey Water plc

Financial Statements 2004

Directors

P A Barrett OBE Chairman, Non-Executive P B Holder MA FCA N J Fisher BA FCCA M E Hegarty BSc MBA CEng FICE FCIWEM

N L Houlahan BA MSc MCIWEM L C Sonden BSc CEng MICE J R Avery LLB Non-Executive J O Newton MA Non-Executive

Advisers Auditors KPMG Audit Plc 8 Salisbury Square, Blackfriars London EC4Y 8BB

Bankers Lloyds TSB Bank Plc Horley Surrey RH6 7BJ

Solicitors Beachcroft Wansbroughs 100 Fetter Lane London EC4A 1BN

Property Consultants Jones Lang LaSalle 22 Hanover Square London WC1A 2BN

Registrar Lloyds TSB Registrars The Causeway Worthing BN99 6DA

Secretary J B Hornby ACA

Contents Directors’ Report Statement of directors’ responsibilities Report of the auditors Profit and loss account Balance sheet Notes to the financial statements Regulatory accounts

01 03 04 05 06 07 20

Sutton and East Surrey Water plc

Financial Statements 2004

Directors’ Report

Principal activities The Company is engaged principally in the supply of drinking water in East Surrey and parts of Kent, Sussex and the London Boroughs of Croydon and Sutton. Financial results and dividends A detailed business review is contained in the financial statements of East Surrey Holdings plc. Turnover for the year ended 31 March 2004 was £38.7 million (£38.1 million). Profit on ordinary activities before taxation was £5.2 million (£9.1 million). Details of dividends declared and paid during the year are given in note 8 on page 11. The directors do not propose a final dividend; the total dividend for the year ended 31 March 2004 was 17.1p (14.2p) per ordinary share and 7.8p (7.8p) per preference share. Dividends are determined as a part of the calculation of an appropriate return on capital (i.e. dividends plus interest) for an efficient company producing a high level of service to its customers. Total dividends cost £6.3 million (£5.4 million) leaving a loss of £1.7 million (a profit of £4.8 million) to be transferred to reserves. Financial Instruments The long dated, inflation linked bond issue was issued at a rate of interest of 2.874 per cent. The index-linked nature of the bond reflects the index-linked regulatory asset value and pricing structure. The bond issue carried a AAA rating. The principal risks arising from the Company’s financial instruments relate to liquidity, inflation and interest rates. The Company ensures that liquidity is available to meet foreseeable needs through overdraft facilities, reviewed annually and repayable on demand. The Company had £23.2 million cash remaining from the Bond issue to fund capital expenditure to 2005. These funds will be drawn down annually. The Company’s exposure to interest rates is limited by the fixed interest rate applicable to the bond. Any overdraft facilities used are charged at 1% above base rate. The Bond is index-linked so that the capital sum and interest payment increase with RPI. The indexation charge is treated as an interest cost but does not have any immediate cash flow impact on the Company. Payments 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. The creditors days are approximately 30 days (16 days). Tangible fixed assets Capital expenditure on tangible fixed assets was £8.5 million. In addition, £13.3 million was spent on renewing infrastructure assets (i.e. water mains). The directors consider that the market value of the land in current use included within tangible fixed assets is not substantially in excess of book value. Directors The present directors are listed on the opposite page. The interests of directors in the shares of the holding company, East Surrey Holdings plc, are as follows: 31 March 2004 Ordinary Voting Preference Shares Shares P A Barrett P B Holder N J Fisher M E Hegarty L C Sonden N L Houlahan J O Newton J R Avery

124,508 185,402 28,303 11,918 2,652 3,803 22,416 6,800

– 7,478 4,901 – – – 3,296 –

31 March 2003 Ordinary Voting Preference Shares Shares 73,240 108,549 16,119 11,306 2,066 3,212 13,186 4,000

– 7,478 4,901 – – – 3,296 –

1

2

Sutton and East Surrey Water plc

Financial Statements 2004

Directors’ Report (continued)

Employees Communication with employees is facilitated through formal and informal consultation, internal newsletters and other channels of communication appropriate to the business. There is communication to employees of annual and half year results and announcement of other significant business matters. Applications for employment by disabled persons are always fully considered, bearing in mind the respective aptitudes and abilities of the applicants concerned. The Company will endeavour where practicable to maintain in useful duty employees who may become disabled because of illness or injury and will consider the development of alternative skills for such employees. Charitable and political donations During the year the Company made charitable donations amounting to £21,744 (£10,263). There were no political donations. Corporate Governance Information on corporate governance is set out in the Directors’ Report of the parent company, East Surrey Holdings plc. Appointed business At 31 March 2004 the Company was in compliance with paragraph 3.1 of Condition K of its Instrument of Appointment, which requires that the water supply assets are protected by a “ring fence”. By Order of the Board, J B Hornby Secretary Redhill, Surrey 3 June 2004

Sutton and East Surrey Water plc

Financial Statements 2004

Statement of Directors’ Responsibilities in Relation to the Financial Statements

Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the company and of the profit and loss for that period. In preparing these financial statements the directors are required to: – select suitable accounting policies and then apply them consistently – make judgements and estimates that are reasonable and prudent – state whether applicable 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 proper accounting records which disclose with reasonable accuracy at any time the financial position of the company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps that are reasonably open to them to safeguard the assets of the company and to prevent and detect fraud and other irregularities.

3

4

Independent Auditors’ Report to the Members of Sutton and East Surrey Water plc

We have audited the financial statements on pages 5 to 19. This report is made solely to the company’s members, as a body, in accordance with section 235 of the Companies Act 1985. 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 auditors The directors are responsible for preparing the Annual Report. As described on page 3, this includes responsibility for preparing the financial statements in accordance with applicable United Kingdom law and accounting standards. Our responsibilities, as independent auditors, are established in the United Kingdom by statute, the Auditing Practices Board, and by our profession’s ethical guidance. We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements have been properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors’ Report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and transactions with the company is not disclosed. Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the company as at 31 March 2004 and of the profit of the company for the year then ended. KPMG Audit Plc Chartered Accountants Registered Auditor London 3 June 2004

Sutton and East Surrey Water plc

Financial Statements 2004

Profit and Loss Account for the year ended 31 March 2004

Note

2004 £000

2003 £000

Turnover Operating costs

2 3

38,733 (28,536)

38,061 (26,644)

Operating profit Exceptional profit Net interest payable and similar charges

4 6

10,197 212 (5,183)

11,417 908 (3,261)

Profit on ordinary activities before taxation Taxation on profit on ordinary activities

7

5,226 (706)

9,064 1,090

Profit on ordinary activities after taxation Dividends – paid and proposed

8

4,520 (6,266)

10,154 (5,367)

(1,746)

4,787

(Loss)/profit retained for the year Movement on reserves, see note 20. Reported profits are equivalent to historic cost profits, and relate to continuing activities. There are no recognised gains or losses other than the profit for the year and the preceeding year.

5

6

Sutton and East Surrey Water plc

Financial Statements 2004

Balance Sheet as at 31 March 2004

Fixed assets Intangible assets Tangible assets

Note

2004 £000

2003 £000

12 11

11,672 126,305

12,645 112,674

137,977

125,319

708 5,346 33,441

663 4,733 37,938

39,495 (19,155)

43,334 (12,076)

20,340

31,258

158,317

156,577

Current assets Stocks Debtors Cash at bank and in hand

13 14

Creditors: amounts falling due within one year

15

Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year

16

(94,709)

(91,372)

Provisions: Deferred tax

18

(6,876)

(6,727)

56,732

58,478

15,489 41,243

15,489 42,989

44,348 12,384

46,094 12,384

56,732

58,478

Net assets Capital and reserves Called up share capital Profit and loss account

19 21

Shareholders’ funds Equity Non-equity 20

These financial statements were approved by the Board of Directors on 3 June 2004 and signed on its behalf by:

P B Holder Director

N J Fisher Director

Sutton and East Surrey Water plc

Financial Statements 2004

Notes to the Financial Statements

1 Accounting policies The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the financial statements. The company has followed the transitional arrangements of FRS17 ‘Retirement benefits’ in these financial statements. Basis of accounting The financial statements have been prepared under the historical cost accounting rules and in accordance with applicable accounting standards. Under FRS 1, the Company is exempt from preparing a cash flow statement, on the grounds that it is a wholly owned subsidiary of East Surrey Holdings plc, which has prepared a consolidated statement dealing with the cash flows of the Group. As the Company is a wholly owned subsidiary of East Surrey Holdings plc, the Company has taken advantage of the exemption contained in Financial Reporting Standard 8 and has therefore not disclosed transactions or balances with entities that form part of the Group (or investees of the Group qualifying as related parties). The consolidated financial statements of East Surrey Holdings plc, within which this Company is included, can be obtained from the address given in note 24. The details of a true and fair override in respect of Third Party Contributions are set out below. Turnover Turnover represents the income receivable for services provided in the ordinary course of business excluding VAT. Infrastructure renewals accounting Expenditure on infrastructure assets, which are considered to have indefinite economic lives, relating to increases in capacity or enhancements of the network is treated as capital expenditure. Expenditure on maintaining the network in accordance with defined standards of service is regarded as mains renewals and is also treated as capital expenditure under FRS15 Tangible Fixed Assets. The depreciation charge for infrastructure assets is the long-term normal annual level of expenditure required, based on an independently certified asset management plan. Depreciation Freehold land is not depreciated. Depreciation is calculated so as to write off the cost of other fixed assets to their estimated residual value by equal instalments over their estimated useful lives as follows: Years Buildings, boreholes and service reservoirs Plant and machinery Motor vehicles and sundry plant

40-100 10-25 3-15

Goodwill The goodwill, representing the excess of the fair value of the consideration given over the fair value of the separable net assets acquired, arising on business combinations, is capitalised. Purchased goodwill is amortised over 20 years which is considered to be an appropriate period under current best accounting practice. Third Party Contributions Prior to 1 April 1990 in certain circumstances third parties were required to make non-returnable contributions towards the cost of specific infrastructure assets. From 1 April 1990 non-returnable contributions are also required from third parties towards the costs of future assets in respect of the connection of new properties to the water supply system.

7

8

Sutton and East Surrey Water plc

Financial Statements 2004

Notes to the Financial Statements (continued)

When the infrastructure assets to which the grants relate have indefinite economic lives, capital contributions towards them are deducted from the cost of these assets. Although acceptable under accounting standards, this is not in accordance with Schedule 4 to the Companies Act 1985 under which the infrastructure costs should be stated at their purchase price or production cost and the capital contributions treated as deferred income and released to profit and loss account over the useful life of the corresponding assets. The directors are of the opinion that, as infrastructure assets have indefinite economic lives, it is not practicable to defer such contributions and release them as described above. Accordingly, the treatment required by the Companies Act 1985 would not present a true and fair view of the Company’s effective investment in infrastructure assets. Movements in capital contributions and the net book value of infrastructure net assets before and after the contributions are set out in note 11, which therefore shows the effect of the Company’s policy. Leased assets Assets acquired under finance leases are capitalised and the outstanding future lease obligations are shown in creditors. The finance element of rentals is charged to the Profit and Loss Account as incurred. Operating lease rentals are charged to the Profit and Loss Account on a straight line basis over the period of the lease. Financial instruments Debt instruments are stated at the amount of net proceeds adjusted to amortise any issue fees evenly over the term of the debt. Deferred taxation Deferred tax is recognised with discounting, in respect of all timing differences between the treatment of certain items for taxation and accounting purposes which have arisen but not reversed by the balance sheet date, except as otherwise revised by FRS19. Pensions The Company operates a pension scheme providing benefits based on final pensionable pay. The assets of the scheme are held separately from those of the Company. Contributions to the scheme are charged to the Profit and Loss Account so as to spread the cost of pensions over employees’ working lives. Stocks Stocks are valued at the lower of cost and net realisable value. Cost is determined on a weighted average basis.

2 Turnover Unmeasured water supplies Measured water supplies Other

2004 £000

2003 £000

26,044 11,786 903

26,233 10,934 894

38,733

38,061

Sutton and East Surrey Water plc

2004 £000 3 Operating costs Wages and salaries Social security costs Other pension costs Raw materials and consumables Depreciation of owned assets Depreciation of infrastructure assets Depreciation of leased assets Amortisation of goodwill Auditors’ remuneration – audit Other fees paid to the auditors and their associates for further assurance services Hire of other assets– operating leases Other operating charges– redundancy costs – other Other operating income

2 11,598

2004 £000

Financial Statements 2004

2003 £000

2003 £000

6,672 560 924 1,774 4,354 3,000 206 973 20

6,223 498 945 1,729 4,207 2,553 200 972 19

14 5

9 5

11,600

6 10,674

10,680

30,102 (1,566)

28,040 (1,396)

28,536

26,644

4 Exceptional Profit Exceptional profit of £212,000 arose from the sale of surplus land at Woodmansterne. The tax charge does not include this item as the profit will be rolled over into future purchases of fixed assets. (2002/03 exceptional profit of £908,000 arose from the sale of surplus land at Kenley. The tax charge does not include this item as the profit will be rolled over into future purchases of fixed assets.)

5 Employees The average number of persons (including directors) employed during the year was as follows: Water supply Other

2004

2003

252 3

260 2

255

262

9

10

Sutton and East Surrey Water plc

Financial Statements 2004

Notes to the Financial Statements (continued)

2004 £000

2003 £000

6 Net interest payable/(receivable) and similar charges Other loans Indexation of Bond Bond fees amortisation Finance leases Other

3,043 3,163 416 58 39

2,957 1,525 456 74 46

Interest payable and similar charges

6,719

5,058

Interest receivable and similar income

(1,536)

(1,797)

Net interest payable and similar charges

5,183

3,261

2004 £000

2003 £000

985 (428)

1,800 (2,594)

557

(794)

388 (239)

(1,300) 1,004

706

(1,090)

Note 7 Taxation UK corporation tax Current tax on income for the period Adjustments in respect of prior periods Total current tax Deferred tax Origination/reversal of timing differences Changes in the amount of discount deducted Tax on profit on ordinary activities

18

The adjustment in respect of prior periods relates to the Inland Revenue accepting computations for the year ended 2000/2001 and an adjustment to the provisions for 2001/2002 and 2002/2003. Factors affecting the tax charge for the current period The current tax charge for the period is 16% lower (2003 42% lower) than the standard rate of corporation tax in the UK of 30% (2003 30%). The differences are explained below. 2004 £000

2003 £000

Current tax reconciliation Profit on ordinary activities before tax

5,226

9,064

Current tax at 30%

1,568

2,719

Effects of: Expenses not deducted for tax purposes Loss on disposal of fixed assets Finance Lease rentals Capital allowances for the period in excess of depreciation Rollover relief on profit on disposal of property Adjustments to tax charge in respect of previous periods

416 17 (52) (901) (63) (428)

375 – (47) (975) (272) (2,594)

Total current tax charge

557

(794)

Sutton and East Surrey Water plc

8 Dividends Ordinary shares – equity Dividends paid Preference shares – non-equity Dividends paid Dividends paid and proposed

9 Directors Fees Remuneration Performance bonus Pension contributions Pensions to former directors

Financial Statements 2004

2004 £000

2003 £000

5,300

4,400

966

967

6,266

5,367

2004 £000

2003 £000

80 534 145 59 53

65 515 110 56 55

871

801

The bonus is dependent upon a range of factors relating to the Company’s performance. Including pension contributions 2004 2003 £000 £000 Chairman Highest paid director

80 268

65 248

Excluding pension contributions 2004 2003 £000 £000 80 250

65 228

The highest paid director was P B Holder. His accrued pension at the year end was £74,355 (£70,000) and his accrued lump sum was £223,063 (£209,000). Number of directors 2004 2003 Retirement benefits are accruing to the following number of directors under: Defined benefit schemes

5

5

11

12

Sutton and East Surrey Water plc

Financial Statements 2004

Notes to the Financial Statements (continued)

10 Pensions Sutton and East Surrey Water plc (SESW) participates in the Water Companies’ Pension Scheme (WCPS), for their employees. The WCPS is a final salary scheme, providing members with benefits related to pay and service at rates which are defined under the rules. To finance these benefits, assets are accumulated in the scheme and are held separately from the assets of SESW. SESW pays contributions to the WCPS at rates in accordance with the advice of the scheme’s actuaries, based on regular actuarial reviews of the financial position of the scheme. The total pension cost for 2003 for this scheme was £924,000 (£945,000). There were no outstanding or prepaid contributions at either the beginning or end of the financial year. The pension cost allows for an offset of 10.4% of payroll in respect of the amortisation over a period of 11 years of the scheme’s assets relating to SESW in excess of the accrued liabilities. The pension cost has been determined in accordance with the advice of professionally qualified consulting actuaries based on an actuarial valuation made as at 1 April 2002. The most significant actuarial assumptions used in this valuation for determining pension costs were; valuation method – projected unit; rate of return on investments – 7.2% pa before retirement and 5.2% pa after retirement; rate of increase in pay – 4.8% pa; rate of increase in pensions – 2.8% pa; valuation of assets – the assets were valued by discounting the expected future investment proceeds that would arise from notionally re-investing the market value at the valuation date in a mixed portfolio of equities and gilts. The actuarial valuation at 1 April 2002 showed that the market value of that part of the scheme’s assets relating to SESW was £57.4m (excluding assets relating to members’ voluntary contributions). On the above assumptions the actuarial value of those assets represented 115% of the value of benefits that had accrued to SESW’s pensioners, deferred pensioners and members based on past service allowing for assumed future pay and pension increases. The actuarial valuation was updated to 31 March 2004, by an independent qualified actuary, using the following major assumptions in accordance with the transitional arrangements of FRS17 Assumptions Inflation Pension increases in payment (RPI) Pension increases in payment (LPI) Salary increases Discount rate

2004 2.9% 2.9% 2.7% 4.9% 5.5%

2003 2.5% 2.5% 2.4% 4.5% 5.6%

Expected 2003/04 return for Equities Bonds Corporate bonds Property Cash

2004 7.9% 4.7% 5.5% 6.3% 4.6%

2003 7.5% 4.5% 5.6% 6.0% 3.8%

Sutton and East Surrey Water plc

Financial Statements 2004

10 Pensions (continued) The fair value of the scheme’s assets, which are not intended to be realised in the short term and may be subject to significant change before they are realised, and the present value of the scheme’s liabilities, which are derived from cash flow projections over long periods and thus inherently uncertain, were: Value as at 31.3.04 £000

Value as at 31.3.03 £000

Equities Bonds Corporate bonds Property Cash

37,753 13,519 – – 688

32,254 3,252 4,205 977 3,431

Total fair value of assets Present value of scheme liabilities

51,960 (58,346)

44,119 (52,800)

Deficit in the scheme - Pension liability Related deferred tax asset/(liability)

(6,386) 1,916

(8,681) 2,604

Net pension liability

(4,470)

(6,077)

2004 £000

2003 £000

Analysis of amount charged to operating profit Employer’s part of current service cost

1,367

1,200

Analysis of the amount credited to other finance income Expected return on pension scheme assets Interest on pension scheme liabilities

2,955 (2,937)

4,410 (2,830)

18

1,580

Analysis of amount recognised in STRGL Actual return less expected return on pension scheme assets Experience gains arising on scheme liabilities Changes in assumptions underlying the present value of scheme liabilities

5,934 690 (4,013)

(16,700) 330 (4,400)

Actuarial gain/(loss) recognised in STRGL

2,611

(20,770)

(8,681)

10,779

(1,699) 1,365 18 2,611

(1,470) 1,200 1,580 (20,770)

(6,386)

(8,681)

The amount of this net pension liability would have a consequential effect on reserves.

Net return - credit

Movement in scheme deficit during the year (Deficit)/surplus in scheme as at 1.4.03 Movement in year Current service costs Aggregate contributions Other finance income Actuarial gain/(loss) recognised in STRGL Deficit in scheme as at 31.3.04

13

14

Sutton and East Surrey Water plc

Financial Statements 2004

Notes to the Financial Statements (continued)

Land £000

Collection reservoir £000

Buildings boreholes & service reservoirs £000

11 Tangible fixed assets Cost 31 March 2003 Additions Disposals Transfers

563 – – –

2,154 – – –

54,319 3,092 (70) 70

49,296 4,382 (345) (86)

83,181 13,259 (277) (2)

7,366 1,116 (805) 18

196,879 21,849 (1,497) –

31 March 2004

563

2,154

57,411

53,247

96,161

7,695

217,231

Depreciation 31 March 2003 Charge for year Disposals

– – –

256 – –

8,800 900 (5)

26,509 2,650 (345)

37,896 3,000 (277)

4,611 1,010 (738)

78,072 7,560 (1,365)

31 March 2004



256

9,695

28,814

40,619

4,883

84,267

Net book value 31 March 2004

563

1,898

47,716

24,433

55,542

2,812

132,964

31 March 2003

563

1,898

45,519

22,787

45,285

2,755

118,807

Capital contributions 31 March 2003 Receipts

– –

– –

– –

– –

6,133 526

– –

6,133 526

31 March 2004









6,659



6,659

Net book value after capital contributions 31 March 2004

563

1,898

47,716

24,433

48,883

2,812

126,305

31 March 2003

563

1,898

45,519

22,787

39,152

2,755

112,674

Plant & machinery £000

Mains £000

Motor vehicles & sundry plant £000

Total £000

Land comprises freehold land at £558,000 (£558,000) and long leasehold land at £5,000 (£5,000). The collection reservoir and mains are classified as infrastructure assets. Finance leases have been arranged for assets included above as follows: 31 March 2004 Cost Accumulated depreciation

5,693 (1,289)

5,790 (4,832)

1,535 (56)

84 (84)

13,102 (6,261)

Net book value

4,404

958

1,479



6,841

31 March 2003 Cost Accumulated depreciation

5,693 (1,210)

5,790 (4,705)

1,535 (56)

84 (84)

13,102 (6,055)

Net book value

4,483

1,085

1,479



7,047

Sutton and East Surrey Water plc

Financial Statements 2004

Purchased Goodwill £000 12 Intangible assets Cost 31 March 2003 and 31 March 2004

19,454

Amortisation 31 March 2003 Charge for year

6,809 973

31 March 2004

7,782

Net book value 31 March 2004

11,672

31 March 2003

12,645

Note 13 Stock Raw materials and consumables 14 Debtors Debtors receivable within one year: Service debtors Amounts owed by fellow subsidiary undertakings Other debtors Prepayments

15 Creditors: amounts falling due within one year Obligations under finance leases Trade creditors Amounts owed to fellow subsidiary undertakings Other creditors Corporation tax Other taxes and social security Accruals and deferred income Deposits from developers

17

2004 £000

2003 £000

708

663

3,711 162 922 551

3,245 273 630 585

5,346

4,733

190 3,249 1,273 7,483 2,588 290 2,644 1,438

173 1,556 687 5,491 440 – 2,763 966

19,155

12,076

15

16

Sutton and East Surrey Water plc

Financial Statements 2004

Notes to the Financial Statements (continued)

Note

2004 £000

2003 £000

16 Creditors: amounts falling due after more than one year Loans Obligations under finance leases

17

94,499 210

90,521 400

Total loans and other borrowings

17

94,709

90,921



451

94,709

91,372

Amounts owed to group joint venture Total creditors amounts falling due after more than one year

17 Financial instruments An explanation of the Board’s objectives, policies and strategies for issuing financial instruments is described in the Directors’ Report on page 1. Short term debtors and creditors, as defined in FRS13, “Derivatives and financial instruments disclosure”, have been omitted from all of the financial instrument disclosure. a) Loans and other borrowings Maturities Note Loans and other borrowings – Between one and two years – Between two and five years – More than five years – Creditors: amounts falling due after more than one year – Creditors: amounts falling due within one year

16 15

Net obligations under Finance Leases Note – Between one and two years – Between two and five years – Creditors: amounts falling due after more than one year – Creditors: amounts falling due within one year

16 15

2004 £000

2003 £000

210 – 94,499

190 210 90,521

94,709 190

90,921 173

94,899

91,094

2004 £000

2003 £000

210 –

190 210

210 190

400 173

400

573

Sutton and East Surrey Water plc

Financial Statements 2004

17 Financial instruments (continued) Other Loans Note 3.25% Irredeemable Debentures 5% Irredeemable Debentures 2.874% Secured Index-linked Bond 2027-2031 – Creditors: amounts falling due after more than one year

16

2004 £000

2003 £000

50 52 94,397

50 52 90,419

94,499

90,521

The £100m Bond was issued on 21 March 2001 and is secured upon the shares of Sutton and East Surrey Water plc. In the event of default the interest and capital payments are insured by Financial Security Assurance Ltd. The capital value of the Bond is changed by the change in the Retail Price Index from year to year. The fees associated with the issue of the 2.874% Secured Index-linked Bond are amortised over the life of the bond; the amount owing on the bond is stated net of the unamortised issue fees and credit insurance premiums. b) Undrawn committed borrowing facilities Undrawn borrowing facilities available to the Group are set out below. The facilities available at the balance sheet date are unsecured.

Expiring in one year or less

2004 £000

2003 £000

2,000

2,000

c) Interest rate risk The Bond and Debentures are at fixed rates and any borrowings made under the current facilities will be related to bank base rates. d) Currency risk The Company’s borrowings are all denominated in £ Sterling. e) Fair value The fair value of financial assets and liabilities is the same as the book value. 2004 £000

2003 £000

18 Provisions - deferred tax Balance brought forward Amount debited/(credited) in the profit and loss account

6,727 149

7,023 (296)

Balance carried forward

6,876

6,727

The amount provided for deferred taxation represents timing differences caused by the excess of tax allowances over depreciation.

17

18

Sutton and East Surrey Water plc

Financial Statements 2004

Notes to the Financial Statements (continued)

18 Provisions - deferred tax (continued) The elements of deferred tax are as follows:

2004 £000

2003 £000

Difference between accumulated depreciation, amortisation and capital allowances Other timing differences

12,735 1,458

12,343 1,462

Undiscounted provision Discount

14,193 (7,317)

13,805 (7,078)

6,876

6,727

2004 £000

2003 £000

3,105 18,000

3,105 18,000

21,105

21,105

3,105 12,384

3,105 12,384

15,489

15,489

19 Share capital Authorised: 31,046,440 (31,046,440) ordinary shares of 10p each 18,000,000 (18,000,000) 7.8% Cumulative irredeemable preference shares of £1 each

Allotted called up and fully paid: 31,046,440 (31,046,440) ordinary shares of 10p each 12,384,593 (12,384,593) 7.8% Cumulative irredeemable preference shares of £1 each

On a winding up, the preference shares would rank above the ordinary shares. The preference shares do not carry any voting rights. 2004 £000

2003 £000

20 Reconciliation of movements in shareholders’ funds Profit for the year Dividends

4,520 (6,266)

10,154 (5,367)

Net (subtraction) from/addition to shareholders’ funds

(1,746)

4,787

Opening shareholders’ funds

58,478

53,691

Closing shareholders’ funds

56,732

58,478

Sutton and East Surrey Water plc

Financial Statements 2004

2004 £000

2003 £000

21 Profit and loss account As at 31 March 2003

42,989

38,202

(Loss)/profit retained

(1,746)

4,787

As at 31 March 2004

41,243

42,989

22 Commitments a) Capital commitments authorised by the directors are: Contracted for

10,724

5,588

23 Related parties The Company is controlled by its ultimate parent, East Surrey Holdings plc. There were no material disclosable trading transactions between the Company and related parties. 24 Holding Company The Company is a wholly owned subsidiary undertaking of East Surrey Holdings plc, a company incorporated in Great Britain and registered in England. The consolidated financial statements of East Surrey Holdings plc are available to the public and may be obtained from London Road, Redhill, Surrey RH1 1LJ.

19

20

Sutton and East Surrey Water plc

Financial Statements 2004

Regulatory Accounts 2004

These accounts and notes thereto are published to comply with the requirements of Condition F of the Instrument of Appointment of Sutton and East Surrey Water plc. The historic cost accounts separate the results of the appointed business from the other activities of Sutton and East Surrey Water plc. These accounts have been prepared in accordance with guidelines issued by the Director General of Water Services.

Sutton and East Surrey Water plc

Financial Statements 2004

Historic Cost Profit and Loss Account for the year ended 31 March 2004

Note

Appointed £000

NonAppointed £000

2004 Total £000

Appointed £000

NonAppointed £000

2003 Total £000

2 3 4

39,614 (29,775) 156

688 (274) –

40,302 (30,049) 156

38,828 (27,817) 941

631 (264) 6

39,459 (28,081) 947

Operating profit Interest receivable Interest payable

9,995 1,530 (6,719)

414 6 –

10,409 1,536 (6,719)

11,952 1,790 (5,058)

373 7 –

12,325 1,797 (5,058)

Profit on ordinary activities before taxation Taxation – current Taxation – deferred

4,806 (431) (149)

420 (126) –

5,226 (557) (149)

8,684 872 298

380 (78) (2)

9,064 794 296

Profit on ordinary activities after taxation Dividends

4,226 (5,966)

294 (300)

4,520 (6,266)

9,854 (4,967)

300 (400)

10,154 (5,367)

(Loss)/profit retained for the year

(1,740)

(6)

(1,746)

4,887

(100)

4,787

Turnover Operating costs Other operating income

21

22

Sutton and East Surrey Water plc

Financial Statements 2004

Historic Cost Balance Sheet at 31 March 2004

Note

Appointed £000

NonAppointed £000

2004 Total £000

Appointed £000

NonAppointed £000

2003 Total £000

5

11,672 128,449

– 24

11,672 128,473

12,645 116,189

– 23

12,645 116,212

140,121

24

140,145

128,834

23

128,857

708 5,268 33,223

– 78 218

708 5,346 33,441

663 4,651 37,758

– 82 180

663 4,733 37,938

39,199

296

39,495

43,072

262

43,334

(21,116)

(207)

(21,323)

(15,448)

(166)

(15,614)

18,083

89

18,172

27,624

96

27,720

Total assets less current liabilities

158,204

113

158,317

156,458

119

156,577

Creditors: Amounts falling due after one year Borrowing Other creditors Provisions - deferred tax

(94,709) – (6,875)

– – (1)

(94,709) – (6,876)

(90,921) (451) (6,726)

– – (1)

(90,921) (451) (6,727)

Net assets employed

56,620

112

56,732

58,360

118

58,478

Capital and reserves Called up share capital Profit and loss account

15,489 41,131

– 112

15,489 41,243

15,489 42,871

– 118

15,489 42,989

56,620

112

56,732

58,360

118

58,478

Fixed assets Intangible assets Tangible assets

Current assets Stocks Debtors Cash at bank and in hand

Creditors: Amounts falling due within one year Net current assets

6

7

Sutton and East Surrey Water plc

Financial Statements 2004

Historic Cost Balance Sheet Reconciliation to Statutory Accounts at 31 March 2004

In the preparation of its statutory accounts, the company has followed common industry practice and adopted the infrastructure renewals accounting basis as set out in FRS15: Tangible Fixed Assets. However for the purposes of the Regulatory Accounts, Ofwat has requested that FRS15 is not applied for infrastructure renewals accounting, thereby providing a basis consistent with prior years. A reconciliation to the balance sheet in the statutory accounts is set out below: Infrastructure assets £000 Cost Cost at 31 March 2004 per Regulatory Accounts Adjustment to opening balance Deemed disposal Infrastructure renewals expenditure capitalised during the year

60,263 31,804 (277) 4,371

Cost at 31 March 2004 per Statutory Accounts

96,161

Depreciation Cost at 31 March 2004 per Regulatory Accounts Adjustment to opening balance Deemed disposal Depreciation charge for infrastructure renewals expenditure

2,557 35,339 (277) 3,000

Cost at 31 March 2004 per Statutory Accounts

40,619

Net Book Value At 31 March 2004 per Regulatory Accounts Adjustment for infrastructure renewals accounting

57,710 (2,164)

At 31 March 2004 per Statutory Accounts

55,542

Creditors amounts falling due within one year At 31 March 2004 per Regulatory Accounts Less infrastructure renewals accrual

21,323 (2,168)

At 31 March 2004 per Statutory Accounts

19,155

23

24

Sutton and East Surrey Water plc

Financial Statements 2004

Notes to the Historic Cost Accounts (continued)

1 Accounting policies The accounting policies used are the same as those adopted in the historical cost accounts as set out on pages 7 and 8, other than the fact that FRS12 Provisions, Contingent Liabilities and Contingent Assets and FRS15 Tangible Fixed Assets have not been adopted in the Regulatory Accounts in relation to infrastructure renewals expenditure, as directed by OFWAT. Infrastructure renewals accounting The accounting policy in respect of infrastructure renewals expenditure adopted in the regulatory accounts is set out below: Infrastructure assets comprise the systems relating to water distribution. Expenditure on infrastructure assets relating to increases in capacity or enhancement of the network is treated as capital expenditure. Expenditure on maintaining the network in accordance with defined standards of service is regarded as mains renewals and charged to the Profit and Loss Account as infrastructure renewals. No depreciation is charged on infrastructure assets because the network of systems is required to be maintained in perpetuity and therefore has no finite economic life. Expenditure on the maintenance of infrastructure assets may vary significantly from the long-term normal annual level, either because maintenance is deferred or because the pattern of expenditure is uneven. In such instances the charge against profits is adjusted by way of accruals or deferrals as appropriate to reflect the long-term normal level of charges, in accordance with defined standards of service. Expenditure on maintaining the operating capability of the network is charged as an operating cost.

Sutton and East Surrey Water plc

Financial Statements 2004

Appointed £000

NonAppointed £000

2004 Total £000

Appointed £000

NonAppointed £000

2003 Total £000

2 Turnover Measured Unmeasured All other sources

11,787 26,044 1,783

– – 688

11,787 26,044 2,471

10,934 26,233 1,661

– – 631

10.934 26,233 2,292

Total turnover

39,614

688

40,302

38,828

631

39,459

3 Operating costs Employment costs Other costs of employment Power Local authority rates Water charges incl. abstraction Materials and consumables Hired and contracted services Bad debts Depreciation and amortisation Infrastructure – Expenditure – Accrual Other

7,003 309 1,851 1,886 666 2,275 5,988 158 5,524 4,371 (1,371) 1,115

173 4 – – – 83 (3) 6 9 – – 2

7,176 313 1,851 1,886 666 2,358 5,985 164 5,533 4,371 (1,371) 1,117

6,702 300 1,733 2,088 639 2,258 4,830 185 5,371 4,471 (1,918) 1,158

147 1 – – – 85 19 – 9 – – 3

6,849 301 1,733 2,088 639 2,343 4,849 185 5,380 4,471 (1,918) 1,161

Total operating costs

29,775

274

30,049

27,817

264

28,081

4 Other operating income/(costs) (Loss)/profit on disposal of tangible assets

(56)



(56)

33

6

39

Exceptional profit on disposal of land

212



212

908



908

156



156

941

6

947

25

26

Sutton and East Surrey Water plc

Financial Statements 2004

Notes to the Historic Cost Accounts (continued)

Land £000

Collection reservoir £000

Buildings boreholes & service reservoirs £000

5 Tangible assets (appointed business) Cost 31 March 2003 Additions Disposals Transfers

563 – – –

2,154 – – –

54,319 3,092 (70) 70

49,296 4,382 (345) (86)

51,376 8,889 – (2)

7,289 1,070 (795) 18

164,997 17,433 (1,210) –

31 March 2004

563

2,154

57,411

53,247

60,263

7,582

181,220

Depreciation 31 March 2003 Charge for year Disposals

– – –

256 – –

8,800 900 (5)

26,509 2,650 (345)

2,557 – –

4,553 992 (755)

42,675 4,542 (1,105)

31 March 2004



256

9,695

28,814

2,557

4,790

46,112

Net book value 31 March 2004

563

1,898

47,716

24,433

57,706

2,792

135,108

31 March 2003

563

1,898

45,519

22,787

48,819

2,736

122,322

Capital contributions 31 March 2003 Receipts

– –

– –

– –

– –

6,133 526

– –

6,133 526

31 March 2004









6,659



6,659

Net book value after capital contributions 31 March 2004

563

1,898

47,716

24,433

51,047

2,792

128,449

31 March 2003

563

1,898

45,519

22,787

42,686

2,736

116,189

Plant & machinery £000

Mains £000

Motor vehicles & sundry plant £000

Total £000

Land comprises freehold land at £558,000 (£558,000) and long leasehold land at £5,000 (£5,000). The collection reservoir and mains are classified as infrastructure assets and therefore are not depreciated. Non-appointed assets comprise motor vehicles and sundry plant costing £85,000 (£77,000). In respect of these assets depreciation of £9,000 (£9,000) has been charged to the profit and loss account and accumulated depreciation at 31 March 2004 amounted to £60,000 (£54,000). 6 Debtors The analysis of debtors in the Appointed Business is as shown in note 14, on page 15, with the exceptions that Service Debtors include £77,000 (£53,000) and prepayments include £1,000 (£29,000) in respect of the non-appointed activities. 7 Creditors: Amounts falling due within one year The analysis of creditors in the Appointed Business is as shown in note 15, on page 15, corporation tax includes £126,000 (£78,000) and accruals include £81,000 (£88,000) in respect of the non-appointed activities.

Sutton and East Surrey Water plc

Financial Statements 2004

Current Cost Profit and Loss Account for the Appointed Business for the year ended 31 March 2004

Note

2004 £000

2003 £000

Turnover Current cost operating costs Other operating income

2 2 2

39,614 (31,718) 120

38,828 (29,228) 790

Working capital adjustment

2

8,016 92

10,390 160

Current cost operating profit

2

8,108

10,550

Interest receivable Interest payable Financing adjustment

1,530 (6,719) 1,319

1,790 (5,058) 1,395

Current cost profit before taxation Taxation – Current – Deferred

4,238

8,677

(431) (149)

872 298

Current cost profit attributable to shareholders Dividends – paid and proposed

3,658 (5,966)

9,847 (4,967)

Current cost (loss)/profit retained

(2,308)

4,880

27

28

Sutton and East Surrey Water plc

Financial Statements 2004

Current Cost Balance Sheet for the Appointed Business as at 31 March 2004

2004 £000

2003 £000

636,217 (7,763) (8,764)

609,555 (7,054) (7,259)

Net operating assets

619,690

595,242

Intangible assets Cash and investments Non-trade debtors Non-trade creditors due within one year Creditors due after one year Provisions for liabilities and charges - deferred tax

11,672 33,223 1,060 (7,622) (94,709) (6,875)

12,645 37,758 893 (3,940) (91,372) (6,726)

Net assets employed

556,439

544,500

15,489 (221) 541,171

15,489 2,087 526,924

556,439

544,500

Note Fixed assets Tangible assets Third party contributions since 1989-90 Working capital

Capital and reserves Called up share capital Profit and loss account Current cost reserve Total capital and reserves

3 4

5 5

Sutton and East Surrey Water plc

Financial Statements 2004

Current Cost Cash Flow Statement for the Appointed Business for the year ended 31 March 2004

Appointed £000

31 March 2004 NonAppointed Total £000 £000

Appointed £000

31 March 2003 NonAppointed Total £000 £000

Net cash flow from operating activities

21,945

423

22,368

18,387

365

18,752

Returns on investments and servicing of finance Interest received Interest paid Interest in finance lease rentals Non-equity dividends paid

1,581 (3,046) (58) (966)

7 – – –

1,588 (3,046) (58) (966)

2,183 (2,990) (74) (966)

7 – – –

2,190 (2,990) (74) (966)

Net cash flow from returns on investments and servicing of finance

(2,489)

7

(2,482)

(1,847)

7

(1,840)

Taxation paid

1,806

(79)

1,727

(1,818)

(108)

(1,926)

Capital expenditure and financial investment Gross cost of purchase of fixed assets Receipt of grants and contributions Infrastructure renewals expenditure Exceptional item Disposal of fixed assets

(17,466) 526 (4,371) 212 75

(13) – – – –

(17,479) 526 (4,371) 212 75

(12,046) 475 (4,471) 908 89

(15) – – – 6

(12,061) 475 (4,471) 908 95

Net cash outflow from investing activities

(21,024)

(13)

(21,037)

(15,045)

(9)

(15,054)

(5,000)

(300)

(5,300)

(4,000)

(400)

(4,400)

65,220 (57,469)

– –

65,220 (57,469)

53,169 (51,184)

– –

53,169 (51,184)

Net cash inflow from management of liquid resources

7,751



7,751

1,985



1,985

Net cash inflow/(outflow) before financing

2,989

38

3,027

(2,338)

(145)

(2,483)

Financing Capital element in finance lease rentals Fees relating to bond issue

(173) 400

– –

(173) 400

(157) –

– –

(157) –

Net cash flow from financing

227



227

(157)



(157)

3,216

38

3,254

(2,495)

(145)

(2,640)

Equity dividends paid Management of liquid resources Withdrawals from short term deposits Purchase of short term deposits

Increase/(decrease) in cash and cash equivalents

29

30

Sutton and East Surrey Water plc

Financial Statements 2004

Notes on the Current Cost Accounts of the Appointed Business

1 Accounting policies These accounts have been prepared for the Appointed Business of Sutton and East Surrey Water plc in accordance with guidance issued by the Director General of Water Services for modified real terms 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 regime. The accounting policies used are the same as those adopted in the historical cost accounts and which are set out on pages 7 and 8, except as set out below. Tangible fixed assets Assets acquired prior to 31 March 1990 and in operational use are valued at the replacement cost of their operating capability. 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 business principle. Also, no provision is made for possible funding of future replacements of pre-31 March 1990 assets by contributions from third parties and, to the extent that some of those assets would on replacement be so funded, replacement cost again differs from value to the business. Redundant assets are valued at their recoverable amount. Land and buildings Non-specialised operational properties were valued on the basis of open market value for existing use at 31 March 1990 and have been expressed in real terms by adjusting for inflation as measured by the changes in Retail Price Index (RPI) since that date. Specialised operational properties acquired since 31 March 1990 are valued at the lower of depreciated replacement cost and recoverable amount, restated annually between periodic Surface Investment Requirement (SIR) reviews by adjusting for inflation using the RPI. The unamortised portion of third party contributions received is deducted in arriving at net operating assets (as described below). Infrastructure assets Mains, sewers, impounding and pumped raw water storage reservoirs are valued at replacement costs selected principally on the basis of data provided by the Asset Management Plan (AMP). A process of continuing refinement of asset records is expected to produce adjustments to existing values when periodic reviews of the AMP take place. In intervening years, values are restated to take account of changes in the general level of inflation, as measured by changes in the RPI over the year. Infrastructure renewals accounting Infrastructure assets comprise the systems relating to water distribution. Expenditure on infrastructure assets relating to increases in capacity or enhancements of the network is treated as capital expenditure. Expenditure on maintaining the network in accordance with defined standards of service is regarded as mains renewals and charged to the Profit and Loss Account as infrastructure renewals. No depreciation is charged on infrastructure assets because the network of systems is required to be maintained in perpetuity and therefore has no finite economic life. Expenditure on the maintenance of infrastructure assets may vary significantly from the long-term normal annual level, either because maintenance is deferred or because the pattern of expenditure is uneven. In such instances the charge against profits is adjusted by way of accruals or deferrals as appropriate to reflect the long-term normal level of charges, in accordance with defined standards of service. Expenditure on maintaining the operating capability of the network is charged as an operating cost. Other operational fixed assets All other operational fixed assets are valued periodically at depreciated replacement cost. Between periodic SIR reviews, values are restated for inflation as measured by changes in the RPI.

Sutton and East Surrey Water plc

Financial Statements 2004

1 Accounting policies (continued) Surplus land Surplus land is valued at recoverable amount, taking into account that part of any proceeds is to be passed on to customers under Condition B of the Licence. Grants and other third party contributions Grants, infrastructure charges and other third party contributions received since 31 March 1990 are carried forward to the extent that any balance has not been credited to revenue. The balance carried forward is restated for the change in the RPI for the year and treated as for deferred income. 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 historical cost profit. Working capital adjustment This is calculated by applying the change in the RPI over the year to opening total of trade debtors and stock less trade creditors. Disposal of fixed assets adjustments This is the difference between the values of realised assets in these current cost accounts and in the historical cost accounts. 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 apart from those included in working capital.

31

32

Sutton and East Surrey Water plc

Financial Statements 2004

Notes on the Current Cost Accounts of the Appointed Business (continued)

2004 £000

2003 £000

2 Analysis of current cost operating profit of the appointed business Turnover Measured Unmeasured Other sources

11,787 26,044 1,783

10,934 26,233 1,661

Total turnover

39,614

38,828

Operating costs Manpower costs Other costs of employment Power Rates Hired and contracted Materials and consumables Service charges Other operating costs Doubtful debts Current cost depreciation and amortisation Infrastructure renewals: Expenditure Accrual

7,003 309 1,851 1,886 5,988 2,275 666 1,115 158 7,453

6,702 300 1,733 2,088 4,830 2,258 639 1,158 185 6,700

4,371 (1,357)

4,471 (1,836)

Total operating costs

31,718

29,228

Other operating costs Current cost loss on sale of fixed assets Exceptional item

(92) 212

(118) 908

Other operating income

120

790

Current cost operating profit before working capital adjustment Working capital adjustment

8,016 92

10,390 160

Current cost operating profit

8,108

10,550

All these revenues and costs relate to the supply of water services. Commentary on significant profit and loss account movements Turnover: The increase in measured turnover reflects the increase in demand during the hot dry summer and autumn of 2003 and also the cumulative increase in the number of customers switching from an unmeasured to a measured supply. Unmeasured turnover has fallen as a result of the small price increase in 2003/04 being offset by a loss of income as customers have switched to a measured supply. Infrastructure renewals: The spend for the year is broadly in line with the Competition Commission determination. Manpower: The higher manpower costs reflect a general salary increase of 3% and the 1% increase in employers’ national insurance contributions. Power: Demand for water during 2003/04 was, on average, 5.6% higher than in 2002/03, leading to higher electricity costs as more water was pumped. Rates: During 2003/04 a rates rebate was received, in respect of the previous year, for the surplus head office space which is leased to third parties. Hired and contracted: The hot dry summer and autumn of 2003 caused a significant amount of ground movement; this led to a greater number of burst mains than is normally experienced. The increase in costs in 2003/04 reflects the Company’s use of outside contractors to repair the burst mains and to reduce leakage. The report year also includes costs in respect of the 2005 Price Review.

Sutton and East Surrey Water plc

Specialised operational assets £000

Nonspecialised operational Infrastructure properties assets £000 £000

Financial Statements 2004

Other tangible assets £000

Total £000

3 Tangible assets Cost 31 March 2003 RPI adjustment Additions Disposals

194,968 5,058 7,062 (522)

13,000 343 – –

505,474 13,142 8,888 –

14,000 337 1,516 (947)

727,442 18,880 17,466 (1,469)

31 March 2004

206,566

13,343

527,504

14,906

762,319

Depreciation At 31 March 2003 RPI adjustment Charge for the year Disposals

103,787 2,688 5,109 (417)

5,312 143 297 –

– – – –

8,788 205 1,074 (884)

117,887 3,036 6,480 (1,301)

31 March 2004

111,167

5,752



9,183

126,102

Net book value 31 March 2004

95,399

7,591

527,504

5,723

636,217

31 March 2003

91,181

7,688

505,474

5,212

609,555

2004 £000

2003 £000

4 Working capital Stocks Trade debtors Trade creditors Short term capital creditors Infrastructure renewals accrual Other trade accruals Trade payments in advance Payroll related taxes and social security contributions Other trade creditors Group trade debtors Group trade creditors Prepayments

708 3,634 (3,249) (1,232) (2,354) (757) (574) (290) (5,209) 23 (14) 550

663 3,191 (1,556) (1,675) (3,710) (567) (431) – (3,729) 10 (11) 556

Total working capital

(8,764)

(7,259)

33

34

Sutton and East Surrey Water plc

Financial Statements 2004

Notes on the Current Cost Accounts of the Appointed Business (continued)

Current Cost Reserve 2004 2003 £000 £000 5 Reserves Balance at 31 March 2003 RPI adjustments: Fixed assets Working capital Financing Grants and third party contributions Current cost (loss)/profit retained

Profit and Loss Account 2004 2003 £000 £000

526,924

510,426

2,087

(2,793)

15,841 (92) (1,319) (183) –

18,137 (160) (1,395) (84) –

– – – – (2,308)

– – – – 4,880

541,171

526,924

(221)

2,087

£000

£000

8,108 (92) (45) 6,480 973 92 (212) (669) 2,939 4,371

10,550 (160) (27) 5,728 972 118 (908) 408 (2,765) 4,471

21,945

18,387

2004 £000

2003 £000

7 Reconciliation of net cash flow to movement in net debt Increase/(decrease) in cash in the period Net cash inflow from bond issue costs Cash outflow from decrease in finance leasing Cash inflow from decrease in current asset investments

3,216 (400) 173 (7,751)

(2,495) – 157 (1,985)

Change in net debt resulting from cash flows Non cash movement

(4,762) (3,578)

(4,323) (1,981)

Movement on net debt in year Net debt at 31 March 2003

(8,340) (53,335)

(6,304) (47,031)

Net debt at 31 March 2004

(61,675)

(53,335)

Balance at 31 March 2004

6 Reconciliation of current cost operating profit to net cash flow from operating activities Current cost operating profit Working capital adjustment Change in stocks Current cost depreciation Amortisation of goodwill Current cost loss on sale of assets Exceptional item (Increase)/decrease in debtors and prepaid expenses Increase/(decrease) in creditors and accrued expenses Infrastructure renewals expenditure Net cash flow from operating activities

Sutton and East Surrey Water plc

8 Analysis of net debt Cash in hand and in bank Loans due after one year Finance leases Current asset investments

Financial Statements 2004

As at 31 March 2003 £000

Non cash items £000

Cash flows £000

As at 31 March 2004 £000

1,819 (90,521) (572) 35,939

– (3,578) – –

3,216 (400) 173 (7,751)

5,035 (94,499) (399) 28,188

(53,335)

(3,578)

(4,762)

(61,675)

2004 £000 9 Regulatory Capital Value Opening RCV Capital expenditure Infrastructure renewals expenditure Grants and contributions Depreciation Infrastructure renewals charge Competition Commission adjustment Outperformance of regulatory assumptions (5 years in arrears)

110,633 12,523 4,553 (682) (6,255) (3,510) 122 (137)

Closing RCV carried forward

117,247

Average regulatory capital value

112,421

The above table shows the Regulatory Capital Value used by The Competition Commission in setting the price limits for the period 2000/01 to 2004/05. The differences from the actual capital expenditure and depreciation etc, will not affect price limits in the current period. Capital efficiencies will be taken into account in the calculation for the next periodic review. The above figures are the 2002/03 prices.

35

36

Sutton and East Surrey Water plc

Financial Statements 2004

Activity Cost Table for the Appointed Business - Revenue Account only for the year ended 31 March 2004

Water resources and treatment £000

Water distribution £000

Service analysis Water supply Total £000

Direct costs Employment costs Power Hired and contracted services Associated companies Materials and consumables Service charges Other direct costs

1,504 947 485 – 1,379 666 104

1,862 856 1,201 67 395 – 460

3,366 1,803 1,686 67 1,774 666 564

Total direct costs General and support expenditure

5,085 2,116

4,841 1,602

Functional expenditure Capital costs Current cost depreciation Infrastructure renewal expenditure Infrastructure renewal accrual

7,201

Functional costs

Customer services £000

Scientific services £000

Cost of regulation £000

9,926 3,718

1,900 766

685 208

742 –

6,443

13,644

2,666

893

742

3,489

1,989 4,371 (1,357)

5,478 4,371 (1,357)

10,690

11,446

22,136

Total from above Rates Doubtful debts Intangible assets Business activities capital costs

26,437 1,886 158 973 1,002

Service costs

30,456

Services for third parties

1,262

Total

CCA (MEA) values Services activities Business activities

Business analysis

31,718

175,124

Service totals Services for the third parties Total

563,370

738,494 23,825 762,319 – 762,319

All these assets relate to the supply of water services. Cost Allocation: Allocation of cost between operational expenditure, capital expenditure and capital maintenance is based on RAG2, RAG3, RAG4 and normal accounting practice. Items of a capital nature costing below £250 are written off to revenue. There has been no change to the basis of allocation of costs from the prior year. Leakage control costs (e.g. contractors, waste contractors etc) are treated as operating expenditure. General and support expenditure is allocated between water resources and treatment, water distribution, customer services etc in proportion to their direct costs.

Sutton and East Surrey Water plc

Financial Statements 2004

Activity Cost Table for the Appointed Business - Revenue Account only for the year ended 31 March 2003

Water resources and treatment £000

Water distribution £000

Service analysis Water supply Total £000

Direct costs Employment costs Power Hired and contracted services Associated companies Materials and consumables Service charges Other direct costs

1,358 865 477 – 1,326 639 288

1,867 815 947 64 430 – 161

3,225 1,680 1,424 64 1,756 639 449

Total direct costs General and support expenditure

4,953 2,060

4,284 1,388

Functional expenditure Capital costs Current cost depreciation Infrastructure renewal expenditure Infrastructure renewal accrual

7,013

Functional costs

Customer services £000

Scientific services £000

Cost of regulation £000

9,237 3,448

1,918 781

581 174

336 –

5,672

12,685

2,699

755

336

3,304

1,655 4,471 (1,836)

4,959 4,471 (1,836)

10,317

9,962

20,279

Total from above Rates Doubtful debts Intangible assets Business activities capital costs

24,069 2,088 185 972 769

Service costs

28,083

Services for third parties

1,145

Total

CCA (MEA) values Services activities Business activities

Business analysis

29,228

164,583

Service totals Services for the third parties Total All these assets relate to the supply of water services.

539,643

704,226 23,216 727,442 – 727,442

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Sutton and East Surrey Water plc

Financial Statements 2004

Current Cost Accounts Five Years Review for the Appointed Business for the years ended 31 March

2004 £000

2003 £000

2002 £000

2001 £000

2000 £000

39,614 (31,718) 120 92

39,915 (30,046) 812 164

39,063 (29,380) 2,333 55

37,626 (29,971) 588 138

45,035 (33,871) (122) 147

8,108

10,845

12,071

8,381

11,189

Net Interest Financing adjustments

(5,189) 1,319

(3,360) 1,434

(3,138) 571

(646) 701

225 563

Current cost profit before taxation Taxation - Current tax Taxation - Deferred tax

4,238 (431) (149)

8,919 896 306

9,504 (1,807) (212)

8,436 (2,064) 82

11,977 (3,763) –

Current cost profit attributable to shareholders Dividends

3,658 (5,966)

10,121 (5,106)

7,485 (5,524)

6,454 (6,311)

8,214 (9,375)

Current cost (loss)/profit retained

(2,308)

5,015

1,961

143

(1,161)

Balance sheet Tangible fixed assets Third party contribution since 1990/91 Working capital

636,217 (7,763) (8,764)

625,403 (7,237) (7,448)

619,256 (6,872) (11,322)

614,605 (6,523) (11,712)

608,116 (6,132) (12,331)

Net operating assets Intangible assets Cash and investments Non-trade debtors Non-trade creditors Creditors due after one year Provisions for liabilities and charges - deferred tax

619,690 11,672 33,223 1,060 (7,622) (94,709) (6,875)

610,718 12,974 38,740 916 (4,042) (93,748) (6,901)

601,062 14,407 44,688 1,883 (6,860) (94,283) (7,432)

596,370 15,640 44,919 2,255 (6,689) (93,652) (7,313)

589,653 17,057 (2,545) 2,589 (6,817) (41,620) (7,561)

Net assets employed

556,439

558,657

553,465

551,530

550,756

Called up share capital Profit and loss account Current cost reserves

15,489 (221) 541,171

15,892 2,141 540,624

16,387 (2,953) 540,031

16,604 (4,994) 539,920

16,976 (5,254) 539,034

Total capital and reserves

556,439

558,657

553,465

551,530

550,756

Profit and loss account Turnover Current cost operating costs Operating income/(expense) Working capital adjustment

All figures are in 2003/04 prices

Sutton and East Surrey Water plc

Financial Statements 2004

Significant trends over the five years Profit and loss account Turnover: The fluctuations in turnover over the five years are due mainly to the ‘k’ amendments. In 2001 there was a P0 reduction in ‘k’ of 17%. Over the five years there has been an increase in demand of 9.7% and properties connected of 2.3%. Demand was exceptionally high in the report year due to the hot dry summer and autumn of 2003. Current cost operating costs: The five year trend shows a reduction in operating costs of 6%; this has been brought about by tight control on spending and efficiency savings. Net interest: The significant change in net interest in 2002 is due to the indexation and interest charges on the £100 million bond issued in March 2001. Balance Sheet Tangible fixed assets: In 2000 the fixed assets were revalued to their MEA (market equivalent asset) values in accordance with regulatory accounting rules, this lead to an overall reduction in value of £57.8 million. There has been no MEA revaluation since. Cash and investments: In 2001 the Company was refinanced and a £100 million index linked bond was issued. The proceeds from the bond were used to refinance the balance sheet and remaining funds are being used to fund the capital expenditure programme to 2005. Creditors due after one year: Until 2001 the Company had an inter-group non interest bearing loan of £37 million, which arose in 1996 when East Surrey Water merged with Sutton District Water. This was repaid when the £100 million bond was issued in March 2001. The majority of this balance now represents the outstanding capital of the index-linked bond. Provision for liabilities and charges: The introduction of FRS19 Deferred tax in 2002 has led to a full discounted provision for deferred tax being made, with 2001 and 2000 figures being restated for the resulting deferred tax liability.

39

40

Sutton and East Surrey Water plc

Financial Statements 2004

Five Year Operational Review for the Appointed Business for the years ended 31 March

2004

2003

2002

2001

2000

249 236 212 181 156 169

214 196 175 166 154 160

232 215 193 167 152 160

207 182 169 158 148 153

233 214 196 160 147 154

Summer rainfall (mm) as a percentage of average summer rainfall (%) Winter rainfall (mm) as a percentage of average winter rainfall (%)

190 55.2 466 108.8

357 103.9 567 132.5

339 98.7 447 104.9

526 153.8 823 194.2

375 109.8 354 83.4

Population (000) Properties connected (000) Length of mains (km)

643 270 3,380

642 270 3,372

641 269 3,371

637 268 3,377

634 267 3,374

Total leakage* (ml/d) Total leakage* (cm/km/day)

24.5 7.2

24.4 7.2

24.4 7.2

24.4 7.2

24.4 7.2

Water Supplied (000m ) Maximum day Maximum 7 day average Maximum 28 day average Summer daily average (April-Sept) Winter daily average (Oct-March) Daily average 3

*Total leakage includes that from both the company’s and customers’ pipes.

Sutton and East Surrey Water plc

Financial Statements 2004

Certificate of the Directors to the Director General of Water Services

The Directors certify that the Company, in their opinion, a) 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 the Appointee’s obligations under the Appointment); and b) 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. Approved by the Board of Directors on 3 June 2004 and signed on their behalf by P A Barrett Director

41

42

Sutton and East Surrey Water plc

Financial Statements 2004

Report of the Independent Auditors to Sutton and East Surrey Water plc and to the Director General of Water Services

We have audited the non-statutory accounts (“the regulatory accounts”) of Sutton and East Surrey Water plc (“the Company”) set out on pages 20 to 39, which have been prepared for the reasons set out on page 20 and under the accounting policies set out on pages 30 to 31. This report is made to the Company in accordance with the terms of our engagement (“the Contract”). This report is made also to the Director General of Water Services (“the Regulator”) in order to meet the requirements of the Instrument of Appointment by the Secretary of State for the Environment to the Company as a water and sewerage undertaker under the Water Industry Act 1991 (the “Regulatory Licence”) and to enable the Regulator to verify that a report from independent auditors has been issued in connection with the regulatory accounts. Our audit work has been undertaken so that we might state to the Company and to the Regulator those matters we have been engaged by the Company to state in this report and for no other purpose. This report has been released to the Company and to the Regulator on the basis that it shall not be copied, referred to or disclosed, in whole (save for the Company’s or the Regulator’s own internal purposes) or in part, without our prior written consent. 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. We will accept such responsibility to the Regulator on condition that the Regulator agrees in writing to the Contract by signing the notice appended to the Contract. Respective responsibilities of directors and auditors The Company’s directors have accepted responsibility under Condition F of the Regulatory Licence for the preparation of these regulatory accounts. Our responsibilities, as independent auditors, are established in the United Kingdom by the terms of our engagement letter dated 3 June 2004, the Auditing Practices Board and our profession’s ethical guidance. Under Condition F of the Regulatory Licence and under the Contract we are also required to report to you our opinion as to whether the regulatory accounts contain the information required to be published and submitted to the Regulator; whether proper accounting records have been maintained by the Company; whether the financial information is in agreement with the Company’s accounting records; whether the financial information complies with the requirements of Condition F of the Regulatory Licence and has been properly prepared in accordance with the Regulatory Accounting Guidelines numbers 1 to 4 issued by the Office of Water Services; whether the regulatory accounts have been properly prepared from the statutory accounts to reflect the adoption of infrastructure renewals accounting as required by the Regulatory Accounting Guidance and, except for the effect of the departure from accounting standards inherent in this requirement, give, under the historical cost convention and together with the information in the statutory accounts on pages 5 to 19 a true and fair view of the revenues, costs, assets and liabilities of the Company; and whether the current cost financial information on pages 27 to 39 has been properly prepared in accordance with Regulatory Accounting Guideline 1, Accounting for Current Costs, issued in May 1992 by the Office of Water Services. We also report to you if, in our opinion, we have not received all the information and explanations we require for our audit. We read the other information accompanying both the statutory accounts and the regulatory accounts and consider whether it is consistent with them, We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the non-statutory accounts or regulatory accounts. Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes an examination, on a test basis, of evidence relevant to the amounts and disclosures in the regulatory accounts. It also includes an assessment of the significant estimates and judgements made by the Company’s directors in preparation of the regulatory accounts, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit work so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the regulatory accounts are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the regulatory accounts.

Sutton and East Surrey Water plc

Financial Statements 2004

Opinions In our opinion the regulatory accounts contain the information for the year to 31 March 2004 required to be published and submitted to you by the Company to comply with Condition F of the Regulatory Licence. In respect of this information, we report that in our opinion: (i) proper accounting records have been kept by the Company as required by paragraph 3 of Condition F of the Regulatory Licence; (ii) the financial information is in agreement with the Company’s accounting records, complies with the requirements of Condition F of the Regulatory Licence and has been properly prepared in accordance with the Regulatory Accounting Guidelines numbers 1 to 4 issued by the Office of Water Services; (iii) the summarised accounts on pages 20 to 26 have been properly prepared from the statutory accounts on pages 5 to 19 to reflect the adoption of infrastructure renewals accounting as required by the Regulatory Accounting Guidance and, except for the effect of the departure from accounting standards inherent in this requirement, give, under the historical cost convention and together with the information in the statutory accounts on pages 5 to 19, a true and fair view of the revenues, costs, assets and liabilities of the Company; and (iv) the current cost financial information on pages 27 to 39 has been properly prepared in accordance with Regulatory Accounting Guideline 1, Accounting for Current Costs, issued in May 1992 by the Office of Water Services. KPMG Audit Plc Chartered Accountants London 3 June 2004

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Sutton and East Surrey Water plc London Road Redhill Surrey RH1 1LJ Telephone 01737 772000 Facsimile 01737 766807 Registered in England Registered number 2447875

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