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Sutton & East Surrey Water plc Financial Statements 2003
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.
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Sutton and East Surrey Water plc Financial Statements 2003
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
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Sutton and East Surrey Water plc Financial Statements 2003
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 2003 was £38.1m (£36.7m). Profit on ordinary activities before taxation was £9.1m (£10.6m). 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 2003 was 14.2p (13.9p) 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 £5.4 million (£5.3 million) leaving a balance of £4.8 million (£3.3 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 £37.9m 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 16 days (36 days). Tangible fixed assets Capital expenditure on tangible fixed assets was £4.9m. In addition, £11.6m 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:
P A Barrett P B Holder N J Fisher M E Hegarty L C Sonden N L Houlahan J O Newton J R Avery
31 March 2003 Ordinary Voting Preference Shares Shares
31 March 2002 Ordinary Voting Preference Shares Shares
73,240 108,549 16,119 11,306 2,066 3,212 13,186 4,000
43,240 108,337 15,907 11,094 1,906 3,000 13,186 4,000
– 7,478 4,901 – – – 3,296 –
– 7,478 4,901 – – – 3,296 –
1
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Sutton and East Surrey Water plc Financial Statements 2003
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 £10,263 (£7,157). 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 2003 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 2003
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Sutton and East Surrey Water plc Financial Statements 2003
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
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Sutton and East Surrey Water plc Financial Statements 2003
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 2003 and of the profit of the company for the year then ended. KPMG Audit Plc Chartered Accountants Registered Auditor London 3 June 2003
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Sutton and East Surrey Water plc Financial Statements 2003
Profit and Loss Account for the year ended 31 March 2003
Note
2003 £000
2002 £000
Turnover
2
38,061
36,668
Operating costs
3
(26,644)
(25,769)
11,417
10,899
Operating profit Exceptional profit
4
Net interest payable and similar charges
6
Profit on ordinary activities before taxation Taxation on profit on ordinary activities
7
Profit on ordinary activities after taxation
908 (3,261)
2,697 (2,985)
9,064
10,611
1,090
(2,025)
10,154
8,586
(5,367)
(5,266)
4,787
3,320
2003 £000
2002 £000
Profit for the year as restated
–
8,586
Prior year adjustment
–
6,912
Total gains and losses recognised since last report
–
1,674
Dividends – paid and proposed
Profit retained for the year
8
Movement on reserves, see note 20. Reported profits are equivalent to historic cost profits, and relate to continuing activities.
Statement of Total Recognised Gains and Losses for the year ended 31 March 2003
5
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Sutton and East Surrey Water plc Financial Statements 2003
Balance Sheet as at 31 March 2003
Note
2003 £000
2002 £000
Fixed assets Intangible assets
12
12,645
13,617
Tangible assets
11
112,674
103,633
125,319
117,250
Current assets Stocks
13
663
636
Debtors
14
4,733
5,513
37,938
42,562
Cash at bank and in hand
Creditors: amounts falling due within one year
15
Net current assets Total assets less current liabilities
43,334
48,711
(12,076)
(16,133)
31,258
32,578
156,577
149,828
Creditors: amounts falling due after more than one year
16
(91,372)
(89,114)
Provisions: Deferred tax
18
(6,727)
(7,023)
58,478
53,691
Net assets Capital and reserves Called up share capital
19
15,489
15,489
Profit and loss account
21
42,989
38,202
Equity
46,094
41,307
Non-equity
12,384
12,384
58,478
53,691
Shareholders’ funds
20
These financial statements were approved by the Board of Directors on 3 June 2003 and signed on its behalf by:
P B Holder
N J Fisher
Director
Director
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Sutton and East Surrey Water plc Financial Statements 2003
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 Financial Reporting Standard 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
Sutton&East Surrey 2003 02
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Sutton and East Surrey Water plc Financial Statements 2003
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.
2003 £000
2002 £000
Unmeasured water supplies
26,233
25,737
Measured water supplies
10,934
10,280
894
651
38,061
36,668
2 Turnover
Other
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Sutton and East Surrey Water plc Financial Statements 2003
2003 £000
2003 £000
2002 £000
2002 £000
3 Operating costs Wages and salaries
6,223
6,066
Social security costs
498
501
Other pension costs
945
505
Raw materials and consumables
1,729
1,956
Depreciation of owned assets
4,207
4,090
Depreciation of infrastructure assets
2,553
1,961
Depreciation of leased assets
200
326
Amortisation of goodwill
972
973
19
22
Auditors’ remuneration – audit Other fees paid to the auditors and their associates for further assurance services
9
15
Hire of other assets
5
117
– operating leases
Other operating charges – redundancy costs – other
6 10,674
– 10,680
10,456
28,040 Other operating income
10,456 26,988
(1,396)
(1,219)
26,644
25,769
4 Exceptional Profit 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. (2001/02 exceptional profit of £2,697,000 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.)
2003 £000
2002 £000
260
255
2
2
262
257
5 Employees The average number of persons (including directors) employed during the year was as follows: Water supply Other
9
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Sutton and East Surrey Water plc Financial Statements 2003
Notes to the Financial Statements (continued)
2003 £000
2002 £000
Other loans
2,957
2,898
Indexation of Bond
1,525
1,642
456
456
6 Net interest payable/(receivable) and similar charges
Bond fees amortisation Finance leases
74
28
Other
46
42
Interest payable and similar charges
5,058
5,066
Interest receivable and similar income
(1,797)
(2,081)
3,261
2,985
2003 £000
2002 £000
1,800
2,060
Net interest payable and similar charges
Note
7 Taxation UK corporation tax Current tax on income for the period Adjustments in respect of prior periods
(2,594)
Total current tax Deferred tax Origination/reversal of timing differences Changes in the amount of discount deducted Tax on profit on ordinary activities
(794)
(229) 1,831
18 (1,300)
628
1,004
(434)
(1,090)
2,025
The adjustment in respect of prior periods relates to the Inland Revenue accepting computations for the years ended 1998/99, 1999/2000 and 2000/2001. Factors affecting the tax charge for the current period The current tax charge for the period is 42% lower (2002 17% lower) than the standard rate of corporation tax in the UK of 30% (2002 30%). The differences are explained below. 2003 £000
2002 £000
Profit on ordinary activities before tax
9,064
10,611
Current tax at 30%
2,719
3,183
Expenses not deducted for tax purposes
375
361
Finance Lease rentals
(47)
(43)
(975)
(632)
Current tax reconciliation
Effects of:
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 Total current tax charge
(272)
(809)
(2,594)
(229)
(794)
1,831
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Sutton and East Surrey Water plc Financial Statements 2003
2003 £000
2002 £000
4,400
4,300
967
966
5,367
5,266
2003 £000
2002 £000
8 Dividends Ordinary shares – equity Dividends paid Preference shares – non-equity Dividends paid Dividends paid and proposed
9 Directors 65
65
Remuneration
Fees
515
479
Performance bonus
110
137
Pension contributions
56
48
Pensions to former directors
55
54
801
783
The bonus is dependent upon a range of factors relating to the Company’s performance. Including pension contributions 2003 2002 £000 £000
Chairman Highest paid director
Excluding pension contributions 2003 2002 £000 £000
65
65
65
65
248
243
228
227
The highest paid director was P B Holder. His accrued pension at the year end was £70,000 (£64,000) and his accrued lump sum was £209,000 (£191,000). Number of directors 2003 2002
Retirement benefits are accruing to the following number of directors under: Defined benefit schemes
5
5
11
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Sutton and East Surrey Water plc Financial Statements 2003
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 2002 for this scheme was £945,000 (£505,000). 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 2003, by an independent qualified actuary, using the following major assumptions in accordance with the transitional arrangements of FRS17 Assumptions
2003
2002
Expected 2002/03 return for
2003
2002
Inflation
2.5%
2.8%
Equities
7.5%
8.3% 5.2%
Pension increases in payment (RPI)
2.5%
2.8%
Bonds
4.5%
Pension increases in payment (LPI)
2.4%
2.8%
Corporate bonds
5.6%
6.1%
Salary increases
4.5%
4.8%
Property
6.0%
6.7%
Discount rate
5.6%
6.1%
Cash
3.8%
5.2%
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Sutton and East Surrey Water plc Financial Statements 2003
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:
Equities
Value as at 31.3.03 £000
Value as at 31.3.02 £000
32,254
45,620
Bonds
3,252
6,627
Corporate bonds
4,205
2,630
977
1,716
3,431
945
Property Cash
Present value of scheme liabilities
44,119
57,538
(52,800)
(46,759)
(Deficit)/surplus in the scheme - Pension asset
(8,681)
10,779
Related deferred tax asset/(liability)
2,604
(3,234)
(6,077)
7,545
Net pension (liability)/asset The amount of this net pension (liability)/asset would have a consequential effect on reserves.
2003 £000
Analysis of amount charged to operating profit Employer’s part of current service cost
1,200
Analysis of the amount credited to other finance income Expected return on pension scheme assets Interest on pension scheme liabilities Net return - credit
4,410 (2,830) 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 Actuarial loss recognised in STRGL
(16,700) 330 (4,400) (20,770)
Movement in scheme surplus during the year Surplus in scheme as at 1.4.02
10,779
Movement in year Current service costs Aggregate contributions Other finance income Actuarial loss recognised in STRGL Deficit in scheme as at 31.3.03
(1,470) 1,200 1,580 (20,770) (8,681)
13
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Sutton and East Surrey Water plc Financial Statements 2003
Notes to the Financial Statements (continued)
Land £000
Collection reservoir £000
Buildings boreholes & service reservoirs £000
Plant & machinery £000
Mains £000
Motor vehicles & sundry plant £000
Total £000
11 Tangible fixed assets Cost 31 March 2002
563
2,154
52,982
48,281
71,774
6,929
182,683
Additions
–
–
1,337
2,284
11,607
1,307
16,535
Disposals
–
–
–
563
2,154
54,319
49,296
83,181
7,366
196,879
31 March 2002
–
256
7,959
25,169
35,546
4,462
73,392
Charge for year
–
–
841
2,597
2,553
969
6,960
Disposals
–
–
–
(820)
(2,280)
31 March 2003
–
256
8,800
26,509
37,896
4,611
78,072
31 March 2003
563
1,898
45,519
22,787
45,285
2,755
118,807
31 March 2002
563
1,898
45,023
23,112
36,228
2,467
109,291
31 March 2002
–
–
–
–
5,658
–
5,658
Receipts
–
–
–
–
475
–
475
31 March 2003
–
–
–
–
6,133
–
6,133
31 March 2003
563
1,898
45,519
22,787
39,152
2,755
112,674
31 March 2002
563
1,898
45,023
23,112
30,570
2,467
103,633
31 March 2003
(1,269)
(200)
(870)
(2,339)
Depreciation
(1,257)
(203)
Net book value
Capital contributions
Net book value after capital contributions
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 2003 Cost
5,693
5,790
Accumulated depreciation
(1,210)
(4,705)
1,535
Net book value
4,483
1,085
1,479
1,535
(56)
84
13,102
(84)
(6,055)
–
7,047
100
13,644
(100)
(6,397)
31 March 2002 Cost
5,693
6,316
Accumulated depreciation
(1,131)
(5,110)
Net book value
4,562
1,206
(56) 1,479
–
7,247
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Sutton and East Surrey Water plc Financial Statements 2003
Purchased Goodwill £000
12 Intangible assets Cost 31 March 2002 and 31 March 2003
19,454
Amortisation 31 March 2002
5,837
Charge for year
972
31 March 2003
6,809
Net book value 31 March 2003
12,645
31 March 2002
13,617
Note
2003 £000
2002 £000
663
636
3,245
2,775
13 Stock Raw materials and consumables
14 Debtors Debtors receivable within one year: Service debtors Amounts owed by fellow subsidiary undertakings
273
951
Other debtors
630
845
Prepayments
585
942
4,733
5,513
15 Creditors: amounts falling due within one year Obligations under finance leases Trade creditors Amounts owed to fellow subsidiary undertakings
17
173
157
1,556
2,117
687
637
Other creditors
5,491
5,370
Corporation tax
440
3,611
Other taxes and social security Accruals and deferred income Deposits from developers
–
273
2,763
3,084
966
884
12,076
16,133
15
Sutton&East Surrey 2003 02
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Page 16
Sutton and East Surrey Water plc Financial Statements 2003
Notes to the Financial Statements (continued)
Note
2003 £000
2002 £000
90,521
88,541
400
573
90,921
89,114
451
–
91,372
89,114
16 Creditors: amounts falling due after more than one year Loans Obligations under finance leases Total loans and other borrowings
17
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
2003 £000
2002 £000
Loans and other borrowings – Between one and two years
190
173
– Between two and five years
210
400
90,521
88,541
– More than five years – Creditors: amounts falling due after more than one year
16
90,921
89,114
– Creditors: amounts falling due within one year
15
173
157
91,094
89,271
2003 £000
2002 £000
Net obligations under Finance Leases Note
– Between one and two years
190
173
– Between two and five years
210
400
– Creditors: amounts falling due after more than one year
16
400
573
– Creditors: amounts falling due within one year
15
173
157
573
730
Sutton&East Surrey 2003 02
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Page 17
Sutton and East Surrey Water plc Financial Statements 2003
17 Financial instruments (continued) Other Loans Note
2003 £000
2002 £000
3.25% Irredeemable Debentures
50
50
5% Irredeemable Debentures
52
52
90,419
88,439
90,521
88,541
2.874% Secured Index-linked Bond 2027-2031 – Creditors: amounts falling due after more than one year
16
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
2003 £000
2002 £000
2,000
5,000
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. 2003 £000
2002 £000
7,023
6,829
18 Provisions - deferred tax Balance brought forward Amount (credited)/debited in the profit and loss account Balance carried forward
(296) 6,727
194 7,023
The amount provided for deferred taxation represents timing differences caused by the excess of tax allowances over depreciation.
17
Sutton&East Surrey 2003 02
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Page 18
Sutton and East Surrey Water plc Financial Statements 2003
Notes to the Financial Statements (continued)
18 Provisions - deferred tax (continued) The elements of deferred tax are as follows: Difference between accumulated depreciation, amortisation and capital allowances
2003 £000
2002 £000
12,343
13,620
Other timing differences
1,462
1,486
Undiscounted provision
13,805
15,106
Discount
(7,078)
(8,083)
6,727
7,023
2003 £000
2002 £000
19 Share capital Authorised: • (31,046,440) ordinary shares of 10p each • (18,000,000) 7.8% Cumulative irredeemable preference shares of £1 each
3,105
3,105
18,000
18,000
21,105
21,105
Allotted called up and fully paid: • (31,046,440) ordinary shares of 10p each • (12,384,593) 7.8% Cumulative irredeemable preference shares of £1 each
3,105
3,105
12,384
12,384
15,489
15,489
On a winding up, the preference shares would rank above the ordinary shares. The preference shares do not carry any voting rights. 2003 £000
2002 £000
20 Reconciliation of movements in shareholders’ funds Profit for the year
10,154
8,586
Dividends
(5,367)
(5,266)
4,787
3,320
Opening shareholders’ funds
53,691
50,371
Closing shareholders’ funds
58,478
53,691
Net addition to shareholders’ funds
Sutton&East Surrey 2003 02
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Page 19
Sutton and East Surrey Water plc Financial Statements 2003
2003 £000
2002 £000
38,202
34,882
4,787
3,320
42,989
38,202
5,588
3,360
21 Profit and loss account As at 31 March 2002 Profit retained As at 31 March 2003 22 Commitments a) Capital commitments authorised by the directors are: Contracted for
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
Sutton&East Surrey 2003 02
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Page 20
Sutton and East Surrey Water plc Financial Statements 2003
Regulatory Accounts 2003
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.
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Page 21
Sutton and East Surrey Water plc Financial Statements 2003
Historic Cost Profit and Loss Account for the year ended 31 March 2003
Note
Appointed £000
NonAppointed £000
2003 Total £000
Appointed £000
NonAppointed £000
2002 Total £000
Turnover
2
38,828
631
39,459
37,238
651
37,889
Operating costs
3
(27,817)
(264)
(28,081)
(26,418)
(260)
(26,678)
Other operating income/(costs)
4
Operating profit Interest receivable Interest payable
Profit on ordinary activities before taxation
941
6
947
2,438
(53)
2,385
11,952
373
12,325
13,258
338
13,596
1,790
7
1,797
2,075
6
2,081
(5,058)
–
(5,058)
(5,066)
–
(5,066)
9,064
10,267
344
10,611
Taxation – current
872
(78)
794
(1,723)
(108)
(1,831)
Taxation – deferred
298
(2)
296
(202)
Profit on ordinary activities after taxation Dividends
Profit/(loss) retained for the year
8,684
380
9,854
300
10,154
8,342
(4,967)
(400)
(5,367)
(5,266)
4,887
(100)
4,787
3,076
8
244 –
244
(194)
8,586 (5,266)
3,320
21
Sutton&East Surrey 2003 02
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Page 22
Sutton and East Surrey Water plc Financial Statements 2003
Historic Cost Balance Sheet at 31 March 2003
NonAppointed £000
2003 Total £000
Appointed £000
NonAppointed £000
2002 Total £000
Note
Appointed £000
12,645
–
12,645
13,617
–
13,617
5
116,189
23
116,212
109,073
17
109,090
128,834
23
128,857
122,690
17
122,707
Fixed assets Intangible assets Tangible assets
Current assets Stocks Debtors
6
Cash at bank and in hand
663
–
663
636
–
636
4,651
82
4,733
5,451
62
5,513
37,758
180
37,938
42,238
324
42,562
43,072
262
43,334
48,325
386
48,711
(15,448)
(166)
(15,614)
(21,403)
(187)
(21,590)
27,624
96
27,720
26,922
199
27,121
156,458
119
156,577
149,612
216
149,828
(89,114)
Creditors: Amounts falling due within one year
7
Net current assets Total assets less current liabilities
Creditors: Amounts falling due after one year Borrowing Other creditors
(90,921)
–
(90,921)
(451)
–
(451)
Provisions - deferred tax
(6,726)
Net assets employed
58,360
(1) 118
–
(6,727)
(7,025)
58,478
53,473
– – 2 218
(89,114) – (7,023) 53,691
Capital and reserves Called up share capital
15,489
–
15,489
15,489
–
15,489
Profit and loss account
42,871
118
42,989
37,984
218
38,202
58,360
118
58,478
53,473
218
53,691
Sutton&East Surrey 2003 02
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Page 23
Sutton and East Surrey Water plc Financial Statements 2003
Historic Cost Balance Sheet Reconciliation to Statutory Accounts at 31 March 2003
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 2003 per Regulatory Accounts
51,376
Adjustment to opening balance
27,534
Deemed disposal Infrastructure renewals expenditure capitalised during the year Cost at 31 March 2003 per Statutory Accounts
(200) 4,471 83,181
Depreciation Cost at 31 March 2003 per Regulatory Accounts Adjustment to opening balance Deemed disposal Depreciation charge for infrastructure renewals expenditure Cost at 31 March 2003 per Statutory Accounts
2,557 32,989 (203) 2,553 37,896
Net Book Value At 31 March 2003 per Regulatory Accounts
48,819
Adjustment for infrastructure renewals accounting
(3,534)
At 31 March 2003 per Statutory Accounts
45,285
Creditors amounts falling due within one year At 31 March 2003 per Regulatory Accounts
15,614
Less infrastructure renewals accrual
(3,538)
At 31 March 2003 per Statutory Accounts
12,076
23
Sutton&East Surrey 2003 02
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Page 24
Sutton and East Surrey Water plc Financial Statements 2003
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&East Surrey 2003 02
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Page 25
Sutton and East Surrey Water plc Financial Statements 2003
Appointed £000
NonAppointed £000
2003 Total £000
Measured
10,934
–
10,934
10,280
–
10,280
Unmeasured
26,233
–
26,233
25,737
–
25,737
1,661
631
2,292
1,221
651
1,872
38,828
631
39,459
37,238
651
37,889
6,702
147
6,849
5,848
164
6,012
300
1
301
322
3
325
Power
1,733
–
1,733
1,779
–
1,779
Local authority rates
2,088
–
2,088
2,156
–
2,156
639
–
639
550
–
550
Materials and consumables
2,258
85
2,343
2,464
74
2,538
Hired and contracted services
4,830
19
4,849
4,684
19
4,703
185
–
185
138
5,371
9
5,380
5,369
Appointed £000
NonAppointed £000
2002 Total £000
2 Turnover
All other sources Total turnover
3 Operating costs Employment costs Other costs of employment
Water charges incl. abstraction
Bad debts Depreciation and amortisation Infrastructure – Expenditure – Accrual Other Total operating costs
(1) 20
137 5,389
4,471
–
4,471
3,284
–
3,284
(1,918)
–
(1,918)
(1,323)
–
(1,323)
1,158
3
1,161
1,147
(19)
1,128
27,817
264
28,081
26,418
33
6
39
908
–
908
2,697
–
2,697
941
6
947
2,438
(53)
2,385
260
26,678
4 Other operating income/(costs) Profit/(loss) on disposal of tangible assets Exceptional profit on disposal of land
(259)
(53)
(312)
25
Sutton&East Surrey 2003 02
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Page 26
Sutton and East Surrey Water plc Financial Statements 2003
Notes to the Historic Cost Accounts (continued)
Land £000
Collection reservoir £000
Buildings boreholes & service reservoirs £000
Plant & machinery £000
Mains £000
Motor vehicles & sundry plant £000
Total £000
5 Tangible assets (appointed business) Cost 31 March 2002
563
2,154
52,982
48,281
44,241
6,860
155,081
Additions
–
–
1,337
2,284
7,135
1,292
12,048
Disposals
–
–
–
563
2,154
54,319
49,296
51,376
7,289
164,997
31 March 2002
–
256
7,959
25,169
2,557
4,409
40,350
Charge for year
–
–
841
2,597
–
960
4,398
Disposals
–
–
–
(1,257)
–
(816)
(2,073)
31 March 2003
–
256
8,800
26,509
2,557
4,553
42,675
31 March 2003
563
1,898
45,519
22,787
48,819
2,736
122,322
31 March 2002
563
1,898
45,023
23,112
41,684
2,451
114,731
31 March 2002
–
–
–
–
5,658
–
5,658
Receipts
–
–
–
–
475
–
475
31 March 2003
–
–
–
–
6,133
–
6,133
31 March 2003
563
1,898
45,519
22,787
42,686
2,736
116,189
31 March 2002
563
1,898
45,023
23,112
36,026
2,451
109,073
31 March 2003
(1,269)
–
(863)
(2,132)
Depreciation
Net book value
Capital contributions
Net book value after capital contributions
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 £77,000 (£70,000). In respect of these assets depreciation of £9,000 (£20,000) has been charged to the profit and loss account and accumulated depreciation at 31 March 2003 amounted to £54,000 (£53,000).
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 £53,000 (£59,000) and prepayments include £29,000 (£2,000) 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 £78,000 (£108,000) and accruals include £88,000 (£79,000) in respect of the non-appointed activities.
Sutton&East Surrey 2003 02
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Page 27
Sutton and East Surrey Water plc Financial Statements 2003
Current Cost Profit and Loss Account for the Appointed Business for the year ended 31 March 2003
Note
2003 £000
2002 £000
Turnover
2
38,828
37,238
Current cost operating costs
2
(29,228)
(28,008)
Other operating income
2
Working capital adjustment
2
Current cost operating profit
2
Interest receivable Interest payable
790
2,224
10,390
11,454
160
52
10,550
11,506
1,790
2,075
(5,058)
(5,066)
Financing adjustment
1,395
544
Current cost profit before taxation
8,677
9,059
Taxation – Current
872
(1,723)
– Deferred
298
(202)
Current cost profit attributable to shareholders Dividends – paid and proposed
Current cost profit retained
9,847
7,134
(4,967)
(5,266)
4,880
1,868
27
Sutton&East Surrey 2003 02
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Page 28
Sutton and East Surrey Water plc Financial Statements 2003
Current Cost Balance Sheet for the Appointed Business as at 31 March 2003
Note
2003 £000
2002 £000
3
609,555
585,308
Fixed assets Tangible assets Third party contributions since 1989-90 Working capital
4
Net operating assets
(7,054)
(6,495)
(7,259)
(10,701)
595,242
568,112
Intangible assets
12,645
13,617
Cash and investments
37,758
42,238
Non-trade debtors
893
Non-trade creditors due within one year Creditors due after one year Provisions for liabilities and charges - deferred tax Net assets employed
1,780
(3,940)
(6,486)
(91,372)
(89,114)
(6,726)
(7,025)
544,500
523,122
15,489
15,489
Capital and reserves Called up share capital Profit and loss account
5
2,087
Current cost reserve
5
526,924
510,426
544,500
523,122
Total capital and reserves
(2,793)
Sutton&East Surrey 2003 02
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Page 29
Sutton and East Surrey Water plc Financial Statements 2003
Current Cost Cash Flow Statement for the Appointed Business for the year ended 31 March 2003
Net cash flow from operating activities
Appointed £000
Non Appointed £000
31 March 2003 Total £000
Appointed £000
Non Appointed £000
31 March 2002 Total £000
18,387
365
18,752
19,853
416
20,269
2,183
7
2,190
1,500
7
1,507
(2,990)
–
(2,990)
(2,057)
(1)
(2,058)
Returns on investments and servicing of finance Interest received Interest paid Interest in finance lease rentals
(74)
–
(74)
(28)
–
(28)
(966)
–
(966)
(966)
–
(966)
investments and servicing of finance
(1,847)
7
(1,840)
(1,551)
6
(1,545)
Taxation paid
(1,818)
(108)
(1,926)
(2,043)
(104)
(2,147)
(12,046)
(15)
(12,061)
(11,158)
(14)
(11,172)
Non-equity dividends paid Net cash flow from returns on
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 Net cash outflow from investing activities Equity dividends paid
475 (4,471)
– –
475 (4,471)
331 (3,284)
–
331
–
(3,284)
908
–
908
2,697
–
2,697
89
6
95
124
39
163
(15,045)
(9)
(15,054)
(11,290)
25
(11,265)
(4,000)
(400)
(4,400)
(4,300)
–
(4,300)
Management of liquid resources Withdrawals from short term deposits
53,169
–
53,169
42,536
–
42,536
Purchase of short term deposits
(51,184)
–
(51,184)
(41,392)
–
(41,392)
1,985
–
1,985
1,144
–
1,144
(2,483)
1,813
343
2,156
Net cash inflow from management of liquid resources Net cash (outflow)/inflow before financing
(2,338)
(145)
Financing Capital element in finance lease rentals Fees relating to bond issue Net cash flow from financing (Decrease)/increase in cash and cash equivalents
(157) – (157) (2,495)
– – – (145)
(157) – (157) (2,640)
(143)
–
(143)
(190)
–
(190)
(333)
–
(333)
1,480
343
1,823
29
Sutton&East Surrey 2003 02
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Page 30
Sutton and East Surrey Water plc Financial Statements 2003
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&East Surrey 2003 02
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Page 31
Sutton and East Surrey Water plc Financial Statements 2003
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
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Page 32
Sutton and East Surrey Water plc Financial Statements 2003
Notes on the Current Cost Accounts of the Appointed Business (continued)
2003 £000
2002 £000
2 Analysis of current cost operating profit of the appointed business Turnover Measured
10,934
10,280
Unmeasured
26,233
25,737
Other sources
1,661
1,221
Total turnover
38,828
37,238
6,702
5,848
Operating costs Manpower costs Other costs of employment
300
322
Power
1,733
1,779
Rates
2,088
2,156
Hired and contracted
4,830
4,684
Materials and consumables
2,258
2,464
Service charges Other operating costs Doubtful debts Current cost depreciation and amortisation
639
550
1,158
1,147
185
138
6,700
7,000
Infrastructure renewals: Expenditure Accrual Total operating costs
4,471
3,284
(1,836)
(1,364)
29,228
28,008
Other operating costs Current cost loss on sale of fixed assets
(118)
Exceptional item
908
2,697
Other operating income
790
2,224
10,390
11,454
160
52
10,550
11,506
Current cost operating profit before working capital adjustment Working capital adjustment Current cost operating profit
(473)
All these revenues and costs relate to the supply of water services. Commentary on significant profit and loss account movements Turnover: The increase in both measured and unmeasured income reflects an effective price increase of 1.1% and an inflation increase of 0.9%. There was also an increase in water supplied to measured customers. 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 an increase in employers’ pension contributions from 10% in 2002 to 17% in 2003 at a cost of £0.4 million.
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Page 33
Sutton and East Surrey Water plc Financial Statements 2003
Specialised operational assets £000
Nonspecialised operational properties £000
Infrastructure assets £000
Other tangible assets £000
Total £000
31 March 2002
186,481
12,265
483,355
13,782
695,883
RPI adjustment
5,757
380
14,984
390
21,511
Additions
3,504
355
7,135
1,052
12,046
–
–
(1,224)
(1,998)
194,968
13,000
505,474
14,000
727,442
110,575
3 Tangible assets Cost
Disposals 31 March 2003
(774)
Depreciation At 31 March 2002
96,910
4,892
–
8,773
RPI adjustment
2,983
152
–
238
3,373
Charge for the year
4,576
268
–
884
5,728
–
–
(1,107)
(1,789)
103,787
5,312
–
8,788
117,887
31 March 2003
91,181
7,688
505,474
5,212
609,555
31 March 2002
89,571
7,373
483,355
5,009
585,308
2003 £000
2002 £000
Disposals 31 March 2003
(682)
Net book value
4 Working capital Stocks Trade debtors
663
636
3,191
2,716
Trade creditors
(1,556)
(2,117)
Short term capital creditors
(1,675)
(2,011)
Infrastructure renewals accrual
(3,710)
(5,545)
Other trade accruals
(567)
(1,062)
Trade payments in advance
(431)
Payroll related taxes and social security contributions Other trade creditors
– (3,729)
(417) (273) (3,574)
Group trade debtors
10
15
Group trade creditors
(11)
(10)
Prepayments Total working capital
556 (7,259)
941 (10,701)
33
Sutton&East Surrey 2003 02
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Page 34
Sutton and East Surrey Water plc Financial Statements 2003
Notes on the Current Cost Accounts of the Appointed Business (continued)
Current Cost Reserve 2003 2002 £000 £000
Profit and Loss Account 2003 2002 £000 £000
5 Reserves Balance at 31 March 2002
510,426
503,655
18,137
7,446
(2,793)
(4,661)
RPI adjustments: Fixed assets Working capital Financing Grants and third party contributions Current cost profit retained Balance at 31 March 2003
–
–
(160)
(52)
–
–
(1,395)
(544)
–
–
(84)
(79)
–
–
–
–
4,880
1,868
526,924
510,426
2,087
(2,793)
£000
£000
10,550
11,506
6 Reconciliation of current cost operating profit to net cash flow from operating activities Current cost operating profit Working capital adjustment Change in stocks
(160) (27)
(52) –
Current cost depreciation
5,728
6,027
Amortisation of goodwill
972
973
Current cost loss on sale of assets
118
Exceptional item Decrease in debtors and prepaid expenses Decrease in creditors and accrued expenses Infrastructure renewals expenditure Net cash flow from operating activities
(908) 408 (2,765)
473 (2,697) 895 (556)
4,471
3,284
18,387
19,853
2003 £000
2002 £000
7 Reconciliation of net cash flow to movement in net debt (Decrease)/increase in cash in the period Net cash outflow from bond issue Cash outflow from decrease in finance leasing
(2,495) – 157
Cash inflow from decrease in current asset investments
(1,985)
Change in net debt resulting from cash flows
(4,323)
Non cash movement
(1,981)
Movement on net debt in year
1,480 190 143 (1,144) 669 (2,098)
(6,304)
(1,429)
Net debt at 31 March 2002
(47,031)
(45,602)
Net debt at 31 March 2003
(53,335)
(47,031)
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Page 35
Sutton and East Surrey Water plc Financial Statements 2003
As at 31 March 2002 £000
Non cash items £000
Cash flows £000
As at 31 March 2003 £000
8 Analysis of net debt Cash in hand and in bank Loans due after one year Finance leases Current asset investments
4,314 (88,540) (729) 37,924 (47,031)
– (1,981) – – (1,981)
(2,495) –
1,819 (90,521)
157
(572)
(1,985)
35,939
(4,323)
(53,335)
2003 £000
9 Regulatory Capital Value Opening RCV
98,416
Capital expenditure
14,169
Infrastructure renewals expenditure
4,427
Grants and contributions
(664)
Depreciation
(5,922)
Infrastructure renewals charge
(3,404)
Working capital adjustment
141
Outperformance of regulatory assumptions (5 years in arrears)
149
Closing RCV carried forward
107,312
Average regulatory capital value
102,511
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 2000/01 prices.
35
Sutton&East Surrey 2003 02
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Page 36
Sutton and East Surrey Water plc Financial Statements 2003
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
Business analysis Customer services £000
Scientific services £000
Cost of regulation £000
Direct costs Employment costs
1,358
1,867
3,225
Power
865
815
1,680
Hired and contracted services
477
947
1,424
–
64
64
1,326
430
1,756
Associated companies Materials and consumables Service charges
639
–
639
Other direct costs
288
161
449
Total direct costs
4,953
4,284
9,237
1,918
581
336
General and support expenditure
2,060
1,388
3,448
781
174
–
Functional expenditure
7,013
5,672
12,685
2,699
755
336
1,655
4,959
Capital costs Current cost depreciation
3,304
Infrastructure renewal expenditure Infrastructure renewal accrual Functional costs
10,317
4,471
4,471
(1,836)
(1,836)
9,962
Total from above
20,279 24,069
Rates
2,088
Doubtful debts
185
Intangible assets
972
Business activities capital costs
769
Service costs
28,083
Services for third parties
1,145
Total
29,228
CCA (MEA) values Services activities
164,583
Business activities Service totals Services for the third parties Total
539,643
704,226 23,216 727,442 – 727,442
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 (eg 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.
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Page 37
Sutton and East Surrey Water plc Financial Statements 2003
Activity Cost Table for the Appointed Business - Revenue Account only for the year ended 31 March 2002
Water resources and treatment £000
Water distribution £000
Service analysis Water supply Total £000
Business analysis Customer services £000
Scientific services £000
Cost of regulation £000
Direct costs Employment costs
1,277
1,668
2,945
Power
932
798
1,730
Hired and contracted services
604
991
1,595
–
63
63
1,457
366
1,823
Associated companies Materials and consumables Service charges
550
–
550
90
150
240
Total direct costs
4,910
4,036
8,946
1,738
583
219
General and support expenditure
1,994
1,220
3,214
763
166
–
Functional expenditure
6,904
5,256
12,160
2,501
749
219
Other direct costs
Capital costs Current cost depreciation
3,342
1,785
5,127
Infrastructure renewal expenditure
–
3,284
3,284
Movement in infrastructure renewal accrual
–
(1,357)
(1,357)
8,968
19,214
Functional costs
10,246
Total from above
22,683
Rates
2,156
Doubtful debts
154
Intangible assets
973
Business activities capital costs
900
Service costs
26,866
Services for third parties
1,142
Total
28,008
CCA (MEA) values Services activities
157,425
Business activities Service totals Services for the third parties Total All these assets relate to the supply of water services.
516,291
673,716 22,167 695,883 – 695,883
37
Sutton&East Surrey 2003 02
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Page 38
Sutton and East Surrey Water plc Financial Statements 2003
Current Cost Accounts Five Years Review for the Appointed Business for the years ended 31 March
2003 £000
2002 £000
2001 £000
2000 £000
1999 £000
Profit and loss account Turnover Current cost operating costs
38,828
38,020
36,602
43,804
45,717
(29,228)
(28,596)
(29,155)
(32,945)
(30,928)
Operating income/(expense)
790
2,271
572
(118)
(393)
Working capital adjustment
160
53
135
143
137
10,550
11,748
8,154
10,884
14,533
(3,268)
(3,054)
(629)
219
830
682
547
367
Net Interest Financing adjustments
1,395
Current cost profit before taxation
8,677
555 9,249
8,207
11,650
15,730
Taxation - Current tax
872
(1,759)
(2,008)
(3,660)
(5,208)
Taxation - Deferred tax
298
(206)
Current cost profit attributable to shareholders Dividends Current cost profit/(loss) retained
80
–
–
9,847
7,284
6,279
7,990
10,522
(4,967)
(5,377)
(6,139)
(9,119)
(9,177)
4,880
1,907
140
(1,129)
1,345
609,555
603,453
599,126
Balance sheet Tangible fixed assets
592,580
644,580
Third party contribution since 1990/91
(7,054)
(6,696)
(6,359)
(5,975)
(5,542)
Working capital
(7,259)
(11,033)
(11,417)
(12,016)
(8,653)
Net operating assets
595,242
585,724
581,350
574,589
630,385
Intangible assets
12,645
14,039
15,247
16,621
18,123
Cash and investments
37,758
43,547
43,788
(2,480)
7,612
893
1,835
2,199
2,523
2,861
(3,940)
(6,685)
(6,524)
(6,644)
(8,037)
(91,372)
(91,877)
(91,293)
(40,556)
(42,193)
(6,726)
(7,243)
(7,129)
(7,368)
Non-trade debtors Non-trade creditors Creditors due after one year Provisions for liabilities and charges - deferred tax Net assets employed
544,500
539,340
Called up share capital
15,489
Profit and loss account
2,087
–
537,638
536,685
608,751
15,969
16,186
16,542
16,976
(2,878)
(4,869)
(5,120)
3,467
Current cost reserves
526,924
526,249
526,321
525,263
588,308
Total capital and reserves
544,500
539,340
537,638
536,685
608,751
All figures are in 2002/03 prices
Sutton&East Surrey 2003 02
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Page 39
Sutton and East Surrey Water plc Financial Statements 2003
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 5.3% and properties connected of 2.3%. Current cost operating costs: The five year trend shows a reduction in operating costs of 5.5%, this has been bought 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. Current tax: The tax gain of £0.8 million (charge £1.8 million) in 2003 has taken into account a £2.1 million reduction in the creditor relating to previous years. This adjustment has arisen as a result of agreeing computations with the Inland Revenue for years ended 1998/99 and 1999/00, and a reduction in the provision for 2001/02. 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 indexed 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 changes: 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
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Sutton and East Surrey Water plc Financial Statements 2003
Five Year Operational Review for the Appointed Business for the years ended 31 March
2003
2002
2001
2000
1999
Maximum day
214
232
207
233
194
Maximum 7 day average
196
215
182
214
186
Maximum 28 day average
175
193
169
196
173
Summer daily average (April-Sept)
166
167
158
160
159
Winter daily average (Oct-March)
154
152
148
147
145
Daily average
160
160
153
154
152
Water Supplied (000m3)
Summer rainfall (mm) as a percentage of average summer rainfall (%) Winter rainfall (mm) as a percentage of average winter rainfall (%)
357
339
526
375
362
103.9
98.7
153.8
109.8
106.2
567
447
823
354
515
132.5
104.9
194.2
83.4
121.6 634
Population (000)
642
641
637
634
Properties connected (000)
270
269
268
267
264
Length of mains (km)
3,372
3,371
3,377
3,374
3,359
Total leakage* (ml/d)
24.4
24.4
24.4
24.4
24.9
7.2
7.2
7.2
7.2
7.4
Total leakage* (cm/km/day) *Total leakage includes that from both the company’s and customers’ pipes.
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Page 41
Sutton and East Surrey Water plc Financial Statements 2003
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 2003 and signed on their behalf by
P A Barrett Director
41
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Page 42
Sutton and East Surrey Water plc Financial Statements 2003
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 20 June 2003, 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.
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Page 43
Sutton and East Surrey Water plc Financial Statements 2003
Opinions In our opinion the regulatory accounts contain the information for the year to 31 March 2003 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 11 July 2003
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Sutton&East Surrey 2003 02
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Sutton and East Surrey Water plc London Road Redhill Surrey RH 1LJ Telephone 01737 772000 Facsimile 01737 766807 Registered in England Registered number 2447875
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