Bournemouth & West Hampshire WATER REGULATORY ACCOUNTS 2008

Transcription

1 Bournemouth & West Hampshire WATER REGULATORY ACCOUNTS 2008 George Jessel House Francis Avenue Bournemouth BH11 8NX Registered No (England & Wales) Phone: Fax:

2 CONTENTS Page No Company Information 2 Operating and Financial Review 3-13 Directors Statements and Responsibilities 14 Independent Auditors Report Consolidated Profit and Loss Accounts 17 Balance Sheets 18 Consolidated Cash Flow Statements 19 Statement of Total Recognised Gains and Losses 20 Historical Cost Accounting Policies Notes to the Historical Cost Regulatory Accounts Appendix Key Performance Indicators 45 Appointed Business Current Cost Profit and Loss Account 46 Appointed Business Current Cost Balance Sheet 47 Appointed Business Current Cost Cash Flow Statement 48 Current Cost Accounting Policies 49 Notes to the Appointed Business Current Cost Accounts Transactions with Associated Companies 53 Notes to the Appointed Business Current Cost Cash Flow Statement 54 Appointed Business Current Cost Profit and Loss Account for the Past Five Years 55 Appointed Business Current Cost Balance Sheet for the Past Five Years 56

3 COMPANY INFORMATION Directors J F McGown (Chairman)* N B E Beale* J S Cox (Senior Independent Director)* T J R Kirkhope* S M J Richer* A R F Cooke (Managing Director) A J D Ferrar (Finance Director) resigned 3 June 2008 D G Sayers (Finance Director) appointed 3 June 2008 R I Harrington (Technical Director) *Executive Independent Secretary A J D Ferrar resigned 31 March 2008 Ms A T New appointed 31 March 2008 Registered Office George Jessel House Francis Avenue Bournemouth Dorset BH11 8NX Telephone Number (01202) Fax Number (01202) Registered Number (England) Auditors PricewaterhouseCoopers LLP Savannah House 3 Ocean Way Ocean Village Southampton Hampshire Bankers Lloyds TSB Bank Plc City Office Monument Street London Registrars Equiniti Aspect House Worthing West Sussex 2

4 OPERATING AND FINANCIAL REVIEW (OFR) Our Business The Company is principally a water supplier operating under an Instrument of Appointment granted by the Secretary of State for the Environment under the Water Industry Act Water is supplied to a resident population of approximately 419,000 in an area of 1,041 square kilometres through a mains network of nearly 2,800 kilometres. Our area of supply is characterised by the densely populated urban coastal fringe to the environmentally protected areas of the New Forest National Park which attract large numbers of tourists. Apart from a few large users which are open to competition under the Water Supply Licensing Regime introduced under the Water Act 2003, we are a monopoly supplier of mains drinking water. Sewerage services are provided by Wessex Water in the west and Southern Water in the east. The water industry is subject to a range of UK and EU legislation. Our performance and the standards of service provided are measured and monitored by a number of regulators, including the Water Services Regulatory Authority (Ofwat), the Environment Agency (EA), Natural England (NE) and the Drinking Water Inspectorate (DWI). The roles of these regulators are covered later in this review. We also have a number of non-regulated activities. These either build upon our core skills and our relationship with our customers or exist by virtue of our land ownership. These businesses include: AquaCare Home emergency and maintenance plans covering plumbing, drainage and heating. Plumbing and heating installation Pre-Heat Ltd Pre-Heat was acquired on 1 February 2007 and provides gas installation and maintenance services, mainly in the social housing sector. Royalty Moorings and Fishery By virtue of our riparian ownership of the beds of the Rivers Avon and Stour and much of Christchurch Harbour we have over 500 moorings under direct management with a further 200 moorings leased under block arrangements. Our Fishery interests at Christchurch and Longham are leased to third parties. Get Set Provides print design and management services to the Group and third parties. Other Additional non-regulated income is generated from property ownership, meter reading data, solicitors enquiries and telephone masts. Business Strategy The Company s aim is to be one of the highest performers in the water sector against all published measures. These include water quality, customer service performance, leakage, operating & capital expenditure efficiency, health & safety and environmental performance. In addition the company strives to add shareholder value, in particular through achieving above sector average return on capital on the Company s Regulatory Capital Value and growth in the non-regulated businesses. As part of our overall business planning activity we develop a long-term Business Plan every five years as part of the Regulatory Price Review. These plans identify the needs of the business including the maintenance of our assets, water resources and the supply/demand balance, drinking water quality and any service level enhancements we consider appropriate. Our five year monitoring plan, covering delivery of outputs implicit in the Price Review, is published on our website. The plans are reviewed and updated at least every year to take into account any new information or changes in circumstances or priorities. We have asked our customers what they believe are the priorities for investment and what they think of the service. We will incorporate their views into our Business Plan. Additionally we have a number of strategic objectives which are largely sub-sets of the overall Business Plan. These include: Continuous improvement in all aspects of our work including: o Service levels o Quality o Efficiency o Health & Safety o Environmental performance o Customer retention in the competitive market provided for in the Water Act 2003 Water Supply Licensing regime o Integration of business systems where this will bring efficiencies or improvement in service o Management of the pension funding requirements o Debt/credit management o Human Resources policies which align with corporate objectives o Development of non-regulated activities 3

5 All these objectives have clearly defined targets and progress against them is reviewed quarterly by the management team and half yearly by the Board. All of the key business areas are controlled by externally audited quality management systems to international standards. Our Performance We use a wide range of Key Performance Indicators (KPI s) to measure our achievement. These include financial and non-financial measures. In the regulated business these very closely align to the measures used by our Regulators in their comparative performance assessments on which they report annually in league table format. Targets are established in a number of ways including targets set by the Board and agreed regulatory requirements. The measures we use are set out in the various tables below and indicate actual performance against our targets and the performance for the prior year. The KPI s are defined in the appendix on page 45. Company Financial Performance Our financial performance is explained in more detail on pages 12 to13. Financial Performance KPI Target Performance 2007/08 Performance 2006/07 Gearing Senior Debt to RCV <70% 56% 59%* Cash Interest Cover > * The 2006/07 figure is calculated excluding subordinated debt. In addition the Board monitors financial performance against budget. Appointed Business KPIs Customer Services We measure our service to customers in three main areas: The Director General (DG) measures as determined by Ofwat Drinking Water Quality as determined by the DWI The Overall Performance Assessment (OPA) as per Ofwat s measurement The DG Levels of Service Numbers unless indicated Target Performance 2007/08 Performance 2006/07 DG2 Number of properties at risk of low pressure *DG3 Unplanned interruptions to supply (performance score) DG6 Billing contacts not answered within 5 days (number not %) DG7 Written complaints not answered within 10 days DG8 Metered customers receiving bill based on meter reading 100% 100% 100% DG9 Telephone contact - all lines busy - number of abandoned calls <0.5% <3.0% 0% 2.0% 0% 1.9% *Note: This is a composite score based on the percentage of customers affected by interruptions of up to 6, 12 and over 24 hours. (These results will be submitted to Ofwat in our June Return and published later in the year.) 4

6 Water Quality Performance 2007 Performance 2006 Overall drinking water quality (%) (Note: drinking water quality performance is assessed on the basis of calendar years). Performance in 2007 continued to be very high with just 4 out of our 12,000 tests carried out on samples of water taken from customers taps not meeting the required standard. There is a very large margin of safety in the standards. All failures are thoroughly investigated and are routinely reported to the Board. Debt Recovery KPIs Our debt collection policies and processes remain very robust and fair. We have designed and delivered an overall revenue strategy with pro-active credit control, good customer data and specific approaches for those customers that cannot pay and those that will not pay. This has resulted in our being listed by Ofwat as the third most effective debt collection Company in the industry for 2006/07. Results for 2007/08 indicate another strong performance with 148,000 charged to the provision compared with 228,000 in 2006/07, as a result of targeted project investment. In the regulated business we measure the performance of the credit and debt department with a number of KPI s. These include the measurement of the charge to the profit and loss account compared to a target. The charge is calculated by measuring the movement in the provision during the year plus the amounts written off (net of any credits written back). In addition we also monitor the cash received as a percentage of the amount billed. The performance of these KPI s in 2007/08 compared to target can be seen below: Profit and loss account charge Cash received as a % of billed Actual 148K 97.0% Target 250K 96.9% Overall Performance Assessment (OPA) Target We strive to be in the upper quartile of performance in the sector (i.e. within the top six companies in the OPA measure). The OPA is a composite measure of operating and service level performance devised by Ofwat. In 2006/07, the latest year for which performance has been reported by Ofwat, we achieved 287 points out of a maximum of 288 points placing us second in the industry. Efficiency Our target is to be in band A of both the operating expenditure and capital maintenance efficiency bands as published by Ofwat each year. Ofwat use econometric modelling to assess the comparative efficiency of all the water companies and band the companies from A to E (A being the most efficient). In 2006/07 we were placed in band A for both operating efficiency and for capital maintenance efficiency. The figures for 2007/08 will not be available from Ofwat until later in the year. Leakage We have an annual leakage target of 22.2 million litres per day (ml/d). This target was set out in our Business Plan for the 2004 Periodic Review and agreed with Ofwat. Our performance was as follows: Target Performance 2007/08 Performance 2006/07 Total leakage ml/d Our relative position in the industry is published by Ofwat. For 2006/07, the most recent year for which information is available, leakage was litres per property supplied per day (Industry average 147.9) or 7.9 cubic metres per kilometre of mains per day (Industry average 10.1). Other KPIs In addition to these headline targets there are a series of other measures, mainly covering operational issues, used to assess performance at the departmental level. These are reviewed at least annually. Examples are: Time taken to fit a meter at customer s option Mains burst data Customer satisfaction tracking Managing the pension funding requirements Monitoring performance against regulatory targets Many of these mirror data provided annually to Ofwat in the June Return and help us in the day to day running of the business. 5

7 Trends in KPI s Performance against our KPI s has remained relatively constant in recent years and this has been at a consistently very high level both in absolute terms and when compared with other companies in the sector. Customer surveys indicate that customers continue to be satisfied with the service they receive. In our most recent tracking survey only 1% of customers expressed a negative view. Capital Expenditure Over the five year period 2005/10 we have been funded within our price levels to invest approximately 54.5 million (2007/08 prices) of capital expenditure. This mainly relates to balancing supply and demand (mainly metering), the maintenance of our above ground assets such as treatment works and pumping stations and maintenance and enhancement of our water mains network. A relatively small amount is now required to be invested in quality improvements. The out-turn cumulative capital expenditure for the three years ended 31 March 2008 against these categories are shown below: We are on target to meet all of the key regulatory outputs assumed in price limits although we had one planned water resources investment, which we no longer believe represents good value for money and which we will discuss with Ofwat. Most of the indicators of serviceability of our water mains network have shown an improving trend over recent years. However, the number of burst mains increased for three years up to and including 2005/06. This indicator was judged by Ofwat to be showing deterioration in the serviceability of the network. We consider that the indicator should not be used in isolation. We have reviewed our investment priorities for the next 2-3 years and agreed an action plan with Ofwat. The number of burst mains fell significantly in 2006/07 to the lowest for many years and Ofwat assessed serviceability as marginal. Bursts fell again in 2007/08 and we are hopeful of a stable ranking. We believe that the variation in the number of bursts is due mainly to normal variations in weather from year to year. Health & Safety As part of our day to day business we carry out a wide range of activities, using both our own staff and those of suppliers and contractors. The activities include civil engineering, repair and renewal of pipes, treatment plant operations, mechanical and electrical maintenance and office-based administration. Our operating environment can never be free from risk of injury but we have a comprehensive and riskbased approach to ensuring that hazards are identified and adequately controlled. Our aim is to have no incidents reportable to the Health & Safety Executive (HSE) under the Reporting of Industrial Diseases and Dangerous Occurrences Regulations (RIDDOR). We encourage the internal reporting of any events or near misses which have the potential to lead to an accident and these are monitored closely and reviewed. During the year we carried out a number of formal audits and inspections across all areas of activity to ensure that Company policy is being applied and that we fully understand our performance and can continue to improve it. 6

8 RIDDOR Reportable Events - (excluding Pre-Heat) RIDDOR Reportable Events - whole /04/02-31/03/03 1/4/03-31/3/04 1/4/04-31/3/05 1/4/05-31/3/06 01/04/206-31/3/07 1/4/07-31/3/08 Incidents reportable to the HSE (excluding Pre-Heat Ltd) under RIDDOR are shown in the above graph. We measure and control our performance in health, safety and occupational welfare by monitoring and investigating accidents, and near misses, appropriate training, a programme of inspection and audit and reporting of performance to the Board. We follow the guidance published by the Health and Safety Commission (HSG65) Successful Health and Safety Management. We have a pro-active Occupational Health programme focused on keeping people well and at work and facilitating quick returns when injury (whether work related or not) occurs. Against HSE agreed measurements we have a very low incidence in the key areas of occupational ill health compared to the rest of the water industry: BWHW incidents of occupational ill health per 1000 employees Water Industry incidents in 2006/07 of occupational ill health per 1000 employees Water only Companies Water and Sewerage Companies Regulation and the Competitive Environment Economic Regulation Price limits are set by Ofwat for five year periods. The last price review was undertaken in 2004 covering the five years from 2005 to 2010 which allowed us an average of 3.1% per year increase in prices above the Retail Price Index (RPI). An interim determination of price limits between reviews may be initiated either by the Company or by Ofwat subject to certain criteria including materiality, being met. The next review is due to be undertaken in 2009 for 2010 to Ofwat set price limits to enable an efficient company to finance its functions and to incentivise companies to improve efficiency and provide high level services to customers. This is achieved through a system of comparative assessment of companies. As part of this process in December 2007 we published our Strategic Direction Statement covering the next 25 years. This document articulates our long term objectives set in the context of our customers priorities determined by customer qualitative research through facilitated focus group discussions. 7

9 Over the next 25 years, we are planning to: Focus on our primary duty of delivering a continuous and reliable supply of safe drinking water Manage demand to ensure security of supply in the face of growth and the major uncertainty of climate change Achieve full metering Maintain and renew our assets and networks to provide greater resilience Increase significantly the rate of renewal of the mains network Manage the business according to the principles of sustainable development, making sure that public water supply and the environment are safeguarded in the future Keep price rises to a level which is as low as possible while consistent with ensuring a sustainable level of maintenance and acceptable risk of failure In addition we have published our Draft Statutory Water Resources Management Plan which is open to consultation. This plan sets out how we will balance supply with demand over the next 25 years. The plan concludes that at current rates of metering and other demand side measures such as water efficiency advice and maintaining our current economic level of leakage at 22.2 ml/day we will not need to develop new water resources during the plan s time horizon. Other work is ongoing in accordance with Ofwat s information requirements in the period leading up to the submission of our draft Business Plan in August 2008 and our final Business Plan in April Throughout this process we are engaging our customers and all other stakeholders both formally and informally so that our plan achieves the best balanced outcome for them during the period and beyond. Environmental and Quality Regulation Environmental standards are enforced by the Environment Agency (EA) often in conjunction with Natural England (NE), the successor body to English Nature. Programmes of environmental improvement are determined by the EA following guidance from the Secretary of State for the Environment and are funded in price limits. Our main issue is the sustainability of our abstractions of raw water from the River Avon. Two investigations, under the Habitats and Water Framework Directives, have proved inconclusive as to the impact of abstraction on salmon migration. The EA has indicated that it is unlikely that we will need to reduce our abstractions from the River Avon. However, we will be promoting the development of our Ibsley Airfield site north of Ringwood for water storage for the benefit of the aquatic environment on the Avon in our Business Plan for the 2009 Price Review. We have owned the site since It is a worked out gravel pit which naturally recharges with water. We are working with the EA in this respect. Water Quality is monitored by the DWI under the terms of the Water Industry Act and the Water Supply (Water Quality) Regulations. We do not currently require a significant programme of investment to improve the quality of drinking water. However, we are targeting investment at replacing ageing galvanised iron communication pipes (the pipes between our water mains and the boundary of customers premises), which can give rise to high levels of iron in the water. As required by legislation, we are currently reviewing the risks at all of our sources and their treatment works which could give rise to the supply of water which does not meet the required standard. Customer Representation Customers are represented by the Consumer Council for Water (CCW), which monitors the quality of service provided by the Company, through regular meetings, visits and audits. Competition The Water Supply Licensing provisions of the Water Act 2003 enable large users consuming 50 million litres per year or more to choose an alternative licensed supplier. This depends upon certain eligibility criteria. Competition may be retail whereby a licensee provides customer service and billing for the water provided by the water undertaker or combined where a licensee introduces his treated water into an undertaker s system for supply to an eligible customer. We have published our access codes in accordance with Ofwat guidelines as well as indicative access prices. We have also signed a Wholesale Master Agreement with a licensee but have received no firm enquiries for access. So far under the water supply licensing regime no customer in England and Wales has switched supplier. Ofwat, the Government and Water UK are undertaking a root and branch review of the competitive framework established by the Water Act 2003 to determine what changes to the regime may be required to facilitate competitive entry. It is likely that changes in primary legislation may be required to achieve this, notably in respect of the costs principle in the Act which governs how access prices are set. The Royal Bournemouth Hospital which switched to a private supply in 2006 resumed mains supply from us in April The Esso Fawley supply is competitively let with the account being supplied by ourselves and Southern Water. We provide the majority of the water. 8

10 Relationships Customers We continue to be very customer focused in all we do. Customers are at the heart of our business and we endeavour to engage with them by a wide variety of means. These include Newsletters, the Website ( satisfaction tracking surveys and an active local media programme. We arrange visits by local schools and provide speakers for local organisations. We also have our own Customer Consultation Group consisting of domestic and business customers who we consult on a wide range of policies and issues. We record very high levels of customer satisfaction from our tracking surveys which confirms the very high scores earned in the OPA, the DG indicators of service and water quality reports as mentioned earlier in this review. 91% of those surveyed had made telephone contact with us, of which 90% would be perfectly comfortable doing so again. Less than 1% of those surveyed commented negatively about our service. Our commitment is to develop our staff to achieve maximum first contact resolution and exemplary standards of customer service. Our water charges for 2007/08 have increased by 5 for the average customer to 134 per year. This is some 11% below the average charge for the industry. This reflects our high ranking for efficiency in the Ofwat assessments. Charter Mark We have continuously held the Charter Mark since 1999 and in the citation based upon our 2007 assessment the following extract was made by the awarding body: We are particularly delighted to highlight that you are one of only a few services who have gone through the Charter Mark process who currently have no partial compliances. This means your service is meeting, or, in the areas of best practice exceeding, all requirements of the Charter Mark criteria. This is an indication of great commitment and an excellent service from the members of staff involved in your service, many congratulations. Suppliers We endeavour to forge strong, long term and mutually beneficial arrangements with our suppliers. We work with them strictly in accordance with our code of Business Conduct and Ethics particularly in respect of payment terms where we abide by the agreed payment terms. All supplier relationships are at arms length and where appropriate contracts for supply or works are formally announced in the Official Journal of the European Union (OJEU), competitively tendered or market tested either for single capital jobs or for longer term period contracts such as for network maintenance. As part of our risk management processes we have identified our critical suppliers whose failure to supply could prejudice our ability to run the business. Contingency plans have been developed to mitigate these risks. We hold regular purchasing issues meetings to assess supplier performance and risks. We routinely audit supplier performance as part of our quality management processes. Corporate Responsibility Employees We aim to be a responsible employer and strive to ensure that our workforce is properly trained, competent and motivated whilst being appropriately rewarded for their efforts and their performance through appraisal. We continue to work towards tailored employment packages where working arrangements and remuneration are as flexible as possible to take into account the individual s personal circumstances and the department s needs. We consult staff on a range of issues. The Staff Consultative Group meets quarterly as does the Company s Health & Safety Committee. All regulated business staff are eligible for an incentive scheme which rewards financial performance, customer service levels, water quality, leakage, health & safety and environmental performance against agreed targets. Environment All our water sources are licensed for use by the Environment Agency. As awareness has grown, and the ability to measure environmental impact has improved over the years, it has been necessary to review certain activities and quantify their impact in order to establish whether our abstractions are sustainable (see page 8). 9

11 We obtain the majority of our raw water from the River Avon, a very important river for wildlife. There have been some concerns that our abstractions may be having an unacceptable impact on the migration of salmon and on other species. We have undertaken an in-depth study into the impact, the outcome of which has been reported to the Environmental Agency. The results of the study were inconclusive, but identified that other factors such as water temperature may be important. Energy Use We use very significant amounts of energy, mostly electricity used primarily for pumping water. Unfortunately, as our system of pumping stations, treatment works and pipes has been modernised and improved to provide a better service and ensure even greater reliability and safety, the amount of electricity used has unavoidably increased. Nevertheless, we have taken a number of steps to ensure we make best use of the power we use by monitoring the performance of the equipment, using it as effectively as possible and replacing less efficient items. In addition we continue to explore ways in which we can increase the amount of electricity we use from renewable sources. Carbon Footprint and Carbon Accounting We are now measuring and recording the carbon footprint of our operational activities, which include energy use for water production and distribution, transport, use of energy in offices and business travel. For our business plan for the next review of prices (PR09) we will consider the carbon impact of the majority of potential investment projects and carry out economic cost benefit analysis in order to satisfy ourselves, as far as reasonably possible, that any proposals are aligned with customer priorities and their impact on the wider community is taken into account. Social & Community We are committed to contributing to the communities we serve and support local activities in different ways. We support local charities against clear criteria and staff take part in charitable work, including fundraising for WaterAid (an international charity aimed at enabling the world s poorest people gain safe water and sanitation). We also work closely with local schools, promoting the health benefits of drinking water and the need to use water wisely and efficiently. Customers also support WaterAid through our annual appeal and we frequently give presentations to local societies and groups about WaterAid s work. Water Resources and Demand 100 RAINFALL COMPARED TO LONG TERM AVERAGE RAINFALL (mm) Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar MONTH 10

12 Demand since April 2005 (excluding Fawley) (Ml/d) Apr 2005 May 2005 Jun 2005 Jul 2005 Aug 2005 Sep 2005 Oct 2005 Nov 2005 Dec 2005 Jan 2006 Feb 2006 Mar 2006 Apr 2006 May 2006 Jun 2006 Jul 2006 Aug 2006 Sep 2006 Oct 2006 Nov 2006 Dec 2006 Jan 2007 Feb 2007 Mar 2007 Apr 2007 May 2007 Jun 2007 Jul 2007 Aug 2007 Sep 2007 Oct 2007 Nov 2007 Dec 2007 Jan 2008 Feb 2008 Mar 2008 Previous minimum (95/96-04/05) Previous maximum (95/96-04/05) Previous average (95/96-04/05) Actual Our water resources remained reliable during the 2007 drought which mainly affected the South East of England and we did not need to impose any restriction on use. As a result of media coverage of the drought and our own ongoing advice to use water wisely, demand in 2006/07 was the lowest for many years. The poor summer weather in 2007, which was amongst the wettest on record, meant that for the reporting year demand remained very low. We are making good progress with metering existing customers and at March 2008 about 51% were metered. It is planned for this to increase to about 60% by March The second of our raw water reservoirs at Longham is likely to be completed by 2009, somewhat ahead of earlier projections and this year we will construct a pumping station to support a small shortfall in the water resource headroom available in our most northerly ground water source at Hale, near Fordingbridge. We continue to work with our customers on demand management and water efficiency measures and as mentioned earlier in this review we met our leakage target. Risks & Uncertainties Risk Management The Company identifies and records in a register the risks facing the business and has paid particular attention to those risks which could, if not managed, have significant impact on the business. For each risk the consequences, impact and likelihood are identified, together with the management controls in place, any further mitigating actions and the manager responsible for taking such action. Risks are reviewed at least twice a year by the managers concerned and at least annually by the Board. The Board also receives regular reports on operational matters such as drinking water quality, health & safety and any operational incidents which have occurred. The Company s approach to risk management and the nature and extent of internal controls was reviewed by an external consultant during the year and the key strategic risks facing the company, together with the mitigating measures in place, were reviewed in depth by the Board early in The Audit Committee which meets three times a year, monitors the effectiveness of the risk management systems which are in place and reports to the Board as a whole. The Board consider the following risks to be the most significant and has detailed the measures in place to mitigate the risk to the business: A major water supply interruption, perhaps because of the loss of a treatment works A serious water quality incident A serious disruption to the business through loss of office facilities or key information systems A serious injury to our staff or someone affected by our activities A serious health and safety incident 11

13 To mitigate the possibility of a serious incident affecting the quantity or quality of drinking water available to customers, the company has over many years built a reasonable degree of robustness and resilience into the water supply network of assets and will continue to do more where economical. This has included, for example, the linking of water supply zones and the duplication of some plant to reduce the impact of some types of failure. The treatment works and other key assets are subject to comprehensive real time monitoring of critical parameters in order to minimise any risk of failure, especially failure to treat the water adequately. Work is progressing on preparation of comprehensive safety plans in respect of drinking water quality. This is an approach put forward by the World Health Organisation and has effectively become a regulatory requirement in England & Wales. This work will further help our understanding of all of the risks which might affect the quality of water from the catchments through to consumer s taps. The Company has considered the impact of loss of key business systems on the premises in which its administrative activities take place and has measures in place to ensure that critical business activities can be resumed within an acceptable time. This includes detailed arrangements for recovery in the event of a serious loss of IT equipment. As part of the Sarbanes Oxley requirements following the listing of Cascal NV on the New York Stock Exchange in January 2008, we are reviewing our key financial and IT risks along with listing the key controls related to these. A programme of internal and external audit is being developed to monitor these controls and risks from mid 2008 onwards. The health, safety and occupational welfare of employees, and anyone else who might be affected by the Company s activities, is taken very seriously and for many years a comprehensive set of procedures have been in place to ensure that the risks are adequately known and properly controlled. These measures include: A health & safety committee (excluding Pre-Heat Ltd) chaired by the Technical Director Assessment of all risks, including on the job assessment where appropriate A system of audit of management arrangements and inspection of the workplace Specific training Comprehensive measurement of performance following guidance issued by the HSE Occupational welfare services for staff Documented whistle blowing procedures which are included in our Personnel Policy Manual whereby any employee may raise any concerns. This is reinforced by the formal Cascal whistle blowing arrangements required under its governance arrangements related to its NYSE listing. The Company has a comprehensive, detailed and documented emergency plan which sets out how an incident affecting the water supply or its ability to carry on its business activities in the event of disruption would be managed. This plan sets a clear structure for dealing with emergencies and roles of key personnel. There are suitable trigger points to ensure escalation to director level where appropriate. Exercises are carried out to help ensure familiarity with the procedures in the emergency plan. Monitoring the Business A number of processes are used to monitor the financial and operational performance of the Group which includes the following: Annual budget setting process Monthly management accounts and variance reporting Monthly reporting and tracking of actual performance against our quality and service KPI s Internal audits based on the risk profile of the various aspects of the business Internal audits of the detailed company procedures The Group s approach to risk management and internal controls is covered in detail in the Corporate Governance Report. Financial Review Appointed Business Turnover increased by 2.1 million to 36.9 million during the year, which was largely the result of the permitted tariff increase in 2007/08 of 5.47% (K of 1.6% plus RPI of 3.87%). The water demand was largely consistent with the prior year. Operating costs before depreciation have increased by 0.5 million to 16.3 million. The increase reflects general inflationary increases, offset by efficiency savings. Net depreciation has increased by 0.6 million to 5.6 million as a result of the continuing capital expenditure programme. Operating profit has increased by 0.9 million to 15.0 million due to the water revenue increase and the control of costs. Gross capital investment in the year amounted to 9.5 million compared with 10.7 million in The major investments during the year were: Enhancements at Knapp Mill Replacement of Fawley Pumping Station Ongoing metering programme 12

14 Balance Sheet Total net debt decreased by 30.1 million during the year caused predominantly by the repayment of the 28 million subordinated loan from The Royal Bank of Scotland (RBS), which was lent to Cascal. At the year-end the net debt to RCV was 56% ( % excluding subordinated debt). The other significant movements in the balance sheet were the reduction in debtors caused by the 32 million loan to Cascal BV being repaid during the year and the net 3.6 million reduction (after deferred tax) in the pension fund deficit (referred to below). Pensions The Company s defined benefit pension scheme is a sub-fund of the Biwater Retirement and Security Scheme. It was closed to new members in February As a consequence of Company contributions of 0.5 million and changes in the discount rate assumptions, our FRS 17 deficit at 31 March 2008 has reduced by 5.2 million ( 4.5 million after deferred tax) to 1.2 million ( 0.9 million after deferred tax). Cash flow The Group net cash inflow from operations was 22.1 million, an increase of 4.5 million over the previous year largely due to increased operating profit and the prior year including a special pension contribution of 2.8 million. Net capital investment increased by 1.7 million to 11.3 million. In June 2007 we repaid the 28 million loan from RBS. The loan to Cascal BV of 32 million was fully repaid in December The interest rate on this loan exceeded our cost of funds. Dividend payments increased by 0.1 million to 5.7 million during the year. The Appointed Business dividend policy is to provide a competitive rate of return to our shareholder, which includes an appropriate element of regulatory out-performance against the PR04 Final Determination. Net interest cash outflow in the year totalled 2.0 million compared to 1.6 million in the previous year, partly due to the reduced duration and hence margin on the loan to Cascal BV. Taxation payments during the year totalled 2.3 million, an increase of 0.7 million on the previous year. This increase is largely due to the tax relief on the special contributions to the pension fund, which affected the prior year. The overall impact of the movements referred to above resulted in a net cash inflow of 4.2 million during the year. Net cash balances at 31 March 2008 were 6.6 million. Outlook Our Regulated Water Supply business continues to perform well in absolute terms and in comparative terms with its sector peers. This is consistent with our overall corporate objectives. We will continue to strive for continuous improvement in all we do but at current levels of performance change will be incremental and not stepped. We expect that revenue will continue to be below the levels assumed by Ofwat in the 2004 price review. Up to now this shortfall has more than been offset by operating cost out-performance against Ofwat s targets. Increases in energy costs for 2008/09 will have a significant impact on our costs in that year and we expect these high costs to continue. Additionally we are from 2008/09 until 2009/10 obliged to decrease prices at below RPI inflation levels as indicated below, before applying RPI inflation increases: 2008/ /10 Decrease before RPI inflation -0.6% -2.4% We are confident about delivering all the outputs implicit in the last price review on time and on budget except for one scheme for wash water recovery at Knapp Mill, Christchurch, which is not cost effective particularly given our secure water resource position. The outlook beyond 2009/10 remains unclear and will crucially depend upon the outcome of the 2009 price review which will conclude in November 2009 when price limits for 2010 to 2015 will be determined by Ofwat. Our Regulatory Capital Value as calculated by Ofwat was 132 million at 31 March Over the next two years it is projected to be: million 2008/ /10 Assuming RPI of 3.0% We will continue to strive to achieve our objective of continuous improvement in all we do through development of our staff, further stakeholder engagement and an even better understanding of customer needs and asset performance. In so doing we will continue to provide an excellent service to our customers at value for money prices whilst providing a challenging and rewarding environment for our staff and continued increase in shareholder value. 13

15 DIRECTORS STATEMENTS AND RESPONSIBILITIES The Directors are responsible, under Condition F of the Instrument of Appointment by the Secretary of State for the Environment, Food and Rural Affairs (DEFRA) and as a water undertaker under the Water Industry Act 1991, for preparing financial statements for each financial year that give a true and fair view of the state of affairs of the Company as at the end of the financial year and of the profit or loss of the Company for that year. The Directors select applicable accounting policies and follow relevant accounting standards, so as to ensure the Regulatory Accounts show a true and fair view, except for the application of infrastructure renewals accounting as set out below. Accounting policies are reviewed regularly to ensure that they continue to be appropriate and are amended when necessary. The Company s policies are consistent with other companies in the water industry and the accounts also comply with Regulatory Accounting Guidelines. The policies are applied consistently, and reasonable, prudent judgements and estimates have been made in the preparation of the financial statements for the year ended 31 March The financial statements have been prepared on the going concern basis. In the opinion of the Directors, all contracts entered into with any associated company include all necessary provisions and requirements concerning the standard of service to be supplied to the appointee, to ensure that it is able to meet all its obligations as a water undertaker. The Directors are responsible for keeping proper accounting records as required by United Kingdom company law, for taking reasonable steps to safeguard the assets of the Company, and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The financial statements for the year ended 31 March 2008 are published in hard-copy printed form and on the Company s website on the Internet. The Directors are responsible for the maintenance and integrity of the website in accordance with UK legislation governing the preparation and dissemination of financial statements. Access to the website is available from outside the UK, where comparable legislation may be different. Certificate of Compliance with Licence Condition F6A In arriving at the certificate provided below, the Audit Committee met on 9 May 2008 to consider the Appointee s financial and management requirements over the next 12 months and the available resources. In addition, compliance with the relevant sections of RAG 5.04 was also reviewed. The Board duly considered the matters on 23 May 2008 and appointed a sub-committee of the Board to resolve that the certificate would be signed by the Company Secretary on behalf of the Board on an appropriate date. This is to certify that in the opinion of the Directors, the Appointee: will have available to it sufficient financial resources and facilities to enable it to carry out, for at least the next 12 months, the appointed activities (including the investment programme necessary to fulfil the Company s obligations under the Appointment and the payment of dividends in accordance with the policy stated on page 13); 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; is in compliance with paragraph 3.1 of Condition K of the Licence; all contracts entered into with any associated company include all necessary provisions and requirements concerning the standard of service to be supplied to the appointee, to ensure that it is able to meet all its obligations as a water undertaker. By order of the Board Alison New Secretary 8 July

16 INDEPENDENT AUDITORS REPORT Independent Auditors report to the Director General of Water Services and the Directors of Bournemouth & West Hampshire Water Plc Independent Auditors report to the Water Services Regulation Authority and Directors of Bournemouth and West Hampshire Water Plc We have audited the Regulatory Accounts of Bournemouth and West Hampshire Water Plc on pages 17 to 56, which comprise: the Regulatory Historical Cost Accounting Statements comprising the Regulatory Historical Cost Profit and Loss Account, the Regulatory Historical Cost Balance Sheet, the Regulatory Historical Cost Cash Flow Statement, the Regulatory Historical Cost Statement of Total Recognised Gains and Losses, the Regulatory Historical Cost Accounting Policies and the notes to the Historical Cost Regulatory Accounts; and the Regulatory Current Cost Accounting Statements for the Appointed Business comprising the Current Cost Profit and Loss Account, the Current Cost Balance Sheet, the Current Cost Cash Flow Statement, the Current Cost Accounting policies, the related notes to the Current Cost Financial Statements, Transactions with Associated Companies, Appointed Business Current Cost Profit and Loss Account for the past five years and the Appointed Business Balance Sheet for the past five years. This report is made, on terms that have been agreed, solely to the company and the Water Services Regulation Authority ("the WSRA") in order to meet the requirements of Condition F of the Instrument of Appointment granted by the Secretary of State for the Environment to the company as a water undertaker under the Water Industry Act 1991 (the Regulatory Licence). Our audit work has been undertaken so that we might state to the company and the WSRA those matters that we have agreed to state to them in our report, in order (a) to assist the company to meet its obligation under the company's Instrument of Appointment to procure such a report and (b) to facilitate the carrying out by the WSRA of its regulatory functions, and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the WSRA, for our audit work, for this report, or for the opinions we have formed. Basis of preparation The Regulatory Accounts have been prepared in accordance with Condition F of the Appointment and the Regulatory Accounting Guidelines, the accounting policies set out in the statement of accounting policies and, in the case of the regulatory historical cost accounting statements, under the historical cost convention. The Regulatory Accounts are separate from the statutory financial statements of the company. There are differences between United Kingdom Generally Accepted Accounting Principles (UK GAAP) and the basis of preparation of information provided in the regulatory accounts because the Regulatory Accounting Guidelines specify alternative treatment or disclosure in certain respects. Where the Regulatory Accounting Guidelines do not specifically address an accounting issue, then they require UK GAAP to be followed. Financial information other than that prepared wholly on the basis of UK GAAP may not necessarily represent a true and fair view of the financial performance or financial position of a company as shown in financial statements prepared in accordance with the Companies Act Respective responsibilities of the WSRA, the directors and auditors The nature, form and content of Regulatory Accounts are determined by the WSRA. It is not appropriate for us to assess whether the nature of the information being reported upon is suitable or appropriate for the WSRA's purposes. Accordingly we make no assessment. The Directors' responsibilities for preparing the Regulatory Accounts in accordance with Regulatory Accounting Guidelines are set out in the statement of directors' responsibilities for regulatory information on page 14. Our responsibility is to audit the Regulatory Accounts in accordance with International Standards on auditing (UK and Ireland) issued by the Auditing Practices Board, except as stated in the "Basis of audit opinion", below and having regard to the guidance contained in Audit 05/03 'Reporting to Regulators of Appointed Entities'. We report to you our opinion as to whether the regulatory historical cost accounting statements present fairly, under the historical cost convention, the revenues and costs, assets and liabilities of the appointee and its appointed business in accordance with the company's Instrument of Appointment and Regulatory Accounting Guideline 2.03 (Guideline for the classification of expenditure), Regulatory Accounting Guideline 3.06 (Guideline for the contents of regulatory accounts) and Regulatory Accounting Guideline 4.03 (Guideline for the analysis of operating costs and assets); and whether the regulatory current cost accounting statements on pages 46 to 56 have been properly prepared in accordance with Regulatory Accounting Guideline 1.04 (Guideline for accounting for current costs and regulatory capital values), Regulatory Accounting Guideline 3.06 and Regulatory Accounting Guideline We also report to you if, in our opinion, the company has not kept proper accounting records as required by paragraph 3 of Condition F and whether the information is in agreement with the appointees' accounting records and has been properly prepared in accordance with the requirements of Condition F and, as appropriate, Regulatory Accounting Guideline 1.04, Regulatory Accounting Guideline 2.03, Regulatory Accounting Guideline 3.06, and Regulatory Accounting Guideline We read the other information contained in the Regulatory Accounts, including any supplementary schedules on which we do not express an audit opinion, and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Regulatory Accounts. The other information comprises the financial review, and the additional information required by the licence. 15

17 Basis of audit opinion We conducted our audit in accordance with International Standards on auditing (UK and Ireland) issued by the Auditing Practices Board except as noted below. An audit includes 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 Directors in the 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 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. However, as the nature, form and content of Regulatory Accounts are determined by the WSRA, we did not evaluate the overall adequacy of the presentation of the information, which would have been required if we were to express an audit opinion under International Standards on Auditing (UK and Ireland). Our opinion on the Regulatory Accounts is separate from our opinion on the statutory financial statements of the company on which we report, which are prepared for a different purpose. Our audit report in relation to the statutory accounts of the company (our "Statutory" audit) was made solely to the company's members, as a body, in accordance with section 235 of the Companies Act Our Statutory audit work was undertaken so that we might state to the company's members those matters we are required to state to them in a Statutory auditors' report and for no other purpose. In these circumstances, to the fullest extent permitted by law, we do not accept or assume any responsibility to anyone other than the company and the company's members as a body, for our Statutory audit work, for our Statutory audit report, or for the opinions we have formed in respect of that Statutory audit. The regulatory historical cost accounting statements on pages 17 to 44 have been drawn up in accordance with Regulatory Accounting Guideline 3.06 in that infrastructure renewals accounting as applied in previous years should continue to be applied and accordingly that the relevant sections of Financial Reporting Standards 12 and 15 be disapplied. The effect of this departure from Generally Accepted Accounting Principles, and a reconciliation of the balance sheet drawn up on this basis with that drawn up under Companies Act 1985 is given on page 31. Opinion In our opinion the Regulatory Accounts of the company for the year ended 31 March 2008 fairly present in accordance with Condition F of the Instrument of Appointment granted by the Secretary of State for the Environment to the company as a water undertaker under the Water Industry Act 1991, the Regulatory Accounting Guidelines issued by the WSRA and the accounting policies set out on pages 21 and 22, the state of the company's affairs at 31 March 2008 on an historical cost and current cost basis, the historical cost and current cost profit for the year and the historical cost and the current cost cash flow for the year and the historical cost and have been properly prepared in accordance with those conditions, guidelines and accounting policies. Without qualifying this opinion we draw your attention to the fact that the infrastructures renewals charge is calculated based on a 5 year period. In respect of this information we report that in our opinion: (a) proper accounting records have been kept by the appointee as required by paragraph 3 of Condition F of the instrument; (b) the information is in agreement with the appointee's accounting records and has been properly prepared in accordance with the requirements of Condition F and, as appropriate, Regulatory Accounting Guideline 1.04, Regulatory Accounting Guideline 2.03, Regulatory Accounting Guideline 3.06 and Regulatory Accounting Guideline 4.03 issued by the WSRA; (c) the regulatory historical cost accounting statements on pages 17 to 44 present fairly, under the historical cost convention, the revenues and costs, assets and liabilities of the appointee and its appointed business in accordance with the company's Instrument of Appointment and Regulatory Accounting Guideline 2.03, Regulatory Accounting Guideline 3.06 and Regulatory Accounting Guideline 4.03 issued by the WSRA; (d) the regulatory current cost accounting statements on pages 46 to 56 have been properly prepared in accordance with Regulatory Accounting Guideline 1.04, Regulatory Accounting Guideline 3.06 and Regulatory Accounting Guideline 4.03 issued by the WSRA. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors Southampton 8 July The maintenance and integrity of the Company website is the responsibility of the Directors and the maintenance and integrity of the Regulator s website is the responsibility of the Regulator; the work carried out by the Auditors does not involve consideration of these matters and, accordingly, the Auditors accept no responsibility for any changes that may have occurred to the Regulatory Accounts since they were initially presented on the websites. 2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements and Regulatory Accounts may differ from legislation in other jurisdictions. 16

18 CONSOLIDATED PROFIT AND LOSS ACCOUNTS Year ended 31 March Appointed Appointed Appointed Appointed Business Business Total Business Business Total Note Turnover 36,927 9,734 46,661 34,853 4,673 39,526 Operating cost (21,952) (9,184) (31,136) (20,777) (4,352) (25,129) Amortisation of goodwill - (144) (144) - (24) (24) Other operating income 5 (6) (36) 2 (34) Operating profit 14, ,399 14, ,339 Profit on disposal of sundry fixed assets Interest payable 8 (5,804) (329) (6,133) (6,165) (83) (6,248) Interest receivable 8 1, ,319 2, ,310 Profit on ordinary activities before taxation 10, ,913 10, ,954 Tax on profit on ordinary activities 9 (3,061) (86) (3,147) (2,457) (237) (2,694) Profit on ordinary activities after taxation 7, ,766 7, ,260 There is no difference between the results disclosed above and the results on an unmodified historical cost basis. 17

19 BALANCE SHEETS At 31 March Appointed Appointed Appointed Appointed Business Business Total Business Business Total Note Fixed assets Intangible assets 12-1,793 1,793-1,931 1,931 Tangible fixed assets ,073 1, , ,488 1, , ,073 3, , ,488 3, ,172 Current assets Stocks and work in progress Debtors 15 8,139 3,514 11,653 39,889 2,620 42,509 Investments Cash at bank and in hand 6, ,102 2,440 1,124 3,564 14,916 5,167 20,083 42,445 5,063 47,508 Creditors: amounts falling due within one year 16 (8,310) (8,632) (16,942) (9,095) (7,715) (16,810) Net current assets/( liabilities) 6,606 (3,465) 3,141 33,350 (2,652) 30,698 Total assets less current liabilities 122, , ,838 1, ,870 Creditors: amounts falling due after more than one year 17 (75,478) - (75,478) (101,414) (606) (102,020) Provision for liabilities and charges 20 (6,540) (136) (6,676) (6,314) (124) (6,438) Net assets excluding pension liabilities 40, ,737 39, ,412 Deficit on group pension scheme 27 (608) (284) (892) (3,740) (744) (4,484) Net assets/(liabilities) including pension liabilities 40,053 (208) 39,845 35,370 (442) 34,928 Capital and reserves Called up share capital 22 22,483-22,483 22,483-22,483 Profit and loss account 23 15,425 (208) 15,217 10,742 (442) 10,300 Revaluation reserve 24 2,145-2,145 2,145-2,145 Total shareholders funds/(deficit) 25 40,053 (208) 39,845 35,370 (442) 34,928 Approved by the Board on 8 July 2008 Jim McGown Chairman 18

20 CONSOLIDATED CASH FLOW STATEMENTS Year ended 31 March Appointed Appointed Appointed Appointed Business Business Total Business Business Total Note Net cash inflow from operating activities 28(a) 22, ,664 17, ,906 Returns on investments and the servicing of finance Interest received - external , ,243 Interest received - internal 1, , Interest paid on finance leases (320) - (320) (307) - (307) Interest paid external (2,833) - (2,833) (3,563) - (3,563) Interest paid internal (51) (267) (318) - (69) (69) (2,006) (148) (2,154) (1,598) (29) (1,627) Taxation (2,318) (332) (2,650) (1,589) (186) (1,775) Capital expenditure and financial investment Purchase of tangible fixed assets (10,885) (410) (11,295) (9,376) (312) (9,688) Infrastructure renewals expenditure (1,694) - (1,694) (1,813) - (1,813) Contributions received 1,255-1,255 1,533-1,533 Sale of tangible fixed assets : trading : other (11,299) (356) (11,655) (9,632) 259 (9,373) Acquisitions and disposals Cash at bank and in hand acquired with subsidiary Purchase of shares in subsidiary undertakings - (259) (259) - (3,573) (3,573) - (259) (259) - (2,742) (2,742) Equity dividends paid (5,744) (315) (6,059) (5,621) (112) (5,733) Management of liquid resources Loan to associated company 32,000-32,000 (32,000) - (32,000) Decrease/(increase) in short term deposits28(d) (159) (159) 32, ,038 (32,000) (159) (32,159) Financing Finance lease capital repaid 28(d) (588) - (588) (573) - (573) Loans raised long term ,000-28,000 Loans repaid long term 28(d) (28,000) - (28,000) (28,588) - (28,588) 27,427-27,427 Increase/(decrease) in cash 28(c) 4,173 (836) 3,337 (5,357) (2,719) (8,076) The Cash Flow Statements should be read in conjunction with the notes on pages 41 to