Report and financial statements for the year ended 31 March Company number MC-136473
Contents Page 3 Directors, Officers and Advisers 4 Directors report 6 Statement of directors responsibilities 7 Independent auditors report 8 Profit and loss account 9 Balance sheet 10 Notes to the financial statements 2
Directors, Officers and Advisers Directors P Butler J E Stimpson G W Maxwell V Rosati (appointed 22 May ) D A Ridley (resigned 7 May ) Company Secretary N Truillet (appointed 1 October ). N Burns (resigned 30 September ). Registered Office P O Box 309GT Ugland House South Church Street Georgetown Grand Cayman Cayman Islands Auditors Ernst & Young LLP 1 More London Place London SE1 2AF 3
Directors report The directors have pleasure in presenting their report and the audited voluntary financial statements for the year ended 31 March. The Company is registered in the Cayman Islands and its operations are conducted entirely within the UK. Accordingly, the voluntary financial statements have been prepared in accordance with UK GAAP. Results and dividends The audited financial statements for the year ended 31 March are set out on pages 8 to 17. The loss on ordinary activities, after taxation, for the year was 33,000 (: profit of 480,000). During the year no dividends were paid (: nil). Principal activities, business review and future developments The Company raises external finance on behalf of the group of companies headed by HDF (UK) Holdings Limited and lends monies to that group accordingly. During the year the Company received interest on loans made to other group undertakings and paid interest on loans raised from external sources and other group companies. The directors consider the performance of the business to be satisfactory and that this is expected to continue in the future. Treasury management and financial risk The Company s financial instruments comprise fixed and variable rate borrowings, interest rate swaps, loans and other amounts owed to and owed by group undertakings, cash and short term deposits. The Company has entered into an interest rate swap linking part of its borrowings to movements in the retail price index. Derivative activity is undertaken by the Company on behalf of the group headed by HDF (UK) Holdings Limited, as determined by the Board of the Company. The Board considers the overall risk profile of the group and enters into derivatives to mitigate or hedge any risks identified, as appropriate. No derivatives are undertaken for trading purposes or to benefit from price fluctuations. The Company s treasury operations are managed within parameters defined by the board and its parent undertaking. It is the Company s policy to minimize liquidity risk within an acceptable range of interest rates. The Company does not use foreign currency financial instruments. The main risks arising from the Company s financial instruments are interest rate and cash flow risk, liquidity risk and credit risk: Interest rate and cash flow risk The Company has raised finance through listed fixed rate bonds, of which 200 million has been linked to inflation through the use of an interest rate swap, and long-term loans due to group undertakings. The finance raised from the listed bonds has been on-lent to group undertakings at an interest rate 0.01% higher than the associated listed bonds, 166 million at a fixed rate and 200 million at a floating rate linked to inflation. The Company s policy is to manage short-term interest rate risk by using short term fixed rate draw-downs. It is the view of the Company that long term fluctuations in interest rates will be within the parameters that are considered acceptable by the Company. Liquidity risk The Company aims to maintain a balance between continuity of funding and flexibility. Continuity of funding has been guaranteed throughout the year by the existence of long term funding facilities. Short term flexibility is achieved by varying the amounts drawn down under these facilities. Further details are given in note 10. Credit risk The Company s financial assets comprise long term loans owed by group undertakings, cash and short-term deposits which represent the Company s maximum exposure to credit risk in relation to financial assets. Directors of the Company The directors who held office throughout the year (except where noted) are stated on page 3. 4
Directors report Disclosure of information to the auditors So far as each person who was a director at the date of approving this report is aware, there is no relevant audit information, being information needed by the auditor in connection with preparing its report, of which the auditor is unaware. Having made enquiries of fellow directors and the Company s auditor, each director has taken all the steps he or she is obliged to take as a director in order to make himself or herself aware of any relevant audit information and to establish that the auditor is aware of that information. Re-appointment of auditors A resolution is to be proposed at the Annual General Meeting for the re-appointment of Ernst & Young LLP as auditor of the Company. By order of the Board N Truillet Company Secretary 10 September 5
Statement of directors responsibilities in relation to the voluntary financial statements In preparing those voluntary financial statements, the directors are required to: select suitable accounting policies and apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and, 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 correctly explain the transactions of the Company to be determined with reasonable accuracy at any time, and which allow financial statements to be prepared. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors confirm that to the best of their knowledge: the financial statements, prepared in accordance with UK GAAP, give a true and fair view of the assets, liabilities, financial position and loss of the Company; and the management report, which is incorporated in the directors report, includes a fair review of the development and performance of the business and position of the Company, together with a description of the principal risks and uncertainties. P Butler Director 10 September 6
Independent auditor s report to the members of South East Water (Finance) Limited We have audited the company's financial statements for the year ended 31 March which comprise the Profit and loss account, Balance sheet and the related notes 1 to 16. These financial statements have been prepared on the basis of the accounting policies set out therein. This report is made solely to the Company s members as a body in accordance with the terms of our letter of engagement. Our audit work has been undertaken so that we might state to the Company s members those matters we are required under International Standards on Auditing (UK and Ireland) to state to them in an auditor s report and for no other purpose. To the fullest extent required by the 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 As described in the Statement of Directors' Responsibilities the company's directors are responsible for the preparation of the financial statements in accordance with applicable United Kingdom accounting standards. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland), and to report to you our opinion as to whether the financial statements give a true and fair view in accordance with accounting principles generally accepted in the United Kingdom. We read the directors' report and we consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) 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 voluntary financial statements give a true and fair view of the state of affairs of the company as at 31 March and of its loss for the year then ended in accordance with accounting principles generally accepted in the United Kingdom. Ernst & Young LLP London 10 September 7
Profit and loss account for the year ended 31 March Note Operating costs 2 (6) (8) Operating loss (6) (8) Interest receivable and similar income 3 18,361 32,679 Interest payable and similar charges 4 (18,395) (31,987) (Loss)/profit on ordinary activities before taxation (40) 684 Tax on loss/(profit) on ordinary activities 5 7 (204) (Loss)/profit on ordinary activities after taxation 12 (33) 480 Operating loss relates to continuing operations. The Company had no transactions during the year other than settling debtors and creditors. The Company has no recognised gains or losses in either period other than the profit for the year shown above and therefore no separate statement of total recognised gains and losses has been presented. The accompanying notes are an integral part of this profit and loss account. 8
Balance sheet at 31 March Note Current assets Debtors: amounts due after more than one year 6 413,559 412,869 Debtors: amounts due within one year 6 2,686 2,162 Total debtors 416,245 415,031 Cash at bank and in hand 7 10,158 10,175 426,403 425,206 Creditors: amounts falling due within one year 8 (6,006) (5,466) Net current assets 420,397 419,740 Creditors: amounts falling due after more than one year 9 (419,159) (418,469) Net assets 1,238 1,271 Capital and reserves Called up share capital 11 - - Profit and loss account 12 1,238 1,271 Equity shareholder s funds 13 1,238 1,271 The accompanying notes are an integral part of this balance sheet. The financial statements on pages 8 to 17 were approved by the Board of Directors and were signed on its behalf by: P Butler Director 10 September 9
Notes to the financial statements at 31 March 1. Accounting policies The principal accounting policies are summarised below. The policies were applied consistently throughout the current and prior years. Basis of preparation The financial statements have been prepared in accordance with applicable UK accounting standards and under the historical cost convention. Borrowing costs Borrowing costs are recognised as an expense when incurred. Taxation Current tax, being UK Corporation tax, is provided at amounts expected to be paid (or recovered) using tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Deferred tax is provided in respect of the material tax effect of all timing differences between the treatment of certain items for taxation and accounting purposes, at the rates of tax expected to apply when the timing differences reverse. Deferred tax assets and liabilities recognised have been discounted at rates equivalent to the post-tax yields to maturity that could be obtained at the balance sheet date on government bonds with similar maturity dates. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. Financial instruments The Company s financial instruments comprise fixed and variable rate borrowings, a derivative financial instrument comprising an interest rate swap, loans due to and owed by parent and fellow subsidiary undertakings, cash and short-term deposits. Recognition and derecognition Financial instruments are recognised in the balance sheet when the Company becomes party to the contractual provisions of the instrument. Financial liabilities are removed from the balance sheet when the related obligation is discharged, cancelled or expires. Financial assets are removed from the balance sheet when the rights to the cash flows from the asset expire, or when the risks and rewards of ownership of the asset are transferred or when control of the asset is transferred. Embedded derivatives Financial instruments that are not carried at fair value through profit and loss are reviewed to determine if they contain embedded derivatives. Embedded derivatives are accounted for separately as derivative financial instruments when the economic characteristics and risks are not closely related to the respective host financial instrument. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required. Derivative financial instruments The Company uses derivative financial instruments such as an interest rate swap to hedge its risks associated with interest rate fluctuations. This use does not qualify for hedge accounting. Derivative financial instruments are recognised initially and subsequently in the balance sheet at fair value with any movements during the year charged or credited to the profit and loss account. The fair value is determined by reference to market values for similar instruments. Interest bearing loans and borrowings All loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of issue costs associated with the borrowing. Interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Interest costs are expensed in the profit and loss account as incurred. 10
Notes to the financial statements at 31 March 1. Accounting policies (continued) Financial instruments (continued) Impairment At each reporting date an assessment is carried out to determine whether there is any indication that financial assets may be impaired. Where there is objective evidence that an impairment loss has arisen, the carrying amount is reduced in accordance with FRS 26 Financial Instruments: Measurement, with the loss being recognised in the profit and loss account in the year in which the respective assessment takes place. Related party disclosures As a wholly owned subsidiary of HDF (UK) Holdings Limited, the Company has taken advantage of the exemption under FRS 8 Related Party Disclosures not to provide information on related party transactions with other companies within the HDF (UK) Holdings Limited group. Note 16 gives details of how to obtain a copy of the published financial statements of HDF (UK) Holdings Limited. Cash flow statement As a wholly owned subsidiary of HDF (UK) Holdings Limited, the Company has taken advantage of the exemption under FRS 1 (Revised) Cash Flow Statements not to provide a cash flow statement because the financial statements of HDF (UK) Holdings Limited include a consolidated cash flow statement and are publicly available 2. Operating costs The fees for the audit of the Company amounted to 6,000 (: 8,000). The Company had no employees during the year (: none). No directors received any remuneration for their services as directors of the Company during the year (: nil). 3. Interest receivable and similar income Loans to group undertakings - interest 17,319 16,876 - fair value movement on interest rate swap 690 14,901 Bank balances and short term deposits 352 902 18,361 32,679 4. Interest payable and similar charges Loans from group undertakings 406 377 Listed debt due after five years 17,299 16,709 Fair value movement on interest rate swap 690 14,901 18,395 31,987 11
Notes to the financial statements at 31 March 5. Taxation a) Analysis of tax charge for the period Current tax UK Corporation tax (credit)/charge on (losses)/profit (8) 204 Under provision in prior years 1 - Total current tax (7) 204 b) Factors affecting tax for the period (Loss)/profit on ordinary activities before tax (40) 684 (Loss)/profit on ordinary activities multiplied by standard rate of tax of 28% (: 30%) (11) 204 Expenses not deductible for tax purposes 3 - Adjustment to tax charge in respect of previous periods 1 - Current tax (credit)/charge for the year (7) 204 6. Debtors Amounts owed by group undertakings due after more than one year - Loans 366,000 366,000 - Fair value of interest rate swap 47,559 46,869 Total due after one year 413,559 412,869 Amounts due from group undertakings within one year 2,087 1,566 Corporation tax 29 29 Prepayments and accrued income 570 567 Total due within one year 2,686 2,162 Total debtors 416,245 415,031 The amounts owed by group undertakings due after more than one year comprise loans as follows: - 200 million (: 200 million) at a variable rate linked to inflation, falling due for repayment by 30 September 2019-166 million (: 166 million) at a fixed effective rate of 5.7171%, falling due for repayment by 29 March 2029 - The indexation on the 200 million variable rate loan due from South East Water Limited falling due for repayment on 30 September 2019 is stated at fair value of 47.6 million (: 46.9 million) in accordance with FRS 26. The movement of 0.7 million (: 14.9 million) has been credited to the profit and loss account as interest receivable and similar income (see note 3) 7. Cash at bank and in hand At 31 March, 7,213,000 (: 7,021,000) of restricted cash was held in designated bank accounts in order to meet interest and associated swap payments falling due in respect of the listed debt. 12
Notes to the financial statements at 31 March 8. Creditors: amounts falling due within one year Amounts due to group undertakings 2,411 1,996 Accruals 3,595 3,470 Amounts due to group undertakings include interest accruals and deferred interest income of 2,023,000 (: 1,613,000) and group relief payable of 376,000 (: 383,000). 6,006 5,466 9. Creditors: amounts falling due after more than one year Listed debt due after five years (i) 366,000 366,000 Fair value of interest rate swap (ii) 47,559 46,869 Amounts due to group undertakings (iii) 5,600 5,600 419,159 418,469 (i) The effective terms of the listed debt, having taken account of a related interest rate swap, are: - 200 million (: 200 million) at a variable rate linked to inflation, falling due for repayment on 30 September 2019-166 million (: 166 million) at a fixed effective rate of 5.7171%, falling due for repayment on 29 March 2029 The listed debt is secured against the assets of the Company, against the assets of its immediate parent company, South East Water Limited (as far as allowed by the Water Industry Act 1991 and South East Water Limited s licence) and against the assets of South East Water Limited s immediate parent company, South East Water (Holdings) Limited. Issue costs for this debt have been borne by South East Water Limited. (ii) The indexation on the 200 million variable rate loan is stated at fair value of 47.6 million (: 46.9 million) in accordance with FRS 26. The movement of 0.7 million (: 14.9 million) has been charged to the profit and loss account as interest payable and similar charges (see note 4). (iii) The amounts owed to group undertakings comprise a loan due to South East Water Limited. The loan falls due for repayment by 27 July 2034 and bears interest at the rate of LIBOR plus 2%.The loan is unsecured and is subordinated to the other creditors of the Company. 10. Financial Instruments Financial risk management objectives and policies The Company s financial instruments comprise fixed and variable rate borrowings, a derivative financial instrument comprising an interest rate swap, loans due to and owed by parent and fellow subsidiary undertakings, cash and short-term deposits. Derivative activity is undertaken by the Company on behalf of the group headed by HDF (UK) Holdings Limited, as determined by the Board of the Company. The Board considers the overall risk profile of the group and enters into derivatives to mitigate or hedge any risks identified, as appropriate. No derivatives are undertaken for trading purposes, or to benefit from price fluctuations.. 13
Notes to the financial statements at 31 March 10. Financial Instruments (continued) The Company s treasury operations are managed within parameters defined by the Board and its parent undertaking. It is the Company s policy to minimise liquidity risk within an acceptable range of interest rates The Company does not use foreign currency financial instruments. The main risks arising from the Company s financial instruments are interest rate, credit and liquidity risk: Interest rate and cash flow risk The Company has raised finance through listed fixed rate bonds, of which 200 million have been linked to inflation through the use of an interest rate swap, and long-term loans due to group undertakings. The finance raised from the listed bonds has been on-lent to group undertakings at an interest rate 0.01% higher than the associated listed bonds, 166 million at a fixed rate and 200 million at a floating rate linked to inflation. The Company s policy is to manage short-term interest rate risk by using short term fixed rate drawdowns. It is the view of the Company that long term fluctuations in interest rates will be within the parameters that are considered acceptable by the Company. Liquidity risk The Company aims to maintain a balance between continuity of funding and flexibility. Continuity of funding has been guaranteed throughout the period by the existence of long term funding facilities. Short term flexibility is achieved by varying the amounts drawn down under these facilities. Further details are given below. Cash is put on deposit with variable maturity dates so as to mitigate liquidity risk. Credit risk The Company s financial assets comprise long term loans owed by group undertakings, cash and short-term deposits which represent the Company s maximum exposure to credit risk in relation to financial assets. Fair values of financial assets and financial liabilities In the opinion of the directors, the fair values of the financial assets and liabilities of the Company (apart from the specific items shown in the fair value tables below) are not materially different from the book values. All fair values are based on arms length transactions in normal market conditions. The fair value of the Company s long term borrowings and loans owed by group undertakings has been estimated based on quoted market prices for the same or similar debt where possible. Where prices did not exist, the fair value has been estimated using calculations of the present value of future cash flows using the appropriate discount rates in effect at the balance sheet dates. The following tables provide a comparison by category of the carrying amount and the fair values of the Company s financial assets and financial liabilities at 31 March. Fair value is the amount at which a financial instrument could be exchanged in an arm s length transaction between informed and willing parties. The Company s financial assets: Loans and receivables Book Value Fair Value Book Value Fair Value Amounts owed by group undertakings due after more than one year - Loans 366,000 402,101 366,000 403,291 - Embedded derivative 47,559 47,559 46,869 46,869 Amounts due to parent and group undertakings within one year 2,087 2,087 1,566 1,566 Cash 10,158 10,158 10,175 10,175 425,804 461,905 424,610 461,901 14
Notes to the financial statements at 31 March 10. Financial Instruments (continued) The Company s financial liabilities: Financial liabilities at amortised cost Book Value Fair Value Book Value Fair Value Listed bonds 366,000 402,101 366,000 403,291 Loans owed to group undertakings due after more than one year 5,600 4,847 5,600 4,735 Creditors due within one year 6,006 6,006 5,466 5,466 377,606 412,954 377,066 413,492 At fair value through profit and loss account Embedded derivative 47,559 47,559 46,869 46,869 The fair value of listed bonds and loans owed to group undertakings have been calculated using discounted cash flow methods using appropriate discount rates in effect at the balance sheet dates. For all other financial instruments, the net book value is considered to equate to the fair value due to the short maturity of the amounts receivable and payable. Maturity analysis of financial assets and financial liabilities The maturity profile of the Company s financial assets and liabilities at 31 March was as follows: More Within 1 year 1 2 years 2 5 years than 5 years Total Fixed rate Fixed rate financial assets: Loans owed by parent company 9,474 18,948 28,421 308,107 364,950 Fixed rate financial liabilities: Listed bond 9,474 18,948 28,421 308,107 364,950 Floating rate Floating rate financial assets: Short-term financial assets 12,245 - - - 12,245 Listed bond 11,315 22,630 33,945 256,579 324,469 Interest rate swap (4,165) (8,534) (11,317) 104,415 80,399 Total floating rate financial assets 19,395 14,096 22,628 360,994 417,113 Floating rate financial liabilities: Short-term financial liabilities 2,411 - - - 2,411 Listed bond 11,315 22,630 33,945 256,579 324,469 Interest rate swap (4,165) (8,534) (11,317) 104,415 80,399 Loans owed to parent company - - - 13,722 13,722 Accruals 3,595 - - - 3,595 Total floating rate financial liabilities 13,156 14,096 22,628 374,716 424,596 15
Notes to the financial statements at 31 March 10. Financial Instruments (continued) The maturity profile of the Company s financial assets and liabilities at 31 March was as follows: More Within 1 year 1 2 years 2 5 years than 5 years Total Fixed rate Fixed rate financial assets: Loans owed by parent company 9,474 18,948 28,421 317,581 374,424 Fixed rate financial liabilities: Listed bond 9,474 18,948 28,421 317,581 374,424 Floating rate Floating rate financial assets: Short-term financial assets 11,741 - - - 11,741 Listed bond 11,315 22,630 33,945 267,894 335,784 Interest rate swap (4,388) (8,051) (10,429) 119,066 96,198 Total floating rate financial assets 18,668 14,579 23,516 386,960 443,723 Floating rate financial liabilities: Short-term financial liabilities 1,996 - - - 1,996 Listed bond 11,315 22,630 33,945 267,894 335,784 Interest rate swap (4,388) (8,051) (10,429) 119,066 96,198 Loans owed to parent company - - - 18,277 18,277 Accruals 3,470 - - - 3,470 Total floating rate financial liabilities 12,393 14,579 23,516 405,237 455,725 Borrowing facilities The Company has access to borrowing facilities of 38,400,000 (: 38,400,000). These facilities remain undrawn at 31 March and 31 March. Once drawn upon repayment falls due by 29 March 2029. Items of income, expense, gains and losses Income statement Net gains/(losses) on: Financial assets, loans and receivables (see note 3) 18,361 32,679 Financial liabilities at amortised cost (see note 4) (17,705) (17,086) Financial liabilities at fair value through profit or loss (see note 4) (690) (14,901) 11. Authorised and issued share capital Authorised 25,000 ordinary shares of 1 each 25 25 Allotted, called up and fully paid 100 ordinary shares of 1 each - - 16
Notes to the financial statements at 31 March 12. Profit and loss account At 1 April 1,271 Loss for the year (33) At 31 March 1,238 13. Reconciliation of movements in equity shareholders funds At 1 April 1,271 791 (Loss)/profit for the year (33) 480 At 31 March 1,238 1,271 14. Analysis of the movement in net debt At 1 April Cash flow Other non-cash changes At 31 March Cash at bank and in hand 10,175 (17) - 10,158 Amounts due from group undertakings: - fixed rate loans 366,000 - - 366,000 - Interest rate swap 46,869-690 47,559 Listed bonds (366,000) - - (366,000) Interest rate swap (46,869) - (690) (47,559) Group loans` (5,600) - - (5,600) Net borrowings (5,600) - - (5,600) Net debt 4,575 (17) - 4,558 15. Related party transactions As a wholly owned subsidiary of HDF (UK) Holdings Limited at the balance sheet date, the Company has taken advantage of the exemption under FRS 8 Related Party Disclosures not to provide information on related party transactions with other companies within the HDF (UK) Holdings Limited group. 16. Parent company and ultimate controlling parties The Company s joint ultimate holding companies are Utilities of Australia Pty Limited as Trustee for the Utilities Trust of Australia and Hastings Funds Management Limited as Responsible Entity for the Hastings Diversified Utilities Fund Both of these holding companies are resident in Australia and it is the directors belief that they control the Company jointly. The immediate parent company is South East Water Limited. The smallest group of companies into which results of the Company are consolidated is that headed by South East Water Limited, a company registered in England and Wales. The largest group of companies into which results of the Company are consolidated is that headed by HDF (UK) Holdings Limited, a company registered in England and Wales. The financial statements of South East Water Limited and HDF (UK) Holdings Limited may be obtained from the Company Secretary, Rocfort Road, Snodland, Kent, ME6 5AH. 17