TIDMBD49
RNS Number : 3791H
Electricity North West Limited
27 May 2011
Electricity North West Limited (the "Company") is pleased to
announce its Annual Financial Report for the year ended 31 March
2011.
The Annual Financial Report is available to view on the
Company's website: www.enwl.co.uk.
In accordance with the requirements of Listing Rule 17.3.1, a
copy of the annual financial report has been submitted to the
National Storage Mechanism and will shortly be available for
inspection at: http://www.hemscott.com/nsm.do.
For further information please contact Electricity North West's
press office on 0844 209 1957 or email
jonathan.morgan@enwl.co.uk.
Electricity North West Limited
Registered number 2366949
Annual Report and Consolidated Financial Statements
for the year ended 31 March 2011
Electricity North West plays a vital role in the North West
region. We own, operate and maintain the electricity network;
delivering energy to our 2.4 million customer premises and we have
a strong track record in safety and reliability.
In the five year period to March 2015 we will be investing over
GBP1.4 billion in the network; supporting the North West's economic
growth, providing jobs and apprenticeships to the region's young
people and supporting the move to a low carbon economy.
We are pleased to present our Annual Report to shareholders for
the year ended 31 March 2011. Further information on our Company
can also be found by visiting our website: www.enwl.co.uk.
Notice regarding limitations on Director Liability under English
Law
The information supplied in the Chief Executive Officer's
Statement, the Business Review and the Corporate Governance
statement in the following pages form part of the Directors' Report
as incorporated by reference and have been drawn up and presented
in accordance with English company law. The liabilities of the
Directors in connection with that Report shall be subject to the
limitations and restrictions provided by such law.
Business Review
The Directors in preparing the Business Review have complied
with s417 of the Companies Act 2006. The Business Review has been
prepared for the Electricity North West Group as a whole and
therefore gives greater emphasis to those matters which are
significant to the Group when viewed as a whole.
Cautionary statement regarding forward-looking statements
The Chairman's Statement, Chief Executive Officer's Statement
and Business Review section of the Annual Report and Consolidated
Financial Statements ('the Annual Report') have been prepared
solely to provide additional information to the shareholders to
assess the Company and the Group's strategies and the potential for
those to succeed. These sections and other sections of The Annual
Report contain certain forward looking statements that are subject
to factors associated with, amongst other matters, the economic and
business circumstances occurring within the region and country in
which the Group operates. It is believed that the expectations
reflected in these statements are reasonable but they may be
affected by a wide range of variables which could cause actual
results to differ materially from those anticipated at the date of
the Annual Report. The Company does not undertake any obligation to
update or revise these forward-looking statements, except as may be
required by law or regulation.
Regulatory reporting and regulatory audits of 2010/11 year
end
Certain regulatory performance data contained in this Annual
Report remains subject to regulatory audit by Ofgem. The final
regulatory reporting pack and regulatory financial statements for
the year ended 31 March 2011 are not due for submission to Ofgem
until September 2011, and will be reviewed by Ofgem thereafter.
Website and Investor Relations
Electricity North West's website www.enwl.co.uk gives additional
information on the Group. Notwithstanding the references we make in
this Annual Report to Electricity North West's website, none of the
information made available on the website constitutes part of this
Annual Report or shall be deemed to be incorporated by reference
herein. Interested institutional debt investors can also gain
access to additional financial information by contacting the Head
of Treasury and Investor Relations (contact details at our
website).
Chairman's Statement
Dear Shareholders
I am delighted to have joined Electricity North West in May
2010, and I am pleased to introduce our Annual Report for
2010/11.
2010/11 has been a hugely significant year for Electricity North
West. The completion of the purchase of United Utilities
Electricity Services ('UUES') on 30 June 2010 transformed the
business into an integrated distribution network operator which
owns, operates, manages and maintains the electricity network for
the North West region - an area of over 12,500 square kilometres
and with more than 2.4 million householders. My congratulations go
to everyone involved in this achievement and in implementing the
business integration plans which are continuing to deliver a smooth
transition into a single more efficient business.
Revenue has increased to GBP394 million as a consequence of the
latest prices agreed with Ofgem to fund our investment plans
operate the network and as a result of the timing of revenue, an
element of which will reverse in the current year. The acquisition
and integration of UUES has brought with it financial efficiencies
and, coupled with the increase in revenues, operating profit has
increased by 35% over prior year to GBP210 million.
These considerable business and financial achievements have been
set against an industry background which continues to face more
public scrutiny and media attention than ever before - a sector
dominated by significant challenges both now and in the years
ahead. The energy sector will go through significant change as it
responds to the challenge of a low carbon economy, issues relating
to security of supply, and the imperative to deliver efficiently to
customers. As a business which constantly demonstrates innovation,
drive and total professionalism, I am confident that the
Electricity North West is well placed to meet these challenges and
to exceed the expectations of our stakeholders.
We area company constantly looks ahead and I am pleased to
report that excellent progress is expected in terms of our network
investment programme. Between 2010 and 2015 the Company plans to
invest over GBP1.4bn in the region's infrastructure and, combined
with a substantial research and development spend, the Company is
playing a key role in the economy of the North West. We are also
aware of the vital role we play within the community and we are
committed to sustainability and to being a 'good' corporate citizen
in all aspects of our operations and activities.
The Company is currently working on its first Environment,
Social & Governance Report, which will be published later in
2011, further evidence of our commitment to corporate and social
responsibility.
The change in business structure has necessitated a change in
the Board during the year. I am pleased to welcome Michael
McCallion, who was appointed to the position of Chief Financial
Officer with effect from 2 September 2010.
The many achievements of the past year would not have been
possible without the commitment and hard work of Steve Johnson and
his team of people and my thanks and congratulations go out to them
all. Without their dedication, commitment and support our
achievements would not have been possible.
Next year, and indeed the years beyond, will not be without
their challenges. However, I am confident that our people are ready
to meet these challenges and I greatly look forward to the
continuing success of the Group.
Phil White
Chairman
26 May 2011
Chief Executive Officer's Statement
Our vision to be the leading energy delivery business is
deliberately stretching, and making progress both in that respect
and towards our strategic objectives should ensure we are well
placed to meet the needs of our customers both now and in the
future. The society in which we live is growing ever more dependent
on electricity. It provides the power for both the basics we rely
on and the luxuries that make our lives easier. Put simply, we
can't do without it. Our customers constantly tell us that what
they expect of us is a reliable and constant source of electricity
- and that is exactly what we aim to provide, 24 hours a day, 365
days a year.
Yet ensuring this reliability is only one part of our business.
We are also committed to being as innovative as possible and we
strive to push the boundaries to find simpler and more effective
solutions to problems. With the challenges of security of supply
and the move to a low carbon economy facing the energy sector, it
is essential that we are able to meet and solve such complex
issues.
Health and Safety
Health and Safety remains our first priority. The Group is
committed to achieving the highest standards of health and safety
for all our customers, employees and contractors. Underpinning the
business' drive for achieving the highest standards of health and
safety is our health and safety management system, which was
certified to the OHSAS 18001 standard in the year.
Customers
Investment on our network is designed to ensure that our
customers continue to receive the levels of service that they
expect from us. We have a comprehensive customer service strategy
in place and in 2010/11 we have achieved our best ever results in
both our customer satisfaction measure and in quality of telephony
response.
Network Availability and Reliability
The major area of investment for at least the next twenty years
is likely to remain the replacement of the existing legacy network.
Electricity North West continues to invest in repairing and
upgrading our network and continues the installation of automated
technology that reduces the number of customers affected by faults
and which restores the supply more quickly by fixing problems
remotely.
I am pleased to report that our key measures of quality of
supply: Customer Interruptions and Customer Minutes Lost, have
improved year on year and are out-performing our regulatory
targets.
Connections
As well as maintaining the current performance of our network we
also have to plan for changes in the use of our network. Whilst
energy efficiency measures will act to reduce the amount of energy
used, other pressures will act to increase electricity demand, such
as population and economic growth, and the move to a low carbon
economy which will see the increased use of electric vehicles
displacing petrol and diesel. We will have to develop our network
to meet this expected growth through a mix of 'business-as-usual'
practices and new commercial approaches.
Social Obligations
Electricity North West is fully committed to sustainability in
all aspects of its operations and activities. Understanding the
impact from an economic, environmental and social perspective is
extremely important and we constantly strive to improve the
important role we play in the community. We continue to support
local charities throughout the region not only with financial
support, but through a sponsorship and donation policy that also
considers donating the time of our employees, and the support of
our business.
Chairman's appointment
The Board is delighted to welcome Phil White CBE as Independent
Non-Executive Chairman, appointed to the Board on 3 May 2010.
Business outlook
2011 marks the first year of the current regulatory period,
which runs for five years from 1 April 2010. Our business strategy
and plan has been developed against the requirements of our vision
'to be the Leading Energy Delivery Business' and is expected to
safely and sustainably deliver significantly improved customer
service; network investment of over GBP1.4bn to secure the required
outputs and to enhance network reliability; and a stable financial
structure that provides the necessary financing to secure the
required investment in our network.
The Board and management are committed to building on the
success of the current year and in implementing a challenging
strategy to ensure we deliver for our customers, for our people and
for our investors.
Steve Johnson
Chief Executive Officer
Business Review
Business Overview
Electricity North West Limited ('ENWL', the 'Company') is a
private limited company registered in England and Wales. The
Company is ultimately owned by long-term infrastructure funds
managed by Colonial First State Global Asset Management (a member
of the Commonwealth Bank of Australia Group) and by JP Morgan
Investment Management Inc.
The principal activity of the Company and of its subsidiaries
('the Group') is the distribution of electricity in the North West
of England.
On the 30 June 2010 the company completed the purchase of United
Utilities Electricity Services Limited ('UUES') from United
Utilities Group PLC ('UU'). The purchase of UUES, which had
previously been contracted to operate and maintain our network, has
enabled the Company to establish one Group which owns, operates,
manages and maintains its network. UUES was subsequently renamed
Electricity North West Services Limited ('ENWSL'). On 31 March
2011, the trade and assets of ENWSL were transferred to ENWL at
book value. ENWL and ENWSL were the principal operating companies
within the Group and, as such, references to 'the Group' and to
'Electricity North West' in the following Business review and
Directors' Report are referring to the operational activity of the
ENWL Group.
Industry structure
The electricity industry in Great Britain is divided into four
main sectors:
-- Generators own the large power stations and smaller renewable
generators. The generators produce electricity from a variety of
fuel sources;
-- Transmission companies own and operate the 400kV and 275kV
transmission network ('national grid') that links the major power
stations and transports electricity in bulk across the country.
National Grid Electricity Transmission is responsible for the
transmission network in England and Wales;
-- Distribution companies own and operate the lower voltage
electricity network, connecting the smaller power stations and the
national grid to every electricity customer in England and Wales;
and
-- Electricity suppliers buy the electricity produced by the
generators, sell that electricity to their customers and pay the
network operators and distribution companies for the transportation
of that electricity across their networks.
Electricity North West owns and operates the main electricity
distribution network in North West England.
The principal direct financial relationship with customers
connected to our network is via charges for new connections. We
charge electricity suppliers for the use of our network and the
suppliers pass these costs on to customers. Typically we account
for around 15% of the electricity bill for domestic consumers.
New Connections
New buildings require new electricity connections and, where
appropriate, enhancements to our network. Customer connections is a
competitive market with a number of different organisations
providing alternative quotations for new connections to our
network. Competitive activity from Independent Connections
Providers ('ICPs') in the North West continues to be very
effective. During the year ended 31 March 2011, assets were adopted
from a total of 17 different companies.
The significant decline in the new housing construction market
has resulted in a significant reduction in low voltage connections
made in the last three years. This has resulted in a slight
increase in the percentage market share completed by Electricity
North West, but a decrease in our market share of the higher
voltage connections as more of our competitors focus their
attention on this market.
Our assets and key facts
Our network is made up of overhead lines, underground cables and
items of plant, such as switchgear and transformers, which are used
to distribute electricity to customers' premises. Our network would
cost approximately GBP9bn to replace. It comprises the following
key assets:
-- around 13,000 km of overhead lines
-- almost 44,000 km of underground cables
-- almost 84,000 items of switchgear
-- more than 34,000 transformers
We deliver over 25 terawatt hours of electricity each year to
more than 2.4 million customers' premises across an area of 12,500
square kilometres.
Economic regulation
The electricity market is regulated by the Gas and Electricity
Markets Authority ('GEMA') which governs and acts through the
Office of Gas and Electricity Markets ('Ofgem').
The amount of income that we receive from suppliers is governed
by a price control framework which is subject to review every five
years. The electricity distribution price control for the five year
period from 1 April 2010 ('DPC5') was agreed with Ofgem in January
2010. Electricity North West will be allowed to increase its prices
by an average of 8.5% plus (RPI) inflation in each of the five
years of DPC5. The cost of capital has been set at 4.0% post-tax
for DPC5.
These revenues fund our ability to operate and maintain the
network, to replace existing assets and to build new ones. This is
undertaken whilst at all times focusing on the industry-wide
challenges of securing a low-carbon economy; security of energy
supply; and delivering efficiently.
We are incentivised to reduce the number of interruptions that
our customers suffer and to reduce the average length of
interruptions. We are also incentivised to reduce the amount of
electrical losses from our network.
We also have a responsibility to look after our network in the
long term. From 2010/11, we will report on the condition of our
network (using Health Indices - HI) and its loading (using Load
Indices - LI). Through the monitoring of these indices we will
ensure that the overall condition of our network continues to
provide a high quality service to our customers.
Future economic regulation
Following privatisation in 1990, electricity distribution
companies have been subject to an 'RPI-X' form of regulation, which
is designed to encourage efficiency. In March 2008, Ofgem launched
a comprehensive review of the 20-year-old DPC framework and made
its recommendations in July 2010, proposing a new approach for
sustainable network regulation, which will be delivered by their
'RIIO' model where:
Revenue = Incentives + Innovation + Outputs
Under the RIIO model there is a much greater emphasis on
companies undertaking a full role in developing a more sustainable
energy sector and delivering value for money network services for
customers today and in the future.
The fundamental principles of the 'RPI-X' based regulatory
regime of creating powerful efficiency incentives by setting
ex-ante revenue allowances for a number of years are retained, but
there are a number of evolutionary developments.
The RIIO framework provides financial support for the
development of innovative solutions to network management. In
future, electricity networks will be expected to meet the growing
needs of the UK low carbon economy including the transition to
electric vehicles and electric heating. With an ever growing
dependence on electricity, distribution network operators will have
growing businesses and an ever more central role in the UK energy
industry.
Our next price review, starting in 2015, will embody these
principles. We will continue to develop our investment plans and
work with Ofgem to develop the RIIO framework, ensuring it provides
an appropriate return for our equity and debt investors to attract
the finance required to support the required investment for our
customers.
Key Performance Indicators
2011 2010
====================================================== ========= =========
Non-Financial
====================================================== ========= =========
Safety: RIDDOR (1) 5 6
Customer minutes lost ('CML') (2) 47.4 49.9
Customer interruptions per 100 customers ('CI')(3) 49.2 50.6
Overall customer satisfaction (4) 89% 87%
Quality of Response (mean score) (5) 91% 91%
====================================================== ========= =========
Financial (Group)
====================================================== ========= =========
Revenue GBP394m GBP324m
Operating profit GBP210m GBP156m
Profit before tax GBP139m GBP17m
Operating cash flow GBP246m GBP218m
RAV Gearing (6) 56% 57%
Interest cover (7) 5.7 times 4.2 times
Capital expenditure on tangible and intangible assets GBP177m GBP174m
(cash flow)
====================================================== ========= =========
-- Continued excellent safety performance.
-- Customer satisfaction and network reliability continue to
improve year on year and to out-perform regulatory targets, earning
additional incentive revenue.
-- Revenue has increased to GBP394m as a result of the increase
in DPC5 allowed revenues, rising RPI and the timing of the recovery
of revenues. An over-recovery of revenue has arisen due to a
combination of price mix and volume changes.
-- Operating profit has increased by 35% over the prior year to
GBP210m as a result of the increased revenue and the delivery of
efficiencies arising from the acquisition and integration of ENWSL
and from the Group's transformation programme.
-- The pension valuation as at 31 March 2010 has been agreed
with the Pension Scheme Trustee and a deficit repair schedule
agreed over 15 years, which is aligned to Ofgem's funding
assumptions.
-- The integration of ENWSL is progressing to plan. We have
successfully in-sourced back-office services previously managed by
UU and the IT Refresh Programme is on track to complete the
separation of Information Technology services from UU by the end of
September 2011.
Notes:
(1) Accidents reportable under the Reporting of Injuries,
Diseases and Dangerous Occurrences Regulations ('RIDDOR').
(2) Customer minutes lost is calculated by taking the sum of the
customer minutes lost for all restoration stages for all incidents
and dividing by the number of connected customers as at 30
September each year. The 2011 figure is yet to be audited by
Ofgem.
(3) Customer interruptions per 100 customers is calculated as:
(total customers affected/total customers connected to the network)
x 100. The 2011 figure is yet to be audited by Ofgem.
(4) Overall customer satisfaction in relation to the response
received from a fault enquiry is measured by an internal overall
customer experience assessment mechanism. It involves a series of
interviews with customers. Sample interviews are conducted
monthly.
(5) Quality of response assesses the speed and quality of
telephone response, measuring customer satisfaction on a scale of
one to five.
(6) RAV Gearing is measured as borrowings at nominal value net
of cash and short-term deposits divided by the allowed Regulatory
Asset Value ('RAV') of GBP1,403m (2010: GBP1,344m) based on March
closing prices.
(7) Interest cover is the number of times the net underlying
finance expense is covered by operating profit from continuing
operations. Net underlying interest expense is calculated as the
underlying cost of borrowings excluding any pension adjustment and
unrealised movements in the fair value of debt and derivatives.
Strategy and objectives
Our Company vision is 'to be the Leading Energy Delivery
Business', measured against the following strategic objectives:
-- Understanding and Influencing the Market
-- Understanding and Delivering for our Customers and
Stakeholders
-- Developing a High Performance Organisation
-- Delivering Sustainable Growth with Robust Financial
Performance
In order to support these strategic objectives, we need to
ensure we have the right people using the right systems and
processes aligned to a clear vision and targets.
Our plan includes investment in excess of GBP20m over the
regulatory period in workforce renewal, recruiting approximately
250 apprentices and graduates. The plan also includes enabling
initiatives in the areas of IT systems, process transformation and
capital delivery to ensure the more efficient targeting and
delivery of network activity.
Operational performance
As noted, Ofgem has recently introduced a new approach to
network regulation. The 'RIIO' model (revenue = incentives +
innovation + outputs) has been designed to promote smarter
electricity and gas networks for a low carbon future. This new
framework emphasises stakeholder input into the price control
process and into the Distribution Network Operator's ('DNO') own
business plans and on-going business decisions. Access to good
information on how we are performing is critical if stakeholders
are to play this role. For this reason we have expanded our 31
March 2011 Annual Report considerably.
Non-financial performance is measured against the six primary
output categories which Ofgem intend to apply for their annual
comparative reporting in DPC5 and in RIIO price reviews: health and
safety; customer satisfaction; network reliability and
availability; connections; environment; and social obligations.
Electricity North West is closely engaged with Ofgem and the
industry in developing the final reporting framework and guidelines
for 31 March 2011 regulatory reporting and we will submit the
regulatory reporting pack ('RRP') and publish our regulatory
financial statements for 31 March 2011, along with other
distribution companies, in September 2011.
Health and safety
The Group is committed to achieving the highest standards of
health and safety for all our customers, employees and contractors.
Electricity North West has continued to drive a health and safety
zero harm culture to meet our performance targets, whilst
developing our safety culture and improving processes and
systems.
Underpinning the business' drive to achieving the highest
standards of health and safety is our health and safety management
system, which was certified to the OHSAS 18001 standard in the
year, together with robust health and safety leadership being
demonstrated at every level of management.
Electricity North West continues to support both the Health and
Safety Executive's UK five year strategy and the Energy Network
Association's ('ENA') 'Powering Improvement' health and safety
strategy.
As a clear demonstration of the Group's commitment to health and
safety, a Board sub-committee for health and safety exists with the
remit of setting our health and safety strategy, objectives and
targets; reviewing and monitoring performance; and reporting to the
main Board.
With the acquisition of ENWSL, the health and safety risk of the
Group is now managed directly. The Group is building on the
continuous improvement culture that was already embedded within
ENWSL under the Asset Services Agreement ('ASA').
This improvement has been demonstrated through a further
significant reduction in the number of Lost Time Accidents (LTAs)
recorded, with five LTAs reported in the year to 31 March 2011
(2010: 10); this includes our sub-contractor organisations. All of
the current year LTAs were reportable under the Reporting of
Injuries, Diseases and Dangerous Occurrences Regulations
('RIDDOR').
Customer satisfaction
An independent surveying specialist measures the satisfaction of
customers contacting our call centre to report interruptions to
supply on our behalf. This survey has enabled us to target
continual improvements in the service we provide for our customers
resulting in year-on-year improvements. Since the introduction of a
High Volume Call Answering system, our telephony performance has
significantly improved during the last three years.
This year we took a number of steps to improve first contact
resolution of customer queries including providing our call agents
with increased information about work that might be affecting
customers and enhanced training. Customer Satisfaction has reached
its highest ever level this year at an average of 89% satisfied for
the year, with one month in the year failing to achieve our
internal 85% target.
Ofgem also measures Customer Satisfaction via a telephony
survey. Performance in this scheme mirrors the high level of
customer satisfaction measured by our own survey (above) and
clearly demonstrates the consistent level of service delivered by
all staff involved in the supply restoration process. February
2011's score of 4.59 placed Electricity North West second amongst
the 14 DNOs and took us to fourth overall on a rolling 12-month
average.
From 1 April 2012 Ofgem will introduce a new 'Broad Measure of
Customer Satisfaction'. Its three key elements will be:
-- an independent customer satisfaction survey of all types of
customers
-- a complaints metric
-- a comparative assessment of distribution company stakeholder
engagement
Customer complaints
We continually focus on the small number of written complaints
we receive from our customers to understand their root causes and
determine how we can improve the service for our customers. This
year we have received 829 complaints covering both operational
activities and new connections. The biggest cause of complaints in
recent months has been a high level of very short duration but high
frequency interruptions on the network. These occur when our
protection systems operate to automatically restore the network and
prevent longer duration interruptions. We recognise that customers
are becoming increasingly sensitive to even the shortest, sub-three
minute interruptions to their essential electricity supply.
A number of actions and initiatives have either been recently
completed or are ongoing to improve Electricity North West's
performance in complaint handling. Processes have been implemented
aimed at resolving more complaints within 24 hours. Weekly
monitoring of cases over six days and ten days has been introduced
to ensure they are resolved as quickly as possible.
We have invested in a new business-wide complaint handling
system. This will enable tracking of each customer's full history
from any team across the business. We have also recently joined the
Institute of Customer Service, giving access to their benchmarking
data and customer service training facilities.
Stakeholder engagement
Electricity North West is committed to a programme of regular
stakeholder engagement. We hold regular meetings with stakeholders
such as local authorities and regional government agencies, and we
have hosted a number of very successful stakeholder events
throughout the year.
In April 2011, we published our consultation on 'How our network
will develop in the period to 2050'. This consultation document is
available on the Company's website (www.enwl.co.uk).
Network reliability and availability
Quality of Service
On average, our network performs such that a customer
experiences a power cut every two years and is without electricity
for less than two hour every two years (99.99% reliability).
Electricity North West continues to invest in repairing and
upgrading our network and continues the installation of automated
technology that reduces the number of customers affected by faults
and which restores the supply more quickly by fixing problems
remotely.
Under the regulatory Interruptions Incentive Scheme, Electricity
North West has been set network performance targets for the number
and duration of customer supply interruptions.
The average number of interruptions per 100 customers per annum
was 49.2* (2010: 50.6), out-performing the regulatory target for
the year of 52.9 (2010: 57.1).
The average number of minutes for which customers were without
supply was 47.4 minutes* (2010: 49.9), beating the regulatory
target for the year of 55.6 minutes (2010: 53.0).
* 2011 figures are draft subject to Ofgem audit and are stated
after allowed exclusions, including severe weather events, as per
2010.
Worst served customers
Quality of Service incentives have been very effective in
improving the average performance of the network, but an anomaly
arises where the network which supplies the worst served customers
may be deemed to be uneconomic to improve.
Worst served customers are defined as those who experience 15 or
more higher voltage interruptions over a three-year period and a
minimum of three higher voltage interruptions in each year.
884 of our customers meet the qualifying criteria to be classed
as among the 'Worst Served' in the country in 2009 and 2010 (720 in
2009 and 164 in 2010) with 118 of these affected in both years. We
worked closely with Ofgem and other industry members throughout the
recent price review to develop a new incentive mechanism which
encourages investment to improve the service afforded to the
community of these 'Worst Served' Customers. This mechanism has
facilitated additional work programmes which would previously have
been considered inefficient. This year we have developed, designed
and approved an innovative approach to improve the performance for
these customers that is now being implemented on the circuits
serving all 884.
Connections
In October 2010 Ofgem introduced new Guaranteed Standards of
Performance for connections. These standards cover the timescales
for the provision of budget estimates for generation connections;
timescales for the provision of quotations for low voltage, high
voltage and extra high voltage connections; and timescales for
commencement and completion of works. This is supported by a new
licence condition that requires DNOs to meet the standards in at
least 90 per cent of cases. Electricity North West has met these
new standards in at least 98% of cases since they were
introduced.
As part of DPC5, Ofgem introduced the opportunity for
distribution companies to earn a margin on contestable connections
activities. Two levels of margin are possible: a regulated margin
and an unregulated margin. Successful application for a regulated
margin is subject to delivery of new standards of service in
connections. Successful application for an unregulated margin is
subject to passing a Competition Test to demonstrate that
competition has developed in that DNO's service area.
Electricity North West has already successfully applied to be
able to charge a regulated margin of 4% on all allowed sole use
connection segments. We have met with Ofgem to discuss the process
for applying for an unregulated margin and we are on track to
submit an application in early 2011/12 to earn an unregulated
margin.
Environment, Social and Governance
Electricity North West delivers an essential service to our
customers. Our overall Environment, Social & Governance ('ESG')
strategy is to grow our business both profitably and sustainably by
providing services and products that benefit customers, society and
the environment. Our ESG strategy co-ordinates all sustainability
related work embedded across the business and concentrates
monitoring and investment into four broad streams. These streams
support the sharing of knowledge and experience, develop innovative
solutions, provide the opportunity to demonstrate our contribution
to our local community, safeguard our reputation and build value
through good corporate governance. Each stream has a key theme for
the year. The four streams and themes for 31 March 2011 were:
-- Environment: Facilitating the move to a Low Carbon
Economy
-- Community: Building relationships with our local
community
-- People: Securing the Work Force of the future
-- Governance: Ensuring Electricity North West applies best
practice corporate governance
Electricity North West is currently involved in projects that
are reducing the impact of Group activities on the environment and
the following examples are indicative of the diverse range of the
sustainability measures being undertaken:
Sulphur hexafluoride (SF(6) ) management
Electricity North West is working in conjunction with the
electricity industry manufacturers to develop vacuum and solid
state insulation for switchgear to eliminate, in the long term, the
use of the potent greenhouse gas, sulphur hexafluoride (SF(6) ), as
an insulator. Wherever practicable, Electricity North West invests
in low SF(6) loss distribution equipment.
The total mass of SF(6) controlled by the Group in 2010/11 was
17,667kg (2010: 20,867kg). The annual leakage of SF(6) , as
recorded at 1 April 2011 equated to 260kg (2010: 702kg), or 1.47%
(2010: 3.36%) of the inventory. The significant reduction is
primarily as a result of our investment to replace the ageing
Whitegate substation in East Manchester.
To further minimise SF(6) losses due to sampling activities,
sampling intervals are restricted to a frequency of once every four
years for each respective Gas Insulated Switchgear ('GIS') plant.
Additionally, refurbishment operations are not undertaken to
prolong the life of the GIS equipment. Items of GIS plant reaching
the end of their operational life are removed from site by
specialist contractors and are sent back to the manufacturers to
ensure that the SF(6) is disposed of correctly by a licensed waste
company.
Oil reprocessing
The reprocessing of PCB-free transformer oils at our Whitebirk
central oil reprocessing depot facility is a long-established
practice, which ensures the efficient reuse of insulating oil that
would otherwise require disposal via specialist waste contractors.
The recycling of the oil ensures that the need for additional
quantities of replacement oil is minimised.
Recycling of waste
The production of spoil waste at source from street works
activities is minimised where economically viable by the use of
trenchless cable laying techniques. Where excavation is required
spoil is recycled and aggregates from recycled sources are used
where possible.
Electricity North West recycles the majority of waste generated
from its operations. Waste is returned to operational bases from
sites and then transferred for recycling in accordance with the
Group's environmental permits.
Distributed Generation ('DG')
Apart from the very largest offshore projects, low-carbon
generation sources from renewables and combined-heat-and power
('CHP') are typically of an appropriate scale to connect to our
network. New generators may sometimes require new connections,
network reinforcement or changes in the use of our existing
network.
Serving generator customers is currently a small business
component. However it is set to grow in the future as the UK
invests in a low-carbon sustainable energy supply. We have recently
reviewed our strategy to provide smaller generators with
information to help them get connected cheaply and efficiently, and
as the take up of small renewable generation continues driven by
the Feed in Tariff, we will continue to look to improve our
service.
Electricity North West annually reviews its forecasts of
generator connections at all scales; from large projects through
intermediate scale developments to micro-generation.
Forecasting future generation connections is subject to
considerable uncertainty, but we are forecasting a further 1 GW of
additional generation in the last four years of DPC5, of which
around 45% is expected to connect during the next year 2011/12,
primarily due to two large offshore DG projects. A significant
shift is expected from the dominance of a small number of large
projects to a much larger number of small renewable and CHP schemes
distributed over a wider area.
New technology and innovation
Electricity North West has been active in investing in research
and development, spending over GBP6m in the last five years to
support 60 innovative projects.
An example of innovation has been the work Electricity North
West has undertaken with manufacturers Kelvatek to develop a smart
fuse. When deployed it will reduce the restoration time for low
voltage transient faults to less than three minutes, where
previously an engineer would have needed to visit the site.
The Group invested GBP1.5m in research and development
expenditure (Innovation Funding Initiatives) in the year ended 31
March 2011 (2010: GBP1.3m).
In 2010 the Low Carbon Network Fund ('LCNF') was introduced to
promote radical changes in electricity networks. The fund will
allow up to GBP500m to be spent nationally to try out new
technology, operating and commercial arrangements, with the
objective of helping all DNOs to understand what they need to do to
provide security of supply at value for money as Great Britain
moves to a low-carbon economy.
We have expanded our research activities particularly in
relation to smart grids and the challenges of future networks. We
are collaborating with a range of local stakeholders to develop
bids for LCNF funding.
Through continuing investment in innovation Electricity North
West will work with our partners in industry and academia to
continue to seek new solutions to network challenges.
Network Investment
Between 2010 and 2015 the Group plans to invest over GBP1.4bn in
the region's infrastructure, including GBP200m for new connections,
GBP120m to reinforce the network and GBP420m to replace assets at
the end of their operational lives.
Our DPC5 Network Investment Plan 2010-2015 is available on our
website (www.enwl.co.uk).
A number of large projects and programmes of work have been
successfully completed within the year, including:
-- The asset replacement of 132kV switchgear at Whitegate
substation near Manchester where the existing 13 circuit breakers
and associated plant were replaced for condition and environmental
reasons.
-- A major 132kV cable replacement has been completed on the
Rochdale to Belfield circuit which was replaced because of its poor
condition.
-- A major 132kV overhead tower line refurbishment scheme has
been carried out on the Bold, Parkside Golborne circuit, where the
line was refurbished with sections being removed and replaced with
underground cable.
Electricity North West has made good progress on flood
protection of critical substation sites by completing the
protection of nine sites and has had a significant programme of
substation security improvements, which has included the
installation of electric fences at six sites based on risk
assessments and the growing impact of metal theft.
IT Refresh Programme
In September 2010, the company signed a contract with Wipro
Technologies for delivery of our IT Refresh Programme ('ITRP') and
to provide ongoing IT support services for the organisation. The
key objectives of the ITRP are to separate the hosting and
operation of IT systems from UU, transition them into our own
estate and to provide a platform for future transformation aligned
to our business plan and IT strategy.
The ITRP has made good progress to date and key milestones
achieved include the successful implementation of our own IS
Service Desk, the migration of the SAP system (supporting key
Finance, HR and Procurement processes) and the commencement of
desktop refresh and user migration. The programme is on track to
complete the separation of services from UU by September 2011.
Electricity North West 21 Century Network
BT Group PLC is changing its existing network to a system known
as 21(st) Century Network. This new network will be unable to offer
guaranteed times for the transfer of data signals. Our control and
protection systems require a level of certainty in the time taken
for a signal to transfer between our substations so that we can
continue to safely and securely operate our network.
In order to maintain the required signal transmission times we
are constructing our own data network of fibre over which we have
total control.
Employees
Our people are key to achieving our business strategy,
delivering high levels of customer service and enhancing
shareholder value. Electricity North West is committed to
developing an engaged, motivated and high performing workforce to
enable the Group to achieve its vision and goals, whilst putting
safety at the core of how we operate.
Workforce renewal
As an organisation we are very conscious that we have an age
profile that means we have a significant number of experienced
staff eligible to retire over the next eight to fifteen years in
particular. In order to address this issue, and with the aid of a
specific DPC5 allowance, we are engaged in a programme of
apprentice and graduate recruitment at levels that have not been
seen in the Company in many years. We are also retraining and
up-skilling staff where appropriate. To support the increased level
of training this will require we are planning to invest in a new
fully equipped training centre that can deliver both classroom
based and practical learning.
Learning and development
Electricity North West is committed to enhancing its employees
skills as well as providing equality of opportunity in learning and
development. We are committed to developing a nurturing culture in
which employees feel valued to reach their full potential and to
understand how their own contribution adds value to the
Company.
Employee engagement
Employee engagement is a key measure for the Group and its
leaders. In 2011 Electricity North West completed its first,
independently facilitated, Employee Opinion Survey since the
acquisition of ENWSL. Based on an excellent response rate of 86%,
the survey indicated an overall positive employment engagement
score of 67%, a baseline against which we will measure future
improvement.
Equality and diversity
Electricity North West sets policies and encourages a working
culture that recognises, respects, values and harnesses diversity
for the benefit of the Company and the individual, and we are
committed to integrating equality and diversity into all that we
do.
Employees with disability
The Group is committed to fulfilling its obligations in
accordance with the Disability Discrimination Act 1995 and best
practice. As an equal opportunities employer, equal consideration
is given to applicants with disabilities in the Group's employment
criteria. The business will modify equipment and practices wherever
it is safe and practical to do so, both for new employees and for
those employees that become disabled during the course of their
employment.
Financial Performance
Group 2011 2010
====================================================== ========= =========
Revenue GBP394m GBP324m
Operating profit GBP210m GBP156m
Profit before tax GBP139m GBP17m
Operating cash flow GBP246m GBP218m
RAV Gearing 56% 57%
Interest cover 5.7 times 4.2 times
Capital expenditure on tangible and intangible assets GBP177m GBP174m
(cash flow)
====================================================== ========= =========
Revenue
Revenue has increased to GBP394m as a result of the increase in
DPC5 allowed revenues, rising RPI and the timing of the recovery of
allowed revenue. An over-recovery of revenue has arisen due to a
combination of price mix and volume changes and, under regulatory
rules, will be passed back to customers through reduced pricing in
the year ending 31 March 2012.
As discussed in more detail under 'Principal risks and
uncertainties', the Company has submitted a request to restate its
losses position for the year ended 31 March 2010. If agreed by
Ofgem, this restatement will reduce the total revenue
over-recovery.
Operating profit
Operating profit has increased by 35% over the prior year to
GBP210m as a result of increased revenue and the delivery of
efficiencies arising from the acquisition and integration of UUES
and from the Company's DPC5 transformation programme. The cost
savings have been off-set by non-recurring costs associated with
the acquisition and integration activities and increased
depreciation.
Business transformation and efficiencies
The acquisition and integration of UUES provides an efficient
business structure to deliver investment in the North West's
electricity network. The integration of UUES is progressing to
plan. We have successfully in-sourced back-office services
previously managed by UU and the ITRP is on track to complete the
separation of IT services from UU by September 2011.
Targeted efficiency initiatives are being successfully realised
through a business wide transformation programme. The Company has a
target of a minimum of GBP150m of efficiency savings over the DPC5
period (total expenditure net of costs of implementation in 2007/08
prices).
Against this target, the Company has realised efficiencies of
approximately GBP50m in 2010/11 (out-turn prices).
Profit before tax
The increase in operating profit coupled with reduced finance
expense causes the increase in profit before tax.
Net finance expense for the year was GBP71m (2010: GBP139m). The
31 March 2011 position reflects adverse fair value movements of
GBP30m on financial instruments (2010: GBP79m).
Taxation
The Government announced on 23 March 2011 that the UK
corporation tax rate will reduce from 28% to 26%, effective from 1
April 2011. The reduction in corporation tax rate contributes to a
deferred tax credit to the Group's income statement of GBP20m. The
deferred tax provision has remained broadly unchanged year on year
given offsetting taxation on the IAS 19 (Pensions) credit in the
year.
Dividends and dividend policy
In the year ended 31 March 2011, the Company paid dividends of
GBP62m (2010: GBP218m). This figure represents an interim payment
of GBP15m paid in June 2010 and a further interim payment of GBP47m
paid in December 2010. The Directors do not propose a final
dividend for the year ended 31 March 2011 (2010: none).
Electricity North West's dividend policy is that the Company
shall distribute the maximum amounts of available cash in each
financial year at semi-annual intervals, after taking due account
of forecast business needs and the Group's treasury policy on
liquidity. Distributions are limited by the maximum amount
permitted by applicable law in any financial year and are subject
to the Company's licence obligations.
Financial Position
Property, plant and equipment
The Company's business is asset-intensive and highly regulated
both operationally (e.g. Electricity Safety & Quality
Continuity (Amendment) Regulations, 'ESQCR', legislation) and
economically. The Group allocates significant financial resources
to the renewal of its network to maintain services, improve network
reliability and customer service and to invest to meet the changing
demands of the UK energy sector. The total cost of the Group's
property, plant and equipment at 31 March 2011 was GBP3,337m, with
a net book value of GBP2,310m. In 2011, the Group invested GBP188m
in capital expenditure. This is mainly related to a large number of
projects for the renewal and improvement of the network as
described above. New investment is financed through a combination
of operating cash flows and increased leverage capacity from a
growing RAV.
Goodwill
Goodwill has increased in the year as a result of the GBP10m
goodwill arising on the acquisition of UUES.
Working capital: Inventories, Trade and other receivables and
Trade and other payables
As a result of the acquisition of UUES, the Group holds
inventories of approximately GBP5.6m (2010: GBPnil).
Group 'Trade and other receivables' have increased to GBP78m
(2010: GBP35m) primarily as a result of delays in revenue
receipts.
Group 'Trade and other payables' have increased to GBP152m
(2010: GBP96m) mainly as a result of working capital timing
differences arising following the acquisition of UUES; previously
the credit period with UUES was 10 days from receipt of invoice and
now the Group has direct management of all its trade creditors and
accruals. UUES creditor days were 24 as disclosed in their March
2010 financial statements.
Net debt
2011 2010
GBP'm GBP'm
================================== ======= ======
Cash and deposits 167 72
Borrowings repayable:
- within one year - -
- after one year (1,044) (899)
---------------------------------- ------- ------
Net debt (877) (827)
================================== ======= ======
Net debt has increased by GBP50m due to the UUES acquisition,
capital investment and dividends paid exceeding the net operating
cash flows generated by the Company.
Borrowings repayable after one year include bonds with long term
maturities of GBP647m (2010: GBP635m). These bonds have nominal
value of GBP450m at 8.875% maturing in 2026 and GBP100m of 1.4746%
index linked bonds maturing in 2046. On 1 March 2011, ENWL borrowed
GBP135m under a new long term loan from the European Investment
Bank. This 1.5911% index linked loan matures in 2024. Also included
in long-term borrowings are inter-company loans at 31 March 2011 of
GBP263m (2010: GBP265m).
Pension obligations
The valuation of the Company's pension scheme under IAS 19
results in a net pension deficit at 31 March 2011 of GBP41m (31
March 2010: GBP143m). As described under 'Principal risks and
uncertainties', the pension scheme valuation as at 31 March 2010
(using assumptions agreed by the Trustee, in consultation with the
Scheme Actuary) has been agreed with the scheme's Trustee and a
deficit repair schedule agreed over 15 years, which aligns to
Ofgem's funding assumptions.
Commitments
Details of commitments and contractual obligations are provided
in notes 9, 10 and 25 of the financial statements.
Cash flow
The Group's net cash generated from operating activities after
taxation paid was GBP215m, an increase of GBP28m from 2010,
reflecting favourable operational performance partially offset by
adverse working capital movements. The Group net cash outflow from
investing activities was GBP153m, an increase of GBP23m. Net cash
generated from financing activities was GBP30m (2010: GBP37m) as a
result of the draw down of a GBP135m loan from the European
Investment Bank, offset by equity dividends payable of GBP62m and
transfers to money market deposits of GBP40m.
Liquidity
The Group's primary source of liquidity is retained profit and
funding raised through external borrowings. The Company has an
agreed regulatory price control to 2015 which provides certainty
for a large majority of the Group's revenues from ongoing
operations, providing both stable and predictable cash flows.
Short-term liquidity
Short-term liquidity requirements are met from the Group's
normal operating cash-flows. Further liquidity is provided by cash
and short-term deposit balances.
In total at 31 March 2011, unutilised committed facilities of
GBP80m (31 March 2010: GBP224m), together with GBP167m (31 March
2010: GBP72m) of cash and short-term deposits provide substantial
short-term liquidity for the Group and Company.
Utilisation of undrawn facilities will be with reference to RAV
gearing restrictions for the North West Electricity Networks
(Jersey) Group.
Long-term liquidity
The Group's term debt was GBP1,044m at 31 March 2011, compared
with GBP899m at 31 March 2010. Amounts repayable after more than
five years comprise bank and other loans.
The Group's long-term borrowings mature at dates between 2012
and 2046. Our long-term debt ratings have remained stable since
July 2009. Currently ENWL and ENW Finance plc are rated BBB+ with
stable outlook by Standard and Poor's, Baa1 with stable outlook by
Moody's Investors Service and A- with stable outlook by Fitch
Ratings. Our short-term debt ratings are A-2 and F2 with Standard
and Poor's and Fitch Ratings respectively.
Summary
The Board has reviewed the 31 March 2012 Budget, the Company's
DPC5 business plan and the requirements of the Company's licence
Condition 30 ('availability of resources') and considers that the
Company has sufficient liquidity to meet its anticipated financial
and operating commitments for the next 12 months.
Treasury Policy
The Group's treasury function operates with the delegated
authority of, and under policies approved by the Board. The
treasury function does not act as a profit centre and does not
undertake any speculative trading activity. It seeks to ensure that
sufficient funding is available in line with policy and to maintain
the agreed targeted headroom to key financial ratios.
Long-term borrowings are at fixed rates to provide certainty or
are indexed to inflation to match the Group's ('RPI') inflation
linked cash flows.
Treasury operations
The principal financial risks which the Company is exposed to
and which arise in the normal course of business are credit risk,
liquidity risk (discussed above) and market risk. Market risk
includes foreign exchange, interest rate, inflation and equity
price risks.
Credit (counterparty) risk management
Exposure limits with counterparties are reviewed regularly. The
Company has adopted a policy of only dealing with creditworthy
counterparties as a means of mitigating the risk of financial loss
from defaults. The Company's exposure and the credit ratings of its
counterparties are continuously monitored and the aggregate value
of transactions concluded is spread amongst approved
counterparties.
Market risk management
The Group manages interest rate exposure by seeking to match
financing costs as closely as possible with the revenues generated
by its assets. The Group's exposure to interest rate fluctuations
is periodically managed in the medium-term through the use of
interest rate swaps.
Derivatives are used to hedge exposure to fluctuations in
interest rates and inflation. A derivative is a financial
instrument, the value of which changes in response to some
underlying variable (e.g. an interest rate), that has an initial
net investment smaller than would be required for other instruments
that have a similar response to the variable, and that will be
settled at a future date. At present, the Company uses interest
rate swaps to manage interest rate risk and inflation swaps to
convert fixed rate debt to index-linked borrowing. No formal hedge
accounting is undertaken.
The Group's use of derivative instruments relates directly to
underlying indebtedness. No speculative or trading transactions are
undertaken. The proportion of borrowings at effective fixed rates
of interest for a period greater than one year is set in
conjunction with the level of floating rate borrowings and
projected regulatory revenues that are exposed to inflationary
adjustments (index linked).
Other than purchases of plant and machinery denominated in
foreign currencies, the Company's cash flows are in sterling and
the Group has no material exposure to foreign currency exchange
rate movements.
Given that the regulated revenue which the Company earns is
linked to inflation, the Company has sought to match a proportion
of the cost of funding the business using a combination of an
inflation-linked bond and new long term bank loan and fixed rate
debt with overlaying index-linked swaps.
During the year, the Company entered into interest rate swaps to
amend the interest rate profile on a nominal GBP250m of the
Company's fixed rate bond, maturing in 2026. The swaps mature in
2013 and have the effect of better aligning the Company's interest
rate costs with the profile of revenue set by Ofgem over the DPC5
period to 2015.
These derivatives do not qualify for hedge accounting and all
movements in fair value are reflected in the income statement. At
31 March 2011 the fair value of these new instruments was GBP16m
(liability) (31 March 2010: GBPnil).
By seeking to match the cost of funding to revenue streams, the
risk of movements in inflation levels is mitigated. Nonetheless,
there will inevitably not be a perfect match between the cash
inflows and outflows. The Company therefore retains some exposure
to movements in inflation rates.
IAS 39 'Financial Instruments: Recognition and Measurement'
limits the use of hedge accounting, increasing the potential
volatility of the income statement.
During the year, this volatility has been experienced, in
particular from the fair value movement arising on the bond held at
fair value, the index-linked swaps, back-to-back swaps and embedded
derivative.
This has led to fair value losses of GBP30m being recognised in
the income statement for the year (2010: GBP97m fair value loss).
As noted above, these movements have no cash flow impact in this
year or the prior year.
Critical accounting policies
The Group and Company prepares its consolidated financial
statements in accordance with International Financial Reporting
Standards ('IFRS') as adopted for use in the European Union,
including International Accounting Standards ('IAS') and
interpretations issued by the International Financial Reporting
Interpretations Committee ('IFRIC'). Therefore the Group and
Company financial statements comply with Article 4 of the EU IAS
Regulations. As such, the Directors are required to make certain
estimates, judgements and assumptions that they believe are
reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the years
presented.
On an ongoing basis, the Group evaluates its estimates using
historical experience, consultation with experts and other methods
considered reasonable in the particular circumstances. Actual
results may differ significantly from the estimates, the effect of
which is recognised in the year in which the facts that give rise
to the revision become known.
Principal risks and uncertainties
The Group operates a Risk Management and Control Framework to
evaluate and manage identified risks as described below.
The Group considers the following risks to be the principal ones
that may affect Electricity North West's performance and results
but cautions that the risks listed in this section do not address
all the factors that could cause results to differ materially.
There may be additional risks that the Group does not currently
know of, or that are deemed immaterial based on either information
currently available or the Group's current assessment of the
risk.
Retail Price Index ('RPI') fluctuations result in volatility in
key metrics
Fluctuations in RPI impact the Company in a number of ways, most
notably in revenues and Regulatory Asset Value ('RAV'). In order to
monitor potential exposure to fluctuating RPI, each month the
Company sources RPI forecasts from a selection of financial
institutions. These are used to refresh the Company's forecasts and
sensitivities on at least a quarterly basis. Any significant
exposure arising from these updates is advised to the Executive
Team and Board as appropriate.
The changing Regulatory Framework may adversely affect the
Company
There is a risk that Ofgem's revised ('RIIO') framework for
future price controls may adversely affect the cash flow,
financeability and/or valuation of the Company, if implemented in
an unfavourable manner. Ofgem's RIIO objectives set out the
principles that the regulator will employ in agreeing future price
controls with distribution companies. These include a number of
significant changes from the principles employed in previous price
controls. In the main they represent an opportunity to grow the
Company by demonstrating the key role that networks have to
undertake in the transition to a low carbon economy.
Electricity North West is actively engaged in the consultations
on the gas and transmission price controls to influence Ofgem's
implementation of its new principles in a manner that would be
beneficial to our customers and the Company if these principles
were replicated in our next price control ('RIIO ED1').
Financing our investment needs
The Group and the Company are financed to a large extent by long
term external funding. There is no guarantee that new external
funding requirements will be financed by external debt providers.
As described in further detail above, forecast operating
cash-flows; the present cash position and committed undrawn
facilities provides sufficient liquidity to meet the Company's
anticipated financial and operating commitments for the next 12
months and the Company has in place a financing strategy to meet
future financing needs; including a regular dialogue with the main
institutional debt investors.
The Company's charging policies may be judged to be
anti-competitive
As competition in the provision of connections to distribution
systems and in the ownership of new electricity networks is in the
early stages of development there is a risk that the Company's
charging statements, deemed appropriate in a monopoly environment,
are viewed by some affected parties as being out of step with the
development of the new market, leading to a potential for challenge
under Competition Law.
The Company has worked with the industry and Ofgem on the
development of a common distribution charging methodology for use
of system charges which will reflect the requirements on DNOs under
a licence not to restrict, distort or prevent competition. Ofgem
made a collective licence modification on 1 July 2009, which
requires DNOs to implement the common charging methodology with
effect from 1 April 2010.
As a concurrent regulator with the Office of Fair Trading
('OFT'), Ofgem has powers under the Competition Act 1998 to
investigate suspected anti-competitive activity and take action for
breaches of the prohibitions in the legislation in respect of the
gas and the electricity sector in Great Britain. These powers
include the power to impose fines of up to 10 per cent of the
Company's revenue for the business year preceding the finding of
the infringement. Any agreement which infringes the Competition Act
1998 may be void and unenforceable. Breaches of the Competition Act
1998 may also give rise to claims for damages from third
parties.
On 20 January 2009, Ofgem announced that, pursuant to its powers
under Section 18 of the Competition Act 1998, it had opened an
investigation into allegations of abuse of a dominant position by
the Company. The allegations relate to the terms imposed by the
Company on independent distribution network operators ('IDNOs')
connecting to the Company's pre-existing network, and whether these
terms foreclose the market to competitors in the area in which the
Company is the incumbent DNO.
In respect of the specific allegations against the Company, we
submitted to Ofgem on 18 March 2009 a detailed response to the
complaint which concluded that, in the Company's opinion, there
were insufficient grounds for Ofgem to continue with its
investigation. In July 2010 Ofgem presented an outline of its
findings and in November 2010 the Company provided a comprehensive
response that demonstrated there was no substantial case for us to
answer. There has been no dialogue or correspondence on this
investigation since that submission.
There is a risk that the Company is in breach of its Licence
obligations or other statutory or regulatory obligations
Breach of a licence condition can attract fines of up to ten
percent of the Company's annual revenue in the year preceding the
date on which Ofgem gives notice of its proposal to impose a
penalty. Ofgem has published a statement of the policy that it
intends to apply to the imposition of any penalty and the
determination of its amount. Any such penalty can be appealed, on
procedural grounds only, to the High Court. In practice, many
regulatory issues arising between licensees and Ofgem are settled
without the need to resort to formal proceedings. However, where
Ofgem is satisfied that a licensee is in breach of the terms of its
licence, it has powers to secure compliance by means of an
enforcement order. If a licensee does not comply with the order, as
well as potentially giving rise to third party action, compliance
can be enforced by the courts and Ofgem may revoke the licence.
The Company has a well established procedure for ensuring
licence compliance. All business processes are designed to be
inherently compliant with all relevant licence obligations. In
addition the Company has established a Table of Accountabilities
for licence compliance. The Table details the obligations under the
standard licence conditions that we must adhere to, the Executive
Team member responsible for the relevant strategy and
implementation and the specific processes for monitoring the
licence conditions. The Table is updated annually and has been
streamlined to reflect the changes arising out of DPC5 and
organisation changes within the Company since the Table was last
revised. Compliance with the Table of Accountabilities is an
integral part of the annual Group Internal Audit plan.
The losses incentive mechanism may result in revenue
reduction
There is a risk that DPC5 revenues will be adjusted downwards in
2012/13 as a result of the Losses Rolling Retention Mechanism
('LRRM'). This mechanism (part of the previous price control, DPC4)
allows for losses benefits to be retained for a period of five
years, providing the benefits are sustained, i.e. losses are lower
at the end of DPC4 than they were at the start.
Fluctuations in settlement data used to determine losses can
have a major impact on performance, though Ofgem have stated that
they will take steps to ensure there are no windfall gains or
losses arising from settlement data corrections.
The final year of DPC4, which is key to the calculation of the
LRRM, saw major fluctuations in settlement data due to corrections
being applied by electricity suppliers.
This has been recognised at industry level as it could
potentially distort the LRRM calculation. Ofgem has already allowed
one DNO group to restate their losses position with regard to the
final year of DPC4. Electricity North West has submitted a similar
request. Detailed analysis of settlement data continues to ensure
the Company achieves the optimal outcome from the LRRM.
Delivery of network investment plans and outputs
The Company has agreed its network investment requirements for
the period to 31 March 2015 with Ofgem. These plans include a
significant increase in the volume of activity particularly with
respect to the refurbishment and renewal of overhead lines from
both an operational and safety perspective. Failure to deliver the
capital plans may lead in some circumstances to non-compliance with
safety legislation and perceived non-delivery by Ofgem and our
customers, leading to potential claw-back of efficiencies,
penalties under the Outputs regime and/or loss of credibility for
future regulatory submissions.
Electricity North West has developed implementation plans to
ensure sufficient contractor resources are procured, work content
of projects is designed in a timely manner and processes are in
place to fully deliver our Outputs efficiently.
A major event causing significant service interruptions could
adversely affect profitability
The majority of service interruptions relate to minor network
issues that are rectified promptly with limited effect on customer
supplies. However, the network occasionally experiences widespread
disruption, typically as a result of climatic effect, such as a
major storm or flooding. Such an event could cause a more
significant interruption to the supply of services (in terms of
duration or number of customers affected), which may have an
adverse effect on the Company's results or financial position due
to the impact of non-exempt events.
The Company has comprehensive contingency plans for all network
emergencies, including key contract resources such as mobile
generators and overhead line teams. These resources are contracted
to carry out the capital programme under business as normal, but
will be the first line of escalation in the event of a major event.
Our plans also include reciprocal arrangements with other DNOs to
provide resources should we need them.
Pension scheme obligations
The Company participates in both defined benefit (closed to new
members since 2005) and defined contribution pension schemes. The
principal scheme is a defined benefit scheme and the assets of the
scheme are held in Trust, independent of Company finances.
There is a risk that under performance of the pension scheme
investments and/or an increase in the scheme's pension liabilities
will give rise to a higher scheme deficit which requires increased
Company contributions. Currently efficient pension contributions
and the scheme deficit as at 31 March 2010 are recoverable through
the price controls set by Ofgem.
Active monitoring of the performance of the scheme's investments
is carried out formally on a quarterly basis by the pension
Trustee. The Trustee engages external professional legal, actuarial
and investment advice for all decisions taken and regularly
consults with the Company.
The scheme undertook an actuarial valuation as at 31 March 2010
which identified a funding deficit of approximately GBP145m (31
March 2008: GBP107m). Following constructive engagement between the
Company and the pension scheme Trustee, a revised deficit repair
contribution schedule has been agreed over a period of 15 years to
31 March 2025, in line with Ofgem's funding assumptions.
Our Board
Phil White FCA, CBE,
Independent Non-Executive Chairman
Phil joined the Board as Independent Non-Executive Chairman in
May 2010. Phil was Chief Executive of National Express Group plc
from 1997 to 2006, leading the business through a period of
considerable growth both in the UK and overseas. Phil is also
Non-Executive Chairman of Kier Group plc, Lookers plc and The Unite
Group plc and a Non-Executive Director of Stagecoach Group plc.
EXECUTIVE DIRECTORS
Stephen Johnson, Chief Executive
Steve joined Electricity North West in 2008 from Morrison plc
where he was Managing Director, having previously been with United
Utilities Group plc as Managing Director of its Industrial and
Commercial Business. Steve previously worked for Norweb and
Yorkshire Electricity and is a member of the Institute of
Engineering and Technology.
Michael McCallion FCA,
Chief Financial Officer
Michael joined Electricity North West in 2007 as Commercial
Director to manage the out-sourcing contract with UU. Following the
acquisition of ENWSL, he was appointed to his current role in
September 2010. Michael was previously Head of Capital Programme
Finance for United Utilities' regulated businesses and prior to
that he was a Marketing Finance Director with AstraZeneca plc. He
is a Fellow of the Institute of Chartered Accountants, having
qualified with PricewaterhouseCoopers.
NON-EXECUTIVE DIRECTORS
John Gittins, Independent Non-Executive
John is an Independent Non-Executive Director. He has been
Finance Director of NCC Group plc until February 2011. Prior to
that, John was Chief Financial Officer of Begbies Traynor Group
plc, Finance Director at Vertex Data Science and Group Finance
Director of Spring Group plc. John is a graduate of the London
School of Economics and qualified as a Chartered Accountant with
Arthur Andersen.
Niall Mills
Niall is Head of Infrastructure Asset Management, Europe for
Colonial First State Global Asset Management. Niall is also a
director of Anglian Water Group and has more than 20 years of
infrastructure experience.
Niall was previously Asset Director for Southern Water in the
UK. Prior to this, he held senior roles with Novar Projects,
Bechtel and North West Water Engineering. Niall has a Masters of
Business Administration from the London Business School, a Bachelor
of Engineering (Hons) and is a Chartered Member of the Institution
of Civil Engineers.
Mike Nagle
Mike Nagle was the Group Company Secretary & Solicitor of
SEEBOARD plc and Senior Vice President, Legal Services at Metronet
Rail. Having now retired as a solicitor, Mike is also a
non-executive director on the Boards of Greensands Holdings Limited
(the parent company of Southern Water) and Zephyr Investments
Limited.
Christine O'Reilly
Christine is Global Co-Head of Infrastructure for Colonial First
State Global Asset Management. Christine is also a director of
Anglian Water Group, CSL Limited and Care Australia. Prior to
joining Colonial First State, Christine was Chief Executive Officer
and Director of the Gasnet Australia Group, a top 200 ASX listed
company. Christine has more than 20 years of infrastructure and
financial experience including an early involvement in the
establishment of the regulatory framework for the Australian gas
industry, eight years with the investment bank, Centauras Corporate
Advisory Services, and audit experience with Price Waterhouse where
she qualified as a Chartered Accountant. Christine is a Bachelor of
Business.
Surinder Toor
Surinder is a Managing Director at JP Morgan Asset Management
and the global head of asset management for JP Morgan's
Infrastructure Investments Group. In addition to Electricity North
West, he holds a directorship in the holding company of Southern
Water. Previously, he was the Chief Financial Officer at Scotia Gas
Networks plc and prior to that he was Managing Director of American
Electric Power's European operations. He has also held positions
with Arthur Andersen, PowerGen plc and at PricewaterhouseCoopers,
where he started his career. Surinder holds an MA in Engineering,
Economics and Management from the University of Oxford and he is a
Chartered Accountant.
Corporate Governance Statement
Electricity North West is committed to a high level of corporate
governance commensurate with its status as a public interest
entity.
In line with the key Governance theme in our ESG strategy,
'ensuring Electricity North West applies best practice corporate
governance', the Company has committed to provide a sustainability
report at the end of each financial year using the Global Reporting
Initiative ('GRI') sustainability reporting guidelines.
The Combined Code
As a private Company, having listed bonds and not listed equity,
the Company has not been bound to report on the Combined Code of
Corporate Governance (the 'Code') at any time during the period
under review. It is, however, required by Standard Condition 44.12
of its licence, to include a corporate governance statement in its
regulatory financial statements that has the coverage and content
of the corporate governance statement that a quoted company is
required to prepare under the Combined Code on Corporate Governance
issued under the Financial Services Authority's Listing Rules and
interpretations on corporate governance. In the interests of
transparency for our stakeholders, the Board has decided to include
this same statement in our statutory financial statements, in
addition to our regulatory financial statements.
Compliance statement
The Listing Rules require UK quoted companies to describe their
corporate governance from two points of view, the first, explaining
adherence to the Code's main principles and the second, explaining
non-compliance with any of the Code's provisions.
The intention of the Code is that companies should be able to
explain their governance in the light of the principles which have
led them to a particular approach. The Directors are of the opinion
that, in the instances where the Company does not comply with
certain provisions of the Code, that approach is justifiable given
the privately held nature of the Company and that the provisions of
the code are disproportionate or less relevant in their case.
Set out below and in the following pages, the Company outlines
its compliance or explains its non-compliance with the provisions
of the Code.
Board effectiveness
An effective Board is in place, whose major role is to promote
the success of the Company by creating value for the Company's
shareholders and providing an efficient, sustainable service to our
customers and stakeholders. In order to achieve this, the Board
meets regularly to provide leadership, set strategic direction and
objectives and ensure that appropriate financial and other
resources are made available to enable the Company to meet those
objectives.
The Company has identified a number of key areas that are
subject to regular reporting to the Board. There is in place a
schedule of decisions reserved for the Board which includes:
strategy approval and management; succession planning; business
plan approval; internal controls; Company policies; and delegation
of authority. Projects and contracts have various limits of
approval to Board level.
The names of the current Directors, who served during the year,
and their biographical details, are set out on page 20.
Since 1 April 2010, the Board has formally met eight times with
seven supplementary meetings (primarily associated with the
acquisition of ENWSL). Attendance by individual Directors at
meetings of the Board, Audit Committee and Remuneration Committee
during the year ended 31 March 2011 was as follows:
Board
Scheduled/
Scheduled/ Supplementary
Supplementary meetings
during appointment attendance
----------------- -------------------- ---------------
P White (Chair) 7/5 7/5
S Johnson 8/7 8/5
M McCallion 4/1 4/1
J Gittins 8/7 6/4
N Mills 8/7 7/5
M Nagle 1/1 1/0
C O'Reilly 1/1 1/0
C Thompson 4/6 2/4
S Toor 8/7 5/5
----------------- -------------------- ---------------
Audit Committee (Non-Executive)
Committee Committee
meetings meetings
during appointment attendance
---------------- -------------------- ------------
J Gittins 2 1
N Mills 2 2
M Nagle 1 1
C O'Reilly 1 1
S Toor (Chair) 2 1
---------------- -------------------- ------------
Remuneration Committee (Non-Executive)
Committee Committee
meetings meetings
during appointment attendance
----------------- -------------------- ------------
P White (Chair) 1 1
N Mills 1 1
M Nagle 1 1
C O'Reilly 1 1
S Toor 1 1
----------------- -------------------- ------------
The Remuneration Committee was established on 28 January 2011
and has met once in the period under review.
In line with the Company's commitment to achieving the highest
standards of health and safety for all our customers, employees and
contractors, a Health and Safety Committee was established during
the year. Its remit includes: setting the health and safety
strategy, objectives and targets; reviewing and monitoring
performance; and reporting to the Board.
The Committee first met in January 2011 and has met once in the
period under review.
In addition, a Pensions Committee was established during the
year. Its duties include monitoring the investment strategy adopted
for the defined benefit pension liabilities by the Trustee and to
input into the efficient running of the pension scheme to meet
regulatory requirements. The Committee has met once in the period
under review.
The terms of reference of each committee are available to the
shareholders of the company and can be obtained by written request
from the Company's registered office.
As there is no formal nominations committee of the Board, as
further discussed below, the number of meetings and attendances as
required by the Code has not been presented.
Formal meetings between Non-Executive Directors without
Executives being present take place and they provide a forum to
raise any issues. Phil White was appointed Chairman of the Company
on 3 May 2010 and therefore it was not considered appropriate to
review his performance for the period under review.
Directors are aware of their right to ensure that any concerns
they have about the running of the Company or a proposed action
which cannot be resolved are recorded in the Board minutes.
Non-executive Directors are further aware of their right, on
resignation, to provide a written statement of any concerns for
circulation to the Board.
The Board has ensured that an appropriate level of Directors'
and Officers' insurance is in place for Directors and other
Officers of the Company.
The Chairman and Chief Executive
Phil White met the criteria of independence set out in the Code
on appointment as Chairman and there is a clear division of
responsibilities between the Chairman and the Chief Executive.
These responsibilities are set out in their respective contracts.
Accordingly, the Company is in compliance with the provisions
contained in this section of the Code.
Board balance and independence
Phil White and John Gittins fulfil the requirements of
independence as set out in the Code. There are four additional
Non-Executive Directors on the Board, each of whom represents an
ultimate shareholder. The Company believes that these Directors
together with the CEO and CFO, represent a good balance of
Executive and Non-Executive Directors such that no individual or
small group of individuals can, or do dominate the Board's decision
making.
Since the appointment of Phil White, the Company has had two
independent non-executive directors on its Board. The Company is
not an equity listed company and therefore the quota of independent
directors listed in the Code is not considered appropriate for the
Company, having regard to its privately held status.
As there are representatives of both shareholders on the Board,
it has not been considered necessary to appoint a Senior
Independent Director to be available to shareholders as required by
the Code.
Appointments to the Board
The Board is satisfied that the process of appointing new
Directors to the Board is rigorous and transparent. Succession
planning is in place for the Executive Team and senior management
to ensure the Company has the appropriate mix of skills and
experience.
There is no formal Nominations Committee for the appointment of
Directors and the Company does not comply, therefore, with the
sections of the Code which deal with Nomination Committees.
The Remuneration Committee has been delegated this function by
the Board, however, and an external recruitment company was used in
the appointment of both Independent Non-Executive Directors.
The terms and conditions of Non-Executive Director appointments
are made available to shareholders. The expected time commitment is
conveyed to the Director, either in written or verbal form and all
Directors confirm that they have sufficient time to fulfil the
role. The Board is regularly updated on other significant
appointments for all Directors.
Information and professional development
All Directors receive comprehensive information on a regular
basis. Board papers are distributed via the Company Secretary's
office sufficiently well in advance of the relevant meeting to
allow time for Directors to be fully briefed. The papers are
detailed enough to enable the Directors to obtain a thorough
understanding of the management and financial performance of the
Company and its business. In addition, workshops are held
throughout the year to enable Directors to better understand major
projects or processes in more depth.
During the year under review, the minutes of Board meetings and
of any Committee meetings were circulated to all members as soon as
practicable. The Company Secretary assists with professional
development when required and advises on governance matters both on
an individual basis and in the form of papers to the Board.
Directors receive an induction on joining the Board which is
tailored to enable them to discharge their duties effectively.
Shareholders were invited to meet prospective candidates in the
recruitment of an independent Non-Executive Director in July 2009
and again in April 2010.
All Directors are aware of their right to have access to
independent professional advice at the Company's expense where
necessary to fulfil their responsibilities as directors and all
Directors have access to the advice and services of the Company
Secretary. The removal of the Company Secretary is a matter for the
Board as a whole.
Performance evaluation
The Chairman conducted an evaluation of the Board's performance
by questionnaire during the period under review. The Chairman has
initiated an external Board evaluation in May 2011, the results of
which will be reported via Mr J Gittins, an Independent
Non-Executive Director, to the Board.
Re-election of Directors
As a private Company, the Company is not required to hold AGMs
unless requested by the shareholder. The Articles of the Company do
not require that Directors retire by rotation. The Company has
strong links, however, with its ultimate shareholders: Board
membership includes shareholder representatives and although the
Company is not compliant with this section due to its private
status, shareholders are involved in Director appointments to at
least as great an extent as if re-election took place at an
AGM.
Level and make-up of remuneration
Levels of remuneration are reviewed in order to attract, retain
and motivate Executive Directors ('Executives') of sufficient
quality to deliver the objectives of the Group.
Performance-related elements of remuneration formed a
significant portion of the total remuneration package of the
Executive Directors in the year under review and these are linked
to both corporate and individual performance objectives.
Short term corporate objectives are based on a balanced
scorecard approach with approximately 55% of the total related to
financial performance and efficiency and 45% of the total
comprising key operational metrics. The long term bonus is based on
financial performance and DPC5 comparative performance, as assessed
by Ofgem, and is deferred until June 2015.
Share options are not offered as an incentive to Executives or
Non-Executive Directors as the Company is private. Remuneration for
Non-Executives is reviewed by the Remuneration Committee, which
ensures that this reflects the time commitment and responsibilities
of the role.
As a private Company, a remuneration report is not required to
form part of the Company's Annual Report and therefore the Company
does not comply with this section.
The Remuneration Committee is careful to ensure that
compensation arrangements in Executives' terms of appointments are
appropriate and not designed to reward poor performance.
The Executives' service contracts are designed to reward good
performance and the notice periods are set at one year or less.
Remuneration policy and procedure
The Remuneration Committee sets the policy and procedures for
Executive remuneration and for setting the remuneration packages of
Executive Directors. No Director is involved in setting his or her
own remuneration.
The Board has established a Remuneration Committee, the terms of
reference of which are available to shareholders. Membership is
solely made up of Non-Executive Directors including one Independent
Non-Executive director, Phil White, who chairs the Committee and
the Board. The Company does not, therefore, comply with this
section of the Code. The Board is confident, however, that Phil
White provides independent and objective chairmanship of the
Committee.
The Committee has responsibility to make recommendations to the
Board on the policy and framework for the remuneration of the
Executive Directors, approve employment related benefits for other
Company employees and implement employees' bonus and long term
incentive plans. The Remuneration Committee has responsibility for
setting remuneration for the Company's Executive Team.
The Board use external consultants to provide benchmark data for
base salary, bonus and other benefits of Directors and the
Executive Team. These are reviewed annually and pension benefits
are considered when reviewing the overall compensation package.
There is no entitlement nor is there a commitment to award an
increase year on year.
The Remuneration Committee also determines the remuneration of
the Non-Executive Directors. The Remuneration Committee, comprising
shareholder representatives, approves all long-term incentive
schemes and significant changes to existing bonus schemes.
Financial Reporting
The Board takes seriously its responsibility to ensure that a
balanced and understandable assessment of the Company's
performance, position and prospects is given in the Annual Report
and in any other report published by it for Ofgem or other
stakeholders as necessary.
Directors' responsibilities in relation to the preparation of
the financial statements and their statement in relation to
information given to auditors are given in the Directors'
Report.
As discussed in the Directors' Report and accounting policies,
after making diligent enquiries, the Directors have a reasonable
expectation that the Company has adequate resources to continue in
operation for the foreseeable future. Accordingly, they continue to
adopt the going concern basis in preparing the Company's financial
statements.
Internal control framework
The Board has accountability for reviewing and approving the
adequacy and effectiveness of internal controls operated by the
Group, including financial and operational controls; regulatory
compliance and reporting controls; and risk management.
As indicated, the Board has delegated responsibility for such
review and approval to its Audit Committee. The Company's
affiliates, ENW Capital Finance plc and ENW Finance plc also
operate Audit Committees.
It is the responsibility of management, through the Executive
Team, to implement Board policies on risk and control. The
Executive Team is responsible for identifying, approving,
monitoring and enforcing key policies. Each year management reviews
all controls including financial, operational and compliance
controls and risk management procedures.
The internal control framework is designed to identify and
manage, rather than to eliminate, the risk of failure to achieve
the Group's business objectives and can only provide reasonable,
and not absolute, assurance against material misstatement or
loss.
The key features of Electricity North West's internal control
framework are:
-- a control environment with clearly defined organisation
structures, operating within a framework of policies and procedures
covering every aspect of the business
-- a well established 'Table of Accountabilities' which is
updated (as a minimum) annually, detailing the obligations under
the standard licence conditions that we must adhere to. It outlines
specific responsibility for compliance with each of our licence
conditions
-- a Capital Programme Management Group and Project Approvals
Group with defined policies and procedures, for planning, approving
and monitoring major capital investment projects
-- comprehensive business planning, risk assessment and
financial reporting policies and procedures; including the annual
preparation of detailed operational budgets for the year ahead and
projections for subsequent years
-- monthly monitoring of risks and control systems, within a
clearly defined risk management framework, with a centralised risk
register updated by each of our business directorates
-- a bi-monthly Board review of financial and non-financial
performance to assess progress towards objectives
-- a quarterly risk workshop held with the Executive Team where
key risks are assessed collectively in terms of impact, likelihood
and control strength, with an annual risk review with the Board
supporting this process
-- health and safety risk assessment and management processes
overseen by a committee of the Board
Formal briefings are provided to our employees on the internal
control framework including the requirements of the key policies
and internal control framework, as well as regular updates being
communicated to all employees as required.
Internal Audit
Our Risk, Control and Assurance team has responsibility to the
Audit Committee for independently assessing the adequacy and
effectiveness of the management of significant risk areas and
internal control in line with an annually agreed risk-based audit
strategy and plan. The internal audit team comprises both financial
and operational expertise and works closely with related areas of
assurance activity, including legal, health and safety and
regulation.
All internal audit activity is conducted by a single team under
the leadership of the Head of Enterprise Risk, Control &
Assurance. The role has a dual reporting line into the Audit
Committee Chairman and the Chief Financial Officer.
To supplement the audit programme, the Group uses external
financial and operational professionals, where appropriate, to
provide independent assurance of internal control processes in
accordance with a pre-defined scope.
In compliance with the Code, the Board regularly reviews the
effectiveness of the Company's system of internal control. The
Board's monitoring covers all controls, including financial,
operational and compliance controls and risk management. It is
based principally on reviewing reports from management to consider
whether significant risks are identified, evaluated, managed and
controlled and whether any significant weaknesses identified are
promptly remedied or managed by more extensive monitoring. The
Audit Committee assists the Board in discharging its review
responsibilities.
Audit Committee and auditor
The ENWL Audit Committee membership consists of Non-Executive
Directors who have recent and relevant financial experience; John
Gittins is considered an Independent Non-Executive Director and
therefore the Company complies, as required, with the conditions
for audit committees detailed in the Disclosure and Transparency
Rules 7.1.1. John Gittins was appointed as Chair of the Committee
on 24 May 2011. Phil White's appointment to the Audit Committee on
24 May 2011 meets the requirement for two independent Non-Executive
Directors outlined in the Code. The composition of the Committee is
considered by the Board to be effective and objective and
representative of the shareholdings.
The main role and responsibilities of the Audit Committee are
set out in its terms of reference and include those items detailed
in this section of the Code save that the Company does not hold an
AGM and therefore the reappointment of Deloitte LLP was approved by
the Board.
The Committee's terms of reference are available to
shareholders. The work of the Committee in discharging its
responsibilities is described below.
The Committee monitors the integrity of the Group's financial
statements and the effectiveness of the external audit process. The
Audit Committee provides recommendations to the Board in relation
to the appointment, reappointment and remuneration of the external
auditor and assesses the external auditor's independence and the
level of non-audit services provided to the Company.
The Committee is also responsible for ensuring that the
Company's policies and practices relating to the insurance of risks
are prudent and compliant with the Company's banking facilities
together with providing oversight of the impact of, and compliance
with, externally imposed regulatory rules on the operations of the
business. The Board has applied the principles of the Code by
establishing a continuous process for identifying, evaluating and
managing the significant risks the Company faces.
The Committee has responsibility to ensure that all commercial
issues are fully understood, analysed, reported and effectively
managed.
The Company has in place guidance on the reporting of incidents
of fraud which detail the procedure(s) to be followed by employees,
together with the option to report anonymously. Employees who
report incidents in good faith are protected by the Company's
Disclosure ('Whistle-blowing') Policy.
The Committee regularly reviews the systems of internal control
and the effectiveness of the Internal Audit function. Both of which
are discussed in more detail above.
The Committee has primary responsibility for the reappointment
of the Company's auditors, Deloitte LLP. Having reviewed the
independence and effectiveness of the external auditors, the
Committee has not considered it necessary to require them to
retender for audit work. The Committee's recommendation for the
reappointment of Deloitte LLP as the Company's auditor was approved
by the Board.
The Company's auditors do provide non-audit services.
Safeguarding the independence of the external auditors is paramount
and controls are in place to ensure their continued independence.
However, there are occasions where services can be more efficiently
undertaken by the external auditor and at no risk of impairment of
their independence.
The Audit Committee has put in place a policy on the provision
of services by the external auditors and all such services are
approved by the Audit Committee prior to commencement.
Relationship with shareholders
As a private Company, the ultimate holding Company of which has
just two major shareholders, the Company does not hold an AGM.
Board membership includes four Non-Executive Directors taken
proportionately from both the Company's ultimate shareholders and
the Company's relationship with the shareholders is, therefore, a
strong one not requiring a formal AGM.
Directors' Report
The Directors present their annual report and the audited
financial statements of Electricity North West Limited (the
'Company') and its subsidiaries (together referred to as the
'Group') for the year ended 31 March 2011.
Business review and principal activities
The Chief Executive Officer's statement on pages 2 and 3 and the
Business Review on pages 4 to 20 report on the Group's activities
during the year and on likely future developments. In addition the
Business Review has been compiled to inform the Company's
shareholders and help them assess how the Directors have performed
their duty to promote the success of the Company under the
Companies Act 2006. A summary of key performance indicators can be
found in the Business Review. The Directors, in preparing the
Business Review, have not sought to comply with the Accounting
Standard Board's 2006 Reporting Statement on operating and
financial reviews.
Principal risks and uncertainties
Principal risks and uncertainties are discussed as part of the
Business Review.
Dividends
In 2011, the Company paid dividends of GBP62m (2010: GBP218m).
This figure represents an interim payment of GBP15m paid in June
2010 and a further interim payment of GBP47m paid in December 2010.
(2010: This figure represented an interim payment of GBP197m paid
in July 2009 and two further interim payments of GBP11m and GBP10m
paid in December 2009 and January 2010 respectively.) The Directors
do not propose a final dividend for the year ended 31 March 2011
(2010: GBPnil).
Directors
The Directors of the Company during the year ended 31 March 2011
are set out below. Directors were appointed for the whole year
except where otherwise indicated.
J A Gittins
S Johnson
M G McCallion (appointed 2 September 2010)
N P Mills
M A Nagle (appointed 28 January 2011)
C E O'Reilly (appointed 28 January 2011)
C Thompson (resigned 2 September 2010)
S S Toor
P M White (Chair) (appointed 3 May 2010)
Alternate Directors during the year were:
S O'Shea (appointed 1 April 2010, resigned 1 April 2011)
M Ayre (appointed 1 April 2011)
M Walters
R O'Malley (resigned 28 January 2011)
P Taylor (resigned 28 January 2011)
At no time during the year did any Director have a material
interest in any contract or arrangement which was significant in
relation to the Company's business.
Going concern
When considering continuing to adopt the going concern basis in
preparing the Annual Report and consolidated financial statements,
the Directors have taken into account a number of factors,
including the following:
-- Management has prepared, and the Directors have reviewed,
updated Group forecasts for the DPC5 period which include
projections and cash flow forecasts, including covenant compliance
considerations. The forecasts include appropriate assumptions on
the efficiencies forecast from business transformation. Inherent in
forecasting is an element of uncertainty, our forecasts have been
sensitised for possible changes in the key assumptions, including
RPI and over recoveries of allowed revenue, and demonstrate that
there is sufficient headroom to key covenants and that sufficient
resources are available within the forecast period
-- The Company's electricity distribution licence includes the
obligation in standard condition 40 to maintain an investment grade
issuer credit rating
-- Under section 3A of the Electricity Act 1989, the Gas and
Electricity Markets Authority has a duty, in carrying out its
functions, to have regard to the need to secure that licence
holders are able to finance their activities, which are the subject
of obligations imposed by or under Part 1 of the Electricity Act
1989 or the Utilities Act 2000
-- The Group and Company have considerable financial resources.
Short-term liquidity requirements are forecast to be met from the
Company's normal operating cash flow. Further liquidity is provided
by cash and short-term deposit balances. Furthermore, committed
undrawn bank facilities are available from lenders of GBP80m within
ENWL,
GBP50m in North West Electricity Networks Limited and GBP20m at
North West Electricity Networks (Holdings) Limited which have a
maturity of more than one year. Whilst the utilisation of these
facilities is subject to gearing covenant restrictions the
covenants are not forecast to pose any operational restrictions
Consequently, after making appropriate enquiries, the Directors
have a reasonable expectation that the Company has adequate
resources to continue in operational existence for the foreseeable
future. Accordingly, they continue to adopt the going concern basis
in preparing the Annual Report and consolidated financial
statements.
Directors' and Officers' insurance
The Group maintains an appropriate level of Directors' and
Officers' insurance whereby Directors are indemnified against
liabilities to third parties to the extent permitted by the
Companies Act.
Political and charitable donations
The Group made no political donations in the year (2010:
GBPnil). Charitable donations by the Group in the year amounted to
GBP11,000 (2010: GBP2,000) in support of causes in the local
communities in which it operates.
People
The Company's policies on employee consultation and on equal
opportunities for disabled employees are contained within the
employees section of the Business Review.
Environment, social and community
Details of the Group's approach to corporate responsibility,
relating to our environment, social and governance policies, can be
found in the Business Review.
Essential contractual relationships
Certain suppliers to the Company contribute key goods or
services, the loss of which could cause disruption to the Company's
services. However, none are so vital that their loss would affect
the viability of the Company as a whole; nor is the business of the
Company overly dependent upon any one individual customer.
Policy on the payment of suppliers and creditors
The Company's policy is to pay suppliers according to agreed
terms of business. These terms are agreed upon entering into
binding contracts and the Company seeks to adhere to the payment
terms, provided the relevant goods and services have been supplied
in accordance with the contracts.
As at 31 March 2011, the average credit period taken for trade
purchases was 23 days from receipt of invoice. In 2010 trade
creditors principally comprised amounts outstanding to UUES for
capital and operating services provided under their contract. The
credit period with UUES was 10 days from receipt of invoice. UUES
creditor days as disclosed in their March 2010 financial statements
were 24 days.
Research and development
The Company is committed to developing innovative and
cost-effective solutions for providing high quality services and
reliability to our customers, and for the benefit of the wider
community and the development of the network, as further detailed
in the Business Review.
Financial instruments
The risk management objectives and policies of the Company in
relation to the use of financial instruments can be found in the
Business Review and in note 16 to the financial statements.
Fixed assets
Further details on Property, Plant and Equipment are provided in
the Business Review and note 10 to the financial statements.
Events after the balance sheet date
There have been no significant events after the balance sheet
date.
Information given to auditor
Each of the persons who is a Director at the date of approval of
this report confirms that:
(1) so far as the Director is aware, there is no relevant audit
information of which the Company's auditors are unaware; and
(2) the Director has taken all the steps that he/she ought to
have taken as a Director in order to make himself/herself aware of
any relevant audit information and to establish that the Company's
auditors are aware of that information.
This confirmation is given and should be interpreted within the
provisions of s418 of the Companies Act 2006.
Independent auditor
Deloitte LLP have expressed their willingness to continue in
office as auditor of the company.
In accordance with s487 of the Companies Act 2006, Deloitte LLP
are deemed to be re-appointed as auditor of the Company.
Registered address
Electricity North West Ltd
304 Bridgewater Place
Birchwood Park
Warrington
WA3 6XG
Registered number: 2366949
Approved by the Board on 26 May 2011 and signed on its behalf
by:
S Johnson
Director
Directors' responsibilities statement
The Directors are responsible for preparing the Annual Report
and the Financial Statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
have elected to prepare the Group and Company financial statements
in accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union and Article 4 of the IAS
Regulations. Under company law the Directors must not approve the
financial statements unless they are satisfied that they give a
true and fair view of the state of affairs of the Group and company
and of the profit or loss of the Group for that year.
In preparing these financial statements, International
Accounting Standard 1 requires that Directors:
-- properly select and apply accounting policies;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- provide additional disclosures when compliance with the
specific requirements in IFRSs are insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the entity's financial position and financial
performance; and
-- make an assessment of the Company's ability to continue as a
going concern.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements comply with the Companies Act 2006. 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 are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
We confirm that to the best of our knowledge:
-- the financial statements, prepared in accordance with IFRSs
as adopted by the EU, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Group and
the undertakings included in the consolidation taken as a whole;
and
-- the Business Review, which is incorporated into the
Directors' Report, includes a fair review of the development and
performance of the business and the position of the Group and
Company and the undertakings included in the consolidation taken as
a whole, together with a description of the principal risks and
uncertainties that they face.
Independent auditor's report to the members of Electricity North
West Limited
We have audited the financial statements of Electricity North
West Limited for the year ended 31 March 2011 which comprise the
Consolidated Income Statement, and the Consolidated and Company
Statements of Comprehensive Income, Financial Position, Cash Flows
and Changes in Equity, and the related notes 1 to 30. The financial
reporting framework that has been applied in their preparation is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union, and applied in accordance
with the provisions of the Companies Act 2006.
This report is made solely to the company's members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
company's members those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company's members as a body,
for our audit work, for this report, or for the opinions we have
formed.
Respective responsibilities of directors and auditor
As explained more fully in the Directors' responsibilities
statement, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true
and fair view. Our responsibility is to audit and express an
opinion on the financial statements in accordance with applicable
law and International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board's
Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free from
material misstatement, whether caused by fraud or error. This
includes an assessment of: whether the accounting policies are
appropriate to the group's and the parent company's circumstances
and have been consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates made by the
directors; and the overall presentation of the financial
statements. In addition, we read all the financial and
non-financial information in the annual report to identify material
inconsistencies with the audited financial statements. If we become
aware of any apparent material misstatements or inconsistencies we
consider the implications for our report.
Opinion on financial statements
In our opinion:
-- the financial statements give a true and fair view of the
state of the Group's and the parent company's affairs as at 31
March 2011 and of the group's profit for the year then ended;
-- the group financial statements have been properly prepared in
accordance with IFRSs as adopted by the European Union;
-- the parent company financial statements have been properly
prepared in accordance with IFRSs as adopted by the European Union
and as applied in accordance with the provisions of the Companies
Act 2006; and
-- the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Directors' Report
for the financial year for which the financial statements are
prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters
where the Companies Act 2006 requires us to report to you if, in
our opinion:
-- adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been received
from branches not visited by us; or
-- the parent company financial statements are not in agreement
with the accounting records and returns; or
-- certain disclosures of directors' remuneration specified by
law are not made; or
-- we have not received all the information and explanations we
require for our audit.
Alan Fendall (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
Manchester, United Kingdom
26 May 2011
CONSOLIDATED INCOME STATEMENT
for the year ended 31 March 2011
Restated*
Note Group Group
2011 2010
GBPm GBPm
Revenue 2 393.8 323.6
Employee benefits expense 3,4 (33.9) (6.7)
Depreciation and amortisation
expense (net) 3 (68.3) (60.4)
Other operating costs 3 (81.2) (100.6)
Total operating expenses (183.4) (167.7)
Operating profit 3 210.4 155.9
Investment income 5 1.8 0.4
Finance expense 6 (73.1) (139.2)
Profit before taxation 139.1 17.1
Taxation 7 (17.9) (18.2)
Profit/(loss) for the year 24 121.2 (1.1)
The results shown in the consolidated income statement for the
current and preceding years are derived from continuing
operations.
*See notes 1 and 2 for details of the restatement
CONSOLIDATED STATEMENT AND COMPANY STATEMENT OF FINANCIAL
POSITION
at 31 March 2011
Re-presented* Re-presented*
Group Company Group Company
Note 2011 2011 2010 2010
GBPm GBPm GBPm GBPm
ASSETS
Non-current assets
Intangible assets and
goodwill 9 29.8 29.8 21.0 21.0
Property, plant and
equipment 10 2,309.5 2,312.5 2,185.1 2,188.1
Investments 11 - 15.4 - -
--------------------- ---- --------- --------- ------------- -------------
2,339.3 2,357.7 2,206.1 2,209.1
--------------------- ---- --------- --------- ------------- -------------
Current assets
Inventories 12 5.6 5.6 - -
Trade and other
receivables 13 78.1 78.1 34.9 34.9
Money market deposits 14 40.0 40.0 - -
Cash and cash
equivalents 14 126.9 126.9 72.0 72.0
Derivative financial
instruments 16 1.0 1.0 1.1 1.1
--------------------- ---- --------- --------- ------------- -------------
251.6 251.6 108.0 108.0
--------------------- ---- --------- --------- ------------- -------------
Total assets 2,590.9 2,609.3 2,314.1 2,317.1
--------------------- ---- --------- --------- ------------- -------------
LIABILITIES
Current liabilities
Trade and other
payables 17 (151.5) (166.9) (95.9) (95.9)
Current income tax
liabilities (24.1) (24.1) (17.7) (17.7)
--------------------- ---- --------- --------- ------------- -------------
(175.6) (191.0) (113.6) (113.6)
--------------------- ---- --------- --------- ------------- -------------
Net current
assets/(liabilities) 76.0 60.6 (5.6) (5.6)
Non-current
liabilities
Borrowings 15 (1,043.9) (1,043.9) (899.2) (899.2)
Derivative financial
instruments 16 (76.3) (76.3) (52.9) (52.9)
Deferred tax 20 (258.6) (259.6) (253.7) (254.6)
Customer
contributions 21 (448.5) (448.5) (422.0) (422.0)
Refundable customer
deposits 22 (1.6) (1.6) (3.5) (3.5)
Retirement benefit
obligations 19 (41.3) (41.3) (142.8) (142.8)
--------------------- ---- --------- --------- ------------- -------------
(1,870.2) (1,871.2) (1,774.1) (1,775.0)
--------------------- ---- --------- --------- ------------- -------------
Total liabilities (2,045.8) (2,062.2) (1,887.7) (1,888.7)
--------------------- ---- --------- --------- ------------- -------------
Total net assets 545.1 547.1 426.4 428.4
--------------------- ---- --------- --------- ------------- -------------
EQUITY
Called up share
capital 23 238.4 238.4 238.4 238.4
Share premium account 24 4.4 4.4 4.4 4.4
Revaluation reserve 24 109.9 109.9 111.6 111.6
Capital redemption
reserve 24 8.6 8.6 8.6 8.6
Retained earnings 24 183.8 185.8 63.4 65.4
--------------------- ---- --------- --------- ------------- -------------
Total equity 545.1 547.1 426.4 428.4
--------------------- ---- --------- --------- ------------- -------------
*See note 16 for details of the re-presentation.
The financial statements of Electricity North West Limited
(registered number 2366949) were approved by the Board of Directors
on 26 May 2011 and signed on its behalf by:
M McCallion
Director
CONSOLIDATED STATEMENT AND COMPANY STATEMENT OF COMPREHENSIVE
INCOME
for the year ended 31 March 2011
Group Company Group Company
2011 2011 2010 2010
Note GBPm GBPm GBPm GBPm
Profit/(loss) for the
financial year 121.2 121.2 (1.1) (1.1)
----------------------------- ---- ------ ------- --------- -------
Other comprehensive
income/(expenses)
Actuarial gains/(losses) on
defined benefit pension
schemes 19 84.4 84.4 (119.3) (119.3)
Deferred tax on items taken
directly to equity 20 (24.9) (24.9) 33.4 33.4
----------------------------- ---- ------ ------- --------- -------
Other comprehensive
income/(expense) for the
year 59.5 59.5 (85.9) (85.9)
Total comprehensive
income/(expense) for the
year and attributable to
equity holders 180.7 180.7 (87.0) (87.0)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2011
Group
Called
up Share Capital
share premium Revaluation redemption Retained Total
capital account reserve reserve earnings Equity
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April
2009 238.4 4.4 116.4 8.6 363.9 731.7
Loss for the
year - - - - (1.1) (1.1)
Transfer from
Revaluation
reserve - - (4.8) - 4.8 -
Actuarial
losses on
defined
benefit
schemes - - - - (119.3) (119.3)
Tax on
components of
comprehensive
income - - - - 33.4 33.4
----------- --------- --------
Total
comprehensive
expense for
the year - - (4.8) - (82.2) (87.0)
Transactions
with owners
recorded
directly in
equity -
--------
Equity
dividends
(note 8) - - - (218.3) (218.3)
--------------- -------- -------- ------------ ----------- --------- --------
At 31 March
2010 238.4 4.4 111.6 8.6 63.4 426.4
Profit for the
year - - - - 121.2 121.2
Transfer from
Revaluation
reserve - - (1.7) - 1.7 -
Actuarial
gains on
defined
benefit
schemes - - - - 84.4 84.4
Tax on
components of
comprehensive
income - - - - (24.9) (24.9)
----------- --------- --------
Total
comprehensive
income for
the year - - (1.7) - 182.4 180.7
Transactions
with owners
recorded
directly in
equity -
--------
Equity
dividends
(note 8) - - - (62.0) (62.0)
--------------- -------- -------- ------------ ----------- --------- --------
At 31 March
2011 238.4 4.4 109.9 8.6 183.8 545.1
--------------- -------- -------- ------------ ----------- --------- --------
COMPANY STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2011
Company
Called
up Share Capital
share premium Revaluation redemption Retained Total
capital account reserve reserve earnings Equity
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April
2009 238.4 4.4 116.4 8.6 365.9 733.7
Loss for the
year - - - - (1.1) (1.1)
Transfer from
Revaluation
reserve - - (4.8) - 4.8 -
Actuarial
losses on
defined
benefit -
schemes - - - - (119.3) (119.3)
--------
Tax on
components of
comprehensive
income - - - 33.4 33.4
--------
Total
comprehensive
income for
the year - - (4.8) - (82.2) (87.0)
Transactions
with owners
recorded
directly in
equity
Equity
dividends
(note 8) - - - - (218.3) (218.3)
--------------- -------- -------- ------------ ----------- --------- --------
At 31 March
2010 238.4 4.4 111.6 8.6 65.4 428.4
Profit for the
year - - - - 121.2 121.2
Transfer from
Revaluation
reserve - - (1.7) - 1.7 -
Actuarial
gains on
defined
benefit -
schemes - - - - 84.4 84.4
--------
Tax on
components of
comprehensive
income - - - (24.9) (24.9)
--------
Total
comprehensive
income for
the year - - (1.7) - 182.4 180.7
Transactions
with owners
recorded
directly in
equity
Equity
dividends
(note 8) - - - - (62.0) (62.0)
--------------- -------- -------- ------------ ----------- --------- --------
At 31 March
2011 238.4 4.4 109.9 8.6 185.8 547.1
CONSOLIDATED STATEMENT AND COMPANY STATEMENT OF CASH FLOWS
for the year ended 31 March 2011
Group Company Group Company
Note 2011 2011 2010 2010
Operating activities
Cash generated from operations 28 245.9 246.8 218.4 218.4
Interest paid (37.0) (37.0) (59.7) (59.7)
Tax paid (31.1) (31.1) (31.4) (31.4)
------------------------------------ ---- ------- ------- ------- -------
Net cash generated from operating
activities 177.8 178.7 127.3 127.3
Investing activities
Interest received and similar
income 0.6 0.6 0.4 0.4
Purchase of property, plant
and equipment (173.9) (155.2) (168.9) (168.9)
Purchase of intangible assets (3.0) (2.9) (5.0) (5.0)
Acquisition of subsidiary,
net of cash acquired 26 (14.3) (23.5) - -
Overdraft acquired on hive-up
of subsidiary 26 - (10.0) - -
Customer contributions received 37.1 37.1 43.9 43.9
Proceeds from sale of
property, plant and equipment 0.6 0.1 0.2 0.2
------------------------------------ ---- ------- ------- ------- -------
Net cash used in investing
activities (152.9) (153.8) (129.4) (129.4)
Financing activities
Proceeds from borrowings 135.9 135.9 270.4 270.4
Transfer to money market deposits (40.0) (40.0) - -
Repayment of borrowings (3.9) (3.9) (32.7) (32.7)
Receipt on close out of swap - - 18.0 18.0
Dividends paid to equity
shareholders of the Company (62.0) (62.0) (218.3) (218.3)
------------------------------------ ---- ------- ------- ------- -------
Net cash generated from financing
activities 30.0 30.0 37.4 37.4
------------------------------------ ---- ------- ------- ------- -------
Net increase in cash and cash
equivalents 54.9 54.9 35.3 35.3
------------------------------------ ---- ------- ------- ------- -------
Cash and cash equivalents at
the beginning of the year 14 72.0 72.0 36.7 36.7
------------------------------------ ---- ------- ------- ------- -------
Cash and cash equivalents at
the
end of the year 14 126.9 126.9 72.0 72.0
------------------------------------ ---- ------- ------- ------- -------
Notes to the financial statements
The principal accounting policies adopted in the preparation of
these financial statements are set out below:
Accounting Policies
Basis of preparation
The financial statements have been prepared in accordance with
International Financial Reporting Standards ('IFRS') as adopted for
use in the European Union, including International Accounting
Standards ('IAS') and interpretations issued by the International
Financial Reporting Interpretations Committee ('IFRIC').
The financial statements have been prepared on the historical
cost basis, except for the revaluation of financial instruments,
investment properties and certain property, plant and
equipment.
The preparation of financial statements, in conformity with
generally accepted accounting principles ('GAAP') under IFRS,
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting year. Although these estimates are
based on management's best knowledge of the amount, event or
actions, actual results ultimately may differ from these
estimates.
Basis of preparation - going concern basis
When considering continuing to adopt the going concern basis in
preparing the Annual Report and financial statements, the Directors
have taken into account a number of factors, including the
financial position of the Group, its cash flow forecasts, liquidity
position, borrowing facilities and covenant compliance as described
in the Directors' Report and Business Review. Consequently, after
making the appropriate enquiries, the Directors have a reasonable
expectation that the Group has adequate resources to continue in
operational existence and comply with its banking covenants for the
foreseeable future. Accordingly, it is appropriate to adopt the
going concern basis in preparing the annual report and financial
statements.
Adoption of new and revised standards
In the current year, the following new and revised Standards and
Interpretations have been adopted and have affected the amounts
reported or the presentation and disclosure in the financial
statements:
IFRIC 18 'Transfers of Assets from Customers'
In the current financial year, the Group has adopted IFRIC 18
'Transfers of Assets from Customers'. IFRIC 18 is effective for
annual periods beginning on or after 31 October 2009, with earlier
application permitted. Having been endorsed by the EU on 27
November 2009, this has been applied by Electricity North West
Limited ('ENWL') during the year ending 31 March 2011. The standard
has been applied to transfers received on or after 1 July 2009. The
amortisation of customer contributions received in respect of
certain connections assets is now shown as revenue rather than
within operating costs. Comparatives have been restated
accordingly. This has resulted in a prior year adjustment as
outlined in note 2. There has been no statement of financial
position adjustment arising from this restatement.
IFRS 3 (2008) - Business combinations
IFRS 3 (2008) requires some significant changes to the way
business combinations are accounted for. All costs associated with
business combinations are expensed directly to the Income
Statement. Additionally any changes to contingent consideration
classified as debt must now be dealt with through ,the Income
Statement subsequent to acquisition. These changes apply to all
acquisitions made on or after 1 January 2010. There is no
requirement to apply these changes retrospectively to earlier
acquisitions.
Improvements to IFRSs
In April 2009 the International Accounting Standards Board
issued its second omnibus of amendments to its standards, primarily
with a view to removing inconsistencies and clarifying wording.
Derivative financial liabilities have been re-presented to
non-current in the preceding year, in accordance with Improvements
to IFRSs. Other than that the adoption of these amendments, which
are effective for accounting periods beginning on or after 1
January 2010, did not have any impact on the reporting of the
financial position or performance of the Group.
Recently issued accounting pronouncements - International
Financial Reporting Standards
At the date of approval of these financial statements, the
following relevant standards and interpretations were in issue but
not yet effective. The Directors anticipate that the adoption of
these standards and interpretations will have no material impact on
the Group's financial statements.
-- IFRS 9: Financial Instruments
-- IAS 24 (amended): Related Party Disclosures
-- IAS 32 (amended): Classification of Rights Issues
-- IFRIC 19: Extinguishing Financial Liabilities with Equity
Instruments
-- IFRIC 14 (amended): Prepayments of a Minimum Funding
Requirement
-- Improvements to IFRSs (May 2010)
Basis of consolidation
The Group financial statements consolidate the financial
statements of the Company and entities controlled by the Company
(its subsidiaries), made up to 31 March each year.
The results of subsidiaries acquired or disposed of during the
year are included in the consolidated income statement from the
effective date of acquisition or up to the effective date of
disposal, as appropriate.
Subsidiaries
Control is achieved where the Company has the power to govern
the financial and operating policies, generally accompanied by a
shareholding of more than one half of the voting rights, of an
invested entity so as to obtain benefits from its activities. On
acquisition, the assets and liabilities and contingent liabilities
of a subsidiary are measured at their fair values at the date of
acquisition. Any excess of the cost of acquisition over the fair
values of the identifiable net assets acquired is recognised as
goodwill. If the cost of acquisition is below the fair values of
the identifiable net assets acquired the difference is recognised
as negative goodwill and immediately written-off and credited to
the income statement in the year of acquisition. All intra-group
transactions, balances, income and expenses are eliminated on
consolidation.
Investments in subsidiaries are stated at cost less, where
appropriate, provisions for impairment.
Business combinations
The acquisition of subsidiaries is accounted for using the
purchase method. The cost of the acquisition is measured at the
aggregate of the fair values, at the date of exchange, of assets
given, liabilities incurred or assumed, and equity instruments
issued by the group in exchange for control of the acquiree. The
acquiree's identifiable assets, liabilities and contingent
liabilities that meet the conditions for recognition under IFRS 3
are recognised at their fair value at the acquisition date. All
costs associated with business combinations are expensed to the
income statement.
Goodwill arising on the acquisition is recognised as an asset
and initially measured at cost, being the excess of the cost of the
business combination over the Group's interest in the net fair
value of the identifiable assets, liabilities and contingent
liabilities recognised. If, after reassessment, the Group's
interest in the net fair value of the acquiree's identifiable
assets, liabilities and contingent liabilities exceeds the cost of
the business combination, then the negative goodwill is recognised,
but immediately written-off to the income statement.
Intangible assets and goodwill
Intangible assets are measured initially at cost and are
amortised on a straight-line basis over their estimated useful
lives. Carrying amount is reduced by any provision for impairment
where necessary.
Amortisation periods for categories of intangible assets
are:
Computer software 3-10 years
Goodwill is stated at cost less any accumulated impairment
losses. Goodwill is allocated to cash-generating units and is not
amortised but is tested annually for impairment.
Property, plant and equipment
Property, plant and equipment comprises operational structures
and other assets (including properties, overground plant and
equipment and electricity operational assets).
Operational structures
Infrastructure assets are depreciated by writing off their
deemed cost less the estimated residual value, evenly over their
useful lives, which range from 5 to 80 years. Employee costs
incurred in implementing the capital schemes of the Group are
capitalised within operational structure assets.
In 1997 the Company undertook a revaluation of certain assets.
This resulted in the creation of a revaluation reserve of
GBP234.9m. The additional depreciation created as result of the
revaluation is transferred from the revaluation reserve to retained
earnings on an annual basis.
Other assets
All other property, plant and equipment are stated at historical
cost less accumulated depreciation.
Historical cost includes expenditure that is directly
attributable to the acquisition of the items. Subsequent costs are
included in the asset's carrying amount or recognised as a separate
asset, as appropriate, only when it is probable that future
economic benefits associated with the item will flow to the Group
and the cost of the item can be measured reliably. All other
repairs and maintenance are charged to the income statement during
the financial year in which they are incurred.
Freehold land and assets in the course of construction are not
depreciated. Other assets are depreciated by writing off their cost
evenly over their estimated useful lives, based on management's
judgement and experience, which are principally as follows:
Buildings 30-60 years
Fixtures, fittings, tools and equipment and vehicles 3-40
years
Depreciation methods and useful lives are re-assessed annually
and, if necessary, changes are accounted for prospectively.
The gain or loss arising on the disposal or retirement of an
asset is determined as the difference between the sales proceeds
and the carrying amount of the asset and is recognised in the
income statement.
Impairment of tangible and intangible assets
Intangible assets with definite useful lives and property, plant
and equipment are reviewed for impairment at each reporting date to
determine whether there is any indication that those assets may
have suffered an impairment loss. An intangible asset with an
indefinite life is tested for impairment at least annually and
whenever there is an indication of impairment. If any such
indication exists, the recoverable amount of the asset is estimated
in order to determine the extent of the impairment loss, if any.
Where the asset does not generate cash flows that are independent
from other assets, the Group estimates the recoverable amount of
the cash-generating unit to which the asset belongs.
The recoverable amount is the higher of fair value less costs to
sell, and value in use. Value in use represents the net present
value of expected future cash flows discounted on a pre-tax basis
using a rate that reflects current market assessments of the time
value of money and the risks specific to the asset for which the
estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit)
is estimated to be less than its carrying amount, the carrying
amount of the asset (or cash-generating unit) is reduced to its
recoverable amount. Impairment of non-current assets is recognised
in the income statement within operating costs.
Where an impairment loss subsequently reverses, the reversal is
recognised in the income statement and the carrying amount of the
asset is increased to the revised estimate of its recoverable
amount, but not so as to exceed the carrying amount that would have
been determined had no impairment loss been recognised in prior
years.
Inventories
Inventories are stated at the lower of cost and net realisable
value. Cost is based on average cost principles and includes
expenditure incurred in acquiring the inventories, conversion costs
and other costs in bringing them to their existing location and
condition.
Financial instruments
Financial assets and financial liabilities are recognised on the
Group's statement of financial position when the Group becomes a
party to the contractual provisions of the instrument.
Trade receivables
Trade receivables are stated at nominal value with any
allowances made for any estimated irrecoverable amounts.
Trade payables
Trade payables are stated at their nominal value.
Cash and cash equivalents
In the consolidated cash flow statement and related notes, cash
and cash equivalents includes cash at bank and in hand, deposits,
other short-term highly liquid investments which are readily
convertible on initial investment into known amounts of cash within
three months and which are subject to an insignificant risk of
change in value.
Money market deposits
Money market deposits with terms to maturity in excess of three
months are not included as cash or cash equivalents and are
separately disclosed on the face of the statement of financial
position.
Financial investments
Investments (other than interests in subsidiaries and fixed
deposits) are recognised and derecognised on a trade date basis and
are initially measured at fair value, including transaction costs.
Investments are classified as available-for-sale and are measured
at subsequent reporting dates at fair value. Gains and losses
arising from changes in fair value are recognised directly in
equity, until the security is disposed of or is determined to be
impaired, at which time the cumulative gain or loss previously
recognised in equity is included in the net profit or loss for the
year.
Financial liabilities and equity
Financial liabilities and equity instruments are classified
according to the substance of the contractual arrangements entered
into. An equity instrument is any contract that evidences a
residual interest in the assets of the Group after deducting all of
its liabilities. Equity instruments issued by the Group are
recorded at the proceeds received, net of direct issue costs.
Bank borrowings
Interest-bearing bank loans and overdrafts are recorded at the
proceeds received, net of direct issue costs. Finance charges,
including premiums payable on settlement or redemption and direct
issue costs, are accounted for on an amortised cost basis to the
income statement using the effective interest method and are added
to the carrying amount of the instrument to the extent that they
are not settled in the year in which they arise.
The effective interest rate is a method of calculating the
amortised cost of a financial liability and of allocating interest
expense to the relevant year. The effective interest rate is the
rate that exactly discounts estimated future cash payments through
the expected life of the financial liability, or where appropriate,
a shorter period. The Group derecognises financial liabilities
when, and only when, the Group's obligations are discharged,
cancelled or they expire.
Borrowing costs and finance income
All borrowing costs and finance income that are not directly
attributable to the acquisition, issue or disposal of a financial
asset or financial liability are recognised in the income statement
in the year in which they are incurred. Transaction costs that are
directly attributable to the acquisition or issue of a financial
asset or financial liability are included in the initial fair value
of that instrument.
Derivatives and borrowings
The Group's default treatment is for borrowings to be carried at
amortised cost, whilst derivatives are recognised separately on the
statement of financial position at fair value with movements in
those fair values reflected through the income statement. This has
the potential to introduce considerable volatility to both the
income statement and statement of financial position.
Financial liabilities designated at fair value through profit or
loss ('FVTPL')
The Group applied the fair value through profit or loss option
to the GBP250m 8.875% 2026 bond upon initial recognition as the
complexity of the associated swaps at that time meant that the
criteria to allow hedge accounting was not met and the otherwise
inconsistent accounting treatment that would have resulted allowed
the Group to satisfy the criteria for this designation.
Financial liabilities at FVTPL are stated at fair value, with
any gains or losses on re-measurement recognised in the income
statement. The net gain or loss recognised in the income statement
incorporates any interest paid on the financial liabilities and is
included in the interest charge. Fair value is determined in the
manner described in note 16.
Derivative financial instruments and hedge accounting
Interest rate swap agreements are used to manage interest rate
exposure. The Group does not use derivative financial instruments
for speculative purposes.
All financial derivatives are initially recognised at fair value
at the date the derivative contract is entered into and are
subsequently re-measured to their fair value at each statement of
financial position date. Changes in the fair value of all
derivative financial instruments are recognised in the income
statement within finance expense as they arise; the Group does not
currently designate derivatives into hedging relationships and
apply hedge accounting.
The Group elects to designate a financial liability at inception
as fair value through the income statement on the basis that it
meets the conditions specified in IAS 39 'Financial Instruments:
Recognition and measurement'.
Hedge accounting
There are two types of hedge accounting strategies that the
Group considers; a fair value hedge and a cash flow hedge.
Currently the Group has no formal hedging relationships.
Operating profit
Operating profit is stated after charging operating expenses but
before investment income, finance expense and other gains and
losses.
Taxation
The tax expense represents the sum of current and deferred tax
charges for the financial year, adjusted for prior year items.
Current taxation
Current tax, representing UK corporation tax, is based on the
taxable profit for the year and is provided at amounts expected to
be paid (or recovered) using the tax rates and laws that have been
enacted or substantively enacted at the statement of financial
position date. Taxable profit differs from the net profit as
reported in the income statement because it excludes items of
income or expense that are taxable or deductible in other years and
it further excludes items that are never taxable or deductible.
Deferred taxation
Deferred tax is the tax expected to be payable or recoverable on
differences between the carrying amounts of assets and liabilities
in the financial statements and the corresponding tax bases used in
the computation of taxable profit. Deferred tax liabilities are
provided, using the liability method, on all taxable temporary
differences at the statement of financial position date. Such
assets and liabilities are not recognised if the temporary
difference arises from goodwill or from the initial recognition
(other than in a business combination) of other assets and
liabilities in a transaction that affects neither the taxable
profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary
differences arising on investments in subsidiaries except where the
Group is able to control the reversal of the temporary difference
and it is probable that the temporary difference will not reverse
in the foreseeable future.
Deferred tax is measured at the average tax rates that are
expected to apply in the years in which the temporary timing
differences are expected to reverse based on tax rates and laws
that have been enacted or substantively enacted at the statement of
financial position date. The carrying amount of deferred tax assets
is reviewed at each statement of financial position date and
reduced to the extent that it is no longer more likely than not
that sufficient taxable profits will be available to allow all or
part of the asset to be recovered. Deferred tax is charged or
credited to the income statement, except when it relates to items
charged or credited to equity, in which case the deferred tax is
also dealt with in other comprehensive income.
Employee benefits - Retirement benefit obligations
The Group's defined pension benefit arrangements are provided
through a division of the Electricity Supply Pension Scheme (ESPS).
The most recent actuarial valuation for the scheme for funding
purposes was carried out at 31 March 2010 and actuarial valuations
will be carried out thereafter at intervals of not more than three
years. The pension cost under IAS 19 'Employee Benefits' is
assessed in accordance with the advice of a firm of actuaries. The
assumptions are disclosed in note 19 of the financial statements.
Results are affected by the actuarial assumptions used. These
assumptions include those made for investment returns on the
scheme's assets, discount rates, pay growth and increases to
pensions in payment and deferred pensions, and life expectancy for
scheme members. Actual experience may differ from the assumptions
made, for example, due to changing market and economic conditions
and longer or shorter lives of participants. Defined benefit assets
are measured at fair value while liabilities are measured at
present value. The difference between the two amounts is recognised
as a surplus or obligation in the statement of financial
position.
The cost of providing pension benefits to employees relating to
the current year's service and the difference between the expected
return on scheme assets and interest on scheme liabilities are
included within the income statement within employee costs.
All actuarial gains and losses are recognised outside the income
statement in retained earnings and presented in the Statement of
Comprehensive Income.
In July 2010, the government announced its intention that future
statutory minimum pension indexation would be measured by the
Consumer Prices Index, rather than the Retail Prices Index. The
Company has taken legal advice on how this change will impact the
Scheme. This change has been reflected in the Company's accounting
figures at 31 March 2011 and a reduction in the benefit obligation
of GBP3m has been recognised in equity as a result of this change
in assumptions.
In addition, the Group also operates defined contribution
pension schemes. Payments are charged as employee costs as they
fall due. The Group has no further payment obligations once the
contributions have been paid.
IFRIC14: 'The limit on a defined benefit asset, minimum funding
requirements and their interaction' was published by the
interpretations committee of the International Accounting Standards
Board in July 2007 and was adopted during the year ended 31 March
2008. IFRIC14 provides guidance on the extent to which a pension
scheme surplus should be recognized as an asset and may also
require additional liabilities to be recognised where minimum
funding requirements exist. Legal opinion was obtained that a
pension surplus could be recovered on wind up of the scheme and
could therefore be recognised, along with associated liabilities.
At this current time this interpretation does not affect the
group.
Provisions
Provisions are recognised when the Group has a present legal or
constructive obligation as a result of past events, it is probable
that an outflow of resources will be required to settle the
obligation, and the amount of the obligation can be reliably
estimated.
Expenditure that relates to an existing condition caused by past
operations that does not contribute to current or future earnings
is expensed.
Revenue recognition
Revenue represents the fair value of the income receivable in
the ordinary course of business primarily for the distribution of
electricity during the year, exclusive of value-added tax. Revenue
includes an assessment of the volume of unbilled energy distributed
to customers between the date of the last meter reading and the
year end. Remaining sales relate to the invoice value of other
goods and services provided which also relate to the electricity
network.
Where turnover received or receivable exceeds the maximum amount
permitted by regulatory agreement adjustments will be made to
future prices to reflect this over-recovery, no liability is
recognised as such an adjustment to future prices relates to the
provision of future services. Similarly no asset is recognised
where a regulatory agreement permits adjustments to be made to
future prices in respect of an under-recovery.
The Group recognises revenue generally at the time of delivery
and when collection of the resulting receivable is reasonably
assured. Payments received in advance of revenue recognition are
recorded as deferred revenue.
Customer Contributions
Contributions receivable in respect of property, plant and
equipment are treated as deferred income, which is credited to the
income statement over the estimated economic lives of the related
assets. Amortisation of contributions received post 1 July 2009 is
shown as revenue following the adoption of IFRIC 18.
Refundable Customer Deposits
Refundable customer deposits received in respect of property,
plant and equipment and are held as a liability until repayment
conditions come into effect and the amounts are repaid to the
customer or otherwise credited to customer contributions.
Leases
Operating lease rentals are charged to the income statement on a
straight-line basis over the period of the lease.
Research and development
Research and development costs are written off to the income
statement as incurred.
Critical Accounting Policies
In the process of applying the Group's accounting policies, the
Group is required to make certain estimates, judgements and
assumptions that it believes are reasonable based upon the
information available. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and
expenses during the years presented.
On an ongoing basis, the Group evaluates its estimates using
historical experience, consultation with experts and other methods
considered reasonable in the particular circumstances. Actual
results may differ significantly from the estimates, the effect of
which is recognised in the year in which the facts that give rise
to the revision become known.
The following policies are those critical judgements which the
Group believes have the most significant impact on the annual
results under IFRS.
Carrying value of long-life assets
The Group's accounting policy for property, plant and equipment
('PPE') is detailed above. The carrying value of PPE under IFRS as
at 31 March 2011 was GBP2,309.5m (2010: GBP2,185.1m). Additions to
PPE, excluding acquisitions, totalled GBP188.1m (2010: GBP167.3m)
and the depreciation charge was GBP75.1m (2010: GBP68.3m) in the
year ended 31 March 2011. The estimated useful economic lives of
PPE are based on management's judgement and experience. When
management identify that the actual useful lives differ materially
from the estimates used to calculate depreciation, that charge is
adjusted prospectively. Due to the significance of PPE investment
to the Company, variations between actual and estimated useful
lives could impact operating results both positively and
negatively, although historically, few changes to estimated useful
lives have been required.
In accordance with IFRS, the Company is required to evaluate the
carrying values of PPE for impairment whenever circumstances
indicate, in management's judgement, that the carrying value of
such assets may not be recoverable. An impairment review requires
management to make subjective judgements concerning the cash flows,
growth rates and discount rates of the cash-generating units under
review.
In the financial year ended 31 March 2011, the Directors have
assessed the carrying value of both tangible and intangible fixed
assets in accordance with the principles of IAS37 'Impairment of
Assets'. This review was underpinned by the 19 December 2007
professional valuation of tangible and intangible assets completed
in accordance with IFRS3 and included a review of the final
proposals for the DPC5 period and thus any impact on the
recoverable amount of these assets. The results of the 2009
valuation supported a fair value in excess of the book value and in
addition the DPC5 final proposals do not indicate a resulting
impairment due to favourable future operating cash flows being
forecast to the end of 2015 and beyond. Furthermore, management
have completed a review of tangible fixed assets for material
obsolescence and/or physical damage and no indication of impairment
was identified.
Revenue recognition
Under IFRS, the Company recognises revenue generally at the time
of delivery and when collection of the resulting receivable is
reasonably assured. Should management consider that the criteria
for revenue recognition are not met for a transaction, revenue
recognition would be delayed until such time as the transaction
becomes fully earned. Payments received in advance of revenue
recognition are recorded as deferred revenue. The Company raises
bills and recognises revenue in accordance with its entitlement to
receive revenue in line with the limits established by the periodic
regulatory price review processes.
The principal customers of the business are the electricity
supply companies that utilise the Company's distribution network to
distribute electricity from generators to the end consumer. Revenue
from such activity is known as 'use of system'. The amount billed
is dependent upon the volume of electricity distributed, including
estimates of the units distributed to customers. The estimated
usage is based on historic data, judgement and assumptions.
Operating revenues are gradually adjusted to reflect actual usage
in the period over which the meters are read.
Accounting for provisions and contingencies
The Group is subject to a number of claims incidental to the
normal conduct of its business, relating to and including
commercial, contractual and employment matters, which are handled
and defended in the ordinary course of business. The Group
routinely assesses the likelihood of any adverse judgements or
outcomes to these matters as well as ranges of probable and
reasonably estimated losses. Reasonable estimates involve
judgements made by management after considering information
including notifications, settlements, estimates performed by
independent parties and legal counsel, available facts,
identification of other potentially responsible parties and their
ability to contribute, and prior experience. A provision is
recognised when it is probable that an obligation exists for which
a reliable estimate can be made of the obligation after careful
analysis of the individual matter. The required provision may
change in the future due to new developments and as additional
information becomes available. Matters that either are possible
obligations or do not meet the recognition criteria for a provision
are disclosed, unless the possibility of transferring economic
benefits is remote.
Retirement benefits
The pension cost under IAS 19 'Employee benefits' is assessed in
accordance with the advice of a firm of actuaries. The assumptions
are disclosed in note 19 of the financial statements. Results are
affected by the actuarial assumptions used. These assumptions
include those made for investment returns on the schemes' assets,
discount rates, pay growth and increases to pensions in payment and
deferred pensions, and life expectancy for scheme members. Actual
experience may differ from the assumptions made, for example, due
to changing market and economic conditions and longer or shorter
lives of participants.
Fair values of derivative financial instruments
The Group uses derivative financial instruments to manage the
exposure to interest rate risk and bond issues. The Board has
authorised the use of derivatives by the Group to reduce the risk
of loss arising from changes in market risks, and for economic
hedging reasons. All financial derivatives are initially recognised
at fair value at the date the derivative contract is entered into
and are subsequently re-measured to their fair value at each
statement of financial position date. Changes in the fair value of
all derivative financial instruments that are not in a hedging
relationship are recognised in the income statement within finance
expense as they arise.
The Group designates derivatives into hedging relationships and
applies hedge accounting where all the criteria under IAS 39
'Financial; Instruments: Recognition and Measurement' are met.
The Group is therefore subject to volatility in the income
statement due to changes in the fair values of the derivative
financial instruments. Further information is provided in note 16
to the financial statements.
Goodwill and intangible assets
Management assesses the recoverability of intangible assets on
an annual basis. Determining whether any of the intangible assets
are impaired requires an estimation of the value in use of the
asset to the Group. This value in use calculation requires the
Group to estimate the future cash flows expected to arise from the
asset and a suitable discount rate in order to calculate the
present value for the asset and compare that calculation to its
carrying value.
On acquisition of business combinations, assessment is required
as to whether the Group has acquired any intangible assets as part
of the acquisition, and subsequent measurement of any intangible
assets must be made.
During the year the Group has acquired the share capital of
ENWSL. On acquisition, in line with IFRS 3 requirements, management
has performed a review for intangibles as part of the assessment of
fair values. For an intangible asset to be recognised it must be
possible to separately identify it and also to reliably measure the
value. Management did not identify any intangible assets arising as
a result of the acquisition of ENWSL, and consequently the excess
of the total consideration over acquired net assets, after fair
value adjustments, of GBP10.1 million has been recognised as
goodwill.
2 REVENUE
2010
2011 Restated
GBPm GBPm
-------- ----- ---------
Revenue 393.8 323.6
-------- ----- ---------
Predominantly all Group revenues arise from electricity
distribution in the North West of England and associated
activities. Only one operating segment is therefore regularly
reviewed by the Chief Executive Officer and Executive Team.
Included within the above are revenues of approximately GBP313.9m
(2010: GBP254.4m) which arose from sales to the Group's five
largest customers. Customer 1 represented GBP98.7m (2010:
GBP78.6m), Customer 2 GBP79.7m (2010: GBP64.4m), Customer 3
GBP55.6m (2010: GBP43.5m), Customer 4 GBP40.3m (2010: GBP32.9m) and
Customer 5 GBP39.6m (2010: GBP32.9m) of revenues. No other customer
represented more than 10 per cent of revenues.
Following the adoption of IFRIC 18 in the year, the amortisation
of customer contributions received on or after 1 July 2009 in
respect of customer connection assets is now shown as revenue
rather than within operating costs. This has resulted in a prior
year adjustment to increase revenue by GBP0.2m.
Operating Profit
The following items have been included in arriving at the
Group's operating profit:
2011 2010 Restated
Group GBPm GBPm
---------------------------------------------------- --------- -------------
Employee benefits expense
Employee costs (see note 4) 33.9 6.7
---------------------------------------------------- --------- -------------
Depreciation and amortisation expense (net)
Depreciation of property, plant and equipment
Owned assets (see note 10) 75.1 68.3
Amortisation of intangible assets and customer
contributions
Software (see note 9) 4.3 3.3
Customer contributions (see note 21) (11.1)(1) (11.2)(1)
---------------------------------------------------- --------- -------------
68.3 60.4
---------------------------------------------------- --------- -------------
Other income
Profit on disposal of property, plant and equipment (0.6) (0.2)
---------------------------------------------------- --------- -------------
Other operating costs include:
Research and development 1.5 1.3
Restructuring costs 1.9(2) -
Operating leases:
- land and buildings 0.6 0.9
- hire of plant and machinery 0.5 1.7
---------------------------------------------------- --------- -------------
1 In the current year GBP1.0m (2010: GBP0.2m) of customer
contributions amortisation has been amortised through revenue as a
result of the adoption of IFRIC 18 as detailed in note 1 and 2.
(2 ) Restructuring costs include severance costs of GBP1.1m acquisition costs of GBP0.8m.
During the year, the Group obtained the following services from
the Group's auditor, at fees detailed below:
2011 2011 2010 2010
Group GBPm GBPm GBPm GBPm
------------------------------ ----- ----- ----- -----
Fees payable to the Group's
auditor for the audit of the
Group's annual accounts 0.1 0.1
Other non-audit services
Other services* - -
Tax services 0.1 0.1
Corporate finance services 0.1 -
Total non-audit services 0.2 0.1
Total fees 0.3 0.2
------------------------------ ----- ----- ----- -----
* Fees payable to the auditor in relation to other services
totalled GBP45,000 (2010: GBP56,000).
Fees payable for the audit of the Company were GBP0.1m
(2010:GBP0.1m).
Fees payable to Deloitte LLP and their associates for non-audit
services to the Company are not required to be disclosed because
the financial statements are only required to disclose such fees on
a consolidated basis.
Employee BENEFIT EXPENSE
Group Group
2011 2010
GBPm GBPm
------------------------------------- ------ -----
Wages and salaries 51.8 6.4
Social security costs 3.9 0.5
Pension costs (see note 19) 12.6 6.7
------------------------------------- ------ -----
Employee costs (including Directors'
remuneration) 68.3 13.6
Costs transferred directly to
fixed assets (34.4) (6.9)
Charged to operating expenses 33.9 6.7
------------------------------------- ------ -----
Average number of employees during the year (full-time
equivalent including directors)
Company Company
Group 2011 2011 Group 2010 2010
Number Number Number Number
------------------------- ---------- ------- ---------- -------
Electricity distribution 1,189 109 94 94
------------------------- ---------- ------- ---------- -------
The increase in employee numbers in the current year primarily
relates to the acquisition of UUES, see note 26 for further
details.
Investment Income
2011 2010
GBPm GBPm
--------------------------------------------------------------- ------ -----
Interest receivable on short-term bank
deposits held at amortised cost 0.6 0.4
--------------------------------------------------------------- ------ -----
Expected return on pension scheme assets (see note
19) 51.7 -
Interest cost on pension scheme obligations (see
note 19) (50.5) -
Net pension interest 1.2 -
Total investment income 1.8 0.4
--------------------------------------------------------------- ------ -----
Finance Expense
2011 2011 2010 2010
Group GBPm GBPm GBPm GBPm
-------------------------------------------- ------- ------ ------- ------
Interest payable
Expected return on pension scheme
assets (note 19) - (41.7)
Interest cost on pension scheme
obligations (note 19) - 46.6
-------------------------------------------- ------- ------ ------- ------
Net pension interest expense - 4.9
Interest payable on bank borrowings - 0.4
Interest payable on Group borrowings 16.8 12.1
Interest payable on borrowings
held at amortised cost 21.0 18.7
Interest payable on borrowings
designated
at fair value through profit or
loss 22.2 22.2
Net (receipts)/payments on derivatives
held for trading (22.5) 3.8
Other finance charges/(income)
related to
index-linked bonds 5.3 (1.6)
42.8 55.6
Fair value losses/(gains) on financial
instruments
Borrowings designated at fair value
through profit and loss 6.8 26.3
Derivatives held for trading 23.5 70.4
Cash settlement on close-out of
amortising swaps - (18.0)
30.3 78.7
Total finance expense 73.1 139.2
-------------------------------------------- ------- ------ ------- ------
In respect of the movement in the fair value of borrowings
designated as at fair value through income statement of GBP6.8m
loss (2010: GBP.26.3m loss), GBP7.5m loss (2010: GBP32.3m loss) is
attributable to changes in credit spread assumptions which is
partially offset by changes in interest rates and therefore
interest payable.
Taxation
2011 2010
GBPm GBPm
------------------------------------- ------ ------
Current tax
UK corporation tax 38.9 14.5
Prior year (1.4) 5.4
Deferred tax (see note 20)
Current year 1.4 (10.3)
Prior year - 8.6
Impact of change in future tax rates (21.0) -
Taxation 17.9 18.2
------------------------------------- ------ ------
Corporation tax is calculated at 28% (2010: 28%) of the
estimated assessable profit for the year.
The Budget on 23 March 2011 announced new phased reductions in
the main UK corporation tax rate. The rate is now proposed to be
23% by 1 April 2014. The first reduction to 26% takes effect from 1
April 2011. Tax rate changes are taken into account if they are
substantively enacted at the statement of financial position date.
The reduction to 26% was included in a resolution passed under the
Provisional Collection of Taxes Act ('PCTA') 1968 on 29 March 2011.
Accordingly the tax disclosures reflect deferred tax measured on
the new 26% rate. It has not yet been possible to quantify the full
anticipated effect of the further 3% rate reduction, although this
will further reduce the company's future tax charge and reduce the
company's deferred tax liabilities/assets accordingly.
The table below reconciles the notional tax charge at the UK
corporation tax rate to the effective tax rate for the year:
2011 2011 2010 2010
GBPm % GBPm %
------------------------------------------------ ------ ------ ----- -----
Profit before tax 139.1 17.1
------------------------------------------------ ------ ------ ----- -----
Tax at the UK corporation tax rate of 28%
(2010: 28%) 39.0 28.0 4.8 28.0
Prior year tax adjustments (1.4) (1.0) 14.0 81.9
Impact of withdrawal of IBA allowances 1.3 1.0 0.9 5.3
Impact from change in future tax rates (21.0) (15.1) (1.5) (8.8)
Tax expense and effective tax rate for the year 17.9 12.9 18.2 106.4
------------------------------------------------ ------ ------ ----- -----
In addition to the amount charged to the Income Statement,
deferred tax relating to actuarial gains on defined benefit schemes
of GBP24.9m charge (2010: GBP33.4m credit) was also taken to the
Statement of Comprehensive Income.
Dividends
Amounts recognised as distributions to equity holders in the
year comprise:
2011 2010
GBPm GBPm
--------------------------------------------- ----- -----
Interim dividends paid during the year ended
31 March 2011 of 13p per share (31 March
2010: 45.8p per share) 62.0 218.3
---------------------------------------------- ----- -----
At the current and prior year ends, there were no proposed final
dividends subject to approval by equity holders of the Company and,
hence, no liability has been included in the financial statements
at 31 March 2011 and 31 March 2010 respectively.
Intangible Assets and goodwill
Assets under
the course
Goodwill Software of construction Total
Group and Company GBPm GBPm GBPm GBPm
--------------------------------- -------- -------- ---------------- -----
Cost
At 1 April 2009 - 34.5 1.3 35.8
Additions - - 5.1 5.1
Transfers - 0.9 (0.9) -
At 31 March 2010 - 35.4 5.5 40.9
Additions - 0.4 2.6 3.0
Arising on acquisition of
subsidiary 10.1 - - 10.1
Transfers - 2.2 (2.2) -
At 31 March 2011 10.1 38.0 5.9 54.0
--------------------------------- -------- -------- ---------------- -----
Amortisation
At 1 April 2009 - 16.6 - 16.6
Charge for the year - 3.3 - 3.3
At 31 March 2010 - 19.9 - 19.9
Charge for the year - 4.3 - 4.3
At 31 March 2011 - 24.2 - 24.2
--------------------------------- -------- -------- ---------------- -----
Net book value
At 31 March 2011 10.1 13.8 5.9 29.8
--------------------------------- -------- -------- ---------------- -----
At 31 March 2010 - 15.5 5.5 21.0
--------------------------------- -------- -------- ---------------- -----
At 1 April 2009 - 17.9 1.3 19.2
--------------------------------- -------- -------- ---------------- -----
In the Group goodwill arose on the acquisition of ENWSL in the
current year, see note 26 for details.
At 31 March 2011, the Group had entered into contractual
commitments for the acquisition of intangible assets amounting to
GBP2.1m (2010: GBPNil).
In the Company, Goodwill arose on the transfer of assets and
liabilities (the 'hive-up') of ENWSL in the current year. This
value reflects the excess of the investment over the book value of
the trade and assets at the date of hive-up and reflects the value
of the business now within ENWL. The value of the investment has
consequently been reduced by this same amount. See notes 11 and 26
for further details.
Impairment testing
The Group tests annually for impairment or more frequently if
there are indications that intangible assets with indefinite lives
might be impaired. The recoverable amounts of the cash generating
units ('CGUs') are determined from value in use calculations. For
the purposes of impairment testing the Group have determined that
there is only one CGU. The key assumptions for the value in use
calculations are those regarding discount rates and the outcomes of
future Ofgem price control settlements.
The Group has prepared cash flow forecasts for the period up to
31 March 2015 and has extrapolated the cash flows into perpetuity.
The rate used to discount cash flows was 7% reflecting an assumed
level of risk associated with the cash flows generated from the
licence.
Property, Plant And Equipment
Group
Non Fixtures, Assets under
operational equipment, the course
Operational land and vehicles of
Structures buildings and other construction Total
GBPm GBPm GBPm GBPm GBPm
-------------------- ----------- ----------- ---------- ------------ ----------
Cost or valuation
At 1 April 2009 2,768.1 11.2 11.7 190.4 2,981.4
Additions 85.0 - 0.2 82.1 167.3
Transfers 86.6 (0.1) (0.3) (86.2) -
Disposals (11.0) - - - (11.0)
At 31 March 2010 2,928.7 11.1 11.6 186.3 3,137.7
Additions 54.2 1.3 4.0 128.6 188.1
Arising on
acquisition - - 18.3 - 18.3
Transfers 104.5 0.4 1.4 (106.3) -
Disposals (7.3) - (0.3) - (7.6)
At 31 March 2011 3,080.1 12.8 35.0 208.6 3,336.5
-------------------- ----------- ----------- ---------- ------------ ----------
Depreciation and
impairment
At 1 April 2009 885.1 3.5 6.7 - 895.3
Charge for the
year 66.8 0.2 1.3 - 68.3
Disposals (11.0) - - - (11.0)
At 31 March 2010 940.9 3.7 8.0 - 952.6
Arising on
acquisition - - 6.9 - 6.9
Charge for the
year 69.9 0.3 4.9 - 75.1
Disposals (7.3) - (0.3) - (7.6)
At 31 March 2011 1,003.5 4.0 19.5 - 1,027.0
Net book value
At 31 March 2011 2,076.6 8.8 15.5 208.6 2,309.5
-------------------- ----------- ----------- ---------- ------------ ----------
At 31 March 2010 1,987.8 7.4 3.6 186.3 2,185.1
-------------------- ----------- ----------- ---------- ------------ ----------
At 1 April 2009 1,883.0 7.7 5.0 190.4 2,086.1
-------------------- ----------- ----------- ---------- ------------ ----------
At 31 March 2011, the Group had entered into contractual commitments
for the acquisition of property, plant and equipment amounting to
GBP35.7m (2010: GBP33.4m).
Company
Fixtures
Non and Assets under
operational equipment, the course
Operational land and vehicles of
Structures buildings and other construction Total
GBPm GBPm GBPm GBPm GBPm
------------- ------------ ------------ ----------- ------------ --------
Cost or valuation
At 1 April
2009 2,771.1 11.2 11.7 190.4 2,984.4
Additions 85.0 - 0.2 82.1 167.3
Transfers 86.6 (0.1) (0.3) (86.2) -
Disposals (11.0) - - - (11.0)
-------------
At 31 March
2010 2,931.7 11.1 11.6 186.3 3,140.7
Additions 54.2 1.3 1.1 128.6 185.2
Transfers 104.5 0.4 1.4 (106.3) -
Intra group
transfers(1) - - 20.9 - 20.9
Disposals (7.3) - - - (7.3)
------------- ------------ ------------ ----------- ------------ --------
At 31 March
2011 3,083.1 12.8 35.0 208.6 3,339.5
------------- ------------ ------------ ----------- ------------ --------
Depreciation and Impairment
At 1 April
2009 885.1 3.5 6.7 - 895.3
Charge for
the year 66.8 0.2 1.3 - 68.3
Disposals (11.0) - - - (11.0)
At 31 March
2010 940.9 3.7 8.0 - 952.6
Charge for
the year 69.9 0.3 2.3 - 72.5
Disposals (7.3) - - - (7.3)
Intra group
transfers(1) - - 9.2 - 9.2
------------- ------------ ------------ ----------- ------------ --------
At 31 March
2011 1,003.5 4.0 19.5 - 1,027.0
Net book
value
At 31 March
2011 2,079.6 8.8 15.5 208.6 2,312.5
------------- ------------ ------------ ----------- ------------ --------
At 31 March
2010 1,990.8 7.4 3.6 186.3 2,188.1
------------- ------------ ------------ ----------- ------------ --------
At 1 April
2009 1,886.0 7.7 5.0 190.4 2,089.1
------------- ------------ ------------ ----------- ------------ --------
(1 ) The intra-group transfer related to the hive-up of net
assets from ENWSL see note 26.
At 31 March 2011, had the property, plant and equipment of the
Group been carried at historical cost less accumulated depreciation
and accumulated impairment losses, the carrying amount would have
been approximately GBP2,164.1m (2010: GBP2,033.1m). The revaluation
surplus is disclosed in note 24, net of deferred tax. The
revaluation surplus arose following a Directors' revaluation of
operational assets and non operational land and buildings in
1997.
Investments
Group Company
GBPm GBPm
--------------------------------- ----- -------
Cost
At 1 April 2010 - -
Additions - 25.5
Transferred to goodwill (note 9) - (10.1)
--------------------------------- ----- -------
At 31 March 2011 - 15.4
--------------------------------- ----- -------
The addition in the year relates the acquisition of ENWSL as
described in note 26. Details of the investments as at 31 March
2011, all of which were incorporated in the UK, are as follows:
Company
------------------- ------------------- ---------------- ------------------
Description of Proportion held Nature of
holding business
------------------- ------------------- ---------------- ------------------
Subsidiary
undertakings
Electricity North Ordinary shares of 100% Operation and
West Services GBP1 each maintenance of
Limited electricity
network(1)
NB Property and Ordinary shares of 100% Dormant
Estate Services GBP1 each
No. 1 Limited
NB Leasing Limited Ordinary shares of 100% Dormant
GBP1 each
NB (Miles Platting Ordinary shares of 100% Dormant
Community Project) GBP1 each
Limited
ENW (ESPS) Ordinary shares of 100% Non trading
Pensions Trustees GBP1 each
Limited
Group and Company
------------------- ------------------- ---------------- ------------------
Description of Proportion held Nature of
holding business
------------------- ------------------- ---------------- ------------------
Associated
undertaking
Nor.Web Limited Ordinary shares of 50% Dormant
GBP1 each
(1 ) As at 31 March 2011 the trade and assets of ENWSL
were hived-up to ENWL. Going forward this company
is no longer expected to trade.
INVENTORIES
Group Company Group Company
2011 2011 2010 2010
GBPm GBPm GBPm GBPm
------------------------------ ----- ------- ----- -------
Raw materials and consumables 5.6 5.6 - -
------------------------------ ----- ------- ----- -------
Trade And Other Receivables
Group Company Group Company
2011 2011 2010 2010
GBPm GBPm GBPm GBPm
----------------------------------- ----- ------- ----- -------
Trade receivables 33.2 33.2 2.0 2.0
Prepayments and accrued income 41.5 41.5 32.9 32.9
Amounts owed by Group undertakings 3.4 3.4 - -
----------------------------------- ----- ------- ----- -------
78.1 78.1 34.9 34.9
----------------------------------- ----- ------- ----- -------
Trade receivables do not carry interest and are stated net of
allowances for doubtful receivables of GBP0.1m (2010: GBP0.3m)
estimated by management based on known specific circumstances, past
default experience and their assessment of the current economic
environment. The average credit period taken on sales is 14 days
(2010: 14 days).
The Directors consider that the carrying amount of trade and
other receivables approximates to their fair value. Of the trade
receivables, 10% (2010: 2.3%) are past due but not impaired. The
majority of balances are less than 45 days past due; a balance of
GBP1.3m is greater than 45 days past due at 31 March 2011 (2010:
GBP0.1m), against which an allowance for doubtful debt of GBP0.2m
(2010: GBPNil) has been made.
The movement on the provision for impairment of trade
receivables is as follows:
Group Company Group Company
2011 2011 2010 2010
GBPm GBPm GBPm GBPm
--------------------------------- ------ -------- ------ --------
Balance at 1 April 2010 0.3 0.3 0.6 0.6
Charged to the income statement - - 0.3 0.3
Utilised (0.2) (0.2) (0.6) (0.6)
Balance at 31 March 2011 0.1 0.1 0.3 0.3
Trade receivables comprise 654 (2010: 32) individual customers
and 68.5% (2010: 26.4%) of the trade receivables balance above
relates to the regulated provision of infrastructure to electricity
retail companies. The Group is required by Ofgem to accept any
company that has obtained a trading licence regardless of their
credit status. To mitigate the risk posed by this, all transactions
with customers are governed by a contract which all customers are
required by Ofgem to sign and adhere to the terms.
Under the terms of the contract, the maximum unsecured credit
that the Group may be required to give is 2% of the Regulatory
Asset Value ('RAV') of the Company. In addition the contract makes
provisions for the credit quality of customers and adjusts the
credit value available to them based on credit ratings and payment
history. Where a customer exceeds their agreed credit level under
the contract the customer must provide collateral to mitigate the
increased risk posed. As at 31 March 2011 GBP2.9m (2010: GBP2.8m)
of cash had been received as security.
The allowed RAV is set by Ofgem for each year of DPC5 (1 April
2010 to 31 March 2015) and is GBP1,403.3m for the year ended 31
March 2011 based on March closing prices (2010: GBP1,343.8m).
At 31 March 2011 GBP95.2m (2010: GBP87.2m) of unsecured credit
limits had been granted to customers and the highest unsecured
credit limit given to any single customer was GBP10.3m (2010:
GBP9.7m). All of the customers granted credit of this level must
have a credit rating of at least A- from Standard and Poor's and A3
from Moody's Investor Services or a guarantee from a parent company
of an equivalent rating. Alternatively, the customer must be able
to prove their creditworthiness on an ongoing basis.
Cash And Money market deposits
2011 2010
Group and Company GBPm GBPm
Short-term bank deposits including cash at bank
and in hand 126.9 72.0
Cash and Cash Equivalents 126.9 72.0
Short-term money market deposits (maturity over
three months) 40.0 -
166.9 72.0
------------------------------------------------ ----- -----
Cash and cash equivalents comprise cash at bank and in hand,
deposits and other short-term highly liquid investments which are
readily convertible into known amounts of cash and have a maturity
of three months or less, net of any bank overdrafts which are
payable on demand. Money market deposits with terms to maturity in
excess of three months are not included as cash or cash equivalents
and are separately disclosed on the face of the statement of
financial position.
The effective interest rate on all short-term deposits was a
weighted average of 0.97% (2010: 0.37%) and these deposits had an
average maturity of 164 days (2010: 5 days).
Borrowings
This note provides information about the contractual terms of
the Group's loans and borrowings. For more information about the
Group's exposure to credit risk, liquidity risk and market risk see
note 16.
2011 2010
Group and Company GBPm GBPm
--------------------------------------------------- ------- ------
Non-current liabilities
Bonds 646.6 634.6
Bank and other term borrowings 134.7 (0.6)
Amounts owed to parent undertaking 67.4 70.4
Amounts owed to affiliated undertaking 195.2 194.8
--------------------------------------------------- ------- ------
1,043.9 899.2
--------------------------------------------------- ------- ------
Carrying value by category
The carrying values by category of financial instruments were as
follows:
2011 2010
Carrying Carrying
Year of maturity Value Value
Group and Company GBPm GBPm
------------------------------------- ----------------- -------- --------
Borrowings designated at fair value
through income statement
8.875% GBP250m bond 2026 335.2 328.4
Borrowings measured at amortised cost
8.875% GBP200m bond 2026 195.3 195.4
1.4746%+RPI(1) GBP100m index-linked
bond 2046 116.1 110.8
1.5911%+RPI(1) GBP135m index-linked
loan 2024 135.0 -
Amortising costs re: Long term loans
at LIBOR plus 2.25% 2012 (0.3) (0.6)
Amounts due to parent undertaking 2015 67.4 70.4
Amounts due to affiliated undertaking 2021 195.2 194.8
Other financial liabilities held at amortised cost 1,043.9 899.2
(1) RPI - Retail Prices Index - a UK general index of retail
prices (for all items) as published by the Office for National
Statistics (January 1987 = 100).
All loans and borrowings are unsecured. There is no formal bank
overdraft facility in place at 31 March 2011. All borrowings are in
sterling. The fair values of the Group's financial instruments are
shown in note 16.
Included within the borrowing note are capitalised facility
arrangement fees of GBP0.3m (2010: GBP0.6m) relating to the undrawn
Revolving Credit Facilities. This was part utilised and repaid in
the current year and is forecast to be further utilised in the year
ended 31 March 2012.
Borrowing facilities
The Group and Company had GBP80m (2010: GBP224.2m) in unutilised
committed bank facilities at 31 March 2011 of which GBPNil expires
within one year (2010: GBP25m), GBP75m expires after one year but
less than two years (2010: GBPNil) and GBP5m expires in more than
two years (2010: GBP199.2m).
16 Financial Instruments
A financial instrument is a contract that gives rise to a
financial asset in one entity and a financial liability or equity
in another entity. The Group uses financial instruments to invest
liquid asset balances, raise funding and manage the risks arising
from its operations.
The principal risks which the Group is exposed to and which
arise in the normal course of business include credit risk,
liquidity risk and market risk, in particular interest rate risk
and inflation risk. Derivatives are used to hedge exposure to
fluctuations in interest rates. A derivative is a financial
instrument, the value of which changes in response to some
underlying variable (e.g. an interest rate), that has an initial
net investment smaller than would be required for other instruments
that have a similar response to the variable, and that will be
settled at a future date.
The Board has authorised the use of derivatives by the Group to
reduce the risk of loss arising from changes in market risks, and
for economic hedging reasons. The accounting policy for derivatives
is provided in note 1.
Risk management
The Group has a formal risk management structure, which includes
the use of risk limits, reporting and monitoring requirements,
mandates, and other control procedures. It is currently the
responsibility of the Board to set and approve the risk management
procedures and controls.
All of the Group's activities involve analysis, acceptance and
management of some degree of risk or combination of risks. The most
important types of financial risk are credit risk, liquidity risk
and market risk. Market risk includes foreign exchange, interest
rate, inflation ('RPI') and equity price risks. The Group has no
material exposure to foreign exchange risk or equity price
risk.
The Group's risk management policies are designed to identify
and analyse these risks, to set appropriate risk limits and
controls and to monitor the risks and limits continually by means
of reliable and up to date systems. The Group modifies and enhances
its risk management policies and systems to reflect changes in
markets and products. The Audit Committee is responsible for
independently overseeing the activities in relation to Group risk
management. Electricity North West's treasury function, which is
authorised to conduct the day-to-day treasury activities of the
Group, reports on a regular basis to the Committee. The Group's
policies and processes for managing risk and the methods used to
measure risk have not changed since the prior year.
Credit risk
The Group takes on exposure to credit risk, which is the risk
that financial loss arises from the failure of a customer or
counterparty to meet its obligations under a contract as they fall
due. It arises principally from trade finance, and treasury
activities. The Group has dedicated standards, policies and
procedures to control and monitor credit risk.
The counterparties under treasury activities consist of
financial institutions. In accordance with IAS 39, the directors
have considered and quantified the exposure of the Group to
counterparty credit risk and do not consider there to be a material
credit risk adjustment required. The exposure to counterparty
credit risk will continue to be monitored.
Although the Group is potentially exposed to credit loss in the
event of non-performance by counterparties, such credit risk is
controlled through regular credit rating reviews of the
counterparties and by limiting the total amount of exposure to any
one party. Management does not anticipate any counterparty will
fail to meet its obligations.
Significant changes in the economy, or in the utilities sector
could result in losses not necessarily provided for at the
statement of financial position date. The total number of customers
in 2011 was 654 (2010: 32), however there are only five principal
customers, see note 2. The creditworthiness of each of these is
closely monitored. Whilst the loss of one of the principal
customers could have a significant impact on the Group, due to the
small number of these, the exposure to such credit losses would be
mitigated in most cases by the protection the regulator provides to
cover such losses. Nonetheless, the credit management process must
be closely adhered to, to avoid such circumstances, and the Group's
management therefore closely monitor adherence to this process.
a) Trade receivables
Credit risk in relation to trade receivables is considered to be
relatively low, due to the small number of principal customers, and
the fact that each of these customers has a contract in place with
the Group, and is required to provide collateral in the form of a
cash deposit subject to the amounts due and their credit rating. At
31 March 2011 there was GBP3.5m receivables past due (2010:
GBP0.3m) against which an allowance for doubtful debts of GBP0.1m
has been made (2010: GBP0.3m).
b) Treasury investments
The Directors do not believe that the Group is exposed to any
material concentrations of credit risk in relation to treasury
investments (including both amounts placed on deposit with
counterparties and asset interest rate swaps).
As at 31 March 2011 none (2010: none) of the Group's treasury
portfolio exposure was either past due or impaired, and no terms
had been renegotiated with any counterparty. The Group has limits
in place to ensure counterparties have a certain minimum credit
rating, and individual exposure limits to ensure there is no
concentration of credit risk.
The table below provides details of the ratings of the Group's
treasury portfolio:
2011 2011 2010 2010
Credit Rating GBPm % GBPm %
AAA 33.7 18.8 - -
AA 1.0 0.5 1.1 1.5
AA- 71.0 39.6 22.0 30.1
A+ 48.5 27.1 25.0 34.2
A 25.0 14.0 25.0 34.2
179.2 100.0 73.1 100.0
---------------------------- ------- ------ ------ --------
No collateral is held in relation to Treasury assets.
Exposure to credit risk
The maximum exposure to credit risk is represented by the
carrying amount of each financial asset, including derivatives, in
the statement of financial position. For trade receivables, the
value is net of any collateral held in cash deposits (please refer
to note 13 for further details).
2011 2011 2010 2010
Group Company Group Company
Credit Risk by Category GBPm GBPm GBPm GBPm
-------------------------------------- ------- --------- ------- ---------
Trade Receivables 33.2 33.2 2.0 2.0
Derivative Financial Instruments
(assets) 1.0 1.0 1.1 1.1
Cash and Cash Equivalents 126.9 126.9 72.0 72.0
Money Market Deposits (original
maturity over three months) 40.0 40.0 - -
201.1 201.1 75.1 75.1
-------------------------------------- ------- --------- ------- ---------
Trade receivables and cash and cash equivalents are measured at
cost. Derivative financial instruments are measured at fair
value.
Liquidity risk
Liquidity risk is the risk that the Group will not have
sufficient funds to meet the obligations or commitments resulting
from its business operations or associated with its financial
instruments, as they fall due. The Group manages the liquidity
profile of its assets, liabilities and commitments so that cash
flows are appropriately balanced and all funding obligations are
met when due. This is achieved through maintaining a prudent level
of liquid assets, and arranging funding facilities.
The Board is responsible for monitoring the maturity of
liquidity and deposit funding balances and taking any action as
appropriate. A long-term view of liquidity is provided by Group
financial models which project cash flows out 40 years ahead, and a
medium-term view is provided by the five year Group business plan,
which is updated ad approved annually by the Board. Shorter-term
liquidity is monitored via an 18 month liquidity projection and
this is reported to the Board. The Board has approved a liquidity
framework within which the business operates.
Available liquidity at 31 March was as follows:
2011 2011 2010 2010
Group Company Group Company
Available Liquidity GBPm GBPm GBPm GBPm
-------------------------------------- ------- --------- ------- ---------
Cash and Cash Equivalents 126.9 126.9 72.0 72.0
Money Market Deposits (original
maturity over three months) 40.0 40.0 - -
Committed Undrawn Bank facilities 80.0 80.0 224.2 224.2
-------------------------------------- ------- --------- ------- ---------
246.9 246.9 296.2 296.2
-------------------------------------- ------- --------- ------- ---------
Cash and cash equivalents comprise cash at bank and in hand and
short-term deposits with maturity of three months or less, net of
any bank overdrafts which are payable on demand.
Committed undrawn bank facilities include GBPNil (2010: GBP25m)
of facilities that expire within one year, GBP75m (2010: GBPNil)
that expires after one year but less than two years and GBP5m
(2010: GBP199.2m) that expires in more than two years. The Group
uses economic hedges to ensure that certain cash flows can be
matched and, where all criteria are met, management uses hedge
accounting to account for these.
The Group gives consideration to the timing of scheduled
payments to avoid the risks associated with the concentration of
large cash flows within particular time periods.
The following is an analysis of the maturity profile of
contractual cash flows of principal and interest payable under
financial liabilities and derivative financial instruments on an
undiscounted basis. Derivative cash flows have been shown net; all
other cash flows are shown gross.
Group and On <1 1 - 2 2 - 3 3 - 4
Company demand year years years years >4 years Total
31 March
2011 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------- ------- ------- ------- ------- -------- ---------- ----------
Trade and
other
payables (10.0) - - - - - (10.0)
Amounts owed
to parent
undertaking - (4.4) (4.4) (4.4) (73.0) - (86.2)
Amounts owed
to
affiliated
undertaking - (12.3) (12.3) (12.3) (12.3) (279.6) (328.8)
Bonds - (41.7) (41.7) (41.7) (41.7) (1,062.9) (1,229.7)
Borrowings
and
overdrafts - (2.1) (2.1) (2.1) (2.1) (155.3) (163.7)
Derivative
financial
instruments
(net) - 15.2 15.2 (22.2) 7.9 10.6 26.7
(10.0) (45.3) (45.3) (82.7) (121.2) (1,487.2) (1,791.7)
------------- ------- ------- ------- ------- -------- ---------- ----------
Group and On <1 1 - 2 2 - 3 3 - 4
Company demand year years years years >4 years Total
31 March
2010 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------- ------- ------- ------- ------- -------- ---------- ----------
Trade and
other
payables (33.2) - - - - - (33.2)
Amounts owed
to parent
undertaking - (4.6) (4.6) (4.6) (4.6) (76.2) (94.6)
Amounts owed
to
affiliated
undertaking - (12.3) (12.3) (12.3) (12.3) (291.9) (341.1)
Bonds - (41.7) (41.5) (41.5) (41.5) (1,095.3) (1,261.5)
Derivative
financial
instruments
(net) - 7.9 7.9 7.9 7.9 (32.4) (0.8)
(33.2) (50.7) (50.5) (50.5) (50.5) (1,495.8) (1,731.2)
------------- ------- ------- ------- ------- -------- ---------- ----------
Market Risk
Market risk is the risk that future cash flows of a financial
instrument will fluctuate because of changes in market prices.
Market prices include foreign exchange rates, interest rates,
inflation (RPI), equity and commodity prices. The main types of
market risk to which the Group is exposed are interest rate risk
and inflation risk. The Board is required to review and approve
policies for managing these risks on an annual basis. The Board
approves all new interest rate swaps and index-linked swaps entered
into. The management of market risk is undertaken by the Chief
Financial Officer or Treasurer under delegated authority.
The Group borrows in the major global debt markets at both fixed
and floating rates of interest, using derivatives, where
appropriate, to generate the desired effective interest basis.
Interest rate risk
Interest rate risk is the risk that future cash flows of a
financial instrument will fluctuate because of changes in market
interest rates. The Group's fixed rate borrowings are exposed to a
risk of change in their fair value due to changes in interest
rates. The Group's floating rate borrowings are exposed to a risk
of change in cash flows due to changes in interest rates. The Group
uses interest rate swap contracts to hedge these exposures.
Investments in short-term receivables and payables are not exposed
to interest rate risk.
Under an interest rate swap, the Group agrees with another party
to exchange at specific intervals the difference between fixed rate
and floating rate interest amounts calculated by reference to an
agreed notional principal amount. The notional principal of these
instruments reflects the extent of the Group's involvement in the
instruments, but does not represent its exposure to credit risk,
which is assessed by reference to the fair value.
Sensitivity analysis
The following sensitivity analysis is used by Group management
to monitor interest rate risk. The analysis below shows
forward-looking projections of market risk assuming certain adverse
market conditions occur. The sensitivity figures are calculated
based on upward parallel shifts of 1% and 3% in the yield
curve.
2011 2010
Change in interest rates Change in interest rates
+1% +3% +1% +3%
GBPm GBPm GBPm GBPm
-------------------- ------------ ------------- ------------- ------------
Debt held at fair
value 11.4 62.5 30.5 80.8
Interest rate swaps 0.1 (2.2) (0.7) (1.2)
-------------------- ------------ ------------- ------------- ------------
Total fair value
movement 11.5 60.3 29.8 79.6
-------------------- ------------ ------------- ------------- ------------
The sensitivity analysis above shows the amount by which the
fair value of items recorded on the statement of financial position
at fair value would be adjusted for a given interest rate movement.
As such fair value movements are taken to the income statement,
there would be a corresponding adjustment to profit in these
scenarios (figures in brackets represent a reduction to profit).
However, there would be no direct cash flow impact arising from
these adjustments.
Although the above measures provide an indication of the Group's
exposure to market risk, such measures are limited in that
historical data is not necessarily a good guide to future events,
and exposures are calculated on static statement of financial
position positions, and future changes in the structure of the
statement of financial position are ignored.
Index-linked debt is carried at amortised cost and as such the
statement of financial position in relation to this debt is not
exposed to movements in interest rates.
Inflation risk
The revenues of ENWL are linked to movements in inflation, as
measured by the Retail Prices Index ('RPI'). To economically hedge
exposure to RPI, ENWL links a portion of its funding costs to RPI
by either issuing RPI linked bonds or by using derivative financial
instruments. The Group's index-linked borrowings and index-linked
swaps are exposed to a risk of change in their fair value arising
from a risk of change of future cash flows due to changes in
inflation rates.
The carrying value of index-linked debt at 31 March 2011 was
GBP251.1m (2010: GBP110.8m). Whilst management does not formally
monitor the sensitivity to changes in inflation, it is estimated
that a 1% increase in inflation would lead to a GBP1.2m
(2010:GBP1.1m) decrease in profits in relation to this index-linked
debt. The Company's revenues are also linked to RPI via returns on
the Regulated Asset Value ('RAV').
The Group also has GBP200m notional principal of index-linked
swaps that convert a portion of the fixed rate of interest payable
under bonds to an inflation-linked rate. These swaps were executed
in conjunction with the associated bond issue so that the fixed
rate of interest receivable under the swaps matches the nominal
interest payable on the bond. Interest settlement dates under the
swaps are timed to coincide with the bond interest payments, which
are semi-annual.
Currency risk
The Group makes no significant sales or purchases in currencies
other than its functional currency. Accordingly, the Group has no
material foreign currency exposures.
Hedging
The Group does not use derivative financial instruments for
speculative purposes, and has not pledged collateral in relation to
any of its derivative instruments. At 31 March 2011, the Group's
derivatives are not designated in effective hedging relationships,
and instead are measured at fair value through the income
statement.
Fair values
The tables below provide a comparison of the book and fair
values of the Group's financial instruments by category as at the
statement of financial position date. Where available, market
values have been used to determine fair values. Where market values
are not available, fair values have been calculated by discounting
cash flows at prevailing interest rates.
For cash and cash equivalents, trade and other receivables,
trade and other payables and short-term loans and receivables with
a maturity of less than one year the book values approximate to the
fair values because of their short-term nature. For non-public long
term loans and receivables, fair values are estimated by
discounting future contractual cash flows to net present values
using current market interest rates available to the Group for
similar financial instruments as at the year end.
The fair values of financial assets and liabilities, together
with the carrying amounts shown in the statement of financial
position, are as follows:
2011 2010
Carrying Carrying
value Fair value value Fair value
Group and Company GBPm GBPm GBPm GBPm
--------------------------------- -------- ---------- -------- ----------
Current assets
Cash and cash equivalents 126.9 126.9 72.0 72.0
Money Market Deposits (original
maturity
over three months) 40.0 40.0 - -
Derivative financial instruments 1.0 1.0 1.1 1.1
167.9 167.9 73.1 73.1
--------------------------------- -------- ---------- -------- ----------
Derivative financial assets are due after more than one year
(2010: same).
2011 2010 (Re-presented)
Carrying Fair Carrying
value value value Fair value
Group and Company GBPm GBPm GBPm GBPm
------------------------------ ------------- --------- -------- ----------
Non-current liabilities
Borrowings designated at fair
value through income statement (335.2) (335.2) (328.4) (328.4)
Borrowings measured at amortised
cost (708.7) (804.1) (570.8) (646.7)
Derivative financial instruments (76.3) (76.3) (52.9) (52.9)
(1,120.2) (1,215.6) (952.1) (1,028.0)
---------------------------------- --------- --------- -------- ----------
Derivative financial liabilities have been re-presented to
non-current in the preceding year in accordance with Improvements
to IFRSs.
The carrying value of trade and other receivables and of trade
and other payables approximates to their fair value for both the
Group and Company.
Fair value measurements recognised in the statement of financial
position
The following table provides an analysis of financial
instruments that are measured subsequent to initial recognition at
fair value, grouped into Levels 1 to 3 based on the degree to which
the fair value is observable:
-- Level 1 fair value measurements are those derived from quoted
prices (unadjusted) in active markets for identical assets or
liabilities;
-- Level 2 fair value measurements are those derived from inputs
other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly (i.e. as
prices) or indirectly (i.e. derived from prices); and
-- Level 3 fair value measurements are those derived from
valuation techniques that include inputs for the asset or liability
that are not based on observable market data (unobservable
inputs).
Level Level Level
1 2 3 Total
31 March 2011 GBPm GBPm GBPm GBPm
---------------------------------------- -------- ------- ------ --------
Financial assets at fair value through
profit or loss
Derivative financial assets - 1.0 - 1.0
---------------------------------------- -------- ------- ------ --------
Financial liabilities at fair value
through
profit or loss
Derivative financial liabilities - (76.3) - (76.3)
Financial liabilities designated
at FVTPL (335.2) - - (335.2)
---------------------------------------- -------- ------- ------ --------
(335.2) (76.3) - (411.5)
---------------------------------------- -------- ------- ------ --------
Level Level Level
1 2 3 Total
31 March 2010 GBPm GBPm GBPm GBPm
---------------------------------------- -------- ------- ------ --------
Financial assets at fair value through
profit or loss
Derivative financial assets - 1.1 - 1.1
---------------------------------------- -------- ------- ------ --------
Financial liabilities at fair value
through
profit or loss
Derivative financial liabilities - (52.9) - (52.9)
Financial liabilities designated
at FVTPL (328.4) - - (328.4)
---------------------------------------- -------- ------- ------ --------
(328.4) (52.9) - (381.3)
---------------------------------------- -------- ------- ------ --------
There were no transfers between levels during the current
year.
Trade And Other Payables
Group Company Group Company
2011 2011 2010 2010
GBPm GBPm GBPm GBPm
----------------------------------------- ------ -------- ------ --------
Trade payables 10.0 10.0 33.2 33.2
Amounts owed to parent undertaking - - 0.2 0.1
Amounts owed to subsidiary undertakings - 15.4 - 0.1
Other taxation and social security 13.8 13.8 6.2 6.2
Customer contributions (see note
21) 29.0 29.0 28.6 28.6
Refundable customer deposits (see
note 22) 6.5 6.5 6.9 6.9
Accruals and deferred income 92.2 92.2 20.8 20.8
----------------------------------------- ------ -------- ------ --------
151.5 166.9 95.9 95.9
----------------------------------------- ------ -------- ------ --------
Trade payables and accruals principally comprise amounts
outstanding for capital purchases and ongoing costs. The average
credit period in the year was 23 days from receipt of invoice. In
2010 trade creditors principally comprised amounts outstanding to
UUES for capital delivery and operating services provided under the
out-sourcing ('ASA') contract. The credit period with UUES for the
year to 31 March 2010, was 10 days from receipt of invoice. UUES
creditor days as disclosed in their March 2010 financial statements
were 24 days.
Directors' remuneration
Group Company Group Company
2011 2011 2010 2010
GBPm GBPm GBPm GBPm
-------------- ----- ------- ----- -------
Salaries 1.0 0.8 0.5 0.5
Accrued Bonus 0.6 0.6 0.5 0.5
Pension 0.1 0.1 0.1 0.1
1.7 1.5 1.1 1.1
-------------- ----- ------- ----- -------
The aggregate emoluments of the Directors in 2011 amounted to
GBP1,734,451 (2010: GBP1,127,063). Emoluments comprise salaries,
fees, taxable benefits, compensation for loss of office and the
value of short-term and long-term incentive awards. Amounts payable
under long-term incentive awards are not payable until June 2015
and are dependent upon a combination of both financial performance
and comparative performance, as assessed by Ofgem, over the DPC5
period. The emoluments of the highest paid Director in 2011 in
respect of services to the Group amounted to GBP727,209 (2010:
GBP699,185). Included in the total emoluments shown above for the
current year, are amounts payable for compensation for loss of
office of GBP410,000 (2010: GBPnil) all paid in cash.
Not included in the amounts shown above are further payments
made in respect of Directors' services, as detailed in note 27.
Mr M McCallion and Mr P Taylor are former members of the United
Utilities Pension Scheme and are members of, and contributed to, a
defined benefit section of the ENW Electricity Supply Pension
Scheme ('ENW ESPS'), which provides an entitlement, on normal
retirement of age 65, equal to 1/60(th) of pensionable earnings for
each complete year of service. Early retirement is possible from
the age of 50 if the Company agrees. Mr S Johnson is a member of
the defined contribution section of the ENW ESPS scheme.
The pension contributions for the highest paid Director for 31
March 2011 were GBP38,500 (2010: GBP37,100). The accrued pension at
31 March 2011 for the highest paid Director was GBPNil (2010:
GBPNil).
As at 31 March 2011 the Directors have no interests in the
ordinary shares of the Company.
Retirement Benefit Schemes
Group and Company
The Group's defined benefit arrangements, are the ENW Group of
the ESPS ('the Scheme') and form part of the Electricity Supply
Pension Scheme ('ESPS'). In the year ended 31 March 2011 the scheme
was split into two sections, the Electricity North West Limited
('ENW') section and the United Utilities Electricity Services
Limited ('UUES') section.
The pension scheme structure as described above was unaffected
by the acquisition of ENWSL. However, following the 'hive-up' of
the assets and liabilities of ENWSL to ENWL and the termination of
the Asset Services Agreement between ENWL and ENWSL on the 31 March
2011, the two sections have been merged as at that date.
The defined benefit section of the Scheme closed to new entrants
in 2005 and new employees of the Group are instead provided with
access to a defined contribution section of the Scheme. The total
cost charged to the income statement in relation to the defined
contribution section for the year ended 31 March 2011 was GBP0.9m
(2010: GBP0.2m) and represents contributions payable to the scheme
at rates specified in the rules of the scheme.
During the year the Group made contributions of GBP27.6m (2010:
GBP15.4m) to the defined benefit sections of the scheme. The Group
will continue to make payments into the scheme in accordance with
the results of the formal actuarial valuation of the Scheme as at
31 March 2010. The Group estimates that contributions for the year
ending 31 March 2012 will amount to GBP26.5m. The total defined
benefit pension expense for the year was GBP10.5m (2010: pension
expense GBP11.4m). Information about the pension arrangements for
the Executive Directors is contained in note 18.
The last actuarial valuation of the Scheme was carried out as at
31 March 2010. The valuation has been projected forward by an
independent actuary to take account of the requirements of IAS 19
'Employee Benefits' in order to assess the position as at 31 March
2011. The present value of the defined benefit obligation, the
related current service cost and the past service cost were
measured using the projected unit credit method. A pension deficit
under IAS 19 of GBP41.3m is included in the statement of financial
position at 31 March 2011 (2010: deficit of GBP142.8m).
The main financial assumptions used by the actuary were as
follows:
2011 2010
% %
--------------------------- ----- -----
Discount rate - ENWL 5.40 5.20
Discount rate - UUES 5.60 5.30
Expected return on assets
- ENWL 5.70 6.00
Expected return on assets
- UUES 6.80 7.20
Pensionable salary growth
- ENWL 4.40 4.60
Pensionable salary growth
- UUES 4.50 4.70
Pension increases - ENWL 3.40 3.60
Pension increases - UUES 3.50 3.70
Price inflation - ENWL 3.40 3.60
Price inflation - UUES 3.50 3.70
The mortality rates utilised in the valuation are based on the
standard actuarial tables S1PMA /S1PFA (birth year) tables with a
105% loading (2010: PNMA00/PNFA00 (birth year) mortality tables
with a 120% loading) to allow for differences in mortality between
the Scheme population and the population used in the standard
tables. A long term improvement rate of 1.0% pa is assumed. These
factors have been taken into account in the calculation of the
defined benefit obligations of the Scheme.
The current life expectancies (in years) underlying the value of
the accrued pension Scheme liabilities for the Scheme are:
2011 2010
---------------------- ----- -----
Male life expectancy
at age 60:
Retired member 25.8 26.0
Non-retired member 27.0 27.9
In valuing the liabilities of the Scheme at 31 March 2011,
mortality assumptions have been made as indicated above. If life
expectancy had been changed to assume that all members of the fund
lived for one year longer, the value of the reported liabilities at
31 March 2011 would have increased by approximately GBP25m before
deferred tax.
As at 31 March 2011, the Scheme's assets and liabilities
recognised in the statement of financial position were as
follows:
Scheme Scheme
assets assets
at Value at at Value at
31 March 31 March 31 March 31 March
2011 2011 2010 2010
% GBPm % GBPm
------------------------------ ---------- ---------- ---------- ----------
Equities 43.7 385.6 40.1 337.6
Gilts 11.8 104.7 18.7 157.6
Bonds 38.3 338.7 38.7 325.2
Property 4.5 39.8 0.6 5.3
Cash 1.0 9.0 1.9 15.6
Assets arising on ENWSL
acquisition 0.6 5.4 - -
Net current assets 0.1 0.6 - -
------------------------------ ---------- ---------- ---------- ----------
Total fair value of assets 100.0 883.8 100.0 841.3
Present value of liabilities (925.1) (984.1)
------------------------------ ---------- ---------- ---------- ----------
Net retirement benefit
obligation (41.3) (142.8)
------------------------------ ---------- ---------- ---------- ----------
To develop the expected long-term rate of return on assets
assumption, the Group considered the level of expected returns on
risk-free investments, the historical level of the risk premium
associated with the other asset classes in which the portfolio is
invested and the expectations for future returns of each asset
class. The expected return for each asset class was then weighted
based on the actual asset allocation to develop the expected
long-term return on assets assumption for the portfolio. The actual
return on the Scheme assets was GBP56.1m gain (2010: GBP174.6m
gain). None of the pension scheme assets are held in the Group's
own financial instruments or any other assets used by the
Group.
Movements in the present value of the Group's defined benefit
obligations are as follows:
2011 2010
GBPm GBPm
------------------------------------- -------- --------
At 1 April 2010 (984.1) (728.0)
Current service cost (11.4) (6.1)
Interest cost on Scheme obligations (50.5) (46.6)
Member contributions (2.1) (2.2)
Past service cost (0.3) (0.4)
Actuarial gains/(losses)
- assumptions 52.9 (252.2)
Actuarial gains - experience
items 27.1 -
Benefits paid 48.7 51.4
ENWSL acquisition (5.4) -
------------------------------------- -------- --------
At 31 March 2011 (925.1) (984.1)
------------------------------------- -------- --------
Movements in the fair value of the Group's pension Scheme assets
were as follows:
2011 2010
GBPm GBPm
--------------------------- ------- -------
At 1 April 2010 841.3 700.5
Expected return on Scheme
assets 51.7 41.7
Actuarial gains 4.4 132.9
Company contributions 27.6 15.4
Member contributions 2.1 2.2
Benefits paid (48.7) (51.4)
ENWSL acquisition 5.4 -
At 31 March 2011 883.8 841.3
--------------------------- ------- -------
The net pension expense before taxation recognised in the income
statement, before capitalisation, in respect of the defined benefit
Scheme is summarised as follows:
2011 2010
GBPm GBPm
-------------------------------- ------- -------
Current service cost (11.4) (6.1)
Past service cost (0.3) (0.4)
Expected return on Scheme
assets 51.7 41.7
Interest on Scheme obligations (50.5) (46.6)
-------------------------------- ------- -------
Net pension expense before
taxation (10.5) (11.4)
-------------------------------- ------- -------
The above amounts are recognised in arriving at operating profit
except for expected return on Scheme assets and interest on Scheme
obligations which have been recognised within investment
income.
The reconciliation of the opening and closing statement of
financial position is as follows:
2011 2010
GBPm GBPm
---------------------------------- -------- --------
At 1 April 2010 (142.8) (27.5)
Expense recognised in the income
statement (10.5) (11.4)
Contributions paid 27.6 15.4
Actuarial gains/(losses) gross
of taxation 84.4 (119.3)
At 31 March 2011 (41.3) (142.8)
---------------------------------- -------- --------
Actuarial gains and losses are recognised directly in the
statement of comprehensive income. At 31 March 2011, a cumulative
gain of GBP199.1m (2010: gain of GBP114.7m) had been recorded
directly in the statement of comprehensive income.
The history of the Scheme for the current and prior years is as
follows:
2011 2010 2009 2008 2007
GBPm GBPm GBPm GBPm GBPm
Present value
of defined
benefit obligation (925.1) (984.1) (728.0) (796.3) (826.1)
Fair value of
Scheme assets 883.8 841.3 700.5 841.4 850.6
Net retirement benefit
(obligation)/ surplus (41.3) (142.8) (27.5) 45.1 24.5
Experience
adjustments
on Scheme
liabilities 27.1 - 0.8 (18.4) -
Experience
adjustments
on Scheme
assets 4.4 - (152.5) (12.9) -
20 Deferred Tax
The following are the major deferred tax liabilities and assets
recognised by the Group and Company, and the movements thereon,
during the current and prior years.
Retirement
Accelerated benefit
tax depreciation obligations Other Total
Group GBPm GBPm GBPm GBPm
At 1 April 2009 297.5 (7.7) (1.0) 288.8
Charged/(credited)
to the income statement 9.0 1.1 (11.8) (1.7)
Credited to equity
for the year - (33.4) - (33.4)
At 1 April 2010 306.5 (40.0) (12.8) 253.7
(Credited)/charged
to the income statement (20.8) 4.4 (3.2) (19.6)
Charged to equity
for the year - 24.9 - 24.9
Arising on acquisition - - (0.4) (0.4)
At 31 March 2011 285.7 (10.7) (16.4) 258.6
Accelerated tax Retirement benefit Other Total
Company depreciation GBPm obligations GBPm GBPm GBPm
At 1 April 2009 298.4 (7.7) (1.0) 289.7
Charged/(credited)
to the income
statement 9.0 1.1 (11.8) (1.7)
Credited to equity
for the year - (33.4) - (33.4)
At 1 April 2010 307.4 (40.0) (12.8) 254.6
(Credited)/charged
to the income
statement (21.0) 4.4 (3.2) (19.8)
Charged to equity
for the year - 24.9 - 24.9
Arising on 'hive-up'
of ENWSL - - (0.1) (0.1)
At 31 March 2011 286.4 (10.7) (16.1) 259.6
There are no significant unrecognised deferred tax assets or
liabilities for either the Group or Company in either the current
or prior year.
Other deferred tax relates primarily to derivative
instruments.
CUSTOmer Contributions
Customer contributions are amounts received from a customer in
respect of the provision of a new connection to the network.
Customer contributions are amortised through the income statement
over the lifetime of the relevant asset.
Group and Company GBPm
At 1 April 2009 418.1
Additions during the year 43.9
Amortisation (11.4)
At 1 April 2010 450.6
Additions during the year 39.0
Amortisation (12.1)
At 31 March 2011 477.5
Amounts due in less than one year (see note 17) 29.0
Amounts due after more than one year 448.5
At 31 March 2011 477.5
Refundable Customer Deposits
Refundable customer deposits are those customer contributions
which may be in part refundable, dependent on contracted
targets.
2011 2010
Group and Company GBPm GBPm
Amounts due in less than one year (see note 17) 6.5 6.9
Amounts due after more than one year 1.6 3.5
8.1 10.4
Share Capital
2011 2010
GBP GBP
Authorised:
569,999,996 (2010: 569,999,996) ordinary shares of
50 pence each 284,999,998 284,999,998
4 'A' ordinary shares of 50 pence each 2 2
Special rights redeemable preference share of GBP1 1 1
285,000,001 285,000,001
2011 2010
GBP GBP
Allotted, called up and fully paid:
476,821,341 (2010: 476,821,341) ordinary shares
of 50 pence each 238,410,671 238,410,671
4 'A' ordinary shares of 50 pence each 2 2
238,410,673 238,410,673
The 'A' ordinary shares and the ordinary shares rank pari passu
in all respects, save that dividends may be declared on one class
of shares without being declared on the other.
Shareholders' Equity
Called
up Share Capital
share premium Revaluation redemption Retained Total
capital account reserve reserve earnings Equity
Group GBPm GBPm GBPm GBPm GBPm GBPm
-------- -------- ------------ ---------
At 1 April
2010 238.4 4.4 111.6 8.6 63.4 426.4
Profit for the
year - - - - 121.2 121.2
Transfer from
Revaluation
reserve - - (1.7) - 1.7 -
Actuarial
gains on
defined
benefit
Schemes - - - - 84.4 84.4
Tax on
components of
comprehensive
income - - - - (24.9) (24.9)
-------- -------- ------------ ---------
Total
comprehensive
income for
the year - - (1.7) - 182.4 607.1
Transactions
with owners
recorded
directly in
equity
Equity
dividends - - - - (62.0) (62.0)
At 31 March
2011 238.4 4.4 109.9 8.6 183.8 545.1
-------- -------- ------------ ---------- --------- -------
As allowed by section 408 of the Companies Act 2006, the Company
has not presented its own income statement. The amount of profit
after tax for the financial year dealt with in the Company's income
statement is GBP121.2m (2010: loss GBP1.1m).
Called
up Share Capital
share premium Revaluation redemption Retained Total
capital account reserve reserve earnings Equity
Company GBPm GBPm GBPm GBPm GBPm GBPm
-------- -------- ------------ ---------
At 1 April
2010 238.4 4.4 111.6 8.6 65.4 428.4
Profit for the
year - - - - 121.2 121.2
Transfer from
Revaluation
reserve - - (1.7) - 1.7 -
Actuarial
gains on
defined
benefit
Schemes - - - - 84.4 84.4
Tax on
components of
comprehensive
income - - - - (24.9) (24.9)
-------- -------- ------------ ---------
Total
comprehensive
income for
the year - - (1.7) - 182.4 609.1
Transactions
with owners
recorded
directly in
equity
Equity
dividends - - - - (62.0) (62.0)
At 31 March
2011 238.4 4.4 109.9 8.6 185.8 547.1
operating Leases
The Group and Company are committed to making the following
payments over the lifetime of the lease in respect of
non-cancellable operating leases which expire in:
Land and Plant Land and Plant and
buildings and machinery buildings machinery
2011 2011 2010 2010
GBPm GBPm GBPm GBPm
Within one year 0.7 0.1 0.6 0.1
In the second to fifth
years inclusive 1.9 0.4 2.1 0.4
After five years 1.4 3.0 1.6 2.9
4.0 3.5 4.3 3.4
ACQUISITION OF SUBSIDIARY
On the 30 June 2010, the Group acquired 100 per cent of the
issued share capital of United Utilities Electricity Services
Limited (now renamed Electricity North West Services Limited
'ENWSL') for cash consideration of GBP25.5m. ENWSL had been engaged
as a third party service provider to manage delivery of all
operations and maintenance, capital investment, connections and
customer service for ENWL. Incorporating the operations and
maintenance contract into one business is expected to reduce costs,
improve efficiency and secure continued delivery of all services to
customers in the region. This transaction has been accounted for
using the purchase method of accounting.
The net assets acquired in the transaction, and the goodwill
arising are as follows:
Provisional
fair value Provisional
ENWSL's carrying amount adjustments fair value
before combination GBPm GBPm GBPm
Net assets acquired
Property, plant and
equipment 12.1 (0.7) 11.4
Inventories 6.2 (1.0) 5.2
Trade receivables 36.8 (0.3) 36.5
Bank and cash balances 9.2 - 9.2
Trade payables (47.3) - (47.3)
Deferred tax asset - 0.4 0.4
Total identifiable assets 17.0 (1.6) 15.4
Goodwill arising on
acquisition
(provisional) 10.1
25.5
Cash consideration paid 23.5
Deferred consideration (payable 31 December
2011) 2.0
Total consideration 25.5
GBPm
Cash consideration paid (23.5)
Cash and cash
equivalents acquired 9.2
Net cash outflow arising
on acquisition (14.3)
The fair value of the acquired identifiable intangible assets
and net assets are provisional pending completion of final
valuations.
The goodwill arising on the acquisition of ENWSL is attributable
to the synergies and other benefits arising from controlling all
the operations and maintenance of the company's operational assets
and capturing the profit earned by the Company. None of the
goodwill recognised is expected to be deductible for income tax
purposes. In accordance with IFRS 3 revised, GBP0.8m of acquisition
costs have been expensed within the period.
It is impractical to disclose the results contributed by ENWSL
in the period between the date of acquisition and the statement of
financial position date. This being due to the following
reasons:
-- between the 1 April 2010 and the acquisition date the ASA
pricing had not been finalised between ENWL and ENWSL; and
-- following the acquisition, trading between the companies has
been conducted on a pass-through basis.
If the acquisition had been completed on 1 April 2010, total
Group revenue for the year would have been GBP393.9m, and profit
for the year would have been GBP121.6m.
Hive up of ENWSL assets and liabilities to ENWL
On 31 March 2011, the trade, assets and liabilities of ENWSL, a
wholly owned subsidiary undertaking, were hived up to ENWL. The
consideration was equal to the net book value of the assets and
liabilities, and is included in amounts owing to group
undertakings.
ENWSL
GBPm
Plant, property and equipment 11.7
Inventories 5.7
Trade receivables 9.4
Intercompany pool balance 52.3
Trade payables (53.8)
Overdraft (10.0)
Deferred tax asset 0.1
Net assets acquired 15.4
27 RELATED PARTY TRANSACTIONS
Transactions between the Company and its subsidiaries, which are
related parties, have been eliminated on consolidation and are not
disclosed in this note.
Related party transactions during the year were as follows:
2011 2010
Group and Company GBPm GBPm
Interest paid 16.8 11.8
Amounts owed to parent undertaking 67.4 70.4
Amounts owed to affiliated undertaking 195.2 194.8
Directors' services 0.1 0.1
Recharges to group companies 0.2 -
The loans from the parent undertaking were made in July 2009. A
loan from North West Electricity Networks Limited of GBP67.4m
accrues interest at LIBOR plus 6.55% per annum and is repayable in
March 2015 and a loan of GBP195.2m accrues at 6.125% per annum and
is repayable July 2021.
Related parties include key management personnel who are the
Directors. Amounts paid to Executive Directors in respect of
remuneration (see note 18) totalled GBP1.7m (2010: GBP1.1m).
Fees of GBP0.1m (2010: GBP0.1m) were payable to Colonial First
State in respect of the provision of Directors' services. Colonial
First State is part of the Commonwealth Bank of Australia which is
identified as a related party as per note 30.
28 Cash Generated From Operations
Group Company Group Company
2011 2011 2010 2010
GBPm GBPm GBPm GBPm
----------------------------------- ---------------
Profit before taxation 139.1 139.1 17.1 17.1
Adjustment for investment income
and finance expense 71.3 71.3 138.8 138.8
----------------------------------- ---------------
Operating profit 210.4 210.4 155.9 155.9
Adjustments for:
Depreciation of property, plant
and equipment 75.1 72.5 68.3 68.3
Amortisation of intangible
assets 4.3 4.3 3.3 3.3
Amortisation of customer
contributions (12.1) (12.1) (11.4) (11.4)
Profit on disposal of property,
plant and equipment (0.6) (0.1) (0.2) (0.2)
Cash contributions in excess of
pension charge to operating profit (15.9) (15.9) (11.9) (11.9)
----------------------------------- ---------------
Operating cash flows before
movements in working capital 261.2 259.1 204.0 204.0
Changes in working capital
Decrease in inventories (0.2) - - -
(Increase) / decrease in trade
and other receivables (4.1) (33.9) 9.0 9.0
(Decrease) / increase in
payables (11.0) 21.6 5.4 5.4
----------------------------------- ---------------
Cash generated from operations 245.9 246.8 218.4 218.4
----------------------------------- ---------------
29 contingent liability
ENWL holds the leasehold title to a number of retail properties
as a result of its legacy retail operations whilst trading as
Norweb Plc. The Company assigned the majority of these to Comet
Group Plc ('Comet') in 1996. ENWL still has a potential liability
for lease obligations under privity of contract rules. In prior
years, owing to the protection afforded by Kesa Electricals Plc
(the parent company of Comet ('Kesa')), management assessed the
risk of exposure to be remote. Although the Company remains
shielded from landlord claims by a chain of indemnities, recent
press coverage speculates that Kesa may be considering disposing of
Comet, which may reduce its financial covenant and increase ENWL's
risk exposure.
Management consider the risk of exposure to be low. Owing to
lack of visibility over the current holder of the lease and an up
to date appraisal of their financial stability and the need for an
appraisal of each retail site, management considers it impractical
to accurately evaluate the exposure at this time.
30 Ultimate Parent Undertaking And Controlling Party
The ultimate parent undertaking is North West Electricity
Networks (Jersey) Limited, a company incorporated and registered in
Jersey. The external address of the ultimate parent company is:
Whiteley Chambers, Don Street, St Helier, Jersey, JE4 9WG.
The largest group in which the results of the company are
consolidated is that headed by North West Electricity Networks
(Jersey) Limited incorporated in Jersey. The smallest group in
which they are consolidated is that headed by North West
Electricity Networks Limited, a company incorporated and registered
in the UK.
First State Investments Fund Management Sarl ('EDIF') and IIF
Int'l Holding GP Ltd ('IIF') have been identified as ultimate
controlling parties and are advised by Colonial First State Global
Asset Management (a member of the Commonwealth Bank of Australia
Group) and JP Morgan Investment Management Inc respectively.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR DKADBQBKDOPB
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