Northumbrian Water Group plc Annual Report and Accounts 2011

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Northumbrian Water Group plc Northumbrian Water Group plc is an independent company quoted on the FTSE 250 Index of the London Stock Exchange. The Group principally works in the provision of water and waste water services. Our vision To be the national leader in the provision of sustainable water and waste water services.

Contents

Directors’ report – business review Financial statements 01 Highlights 85 Statement of directors’ responsibilities in relation 02 NWG at a glance to the Group financial statements 04 Chairman’s statement 86 Report of the auditors on the Group financial 06 Chief executive officer’s review statements 10 Our corporate responsibility 88 Consolidated income statement 12 Our performance measures 89 Consolidated statement of comprehensive income 14 Our market 90 Consolidated statement of changes in equity 16 Our financial performance 91 Consolidated balance sheet 22 Our operating performance 92 Consolidated cash flow statement 50 Our risks and uncertainties 93 Notes to the consolidated financial statements 52 Appendix to the directors’ report – business review 132 Statement of directors’ responsibilities in relation to the parent Company financial statements Directors’ report – governance 133 Report of the auditors on the Company financial statements 54 Board directors’ biographies 135 Company balance sheet 56 Statutory disclosures 136 Notes to the Company financial statements 58 Corporate governance statement 140 Shareholder information Remuneration 71 Directors’ remuneration report

All corporate responsibility related sections throughout the report are highlighted with a green shaded box.

Cautionary statement This annual report contains certain statements with respect to the future operations, performance and financial condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those forecast. Such statements reflect knowledge and information available at the date of preparation of this annual report and the Company undertakes no obligation to update such statements. Nothing in this annual report should be construed as a profit forecast. Certain regulatory performance data contained in this annual report is subject to regulatory audit. 01

The directors of Northumbrian Water review – business report Directors’ Group (NWG or the Company) are Highlights pleased to present their report on the affairs of the Company, along with the audited financial statements and the auditors’ report for the year ended 31 March 2011.

Financial highlights – Proposed final dividend of 9.57 Revenue 2011

– Strong financial performance with pence (2010: 8.85 pence) per share 2011 statements financial and report Annual plc Group Water Northumbrian a 6.3% increase in profit before tax to be paid on 9 September 2011, giving a full year ordinary dividend – Regulated business operating of 14.29 pence (2010: 13.24 pence) costs are better than target £73 8 .1 m per share, an increase of 7.9% 2010: £704.7m reflecting good progress on our efficiency programme and fixing Operational highlights of power prices to March 2015 – Continued high levels of Profit before interest 2011 customer satisfaction – Net interest charges increased by £17.4 million, largely reflecting RPI increases – Excellent levels of drinking water quality on index linked bonds; net cash interest – Water resource situation is good with charges increased by £2.6 million £304.2m no plans for restrictions; expansion 2010: £275.8m – Capital investment in the period of Abberton reservoir to secure of £219.9 million for the Group; supplies for the Essex region for Profit before tax 2011 capital investment for the regulated 25 years is progressing well business of £221.5 million – Industry-leading waste water compliance – New loan facilities in place; £100.0 – Construction commenced on advanced million US private placement anaerobic digestion plant at Howdon, £181.0 m completed for the Company in April on Tyneside, a further step towards our 2011 and £150.0 million approved 2010: £170.2m target of generating 20% of our energy by the European Investment Bank from renewable sources by 2015 Profit for the year 2011 (EIB) for the regulated business – Achievement of Government’s – Funding and approved facilities in Skills Pledge with 90% of the place to meet the requirements workforce trained to at least National of the business to March 2014; Qualification Framework Level 2 £178.4 m cash and short term deposits at 2010: £122.9m 31 March 2011 £141.7 million

Revenue £m Profit before tax £m

738.1 181.0 704.7 170.3 170.2 670.4 694.1 633.5 147.8 152.7

07 08 09 10 2011 07 08 09 10 2011

Dividend per share pence

14.29 12.79 13.24 12.07 11.27 www.nwg.co.uk

07 08 09 10 2011 02 Directors’ report – business review – business report Directors’ NWG at a glance

Northumbrian Water Group plc Our water and sewerage services in the north east cost

Annual report and financial statements 2011 statements financial and report Annual plc Group Water Northumbrian NWG owns a number of companies which, together an average householder 92 pence per day and in Essex with NWG, form the Group. The largest of these and Suffolk area, 66 pence for a water only service. companies, Northumbrian Water Limited (NWL), is one of the ten regulated water and sewerage businesses The Water Services Regulation Authority (Ofwat), as the in England and Wales. The emphasis given to NWL economic regulator, sets price limits for companies in throughout this report, reflects its importance to the England and Wales every five years. 2010/11 was the overall performance of the Group. first year in the current five year investment plan. This regulation is performance based and companies are Northumbrian Water Limited measured in terms of efficiencies related to operating NWL operates in the north east of England, where it costs, capital programmes and financing as well as trades as Northumbrian Water, and in the south east their general operations. The regulated revenue of the of England, where it trades as Essex & Suffolk Water. company is set by reference to the rate of inflation, Northumbrian Water currently provides water and measured by the Retail Price Index (RPI), as well as an sewerage services to 2.7 million people and Essex adjustment factor referred to as ‘k’. The profile of ‘k’ & Suffolk Water provides water services to 1.8 million for the current five year period is shown below: people in a combined area of over 12,260 square kilometres. 2010/11 2011/12 2012/13 2013/14 2014/15 k (%) 5.0 3.8 0.9 0.0 (1.0) Key facts 47 impounding reservoirs NWL has a long term agreement with RWE npower 57 water treatment works for it to operate and sell the energy from NWL’s 346 water pumping stations hydroelectric power station at Kielder Water, which 338 water service reservoirs is the largest in England. 25,624km water mains 414 sewage treatment works Water and waste water contracts 731 sewage pumping stations NWG controls a number of special purpose companies 16,181km sewers which have water and waste water contracts in Scotland, Ireland and Gibraltar. NWL is licensed to provide these services and currently supplies over 1,250 megalitres of water per day. This Other water is drawn from reservoirs, where it is collected and SA Agrer NV (Agrer) carries out project work in stored, rivers and groundwater sources. It is treated at developing countries through a number of overseas our works before it is delivered by a network of pipes to aid-funded agencies. homes and businesses. Revenue £m In the north east of England, where NWL also provides sewerage services, waste water is then collected from these properties via the sewerage network and treated 40.0 at our works before it is returned to the environment as 8.7 either clean water or sludge which can be recycled as fertiliser or used to generate energy.

NWL Water and waste water contracts 689.4 Other www.nwg.co.uk 03 Directors’ report – business review – business report Directors’ North east England Northumbrian Water provides water and Berwick sewerage services to 2.7 million people in the north east of England. The major population centres of Tyneside, Wearside and Teesside are in our area but we also Alnwick serve large rural areas in Northumberland Norwich and County Durham (provision of waste Great Yarmouth water services only in Hartlepool). Kielder Morpeth Annual report and financial statements 2011 statements financial and report Annual plc Group Water Northumbrian Lowestoft

Newcastle River Tyne Hexham SUFFOLK AREA Barsham Gateshead Derwent Sunderland Southwold Head Of ce Walpole Durham

River Wear Hartlepool Cow Green

Darlington

River Tees Middlesbrough Aldeburgh

Ipswich

South east England Essex & Suffolk Water provides water Colchester services to two separate supply areas. Abberton ESSEX AREA Clacton

Our Essex area, which has a population Langford of 1.5 million, is part rural and part urban Chelmsford with the main areas of population being Hanning eld in Chelmsford, Southend and the London

Boroughs of Barking and Dagenham, Brentwood Havering and Redbridge. Southend Romford Basildon We serve a population of 0.3 million in Barking our Suffolk area, which is mainly rural Tilbury with the biggest towns being Great Yarmouth and Lowestoft.

Norwich

Great Yarmouth

Lowestoft

SUFFOLK AREA Barsham

Southwold Walpole www.nwg.co.uk

Aldeburgh

Ipswich

Colchester

Abberton

ESSEX AREA Clacton

Langford

Chelmsford

Hanning eld

Brentwood

Southend Romford Basildon Barking

Tilbury

This the was firstyear of yearthe five regulatory made have a good start, We cycle 2010-2015. plans customers. shareholdersand for value delivering established have we important, Equally andtaken actions ensure to can we deliver over the whole period and beyond.

statement Chairman’s Chairman’s

04 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 05 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

this report, show the balanced scorecard we have have we scorecard balanced the show report, this the which against base the also is It that. do to introduced remuneration all of senior management will be assessed. Our long term commitment service to customers, to achievingand to efficiency and environmental targets, requires long term The investment. extension of Abberton reservoir is a perfect example andthere is a case study the project of on pagewill It 43. help secure the long our term supply customers to water in of Essex. Also is the worthy commencement note of of work on our second advanced anaerobic digestion on north Howdon, Thisplant, at follows the Tyneside. successful operation the plant of Bran at Sands, on will they significantly Together increaseTeesside. our use renewable of energy. The work our of people during the winter was Theirexceptional. unstinting efforts throughout the year are always evident and are the basis our of successes. thank themWe for all do they and seek we ensure to the right have they environment and personal development opportunities. were listed as a We in the Sunday Times watch’ ‘Best to ‘company Companies This work survey. was a significant for’ to result as it was the firsttimewe had taken part. this a surprise was not as our employeeHowever, survey showed that levels satisfaction of are high. an hour’ Our employees are active in our ‘Just volunteering scheme, working in thecommunities we serve. These communities are important us and to we developedhave significant partnershipsto ensurethat supportwe and help sustain to them. That work is part a corporateof responsibility programme covering all aspects our of business and seeking embed to sustainability all at levels. I must thank fellow my directors for their support I would particularlyduring the year. thank Claude to like Lamoureux, who leaves the Board after this year’s Annual General for hisyears five Meeting on (AGM), the Board. He has provided us with wisdom and an international dimension. Anita and Alastair Frew Balls leftboth the NWL board after nine years dedicated of service. wish welcomed We them have all We well. the Board as well Rew AGM Paul to since last year’s who has been a memberas the NWL Simon of Lyster, boardyears. for five The board has considerable strength, drawn in part from the diverse backgrounds and experience the directors. of Sir Derek Wanless Chairman May 2011 31 for the long term. Ofwat has introduced the Service Service the introduced has Ofwat term. long the for and period year five this in (SIM) Mechanism Incentive score our improved have we period trial year two the in significantly. We Ourto much improve aim is further. performancemonitor the company’s closely and, in Our focus remains on our customers and the trust they they trust the and customers our on remains focus Our put deliver in us to for them eachand every and day A number reviews our of of regulators are under consideration. also expect We a White Paper for Water. This does uncertainty create believe for the We industry. the model overall, that, for the industry has worked well. Much the necessary of change can be made the by industry in association with Government and regulators without potentially disruptive change. Regulatory change must undermine not the confidenceof our investors. Yet again, the weather had a huge impactYet on our operations The worst during winter in over the year. years posed100 many challenges the for us. Due to extraordinary work teams of across the company, supplies our customers to affected. were not I must those who tributepay to worked in exceptionally hard conditions guarantee to supplies deal and to with the inevitably increased leakage although, quickly, in these circumstances, it possible was not achieve our to leakage target in the north. The strong financial performance, delivered in difficult and uncertain economic conditions, has enabled the recommendBoard to a dividend for the year in line with the objective established we in 2005. Annual real consistentlyincreases have been 3.0% of provided since then. The economic climate remains uncertain although were pleased we the agreement note to by Sahaviriya Steel Industries the Corus over take to (SSI) decisionplant and build Hitachi’s on Teesside its to high speed train assembly plant in Durham. These, and other developments, should help stabilise us to our demand in the future. We are buildingWe on strengths developed many over years but recognise we that the future will pose new challenges and uncertainties, often outside our control. An example is the weather and its impact on our environment. Another is possible the reform to regulatory regime although, in are that case, seeking we influenceto changeto ensurethe company can deliver and objectivesits, the Government’s, efficiently and effectively. The Board reviews all identified strategic risks regularly; are they detailed of on pages and 50 51 this report. seek judge We manage to and to the impact riskof on the business, financially and operationally. This was also the firstyear with Heidi Mottram as our Chief Executivereviewtheyear of Officer Heidi’s (CEO). is in this pages report. 9 of 6 to gives It a sense the of energy and determination she has the brought to OurGroup. strategy has been reviewed and our values Allreset. our employees been have engaged in the work. The result is a change not in our direction. Rather, it is a change in the pace and scale improvements of sought and in our ambition against benchmarks. The new regulatory cycle introduces new performance standards for the period and, in this report, we indicate the substantial progress we are already making. Profit has improved, as is neededto ensurewe can attract the funding required deliver to our ambitious investment programme.

It has and been also a hugely a enjoyable year, and very interesting one, time as I took understand to stakeholders its to listen business, develop the to them with work and employees forward. way a This highlights review our business activity during first my year of NWG. CEO as

officer’s review officer’s Chief executive executive Chief

06 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

07 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

Communities

Environment People Vision Values

Reputation Competitiveness are important us and want to to we is critical us and to our stakeholders

– we are– we open and honest in meeting our Customer Environment and acknowledge we our responsibilities protect to and enhance the natural environment. Our carbon management plan will help reduce our carbonfootprint and will we adopt good environmental practice in all aspects our of activity. Communities build strong relationships with the communities we serve. will ensure We that corporate responsibility is embedded in performance management and that we benchmark ourselves against the best companies. agreedhave We specific to goalshelp us achieve our vision against these themes, and clearhave accountability for their achievement throughout Thesethe company. are measured in a balanced scorecard which assesses our performance against performancekey This is reviewed indicators (KPIs). the Board, managementby team and all employees on a monthly basis. I believe that clear direction and goals to are key success, but just as important is a clear sense of So at values, and do things we how here’. ‘around the same time as reviewing our vision, have we made a clear commitment five values.core to One team promoting work – we together consistently, co-operation, achieve our to corporate objectives. Customer focused exceed aim the – we to expectations our of external and internal customers. Results driven personal take – we responsibility for achieving excellent business results. Creative continuously – we strive and for innovative deliverbetter to ways our business. Ethical commitments, with a responsible approach the to environment and our communities. willdrive greater efficiency us to focuses on delivering industry-leading are our greatest asset be and want to we recognised as a great company work for with to high levels satisfaction of from our employees. will We provide support and training and excellent promote employee relations. People and, indeed, be the most to efficient water company. isIt just not about driving cost down but using supportinnovation to our activity. Competitiveness customer service. Our relationship with customers is the successcore to our of business and it is essential trustthat they our service. Customer service is the at heart the company of and all employees a clear have focus on getting things first ‘right time every time’. Although are required we meet regulated to standards for customer service, this should define not our aspiration as the quality our of service must go beyond that. Customer Thethemes five described below are mutually supportive and achieving the right balance between them is essential our success to and reputation. NWL had previously its stated vision the national ‘be to leader in the provision sustainable of and water waste and our commitment services’, water this is to reaffirmed.to to continuedeliverwantWe valueto customers and other stakeholders focusing by on our core competencies and water water waste of management.underpin We our be drive the best to with five themesstrategic containing goals and targets whenthat, reached, will see our vision and our values delivered. In the autumn, Vision ‘Our Our Our Values was introduced all our to Way’ employees during a series interactive roadshows of and, as a result,there is clarity and energy throughout the company which is driving the business forward. I joined a company whichalready had good a reputationand I was impressed immediatelythe by loyalty and commitment the workforce. of was It the start a newyear five of investment periodfor NWL and taken theI have opportunity couple to that plan with vision and values.a review our of strategy, We continue be activelyWe to involved in the business community in all operating areas through direct membership and involvement in the councils/boards the Confederationof British of Industry Chambers (CBI), Commerceof and other similar organisations. For part,my been I have getting involvedin a number of organisations which I believe can influencethe future the companyof and locally I am a member the of CBI Council and been have join asked their to national Infrastructure also I have Group. joined the GreenGovernment’s Economy Council as the water industry representative and I hope that the Council can bring a real influencetheto development of policy carbon a low relating to economy. industrialThis demand year, has stabilised and were we particularly pleased with the signing theagreement of SSI fromby Thailand secure to the future the Corus of Thereplant on is evidence Teesside. some of industrial growth particularly with the confirmationthat Hitachi will develop in a site Durham assemble to its high speed trains. Metering our of domestic customers continues increase,to although a different at pace in our various and domesticareas supply, of demand is also steady. The collection income of remains focus for us, a key particularly in a difficult economic climate. Private drains and sewers is the One the major of challenges face we in 2011/12 transfer private drains of and the sewers industry to in This will almostOctober. double our sewerage network overnight and much work is already in hand assess to what is needed in terms staffing, of building effective data, information sharing and communications to fullycustomers. don’t know the impact We the of buttransfer it will yet, higher lead to costs, in the order £20 millionof which a year will initially, we need to recover in thisyear five investment period. The industry has worked well in partnership, come UK, via to Water up with the most practical cost effective forward way for customers.

The company also continued receive to external recognition Ethisphere listed This for its activity. year, most ethical companies in the world, 110 inNWG its top one only of five companies chosen thein UK. This recognises the impact on underpinning have we the communities in which operate we and also recognises our longstanding relationships industrial with key and commercial customers. The report will also focus on many highlights throughout the year but the development our extend of work to Abberton reservoir and commence our second advanced anaerobic digestion plant after Howdon, at the successful operation Bran at Sands, are particularly notable. The years worst challenged winter 100 for over our employees but responded they magnificently ensuring that no supplies were interrupted. This was a fantastic achievement and I am very proud and grateful for the commitment and hard work so many our of of employees in truly dreadful weather conditions. 2010/11 The company was successful in meeting many the of targets in its balanced scorecard Out during the year. whichis a very targets improved in we 26 18, of good start. Most notable were the improvements in sewer flooding, our SIM scorefor customer service wellas as the reduction in the number interruptions of supply. to were alsoWe very retain proud our to industry-leading position in sewage Our treatment. independent customer satisfaction scores still show customers that are satisfied thewith servicewe provide wellas valueas for money although were disappointed we that this reflectedwas not theat same levelthe in research undertaken the Consumer by Council for Water this year. (CCWater)

continued Chief executive officer’s review review officer’s executive Chief

08 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 09 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk We strongly We support Ofwat by the move significantly to reduce the burden regulatory of reporting and move risk-based regulation. A usefultowards start was June Returnreporting made in the simplified2011 requirements but support we the proposal for more been have We working in radical change in 2012. partnership withOfwat pilot high a set of level to KPIs be reportedto companies by in place the current of detailed and prescriptive reporting requirements. Ofwat has published a series consultation of and discussion papers on the subject price ‘Future of limits’. responded have We these to papers and also engaged in a range workshops, of meetings and informal discussions with Ofwat. believe We the more focused approach regulation to should be reflected thein approach future price to reviews as well as the annual reporting welcome adopt We intention cycle. to Ofwat’s a more outcome-focused approach price to setting and madehave suggestions the how price as to setting methodology could be simplified and made more transparent. look forward We responding to Ofwat’s to formal consultation paper outlining its proposals for future price reviews in later the year. TheTrading Office has announcedFairof a market study looking whether at the market for treatment of organic is working waste effectively deliver to the best outcomes for customers. NWL was an early investor in advanced anaerobic digestion technology and we welcome this review as it should provide the clarity required inform investmentto decisions. Summary This has beena very good are year We for the Group. reporting a strong a clear results, set of have we vision and goals deliver to and made have good progress in performance in many areas. There is a strong sense of commitmentenergy, and accountability in the business and I am confidentof further success2011/12. in Heidi Mottram Chief Executive Officer May 2011 31 In addition, await the publication we for consultation draftof Regulations from Defra introduce to a duty on landlords provide companies water to with relevant details so that accurate bills can be issued tenants. to This should assist in collectingincome from the private rented sector where bad been debts have relatively high. Regulatory reform welcomeWe the conclusions the Defra of review of Ofwat We conducted and David CCWater by Gray. also welcome the view that the overall regulatory framework, including the continued role for a separate is generallycustomer body, fitfor purpose.We support the call for regulatory simplification andreduced a reporting burden which isalready being championed enthusiastically Ofwat. also by support We further clarificationtheof respective roles of Government and regulators and a call for more transparency in consultation processes. The Water WhiteThe Paper Water will be an opportunity end to unhelpful speculation around the future regulatory regime and provideclear a vision for the future the of industrywater that retains the confidenceof customers and investors alike. Legislative changes Government’s the of publication to forward look We later Environment Natural the and Water on Papers White The formershould this year. bring greater clarity in areas such resource as water planning, metering, social tariffs the with worked have We reform. market broader and the how of vision a out set to UK, Water through industry, without objectives its of many achieve can Government NWL changes. legislative minor only with or legislation contributed and Defra with meetings frequent held has including reform abstraction and trading water on ideas Anglian with Practice’) for theory (‘Trading project joint a Cambridge remain and We Veolia. Water Water, committed any moves that can to deliver clear and other customers, for improvements demonstrable stakeholders and the wider environment. Northumbrian driving commitment Group’s Water sustainabilityto demonstrates that strong leadership and ambition can make a tangible difference to communities and the environment.” Northumbrian Group has Water an open and inclusive approach working to with a wide array of external partners develop extremely to impressive social and environmental initiatives.” Simon Lyster, Chair, CRC. Chair, Simon Lyster, Norma Hope, CRAG. Chair, Our customer research also highlights customers that value thework NWL of inthe community and for the environment and it helps build their to trust in our work. Each aspect the highlighted of work in this report has a direct its benefittheto company, community and its environment, such as cost saving, carbon reduction, environmental impact, skills development or leverage. Case studies throughout our annual report, example for on advanced anaerobic digestion or use reed of beds treatment, in water demonstrate the tangible business benefits such as reduced costs and power consumption. ensure that sustainabilityTo runs throughout the business, all parts theCompany of are involved from the Board all through employees. to Governance of our sustainability activity is led our by Corporate Responsibility a subcommittee Committee (CRC), of the NWL board. The CRC comprises non-executive directors, directors, executive the CEO (who is directly accountable the NWL and to boards NWG the both for environment and sustainable developmentpolicies) and senior managers from across the business. In addition, a CR Advisory Group acts as (CRAG) a critical friend, guide helping validate, and to challenge sustainability strategy and activities. The CRAG NWL’s is made senior up of representatives from partner organisations reflect key areasthe to of our communities strategy. “ “

behave fairly and responsibly; use resources wisely; qualityimprove and life; of contribute economic to development. − − − − In previous years, in line with many other companies, reported have we on corporate responsibility separately within this report. a review During the year, ourof vision, values and strategy has given us the opportunity truly to embed sustainability throughout our business.Reflecting the importance of sustainability our business to believe we that we should report sustainability issues alongside our core business activities decided and have we highlight to sustainability areas throughout our annual report in recognisegreen. We that this is an innovative approach and would welcome any feedback. This activity is extensive and it is possible not include to everything sustainability here. As a result, key issues appear in green and our boxes are linked to Sustainability Highlights document, a partner documentthis annual to report, which contains more detailed information on our responsible business practice policies, plans, KPIs and case studies. NWL is expected provide a secure to supply water, of a basic necessity for health, or protect enhance and to the environment Our it. when to return we waste stakeholders also expect us to: believeWe that sustainability helps the improve to performance the company of achieve and our to business strategy and objectives. This is reflected in our business plan where our sustainability objectives our core into are business woven strategy. Our credentials for our work been have recognised and these are outlined on Business page 44. in the Community has highlighted (BITC) that those companies participating in their Corporate Responsibility Index outperform other FTSE 250 companies and Ethisphere highlights similar outperformance share for ethical companies. NWG’s price has outperformed against the FTSE over 250 the lastyears five as highlighted 78. on page − − − −

responsibility responsibility Our corporate corporate Our

10 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 11 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

Kielder Water & Forest Park 4 4 4 4 4 2 2 4 4 4 4 4 20 36 available bonus available % Contribution to Bespoke Retain Retain 900 600 15 3 Target 2011/12 174 Set Board by Set Board by 4.4 66 100 81 147 11 Bespoke – south Coliform incidents (no.) PlatinumBITC Plus accreditation Scorecard measure Customer satisfaction – SIM quantitative score Profit before tax efficiency Capital FTSE4Good accreditation – SIM qualitative score Unplanned interruptions >6 hours – north Pollution incidents (categories 1 & 2) Engagement and satisfaction index (%) Lost time reportable accidents (no.) – south Sewage treatment works compliance (%) Leakage (Mld) – north

Personal targets Personal Customer Strategic theme Competitiveness Communities People Environment The table below details those KPIs and the targets that have been set for 2011/12. A full explanation eachof The table below details those KPIs and the targets been that have set for 2011/12. target follows. In order ensure to alignment the management of this balanced team, scorecard represents now the criteria of 80% contributing their annual to bonus, with a further available 20% for the achievement bespoke of personal targets. Looking forward, the financial KPIs remain unchanged for 2011/12. However, in to ordermeasure delivery However, theof Looking forward, the financial remain KPIs unchanged2011/12. for Company business plan and goals, a balanced scorecard KPIs has of been introduced, which replaces the existing non-financial TheseKPIs. indicators are spread competitiveness, acrossthethemes of customer, people, environment and communities and targets been have set on a trajectory deliver to the company vision being of ‘the national leader services’. and water in water waste The Groupmonitors performance using a range financial of and non-financial PerformanceKPIs. against these indicators is reported financial within the ‘our performance’‘our operating and performance’ sections in later this report.

measures Our performance performance Our

12 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 13 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

Definition of measure SIM qualitative measure, assessing satisfaction of consumers across their experience from first first from experience their the customeracross satisfaction. consumers of satisfaction assessing measure, qualitative SIM correspondence final to resolution, through independent surveys. Surveys are carried outfour times waste water and billing a year for water, contacts and the average score taken. A score of from work. with compliant works networkWater leakage for the financial as reportedtreatment year, to Ofwat. sewage by served equivalent population of Percentage Environment Agency (EA) look-up table consents. Number category of 1 and 2 pollution incidents in the calendar as defined year, by the EA. Category 1 is a major water pollution incident and category 2 is a significantwater pollution incident. Accreditation FTSE4Good by index series, which has been designed objectively to measurethe performance companies of that meet globally recognised corporate responsibility standards. Accreditation at Platinum BITC by Plus level, the highest level in their corporate responsibility index. isBITC a national business-led charity which advises, challenges and supports its members to create a sustainable future for people and the planet and improve to business performance. SIM quantitative measure, based on customer contacts. Contacts are normalised per thousand connected properties and multiplied a weighting by factor for each category. ‘unwanted’ Categories include unwanted customer calls, abandoned calls, first stage written complaints, second stage written complaints and investigations. CCWater The lower the score the higher 5 indicates maximum satisfaction. A weighted scoring the of number properties of which affected interruptions by for supply to more of than interruptions includes It parties. sixthird hours’ duration whichby are unplanned, unwarned (excludingdirectly overruns planned of caused and warnedwhich those for interruptions except weights scoring interruptions) The advance. in hours 48 than less notified are customers hours,exceed and heavily 12 weights those which hours. exceed 24 number coliform of Total failures in regulatory samples at water treatment works and service reservoirs. One coliform or more is a failing sample. impact the for adjusted Board, the by approved budget the to compared tax before profit Actual variancesof related indexation to on index linked bonds, which depends on the July RPI in the year. Profit before tax has been chosen because it is a primary financial measure for theGroup for which the executive directors are accountable. An annual assessment the of efficiencyof the NWL capital investment programme is undertaken theby Board. The Engagement and Satisfaction Index is calculated from scores items selected for 13 from the annual employee survey. These items align the Sunday to Times Best Companies survey and give a measure employee of satisfaction. Accidents reportable the Health to and Safety Executive resulting in more than three days lost

Customer satisfaction – SIM qualitative score Environment Leakage (Mld) works treatment Sewage (%) compliance incidents Pollution (categories 1 & 2) Communities accreditation FTSE4Good BITC Platinum Plus accreditation Measure Customer Customer satisfaction – SIM quantitative score >6 hours Unplanned interruptions interruptions Unplanned incidents Coliform Competition Profit before tax efficiency Capital People and Engagement satisfaction index (%) reportable time Lost (no.) accidents

Our external environment In the north east, there has been a gradual fall in demandoverall water in recent decades as a consequence a reduction of in industrial demand This trend is expected continue to butthe for water. pace decline of has stabilised now after some industrial closures during the economic recession. The north east compares the rest the well of to country as far resources as water are concerned and our major regional rivers can all besupported This provides Kielder veryby high Water. security supplyof for our customers. also provide We the highest levels compliance of across water for waste this area ensuring can that we return the water and sewage sludge the environment to satisfactorily whilst meeting the demands all of customers. Bran Sands is particularly important in this respect as it supports the heavily industrialised area within The treating advanced its waste. by Teesside anaerobic digestion plant there is operating now effectively and helping build us our to use of renewable energy. southern operating area scarce is in a water NWL’s region that is forecast experience to further economic and population growth in the medium Whileterm. this area has also seen a reduction in demand from heavy and industry, the recession dampenis likely to housing growth in the near future, a current have we deficit, meaning supplies are securenot in growth a severe drought. Future will intensify the pressure on the balance between supply and demand. NWL is implementing long term plans ensure to the availability supplies water of meet current both to and future demand in the region. After approval from the EA, the project increaseto the capacity Abberton of reservoir, couplednear Colchester, with ongoing demand management measures, will secure supplies to the Essex area for the foreseeable future.

The largest of NWG’s businesses, businesses, NWG’s of largest The NWL, operates in the north east andtwo The England. of east south areas very have different economic, resource water and demographic characteristics. Our market

14 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 15 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk The current pressures within financial markets have been well documented and the credit crunch has resulted in reduced availability certain of types of finance.It is highly unlikelythere willtheto returnbe a exceptionally cost low debt of experienced from late Although market conditions have early2005 to 2007. improved in recent months, some uncertainty remains. With the financing alreadywe have put in we place, are sheltered from this uncertainty in the short term as we will need not raise to any new debt before March 2014. Regulatory and legislative framework As a monopoly supplier an of essential public service, industrythe UK water operates within a demanding regulatory environment. Ofwat regulatesprices and levels customer of service, while the Drinking Inspectorate monitors (DWI) Water drinking quality water and the EA covers environmental Customers’ interests areprotection. represented CCWater. by NWL maintain aims to good working relationships with its regulatorsand with regional organisations, such as local authorities, which an have interest in the services it provides and can influence business.the company’s This is particularly important following Government reviews the regulators, of changes in regulatory reporting and proposals legislate to in the sector following the publication a White of Paper in later the year. Abberton reservoir 16 Directors’ report – business review – business report Directors’ Our financial performance

NWG and NWL use a range of financial KPIs to monitor Annual report and financial statements 2011 statements financial and report Annual plc Group Water Northumbrian the financial standing of the businesses and to ensure that strong credit ratings are maintained. The definition, purpose and source of each KPI are shown on page 52.

Performance against the financial KPIs is set out below:

Performance Target Current year Previous year

KPI NWG NWL NWG NWL NWG NWL Gearing to RCV (%) <75 <701 632 563 66 61 Cash interest cover (times) >2.5 >3.0 3.2 4.0 3.3 3.9 Cash flow to net debt (%) >13 >13 16 20 15 18

Notes: 1. Less than 65% for the regulated business of NWL. 2. NWG’s pro forma Regulatory Capital Value (RCV) at 31 March 2011 was £3,643.1 million (2010: £3,420.5 million) (see below). 3. NWL’s RCV, as advised by Ofwat, at 31 March 2011 was £3,318.4 million (2010: £3,095.0 million).

Gearing to RCV % Cash flow to net debt %

20 66 65 67 66 63 18 18 59 59 61 61 17 56 16 16 16 15 15 15

NWG NWG NWL 07 08 09 10 2011 NWL 07 08 09 10 2011

Cash interest cover %

4.0 3.9 3.8 3.9 3.6 smaller data adjusted 3.3 so figures fit smaller data adjusted so figures fit 3.1 3.1 3.2 2.9 www.nwg.co.uk

NWG NWL 07 08 09 10 2011 17 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk Operating costs increased by £5.0 million (1.2%) to to Operating costs million increased (1.2%) £5.0 by million, principally£433.9 reflecting movementsat NWL, which are detailed and the one-off below, recovery of claim costs Caledonian by Environmental Services Profit on ordinary in the prior(CES) year. activities before interest for the year million was £304.2 (2010: an increase million), 10.3%. of £275.8 million within Net interest charges increased £17.4 by which net cash interest charges increased £2.6 by million. The non-cash element the increase of principally reflects inflation of the principal on the index linked million)bonds and an (£28.5 increase in the interest These million). cost pension of plan obligations (£7.2 were partially offset better by than expected returns million) and one-offon pension credits assets (£13.9 in respect the acquisition of the remaining of 25.0% subordinated loan already not in stock CES held by million) and a termination discountthe Group (£4.6 on the transfer a finance of leaseto a new counterparty million). (£2.9 Profit on ordinary activities before taxfortheyear higher million, than 6.3% the previous year was £181.0 The current million). tax charge reduced £170.2 (2010: million) principally reflecting £37.8 million (2010: £33.1 to increased profitability thanmore offset by adjustments in respect prior of periods. chargeThe deferred of tax million credit £30.5 of (2010: million) reflects deferred£9.5 a decrease thein Group’s tax liability million following £46.3 of the enactment a of reduction in the UK corporation to tax from 28.0% rate with effect26.0% from 1 April 2011. (2010: The effective tax for the period rate was 1.4% reflectingthe impacttheof deferred tax rate 27.8%) change. In the absence change, the rate and of other prior year the items, effective would rate beenhave 28.5%. million Capital investment for the Group was £219.9 million £236.3 including restated), recognition (2010: million for assets £nil at adopted cash £13.9 of consideration, as required Transfers under IFRIC 18 million). £14.0 Assetsof from Customers (2010: £m 24.5 49.6 Year to 178.4 31.3.2011 per share) pence per share) Interim dividend pence paid (ordinary – 4.72 Final dividend proposed (ordinary – 9.57 NWG Revenue for the year March ended 2011 31 £704.7 million (2010: £738.1 to increased 4.7% by and sewerage Water chargesmillion). the at Group’s principal subsidiary NWL, increased in line with the price review (final determination) 5.0% allowanceof plus Income the November from 2009 0.3%. of RPI contracts and water water waste the Group’s increased 4.4%. by Profit fortheyear Profit Financial results and dividends The Group also prepares detailed medium term business plans and annual budgets, which are reviewed are and submitted the Board Targets for approval. to measureset to performance and regular financial forecasts are made. Business plans and budgets include an assessment risks the key and of success factors facing each business unit. On a monthly basis, management compares the actual operational and financial performanceof each business with plan and budget and this is reported the Board. to Gearing NWL, at and for the regulated business, has and This respectively. 60% fromreduced 61% 56% to the is impact due the to high of increase RPI on the andRCV a reduction in net debt reduced the over million, the due to period million £1,868.3 £28.5 of to timing intra-Group of dividends which were paid after the balance sheet date. The Group’s gearingThe on this pro forma Group’s basis has decreased with net debt increasing 63%, from to 66% million the year, over £2,303.5 to million (1.8%) £41.1 by while pro forma Group has RCV increased 6.5% by due principally the increase to in RPI. The pro forma Group RCV includes £219.1 million (2010: million (2010: Theproforma Group includes RCV £219.1 million) £106.7 million (2010: million) and £105.6 £218.8 for the Kielder securitisation and private finance initiative contracts, Adding respectively. (PFI) NWL’s these to results million), £3,095.0 million (2010: £3,318.4 of RCV million (2010: in a pro forma Group £3,643.1 of RCV million). £3,420.5 line with with line

Early in the year, we instigated we an efficiencyEarly in the year, programme focused on identifying and implementing sustainable operating cost efficiencies in to achieveorder our medium term goal being of efficiency in the top bandfor and water sewerage,both as measured Ofwat, by by This programme has progressed well and, as 2013/14. a result, are we ahead our of final determination profile. Further information on this programme is provided on page 28. Water and waste water contracts Ireland Scotland, in contracts water waste and water Our in are and well performing all are Gibraltar and expectations. Revenue for the contracts increased to (2010: 2011 March 31 ended year the for million £40.0 of settlement the of result a as principally million), £38.3 tariffs, revenue on indexation and claims outstanding Profit on ordinary CES. at both activities before interest result a as reducing million), £10.2 (2010: million £9.5 was year, prior the in costs claim of recovery one-off a of partially offset the increased by revenues. The Group is involved in two projects deliver to long contractsterm PFI with water Scottish for waste Water the Group acquired the Intreatment. April 2010, non-controllingremaining equity 25% interest in CES for a nominal sum resulting in an million increase £0.6 of in equity shareholders’ funds. also It purchased the subordinatedremaining loan for a stock 25% consideration million which, £0.4 when of compared to the book million, resulted value the loan of £5.0 of stock million gain that has beenin a £4.6 recognised in net finance costs thein period. shareholding the Group CES, has now At a 100% in projectboth and operating companies and the benefit a 40 yearof contract. Funding was provided through year fixed corporateinteresta 37 rate bond thewith principal amortising from 2008. shareholdingIn the Ayrshire, Group in the has a 75% project shareholding company and a 100% in the company that operates the three effluenttreatment plants that comprise this 30 year contract. Finance was provided year through loan a 27 on a fixed interest basis with the principal amortising from 2003.

We have recently have We tendered our major procurement arrangements water covering waste treatment, water treatment networks and water waste and have contractors and consultantsappointed framework 19 to billionagreements of covering an estimated £1.5 investment the next over years, ten commencing 1 April In addition, are we currently undertaking a tender 2011. process appoint to additional contractors in readiness for the transfer responsibility of private for drains and sewers on 1 October 2011. Capital investment in the regulated business for the million, under regulatoryperiod accounting was £221.5 This is million). slightly lower £218.3 guidelines (2010: than the final determination by the deflated profile, Construction Industry some due to Price Index (COPI), delays in maintenance investment as a result the of but this should besevere winter recovered weather, in future years. is It difficultto assess potential any outperformance the AMP5 over period this at early stage given the volatile COPI but nature of remain we focused on delivering our regulatory programme. Profit Profit on ordinary activities before interestfortheyear million). £268.9 million (2010: was £297.6 Operating costs increased by £2.9 million (0.7%) to to Operating costs increased million (0.7%) £2.9 by million, principally reflecting increases£391.8 in depreciation, pension charges and efficiency water costs, partially million), offset savings by on power (£6.1 other efficiencies and one-off charges thein prior year for restructuring both million) and for costs (£5.4 bad debt the closure relating to a major of customer million). (£1.7 NWL millionRevenue for the year was £689.4 ended 31 The increase million). is £657.8 (2010: March 2011 mainly the application due to the final of determination in respect on water and RPI, of 0.3% increase 5.0%, of and sewerage charges. Demand from domestic both and industrial customers has remained steady.

continued Our financial performance performance financial Our

18 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 19 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk The directors consider adjusted that EPS for the volatility inherent in some deferred tax items gives a underlyingbetter indication the Group’s performance. of In previous years, an adjustment has been made the directors deferred have for total tax. However, concludedthe that ongoing deferred tax charge forms part underlying of performance and it is more appropriate only to adjust for significant non-recurring deferred tax items. For the current period, from EPS continuing operations, adjusted for the deferred tax credit the corporation relating to tax reduction, rate pence). 23.67 restated: pence (2010 were 25.50 A final pencedividend9.57 perof share fortheyear will be recommended the by Marchended 2011 31 shareholdersBoard to July on 2011 28 the at AGM to and, if will approved, be paid on 9 September 2011 shareholdersRegister Members of on the Company’s at with Together the close August business of 2011. on 12 the ordinary pence per interim share, dividend 4.72 of the ordinary dividends paid and proposed for the year pence per 13.24 pence per share (2010: will be 14.29 based on This representsshare). an increase 7.9%, of theon ordinaryaverage4.9%, inflationovertheyear of dividends for the previous year and is consistent with decision maintainthe Board’s to a progressive dividend policy with real increases per annum. The 3.0% of excludingdividend significant, cover for the year, non-recurring times (2010: deferred tax, was 1.9 times). 1.8 The board our of main subsidiary, NWL, has proposed a dividend policy consistent with the underlying growth assumptions Ofwat by adopted the at price review in 2009. Northumbrian Share Limited, Scheme Water Trustees which this report of the at date shares held to 765,962 be used in the satisfy future to the vesting and exercise Incentive under awards Longof Term the Company’s has waived the right all dividends to Plan on the (LTIP), shares it holds. can Further be found details the LTIP of remunerationin the directors’ report. Earnings per share and dividends Basic and diluted earnings per share for the year (EPS) pence pencewere and 34.44 34.38 respectively (2010: pence pence and respectively). 23.62 23.67 The most significant new contracts signed duringthe year include:provision technical of assistance a local to development and management natural of resources million – 54 months); programme in Chad (€1.3 improvement the agricultural of products value chains a country millionin Mali months); – 20 evaluation (€0.5 Nepal,of million Nicaragua – (€0.5 and Tanzania six and months) a new Framework contract for the StudiesEuropean Commission and technical 1: Lot assistance in all In the technical sectors years). (four assistance the Good to Governance programme in Burundi, a significantextension has been signed million months). – 28 (€0.9 Other Agrer million was £8.3 March 2011 Revenue 31 for the year to Agrer has During signed million). the year, £8.5 (2010: new contracts and extensions gross with margin a total the gross margin of March 2011, million. 31 At €1.7 of million. the order book is in excess €2.1 of AquaGib Limited, which is two thirds owned the by Group in a joint venture with the Government of operatesdual Gibraltar’s Gibraltar, drinking water and sea distribution water systems under its 30 year contract with the Government Gibraltar. of In Ireland, the Group is part a contractual of consortium that designed and treatment built water plant a waste for Cork City Council. Under the consortium agreement, the Group has responsibility year for a 20 contract for the operation and maintenance the plant. During of the the Group added its Irish to projectyear, portfolio by signing year a 20 operation and maintenance contract for the Fermoy and treatment Mallow water waste withworks, Cork County Council, commencing in May 2011. 20

Directors’ report – business review – business report Directors’ Our financial performance continued

Accounting policies NWG’s interest structure %

Annual report and financial statements 2011 statements financial and report Annual plc Group Water Northumbrian The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the 6 European Union as it applies to the financial statements 20 of the Group for the year ended 31 March 2011.

Capital structure and liquidity As at 31 March 2011 the Group and NWL’s regulated 74 Fixed business debt structure remain largely unchanged from Index Linked the previous year end date. Floating

In February 2011, the Group agreed a new £100.0 million NWG’s funding source % US private placement with a ten year maturity at a coupon of 5.82%, the proceeds of which were received on 14 April 2011. On the same date, this and existing 5 8 cash reserves were used to refinance £125.0 million of holding company debt maturing in May 2011. NWL has 14 also received approval for a new £150.0 million facility from the EIB which will be drawn in three £50.0 million Bonds 73 tranches, in the calendar years 2011 to 2013, at interest EIB rates to be determined at the time of drawdown. Bank Lease The Group and NWL’s regulated business debt structure remain largely unchanged with 74% (NWL: NWG’s gross debt £m 70%) fixed at an average rate of 5.80% (NWL: 5.96%), maturity profile 20% (NWL: 23%) index linked at an average real rate of 600 2014 2012 2015 2013 2025 2020 2040 2050 2035 2055 2045 1.85% (all NWL) and 6% (NWL: 7%) on a variable rate 2030 basis. The blended average rate for the Group and 500 NWL’s regulated business for the year ended 31 March 400 2011 was 5.80% and 5.93% (2010: 4.62%, 4.45%), 300 respectively, reflecting increased RPI. 200

Cash interest cover has remained stable for the year as Group 100 have the credit ratings for NWL at BBB+ stable (Fitch NWL appointed 0 and Standard & Poors) and Baa1 stable (Moody’s). Yearly Five year periods www.nwg.co.uk 21 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk Following the 2004 actuarial valuation the Group prepaid contributions December for the period 31 to In place recommencing of regular2010. contributions the Group agreed pay to from 1 January 2011, further advance contributions the scheme to totalling Amounts million March for the period 2015. 31 to £70.0 million were paidtotalling £22.9 in the period to million was paid and a further £47.1 March 2011 31 These payments comprise employers’ in April 2011. contributions and the deficitrecovery funding assumed in the final determination. A full actuarial valuation the scheme of as at is underway. December31 2010 The deficit(under InternationalAccounting Standard Retirement Benefits)theof defined 19 (IAS) benefit March million, 31 at scheme has decreased from £133.1 This is due to March million 2011. 31 at £46.0 to 2010, million) a reduction in the liabilities the scheme of (£37.2 and an increase in the value scheme of assets (£49.9 The valuationmillion). the scheme of liabilities has taken account legislative of changes which mean that future statutory deferred revaluations and statutory pension increases will the be Consumer linked to Price Index As a consequence, increases(CPI). CPI been have applied for deferred pensions in all sections the of scheme those and sections to where the scheme rules link increases pension the Government’s to increase orders. This has given a reduction rise to in the scheme liabilities million. around of £36.0 Pensions The Group operates a defined both benefit pension scheme, which is closed new entrants, and to an occupational defined contribution arrangement. It alsoIt invests any surplus funds the Group have, may based on its forecast requirements and in accordance treasury On occasions,with policy. the Group’s derivatives are used as part this process, of but the policies prohibitGroup’s their use for speculation. detailsFull the financial are to provided 20 in note statements. The Group is operating in compliance with its policies. Total cash, cash equivalentsTotal and short term cash amounted to deposits March available 2011 31 at million. This, and is sufficient the facility, new EIB £141.7 meet theto requirements the business of the through to end March of 2014. Treasury policy The treasury main purposes function the Group’s of ongoing assessare capital to the Group’s requirement, maintainto short term ensuring liquidity, access to medium term committed back up facilities, and to raise funding, taking advantage any favourable of market opportunities. Mains cleaning programme – valve installation , .

These measures have been reviewed in the year, as as year, the in reviewed been have measures These been has KPIs outlined performance in ‘our of measures’ on page 12 scorecard balanced new a and introduced for 2011/12. We use a range of KPIs to measure non-financial non-financial measure to KPIs of range a use We performance in the business and these indicators are the by reviewed management team each month. Performance for the year is reported in this section. The definition, purpose and source of each areKPI shown on pages 52 53 to

performance Our operating

22 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 23 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 89 85 2010/11 2010/11 Performance Performance 0 0 55 41 91 91 87 87 n/an/a 99.9 99.8 150688 253 487 256 230 99.399.3 99.3 99.7 99.999.9 99.87 99.83 Target Target Target Target 2010/11 2010/11 1,7001,100 1,573 700 S S S S S N N N N N N N N/S South (S) North (N) 1 Customer satisfaction measure We the views our of customers with quarterly tracking research alongside qualitativework in focus groups. This helps understand us to their views on service, value money for and other issues as well as their general NWL perception the company. of measures its performance for domestic customers in customer research ways, two key and performance against standards. Customer research is carried out each quarter in the regions served and the table below shows the key results for overall satisfaction with service and value for money.

. The sites include information

1

1

New SIM measures were which introduced incorporate in 2010/11, this KPI, therefore no separate target set. Satisfaction measured on a net basis (see appendix the to directors’ report – business review). Properties subject sewer flooding(other to causes) Properties risk at sewer of flooding(oncetenyears in or twicetenyears) in Billing contacts responded (within(%) working five to days) Written complaints responded (within working ten (%) to days) Properties subject unplanned to interruption six of hours or more Properties subject hosepipe to bans any at time during the year Value for money for Value (%) Bills based on meter readings (%) Note: 1. Properties risk at pressure low of Customer service The performance againststandards service of is shown below. Note: 1. Overallservice (%) about our services and allow now customers ask to questions and work investigate being carried out in their area. customers If are directly affected any by work, give we advance warning and explain the need for the timing such also of work. communicate We more broadly with local communities through public meetings and customer information events. and www.eswater.co.uk Putting customers first Customer service is the at heart the company of and the culture getting of things first ‘right time every is embedded time’ in the business. keep We customers informed about our activities through leaflets with bills and ourwebsites at www.nwl.co.uk Customer Affordability provide clearaim accurate, to We and timely bills which encourage promptpayment. Customers who deliberately paying avoid charges are actively pursued. In the current economic we climate, know that affordability continues be a genuine to concern for many customers and continue we to be considerate their of circumstances, ensuring they can choose suitable payment options and that our recovery techniques are appropriate and effective. customers who deliberatelyHowever, paying avoid charges are actively pursued and are we working closely with Ofwat and Defra seek to changes to legislation which will assist the industry identify to those responsible for charges more easily. The Flood Management and Water Act 2010 outlines sewerage how service providers may operate concessions for surface drainage water charges, certain protect to community groups and premises from unaffordable charges. have We decided introduce to an interim concessionary 31 to charge the for charging year 1 April 2011 and will carryMarch out 2012 consultation with determine to the longerCCWater term future of any concessions in the coming months. Business customers The economicsituation has had a significant impact on some business sectors which are important in our operatingregions and NWL has been working closely with major customers in those mitigate the sectors to impact where possible. NWL has always tried to continued

The way we handleThe we way customer complaints is reviewed annuallywho assess CCWater by cases against rangea all of 96% cases reviewed criteria.of During 2010/11, were assessed value as good. the feedback We provide us andCCWater actively use their suggestions furtherto the customer improve experience. The qualitative aspect SIM takes of the form a survey, of which is conducted each quarter across every water company and asks customers who made have contact with us about their experience. Our cumulative score an out 5, of for the four quarterly surveys was 4.14 improvement score 4.10. on the of previous year’s The quantitative aspect SIM includes of metrics for all lines busy and abandoned calls, calls, unwanted written complaints investigations, each and which CCWater of are worth a number penalty of points depending upon Resultsthe severity. across all metrics improved during customer complaints continuethe reduce year, to and a was 211, our quantitative SIM score for 2010/11 significant when improvement compared2009/10 to our score 331. equated to In addition, Ofwat introduced the SIM in the year, which monitors quantitative both and qualitative aspects customer of service. This new mechanism financially incentivisesthe best performing companies and penalises endeavouring the worst, simulate to competitionand encourage excellent service throughout the Our industry. be aim the is to leading company for SIM.

Customer Our operating performance performance operating Our

24 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 25 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

Kielder Water & Forest Park, Lakeside Way Leisure customers NWL continues develop its to leisure facilities all at strategic sites including investment in fishing facilities, holiday accommodation and supporting ‘access Occupancy the log of cabins Kielder at for all’. was fishing membersregistered. 5,814 and have we 85% The combined activity our of reservoirs this rates business the largest its kind of in the UK, with a high customer satisfaction all at sites. NWL is also an active member the Kielder of & Forest Park Water Development Trust. work with its major customers in partnership and the case study highlights on page27 such work KPat Foods. While economic conditions remain challenging, industrial demand has stabilised this year following, for example, the development the of former Artenius Chemical Lotte by site UK Limited. The agreement for the the takeover Corus of site SSI shouldby help stabilise industrial demand going forward. NWL is active in the business communities where it operates as a member the CBI of and Chambers of Commerce. By supporting these and smaller groups NWL can help business growth and development in the areas it serves aswell as retaining contact with organisations which represent customers. Business customer satisfaction is also tracked on a regular basis and levels satisfaction of are high. Strategy in action– Customer

26 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 27 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk water consumptionwater has been reduced meaning less abstraction, treatment and pumping for NWL and bills and lower water for KP; the trade effluent discharge is cleaner andrequires lessreducingtreatment, the cost power and of de-sludging for NWL, resulting in lower trade effluent discharge costs for KP. − − We always aim to exceed the expectations of our customers by by customers our of expectations the exceed to aim always We communicating and delivering for responsibility personal taking examples many have We servicea good promises. keeping and below. outlined these are of two everytime’, time first ‘right of Many our of domestic customers meters have and billspay based upon much how for those who have Having use. they however, water a meter can help money, save larger this can families, be more difficult. big gardens or water, use of lots two Father of familyThis was exactly from the case Stockton-on-Tees. for the Young contacted discuss us to Stephen his metered Young bill and seek advice about ways reduceto his charges. however, Stephen already used rainwater, butts store water to following our advice, Stephen and his family made some simple changes including turning off the tap while brushing taking their teeth, shorter showers and using NWL’s efficiencywater pack containingvariety a water savingof devices. Commenting on the help and advice he received, Stephen said: “Getting in touch I know call which my with NWL will is is amazing easy. be answered straight away, these I will that days be able speak someone to to who cares and my relates to our customer Vikki advisorconcerns.” all Anstey, who Stephen, talked said: “It’s to about concerns listening each to customer’s and then making sure meet you their needs and go the extra help mile to them.” work aim in partnership to We with our major business customers as know we that for them factor in theira key business is reliability and security our of services. crisp Valley manufacturerTees KP Foods (KP) is a major customer NWL’s of economic KP’s improve Billingham performance sewage treatment works. To and enhance the sustainability its operations, of KP proposed construct to a membrane account enablebioreactor be and treated to re-circulated to water its at plant. NWL’s manager worked with ensure KP to that the proposed development did not sewage treatment works compliance whiledetrimentally providing impact on NWL’s advice and support. parties Both benefited have thefrom close, honestworking relationship which has resulted in a great deal trust of and respect: − − NWL and KP each have increased their competitiveness improving by their efficiency. Working in in Working partnership Efficiency programme The efficiency programme has identified 100 around projects and initiatives from across the whole business, ranging from large scale smaller strategic reviews to improvements a local at Examples level. some of the of changes underway include consolidating all chemical analysis for our northern operating region one at laboratory; the implementation site-specific of energy management plans reduce to energy usage; increasing the capability enable our of website to improved customer self-service; investigating opportunities for co-digestion external of streams waste our at advanced anaerobic digestion plant Bran at Sands and insourcing activities where it is more efficient and effectiveto do so. These efficiencies additionalare theto benefits already secured through procuring our full energy requirements and the headcount reductions March resultingto 2015 from severances and early retirements, for which provision was made last year. Delivery the programme of is on schedule and, as a result, are we ahead the final of determination profile. these benefits are partiallyHowever, offset theby impact the changes of the Carbon to Reduction Commitment Energy Efficiency Scheme announcedby the Government in its Comprehensive Spending Review which is expected increase to energyin October 2010, millioncosts around by next £3.0 year with further and which million 2014/15, by increases £1.5 up to of fundedwas not in the final determination. Other aspects performance of in our relation to competitiveness theme are included financial in ‘our performance’ 21. to on pages 16

Early in the year we instigated an an instigated we year the in Early focused programme efficiency implementing and identifying on cost operating sustainable achieve to order in efficiencies being of goal term medium our for band efficiency top the in sewerage, and water both Ofwat. by measured as

Competitiveness Ouroperating performance

28 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 29 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk Research carried out London by Economics for ‘IndependentProfessor Martin Review of Cave’s Competition found Markets’ and Innovation in Water in terms innovation infrastructure, of that, NWL was one the companiesof best equipped innovation promote to in terms the resources of it dedicates. Bran Sands advanced anaerobic digestion waste water treatment; water waste renewable energy production using biogas; regeneration brownfield of land using water treatment by-products; early warning for leaks system and and bursts; pipelineremote condition assessment. novel processes for drinking production water and advanced automatic control systems for waste treatmentwater process; a device reducing for flooding and pollution; microbial fuel cells and electrochemical cells, which, generate respectively, electricity or hydrogen water; from waste novel instruments for monitoring the quality of effluent; water waste beneficialre-uses treatment forwater sludge; powerlow de-watering and thickening water of treatment sludge; internal inspection distribution water of pipes while in service; lining systems for extending the life expectancy distribution water of pipes; efficientwater and rapid disinfection water mains; of − − − − − − − − − − − − − − During the year, the Group invested £2.3 million the Group £2.3 invested During the year, million) in research and development. £2.1 (2010: − − − − − − Researchand development As part its competitiveness of theme, NWL runs a programme research of and development linked to its operations, which includes the development of technical solutions and water for water waste management, collaborative research within the sector and partnerships with academic and research organisations and actively encourages innovation. This has supported development, the invention, trial implementationand/or of: − − − − − − − − Strategy in action– Competitiveness

30 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 31 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk An initial stage of water treatment involves removing silts and algae algae and silts removing involves treatment water of stage An initial two around creates which a process reservoir water, raw from Around every day. sludge liquid based (iron) a ferric of litres million can be recycled separated, once which, water is this of 99.8% clearly is innovation case, this In re-use. reservoirfor the to back competitiveness. our to linked sludge was discharged lagoons into Traditionally, storing the solids whilst allowing clear overflowAt Hanningfield, to the reservoir. water back into our largest water treatment the works, last lagoon was near the end its life of and although it would beenhave quicker and easier specifiedhave to traditional mechanicaltreatment, a considerable amount work three of over years was undertaken that reed prove to beds could provide a sustainable and effective alternative sludge for water treatment – a world firstfor a projectthisof scale. Natural England strongly supports the reed bed project Hanningfield at reservoir because it will provide a sustainable, energy and carbon-efficient solutiontheto long-term disposal treatment water sludge. of will It also a significant create reed bed within hundred a few metres Hanningfield of reservoir which will be designated as a special of site scientific interestthat will of usebe ownin its rightforvariety a of wildlife, including reed bed invertebrates, birds and foraging will It bats. also provide a regular supply water for a disused sludge lagoon within special the of site scientific interest which the company has recently restored very successfully as a wildlife-rich scrub wet mosaic and woodland. reed of bed, open water, World World at first Hanningfield 5.8 2010/11 Performance 1 9.4 2.9 3.1 4.3 4.1 Target Target 2010/11 No target set, industry average provided for information. (per 1,000 employees) (per 1,000 Sickness absence (%) Lost time reportable accidents Employee turnover (%) Notes: 1. everyone engagementand of involvement Theactive importantan business is partdeliveringthe across of of views seek the performanceto continues NWL and engagement annualemployee an through employees rate response largest the survey had year’s This survey. life, working covered feedback the and 75%, at ever, company. managers the and communications, training, consider to workshops to invited were employees All their in improvement identify and for areasresults the outputs the environment, and practices working departmental of action development the to contributing they us told respondents of 80% addition, In plans. would 81% company, the for work to proud are believe 77% and company the for recommend working that NWL is a great organisation work for. to For the firsttimetook NWLpart the in Sunday Times Best Companies survey watch’ and achieved to ‘one anstatus, excellent achievement on first time entry. NWL employees also access have a scheme to which provideswidea range benefits of including tax efficient benefits such as childcarevouchers, services,water cars for personal use and discounted vouchers. store employees of Currently participate 73% in the scheme, last year. up from 72% 4 1 % 24 132 Average Average 2,875 95 3,031 100 number of employees

Group business unit NWL NWL’s current level of sickness absence is 3.1%, current level sickness of absence is 3.1%, NWL’s which iswell below the norm for the sector. Water and waste water contracts and water waste Water Other employeesTotal ensuresNWG its terms and conditions attract both and retain the best people in the areas it serves. NWL employee below turnover the is relatively 5.8%, at low industryUK water average 9.4%. of Employees Throughout people, as the Group employ we 3,031 set out below: Employee policy Each company within the Group has developed its own employee policies, reflectingthe framework These Code ‘Our Conduct’. of set out in NWG’s policies are tailored specific to business objectives and operating environments. Each company aims recruitto and retain the best people, with a diverse range skills, of experience and backgrounds, who are committed making to the company successful. In eachreturn, company provide aims opportunities to and training for employees develop their to skills and capabilities equip to meet them the to challenges of their roles, while rewarding the contributions both of teams and individuals. The CEO has responsibility at Board level for human resources issues. The Human reports SarahResources directly Salter, to Director, the CEO.

People Ouroperating performance

32 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 33 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk In 2010, NWL continued build on to its award-winning In 2010, approach engaging by with all employees some over departmental120 workshops facilitated senior by interactivemanagers roadshows facilitated and 51 the directors.by These were all structured outline to our vision and values, encourage a dialogue on improvements working to practices and environment seekand to views This on its people has strategy. been further developed include to leadership events held bi-annually engaging the most senior managers in the continuous development plans enable of to the achievement the vision. of Training and development All Group companies train and develop their employees benefit to the companyboth andthe individual. Annual appraisals are given high priority, as is the identificationtrainingof needs, recognitionin the importanceof training of and development in goals andachieving policies. the Group’s In NWL, a 360° feedback mechanism, which evaluates performance against the company values, has been introduced for all senior managers. The results the of feedback are discussed annual at appraisal meetings. Consultation and engagement Each Group company engages with its employees through a variety means of appropriate its working to environment. The importance an of inclusive and engaging management style is fully recognised. NWL welcomes employment applications from people with disabilities and, where existing employees develop disabilities, are they supported remain to in employment, wherever practicable, providing by appropriate adjustments their roles to effective and/or redeployments. Occupational health physicians assist this process with professional medical advice. Equality and diversity equalopportunityan operates TheGroup policy employee applicantor job no that ensure designedto of grounds the on treatment lessreceives favourable or ethnic race, disability, marital status, gender, age, NWL orientation. sexual or religion origin, national census and against profile workforce its monitors employer an recognised as be to aims and data sector serves, communitiesit diverse the within choice of backgrounds rich the of advantage full takes ensuringit employees. potential and current of abilities and Recognising ouremployees’ academic achievements, the fifth annual skillswereawards celebratedthis Attended senior by managersyear. from around the business, and with guest speaker Kriss Akabusi, the were againevents motivational and memorable. Communication The Group uses a wide range communicationof methods including magazines, brochures, leaflets, newsletters, notice intranet, boards and regular team meetings. NWL issues all employees witha series of information booklets clearly explaining areas such as visionthe and company’s values, terms, conditions and benefitsof employment, and occupational health and wellbeing programmes. Disclosure (Whistleblowing) The Group encourages open feedback and is committed employees protecting to who voice wish to concerns about behaviour or decisions that they bebelieve illegal to or unethical. The Audit Committee regularly reviews the disclosure policy. Health and safety and safety and health on emphasis great places NWG actively are Employees environment. working safe a eliminating and identifying in involved be to encouraged a in resulted has This workplace. the in hazards significantreduction in accidentsoverrecent years. A health and safety policy is maintained and implemented each at subsidiary. Our emphasis on the importance health of and safety within NWL has resulted in major improvements our safetyto record in recent years. This year we experienced nine reportable accidents and incidents employees, whichper 1,000 continues the improving trend achieved the last over seven years. established have We a medium term plan for taking We health and safety forward in the company 2015. to furtheraim to reduce the number accidents of 10% by each year maintain and to and the safety improve culture in the company. continued

NWL continues implement to its Management Development Framework which is structured (see diagram cover the on training page to 33) needs of those who show the potential for management right developmentthrough to director at As level. part of this framework are we working in partnership with Newcastle Business School provide qualifications, to from a Diploma a Masters to degree, in leadership introduced we our and management. In 2010, LEADer programme, which is the next in step our Management Development some Framework, of to our operational departments. This development programme for supervisors, team leaders and works managers includes assessment against NQF Levels 2, 3 and 5 management standards, as appropriate, supported formal by development and coaching. We signedWe Skills the Government’s Pledge the at end publicly committing develop the 90% to of 2007, of workforce, employees, around least at 2,600 to National QualificationFramework (NQF)the Level 2 – equivalent five GCSEs of theat by grades C – to end A with 90.2% This was achieved July by 2010 2010. of qualifiedto VocationalNQF Level 2 National or above. Qualifications to continuebe delivered in customer and operational areas. In addition, currently we have seven graduates on our Graduate Development Programme and apprentices. 29 Our people our business to are the key success. Our build aim is and to maintain a culture which values, encourages and recognises outstanding performance, where share we a commitment our to objectives delivering and to our personal best. From corporate induction and days induction planning, to individual coaching, accreditation skills of through national vocational qualifications, and management andleadership programmes, provideresources the we needed help to employees reach their full potential.

People Our operating performance performance operating Our

34 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 35 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk Employee Share Incentive Plan (SIP) The directors believeemployee that investment strengthens the ties between the Group and its employees. More than employees a third of participate the of and an together have interest in 0.6% in the SIP, issued share capital. The scheme provides one free matching share every for three shares bought an by employee. Shares for the SIP are purchased market at and dividendsprice the Trustee by are paid in cash directly participants. to There areno performance but free sharesconditions held not attached the SIP, to months are forfeited.in trust least for at Employees 12 participating in the SIP are given the opportunity to theirexercise rights voting through the Trustee. Chris Loftus received the Essex Young Achiever of the Year Award Quality The company has successfully extended its scope of certificationtheto international occupational health andsafety management standard OHSAS 8001:2007 includeto Scientific Services,thus now ensuring company-wide coverage. We continue to promote healthy continue promote eating, hydration We to discourageand to smoking in our workforce and offer excellent health screening and medical insurance schemes. Around employees 2,200 have been through our health screening and fitness standards programmes, which of both include now lifestyle advice elements. NWL proactively supports and encourages employees strive for high to standards health of and wellbeing providing by a wide range services, of support and resources occupational relating to medicalhealth, advisor with the Group’s providing comprehensive occupational health services, general health promotion and stress management. NWL employees also on and have access off-site to specialist advice and support treatment to recovery from musculoskeletal have disorders We (MSD). reduced sickness absence over 39% MSD due by to introduced we NWL Support. Part In 2010, the year. this serviceof is an Employee Wellbeing Programme which gives employees and their immediate family access face face or telephone to to counselling on a range subjects of regardless whether of or the not issues are work In addition, related. it also provides a telephone based case management service for employees who either have a stress related or mental health reduced condition. have We stress related sickness in the firstyear. absence 16% by Strategy in action– People

36 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 37 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

Tony Erskine, our customer manager, joined us aged 17 on the young person’s on Erskine, the young person’s joined our customer us manager, agedTony 17 development programme, a youth training scheme, and began studying for a higher BA bespoke nationalNWL’s certificate qualification. Henow is in his final ofyear in(Hons) Leadership and Management and will graduate in July. said: “The course BA is the bestTony thing ever done. has It that I have been a real openereye and enabled learn me to new skills, get different perspectives and learn beenfrom a massive others. It’s benefitto me as a manager and I believe makes me been hard of a lot worka more but effective gained It’s I have from a lot leader. it and so will the company”. Chris Loftus, leakage assistant, was unemployed and sure what not of he to wanted do with his life when Water he Get saw the into poster advertising Trust The Prince’s programme in the window his of local Jobcentre. He found his age and lack of experience a real hindrance until he joined us on a three week course designed to year olds withprovide the opportunity unemployed 16-25 learn to about the water industry and get some valuable hands-on work experience, before hopefully moving employment.into He has been now with NWL for three years and has become a young ambassador while for the Princes receiving Achiever Trust the Essex Young Award. the Year of Kathryn distribution Waugh, joined operations the accelerated controller, graduate development programme following in her 2001 degree in physical She geography. undertook a series strategic projects of and business support placements develop to her knowledge business of processes and gain a broad overview the company of and its operations. After further development roles works and water in water waste management, she has taken now a senior role in operations. Kathryn said: “I find working with people make positiveto improvements the operations to and maintenance side the business of very I really rewarding. enjoy job my and working for NWL.” As a company we are committed to investing in training and and training in investing to committed are we a company As safe and competent are people our that ensure to development and skills develop support to them to roles, current their in people where and, forward business the take help to knowledge We roles. future for develop them help to orientated, career are have who business the in people our of examples many have NWL. within career their developed Growing in water – water in in investing our people Water resources resource Water availability issue is a key in our Essex and Suffolk areas. continued Work throughout 2010 on increasing the capacity Abberton of near reservoir, Good progress58%. by was made andColchester, the project remains on programme. construction two of new pipelines to In early 2011, bring from Norfolk water commenced. The one remaining part the overall of Abberton Scheme that requires permissions is the variation abstraction of licences Denver at and in Blackdyke, Norfolk, and we are working closely with the EA on progressing this. do not we Once this scheme is operating, in 2014, develop further to expect have to major resources in Essex for the next years. 25 believe we In addition improving to the supply water, of it is important manage to the demand so that for water it does exceed not levels that can be supplied in a Meteringsustainable has an important way. role to play in this regard. For several years been have we installing meters upon water change occupier of in properties in the Essex area. This is in addition the to optional metering scheme available all customers. to domesticAround of 48% households in Essex and in60% Suffolk are In the metered. now north east, householdswhere of supplies are more plentiful, 24% are metered. efficiencyNew water targetswere introduced in reduce to per capita consumption across 2010/11 domesticthe company’s customers one by litre per property These targets per apply day. in all areas served and the award-winning work previously carried out in Essex was extended the rest the company. of to New initiatives been have developed, including an theatreinnovative production called ‘Little Green Riding Hood’ with Fame Factory which Spotlight, efficiency the water took messageto 36,500 school NWL children met its water the last over year. efficiency the before theyear. targetsof end early, 2010/11 99.95 99.84 99.97 99.70 99.93 Performance Target Target 2010/11 99.95 99.94 S S 99.98 S 99.85 N 99.85 N 99.65 N 99.70 South (S) North (N)

Performance Index (%) Maintenance Index (%) Compliance (%) Compliance Work usingWork new cleaning techniques refurbish to more kilometres the large of than diameter 150 pipe network is well advanced. The network supplies drinking half over a million to water customers in south east Northumberland and The parts majority Tyneside. of the cleaningof been now works have delivered and the programme be is due completed to in June 2011, achieving a significantreduction in customer Progresscomplaints has discoloured been of water. maintained despite the unusually harsh winter. DWI Operational Operational DWI Distribution improved has works treatment water at Compliance failures microbiological fewer with 2010 in significantly being work the reflects This year. previous any than undertaken achieve internal to medium term targets for maintenance servicereservoir addition, In performance. three now rates inspection with enhanced, been has times higher than historical frequencies. The aim this of sustainwork is to a higher level microbiological of compliance while ensuring the integrity the asset of base for the long term. DWI Mean Zonal Zonal Mean DWI Water quality The quality is critical water of our customers to and samples are taken on a daily basis for analysis under regulations The monitored the DWI. quality by in all areas served remained high.

Environment Ouroperating performance

38 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 39 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk The advanced anaerobic digestion plant Bran at Sands is fully now operational and generatingthe expected volumes biogas of and electricity. The re-organisation, operate the plant to much at lower manning has levels been than previously, successfully implemented. Construction is underway now on a processsimilar to the plant onTyneside, Howdon, at sludge. remainder NWL’s of the 34 33 of bathing of in waters the northA total east passed the required mandatory standard and met the more demanding28 guideline standard. The single mandatory failure was Saltburn and NWL is carrying out a detailed investigation on whether any of our assets could be contributing this and to is working with other agencies determine to be may they how impacting on this bathing water. The number properties of experiencing internal floodinghydraulicto overloading due reduced This can attributedbe to a significantly2010/11. in combination less of frequent and intense summer and the cumulative effect ourstorms of in sewer 2010 flooding investment programme. Enhancedresolution rain radar has been now in place in the north east since 2009 allowing identify us to severe weather across the region. completed we 43 schemes a cost at During 2010/11 million that resulted in the removal 178 of £17.5 of properties from floodingregisters. Planning to identify schemes for coming years part forms a key our of investment programme and is well advanced, with a further properties be 270 addressed to in 2011/12. in lineAdditionally, with our serviceability action plan for sewer flooding, we embarkedhave on a programme increased of mitigation. This covers not only properties where a scheme is cost not beneficial but alsoproperties where a solution be not may implemented quickly. 2010/11 Performance 102 101 100 97 100 100 Target Target 2010/11 2 and 3) Standard (%) Pollution incidents (category 1, Bathing Mandatory waters (Northern operating area only) Sewage treatment works (%) Waste water exceptional performance for sewage treatment NWL’s works continued with all numerically consented works again remaining compliant for the year. Our assets, once again, very proved resilient during the most severe December weather for more than years in the north100 east England. of very proved It challenging but wereable maintain we to supplies to customers largely the exemplary due to efforts our of employees who worked tirelessly in difficult conditions. The severe freeze and inevitably subsequent thaw, resulted in a significant increase in burst pipes and leakage on both our own network and customer premises. As a result, in our northern operating region, lost thethe winter water over period meant along we, with other companies, did meet not our annual leakage In target. our southern region, conditions were quite sonot severe and achieved we our We target. recoveredhave from the effects the winter of through implementing an action plan which will position us well meet theto target in the following year. We continue monitor the weatherWe to patterns and bedry has to proved with littlethe early part 2011 of rainfall. The resource situation is still good with adequate resources meet in demand. storage to There are no plans for restrictions although the company will continue use awareness to campaigns encourage to customers controldemand to in dry periods. Selset hydroelectric plant hydroelectric installationsreservoirs five at including largest man-madethe UK’s Kielder reservoir, Water. A recently commissioned million £2.5 hydroelectric project our at Selset reservoir that will generate up kilowatts electricity of 750 to megawatt – 4,000 Renewablehours energy a year. is also being generated with hydroelectric plants Derwent, at Lartington reservoirs and Wear Valley in addition biogasto combined heat and power plants at Stressholme, Hexham and Aycliffe; limiting tertiary ultraviolet disinfection outside the seasonbathing water five at majorworks reduces energy consumption and carbon emissions with no detrimental effect on the marine environment; and encouraging customers, through our water ‘using wisely’ campaign, recognise to that if waste they also they energy waste (information and tools water, are available for customers on our websites). − − − − − − efficiency the reviewing by and projects, these Through reduced have we business, the across pumps our of the over 9% almost energyby used of amount the lastyears. five NWL has successfully achieved the Carbon Trust Standard for its efforts in reducing greenhouse gas emissions. The standard provides an objective benchmark against which our commitment and success in addressing our climate change impact was assessed and is significant as it demonstrates progress against our ambitious carbon management plan. continued

our £33.0 millionour £33.0 investment in thermal hydrolysis advanced anaerobic digestion Bran at Sands, MW) the energy of which provides (c.4.7 50% requirements This the site. of enables water waste sludge generate to methane fuel to gas engines and produce green electricity. A similar plant will be constructed which Howdon, at is planned for these plants will Together completion in 2013/14. help meet our target generating of our of 20% energy needs from renewable as well energy, as reduce our overall energy demand; − The carbon management plan includes energy efficiency,renewable energy generation water and efficiency and supports our activitiesto help us adapt a changingto represents It climate. a sustainable and responsible forward way for the business, our customers and the environment. The projects which will help achieve us our to carbon reduction target are outlined below: NWL has published its carbon management plan to reductionmeet its target in operational a 35% of emissions from a 2008 base. 2020, by − The number properties of floodedotherto duecauses Thisreduction also reducedsignificantly 2010/11. in has been influencedby increased sewer cleansing activity as well as better weather. Carbon management plan The industry water is one the largest of users of energy in the UK and play a full aim we to part in support plans reduce Government’s of to emissions. been have We working hard recent over years to reduce our carbon footprint while preparing ourselves for the futurechallenges a change of in climate and the weather face may we events as a consequence.

Environment Environment Our operating performance performance operating Our

40 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 41 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk More positively found have that the anticipated we drier summers the future of are less a concern of for NWL than for many other companies in our industry. The ongoing increase investment to the capacity of Abberton reservoir plays a big part in this for our Essex operating area. is underway Work now on this project that has been in development 15 for over years, a reflectiontheof long leadtimes for such environmentally sensitive schemes. The presence Kielderof helps the north protect Water east region an even greater Despite extent. to anticipate we this, willthat we need monitor and to formally update our understanding the threat of from the changing weather regular at intervals. Quality international the to certification its maintained has NWL international the to and 9001:2008 qualityISO standard all across 14001:2004 ISO standard environmental and sites operational including business, the of areas office basedteams. Over the course the past of incorporated year have we ourthis work response into the new adaptation to reporting the Government power granted to the by 2008 Climate Change This Act. work has highlighted that increasing rainfall intensity is the mostsignificant short term threat will that we face as a result the of changing This climate. represents a serious challenge manage are ifto we successfully the higher risk level of sewerof flooding that alreadyWe willhave result. begun actions take that will to better prepare us for this challenge, including investment in weather radar, monitoringremote the sewer of network and joint working with other drainage agencies. These will all contribute our better to understanding and management the threat. of In past carried years, have we out research the into likely impact climate change of on all our assets and resourceswater and this has been incorporated in our climate change policy as part our of corporate responsibility work. This work is continuing, based on the projections latest UKCP09 published in 2009 by the UK Climate Impacts Programme. Changing weather patterns The cycle and water the changing weather a have direct influence theon provisionwater waste and of employees areexperienced in services. water NWL’s managing the effects much little too or of too rainfall, but changing weather patterns will present a growing challenge for the business. Strategy in action– Environment

42 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 43 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk Essex is the driest county in the UK. In a dry UK. In already the demand driest county in year the is Essex is situation this rise population to due and supply outstrips worse. get to expected million years Abberton in the planningAfter the £150 construction 17 scheme to million customershelp secure in Essex made supply 1.5 water good to progress in its firstyear. The will near reservoir, be enlarged Colchester, with its footprint extended 58% by and the increased 40%, by capacity Over the last will year, be in service in 2014. significant progress has been made and importanttwo milestones now been have the reservoir isreached. flowing now into Water viathe newly completedreservoir inlet structure Broadmeadows at and work has begun on the construction two of kilometre long, steel 16 major pipeline diameter, metre water raw These routes. 1.2 pipelines will transfer from the water River Abberton. Wormingford at Stour to Abberton international is of a site environmental significance, designated underthe Ramsar convention on wetlands. In designing our proposals, working closely with Natural gone have we England, beyond what the and RSPB is Essex Wildlife Trust, required only not maintain to the environmental significanceto theof butenhance site Theit. new reservoirwill existing have concrete edging will removed, include more marginal shallow as well waters, as a new re-sited visitor centre and an extensive wetland area the at western end The the reservoir. of new proposals will improve biodiversity as well as enhance the amenities for visitors. Good Good progress the for Abberton Scheme Community Foundations covering our areas supply of hold endowment million funds totalling nearly £1.0 years.contributed These NWL the by last over 19 are long term investments with the income from the funds used support to community and environmental initiatives. Community groups are chosen by committees our of own employees recipients (44 this year). In addition cash to donations, NWL seeks support to many projects through in-kind giving and support. Through put aim NWL we to estates ‘Good Moves’ productive into community Working use. in partnership with artist groups CoExist and have Metal, we developed a temporary art project our at empty Southend complex provide space to for a temporary gallery,studio and small creative business complex. focused have We on developing affordable rural housing contribute the sustainability to to and vitality thoseof communities, including support the Prince of Affordable Wales’ of Rural Housing Initiative since it was launched in 2003. As part this commitment of arewe working with Hastoe Housing on a project houses on land close Hanningfieldfor 12 to water treatment works in Essex and these are due for completion in 2011.

The for safety’ ‘Care scheme, which encourages employees reduce to accidents and associated lost has for ourtime, triggered payments £16,000 over charitiesnominated employees by (Great North Air Ambulance Service, National Royal Lifeboat Institution Macmillan Place, Cancer Myelin Zoe’s Project, (RNLI), Support, St Cuthbert’s Hospice and East Anglian Since Hospice). it beganChildren’s in 2004 over has been£326,000 raised for charity. Investment in our communities This year the Group made charitable donations In addition, and in line with previous totalling £152,000. contributedyears, have we resources with a value our of annualequivalent pre-tax least at profits to 1% (through cash, employee time and expertise, or use of our facilities) projects to which benefitthe communities serve.we Our employees fundraised £69,000 for charities this year. The support our communities give we to focuses on five broad areas. NWL supports the communities we serve in a numberserve a in supportscommunitieswe NWL the been widely recognisedas have We different ways. of areas the make that support projects leadersour in for invest. or work live, to whichserve placesin better we by been has re-accredited company the year This a as re-accreditation awaiting is and FTSE4Good Community. Businessthe in by company Plus Platinum The Queens Industry for Award is still in place as it is awardedyear for a fivethe company period. Thisyear, was also recognised Ethisphere,an by American- most based as international one the 110 of think-tank, ethical companies in the world and was one only of companies.five UK-based

Communities Ouroperating performance

44 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 45 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

Heidi Mottram, CEO, hands over cheque Participation in our communities in-kind giving, encourage we As part NWL’s of employees volunteer their to skills time, and expertise an hour’ volunteering scheme.through our ‘Just support We our people actively to participate in their local communities giving by them work time to volunteer in projects their of choice. During the year our people helped have hundreds community of projects, completing tasks as varied as beach clean ups, organising charity balls and taking on ambitious gardening and decorating challenges. For example, a group employees of volunteered their support time to people with disabilities participate to in an activity weekend organised the charity by volunteers andLeonard Cheshire Disability. Together, service users enjoyed outdoor activities including abseiling and taking Further a zip wire across a river. highlights came from the Essex based employees food of supplies boxes who collected as 1,000 over part the Harvest of for the Hungry campaign 2010. This important contribution helped the humanitarian campaign provide an to essentiallifeline villages to and communities scattered across Eastern Europe. employees of Currently participate 27% in the ‘Just an hour’ volunteering scheme and last year over gave different hours the community. Over to 870 7,600 organisations were given financial and in-kind support during the year. provides further details of In December 2010, the structure the Partnership of In December 2010, was formalised forming by registered a charity called the Kielder & Forest Park Development Water which will continue deliverTrust to the vision and year investment25 plan for the area. The website www.visitkielder.com all facilities. The 26 mile Lakeside Way, a multi-userThe mile track, is 26 now Lakeside Way, all of visitors. Thisused 45% trail by was used for the first dubbedKielderthe Marathon in October2010, most beautiful in Britain, organised Olympic by athlete Cram. This,Steve combined with other activities including the development mountain of trails bike and the increasingly popular Kielder Observatory, has helped increase to visitor numbers between 2008 and creating an additional 306,250, to 66 9.4% by 2010 direct and indirect jobs and boosting the spend in the million. local £15.5 to economy 20% by The Kielder Partnership and was created in 1994 consisted public private, of and voluntary sector partners committed the development to Kielder of & Forest Park asWater a tourism, leisure and recreation destination. Activity has focused on delivering vision the Partnership’s –‘Kielder Big Picture’ – includingthe use the fabulous of tracks and trails developed in 2008/09. links and networks enable to sporting partners share get together to ideasto and resources; financial supportof approximately£50,000 per annum which then levered £600,000 over from other sources; advice and marketing support on programme development; sportsbottled bottles, jugs water tap or water, mains-fed bottle-free coolers reinforce the to importance drinking of rehydrate tap to water during sporting activities; and help with fundraising and raisingthe theof profile partnerships attract to additional investment. − − − − − Supporting healthy communities NWL continues the health promote to benefitsof drinking tap and campaign for health’ water our ‘Water encourageaims to people lead a healthy to lifestyle. has been provided fund to free £341,000 over date, To coolersmains-fed water in schools and around 740 schools. been alsohave We supplied in nearly 410 bottle-freecontinue promote coolers to water as a sustainable alternative bottle-fed to coolers. Similarly, bottled donate initiative usewe to our tap ‘tap into’ community to water sporting in events order to the importancepromote rehydration during of Thisexercise. bottles year donated we 82,300 events. tap to of water Working with a wide and diverse range sporting of partners is a natural extension for our of ‘Water campaignhealth’ and work we with support them to grassroots sporting activities get people to active as well as educating them on healthy eating and good hydration. Through our partnerships reached have we over 96,000 children and provide: adults. We − − − − − continued

Northumberland Wildlife Trust (Kielder Bakethin); and NorthumberlandTrust Wildlife Durham Wildlife Trust; (Hanningfield);Essex Wildlife Trust Broads Authority and (Lound Broads); and Trinity (NorthDavy Down Stifford, Trust Essex). − − − − − We also leadWe on specific environmental education initiatives such as ‘Northumbrian the innovative Water project. ThisGLOBE’ year the project, in collaboration with The Climate Change Schools ClimateNE, Project, EA andUK, GLOBE is supporting five schools to take controlcapturing of and analysing local weather data, patternsand extreme (using weather events stations childrenand training Ultimately, provided NWL). by involved will become ‘community drive scientists’ to behavioural change local at levels. Educating our communities about their environment partnershipsKey been have developed NWL by to help the conservation biodiversity of on our sites, to facilitate public accessdevelop and conservation to education. Our contribution includes funding project officers and providingexpertise theto organisations. Our current partnerships include: A wide range targeted of educational materials are available on our websites for children and teachers. the use these promote of materialsWe and celebrate approachesinnovative environment to and health education via our support the Northumbrian of Water Schools in the north Awards east and Cash for Schools in Essex. Awards − − − − −

Communities Our operating performance performance operating Our

46 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 47 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

Craig Holliday visits WaterAid project in Bangladesh Supporting developing communities through WaterAid NWL has continued raise funds to and awareness for which bringsthe work WaterAid of sustainable water and sanitation solutions, as well as hygiene education, the poorestto parts Africa of and Asia, as it has since the charity was formed industry the water by in 1981. The employee fundraising committee has raised with the help the of million,more than since £4 1997, company and last year focused its fundraising support on specific projectsEthiopia.We supportin our employees become to ambassadors for the charity and encourage annual supporter see trips WaterAid to Asset Managerprojects. This year, Craig Holliday visited Bangladesh and saw first hand ourhow internationaladopted charity saves lives. We are representedWe on the steering group for Healthworks and provide research, marketing and communications support. The centre has received almost and visits date provides now 20,000 to over health58 and community support services including healtha GP led centre walk-in open 8pm 8am 365 to acts It as a community a year. days focal point where service providers and community groups can come addresstogether to issues that affect the quality life inof their local community. We have linked initiativehave our and ‘Good moves’ ourWe campaign for health’ ‘Water develop Healthworks. to This is a unique projectutilising one our of redundant buildings help to tackle the poor long term health of the residents in Easington, County Durham, by granting a 99 year lease County to Durham Primary and workingCare in partnership Trust develop to services for the local community in an area where census records show one the worst of health records in the country. Strategy in action– Communities

48 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 49 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk Castle View Enterprise Academy, in Sunderland, completed its its completed Sunderland, in Academy, Enterprise View Castle year. the during operations of year first NWL is the lead sponsor a centre create excellence and of to wanted with a clear focus on raising standards academic of performance enable to every student to achieve their personal best in all areas academy of life within secure a safe, and stable environment. NWL formed a new trust govern board the school, to recruited an inspirational head teacher and helped form her a new leadership to design team, an engaging curriculum and implement new a set policies of which would fundamentally change and school improve life for the students. CastleDuring View EnterpriseA*–Cs the firstyear, Academy students achieved 43% in GCSEs English in the old and Castle from Maths 26% View (up School) and 86% Persistent absencesA*–Cs (upfive decreased or 10%, from more GCSEs63%). from firstinyear the old in theof new Castle academy’s operation. View 6.3% school, to the new academy undertook Ofsted assessment andIn March from being 2011, a failing school previously is a school now making good progress. Indeed, sixteen students Castle at View Enterprise Academy gained have amongst the highest grades GCSE Mathematics possible examinations in the – January 2011 six months ahead schedule. of Eight the sixteen of and gained the other grade A* eight gained grade A. In addition the excellent to teaching in the academy and after school tutorials, these more able students were also coached one our by of graduate trainees, David Bullin, who has a maths degree. David has given his time under our employee volunteering on Wednesdays scheme, after Just an school hour, and more recently on Saturday mornings. A* performance at Castle View The Board risk for sets the tone management within the Group and determines the appropriate risk appetite. The Board monitors themanagement fundamental of risks and approves major decisions affecting the risk Senior profile. managementGroup’s implements policies on risk management and internal control. For NWL, the management team reviews the approach riskto management in detail every year and the Audit Committee considers the outcome. The management team reviews the significant risksevery month and a full review the model of for emerging significant risks is carried out quarterly. Any issues that arise from these management team reviews are reported the CEO by the board. to Apart from NWL, none the subsidiaries of has risks considered short be significant to theandto Group’s long term value. The internal of system control incorporates risk management. encompasses It a number elements of that together facilitate an effective and efficient operation, enabling the company respond to to a variety risks. of These elements include: Policies and procedures Attached fundamental to risks are a series policies of that underpin the internal control process. Written procedures support the policies where appropriate. Business planning andbudgeting The business planning and budgeting process is used set objectives,to agree action plans and allocate resources. Progress against meeting business plan and budget objectives is monitored regularly. Risk register The risk register identifies key risks, each with a risk owner who is responsible for evaluating the risk on a regular ensuring basis. of As way a that risk management is embedded the business, into the risk owners the management have these of risks as a personal KPI. Strategic risk model Risks that are known but well yet defined not enough for the likelihood and consequence be reasonably to foreseen are included instrategic a risk model.

The NWG BoardThe NWG requires all to Group the within subsidiaries impact the assess and identify using business their to risks of each For model. risk standard a records model the identified, risk and magnitude uncontrolled the occurring risks the of likelihood place in controls the as well as before risks those mitigate to assessing the controlled magnitude. acceptable of view Board’s The view balanced a on based is risk operating the in risks the of all of ensure to aims It environment. between balance appropriate an risk aversion and opportunities.

uncertainties Our risks and Our risks

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Ernst & Young, the objective which provide of was to ErnstYoung, & NWLmanagement and the Audit Committee with a view the different of assurance functions within the company andwhich the extent to provide they assurance that the control activities are operating. An assurance map forms now a permanent part of the process and, for each risk, highlights who provides assurance that the control activities are in place and operating effectively. Mitigation measures Mitigation The financial ratios, financial results, liquidity position and credit ratings are described in the financial performance In addition,to the 20 financial sectionnote 21. to 16 on statements,pages includes details 123, to strategy on the and Group’s treasuryon pages 118 operations for managing its capital; its exposures liquidity to risk, interest risk, rate foreign currency risk and counterparty risk; and details its of financial instruments. The Board reviews the treasury strategy proposals. specific approves periodicallyand playWe a leading role in the policy debate, through UK, Water direct lobbying and forging positive relationships with relevant parties. respond We positively consultation to papers. playWe a leading role in consultation groups with Ofwat and other stakeholders. respond We positively consultation to papers. in increases tariff for claim future a support to An internal project team has been established understanddocumentation to and prepare the businessfinancial for the sound maintain We transfer. order recover to additional costs borne. maintain We close liaison with the rest the of industry and have had constructive dialogue with Ofwat regarding the process. have processesWe in place anticipate to and plan for the impact climate of change. While these have long time horizons, they are reviewed regularly ensure to that any changes are identified early. In most cases, duplicate mains and diversion supplies of would limit supply consequences. Comprehensive plans exist provide to a minimum emergency service customers to until repairs are completed, including mutual aid arrangements with other water companies. A proactive inspection regime is in place along with longer term reviews network of resilience. managing for responsible is teams, various from stakeholders comprising group, flooding sewer A the process, flood reporting, network capacity studies and prioritisationof investmentto reduce risk. Significant additional capitalexpenditure has been investedto address affected properties. The recently constructed rain radar station for the region is now operational and provides improved controlsdata. are However, not yet sophisticated enough predict to or prevent consequences of severe rainfall. Undertakings have been agreed with carry the DWI to out certain actions mitigate to pesticide issues (metaldehyde and clopyralid). While specific treatment processes, such as carbon dosing, are undertaken at treatment works, proactive catchment management is also beingthan carried out. solution sustainable more a is ThisThis involves working with farmers, regulatorspesticides. and other stakeholderssuch advise to for on improved techniques application and storage the alternative constructing of major new treatment processes. It is not possible directly to influence industrial volumes, our account however, managers liaise closely with significant customersto provide support where possible. have a numberWe contracts of treat to industrial waste streams at our Bran Sands works. The liability under each contract is capped in except, certain cases, where NWL is in willful breach. A site-specific management regime is in place incorporating additional monitoring and a greater amount standby of assets. The defined benefit scheme was closed to new entrants, benefits restructured and employee contributions increased in 2008. Advance contributions have been made the scheme, to including deficit funding allowed in the final determination. TheTrustee scheme determinesinvestment policy and monitors performance investment of managers. Triennial actuarial valuations the of scheme are carried out, with the latest currently underway. as audited is This Company. the Our health and safety policythroughout and safety management system definemanagement clear and arrangements and implementation for responsibilities to set are targets and plans term partLong our of quality andteam. environmental management system.management Visible highand level supportBoard for health andthe by provided is safety improvement. continuous promote

Risk description Risk Funding and liquidity risk of the company Unfavourable changes to structure, regulatory the Water the of result a as White Paper the to changes Unfavourable price or structure regulatory setting mechanism by Ofwat of transfer the of Impact private drains and sewers is anticipated than greater climate in shift Unexpected change impact failure to due supply of Loss main. water strategic of catastrophic covers This failure that is greater than the response capability Sewer flooding failures prescribed to lead Pesticides value or concentration possible and failure action enforcement through income of Loss customers large of closure or lower industrial volumes Bran at Incident water waste Sands causes works treatment interruption business pension increasing of Risk contributionsresulting from increasing longevity longevity increasing from of impact the and conditions economic on investment returns Health and safety safety and Health prosecution Last year, the Audit CommitteeLast year, commissioned an additional risk and assurance mapping report from Audit Committee The Audit Committee reports the Board onto internal controls and alerts any the emerging Board to issues. In addition, the Audit Committee oversees internal audit, external audit and management, as required, in its review internal of controls. To enable tracking perception of To of monitor customer service To performance track the employee turnover within the To monitor the safety performance To NWL of NWL non-financial KPIs Customer satisfaction Definition and calculation: Domestic customers’ satisfaction with overall service and overall value for expressed as satisfactionmoney, averaged the over surveys carried satisfactionAverage out during the year. usingis based the score 6 and of on scale a 10 1 to of above as satisfied. Net scores to are trueused show satisfaction taking by consideration into those who are dissatisfied who score between 1 3. and Purpose: reputation, service and value for money time. over Source of underlying data: Independent surveys 500of customers (300 north, 200 chosen south) at random, but representative the customer of base, carried out each quarter customers. 2,000 of – a total Customer – levels of service Definition and calculation: Customer service standards are established Ofwat by and calculated using source data in the company. Purpose: NWL. of Source of underlying data: Information collected the companyby and submitted Ofwat. to is It independently certified. Employee turnover Definition and calculation: Number leavers of within the year as a percentage average of headcount. Purpose: business ensure to that it is within benchmark data. Source of underlying data: Current employees’ details are held within the human resources management – reports system show leavers against headcount. Lost time reportable accidents Definition and calculation: Injury accidents that are reported the Health to & Safety Executive as required the Reportingby Injuries, of Diseases and Dangerous Occurrences Calculated Regulations as the 1995. number accidents of reported in financialyear per employees. 1,000 Purpose: time. over Source of underlying data: Completed NWL accident/incident report forms. Employee numbers are provided the human by resources department. The generates RCV most the revenue of The generates RCV most the revenue of Measures the ability the Group of or ability or company’s, Indicates the Group’s,

Financial KPIs Gearing to (NWG) RCV Definition and calculation: The Group ratio of net RCV calculated as NWL’s a pro formadebt RCV, to plus the level debt of associated with the Kielder securitisation and contracts.the The PFI NWL RCV represents capital the total value the appointed of water and sewerage business on which Ofwat allows a rate returnof price at reviews. Purpose: Gearing to (NWL) RCV Definition and calculation: The NWL ratio of net The NWL represents RCV the total RCV. NWL’s debt to capital value the appointed of and water sewerage business on which Ofwat return of at allows a rate price reviews. Purpose: Cash interest cover (NWG and NWL) Definition and calculation: Cash generated from operations less tax divided net interest by paid. Purpose: Cash flow to net debt (NWG and NWL) Definition and calculation: Cash generated from operations less tax paid divided net debt. by Purpose: business review business stream the Group of and regulatory gearing is an important in factor credit ratings. Source is of calculated RCV underlying data: NWL’s Ofwatby and published Ofwat each also year. publishesanticipated valuesyears five up to ahead, based on its last price determination. Group net debt is disclosed in the audited financial statements. stream the Group of and regulatory gearing is an important in factor credit ratings. Source is of calculated RCV underlying data: NWL’s Ofwatby and published Ofwat each also year. publishes anticipated valuesyears five up to ahead, net debt based on its last price determination. NWL’s is disclosed in the audited regulatory accounts. company service to its debt. Source of underlying data: Audited financial statements. reduceto debt in the absence need of for additional withoutinvestment, resorting asset to disposal. Source of underlying data: Audited financial statements. directors’ report – report directors’ Appendix to the the to Appendix

52 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 53 Directors’ report – business review Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk To monitor drinking quality. water To monitor the performance To NWL’s of To track and trend sickness To absence levels Pollution incidents Definition and calculation: Number 2 category of 1, and 3 pollution incidents in the calendar year as defined the EA.by monitorPurpose: the performance To NWL’s of sewerage and system its impact on the environment. Source of underlying data: Information recorded and reported Ofwat to the EA. by Sewage treatment works Definition and calculation: Percentage population of equivalent served non-compliant by works failing tablelook-up consents, as definedtheby EA. Purpose: Bathing waters Mandatory Standard Definition and calculation: Percentage bathing of complyingwaters with Mandatory Standards. coastal monitorPurpose: the impact NWL’s of To treatment works on the environment. Source of underlying data: Information recorded and reported the EA. by Source of underlying data: Samples recorded by NWL and audited the DWI. by sewage treatment works and their impact on the environment. Source of underlying data: Information recorded by NWL and the EA and reported the on latter. by Water quality Definition and calculation: Compliance with drinking regulationswater as monitored the DWI. by Purpose: Sickness absence Definition and calculation: Sickness absence days as a percentage working total of multiplied days the by end month of headcount. Purpose: across the organisation. Source of underlying data: Statement Fitness of for workto return interviews weeklyand (fit Work note), returnsmanagers. by 5 Wildlife Fund (WWF) for nine years, where he was responsible for WWF’s global policy work on international conventions. Simon is a Trustee of Conservation International – UK, the World Land and Trust the Kilverstone Wildlife Conservation Trust. 5. Margaret Fay CBE (from 1 June 2010) Independent Non-executive Director Margaret Fay was appointed to the boards of NWG and NWL on and1 June is a member 2010 of the Remuneration and Nomination Committees.She isalso membera Corporate Responsibilityof NWL’s Committee. Margaret was formerly Managing Director Tees of Tyne Television until she took early retirement in December 2003 becometo Chairman of One North East, a position she held until August She is Deputy 2010. Chairman of The Sage Gateshead, a Governor of the University of Sunderland, Patron Valley of Tees Community Foundation and the Prince of Wales’ Ambassador for the north east of England. Margaret was awarded an OBE for services broadcasting to in 2004 a CBE and, for in 2010, services regional to development. . ie 4 4. Simon Lyster (from 1 April 2011) Independent Non-executive Director Simon Lyster was appointed to the Board of NWG on 1 April 2011, having joined the board of NWL in September 2006, is a member of the Nomination Committee Corporateand chairs NWL’s Responsibility Committee. Simon is a lawyer by training, qualified in both the UK and the USA and has been Chief Executive of LEAD International since 2005. Before joining LEAD (which he will leave Simonduring was July 2011), Director General of The Wildlife oneTrusts, of the largest nature conservation organisations in the UK, for seven years. Before that, Simon worked for World Water & Power Opportunities plc, Hansen Transmissions International Bolux NV, Utilities (Sicav Luxembourg), Mercurius Utilities (Liechtenstein), EFMI Funds plc and Ecofin Global Long/Short Fund. All the above funds are focused on utilities. In 2005, he became a Director of Promethean plc, an AIM-listed investment company and sits on the supervisory board of Banque Jean-Philippe Hottinguer & C 3 PricewaterhouseCoopers LLP (PwC) from until 1987 March and was lead2010 partner for a diverse range of FTSE clients100 and for PwC’s UK energy, utilities and mining sector practice. Most recently, he was PwC’s sustainability and climate change assurance leader and renewables leader. He is a Non- executive Director of both the Met Office and the Sustainable Development Commission and chairs their Audit Committees. 3. Martin Nègre Independent Non-executive Director Martin Nègre was appointed to the Board in May 2003 and the to board of NWL in January 2006 and is a member of the Audit, Remuneration and Nomination Committees. He was, between April 2000 and April the 2001, CEO of the former Northumbrian Water Group plc and the chief corporate representative of its parent company, Suez, in the UK. He currently chairs Ecofin Global Utilities Hedge Fund Limited, Ecofin Special Situations Utilities Fund, Ecofin North American Hedge Fund and Ecofin China Power & Infrastructure Fund. His other directorships include Ecofin 2

1 1. Claude1. Lamoureux Director Non-executive Claude Lamoureux was appointed theto boards of NWG and NWL on December 1 2006. Claude was, until 1 December 2007, President and CEO of the Ontario Teachers’ Pension Plan Board Previously,(OTPP). he spent 25 years as a financial executive with Metropolitan Life in Canada and the US. He is a Director of Xstrata plc, Industrial Alliance Insurance and Financial Services Maple Inc., LeafFoods Atrium Inc., Innovations TheInc., Learning Partnership and the University York Foundation. OTPP holds of the issued 27% share capital of NWG and Claude is, therefore, not regarded as an independent Director. Claude will retire from the boards of NWG and NWL on July 28 2011. 2. Paul Rew (from 1 October 2010) Independent Non-executive Director Paul Rew was appointed to the boards of NWG and NWL on October 1 Paul is 2010. a member of the Audit and Nomination Committees and of Corporate ResponsibilityNWL’s Committee. Paul, a chartered accountant, was a partner in

biographies Board directors’ Board

54 Directors’ report – governance Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 55 Directors’ report – governance Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 10 the Department of Transport from Sir Patrick became 1997. to 1991 a Non-executive Director of the Go-Ahead Group plc in 1999 and its Chairman in 2002. He is also Chairman of the Advisory Committee of Alexander Proudfoot UK and a Non-executive Director of Camelot UK Lotteries Limited. Martin11. Parker (not pictured) General Counsel and Company Secretary Martin Parker was appointed as Company Secretary of NWG in May 2003. Martin joined the former Northumbrian Water Group plc in concentrating 1990, on acquisitions, overseas projects and contracts with industrial customers,before being appointed Head of Group Legal Services in and 1998 General Counsel and Company Secretary of NWL in 2000. Martin is Secretary of all the Board committees. 9 of the Audit and Nomination Committees. Alex qualified as a chartered accountant in 1981 and joined Cazenove, a city corporate stockbroker, in 1982. He worked initially as an analyst and transferred the to corporate finance department1986, in becoming partner a in 1988. In he 1996, became a director of the firm’s fund management division and, from 2000 to 2003, was the Chief Operating Officer of that division. Alex left Cazenove in 2003.He is a Non- executive Director of Lighthouse Group plc and is a Trustee of and Help for Heroes.L’Arche 10. Sir Patrick Brown Senior Independent Non-executive Director Sir Patrick Brown was appointed theto Board in May 2003 and theto board of NWL in January 2006. Sir Patrick chairs the Audit Committee and is a member of the Nomination and Remuneration Committees. He held various positions in the Department of Transport and the Department of the Environment, becoming Second Permanent Secretary and Chief Executive of the Property Services Agency in He 1990. was Permanent Secretary for 8 Chairman of Legal and General Longevityplc’s Science Advisory Panel and a member of the Board for Actuarial Standards at the Financial Reporting Council. 8. Chris Green Finance Director Chris Green was appointed theto boards of NWL in April 2000 and NWG in May 2003. Chris qualified as a chartered accountant and after ten years in the accounting profession he joined the former Northumbrian Water Group plc in January He1990. was initially involved in the diversified Group’s business activities before being appointed as Group Finance Director in Chris is Chair of Trustees1997. for the Northumbria Calvert Trust, a charity devoted providing to outdoor activities for the disabled, and is Deputy Chair of Governors at the University of Sunderland. 9. Alex Scott-Barrett Independent Non-executive Director Alex Scott-Barrett was appointed theto Board of NWG in September 2006, having joined the board of NWL in November 2005. He chairs the Remuneration Committee and is a member 7 6 6. Heidi Mottram OBE Chief Executive Officer Heidi Mottram was appointed to the boards of NWG and NWL on 1 March and became 2010 CEO on April 1 Heidi 2010. is a member of the Nomination Committee and Corporate ResponsibilityNWL’s Committee. Heidi was Commercial Director for Arriva Northern Trains from January 2004, before joining Serco-NedRailways in November 2004 as Managing Director, Northern Rail Limited. She was named RailBusiness Manager of the in 2009 Year and was awarded an OBE for services theto rail industry in 2010. Sir Derek7. Wanless Chairman Sir Derek Wanless was appointed theto Board as an Independent Non-executive Director in December 2003. He joined the board of NWL in January 2006 and, in July 2006, became Chairman of NWG and NWL. Sir Derek chairs the Nomination Committee and is a member of the Remuneration Committee. He became a director of National Westminster Bank and in its 1991 Group Chief Executive in 1992. He retired from that position Sirin 1999. Derek is currently £ , 6,845 8,208 3,312 18,365

Name of political party We do support not We any political party directly and do not, we or through any subsidiary, make what are commonly regarded as donations any political to party or the other wide political definitionof organisation. However, donations in the Political Parties, Elections and Referendums Act 2000 covers activities which form part the of necessary relationship between the Group and political parties and political organisations. These activities include attending party conferences, as these provide the best opportunity meet a range to stakeholders, of national both and explain local, to our activities, as well as local meetings with and MEPs MPs, their agents. The costs were as follows: associated with these activities during 2010/11 Political the Group hasDuring worked with politicians the year, all of major parties, officials and opinionformers. Thiswork has included making representations on issues which NWL feels are important our customers to and communities for health’, adoption private sewers,such of ‘Water as competition, White Paper, the review regulators, of the Water climate Framework change, Directive the Water and other legislative issues which could affect our customers. Principal activities The principal activities the Group of during the year services. were the provision and water water waste of of this section of report the directors’ of 70 Pages 54 to contain the Board biographies, directors’ of together with the Companies of Act 2006 and Schedulesuch and other s418 the statutory 7 to disclosures, as required s416 by Large and Mediumsized Companies (Accounts and Reports) and Group’s Regulations 2008, as are already not referred in the business to review section the report. of The corporate governance statement explains the how Company has applied the principles the Combined of Code during the year and also complies with the requirements Disclosure of Rule 7.2. & Transparency contains a review the performance of business during the Group’s of the year and the position the at end the of year with analysis future using prospects, A description KPIs. research the Group’s of and development, the principal risks and uncertainties facing the business use financial of and details instruments the Group’s of are also contained within the businessreview.

Directors’ report – business review and governance the Companiesof Act 2006, report the directors’ In accordance – business on with pages 53 s417 1 to review, Statutory disclosures Conservative Labour Liberal Democrats Total Shareholder authority permit to will the Company AGM be continue sought to with at these activities until the 2012 AGM. this year’s

56 Directors’ report – governance Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 57 Directors’ report – governance Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk Going concern The Group has sufficient funding Theand directorsfacilities in to placemeet requirements its to March2014. believe that the Group is well placed manage to its business risks successfully continue they and, accordingly, adopt the goingto concern basis in preparing the annual report and financial statements. Directors’ declaration the Companies of ActAs 2006, required so far as under each current s418 there director is no is relevant aware, audit information auditors which of are unaware the and Company’s each director has taken all the steps that he or she takenas have ought a director in make order himself to to or herself any relevant of aware audit information establishand to auditors that information. are of aware that the Company’s Auditors LLP has indicatedErnst its willingness & Young continue to in office andresolution a proposing re-appointment its as auditors will be shareholders put to the at AGM. Indemnification of directors The Company hasin place and directors’ officers’ insurance28 November 2005,on and, a deedentered into of indemnity grant the directors to further protection against liability third parties, to subjectthe conditions to set out in the Companies Such Act. qualifying third party indemnity provision remains approving in of force as the at date report.the directors’ Directors’ remuneration and interests Information about remuneration directors’ and their interests in the shares the Company of is contained in the remunerationdirectors’ report. Creditors policy agreeThe is payment to Company’s terms with suppliers on pay time and according those to agreed to policy maketerms. payment The is to more not Company’s than 30 after days receipt as a valid except of invoice, otherwise agreed. expressed The ratio, between in days, the amount invoiced its suppliers by during the year and days). 21 was 30 (2010: days Marchthe amount its trade creditors 2011, to owed 31 at

and March March

or, alternatively, printed copies alternatively, can or, 1264, email: [email protected] 1264, .

Apart from streamlining the work of the two main boards, which now have common non-executive membership, membership, non-executive common have now which boards, main two the of work the streamlining Apartfrom be non-executive directors Ofwat NWG. of focus on the core considered business, given such NWG’s that, cross- NWG’s of nature the if this on position its review will Ofwat interest. of conflict a create not would directorships experience necessary the demonstrate course, of still, must question in directors The significantly. changes business in roles, these for suitable be would Scott-Barrett Alex and Fay Margaret that agreed Ofwat understanding. and Anita and Alastair Frew been not therefore, Balls replacedaddition have, Simon to Lyster. on the NWL board. this reduction in the number non-executive of directors brings significant a saving feesin expenses.and 2011, NWL and Ofwat agreed that the independent directors of NWL, for the purposes of the Licence, may also also may Licence, the of purposes the for NWL, of directors independent the that agreed Ofwat and NWL 2011, NWL’s Instrument of Appointment (usually called its ‘Licence’) requires NWL to have at least three independent independent three least at have to NWL requires ‘Licence’) its called (usually Appointment of Instrument NWL’s company the which in areas the with connection a and customers of interests the of understanding an with directors none these whom of Alastair roles were held Anita Balls by and Frew, Simon Lyster, Marchoperates. 2011, Until 31 31 on board NWL the from Balls Alastair and Frew Anita of retirement the to Prior NWG. of directors were In accordance Articles with the Company’s having been Association of Articles), (the Rew Paul and Simon Lyster, appointed as directors the Board by since the will last be AGM, eligible All for election AGM. other this at year’s directors holding officethe of the on notice conveningAGMday thewill office retire from and offer themselves for re-election, with Claude of the exception Lamoureux who will fromAGM. retire office theat thisyear’s of end Simon Lyster, whohas been a Non-executive Director NWL of sinceSimon September 26 Lyster, 2006, was appointed as a Non-executive Director on NWG 1 April of 2011. Board composition the directors the Company of were Sir Derek Wanless, Sir Patrick Heidi Brown, Mottram, March 2011, As 31 at Chris Green, Claude Lamoureux, Martin Nègre, Alex who Scott-Barrett, all served Margaret and Rew, Paul Fay for Margaret and except Rew Paul who Fay werethroughout appointed on 1 June the year, and 1 October respectively. 2010, In June 2010, the FRC introduced a new UK Corporate GovernanceIn June 2010, Code, which will apply the Company’s to The Board has consideredfinancialthe requirements year 31 March2012. theending of new code and believes that the Company is well positioned achieve compliance. to Some the main of principles, such as the annual re-election all of directors, already have been implemented. The Board has a code ethics, Code of ‘Our Conduct’ of which covering is available website, on the Company’s its relationships with customers, employees, suppliers, local communities, shareholders, other investors and regulators. online www.frcpublications.com at This together statement, with remuneration the directors’ report, describes the how Company has applied the principles The the Code of board during NWL of also maintains the year. high standards corporate of governance and endeavourscomply to with the Code, wherever practicable. be obtained free charge of from 8247 FRC publications, 020 tel: The Board believesbest practice in corporate governance is an important in helping tool it meet its responsibilities. The Board considers during that, the this year report, of and the date up to it has compliedwith the main principles and provisions the Combined of Code The 2008 Code Code). (the is available download to from the Financial Reporting website www.frc.org.uk/corporate/ukcgcode.cfm at (FRC) Council’s

statement Corporate governance governance Corporate

58 Directors’ report – governance Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 59 Directors’ report – governance Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

1 1 1 – – 3 3 3 1 2 3 3 3 1 Audit

1 – – – – 3 3 3 3 2 2 3 Remuneration

1 – 4 1 2 4 4 4 3 4 4 1 Nomination 6 1 4 6 6 6 5 6 5 4 6 Board

4

2

3 Not a member, but attended at the invitation of the Committee chairman. Appointed the to Board on 1 June 2010. Appointed the to Board on 1 October 2010. Retired from the Board on 29 July 2010. Heidi Mottram Alex Scott-Barrett Jenny Williams The Board NWG meets least at every two months, usually immediately following meetings the NWL of board. As NWL is so significant within it the be may helpfulto Group, provide an insightthe to how NWL boardas works. the CEO provides an overview performance of Typically, since her last report, highlighting issues which to the board needs particular pay to attention. She also reports on regulatory and other developments affecting the performance is captured means by balanced a of scorecard NWL’s which shows performancesector. against a series Achievement KPIs. of against this scorecard will also element be a key and NWG of NWL bonuses directors’ and overview future years. also The contains CEO’s detailed reports on finance,regulation, operations in 2011/12 and human resources. Reports are provided from chairmen committees of which met since have the last board meeting. Health and safety performance is addressed each at meeting. The NWL board considers papers seeking approval contracts million of worth and £2.0 over capital projects (which in may time require a series contracts) of million. Papers £5.0 over seeking investment approval are required contain to sections on sustainability and risk. For example, a paper seeking investment approval for a scheme alleviate sewer to floodingwould needto demonstrate that the solution proposed is sustainable. Notes: 1. 2. 3. 4. Number meetings of The following table sets out the attendance directors of Board at and committee meetings during 2010/11: The Company has terms adopted reference of which set out the matters reserved the Board for approval to and matters which orcan are, delegated be, the committees to and management. The Company has also adopted financial approval rules which set outthe authorisation processes and financial to belimits applied to financial transactions NWL within has its adopted own version the Company. these of guidelines. Standing or Executive Committees can decisions take delegated not specific to committees between Board meetings. All directors receive Standing notice of Committee meetings and participate may if wish. they Decisions taken the by Standing or Executive Committees are reported the at next Board meeting. Sir Derek Wanless Board responsibilities and processes The Board sets and implements strategy and ensures the Company’s compliance with Group policies and legal and regulatory vision, values obligations. and The strategy are Group’s set out in the Chief Executive Officer’s management Board agendas review. are proposed the CEO and by Company Secretary, with input from NWL’s approval the for Chairman.team, by Chris Green Sir Patrick Brown Claude Lamoureux Martin Nègre Margaret Fay RewPaul

The Chairman and clearly CEO have defined writtenresponsibilities which been have agreedtheby Board. The Chairman leads the Board and creates the conditions for overall Board and individual director effectiveness, insideboth and outside the boardroom. The CEO is responsible for running business the Company’s on a day basis. day to The Company complies requirement with that half the Code’s the directors, of excluding the Chairman, are the Biographicalof details independent appointment. TheChairman on was directors. independentnon-executive directors appear on pages 54 and and 55 details their of service contracts are remuneration in the directors’ report. Board balance and independence directors servedTen during the year – the Chairman, two directors, executive the Senior Independent Non- Directorexecutive and sixother non-executive directors. Sir Derek Wanless is the non-executive Chairman. The directorsexecutive are Heidi Mottram and Chris (CEO) Green (Finance Sir Patrick Brown Director). is the Senior Independent Non-executive Director and the other independent non-executive directors who served during the Martin Alex Scott-Barrettyear Nègre, were Margaret Rew, and Paul Jenny Fay, Williams. Claude Lamoureux is also a Non-executive Director but is independent President not and OTPP, CEO of as until he 1 December was, 2007, the issued of which holds share capital 27% Jenny Williams the Company. of retired from the boards and NWG of NWL on July 29 2010. Authorisation of directors’ conflicts of interest the Companies of a situation avoid Act 2006, in to or which have, they Directors a statutory under have duty, s175 there is no breachthisof duty a conflictcould theinterests. if However, of interest have, Board thewith Company’s has authorised the matter in question. The Articles permit directors than the director (other having the interest in authorisequestion) to any situation giving a known rise to or potential conflict.register A theof interests which have been authorised is maintained the Company by Secretary and is available every at Board meeting. The Company will follow emerging best practice in line with guidance the General paper. Counsel 100’s During the year, the non-executive directorsDuring met formally the year, once without the directors executive and are in regular contact with each The other non-executive throughout directors the also year. met once without the Chairman but did consider not additionalformal meetings be necessary. to The Board NWG also oversees the non-NWL businesses, and particularly contracts the PFI in Scotland, the operating contracts in Ireland, AquaGib and Agrer. The Board NWG works in a very The members similar Board the NWG way. of all sit on the NWL board, and operational issues. The Board’s NWG therefore Board the NWG does need not become to involved in NWL’s too focus sets the It future is strategic. direction all of Group companies, with particular a emphasis on the medium and long including term, funding. Non-executive directors are encouraged meet employees to in order gain a closer to understanding the of non-executive directors held the CEO) (and an open six NWG’s forum of issues face. they On 30 March 2011, officesat Hanningfield, in Essex.event This was successfulwith employees NWL’s at and will be repeated otherat venues. As well as the reports described the NWL board above, receivesrisk reports and approves budgets, financial plans, reports Ofwat, to accounts, dividends payable and a range other matters. of The NWL board also sets time aside during its meetings consider to forward-looking and meets on develop separate strategy to days strategy, that work. The papers submitted the board are to used as the basis for discussion, rather than as an end in themselves. The Chairman ensures wherever that, possible, the board avoids becoming immersed too in detail and that the meetings are used generate to ideas constructively and to challenge the management. Non-executive directors readily question the assumptions the management of team and bring new perspectives from their experience elsewhere.

continued Corporate statement governance

60 Directors’ report – governance Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 61 Directors’ report – governance Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk sending Board papers directors before to each Board meeting; sending briefingto directors packs the in months when Board meetings are held; not and providing team room a directors’ intranet containing site Board and committee papers, minutes, analysts’ reports and reference and regulatory documents, which to all directors access. have keeping in regular contact with directors; − − − − The results the external of evaluation were generally very positive and a number actions of were agreed, with a furtherview to improving the performance the boards. of Although the Board discussions arealready lively and vigorous, the consultant encouraged be directors even more challenging to in their approach. Performance evaluation A full evaluation the performance of the Board of and its committees was conducted during the year an by external consultant, who observed board meetings and NWG of NWL, and a meeting the Audit of Committee. Each director completed a detailed questionnaire prior a one-to-one meeting to with the consultant. The questionnaire was designed address to strategic issues and succession planning, as well as the approach the Board of to operational and financial matters,therole the of non-executive directors andthe qualityof information received by board and its committeesthe Board. was evaluated The the at same performance The time. Chairman NWL’s of used assist the evaluation to with his evaluation each of director. Directors attend conferences and seminars where this will help them in the performance their of duties. − − − − The Company Secretary ensures that directors informed are kept and that information effectively flows withinthe Group by: Managers from within the Group submit papers or give presentations Board at industry meetings. Water representatives meet the NWL discuss board to current issues. Information and professional development All directors access have independent to professional advice assist to them in the performance their of duties, expense, the Company and to theat Company’s Secretary for advice and assistance. The Chairman, with the assistance the Company of Secretary, monitors the induction and training requirements directors. of All new directors receive an induction information pack and are encouraged visits make site arrange to andto meetings with managers. Margaret has Since visited Fay joining Birtley the Companysewage in June treatment works 2010, (STW), Lumley treatment water works (WTW) and Rew Paul has Bran Sands Since joining STW. in October 2010, visited Bran Sands Lumley WTW, STW, Hanningfield Kielder, and Abbertonreservoirs andthe Pity Me customer contact centre. The Board NWG Overthe supports coming the findings ‘Women recentLord of on Davies’ Boards’. review, months the Board will review its procedure for the appointment directors of (including the impact the approach of managementtaken to development a less at senior level) and consider which the Davies of recommendations should whether be adopted, or become they not formally binding on companies. AGM, Following this year’s if Heidi Mottram the nine of and directors Margaret will are re-elected, be female. Fay two (22%) The General Counsel and Company Secretary, Martin Parker, assists the Board to ensure that good corporate corporate good that ensure to Board the assists Parker, Martin Secretary, Company and Counsel General The governance compliance is achieved. He is also Company Secretary NWL of and is secretary all Board to committees. The non-executive directors bring the Board many to years business of experience as well as financialexpertise and the ability and willingness challenge to and support the directors. executive Sir Patrick as Senior Brown, Independent is available shareholders to Non-executive Director, who raise wish to any concerns and leads the non-executive directors in performance. their evaluation the Chairman’s of

Nomination Committee The main duty the Nomination of Committee identify is to and nominate candidates fill Boardvacancies to for approval the Board. The by Committee also reviews succession planning for the Board, NWL board and senior appointments and will make recommendations the Board to when appropriate. usual The Committee’s policy use externalis to recruitment consultants advertise or to in order identify to suitable candidates. Remuneration Committee The work the Remuneration of Committee, and details remuneration, the directors’ of are set out in the directors’ remuneration report. Board committees The Board has Nomination Audit, and Remuneration Committees assist to it inthe performance its duties. of The Board sets the terms reference of the committees of and receives regular reports from their chairmen at Board meetings. The terms reference of committees of are available website or from on the the Company’s Company Secretary. External appointments Executive directors generally have only accepted non-executive positions outside the Group where this would benefit eitherthe Group theor local community. These positionstendedto be withhave educational institutions, economic regeneration groups or similar bodies. The Board has agreed directors that executive the Company of who are appointed non-executive directorships to a more of commercial nature retain may the fees, subject to obtaining consent the Chairman’s before an appointment is accepted. Only one such external appointment per director will generally be permitted. The Chairman’s commentsThe Chairman’s on the evaluation the directors of seeking election and annual re-election the at AGM are provided in the Notice Meeting. of The comments the Senior of Independent Non-executive Director on the evaluation the Chairman of are also provided in the Notice. The Board has also considered the FRC’s ‘Guidance on Board Effectiveness’, published in March 2011. The The Board has also‘Guidance published considered on Board Effectiveness’, in March the FRC’s 2011. directors consider and the that the NWG work both NWL of boards and the roles the Chairman, played by the Senior Independent Non-executive Director and the other directors are consistent with the practical both content and underlying philosophy the Guidance. of It was agreed that the Board’s time would was beIt agreed more tightly focused that the Board’s on strategic issues, so that maximum value is added. As well as commenting on the contributions from the directors and the processes Board at adopted and committee meetings, the consultant made certain practical observations. The consultant for example, that felt, a meeting the Audit of Committee was hampered the fact by that some people (who members were not the of Committee) participated video by conference. was It agreed that this helpful was not and the schedule of meetings was immediately the need avoid adjusted to for this in future. In Board relation papers, to it was agreed that some could be a little more incisive and their state main points more clearly.

continued Corporate statement governance

62 Directors’ report – governance Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 63 Directors’ report – governance Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk ensuring the financial and accounting of systemsNWG and its subsidiaries are providing accurate to and up informationdate on their current position; publishedensuring financial NWG’s statementsrepresent true a and fairreflection of this position; and assessing the scope and effectiveness risk management the Group’s of systems and the integrity its internal of financial controls. − − − The purpose the Audit of Committee assist is to and executive both non-executive discharge directors to NWG of their individual and collective responsibilities in relation to: − − − The Committee members receive regular briefings externalthefrom to auditorsenable keep to to themdate up on financialreporting standards. Audit Committee The Audit Committee members during the year were Sir Martin Patrick Brown (Chairman), Nègre, Alex Scott- Rew Paul and Alex Scott-Barrett and Jenny WilliamsBarrett, July 29 2010). Rew Paul (until (from 1 October 2010) are chartered accountants and the Board is satisfiedrecent thatthey have both andrelevant financial experience. following the isIt proposed Rew that Paul will as over take Chairman the Audit of Committee July on 2011, 28 Rew Paul was a seniorAGM. partner membership The Committee’s with PwC complies until March 2010. with the Code. The Chairman and directors executive Audit are invited Committee to meetings, with the permission its Chairman,of but no right have attendance. of Managers from within the Group Audit are invited Committee to meetings discuss to issues their relating areas to the business. of the Committee During met with the year, both the external Audit Partner and Internal Audit Manager discuss to audit business, without the directors executive being present. The Committee remains satisfiedthatthe internal audit function is to operateable with independence and is under not any pressure from the management executive the Company of produce to particular results. The members the Nomination of Committee are Sir now Derek Wanless Sir Patrick Margaret (Chairman), Brown, Heidi and Mottram, the membership Martin Alex Scott-BarrettFay, Nègre, Rew, and Paul is Simon Lyster, compliant with the Code. The Committee also considered extensions the appointments to non-executive of directors on and the NWG NWL boards whose contracts for services Non-executive expired directors during are appointed the year. for a term of one year and all directors are subject annual to re-election the at AGM. During the year, the CommitteeDuring recommended the year, and the NWG NWL to boards the appointments Margaret of Fay as additionaland independent Rew, Paul non-executive directors. The Committee felt that an additional non- withexecutive strong business and political contacts, especially in the north east, would be a valuable addition the boards. Margaretto was regarded Fay the Committee by as an ideal candidate for this role and she was, approachedtherefore, the Company discuss by to the opportunity. Rew Paul was appointed for his first class finance skills experienceand and particularexpertise in sustainability. The Committee consideredthatthese all-roundattributes understanding and Rew’s Paul business of made him an excellent addition the twoprincipal to boards. Leading search executive consultants assisted the Committee appointment. Simon withLyster, Rew’s Paul a Non-executive Director NWL of since September 26 2006, was appointed Board the NWG on to 1 April 2011. bringsSimon very Lyster significantexperience of sustainability issues, wellas excellent as analytical skills and a Essex operating area. first-hand understandingof NWL’s

monitoring the integrity the financial of thestatements of Company; internalreviewing controls the Company’s (both financial andby informationconsidering systems) reports of the internalboth and external auditors, directing questions management to and reviewing the financial risks and controls information provided them on to an annual basis; monitoring and reviewing the effectiveness the internal of auditfunction reviewing by the scope the annual of audit plan, the results those of audits and monitoring the completion actions of identified duringthe audits; monitoring and reviewing the performance and effectiveness the external of reviewing auditors, in by particular, the scope and costs the audit of process; reviewing the external independence auditors’ monitoring by the extent the provision of non-audit of services and receiving reports from the external auditors; monitoring the potential impact and management significant of the to businessrisks using a risk methodology (meeting the recommendations Review Group the 2005 of guidance) Turnbull whichout sets and all rates identified risks, including operational,external, financial,environmental, social governanceand risks; reviewing terms reference; of the Committee’s financialreviewing approval the Group’s rules; tax strategy; reviewing the Group’s contract terms; reviewing NWL’s accounting andreviewing treasury the Group’s policies; and interimreviewing management the Company’s statements,half-yearly and preliminary results announcements and final published annualreport and financial statements. − − − − − − − − − − − − Non-audit services and objectivity the safeguard servicesto non-audit of approval the for procedure a approved has Committee The Board’s Practices Auditing the of requirements the with complies which auditors, external the of independence information financial bookkeeping, provide to permitted not are auditors external The 5. No. Standard Ethical revised approval, prior servicesrequire Permitted services. outsourcing audit internal or implementation, and design systems The £50,000. over if Committee, Audit the from or £50,000, under if Chairman, Committee Audit the from either the of breakdown A servicesprovided. non-audit all of details annually report to auditors the requires Company External auditors auditors since LLP been 2003. have The the audit Group’s Ernst engagement & Young partner is subject to change everyyears five wasand last changed2008. in The Audit Committee Chairman reports the Board to following each meeting the Committee of and Committee minutes are the Board. circulated to Given the importance business, the Committee the Group’s NWL of to works closely with the Audit Committee of committeesNWL. In both particular, review significantregulatory debt reports for Ofwat andregularly review NWL’s recovery strategy and performance. In addition, meetings were held with the Ofwat Reporter during the year to discuss the June Return process. cost audit of and non-audit services provided the auditors the financial by is set 4 to out in note statements. The Committee has assumed now responsibility for the practical work being ensure done to the that Group’s procedures designed prevent bribery to are adequate (having regard the provisions and to the Bribery of Act 2010 the official guidance published This buildsthat Act). relationto in on significant work NWG by done the Board, with advice from the Company Secretary assess and Internal to Audit the bribery Manager, risk faced the Group, by clarify policies and map the procedures be put to in place. During the year its work included: − − − − − − − − − − − −

continued Corporate statement governance

64 Directors’ report – governance Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 65 Directors’ report – governance Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

The NWL management team manages the major business the Group of and consists Heidi of Mottram (CEO), Chris Green (Finance Graham Director), Neave (Operations Director and on Ceri NWL board), Jones (Regulation & Scientific Services Director and on JohnNWL Ianboard), Devall Donald Director), (Customer(Water Services Colin Price (Technical Director) and Henry SarahDirector), Salter (HR Wilson Director from 4 January 2011), Diane former Morton, The NWL HR resigned Director, on 30 September 2010. NWL’s Director). (Wastewater management team meets monthly consider to and discuss progress against annual and monthly financial and operational targets. prepares It an annual budget and business plan for consideration and approval the NWL by board. NWL operates a balanced scorecard which monitors progress against KPIs and which covers all areas operationof the business. of Organisational structure The trading subsidiaries their have own boards directors of Subsidiary (the Boards) which are responsible for the operational and financial theirof control own businesses. The Subsidiary Boardsreport executivetheto directors Board on matters the Company’s and to including major financial, strategic, organisational, compliance and regulatory issues. Internal audit’s findingsInternal audit’s andrecommendations theare to presentedAudit Committee along with agreed actions. Internal audit updates progress against any agreed actions until the control weakness is resolved. The Board has reviewed the effectiveness internal of system as during control, follows, the year. the Group’s of The internal audit team manages a process whereby all the financial of controls withinthe Group are identified and certifiedtheby relevant manager as As havingpart operatedforthe of a fullprogrammeyear. work,of which is agreed withthe Audit Committee, these A report controls throughout are tested detailing the year. any areas of concern is produced after each audit. As part the same of process business all the key of risks are identified. Each risk is assessed on an unmanaged basis, the controls in place mitigate the risks to are detailedand the risk is then re-assessed after these controls. The use our of standard accounting manual finance by teams throughout the Group ensuresthattransactions and balances are recognised and measured in accordance with prescribed accounting policies and that information is appropriately reviewed and reconciled as part the reporting of process. The use a standard of reporting pack all by entities in the Group ensures that information is gathered and presented in a consistent facilitates that way the production the consolidated of financial statements. The Board has overall responsibility for maintaining a sound internal of system control and for reviewing its effectiveness. The is designed system manage to rather than eliminate the risk failure achieve of business to objectives. Regular reviews the effectiveness of the internal of control are system carried out in accordance with Review Groupthe 2005 guidance. Turnbull The actions necessary address to weaknesses and otherwise improve internal of the system control are communicated management. to Internal audit monitors implementation these of actions and reports the Audit back Committee. to This process has been in place throughout the year and up to annual report and financial statements. There are inherent limitations approval the 2010/11 of of the date in any internal of system control and even the most effective can system only provide reasonable, a and absolute, not assurance againstmaterial mis-statement or loss. Review of internal control The Board believes as explained therethat, are effective below, systems in place identify to and manage significant risks and that it receives sufficient informationto enable to assess it these risks. not impaired.not On 25 May 2011, Ernst & Young LLP confirmedtheto Audit Ernst & Young Committee, in accordance(Communication260 with ISA May 2011, On 25 auditof matters those charged to considered have that they with governance), their relationship with the Company is staff audit and partner engagement audit the of objectivity the judgement, professional their in that, and , together with a summary NWL how of is managing these risks. .

The approval the Board of is required for major investments, including those in new and markets, large capital expenditure programmes. The treasury whichis approved the Board, requires by strategy, that investments are certainlimited to money market and treasury exposure any single to instruments, bank, and that the Group’s building society or market is controlled, with maximum deposits allowed with any single counterparty. The Group’s investment strategyborrowings fix aims forinterest to partrates and investmentsforthe of periods Group’s determined the forecast by cashtheof individual flow businesses. This managesexposurethe the to riskof changes in short term interest Foreign rates. currency exposure is also managed as part the treasury of strategy approved the Board. by Budgets and business planning The Group prepares detailed medium term business plans and annual budgets which are reviewed the by directorsexecutive and submitted the BoardBusiness to for approval. plans and budgets include an assessment risks the key andof success factors facing each business unit. Some subsidiaries, such as NWL, consider risks The more frequently. directors executive consider significant risks in a structured on a monthly way basis, assessing the likelihoodand potential impact the relevant of risks before andboth after risk management measures been have putin place. Further details about risks how and uncertainties facing the Group are assessed and managed are included report in the directors’ – business review on pages and 50 51 Information and reporting system Each Subsidiary Board financial holds the Company’s a copy of approval rulesterms and reference,of which contain full details the procedures of for distribution information of and financialreporting. Each Subsidiary Board has developed financial controlsystems to appropriateactivities.its For a number years, of the Subsidiary Boards performed have a full annual business risk analysis meet the to recommendations Review Group the 2005 of guidance. Turnbull This methodology is described above in relation the work the Audit of to Committee. The results the risk of reviews are reported in detail the Audit Committee to and a summary is directors. reported Accompanying the Company’s to the risk model is a detailed review each of internal financialcompany’s controls along with either confirmation that the have controlsoperated throughout the year or details Action any exceptions. points of arising from these reviews are followed up as part the internal of audit process. On a monthly basis, the directors executive compare the actual operational and financial performanceof each business measure are set to with its performance plan and budget. Targets and regular forecasts are made. The Board is able monitor the impact to environmental, of social and governance business, matters on the Group’s assessto the impact significant of risks theon business evaluate methodsto of managing and these risksthrough reports it receives from the Subsidiary Boards and the Audit Committee. The environmental risks considered be to significanttheby Board are described on page 51

continued Corporate statement governance

66 Directors’ report – governance Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 67 Directors’ report – governance Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk Shareholders are entitled requisition to a general meeting and the Company of speak attend, and vote to at general meetings, in accordance with the Companies Acts and the Articles. Shareholders the right have to appoint proxies. Rights and obligations attaching to the shares The rights attaching the shares to in the Company are set out in the Articles and be may changed with the approval the shareholders. of Subject the provisions to the Companies of shares Acts, be may issued with or have attached such thereto preferred, deferred, qualifiedother or rights or suchrestrictions, whether regardin to dividend, return capital of voting, or otherwise, as the Company ordinary by may if resolution there determine or, has been not any such determination, as the Board determine. may Information pursuant to the Directive Takeovers Structure of the Company’s share capital ordinary pence shares 10 admitted trading. to the Company had 518,623,845 March 2011, As 31 at AGM Shareholders are encouraged which at AGM attend can they the to Company’s meet and question the directors. The Company will make a presentation highlight to business the at AGM the key developments and during events The full Boardthe is year. expected be answeravailable shareholders’ to to the at AGM the at questions. Voting willAGM be on hands a show of but the cast proxy votes on each resolution will be displayed after each resolution has on hands been a show the If voting of on. produces voted a differentresult from that which been would have achieved on a poll, the Chairman will call a poll so that the result on that resolution the voting of reflectsthe wishes the majorityof shareholders. of The cast proxy each votes at are disclosed AGM on our The website. notice has been shareholders sent to together with an explanation be heldconvening July to on 2011, the 28 AGM, the businessof be conducted to the at meeting and a form proxy. of All shareholders are encouraged contact to the Company with queries or suggestions. A welcome letter is sent all new non-corporateto shareholders, which includes information on services available shareholders. to Investor relations The Company welcomes constructive communication with all its shareholders. Our main communication with shareholders is through the publication the annual of report and financial statements, half-yearly financial report, interim management statements and through In addition, information website. the executive on the Company’s directors regular have contact large with institutional the Company’s as well investors, as giving presentations to analysts andthe directors executive stockbrokers. held During 36 meetings the year, with a range institutional of feedback Investor investors. reports from meetings, investor advisers, prepared the Company’s by are considered Boardat meetings and analysts’ on notes the Company are made intranet available all directors to on the Board’s team The room. Board believes that these methods feedback investor of provide the Senior Independent Non- Directorexecutive and the other non-executive directors with a balanced understanding the issues of and concerns major of shareholders. The Senior Independent Non-executive Director is available shareholders to who raise wish to any matters concern of and the Chairman welcomes contact with any shareholders who have matters discuss. wish they to The Companyhas received not any requests from institutional shareholders to meet with non-executive directors. capital 3.00 3.02 7.86 % share 26.76

shares at 31.5.2011 Number of 15,573,103 15,654,522 40,787,412 138,776,864 – 3.15 7.48 capital 26.76 % share

31.3.2011 shares at Number of Below 3% 16,319,467 38,770,495 138,776,864

in the case a certificated of duly the share, stamped,instrument transfer, is of lodged thewith Company accompanied the certificate by forthe sharesto which relatesit and suchother evidence theas Board may reasonably require show the right to the transferor make of the transfer; to in the case a certificated of the share, instrumenttransferof is respectin of only one class of and share; in the case a transfer joint of holders to a certificated of or uncertificated the share, number of joint holders to whom the share be transferred is to does exceed not four. − − − Additionally, whereAdditionally, a member or other person on whom a Disclosure the Companies of Notice (pursuant s793 to Act 2006) has been served and within has the not, period specified, suppliedtheto Company the information requiredin respect any shares, of the Board impose may a sanction preventing the member from attending and any at generalvoting meeting. Restrictions on voting rights In accordance with the Articles, no member shall, unless the Board otherwise determines, be entitled be to eitherpresent personally unless vote, or to all proxy, or calls by or other sums presently payable him by in respect sharesof in the Company been have paid. The holdings include, where applicable, the aggregate investment of management interests clients’ within the respective asset management companies and since have may changed without triggering a further notification. Legal & General Investment Management (UK) Ltd. Artemis Investment Management LLP Ontario Teachers’ PensionOntario Plan Board Teachers’ Significant shareholdings Details shareholders of with significant holdings issued thein Company’s share capital are set out below: Additionally, whereAdditionally, a member or other person on whom a Disclosure Notice has been served (pursuant s793 to the Companiesof Act 2006) and within has the not, period specified, suppliedtheto Company the information required in respect any shares, of the Board impose may a sanction declining register any transfer to shares, of other than a sale a bonafide to unconnectedthird party. AssetPictet Management Ltd If theIf share be transferred to is an uncertificatedthe share, Boardregisterrefuseto may transfer a theif Uncertificated Securities Regulationsto do so. allow2001 it Restrictions on the transfer of shares Any shareholder transfer may a certificated share, as defined in the Articles, by an instrument transfer of in the usual the transfer form anor of uncertificated in such other form as the Board However, approve. may share, as defined thein Articles, need not be in writing and shall comply with any rulestheby Board adopted under Article in its absolute discretion and without however, assigning The Board any reason, may, decline register any to 13.7. transfer any share of that is a fully not paid up share or on which the Company has a lien, providedthat such discretion be not may exercised prevent dealings in such as to a way inthe shares from taking place on an open and proper basis. The Board also may decline register any transfer to unless: − − −

continued Corporate statement governance

68 Directors’ report – governance Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 69 Directors’ report – governance Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk persons be members to such of local or divisional boards, or agents, and fixtheir remuneration; appoint for such purposes attorney(s) and with such powers, authorities and discretions, and for such period and subject such terms to and conditions, as it think may fit; delegate any director; its powers to accept, endorsesign, or draw, otherwise all cheques, execute promissory drafts, notes, bills exchange of and other instruments and all receipts for moneys the Company paid to in such manner as the Board shall from time time determine; andto allexercise the powers of the Company of grant and to pensions, pay annuities, gratuities, superannuation or other allowances and benefitsof any person.in favour establish local or divisional boards or agencies affairs manage to the Company’s any of and appoint any − − − − − Allotment of shares Subject theprovision the to Companies of the Articles Acts, and any authorising resolutions passed in general meeting, the shares the Company of shall be the at disposal grant allot, options the Board, of which offer, may orover otherwise dispose such them of persons, to such at times, for such consideration and upon such terms and conditions as the Board determine. may The directors will again be seeking authority from shareholders at for the allot directors shares AGM to duringthis year’s the ensuing year although, present, at the Company has no doing intention of so. − − − − − Powers of the Board The Articles provide that the business the Companyof shall be managed the Board, which by all exercise may such powers the Company of as are required not the (by Companies Acts or the Articles) be the exercised by to Company in general meeting. Subject the Companies to the Articles Acts, and any directions given special by alia: inter resolution, the Board may, Amendments to the Company’s Articles The Company amend may its Articles passing by a special resolution its members. of The Company may, by special by The resolution, Company ordinary or may, by resolution which of special notice has been given in accordance with the provisions the Companies of any remove director Acts, before the expiration his of period by ordinary officeof resolution, and may, appoint another person in his place. Any person so appointed shall be subject retirement the to at same time as if he had become a director on the on day which the director in whose place he is appointed was last appointed a director. The main duty of the Nomination Committee is to identify and nominate candidates to fill Board vacancies forvacancies Board fill to candidates identify nominate and to Committeeis Nomination the dutyThemain of approval the Board. The by work the Nomination of Committee is described above. Appointment and replacement of directors ordinary by The Company resolution, may, The appoint Board also any may person appoint be a director. to directors, either fill casual to vacancies or as an additiontheto Board, but directorany so appointed shall hold office only the until AGMnext and shallthen werewhobe eligiblefor election.PaulLyster, Rew and Simon appointed the Board to since will the last be AGM, eligible the Articles Additionally, for election AGM. this at year’s provide for the annual re-election all of directors. Details all of the directors seeking re-election AGM this at year’s are set out in the Notice Meeting. of The deadline for delivering either written or electronic proxy forms voting is 48 hours before the appointed time of the meeting. Shares required fulfilvested to awards made underthe NorthumbrianTrust are Water Group plc Employee acquired through Northumbrian Share Limited. Scheme In line Water with Association Trustees British of Insurers the Employee Trust (ABI) Guidelines, dividends and rights voting are waived on March these 2011, shares. 31 At shares. 765,962 held of a total

Northumbrian Group plc Water Registered office: Northumbria House, AbbeyPity Road, 5FJ Durham,Me, DH1 Registered in England and 4760441 Wales No. Martin Parker General Counsel and Company Secretary 2011 May 31 By order the Board of Significant agreements million loans of provided NWL and the had EIB £344.7 by the applicable terms include March 2011, As 31 at changecontrol of after clauses. consultation If, with the NWL, opinion is the of EIB that a change control of has a material or adverse have, had, is likely to effect, then could the EIB give 30 requesting notice days of early repayment the loans of plus, in certain circumstances, a premium depending on prevailing market interest rates. Purchase of own shares Subject the provisions to the Companies of Acts and the Articles any confirmation and to or consentrequired by the Company time from may purchase time to law, its own shares. The Company will again be seeking authority from shareholders purchase to its AGM own shares during this at year’s the ensuing year although, present, at the Company has no doing intention of so.

continued Corporate statement governance

70 Directors’ report – governance Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 71 Remuneration Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk (in the ‘about us: corporate (in us: the ‘about governance’ section)

agree bonus payments for 2009/10; set performance targets directors for executive and senior managers; agree salaries for 2011/12; Decemberdetermine the vesting made awards which percentage on 13 2007 be applied to the LTIP to Decembervested on 13 2010; subject vest, performance to (to on awards 8 December andgrant continued LTIP 2010 service, on 8 December 2013); consider the impact changes of the tax to treatment pensions; of and review the pension contributions payable in respect members executive of defined the Company’s of contribution pension scheme. − − − − − − − As the Committee works closely with NWL’s remuneration committee, CommitteeAs the Committee papers works closelyand minutes with NWL’s are allcirculated and NWG to NWL non-executive directors, who can give their views direct the Committee to Chairman and can attend meetings if wish. they Following the year end, the Committee its largest to shareholders wrote and the major representative bodies to In summary, these changes consult on a number changes of remuneration executive to arrangements for 2011/12. introducewere to an the defined tier executive to contribution pension scheme,expand the rangeof annual bonus metrics include to a balanced scorecard, increase maximum bonus to potential directors for executive from 70% base of salary100% and introduce bonus deferral and clawback. Further details the changes of are set out below. No changes long were made term to incentive provisions. The Committee’s work over the past year The Committee met three times during attendance the year with all 100% by members, for Sir Patrick except meeting and Margaret who did Fay join not Brown the Committee who present was not the at March until 2011 to: June 2010, − − − − − − − External advice The Committee continued receive to advice during the year from its appointed advisers, Hewitt New Bridge Street and also(HNBS), from the CEO (although never about her The own remuneration). Human Resources Director, also attends Committee who joined meetings provideSarah expert to the Group Salter, on4 January advice. 2011, and continues assist to the CommitteeHNBS in was maintaining paid for these £33,399 services best in 2010/11 practice in remuneration. relation to HNBS did provide not any other servicesthe Company to during the year. Remuneration Committee members The Committee members are Alex Scott-Barrett (Committee Sir Chairman), Patrick Martin Brown, Nègre who are all consideredand Margaret the Company Fay, be by independent, to and Sir Derek Wanless. The membership the Committee of compliant therefore, was, with the MartinCode throughout Parker, the year. the Company Secretary, is secretary the Committee. to The Committee is always available engage to with major shareholders and their representatives discuss to remuneration matters. The RemunerationCommittee The role of the Remuneration Committee The Remuneration Committee the Board of Committee) (the determines the remuneration and terms of employment the Chairman of directors executive and NWG of NWL and the Company, of a further six senior managers, in accordance with a remuneration policy approved the Board. The by terms reference of the of Committee are published on our website www.nwg.co.uk at or a copy can be requested from the Company Secretary. In this report, which will be submitted for approval at the AGM on 28 July 2011, we describe we the how Chairman,In this report, which will be submitted July on for approval 2011, 28 the at AGM andexecutive non-executive directors are remunerated. Those parts the remuneration of report which are subject LLP are marked audit Ernst ‘audited’. to by & Young

report Directors’ remuneration remuneration Directors’ 72

Remuneration Directors’ remuneration report continued

Remuneration policy

Annual report and financial statements 2011 statements financial and report Annual plc Group Water Northumbrian The Committee considers the principles and provisions of the Code when setting its policy and believes it is fully compliant. The policy of the Company is to provide remuneration that is sufficient to attract, retain and motivate directors of the quality required to run the Company successfully, while paying fairly. Although HNBS provides the Committee with detailed comparative data on other companies in the utilities sector and more widely, the Committee uses this data with caution given the lack of direct comparators and to avoid remuneration being ratcheted up as a result of benchmarking exercises.

Consistent with its fair pay policy, when considering the remuneration packages of senior executives and directors, the Committee takes into account the pay and employment conditions of other employees in the Group. However, it does not consider that a formulaic approach to the pay differentials between directors and other employees would, of itself, be helpful. It recognises, however, that excessive pay differentials would be divisive and would undermine the Group’s core value of working as ‘one team’. The Committee is determined to ensure that executive’s remuneration continues to be set at a level which is reasonable and appropriate. The directors have been awarded the same 3.71% increase in their basic pay as nearly all other employees for 2011/12.

The Committee also considers environmental, social, risk management and governance issues when setting remuneration terms.

The remuneration policy of the Committee is that: −− the setting of base salaries is largely influenced by individual contributions and internal relativities rather than external comparators (although for 2010/11 and 2011/12 the Committee was influenced by general economic conditions); −− the annual bonus plan recognises the interests of all of the Company’s stakeholders (including shareholders, customers and employees) rather than being focused solely on profit; and −− management shares in the longer term value created for the Company’s investors and the serviceability of the Company’s regulated assets.

Elements of remuneration The remuneration of the executive directors comprises: −− basic salary; −− benefits (including pension and participation in the Company’s SIP); −− a performance related annual bonus; and −− annual LTIP awards.

In addition to reviewing each constituent element, the Committee reviews the remuneration packages as a whole to ensure that they remain appropriate in terms of structure and quantum. The chart below shows the composition of the CEO’s remuneration (as a percentage of basic salary) both at ‘target’ and ‘maximum’ levels of performance. Maximum performance assumes the achievement of maximum bonus and full vesting of LTIP awards.

Fixed pay Variable pay

Total

Maximum www.nwg.co.uk

0% 50% 100% 150% 200% 250% 300% 350%

Basic salary Pension & benefits Annual bonus LTIP 73 Remuneration

Basic salary and benefits

Basic salary is reviewed annually based on individual contributions and internal relativities. The Committee also has 2011 statements financial and report Annual plc Group Water Northumbrian regard to market practice in other quoted water companies and similar sized companies more generally.

Current basic salaries, together with the previous year’s salaries, are set out below:

As at As at As at 1.4.2011 1.4.2010 1.4.2009 Heidi Mottram £331,872 £320,000 n/a Chris Green £236,459 £228,000 £225,000

For 2011/12, salaries for senior executives have been increased by 3.71%. This is the same as for nearly all other employees.

Benefits provided to the executive directors comprise membership of pension schemes (as detailed below), car allowance and healthcare.

Pensions The main features of the Northumbrian Water Pension Scheme are set out in note 24 to the financial statements. Basic salary is the only pensionable element of the executive directors’ remuneration packages.

The executive directors’ pensions were modified with effect from 1 January 2008, in line with the changes proposed for the pension scheme as a whole, and the executive pension arrangements were closed to new entrants on that date. In 2010/11, Heidi Mottram received an employer’s contribution of 8% of salary to the defined contribution section of the Northumbrian Water Pension Scheme and made an employee contribution of 5%. The employer’s contribution of 8% was the same as was available to any other employee making a 5% contribution during 2010/11. Following consultation with the Company’s largest shareholders and major representative bodies, the employer contributions on behalf of executive members of the defined contribution scheme have been increased from 8% to 15% of salary, with employee contributions increased from 5% to 8%, from 1 April 2011. This was thought necessary in order to make the remuneration packages available for senior recruits market competitive. Heidi Mottram is the only executive director of the Company in the defined contribution scheme.

Annual bonus The annual bonus plan has been designed to reflect the interests of all of the Company’s stakeholders. The maximum annual bonus potential for the executive directors for 2010/11 was 70% of salary:

20%

40% Shareholders – profit before tax 5% Customers – Ofwat’s overall 5% performance assessment rating Employees – percentage lost time through Bespoke personal www.nwg.co.uk – 2 39 20 61 36 44 20 Heidi Heidi 100

Mottram (% of salary)(% (% ofsalary) (% actual bonus actual – 2 20 61 39 Chris Green (% ofsalary) (% actual bonus actual 5 5 40 20 70 bonus Maximum (% ofsalary) (% 2 3 . 4 1

The PBT bonus is based on actual PBT performance compared the to budget PBT set by the Board at the beginning ofprimary the year. PBT has been financial chosen because measure it isfor a the Company, for which the executive directors are accountable. The anycalculation variance betweenof PBT performance the actual and is adjusted budgetto interestexclude the charge impact onof index linked bonds issued by Northumbrianeach year and Water is, Finance therefore, plc, outside which depends of management entirely control. on RPIin July of The directors’ remuneration report for 2009/10 stated that the bonus metrics would be to used be the in same 2010/11 as in the previous year. Therefore,Ofwat no longer although publishes an rating, OPA the Committee on the same has score OPA estimated basis for 2010/11, as before, NWL’s as 362. This has been placed in a range for bonus purposes being 426, to of 351 the published range of performance across water the 10 and sewerage companiesThe year end in percentage 2009/10. of time lostthrough sickness against a range was 3.1%, for bonus purposes 2.99%. to of 2.7% Heidi Mottram’s personalIn 2010/11, targets related principally maintaining to key financial ratios and measures, ensuringmajor that investors good relationships and analysts, were increasing maintained operating with and capital maintenance efficiencies,were properly identifying quantified, business refreshing development the risk modelopportunities, and preparing a ensuringhigh level thatstrategic investment risk matrix.needskey financial Chris Green’sratios personal and measures, targets weremaintaining focused mainly good relationships on maintaining with major investors and analysts,between ensuring risk and reward,treasury reviewing management and developing achieved strategy an appropriate in relation market to balance reform and competition,investment identifying needs were business properly development quantified, refreshing opportunities, the risk ensuringmodel, preparing that a high level strategicbase and investmentrisk matrix programme and identifying of NWL. further opportunitiesto impact the cost Percentage time lost through sickness Bespoke personal targets Overall performance assessment rating (OPA) Total Balanced scorecard measures Bespoke personal targets Total Bonus metric Bonus PBT Following consultation largest with the Company’s shareholders, the range annual of bonus metrics has been expanded include to a balanced scorecard align to annual incentive more pay closely with stakeholders’ wider In addition the introduction to the balanced of scorecard, the maximum annual bonus interests for 2011/12. salary of will 100% be increased and to will be from 70% potential for the directors executive in 2011/12 apportioned as follows: Notes: 1. 2. 3. 4. The new metrics are firmly linked to the Company’s strategic goals (customer, competitiveness, people, environment environment people, competitiveness, (customer, goals strategic Company’s the to firmlylinked are metrics Thenew capitalassessment of an with along ‘competitiveness’, performance reflects ThePBT metric communities). and ‘customer’ The goals. strategic other the to linked balanced are scorecard the of elements other the while efficiency, goal The‘people’ quality. water and unplanned interruptions satisfaction, customer on based underpinsgoal targets targets goal ‘environment’ reportable time The accidents. lost engagement and employee for targets in reflected is on based are targets ‘communities’ while performance incidents, treatment pollution and sewage compriseleakage, these measures are of Definitions socialresponsibility achievement. corporate Group’s the of recognition external andoutlined 13 on pages 12 metric Bonus Profit before tax (PBT) Actual performance against the 2010/11 targets was as follows: Actual performance against the2010/11

continued Directors’ remunerationDirectors’ report

74 Remuneration Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 75 Remuneration Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 1 99% 99% awards awards Value of % of salary granted as a awards awards granted Number of conditional conditional 96,212 68,551 Based on a closing share price on 7 December of 328.5 pence. 2010 Note: 1. Heidi Mottram Conditional Heidi to made awards Mottram on 8 December and Chris Green 2010 were: LTIP directors executive and senior managers receive, may the at discretion the Remuneration of Under the LTIP, Committee, annual conditional shares of awards annual in of the Company salary worth 100% up to grant, at although only All the directors executive level. three participate NWG have awards year of pre-vesting the at 100% performance conditions. Bonus clawback and LTIP the Committee has introduced a clawback provision which will As part the changes of introduced for 2011/12, apply in the event that results on which are are awarded, subsequently bonuses are be paid, or found LTIPs to inaccurate or there has been relevant misconduct on the part the employee. of Bonus deferral Following the increase in bonus the Company potential, has introduced bonus deferral directors. for executive Of will be payable bonus in cashthe total 70% awarded, and will 30% be payable in shares, deferred for three years. Bespoke personal targets have been set for Heidi Mottram and Chris Green for 2011/12. For Heidi Mottram these Bespoke personal targets been have set for Heidi Mottram and Chris Green for 2011/12. include maintaining financial key ratios in line thewith NWG and NWL approved budgets, maintaining good keeping(and the relationships with and investors analysts, delivering the operating efficiency plans2011/12 for on track) strategy and on advanced progressing anaerobic the Group’s remainder the plansof 2014/15 for digestion, co-digestion targets and include renewable Chris maintaining energy. Green’s financial key ratios, maintaining good relationships with and investors analysts, refreshing the risk model and preparing a high level strategic risk matrix and work oncurrent cost depreciation and its impact on return on capital employed. Chris Green The element PBT the bonus of will be scored on a sliding scale around the target figure. A simple pass/fail measure will apply the other targets to and most the targets been of have setlevels at which would require actualresults. The Remuneration Committee significantconsidersoverallthe improvements2010/11 overthe bonusmetrics be appreciably to more and than stretching before, reflect that they operational performance and delivery A similar customers to ina more approach structured has way. been in adopted executives relation to below board level and senior managers, albeit varying at levels bonus of opportunity. Calibration 30% of this part of an award (i.e. 15% of the of this part 15% of 30% an (i.e. of award award) will vesttotal for median performance increasing on straight a line so 100% that vests award) for upper the total of 50% (i.e. quartile performance. 30% of this part of an award (i.e. 6% of the of this 6% part of 30% an (i.e. of award award) will vesttotal for average three-year increasingROCE on 6.3%, a straight of line award) will the total of 10% (i.e. so that 50% vest for average three year ROCE 6.45% of 20% and on (i.e. a straight line so that 100% award) will the vest total of for an average ROCE 6.75%. of 50% of this part of an award (i.e. 10% of the the of 10% (i.e. award an partof this of 50% assessments award) will vesttotal for ‘stable’ in three out the four of asset classes. 100% the total of this 20% partof an (i.e. of award assessmentsaward) will vest for ‘stable’ in all four asset classes. No would awards vest under this part an for less of award than three assessments. ‘stable’ 30% of this part of an award (i.e. 3% of of 3% (i.e. award an of part this of 30% customer a for vest will award) total the increasingsatisfaction index 83%, of on a an of part this of 100% that so line straight award) vests for a the total of 10% (i.e. award customer satisfaction or above. index 93% of Description Relative against TSR the FTSE 250 excluding investment trusts and companies in the following banks, sectors: financial services, life insurance, non-life insurance, real estate investment and services and real estate investment trusts, oil and gas producers and oil equipment and services. In addition, will awards only vest if the Committee is satisfiedthatthe Company’s performanceTSR is consistent with the underlying business performance of the Company. Average absoluteAverage ROCE for NWL the over three financialyears starting from 1 April immediately preceding grant date. Ofwat serviceability four the for targets non-infrastructure, water classes asset (i.e. infrastructure,water sewerage non- infrastructure) sewerage and infrastructure in the finalyear theof relevant three year performanceServiceability period. is number Ofwata on based measuredby asset include which indicators of quality water performanceindicators, compliance environmental compliance, consumerservice.and Results of NWL’s independently run Results NWL’s of customer satisfaction index, measured as the average score for the surveys carried out during the relevant three year performance period. 50% 20% 20% 10%

a significant part theaward basedof TSR on ensures alignment with investors; the use an of absolute ROCE target for part the ensures awards of is directly that reward the linked to management’s delivery the business of plan; the serviceability regulated assets is critical the longer to term targets recognise that the maintenance NWL’s of returns for shareholders; and customer satisfaction objective is a key for NWL and customers are important stakeholders. − − − − Total Total shareholder return (TSR) Details the pre-vesting of performance are: conditions made for awards during 2010 metricPerformance Weighting

continued Directors’ remunerationDirectors’ report Return on capital employed (ROCE) Serviceability Customer The Committee is satisfiedthatthe metricsabove and targetsremain appropriateforthefollowing reasons: − − − −

76 Remuneration Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 77 Remuneration Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk £ 2010/11 5,317 37,220 10,634 159,516 159,516 £ 2011/12 5,514 38,601 11,029 165,434 165,434 Chairman Fees payable during 2010/11 and the Company’s policy from 1 April 2011 (in line with the approach taken policy in and from the Company’s 1 April 2011 Fees payable during 2010/11 respect the salaries of are: executives) NWG of Non-executive directors’ fees remunerationThe Company’s policy is that the Chairman and the non-executivedirectors should receive a fixed fee for their normal duties. Reflectingthe addedresponsibilities andtime commitment, chairingthe Remuneration and Audit Committees attracts an additional fee the non-executive over standard directors’ base fee. Responsible investment The Committee Guideline of is aware the ABI of 3.2 Guidelines on Responsible Investment Disclosure and is satisfiedthat neitherexecutive the LTIPannualdirectors’ performance bonus targets northe conditions are likely, irresponsible motivate to inadvertently, behaviour. Share ownershipguidelines The Board NWG has introduced guideline a requestingmaximum a build directors NWG up to (over years) five of shares in the Company with basic a value equal salaryone year’s to (in the case the or directors) executive one of fees (in the caseyear’s non-executive of directors). Full detailsFull past levels of award and performance conditions are shown in table 2. The LTIP award granted on 13 December The Committee granted became award on December 13 2007 availableThe vest on 13 LTIP to 2010. instructed assess HNBS to was the HNBS award of the level vesting this reported of award. of that 48.84% performance TSR the Company’s relating the award of to against the FTSE 250 available vest (being to 97.68% ROCE performance the Company’s relatingIndex the award and of to 0% against companies). the other water vesting, thePrior Committee to satisfied itselfthatthe recorded TSR performancewas a genuinereflection of underlyingthe Company’s performance. Details the number of which awards of lapsed and those which were theexercised directors by the Company of are shown in table 3. Non-executive director base fee Audit Committee chairing fee Remuneration Committee chairing fee In the event of a changeIn the event of the control, Committee of would determine which the extent to the performance conditions had been met and the proportion the performance of periodhad that elapsed in deciding whether or any vesting not would awards place. take of Directors’ interests awards in LTIP The conditional directors’ interests in the ordinary pence awarded in shares accordance 10 the Company, of with are set out in table 3. March 2011, as 31 at the terms the LTIP of The Chairman and the non-executive directors do receive not benefits in kind and do participatenot in bonus, pension or share schemes Furtheroperated the Company. by details non-executive of remuneration directors’ are set out in table 1. 78

Remuneration Directors’ remuneration report continued

Ordinary 10 pence shares required to fulfil LTIP awards which have vested may be provided by the Northumbrian

Annual report and financial statements 2011 statements financial and report Annual plc Group Water Northumbrian Water Group plc Employee Trust, through Northumbrian Water Share Scheme Trustees Limited. The Trustees are Sir Patrick Brown, Martin Nègre and Kate Alsop. Anita Frew and Alastair Balls stood down as Trustees when they retired as non-executive directors of NWL on 31 March 2011. At that date, the Trust held a total of 765,962 ordinary 10 pence shares. This represents 0.1% of the Company’s total issued share capital, so is substantially less than the 5% limit on shares that can be held in trust. In line with the ABI Guidelines, dividends are waived on these shares and the voting rights attached to these shares will not be exercised at the AGM.

Share dilution The Company’s share plans contain dilution limits that comply with the ABI Guidelines. Shares for both the LTIP and SIP schemes are provided by purchase on the market. There has, therefore, been no dilution to date and there is no commitment to issue new shares in relation to either scheme.

Performance graph The graph below shows a comparison between the TSR for the Company’s shares for the five year period to 31 March 2011, and the TSR for the companies comprising the FTSE 250 Index (excluding investment trusts) over the same period. This index has been selected as the Company is a constituent of the FTSE 250.

200

180 172 158 160 141 135 140

120 126 103

100 108

80 93 92

60

40 53

20

0 1-Apr-06 31-Mar-07 31-Mar-08 31-Mar-09 31-Mar-10 31-Mar-11

NWG FTSE 250 (excluding investment trusts)

Note: This graph shows the value, by 31 March 2011, of £100 invested in NWG on 1 April 2006 compared with the value of £100 invested in the FTSE 250 Index (excluding investment trusts) over the same period.

Source: Thomson DataStream

Service contracts All non-executive directors are appointed for a term of 12 months with a six month notice period for the Company and the director. The executive directors have service contracts with 12 months notice periods and which expire when the directors reach normal retirement age. No special arrangements apply if there is a change of control. The contracts do not contain any liquidated damages clauses or provide explicitly for termination payments. If a contract is to be terminated, the Committee will determine the compensation to be paid. There is no automatic entitlement to bonus payments and LTIP vesting is at the discretion of the Committee. The Committee will apply such mitigation to any contractual obligations as it considers fair and reasonable, taking into account the best practice provisions of the www.nwg.co.uk Code. Details of the contracts of the executive and non-executive directors who served during the year are shown in table 4. 79 Remuneration Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk Alex Scott-Barrett Chairman of Remuneration Committee May 2011 31 This remuneration directors’ report has been produced in accordance with the Companies Act 2006 and Schedule the Large 8 of and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008. wasIt approved the Board by and signed onits behalf the Chairman by the Remuneration of Committee. will It be the shareholders put to AGM. for approval the at Company’s Directors’ interests in shares under the SIP The Company SIP is open UK employees to with more than three months service. Further details the SIP of are set out report in the directors’ the directors executive – business had During the opportunity the year, review. to participate in the SIP and their interests in the ordinary pence purchased shares 10 the Company, and of held in are set out in tableaccordance 7. with the terms the SIP, of Directors’ interests in shares are set The beneficial directors’ interests thein 31 Marchordinary2011, 10 pence at as shares theof Company, out in table 6. External appointments of executive directors positionThe on external Board’s appointments is described in full inthe corporate governance statement but, in summary, the Board has agreed directors that executive the Company of who are appointed non-executive to directorships which a fee pay retain may the fees, subject consent obtaining to the Chairman’s before an appointment is accepted. Only one such external appointment per director will generally be permitted. Heidi Mottram is a Board Forward member for which Yorkshire of she is paid and retains an annual fee £8,666. of Terms and conditions appointmentTerms of non-executive of directors are available for inspection the at Company’s registered office during normal business hoursAGM. termstheandTheat of appointment set outexpectedthe time commitment for each non-executive director.

– – 37 37 47 37 42 38 £000 323 158 429 31.3.2010 1,148 year ended Total forTotal the

– 19 12 43 31 37 37 48 £000 379 160 526 1,292 31.3.2011 year ended Total for the 2

– – – – – – – – – £000 334 139 195 Bonus 1

– – – – – – – – – 23 12 11 £000 Benefits

– – – – – – – – – £000 548 228 320 Basic salary Basic

– – – Fees 19 12 43 31 37 37 48 £000 387 160

4 3

The remuneration of each executive director includes non-cash benefits comprising the provisionThe annual of car allowances bonus is payable for performanceand inhealthcare. June 2011, during the year ended March 31 2011. Includes additional fee paid as Chairman of the Audit Committee. Includes additional fee paid as Chairman of the Remuneration Committee. Paul RewPaul Jenny Williams remuneration Total Margaret Fay Claude Lamoureux Martin Nègre Alex Scott-Barrett 2. 3. 4. Notes: 1. Executive directors

Table 1 Table Directors’ emoluments (audited) The emoluments the directors of the Company of for their services as directors the Company of and (where relevant) its subsidiaries, rounded the are nearest set out to below, thousand pounds: These tables form the part remuneration the directors’ of report which tables for are audited (except 2 and 4 which do require not auditing).

continued Directors’ remunerationDirectors’ report Non-executive directors Sir Patrick Brown John Cuthbert Chris Green Sir Derek Wanless Heidi Mottram

80 Remuneration Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 81 Remuneration Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 50% of award depends award of performance TSR 50% on the Company’s against the FTSE Index, excluding investment trusts. 250 vests median at 30% performance with straight line pro-rating TSR of performance against the members the FTSE of excluding Index, 250 for upper quartileinvestment 100% trusts, to performance. Where performance TSR the Company’s is below the median, none this of element will the award of vest. 30% vests median at 30% performance. upper At quartile all or above, this elementof will the Between award of vest. median and upper quartile, straight line pro-rating Where will the return apply. on capital employed performance is below the median, none this element of of willthe award vest. 50% of award depends on NWL’s return on capital employed relative to to relative employed capital on return NWL’s on depends award of 50% and the otherthat of water sewerage companies England of and Wales. 100% of salary of 100% permitted and actual directors executive grants to shares salary.related of to worth 100% Please the refer remuneration back to report for performance conditions. 100% of salary of 100% permitted and actual directors executive grants to sharessalary. related of to worth 100% (1)  (2)  (1)  (2) Performance conditions and vesting schedules Maximum award LTIP awardLTIP made 4 January and 8 December 2010 2010 LTIP awardLTIP made December 13 2007 and December 15 2008 Maximum award Performance conditions schedulesVesting Table 2 Table Summary performance of LTIP conditions (unaudited)

– Awards Awards 31.3.2011 held as at as held 96,212 96,212 78,650 78,650 83,240 68,551 68,551 96,212 96,212 230,441 230,441

28.7. 2011

11.5.2012 11.5.2012 31.5.2011 25.9.2011 30.9.2011 2 30.11.2011 – – – – – during vested Awards Awards the year Current contract end date 30,095 30,095 30,095 – – – – – during lapsed Awards Awards the year Normal retirement age (65) Normal retirement age (65) 31,525 31,525 31,525 31,525

– – – during the year Awarded 96,212 68,551 68,551 96,212 96,212 68,551 68,551 Notice period Notice by either party 6 months 6 months 6 months 6 months 6 months 6 months 6 months

12 months 12 months – – – 1 –

start of Awards Awards the year term held at the 78,650 78,650 83,240 61,620 61,620 223,510 223,510 Unexpired Unexpired

3 4 5 5 1

4 months 4 months 6 months 2 months 11 months 11 months Not fixed term Not fixed term Award date

4.1.2010

8.12.2010 8.12.2010 15.12.2008 13.12.2007 Contract Contract start date 1.3.2010 1.6.2010 12.5.2011 26.9.2010 1.10.2010 23.5.2003 1.12.2010 12.5.2011 1.12.2010

Initial Initial appointment 1.3.2010 1.6.2010 12.5.2003 26.9.2006 1.10.2010 23.5.2003 1.12.2003 12.5.2003 1.12.2006

3

2

Calculated and rounded as May at 31 2011 nearest to whole month. The service contracts of the executive directors do not contain provisions relating compensation to Remuneration for termination. Committee In the event of termination would make recommendations by the Company, the the to Board on what payments, if should any, be made the to termination, director, depending taking on the into circumstances accountthe Code which of the discourages payment for failure. The Company wouldContracts also expect do not provide directors for compensation seek to mitigate to their for loss loss. of office in excess of fees accrued. The market value of the shares on the date of the award was 334.0 pence per share. The three year performance period30 September ran from 2010. 1 October 2007 to Shares vested December on 13 and the 2010 closing price on that date was 332.0 pence per share. The market value of the shares on the date of the pence award was per 251.5 share. The three year performance period runs30 from September 1 October 2008 2011. to The market valueof the shares on the date of the award pence was 272.5 per share. The three year performance period30 runs September from 1 October 2012. 2009 to The market value of the shares on the date of the award was pence 328.7 per share. The three year performance period30 September runs from 1 October 2013. to 2010 The cost of conditional awards is charged the to income statement over the three year performance periodof the probability which to they relate of performance after taking account criteria being met. million In the £0.1 year, was charged the to income statement £0.4 million). (2010: Details of the performance conditions are shown at table 2. The market price of the shares was March on 332.2 31 pence 2011 per share. During the the year, highest market price was 364.0 pence perand share the lowest market price pence was per 245.1 share. Aggregate gross gains made by directors on exercise of awards at date of vesting £103,955). was (2010: £99,915 Martin Nègre Alex Scott-Barrett Paul RewPaul Heidi Mottram Chris Green Non-executive directors Sir Derek Wanless Sir Patrick Brown Margaret Fay Claude Lamoureux 2. 3. Notes: 1. Executive directors

Table 4 Table Directors’ service contracts (unaudited) the contracts of the directors of who served during the year are shown below: May 2011, Details, as 31 at Notes: 1. 2. 3. 4. 5. 6. 7. 8. 9. Heidi Mottram Table 3 Table Directors’ interests awards in (audited) LTIP the directors had the following conditional interests in the ordinary pence shares 10 the of March 2011, As 31 at awarded in accordanceCompany, with the terms the LTIP: of

continued Directors’ remunerationDirectors’ report

Totals

Totals Chris Green

82 Remuneration Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 83 Remuneration Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk – year £000 £000 43.6 Number of shares directors’ directors’ Employer Employer held as at at as held value less less value 31.5.2011 in transfer 169.9 during the 65,000 43,000 25,000 20,000 20,000 Total changeTotal 199,434 199,434 contributions contributions

1 2 3 – – year £000 £000 value of Number accrued accrued Transfer Employee Employee during the 31.3.2011 31.3.2011 of shares held as at as held 65,000 25,000 20,000 20,000 43,000 pension at pension 2,281.3 2,281.3 contributions 199,434

1 £000 start of value of the year Transfer Transfer Number accrued 1.4.2010 6,000 of shares pension at at pension held at the 65,000 25,000 43,000 70,000 20,000 2,111.4 2,111.4 169,339 £000 18.9 Transfer Transfer increase directors’ directors’ in accrued in value of net pension less less pension contributions £000 0.9 Increase of inflation in accrued in pension net net pension £000 6.4 pension Increase in accrued in £000 Accrued Accrued 110.7 31.3.2011 pension at pension £000 Accrued 31.3.2010 104.3 pension at at pension

4 At 1 April 139,339 of these 2010, shares were beneficially owned by Mrs G Green, 10,000and were beneficially owned by each of MissMr P J J M Green. Green, Mr M F Green and of 139,434 these March sharesAt 31 2011, were beneficially owned by Mrs G Green, and 20,000 were beneficially owned by each of Miss P J Green,Mr Mr M F J M Green. Green and the 43,000 MarchAt 31 shares 2011, were beneficially owned by Lady Brown. Jenny Williams retired from the Board on 29 July 2010. The directors participate in a salary sacrifice arrangement and, therefore, paid no contributionsAccruedto the pensions schemes shown during are thethe amountsyear. that would be paid annually at the normal retirement age basedVoluntary on service contributions the to end of the year. paid by the directors and resulting benefits are not shown. The change in transfer value reflects fluctuations in the transfer value todue factors beyond the control ofmarket the Company conditions. and directors, such as changes instock The transfer values have been calculated in line with the relevant legislation and using actuarial assumptions agreed by the Trustee. Defined benefit scheme Notes: 1. 2. 3. 4. Sir Derek Wanless 6 Table Directors’ interests in shares (audited) The directors had the following beneficial or family interests the in ordinary10 pence shares theof Company at as March 2011: 31 Notes: 1. 2. 3. 4. 5. Chris Green Heidi Mottram Defined contribution scheme Chris Green Table 5 Table Directors’ pensions and pension benefits(audited) The accrued defined benefit pensions and corresponding transfer valuesexecutive for the directorsare set out below: Claude Lamoureux Sir Patrick Brown Martin Nègre Alex Scott-Barrett Jenny Williams 1 606 held as at at as held 6,936 31.5.2011 Number of SIP shares shares SIP 1 606 6,372 held as at as held 31.3.2011 Number of SIP shares 1 – start of the year 5,653 held at the Number of SIP shares shares SIP

These figures include the shares paid for by the participant and the free shares granted by the Company. A summary of the SIP can be found in the directors’ report – business review. Chris Green 2. Heidi Mottram Notes: 1.

Table 7 Table Directors’ interests in shares under the SIP (audited) thefollowinghad interests thein Theordinary10 pence directors whoshares held of office31 March2011 at as purchasedthe Company, and held in accordance with the terms the SIP: of

continued Directors’ remunerationDirectors’ report

84 Remuneration Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 85 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

the financial statements, prepared in accordance with EuropeanIFRSstheby as adopted Union, truegive a and fair view the assets, of liabilities, financial position and of the profit Company and the undertakings included in the consolidation taken as a whole; and reportthe directors’ and business review includes a fair review the development of and performance the of business and the position the Company of and the undertakings included in the consolidation taken as a whole, together with description a the principal of risks and uncertainties face. that they select suitable accounting policies in accordance Accounting with IAS 8: Policies, Changes in Accounting Estimatesand Errors and then apply them consistently; present information, including accounting policies, in a manner that provides reliable, relevant, comparable and understandable information; provide additional disclosures when compliance with specificrequirements in IFRS is insufficient to enable users understandto the impact particular of transactions, other financial and events conditions on the Group’s position and financial performance; that the Groupstate has complied with IFRSs, subject any material to departures disclosed and explained in the financial and statements; make judgements and estimates that are reasonable and prudent. − − − − − − − Heidi Mottram Chief Executive Officer Sir Derek Wanless Chairman By order the Board of Responsibility statements confirmtheto We bestthatof our knowledge: − − The directors are responsible for keeping adequate accounting records that are sufficientto show explainand the transactions and discloseGroup’s with reasonable accuracy any time at the financial positiontheof Group and enable ensure them to that the Group financial statements comply thewith Companies2006Act and Articleof 4 the IAS Regulation. They are also responsible for safeguarding the assets the Group of and, hence, for taking reasonable steps for the prevention and detection fraud of and other irregularities. to theto Group financial statements The directors are required prepare to Group financial statementsfor each Under financialthe Company year. Law, directors must approve the not financial statements unlessthey are satisfied that presentthey fairly the financial positionthe Group of and the financial performance and cash of theGroup flows for that period. Inpreparing those Group financial statementsthe directors required are to: − − − − − The directors are responsible for preparing the annual report and the Group financial statements in accordance with applicable United Kingdom and law those International Financial Reporting Standards as by adopted (IFRSs) the European Union. Statement directors’ of responsibilities in relation , the directors are with respectpages 70 internal to to 58

. The financialreporting frameworkthat has been applied theirin preparation is applicable law and

give a true and fair view of the state of the Group’s affairs as at 31 March 2011 andfor itstheyear profit of affairsgive March a true 2011 and as fair 31 the at Group’s of view the state of then ended; beenhave properly prepared in accordance with IFRSs the European as by adopted Union; and beenhave prepared in accordance with the requirements the Companies of Act 2006 and Article the 4 of IAS Regulation. the information givenreport in the directors’ for the financialyear for whichthe financial statementsare prepared is consistent with the Group financial andstatements; the information given in the corporate governance statement set out on control and risk management systems in financial relation to reporting processes and about share capital structures is consistent with the financial statements. − − − − − Opinion on other matters prescribed by the Companies Act 2006 In our opinion: Opinion on financial statements In our opinion the Group financial statements: − − − − − 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 causedby This includesfraud or error. an assessment whether of: the accounting policies are appropriate the Group’s to circumstances and been have consistently applied and adequately disclosed; the reasonableness significant of accounting estimates made and the directors; by the overall presentation the financial of statements. In addition, readwe all the financial and non-financialinformation in the annual report to identifymaterial inconsistencies with the audited financialwe statements.If becomeof aware any apparent material misstatements or inconsistencies considerwe the implications for our report. Respective responsibilities of directors and auditor As explained morefully in the Statement Responsibilities Directors’ of set out on page 85 responsible for thepreparation the Group of financial statements forand being satisfied that they a give true Ourand responsibility fair view. audit is to the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require comply us to with the Auditing EthicalPractices Standards Board’s for Auditors. This report is made members, in solely accordance the Company’s as the to a body, of with Chapter Part 3 of 16 Companies Act 2006. Our audit work has been undertaken members the Company’s might so to that we state reportthose matters them the fullest in are an to required we auditor’s and state for no other to purpose. To extent do accept not we permitted or assume law, responsibility by anyone other than to the Company and members for our auditthe Company’s work, as for this a body, report, or for the opinions formed. have we Independent auditors’ report to the members of Northumbrian Water Group plc auditedhave the GroupWe financial statementsof Northumbrian Water Group forplc theyear 31 Marchended which comprise the consolidated income consolidated statement, 2011 statement comprehensive of income, consolidated statement changes of consolidated in equity, balance sheet, consolidated cash flow andthe related 28 1 to notes International Financial Reporting Standards the European as by adopted (IFRSs) Union.

Report of the auditors on the the on auditors the of Report Group financial statements

86 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 87 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk relating to the Company’s compliance the Company’s relating to withpages 70 to 58 , in going relation to concern; and page 57 the directors’ statement, set statement, outthe directors’ on certain disclosures remunerationdirectors’ of specified by law are made; not received not have we all the information and explanations require we for our or audit; a corporate governance statement has been not prepared the Company. by the part the corporate of governance statement on the nine provisions the June of 2008 Combined Code specifiedfor ourreview. − − − − − − Debbie O’Hanlon (Senior statutory auditor) For and on behalf of Ernst LLP & Young Statutory Auditor Newcastle upon Tyne 2011 May 31 Under the Listing Rules are we required review: to Other matter reported have We separately on the parent Company financial statements of Northumbrian Water Group fortheplc and on the information in the Remuneration Directors’ Reportyear March ended 2011 31 that is described as having been audited. Under the Companies Act 2006 are we required report in our to opinion: if, you to − − − − Matters on which we are required to report by exception report nothing to have We in respectthe following: of £m 0.9 0.4 (9.5) Year toYear 37.2 (37.8) 122.9 122.5 122.9 704.7 275.8 170.2 8.85p (428.9) (143.7) 31.3.2010 31.3.2010 23.67p 23.62p 23.67p 23.62p 12.89p £m 0.7 0.1 54.9 30.5 Year to (33.1) 178.4 178.3 178.4 738.1 304.2 181.0 9.57p (433.9) (178.8) 31.3.2011 34.44p 34.38p 25.50p 25.45p 13.57p 8 8 8 9 9 8 2 3 2 6 6 2 7 7 Notes

parent Company parent Company parent Company the parentof Company Profit on ordinary activities before taxation Share profitafter of taxof jointly controlled entities Profit for the year Attributable to: Equity shareholders the parent of Company Non-controlling interests Basic earnings per share attributable ordinary to equity holders the of Dividend paid per share

For the year ended 31 March 2011 March 31 ended year the For Consolidated income statement Operating costs Finance costs payable – current taxation Continuing operations Revenue – deferred taxation Diluted earnings per share attributable ordinary to equity holders the of Adjusted earnings per share attributable ordinary to equity holders the of Adjusted diluted earnings per share attributable ordinary to equity holders Ordinary final dividend proposed per share Profit on ordinary activities before interest Finance income receivable

88 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 89 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk £m 1.1 0.4 (0.8) (0.3) (0.1) (0.1) Year toYear 122.8 122.4 122.8 122.9 31.3.2010 31.3.2010 £m 2.6 0.2 0.1 53.7 74.0 Year to (23.1) 232.1 232.0 232.1 178.4 31.3.2011 24 Notes

Gains/(losses) on cash flow hedgesto equity taken differencesTranslation on items chargedTax or credited equity to other comprehensive gain/(loss)Total comprehensive incomeTotal for the year Attributable to: Equity shareholders the parent of Company Non-controlling interests Profit fortheyear Profit

For the year ended 31 March 2011 March 31 ended year the For Consolidated statement comprehensive of income Other comprehensive income Actuarial gains – – – £m Total Total 0.1 0.1 0.4 (0.1) 53.7 (70.3) (66.7) 475.9 232.1 178.4 313.9 122.8 122.9 257.4 – – – – – – – – – £m 2.3 0.1 0.1 2.8 0.4 0.4 2.4 Non- (0.6) interests controlling controlling

– – £m Total Total 0.6 0.1 0.1 0.4 (0.1) equity 53.7 (70.3) (66.7) 473.6 232.0 178.3 311.1 122.4 122.5 255.0 £m 0.6 0.1 0.1 0.4 0.8 (0.3) (0.3) 51.9 (70.3) (66.7) (17.4) earnings earnings 230.2 178.3 123.3 122.5 Retained (177.8) (234.5) – – – – – – – – – – £m 0.9 0.2 0.2 0.7 1.0 (0.3) (0.3) Currency translation translation – – – – – – – – – – – – £m 0.3 0.3 (2.0) (2.3) (1.7) shares shares Treasury Treasury – – – – – – – – – – £m 1.6 1.6 (8.2) (0.6) (0.6) (7.6) (6.6) hedge reserve Cash flow flow Cash – – – – – – – – – – – – – – £m Share reserve 446.5 premium 446.5 446.5 – – – – – – – – – – – – – – £m capital capital 51.9 51.9 51.9 Equity share Equity

controlling interest in subsidiaries share-based payment income and expense for the year income income and expense for the year income Equity dividends paid Acquisition non- of At 31 March 31 At 2011 Deferred tax related to Exercise of LTIP awards Exercise LTIP of Share-based payment Total comprehensive Total Equity dividends paid Other comprehensive Exercise of LTIP awards Exercise LTIP of At 1 AprilAt 2010 Profit fortheyear Profit Share-based payment Total comprehensive Total Other comprehensive

For the year ended 31 March 2011 March 31 ended year the For Consolidated statement changes of in equity At 1 AprilAt 2009 Profit fortheyear Profit

90 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 91 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 1 £m 1.7 2.2 0.2 8.2 3.6 4.1 3.3 7.8 0.7 2.8 (8.2) (2.0) Year toYear 12.9 15.8 12.5 64.2 51.9 33.1 restated 205.2 313.9 133.1 446.5 233.5 311.1 313.9 606.1 151.2 136.4 174.8 330.3 (177.8) 31.3.2010 3,605.4 3,621.8 3,416.6 3,935.7 2,433.9 3,518.9 £m 1.7 2.4 0.2 9.8 2.6 3.6 4.0 3.3 1.4 6.8 0.9 2.3 (6.6) (1.7) 12.0 46.0 51.9 64.2 Year to (17.4) 331.9 475.9 446.5 255.1 473.6 475.9 598.7 163.7 155.6 153.9 141.7 300.3 31.3.2011 3,712.3 3,536.7 3,204.8 4,012.6 2,295.8 3,626.8 7 24 17 16 20 21 10 10 13 14 15 17 19 19 11 12 15 Notes Heidi Mottram Chief Executive Officer

The prior year balance sheet has been restated reflect to the impactTransfers of IFRIC18 of Assets from Customers. Deferred income tax liabilities and other payables Trade Amounts receivable consortium relating to relief Current assets Inventories Cash and cash equivalents Income tax payable Other intangible assets Financial assets and other receivablesTrade liabilitiesTotal Net assets Capital and reserves Issued capital Property, plant and equipment Share premium reserve Other payables Grants and deferred income Current liabilities Interest bearing loans and borrowings Cash flow hedgereserve sharesTreasury Currency translation Retained earnings Equity shareholders’ funds capitalTotal and reserves Non-controlling interests Provisions Chairman Sir Derek Wanless Note: 1. and signed on its behalf by: May 2011 Approved the Board by on 31 Non-current assets Goodwill Pension liability swaps Interest rate

As at 31 March 2011 March 31 at As Consolidated balance sheet Short term cash deposits assetsTotal Non-current liabilities Interest bearing loans and borrowings Provisions Investments in jointly controlled entities – – £m 0.3 0.6 1.4 8.8 0.4 (7.2) (0.1) (5.0) (5.7) (0.3) Year toYear 15.8 92.3 81.0 10.1 10.3 (20.9) (94.8) (66.7) (54.6) (35.7) 189.1 173.3 173.3 144.8 230.4 380.9 275.8 105.5 (220.6) (114.8) 31.3.2010 31.3.2010 – £m 1.4 0.8 1.1 1.3 4.7 5.2 0.2 (7.3) (0.4) (8.9) 14.4 13.2 11.5 Year to (33.0) (97.5) (19.5) (70.3) (38.7) (14.7) (22.4) 141.7 173.3 140.3 140.3 231.9 409.1 304.2 111.6 (167.4) (202.9) (116.1) 31.3.2011 15 15 15 15 Notes

operating activities income statement Total cash,Total cash equivalents and short term cash deposits Cash and cash equivalents at end of year Cash and cash equivalents end at year of Short term cash deposits

For the year ended 31 March 2011 March 31 ended year the For Consolidated cash statementflow Cash and cash equivalents start at year of Payment principal of under hire purchase contracts and finance leases (Decrease)/increase in cash and cash equivalents Acquisition externally of held loan issued stock a subsidiary by Net cash flows from financing activities Repayment borrowings of Net cash flows from investing activities Financing activities Dividends equity paid to shareholders Dividends received from jointly controlled entities Short term cash deposits Maturity investments of Purchase property, of plant and equipment Net cash flows from operating activities Proceeds on disposal property, of plant and equipment Investing activities Interest received Capital grants received Income taxes paid Increase in trade and other receivables Increase in trade and other payables Cash generated from operations Advanced contributions in respect retirement of benefits Interest paid Profit Profit on ordinary activities before interest Operating activities Reconciliation of profit before interest to net cash flows from Increase in inventories Depreciation Other non-cash charges and credits Net credit for provisions, less payments Difference between pension contributions paid and amounts recognised in the

92 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 93 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

IFRS 3 Business Combinations (Revised) ConsolidatedIAS 27 and Separate Financial Statements (Amendment) FinancialIAS 32 Instruments: Classificationof Rights Issues (Amendment) IAS 39 Financial Instruments: Recognition and Measurement – Eligible hedged items (Amendment) Distributions Non-cash of IFRIC 17 Owners Assets to Assets of from Customers Transfers IFRIC 18 IFRSImprovements 2009 to − − − − − − − The Group financial statements are presented in sterling and valuesall rounded are theto nearest one hundred where million) except otherwisethousand indicated. pounds (£0.1 Northumbrian Group plc Water is a public limited company incorporated and domiciled in England and Wales. ordinaryThe Company’s shares are traded on the London Stock Exchange. The guidance provided in the Force Urgent Draft Issues Abstract: Accounting Task Implications the of Replacement the Retail of Prices Index with the Consumer Prices Index for Retirement Benefits has also been applied in the period. The adoption the other of standards and interpretations a material listed above do have not impact on the Group. IFRIC 18 Transfers of Assets of from Customers is effective Transfers was in adopted the period. for accounting IFRIC 18 IFRIC 18 periods beginning on October or after applicable 2009, 31 transactions to effected on or after 1 July 2009. This has required the prior year balance sheet be restated resulting to in the balances property, of plant and equipment, The impact onfor profit both Marchand million grants 2010. and 31 at deferred income, each increasing £14.0 by the current period and prior periods is £nil. The Consolidated adoption IAS 27 of and Separate Financial Statements (Amendment) has required the reclassificationof minority interests as non-controllingtransactions interests. any Also, with non-controlling intereststhat do result not in gaining or losing control will be accounted for as equity transactions. The Group has the adopted following standards and interpretations during the year: − − − − − − − The directors consider the following accounting financial policies be relevant to in the relation Group’s to were authorisedstatements. The financialfor issue thestatementsof Groupfortheyear 31 March2011 ended and the balance sheet behalf was signed Sir on by Derek the Board’s May 2011 the Board by directors of on 31 Wanless (Chairman) and Heidi Mottram (Chief Executive Officer). The financial statementsbeen have prepared on a going concern basis which assumesthatthe Group will have adequate funding meet its to liabilities the Group as fall they due in the foreseeable March 2011 future. As 31 at The directors million). reviewed have net current assets £125.1 of million (2010: had net current liabilities £31.6 of cashrequirements flow and are confident that they will be to able meet thesefrom availablefunds and new financing facilities.the directors Accordingly, believe it is to appropriatepreparethe financial statements on a going concern basis. 1. Accounting1. policies Statement(a) of compliance The consolidated financial statements been have prepared in accordance Europeanthewithby IFRS as adopted Union as itand appliesin accordance the financial to thestatementsof Groupfortheyear 31 March2011 ended with the Companies Act 2006. Notes to the to Notes consolidated financial statements

(d) Goodwill Goodwill arising on the acquisition subsidiary of undertakings and businesses represents the excess the fair of value the consideration of given the fair over value the identifiable of assets and liabilities acquired.Following initial recognition, goodwill is measured cost at less any accumulated impairment losses. 1 April Prior to goodwill 2004, was amortised its estimated over useful such life; amortisation ceased March Goodwill 2004. on 31 relating to acquisitions since 1 April 2004 is amortised. not Goodwill is reviewed for impairment annually or more frequently if or events changes in circumstances indicate that the carrying value be may impaired. For the purposes of impairment goodwill testing, is allocated the related cash-generating to units monitored management. by Where the recoverable amount the cash-generating of unit is less than its carrying amount, including goodwill, an impairment loss is recognised in the income The statement. carrying amount goodwill of allocated a cash- to generating unit account is taken into when determining the gain or loss on disposal the an or unit, of of operation within it. (c) Associates(c) and jointly controlled entities Investments in associates and jointly controlled entities in the Group financial statements are accountedfor using the equity method accounting of where the Group exercises significant influenceover the associate. Significant influence is generally effective presumedexist to shareownership where the or Group’s more. 20% The is Group’s the postof tax profits less lossesof associates and jointly controlled entities is included thein consolidated income statement and the carrying value in the balance sheet share comprises their of net assets/liabilities the Group’s less distributions received and any impairment losses. Goodwill arising on the acquisition associates of and jointly controlled entities, representing share net the excess the fair cost of of investment of compared the Group’s to identifiablevalue the associate’s of assets, liabilities and contingent liabilities, is included thein carrying amountof the associate and is amortised. not Financial statements jointly of controlled entities and associates are prepared for the same reporting period as Where the Group. necessary, adjustments are bring made to the accounting policies used line account with into those into the take Group of fair to values assigned acquisition of the at date reflect andto impairment losses where financial Adjustmentsappropriate. statements are thealso to madeGroup’s share unrealised of eliminate the gains Group’s to and losses on transactions between the Group and its jointly controlled entities and associates. Non-controlling interests represent the portion profit of or loss and net assets in subsidiariesthat is heldnot the Groupby and is presented within equity in the consolidated balance sheet, separately from parent shareholders’ equity. Where necessary, adjustments are bring made to the accounting policies used under relevant local GAAP in the individual financial subsidiaries thestatementsof Company, and jointly controlled entitiesline into thosewith used the Groupby under IFRS. 1. Accounting1. policies continued (b) Basis of consolidation The consolidated financial statements includethe Company and its subsidiary undertakings. Theresults of subsidiaries acquired during the period areincluded their from of the acquisition. date The results subsidiaries of disposed duringof the period are included their of the disposal. date sales to Inter-segment and profits are eliminated fullyon consolidation. Where, for commercial reasons, the accounting reference a subsidiary of date management other thanis the a date Company, that of accounting accounts made the Company’s reference up to been have date used. the In ‘Consolidationaccordance financial – Special with SIC 12 Purpose Entities’, statements two of companies are consolidated as special purpose entities, with May 2004, effect from 12 the transaction of the date which utilised these entities.

continued Notes to the to Notes consolidated financial statements

94 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 95 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk Expenditure on infrastructure assets which enhances the asset base is as treated fixed asset additions while maintenance expenditure which does enhance not the asset base is charged as an operating cost. Infrastructure assets were measured May 2003) their at prior transition a date at fair IFRS (23 which to value, to aswas adopted deemed historical cost on transition The IFRS. assets to and liabilities were measured fair at value as a result the acquisition of May 2003. on 23 Infrastructure assets In the regulated services water business, infrastructure assets comprise a network systems being of mains and sewers, reservoirs, dams and sea outfalls. Assets in the course construction of are depreciated not until commissioned. The carrying values property, of plant and equipment are reviewed for impairment if or events changes in circumstances indicate the carrying value be not may recoverable and are written down immediately their to recoverable amount. Useful lives and residual values are reviewed annually and, where adjustments are required, these are made prospectively. Freehold land is depreciated. not Other assets are depreciated evenly their over estimated economic lives, which are principally freehold as follows: buildings, 30-60 years; operational structures, plant and machinery, years; 4-92 years. and yearsinfrastructure fixtures, below); (see 4-10 assetsfittings, tools 13-200 and equipment, Property, plant and equipment are included cost at less accumulated depreciation and any provision for impairment. Cost comprises the aggregate amount paid and the fair value any other of consideration given to acquire the asset and includes costs directly attributable making to the asset capable operating of as intended. (f) Property, plant and equipment Property, plant and equipment and depreciation Property, plant and equipment, including assets in the course construction, of comprise infrastructure assets (being mains and sewers, impounding and pumped storage reservoirs, water raw dams, sludge pipelines and sea outfalls) and other assets (including properties, overground plant and equipment). Expenditure on internally developed intangible assets, excluding development the income costs, is taken to statement in the year in which it is incurred. Intangible assets acquired separately from a business are carried initially An cost. at intangible asset acquired as part a business of combination is recognised outside goodwill if the asset is separable or arises from contractual or other legal rights and its fair value can be measured reliably. Development expenditure is recognised as an intangible asset only after its technicalfeasibility and commercial viability can be demonstrated, the availability adequate of technical and financialresources to and an intention complete the project been have confirmed andthe correlation between development costs and futurerevenues has been established. 1. Accounting1. policies continued Intangible(e) assets other than goodwill Other intangible fixed assetsrepresent the receive to right income underthe operating agreement thewith Environment Agency in respect the Kielder of transfer scheme. Water The value this intangible of asset has been assessed with reference the net monies to raised in accordance with the Kielder May 2004. securitisation on 12 The the term operating of agreement is in perpetuity no amortisation and, accordingly, is provided. The value of this intangible is assessed for impairment on an annualbasis in accordance with IAS 36 ‘Impairment Assets’. of 60 years 150 years 100 years 200 years 4-20 years

(j) Revenues Provision services of Revenue, which excludes valueadded tax, represents the fair value the income of receivable in the ordinary course businessof for services provided. Revenue is recognised the extent that it to is probable that the economic benefits to the Groupwill flow revenueand the can be reliably measured. (i) Inventories Inventories are cost the at lower stated of and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs, as well as an element overheads of been that have incurred in bringing the theirinventories present to locations and condition. Unrealised gains and losses arising from changes in foreign currency exchange are rates cash not However, flows. the effect changes exchange of rate on cash and cash equivalents held or due in a foreign currency is reported in the cash flow statement reconcilein to order cash and cash equivalentstheat beginning andthe theof end period. This amount is presented separately from cash flows from operating, investing and financing activities, where material, and includes the differences, had those cash flows been if any, reported at of end period exchange rates. (h) Foreign currencies and foreign currency transactions in foreign currenciesTransactions are initially recorded in the functional currency applying by the spot exchange ruling the transaction.rate of the at date Monetary assets and liabilities denominated in foreign currencies are re-translated the at functional currency exchange of ruling rate the at balance sheet The functional date. and presentational currency Northumbrian of Group plc Water is United Kingdom Assets and liabilities sterling (£). subsidiariesof and jointly controlled entities in foreign currencies are sterling translated exchange of into rates at ruling the at end the financial of period andthe results foreignof subsidiaries translated are averagethe at rate exchangeof for the period. Differences on exchange arising from the re-translation the opening of net investment in subsidiary companies and jointly controlled entities, and from the translation the results of those of companies All equity. are other taken foreign to averageat exchange rate, differences the income are taken to statement in the period in which arise. they Water mains Water Sea outfalls Sewers Dedicated pipelines Financial(g) assets Financial assets comprise loans third parties to recoverable in more than one year and include cash held on long term deposit as a guaranteed investment contract the Kielder relating to securitisation. These assets are recognised cost at and are measured annually based Any on impairment the ability repay. the is borrower of to the incometaken to statement in the period in which it arises. Loans and receivables aremeasured amortised at cost using the effective method. The interest rate Group assesses each at balance sheet whether date a financial asset or group financial of assets is impaired. Dams and impounding reservoirs 1. Accounting1. policies continued Infrastructure assets are depreciated their evenly estimated to residual values their over estimated economic lives, which are principally as follows:

continued Notes to the to Notes consolidated financial statements

96 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 97 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk Actuarial gains and losses on experience adjustments and changes in actuarial assumptions are recognised in full in the period in which occur they in the consolidated statement comprehensive of income. The service cost is disclosed in employment costs and the expected interest income and interest cost on obligations are disclosed within finance costs payable/(incomereceivable). The interest element the defined of benefit cost represents the change inpresent value of scheme obligations resultingfrom the passage and time, is of determined applying by the the opening discount to rate present value the benefitof obligation, taking account into material changes thein obligationexpectedThe during theyear. return on plan assets is based on an assessment made the at beginning the year of long of term market returns on scheme assets, adjusted for the effect on the fair value plan of assets contributions of received and benefits paid during the year. (m) Pensions(m) and other post-employment benefits Defined benefit scheme The cost providing of benefits underthe defined benefit schemedetermined is using the projected unit credit method, which attributes entitlement benefitstheto current to period determine(to current serviceto cost) and the current and prior periods determine (to the present value defined of benefit obligation) and is based on actuarialadvice. servicePast costs are recognised in the income statement on straighta line basis the vesting over period or immediately if the benefits vested. When have a settlement(eliminating all obligationsfor benefits already accrued) or a curtailment (reducing future obligations as a result a material of reduction in the scheme membership or a reduction in future entitlement) occurs, the obligation and related plan assets are re-measured using current actuarial assumptions and the resultant gain or loss recognised in the incomestatement during the period in which the settlement or curtailment occurs. Rentals under operating leases (where the lessor retains a significant proportiontheof risks andrewards ownership)of are expensed in the income statement on a straight line basis the lease over term. (l) Leases Where assets are financedby leasing arrangements whichtransfer substantially allthe risks of andrewards ownership the assets the Group, the are at as treated if to had they been purchased if lower, their at fair value or, present value the minimum of lease payments. Rentals or leasing payments are as treated consisting a capital of element and finance charges,the capital elementreducing the outstanding liability andthe finance charges being charged the income to statement the period over the leasing of contract a constant at on the reducing rate outstanding liability. (k) Grants and contributions Grants are recognised their at fair value where there is reasonable assurance the that grant will be received and all attaching conditions will be complied Revenue with. grants are credited the income to statement in the period which Capitalto relate. they grants and contributions property, relating plant to andequipment are as treated deferred income and amortised the income to statement the expected over useful economic lives the related of assets. Deferred income assets relating from adopted to customers, recognised in accordance with IFRIC 18, is amortised the income to statement the expected over useful economic lives the related of assets. Dividends Revenue is recognised when the shareholders’ right receive to the revenue is established. 1. Accounting1. policies continued Revenue is recognised not until the services Revenue services for been have provided the customer. to relates excluding any amounts paid in advance. the year, Revenueto for measured charges and water water waste includes amounts billed plus an estimation the amounts of unbilled the at year end. The accrual is estimated using a defined methodology based upon dailyaverage water consumption, which is calculated based upon historical billing information.

where the deferred tax liability arises from the initial recognition goodwill of an or of asset or liability in a transaction that is a business not combination and, the the at time transaction, of affects neither the accounting profit nor taxable profit or loss; and in respect taxable of temporary differences associated with investmentsin subsidiaries, associates and interests in jointly controlled entities, where the timing the reversal of the temporary of differences can be controlled and it is probable that the temporary differences will reverse not in the foreseeable future. − − Deferred tax liabilities are recognised for all taxable temporary differences except: Deferred tax Deferred tax is provided using the liability method on temporary differences the at balance sheet between date the tax bases assets of and liabilities and their carrying amounts for financialreporting purposes. − − (o) Taxes (o) Current tax Current tax assets and liabilities for the current and prior periods are measured the at amount expected be to therecovered taxation from, or paid to, authorities. The tax and rates tax used laws compute the to amounts are those that are enacted or substantively enacted the balance by sheet date. Where the terms an of equity-settled are modified award award or a is new designated replacingas a cancelled or settled the cost based award, on the original terms award continues be recognised to the original over vesting period. In addition, an expense is recognised the remainder over the new of vesting period for the incremental fair value any modification, of based theon difference betweenthe fairvalue theof original award andthe fairvalue of the modified as both measuredaward, theof modification. theon date No reduction is recognised if this difference is negative. At eachAt balance sheet before vesting, the cumulative date expense is calculated, representing which the extent to the vesting period has expired, management’s best the achievement estimate of or otherwise vesting of conditions and the number equity of instruments in the case an that will of instrument ultimately vest or, subject a market to or non-vesting condition, be as treated vesting as described This above. includes where any award non-vesting conditions within the control the Group of or the employee The are met. not movement in cumulative expense since the previous balance sheet is recognised date in the income with statement, a corresponding entry in equity. No expense is recognised where awards that do for for awards ultimately not except vest, vesting is conditional upon a market or non-vesting condition, which are as treated vesting irrespective whether of or the not market or non-vesting condition is satisfied, providedthat otherall performance conditions are satisfied. (n) Share-based(n) payments The cost equity-settled of transactions with employees is measured reference the by fair value at to the at date which are they granted and is recognised as an expense the vesting over period, which ends on on which the date the relevant employees become fully Fair value entitled is the determined award. to an by external valuer using the Monte-Carlosimulation model. Invaluing equity-settled transactions, no account isanyvesting taken of conditions, other than conditions the price linked to the shares of the Companyof conditions) (market or those related not to performance or service conditions). (non-vesting 1. Accounting1. policies continued Defined contribution scheme The Groupalso operates a defined contribution scheme. Obligationsfor contributionstheto scheme are recognised as an expense in the income statement in the period in which arise. they

continued Notes to the to Notes consolidated financial statements

98 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 99 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk authority, in whichauthority, case the value added tax is recognised as part the cost of acquisition of the asset of or as part the expense of item as applicable; and receivables and payables. where the value added tax incurred on a purchase assets of or services is recoverable not from the taxation an asset or liability in a transaction that is a business not combination the and, the at time transaction, of affects neither the accounting profit nor taxable profit or loss; and in respect deductible of temporary differences associated with investments in subsidiaries, associates and interests in jointly controlled entities, deferred tax assets are recognised only the extent that it to is probable that the temporary differences will reverse in the foreseeable future and taxable profit willavailable be against which the temporary differences can be utilised. where the deferred tax asset the deductible relating to temporary difference arises from the initial recognition of − − − − A derivative instrument is considered be used to for hedging purposes when it alters the riskof profile an underlying risk exposure the Group of management in line with the Group’s policies. swap agreements Interest rate are used manage to exposures. interest rate Derivative financial instrumentstheir at are stated fairvalue. (p) Derivative financial instruments The Group utilises forward swaps, interest agreements rate rate and forward exchange contracts as derivative financial instruments. The net amount value of added tax recoverable the taxation from, or payable to, authority is included as part of receivables or payables in the balancesheet. − − Value addedValue tax Revenues, expenses and assets are recognised the net amount of value of added tax except: Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right set off exists to current tax assets against current tax liabilities and the deferred taxes the same to relate taxable entityand the same taxation authority. Deferred tax is recognised in the income statement unless items it accounted relates to for outside profit or loss, in which case it is recognised in correlation with the underlying transaction either in other comprehensive income or directly in equity. Deferred tax assets and liabilities are measured the at tax that are rates expected apply the year to when to the asset is realised or the liability is settled, based on tax tax (and been rates that have laws) enacted, or substantively enacted, the at balance sheet date. The carrying amount deferred of tax assets is reviewed each at balance sheet and date reduced the extent that to it is no longer probable that sufficient taxable profit availablewill be to allow all or part of the deferred tax to asset be utilised. Unrecognised deferred tax assets are reassessed each at balance sheet and date are recognised to the extent that it has become probable that future taxable profit will theallow deferred tax to recovered.assetbe − − 1. Accounting1. policies continued Deferred tax assets are recognisedall for deductible temporary differences, carry forward unused of tax credits and unused tax losses, the extent that it to is probable that taxable profit willavailable be against whichthe deductible temporary differences, and the carry forwardunused of taxcredits and unused tax losses can be utilised except:

(q) Interest bearing loans and borrowings Allloans and borrowings are initially the at amount stated the net of proceeds, being fair value the consideration of received issue net of costs associated with the borrowing. Finance costs (including issue the are taken costs) to income statement the the term debt over of a constant at on the balance rate sheet carrying amount. The carrying amount is increased the finance by charges amortised andreduced by payments made respectin theof accounting period. The carrying amount index of linkedborrowings increases annually in line with the July RPI, with the accretion being charged the income to statement as finance costs payable. Other borrowing costs are recognised as an expense when incurred. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or or exercised, no longer qualifiesfor hedge accounting.thatAt point time, cumulativeany in gain or loss theon hedging instrument recognised in equity in equity is kept until the forecast transaction occurs. a hedged If transaction is no longer the net cumulative gainexpected occur, or loss to recognised in equity is transferred the income to statement. For derivatives that do qualify not for hedge accounting, any gains or losses arising from changes in fair value are taken directly the income to statement. When the hedged firm commitmentresults thein recognition of a non-financial asset or a non-financial liability then, the at time the asset or liability is recognised, the associated gains or losses that had previouslybeen recognised in equity are included in the initial measurement the acquisition of cost or other carrying amount the of asset or liability. For all other cash flow hedges,the gains or lossesthat recognised are in equity transferred are to the income statement in the same periods in which the hedged firm commitmentaffects the net profit and loss. In cash relation to flow hedgesto hedge firm currency commitments which meet the conditions for hedge accounting, the portion the gain of or loss on the hedging instrument that is determined be an effective to hedge is recognised directly in equity and the ineffective portion is recognised in the income statement. In fair relation value to hedges, which meet the conditions for hedge accounting, any gain or loss from re- measuring the hedging instrument fair at value is recognised immediatelyin profit or loss. gainAny or loss theon hedged item attributable the hedged to risk is adjusted against the carrying amount the hedged of item and recognised in the income Where statement. the adjustment the carrying is to amount a hedged of interest bearing financial instrument,the adjustment is amortisedtheto net profit and loss such that it is fully amortised bymaturity. Hedging transactionsundertaken the Company by are classified as either fairvalue hedges whenthey hedgethe exposure changes to in the fair value a recognised of asset or liability; or cash flow hedges wherethey hedge exposure variability to in currency cashthat flows is eitherattributable to a particular risk associated with a recognised asset or liability or a forecast transaction. The fair valueforward of exchange contracts is calculated reference current by to forward exchange for rates contracts with similar maturity profiles. The fairvalueswaps of is interest determinedrate referenceby to market values for similar instruments. 1. Accounting1. policies continued Under derivative IAS 39, financial instruments are measuredalways at fairvalue, with hedge accounting employed in respect those of derivatives fulfillingthe stringentrequirements for hedge accounting as prescribed under IAS In summary, these39. criteria initial to relate designation and documentation the hedge of relationship, prospective the relationshiptesting of demonstrate the to expectation that the hedge will be highly effective throughout its life and subsequent retrospective the hedge testing of verify to effectiveness.

continued Notes to the to Notes consolidated financial statements

100 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 101 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk (u) Trade and Trade (u) other receivables receivablesTrade are recognised and carried original at invoice amount less an allowance for any uncollectable amounts. Invoices for unmeasured charges and water water waste areother due receivables on fixed dates; generally 30 payment day have terms. An estimate for doubtful debts is made when collection the full of amount is no longer probable. Bad debts are written offTrade other whenand receivables identified. do not carry any interest. For the purpose the consolidated of cash flow statement, cash and cash equivalents are as defined above, outstandingnet of bank overdrafts. Short term cash deposits disclosed in the balance sheet comprise cash deposited with a maturity greater of than three months on acquisition, a fixed interestand rate which do not constitute cash equivalents under 7 IAS Cash‘Statement of Flows’. (t) Cash and cash equivalents and short term cash deposits Cash and cash equivalents disclosed in thebalance sheet comprise cash bank at and in hand and short term deposits with a maturity on acquisition three of months or less, which are held for the purpose meeting of short term cash commitments rather than for investment or other purposes. Cash equivalents are readily convertible a knownto amount cash of and subject an insignificant to riskof changesvalue. in (s) Loans(s) and receivables Loans and receivables are non-derivative financial assets with fixed ordeterminable payments that notare quoted in an do active qualify not market, as tradingassets and been not have designated as either fair value through profit and lossavailable or for sale. Gains and losses recognised are in income whenthe investments are de- recognised or impaired, aswell as through the amortisation process. The Group capitalises borrowing costs for all eligible assets when construction commenced on or after 1 April and 2009, continues expense to borrowing costs construction relating to projects that commenced prior that date. to Capitalisation ceaseswhen the asset is substantially ready for itsintended use or sale.active If development is interrupted for an extended period, capitalisation is suspended. When construction occurs piecemeal and use eachof part ceases upon substantial completion that part, of a weighted average cost borrowings of is used. (r) Borrowing costs Borrowing costs are generally expensed as incurred. Borrowing costs that are directly attributable the to acquisition or construction an of asset that necessarily takes a substantial prepare time to for its intended use are capitalised while the asset is being constructed as part the cost of that asset. of Net debt is the sum all of current and non-current liabilities less cash and cash equivalents, short termcash deposits, financial investments and loansreceivable. 1. Accounting1. policies continued Loans and borrowings acquired acquisition at fair are restated value. The to adjustment arising on acquisition is amortised the income to statement on the basis the maturity of of profile each instrument. Realised gains and losses that occur from the early termination loans of and borrowings the income are taken to statement in that period.

Where an existing financial liability replacedis by another thefrom same lender on substantially differentterms, or the terms an of existing liability are substantially modified, such exchangean or modificationtreated is as a de-recognition the original of liability and the recognition a new such liability, of that the difference in the respective carrying amounts togetherwith any costs or fees incurred are recognised in the income statement. (y) De-recognition of financial assets and liabilities A financial asset or liability is generally de-recognised whenthe contractthat givesto it is risesettled, sold, cancelled or expires. An assessment is made each at reporting whether as to date there is any indication that previously recognised impairment losses no may longer exist decreased. or have may such If indication exists the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used determine recoverable to the asset’s amount since the last impairment loss was recognised. is that If the case the carrying amount the asset of is increased its recoverable to amount. That increased amount cannot exceed the carrying amount been that would have determined, depreciation, net of had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in theincome statement unless the asset is carried revalued at amount, in which case the reversal is as treated a revaluation increase. After such a reversal the depreciation charge is adjusted in future periods revised allocate carrying the asset’s to amount, less any residual onvalue, a systematic basis its remaining over useful life. (x) Impairment of assets The Group assesses each at reporting whether date there is an indication that an asset be may impaired. any If such indication or exists, when annual impairment testing for an asset is required, the Group makes an estimate recoverable the asset’s recoverableof amount. An asset’s amount is the higher or cash-generating an of asset’s fair value lessunit’s sell costs and to its value in use and is determined for an individual asset, unless the asset does generate not cashthat inflows are largely independentthoseof otherfrom assets or groupsof assets. Where the carrying amount an of asset exceeds its recoverable amount, the asset is considered impaired and is written its recoverabledown to amount. In assessing value the in estimated use, future cash flows theirare discountedto present value using a pre-tax discount that reflects rate current market assessmentsthetimeof value of money and the risks specifictheto Impairmentasset. losses on continuing operations recognised are thein income statement in those expense categories consistent with the function the impaired of asset. (w) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result a past of it is probableevent, an that outflowresourcesof will requiredbe andreliable a estimate can be themadeof amount the obligation. of 1. Accounting1. policies continued (v) Investments Investments are initially recorded the at fair value the consideration of given including the acquisition charges associated with the investment. Subsequent initial to recognition, are they valued original at cost less any impairment.

continued Notes to the to Notes consolidated financial statements

102 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 103 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

on or after: on or after: 1.1.2011 1.7.2010 1.7.2010 1.7.2011 1.1.2013 1.1.2013 1.1.2013 1.1.2013 1.1.2013 1.1.2011 periods beginning beginning periods periods beginning beginning periods . Effective for accounting accounting for Effective Effective for accounting accounting for Effective 1.7.2010, 1.7.2011 1.7.2010, note 1(f) note , ‘Pensions and other benefits’; post-retirement the bad debt provision which is calculated applying by a range percentages of debt different of to ages. These percentages also vary between different categories Higher debt. of percentages are applied those categories to debtof which are considered be greater of risk to and debt also greater The of age. to value the bad debt of provision is sensitive the specific to percentages applied; and the asset lives assigned property, plant to and equipment, details which of can be found in possible impact are disclosed 24 in note those assumptions used in arriving the at pension asset/liability These assumptions key under and their IAS 19. − − − − − − (aa) Key assumptions(aa) Key The directors consider assumptions that the key applied the at balance which sheet a significant have may date, risk causing of a material adjustment the carrying to amounts assets of and liabilities within the next financial year are: IFRIC 19: ExtinguishingIFRIC 19: Financial Liabilities with Equity Instruments the directors are still evaluating the impact and these 13, of standards Given the recent publication IFRS 10,11,12 of financial statementson thein the Group’s periodof initial application. IFRIC Amendment: Prepayments a Minimum of Funding RequirementIFRIC 14: International Accounting Standards (IAS/IFRS) Amendment IFRS 1 – Limited to ExemptionIFRS 1: from Comparative IFRS 7 Disclosures IFRS 7: Amendment IFRS 7 – Financial to IFRS 7: Instrument Disclosures FinancialIFRS 9: Instruments: Classification and Measurement Consolidated Financial StatementsIFRS10: Joint Arrangements IFRS11: Disclosure Interests in of Other Entities IFRS12: Measurement Fair Value IFRS13: Related Party DisclosuresIAS 24: (Revised) IFRSImprovements 2010 to 1. Accounting1. policies continued (z) Accounting standards the InternationalDuring Accounting the year, Standards Board and International Financial Reporting Interpretation Committee issued have (IFRIC) the following standards and interpretations with an effective after date of the date these financial statements: £m Total Total (6.2) (5.4) 743.5 738.1 710.9 704.7 £m 8.7 8.6 Other (6.2) (5.4) 14.1 14.8 – – £m 40.0 40.0 38.3 38.3 contracts Water and waste water – – £m Water Limited 689.4 689.4 657.8 657.8 Northumbrian Northumbrian

Revenue Transfer prices betweenTransfer business segments length basis are set on in an a manner arm’s similar transactions to with third parties. Segment segment revenue, expense and segment result include transfers between business segments. Those transfers are eliminated on consolidation. Other Agrer provides overseas aid funded project work in developing countries through a number funding of agencies. Central unallocated costs and provisions arealso included in this segment. Water and waste water contracts ownsNWG a number special of purpose companies for specific water contracts water waste andin Scotland, Ireland and Gibraltar. Northumbrian Water Limited NWL is one regulated the ten and of water sewerage businesses in England and Wales. NWL operates in the north east England, of where it trades and as Northumbrian in the south east England, of where it trades Water, as NWL also hasEssex non-regulated & Suffolk activities Water. closely its principal related to regulated activity. 2. Segmental analysis For management purposes, the Group is organised business into units according its the products nature of to and services and has three reportableoperating segments. The trading thebusiness of is principally carried out within the UK. is Profit measuredat profit onordinary activitiesinterest. before

continued Notes to the to Notes consolidated financial statements Year endedYear March 31 2011 Segment revenue Revenue from external customers Inter-segment revenue Inter-segment March ended 2010 31 Year Segment revenue Inter-segment revenue Inter-segment Revenue from external customers

104 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 105 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

£m £m £m Total Total 0.7 0.9 (2.6) (47.3) restated restated restated restated 304.2 181.0 236.3 178.4 275.8 170.2 122.9 105.5 (106.5) 31.3.2010 31.3.2010 31.3.2010 31.3.2010 (123.9) 3,935.7 3,621.8

Total Total £m £m £m Other (3.3) (2.9) 219.9 111.6 31.3.2011 31.3.2011 4,012.6 3,536.7

£m £m £m

9.5 5.4 6.0 10.2 287.5 contracts 31.3.2010 31.3.2010 31.3.2010 31.3.2010 Water and 3,140.4 waste water

Other £m £m £m 0.3 5.8 water contracts Water Water and waste Limited 297.6 179.4 268.9 31.3.2011 31.3.2011 3,096.4 Northumbrian Northumbrian

£m £m

99.5 22.9 restated restated 230.9 130.6 31.3.2010 31.3.2010 31.3.2010 31.3.2010

£m £m water contracts Water and waste 18.0 219.6 123.6 105.8 31.3.2011 31.3.2011 Northumbrian Water Limited Water Northumbrian £m restated restated 458.5 31.3.2010 31.3.2010 3,517.6 £m 422.3 31.3.2011 3,709.6 Northumbrian Water Limited Water Northumbrian 2. Segmental analysis continued Profit on ordinary activities before interest Property, plant and equipment additions Segment assets Year endedYear March 31 2011 Segment profit on ordinary activities before interest Net finance costs Share profit of from jointly controlled entities Profit on ordinary activities before taxation Taxation Depreciation Profit fortheyear Profit from continuing operations March ended 2010 31 Year Segment profit on ordinary activities before interest Segment liabilities Non-current assets for operations in the UK were £3,700.7 million (2010: £3,592.1 million). Non-current million). assets for £3,592.1 millionNon-current (2010: assets for operations in the UK were £3,700.7 million). £13.3 million (2010: operations in other countries were £11.6 Geographical information Revenue from million). other £680.0 million (2010: Revenue from external customers from the UK was £714.8 million). £24.7 countries million was £23.3 (2010: Net finance costs Share profit of from jointly controlled entities Profit on ordinary activities before taxation Taxation fortheyear Profit from continuing operations Assets and liabilities Other comprises taxation, interest and net debt. Assets of from Customers Transfers was in adopted the period. ThisIFRIC 18 has required the prior year segment assets million and property, for transactions plant and effected equipment on or additions be £14.0 restated by to after 1 July 2009. – £m £m £m 0.3 2.1 1.2 0.9 9.7 1.6 4.8 7.3 (0.2) (5.0) Year toYear Year toYear toYear 23.7 19.6 88.3 23.1 87.1 (27.0) 111.4 105.5 197.6 428.9 111.4 111.4 31.3.2010 31.3.2010 31.3.2010 31.3.2010 31.3.2010 – – £m £m £m 0.1 0.3 2.3 1.2 1.8 7.3 (0.9) (4.6) 25.6 17.8 85.2 25.4 87.6 13.9 Year to Year to Year to (28.7) 110.6 111.6 199.0 433.9 110.6 110.6 31.3.2011 31.3.2011 31.3.2011 ) ) 1 )

£97,000 of this£97,000 relates the to Company £95,000). (2010: Other fees auditors: to Other services 3. Operating costs

continued Notes to the to Notes consolidated financial statements Materials and consumables Manpower 5 costs note (see Depreciation property, of plant and equipment Other operating costs Own work capitalised Profit on disposalof property, plant and equipment Amortisation capital of grants Costs research of and development Operating lease payments Bad debt charge Operating costs 4. Auditors’ remuneration Included million) in wages and salaries £0.7 expense is a total share-based of million (2010: payments £0.4 of which arises from transactions accounted for as equity-settled share-based payments. Manpower costs Other pension costs employment costs Total employment costs were chargedTotal as follows: Capital schemes and infrastructure renewals Restructuring cost – wages and salaries Restructuring cost – defined benefit pension service 24 (see note cost Defined benefit pension service 24 (see note cost Wages and salaries Social security costs 5. Employee information The employment total costs all of employees (including the Group of directors) were: Note: 1. Audit the financial of statements

106 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 107 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk – – £m 24 4.0 (5.6) (6.6) (4.5) 151 Year toYear Year toYear 36.1 (31.6) Number 143.7 114.7 106.5 2,930 3,105 31.3.2010 31.3.2010 31.3.2010 31.3.2010 £m 24 5.1 (1.9) (4.6) (2.9) (4.4) 132 43.3 21.9 Year to Year to (45.5) 178.8 112.9 123.9 2,875 3,031 Number 31.3.2011 31.3.2011 Total finance costs payable Total Finance income receivable Acquisition loan CES of stock Finance costs payable on hire purchase contracts and finance leases Expected return on pension plan assets Finance costs payable on debentures, bank and other loans and overdrafts Interest cost on pension plan obligations Finance lease termination discount Net finance costs payable Amortisation discount, of fees, loan issue costs and other financing items During the period, the Group acquired the subordinated loan issued stock from CES an by external party. This was acquired below at million. book In addition, value the Group leading a gain transferred £4.6 of to a finance leaseto a new counterparty with a termination discount million. valued £2.9 at Accretion on index linked bonds Northumbrian Limited Water 5. Employee informationcontinued The average monthly number employees of the Group of during the year was: Water and waste water contracts and water waste Water Other 6. Finance costs payable/(income receivable) The information required Schedule by the Large of 5 and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 is contained remuneration in the directors’ report under emoluments, directors’ pensionsdirectors’ and benefits, interests in directors’ sharesLTIPawards and debentures, interests in directors’ and interests in directors’ shares under the Share Incentive Plan. – – – – – – £m £m 9.2 0.3 9.5 0.2 0.3 0.1 (1.3) (0.2) Year toYear Year toYear 47.3 37.8 37.6 38.9 31.3.2010 31.3.2010 31.3.2010 31.3.2010 £m £m 6.8 2.6 9.0 0.2 0.1 0.7 3.1 (9.5) (0.1) (0.1) (0.1) 33.1 32.9 42.3 23.1 19.4 Year to Year to (46.3) (30.5) 31.3.2011 31.3.2011

7. Taxation 7. on profit Tax (a) on ordinary activities

continued Notes to the to Notes consolidated financial statements (b) Tax relating(b) Tax to items charged or credited outside of profit or loss The rate of UK corporation tax was reduced from 28% to 27% by the Finance (No. 2) Act 2010 with effect from UKThe corporation of the Act Finance 2010 by rate 2) tax (No. 27% was reduced to from 28% The was further rate with effect reduced 26%, from to the on same the passing date, a resolution of 1 April 2011. which at point was the new rate under March the on Provisional 23 2011 Act Collection 1968 Taxes of substantivelyenacted. As a result, deferred tax was re-measured which at the at rate timing differences are expected reverse. Adjustments to in respect prior of periods arise from revisions UK tax to returns. Effect changes of in tax and rates laws: – Impact reduction of UK of corporation in rate tax Adjustment in respect prior of periods deferred tax (credit)/charge Total charge in the incomeTax statement Deferred tax: Origination and reversal temporary of 28%) differences (2010: in the year 26% at Total current tax Total Overseas tax Adjustment in respect prior of periods UK corporation tax Income tax recycled from equity on cash flow hedges Current tax: Current income tax charge 28% at Interest rate swaps Interest rate Impact reduction of UK of corporation in rate tax charge in the statementTax comprehensive of income Deferred tax: Share based payment Current tax: Current tax recycled income to statement on cash flow hedges Deferred tax: Actuarial gains and losses on pension schemes credit in the statementTax changes of in equity

108 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 109 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk – – £m £m Total Total 0.1 1.8 0.9 9.5 (0.1) (0.5) (1.5) (1.0) (0.1) Year toYear 23.2 47.3 47.3 47.7 (30.5) 598.7 606.1 170.2 596.5 31.3.2010 31.3.2010 – – £m £m 0.1 0.4 1.1 2.6 2.1 0.5 Other (0.1) (0.7) (1.4) (2.7) (0.2) 16.2 15.8 49.6 50.7 15.3 Year to (46.3) 181.0 31.3.2011 – – – £m 9.9 (1.0) (0.4) 10.9 11.3 Business Business combinations combinations – – – £m 1.0 (0.2) (3.5) (3.3) (2.5) swaps Fair values values Fair interest rate – £m 0.3 (0.4) (4.2) benefit benefit 22.1 (38.1) (34.2) (16.4) obligations obligations Retirement Retirement – – – £m 0.2 (5.7) (5.1) (0.6) (5.5) Tax losses losses Tax – – – £m (1.3) 13.8 income (60.2) (58.9) (46.4) Deferred – – – tax £m 15.5 (43.5) 643.4 686.9 671.4 Accelerated depreciation depreciation payment statement income statement comprehensive income At 31 March 31 At 2011 million) which arisen have in its Gibraltar subsidiary for which £7.1 million (2010: The Group has tax losses £7.0 of a deferred tax asset has been not recognised as be not may they used offset to taxable profits elsewhere thein Group and it is expected not that the subsidiary will utilise significant amounts theforeseeablein future. The losses available for offset against however, are, future taxable profits arising thein subsidiary withouttime limit. Reported in equity on share-based At 1 AprilAt 2010 in the incomeCharge/(credit) Charge in other comprehensive – Impact of rate reduction– Impact rate of on movement in deferred tax (d) Deferred tax The movements in deferred tax liabilities/(assets) are as follows: Effect changes of in tax and rates laws: reduction– Impact rate of on opening deferred tax is mainly due The decrease 26.4% of 27.8%). (2010: was 1.4% The effective March tax 2011 31 for the year rate to the impacts the reductionto of UK of corporation in the rate tax and prior year In items. the absence the rate of change and prior year the items, effective been would have rate 28.5%. Depreciation in respect non-qualifying of items Non-taxable income and enhanced tax reliefs Non-taxable amortisation financing of items Adjustment tax to charge in respect prior of periods Other tax expense reportedTotal in the income statement Accounting profit before tax Effects of: Expenses deductible not for tax purposes 7. Taxation continued7. Reconciliation(c) of the total tax charge Accounting profit multipliedby standardof corporation rate tax(28%) At 1 AprilAt 2009 Charge/(credit) in the incomeCharge/(credit) Charge/(credit) in other Charge/(credit) – pence pence restated restated Earnings Earnings Earnings 23.67 23.62 23.67 23.67 23.62 per share per share 31.3.2010 31.3.2010 31.3.2010 million million number number average average 517.6 518.6 517.6 517.6 518.6 of shares of shares Weighted Weighted Weighted 31.3.2010 31.3.2010 31.3.2010 – £m £m Profit Profit Profit restated restated 122.5 122.5 122.5 122.5 122.5 31.3.2010 31.3.2010 31.3.2010 pence pence (8.94) 34.44 34.38 34.44 25.50 25.45 Earnings Earnings 31.3.2011 31.3.2011 per share per share million million number number 517.8 518.6 517.8 517.8 518.6 average average average 31.3.2011 31.3.2011 of shares of shares Weighted Weighted Weighted £m £m Profit Profit Profit (46.3) 178.3 178.3 178.3 132.0 132.0 31.3.2011 31.3.2011

Basic EPS The weighted average number shares of for diluted is calculated EPS adding by the weighted average number of ordinary shares in issue during the year and the weighted average number ordinary of shares that would be issued on the conversion all of the dilutive potential ordinary shares ordinary into shares. 8. Earnings per share Basic is calculated EPS dividing by the profitattributable to ordinary equity holderstheof parent Companytheby weighted average number ordinary of shares shares in issue Treasury held during are excluded the year. from the weighted average number shares of for basic EPS. The Group expects to continue to incur high levels of capital expenditure during NWL’s 2010-15 regulatory period 2010-15 The Groupexpects continue incur to to high levels capital of expenditure during NWL’s and be able claim to tax it is expected reliefs that capital in excess depreciation. of allowances However, will be containsclaimed clauses reduce in future a slower at to to rate from because rates 20% Finance Bill 2011 (No.3) (general (specialpool) 8% rate with plant to effect pool)18% and from from 1 April 10% 2012. 7. Taxation continued7. Factors(e) that may affect future tax charges Had that The Government reduce has its corporation stated intention to of 1 April the UK by rate tax 2014. 23% to the closing deferred million tax million liability £529.6 to been would have applied reducedrate £69.1 by in 2010/11 million. and corporation million the current £34.7 to year’s tax charge been would have reduced £7.6 by

continued Notes to the to Notes consolidated financial statements Diluted EPS The directors consider adjusted that EPS for the volatility inherent in some deferred tax items gives a better underlyingindication the Group’s performance. of In previous years, an adjustment had been made for total the directors concludeddeferred have tax. that the ongoing However, deferred tax charge forms part underlying of performance and it is more appropriate only to adjust for significant non-recurring deferred taxForthe items. current period, the deferred tax credit the corporation relating to tax reduction rate has been adjusted and the prior year adjusted has EPS been restated with no element deferred of tax The removed. deferred tax charge now million) and has £9.5 an impact on the included million in adjusted (2010: for the current EPS period is £15.8 pence per share). 1.84 pence 2.80 adjusted (2010: of EPS Basic EPS Deferred tax – effect changes of in tax rates Adjusted EPS Diluted adjusted EPS

110 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 111 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

£m £m Total Total (0.2) Year toYear 45.8 66.7 22.7 44.0 67.8 67.8 68.0 31.3.2010 31.3.2010

– £m £m Other 49.6 70.3 24.5 45.8 64.2 64.2 64.2 Year to 31.3.2011

£m 3.6 3.6 3.8 (0.2) Goodwill Goodwill 10. Intangible10. assets Proposed for approval shareholders by the at AGM: pence) 8.85 pence (2009/10: 9.57 Final dividend for 2010/11: Dividends paid Interim dividend for 2010/11: 4.72 pence (2009/10: 4.39 pence) 4.39 pence (2009/10: 4.72 Interim dividend for 2010/11: Declared and paid during the year: Equity dividends on ordinary shares: pence pence) 8.85 8.50 Final (2008/09: dividend 2009/10: for 9. Dividends paid and proposed The other intangible asset represents the right in perpetuity receive to income under the operating agreement with the Environment Agency in respect the Kielder of transfer scheme Water the directors and, therefore, consider the asset has an indefinitefuture Accordingly, cashlife. whichflows, increase in linehave inflation, with been in perpetuity. This represents a longdiscounted 6.44% term of nominal a rate at gilt yield and an assumed credit spread. This calculation had not been satisfied theimpaired. Groupthatthe carrying31 March2011 value at Furthermore, it is improbable that the discount would increase rate such a level to the that carrying value would be impaired. Goodwill has been cash-generating and water allocated the water waste to unit and the other intangible assethas been allocated the Northumbrian to Limited cash-generating Water which unit, are also the operating segments. As from 1 April transition of goodwill IFRS, the date 2004, to is no longer amortisedbut is subject now an annual to impairment review. Net book value 1 April at March 2009 2010 and 31 Impairment: 1 AprilAt 2009, 1 April 2010 and March 31 2011 Net book value at March 31 2011 Cost: 1 AprilAt 2009, 1 April 2010 and March 31 2011 – – – – – – £m £m Total Total (9.3) (9.7) (9.7) (9.8) 23.6 71.4 47.8 982.2 111.6 886.4 105.5 219.9 236.3 31.3.2010 31.3.2010 1,084.5 3,626.8 3,518.9 3,388.2 4,711.3 4,501.1 4,274.6 – – – – – – – – – – – – – £m £m 69.3 22.0 47.3 148.4 111.4 170.5 148.4 203.8 111.4 215.7 170.5 course of (166.8) (274.8) 31.3.2011 construction construction Assets in the – – – – £m 0.3 9.0 0.4 0.3 (0.3) (0.1) 72.7 71.2 52.9 11.4 13.1 38.3 fittings, fittings, (11.4) Fixtures, 148.6 136.9 221.3 128.0 208.1 180.9 tools and equipment – £m 1.2 1.6 (2.5) (0.3) (3.1) (2.5) (2.4) (3.2) (2.0) 72.8 71.8 73.7 779.4 709.4 640.7 132.9 plant and machinery structures, Operational Operational 1,544.9 1,544.9 1,484.3 2,324.3 2,254.3 2,125.0 – – – – £m (6.8) (6.6) (6.8) (6.6) assets 25.2 99.9 22.8 83.7 14.5 76.3 18.7 96.7 118.3 1,777.4 1,711.8 1,619.2 1,895.7 1,811.7 1,702.9 Infrastructure Infrastructure – – – – – – £m 2.2 2.8 1.9 0.1 3.7 6.9 (0.5) 38.2 83.4 79.6 61.3 36.0 34.0 13.4 95.3 121.6 115.6 and buildings and Freehold land Freehold

At 31 March 31 At 2011 The net book value property, of plant and equipment held under hire purchase contracts and finance leaseswas as follows: Disposals Net book value at March 31 2011 (restated) Net March book 2010 value 31 at Net book value 1 April at 2009 Operational structures, plant and machinery include an element land of and buildings dedicated those assets. to The Group has applied Borrowing IAS 23 Costs (Revised) in million the year and for the has year capitalised to £1.9 The capitalisation million). used determine rate to the amount £1.2 borrowing of costs eligible (2010: March 2011 31 Assets of from Customers Transfers was in adopted the IFRIC 18 5.96%). for capitalisation (2010: was 5.96% period. million This for transactions has required effected prior on year or after additions be £14.0 restated by to 1 July 2009. At 1 AprilAt 2010 Charge for the year Reclassifications Reclassifications Disposals March 31 At 2011 Depreciation: 1 AprilAt 2009 Charge for the year Reclassifications Disposals Schemes commissioned At 1 April 2010 (restated) 1 AprilAt 2010 Additions Reclassifications Disposals Schemes commissioned 11. Property,11. plant and equipment

continued Notes to the to Notes consolidated financial statements Additions (restated) Cost: 1 AprilAt 2009 Operational structures, plant and machinery Infrastructure assets

112 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 113 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk – – – – £m £m 4.1 3.1 0.6 0.6 0.6 3.6 3.6 0.8 (2.5) (2.8) (2.8) Agreco Agreco 31.3.2010 31.3.2010 31.3.2010 31.3.2010 £m £m VLS 4.0 6.9 1.0 0.4 0.3 7.9 7.9 3.3 (5.9) (0.6) (0.1) (4.6) (7.9) 15.8 (12.5) 31.3.2010 31.3.2010 31.3.2011 – – – – £m 3.2 0.3 0.3 0.3 1.4 1.4 0.6 (2.9) (0.8) (0.8) Agreco Agreco 31.3.2011 £m VLS 6.7 1.0 0.5 0.4 8.4 7.7 3.4 (5.7) (0.5) (0.1) (4.9) (7.8) 16.1 (12.7) 31.3.2011 The Group, through Agrer, also holds interest a jointlyin Agreco, 50% a The through controlled Group, Agrer, entity incorporated in Belgium. (a) Investments(a) in jointly controlled entities The through Group, Northumbrian Services Limited, holds the nominal of 50% value issued of ordinary shares £1 in Vehicle Lease and Service principal Limited jointly (VLS), the controlled Group’s VLS was incorporated entity. in England and Wales and undertakes the business hiring, of leasing and servicing vehicles of and plant. Investments in jointly controlled entities 12. Investments Revenue Operating costs Profit on ordinary activities before interest Finance costs payable Profit on ordinary activities before taxation Current taxation fortheyear Profit Non-current assets Current assets Share gross of assets Current liabilities Non-current liabilities Share gross of liabilities Share net assets of £m 3.3 31.3.2010 31.3.2010 £m 3.3 31.3.2011 loans instruments Holding investments of and and sewerage services Water Holding finance of services water Waste services water Waste services water Waste services water Waste Water and sewerage services Water services water Waste Aid funded project work Business activity Business 75 67 100 100 100 100 100 100 100 100 Proportion Proportion nominal of value of issued shares held by Group (%) Ordinary shares £1 of Ordinary shares £1 of Ordinary shares £1 of Ordinary shares £1 of Ordinary shares £1 of Ordinary shares £1 of Ordinary shares £1 of Ordinary shares £1 of Ordinary shares £1 of Ordinary shares £1 of Description of shares held England and Wales England and Wales England and Wales Scotland Scotland Scotland Scotland Gibraltar England and Wales Belgium Country of incorporation or or incorporation of Country registration and operation

Limited Limited Finance plc Services plc Levenmouth Treatment Services Limited Limited Operations Limited Projects Limited Northumbrian Services Northumbrian Water Northumbrian Water Caledonian Environmental Caledonian Environmental EnvironmentalAyr Services EnvironmentalAyr Services AquaGib Limited Name of undertaking 12. Investments continued (b) The Group’s interests in principal subsidiaries at March 31 were as follows: 2011 continued Notes to the to Notes consolidated financial statements Inventories13. Allsubsidiaries listed above are indirectly held. The directors consider give full that to particulars all of subsidiary and associated undertakings would a statement lead excessive of to length. The information above those relates to subsidiary and associated undertakings or groups undertakings of whose results or financial position, thein opinion the directors, of principally affect the figures thesubsidiaries A of fullGroup. the of list Company’s is attached latest annual the Company’s return to filedat Companies House. Northumbrian Water SA Agrer NV the Group increased itsshareholding Caledonian in both Environmental ServicesIn 2010/11 plc and Caledonian Environmental Services 100%. Levenmouth to Treatment Limited from 75% Stores

114 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 115 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk £m £m £m £m £m Total Total 9.2 1.1 0.5 1.1 (1.5) 53.4 72.2 31.7 19.6 37.1 17.8 44.5 66.1 48.7 46.3 14.7 15.8 (14.2) (10.4) 136.4 108.7 174.8 173.3 31.3.2010 31.3.2010 31.3.2010 31.3.2010 31.3.2010 31.3.2010

– – £m £m £m £m >48 3.8 0.6 0.6 1.4 1.4 (1.4) 11.0 60.3 78.2 65.0 76.7 months months 153.9 141.7 140.3 31.3.2011 31.3.2011 31.3.2011 £m 2.5 2.7 36-48 months months £m 6.4 5.8 24-36 months months £m 12-24 12.4 11.8 months months

£m 3-12 3-12 26.8 24.9 months months

£m 0-3 0.6 0.5 months months Other receivables million) were impaired. £37.1 trade receivables million nominal at (2010: value £44.5 of March 2011, As 31 at Movements in the provision for impairment trade of receivables were as follows: Financial assets Prepayments and accrued income Amounts jointly by owed controlled entities Trade receivablesTrade 14. Trade and Trade other14. receivables Charge for the year Utilised 1 AprilAt 2010 Charge for the year Utilised March 31 At 2011 March, the analysis 31 tradeAt receivables of overdue but impaired not is as follows: At 1 AprilAt 2009 Cash equivalent deposits Bank overdrafts Cash and cash equivalents Cash bank at and in hand 2011 2010 Cash15. and cash equivalents and short term deposits For the purposes the consolidated of cash flow statement, cash and cash equivalents comprisethefollowing at March: 31 Short term cash deposits with a maturity million), less of than three months, represent amounts Short £14.7 term cash deposits £nil of (2010: on deposit fixed at rates thewith NorthumbrianPension Water Scheme. Short term cash deposits months <3 Short term cash deposits >3 months £m £m 7.0 1.5 6.8 33.1 81.1 39.7 19.4 11.0 24.6 58.9 66.5 (24.6) 151.2 104.1 550.5 308.6 386.8 346.3 241.1 168.5 110.2 110.2 31.3.2010 31.3.2010 31.3.2010 31.3.2010 2,354.4 2,329.8 2,329.8 2,433.9 £m £m 7.2 1.4 1.9 82.2 39.1 17.8 16.5 58.9 69.7 163.7 155.6 155.1 103.5 176.6 115.5 530.0 307.5 384.0 346.4 241.4 115.5 (155.1) 31.3.2011 31.3.2011 2,192.3 2,347.4 2,295.8 2,192.3 ) )

note 18 million) note (see £104.1 million, 2010: £103.5 (principal £177.6 million, 2010: £169.5 million) £169.5 million, 2010: (principal £177.6 million) £110.4 million, 2010: (principal £115.7 2010: £300.0 million) £300.0 2010: million) £350.0 2010: million) £350.0 2010: million) £248.0 2010: million) £61.6 2010: million) £66.6 (principal million, 2010: £69.8 million) £110.4 million, 2010: (principal £115.7 Non-current: 16. Trade and Trade 16. other payables

continued Notes to the to Notes consolidated financial statements 17. Interest bearing17. loans and borrowings Accruals and deferred income Interest payable Other payables Trade payables Trade Current instalments due on borrowings (principal £150.4 million, 2010: £19.7 million) £19.7 Current instalments million, 2010: due on borrowings (principal £150.4 million) £19.7 Less current instalments million, due 2010: on bank loans (principal £150.4 Non-current obligations under finance leases and hire purchase contracts (principal Current obligations under finance leases and hire purchase 18 (see contracts note Current: Bank overdrafts Index linked Eurobonds – due 15 July 2036 bearing interest rate of 2.033% JulyIndex linked 2036 bearing Eurobonds – due 2.033% 15 of interest rate JulyIndex bearing linked 2049 Eurobonds – due 1.7118% of 16 interest rate Non-current instalments on borrowings (principal £2,166.9 million, 2010: £2,300.2 million) £2,300.2 million,Non-current 2010: instalments on borrowings (principal £2,166.9 Borrowings comprise the following: million) £546.6 million, 2010: Loans (principal £527.1 million) £6.8 million,Subordinated 2010: loan (principal stock £1.9 (principal bearing 6.0% of million, interest £300.0 rate October 2017 Eurobondsdue – 11 Eurobonds (principal – due million, 6 February £350.0 bearing 2023 6.875% of interest rate (principalEurobonds million, – due April 29 £350.0 bearing 2033 5.625% of interest rate (principal million,Eurobonds – due January 23 £248.0 2034 bearing 5.87526% of interest rate million, (principal bearing £61.5 MarchEurobonds 2037 6.627% – due of interest 31 rate Index linked Eurobonds – due bearing 30 January 1.6274% of interest rate 2041 JulyIndex linked 2053 bearing Eurobonds – due 16 1.7484% of interest rate

116 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 117 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk £m £m 7.0 7.0 0.8 2.6 23.5 26.7 30.1 (74.0) 154.6 185.1 111.1 104.1 111.1 31.3.2010 31.3.2010 31.3.2010 31.3.2010 £m £m 7.2 7.2 0.7 2.4 23.5 26.6 29.7 (71.6) 151.6 182.3 110.7 103.5 110.7 31.3.2011 31.3.2011 ). Later thanyears five Present value minimum of lease payments After one year but more not thanyears five Less finance charges to allocatedfuture periods Disclosedas due: than later Not one year After more than one year Amounts due: than later Not one year 18. Obligations under hire purchase contracts and finance leases The value the capital of and interest elements the index of linked Eurobonds movements are linked in the to UK RPI 1(q) note (see The Eurobonds January – due 23 2034 are secured on the income receivable under the Kielder transfer Water scheme for the period January 23 to 2034. Lease commitments The Group has non-cancellable entered into operating leases in respect land of and buildings, plant, machinery vehicles.and motor The future minimum rentals payable under non-cancellable operating leases are as follows: 17. Interest bearing17. loans and borrowings continued million) and £2,300.2 the carryingThe million value difference of (2010: between the principal value £2,166.9 of million) and a £14.7 million (2010: million) are unamortised £2,329.8 issue costs £14.1 of million (2010: £2,192.3 million) in excess the original of £44.3 loan proceeds reflectthe to fairvalue million of creditloans (2010: £39.5 of subsidiaries by owed acquired in 2003. After one year but more not thanyears five Afteryears five Not later than later Not one year £m 0.2 2.2 2.4 0.4 2.6 0.2 2.4 2.6 (0.2) ), and are expected be paid), the to remaining over lives, which is approximately

(d) Liquidity risk available policy have is standby to committedAs the Group’s regards liquidity, day bank to day borrowing facilities with a value no less million of than and £50.0 with a bank agreement availability period no less of than three million). million the Group undrawn had £75.0 of £35.0 committed bank facilities (2010: March 2011, 31 months. At millionA further committed of bank £70.0 facilities on were entered 7 April into 2011. (c) Risks(c) arising from the Group’s financial instruments The main risks financial arising instruments from the Group’s are liquidity risk, interestrisk rate foreignand currency risk. The Board reviews and agrees policies for managing each these of risks and are they summarised below. Alltreasury activities are conducted in accordance with these policies. (b) Treasury operations The treasury main purpose ongoing function the Group’s of assess capital is to theGroup’s requirement and to raise funding on a timely basis, taking advantage any favourable of market opportunities. also It invests anysurplus funds based the Group upon have, may its forecast requirements and treasury in accordance with the Group’s On occasions,policy. derivatives are used as part policies this process of prohibit but the Group’s their use for speculation. 20. Financial instruments Group(a) strategy The level capital of expenditure which the Group is obliged incur to is such that it cannot be wholly financedby internally generated sources. As result, a the Group must rely upon raising additional finance regularon a basis, be principallyto used fund to the long term assets required in its regulated strategy business. is to The Group’s finance such investmentby raising to mediumprovideto termlong a balance debt, sheet with termmatch long assets fix and a major to proportionof interest rates. Non-current 1 AprilAt 2010 Arising during the year Utilised March 31 At 2011 Analysed as: Current Non-current The provision represents outstanding discretionary pension liabilities. The discretionary pension liabilities have been calculated anby independent using actuary, the same actuarial assumptions as applied the defined to benefit pension scheme 24 (see note years. 11 At 1 AprilAt 2010 Current 19. Provisions19.

continued Notes to the to Notes consolidated financial statements

118 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 119 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk £m 1.3 2.5 3.8 0.9 1.9 2.8 Effect on profit/equity profit/equity The Group monitors capital using gearing ratios for the Group and NWL. For NWL, this is net debt divided by asthe RCV determined and published Ofwat, by plus and RCV a pro forma for the Group, for the Kielder RCV securitisation and the level associated contracts of the PFI (at net debt debt included relating in the Group’s policy for the Group keep the gearing and is to and 70% The Group’s ratio less those assets). to than 75% NWL, respectively. (j) Capital risk The primary capital objective management the Group’s of ensure is to that it maintains a strong credit rating and healthy capital ratios in order support to its business and maximise shareholder value. (i) Counterparty risk The treasury which is approved the Board, requires by strategy, that investments are certain limited to money market and treasury exposure any single instruments, to bank, building and that the Group’s society or market is controlled, with maximum deposits allowed with any single counterparty. The investment criteria cover credit rating and asset including size, sovereign and political risk. Current market conditions resulted have in closer monitoring counterpartiesof and cancellation or suspension deposits. of +100 +150 2010 +50 +10 0 +150 (h) Credit risk There are no significant concentrationsof credit risk withinthe Management’s Group. assessmenttheof maximum credit risk exposure financial relating to assets representedis theirby carryingvalue theat as balance sheet date A significant (o)). (see proportionthetradeof balances debtor are with domestic customers who are to unlikely a publishedhave credit rating. Increase in basis points 2011 +50 (g) Market(g) price risk exposure market price to risk The principally Group’s comprises policy exposures. is interest to rate The Group’s accept a degree risk. interest of rate The following table shows the impact on profit and equityof an increase thein variable cost borrowing. of The range is considered reasonable based on the forecast variable borrowing of rates and all other elements being months and consistent highlights for the next this is material 12 not the Group: to (f) Foreign currency risk transactional a of equivalent sterling £100,000 of excess in exposure currency foreign any that is policy TheGroup’s Any identification. on immediately covered be should nature, translation a of equivalent sterling million £3.0 or nature, exposures are covered through the use forward of foreign exchange contracts. 20. Financial instruments continued Interest(e) rate risk The Groupfinances its operationsthrough a mixtureretainedof profits and bank borrowings. It both atborrows fixed and to of interestswaps floating uses rates generate interest theaccordingly, and, rate desiredinterest profile keep policyto a minimum fluctuations.is exposure interestof rate to 60% The manage andGroup’s to the Group’s borrowingswere at fixed theof Group’s 75%) (2010: 74% 31 March2011, its borrowingsAt of interest. fixed at rates Index linked interest. of borrowingsrates are as treated variable debt. rate

£m £m £m Total Total Total Total Total (1.9) (8.2) (2.4) (1.4) 12.9 51.4 131.0 143.1 (255.9) (477.3) (271.7) (102.5) (696.9) 5,505.7 5,374.7 5,366.0 5,417.4 (1,606.6) (2,303.5) (1,338.2)

– – – – £m £m £m (1.9) (0.4) (0.9) 11.3 5 years (60.0) (80.2) 5 years 5 years (145.9) (477.3) (606.2) More than More than More than 4,381.8 4,381.8 4,381.8 4,381.8 (1,466.3) (1,317.2)

– – – – – – – £m £m £m (0.5) (0.3) (4.5) (4.3) (22.1) (27.2) (10.0) (14.5) 704.5 704.5 824.4 824.4 1-5 years1-5 1-5 years 4-5 years

– – – – – £m £m £m (1.0) (0.3) (4.5) (4.2) 48.7 20.0 (21.3) (26.8) (10.0) (14.5) 173.3 124.6 118.0 138.0 3-4 years 3-12 months months 3-12 3-12 months months 3-12

– – – – £m £m £m 0.2 (1.5) (0.3) (4.5) (4.2) 82.3 40.3 31.3 71.6 (21.1) (27.1) (10.0) (14.3) 244.7 162.4 3 months months 3 Less than 2-3 years 3 months 3 Less than – – – – – £m £m £m 1.4 0.5 1.4 1.5 0.1 1.6 (2.0) (0.3) (4.4) (4.1) (21.2) (27.6) (55.4) (59.3) 1-2 years1-2 On demand On demand

– – £m 0.9 (2.8) (0.3) (1.4) (4.4) (4.2) 11.9 (24.3) (31.6) 143.1 (126.3) Within 1 year

purchase contracts purchase contracts Year ended 31 March ended 2010 31 Year Bank loans Obligations under finance leases and hire Other loans Fixed rate at March 31 2011 Variable rate: Cash and cash equivalents Financial investments Eurobonds Bank loans Overdrafts Obligations under finance leases and hire Variable rate at March 31 2011 Net borrowings at March 31 2011 Fixed rate: Eurobonds Interest bearing loans and borrowings Year ended 31 March ended 2011 31 Year and other payables Trade (k) Contractual maturity of financial liabilities (principal and future interest payments) Thetable below summarises financialthematurity 31liabilities theMarch of profile based Group’s at on contractual undiscounted payments: 20. Financial instruments continued March2011 million. 31 For NWL, at the RCV was £3,643.1 March 2011 the pro forma 31 For the at Group, RCV million. On this basis, the gearing for the Group ratiosfor NWL. were 63% and 56% was £3,318.4

continued Notes to the to Notes consolidated financial statements Subordinated loan stock Interest bearing loans and borrowings and other payables Trade (l) Maturity profile of financial assets and liabilities (carrying value) March ended 2011 31 Year

120 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 121 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk £m £m Total Total (6.8) (8.7) (2.6) (1.5) 15.8 14.0 75.0 174.8 (273.7) (455.4) (274.2) (102.4) (628.9) 31.3.2010 31.3.2010 (1,633.5) (2,262.4) (1,341.7) – – – £m £m (6.8) (0.4) (1.0) 11.3 35.0 5 years (70.0) (80.2) (168.0) (455.4) (594.3) More than 31.3.2011 (1,497.2) (1,321.0) – – – – – – £m (0.5) (0.3) (4.5) (4.3) (21.2) (26.3) (10.0) (14.5) 4-5 years – – – – – £m 0.2 (1.1) (0.3) (4.5) (4.1) (21.2) (26.7) (10.0) (14.3) 3-4 years – – – – – £m 0.5 (1.7) (0.3) (4.5) (4.2) (21.1) (27.3) (10.0) (14.0) 2-3 years2-3 – – – – – £m 0.9 (2.3) (0.3) (4.4) (4.1) (24.5) (31.2) 1-2 years1-2 (171.7) (175.2) – – £m 1.1 (2.7) (0.4) (2.5) (1.5) (4.3) (4.0) 15.8 (17.7) (24.8) 174.8 183.4 Within 1 year purchase contracts hire purchase contracts Bank loans Obligations under finance leases and hire Other loans Fixed rate at 31 March 2010 31 at Fixed rate Variable rate: Cash and cash equivalents Short term cash deposits Financial investments Eurobonds Bank loans Overdrafts Obligations under finance leases and March 2010 31 at Variable rate (n) Borrowing(n) facilities The Group has various undrawn committed borrowing facilities. The facilities March, in respect available 31 at of which all conditions precedent been have are as follows: met, (m) Currency(m) exposures after taking account into the effects forward of foreign exchange contracts, the Group March had no 2011, 31 At £nil). currency exposures (2010: Net borrowings at 31 MarchNet borrowings 2010 31 at The variable net borrowings rate comprise sterling denominated bank borrowings and deposits that bear interest months LIBOR. based rates at upon 12 up to 20. Financial instruments continued March ended 2010 31 Year Fixed rate: Eurobonds Subordinated loan stock Expiring in less than one year £m (6.8) (1.5) 15.8 14.0 (12.5) 174.8 136.4 (151.2) (111.1) (559.5) 31.3.2010 31.3.2010 (2,305.6) (1,804.0) – Fair value £m (9.8) (1.9) (1.4) 12.9 143.1 153.9 (155.5) (110.7) (541.3) 31.3.2011 (2,409.9) (1,899.2) £m (6.8) (1.5) 15.8 14.0 (12.5) 174.8 136.4 (151.2) (111.1) (550.5) 31.3.2010 31.3.2010 (2,289.7) (1,797.1) – Book value Book £m (9.8) (1.9) (1.4) 12.9 143.1 153.9 (155.5) (110.7) (530.0) 31.3.2011 (2,314.9) (1,815.5)

(principal of £110.7 million, 2010: £111.1 million) £111.1 million, 2010: (principal £110.7 of 20. Financial instruments continued Fair(o) values of financial assets and financial liabilities A comparison category by book of values, which are all recognised amortised at and cost, fair values the of financial assets Group’s and liabilities31 March is set outat as below:

continued Notes to the to Notes consolidated financial statements (p) Hedges Cash flow hedges – currencyforward contracts nil). the Group held no forward exchange contracts (2010: March 2011, 31 At The difference between the principal value of £2,428.0 million (2010: £2,430.9 million) and the carrying £2,430.9 The difference value of million between (2010: the principal value £2,428.0 of million) and a £14.7 million) million are unamortised (2010: £2,465.5 issue costs £14.3 of million (2010: £2,458.1 million) in excess the original of £49.3 loan proceeds reflectthe to fairvalue millionof loans (2010: credit £44.4 of subsidiaries by owed acquired in 2003. In the absence of an openly traded market value for the index linked bonds with a book value of £477.3 millionIn the absence an of openly traded market value for the indexlinked bonds with a book value £477.3 of the fair value million), the at balance sheet £455.4 has date been calculated considering by (2010: the remaining the relevantdebt maturity, UK index linked gilt and an rate appropriate credit spread reference market by to evidence for conventional bonds. The fair values swaps the interest and of rate sterling denominated long term fixedand rate index linked debt with been have determined million), reference prices by to available from £1,797.1 million (2010: a book value £1,815.5 of the markets on which the instruments involved are traded. All the other fair values shown been above have calculated discounting by cashat flows prevailing interest rates. Interest rate swaps Interest rate and other payables Trade Eurobonds (principal of £1,788.3 million, 2010: £1,766.4 million) £1,766.4 million, 2010: Eurobonds (principal £1,788.3 of Obligations under finance leases and hire purchase contracts Financial assets: Cash and cash equivalents Financial investments and other receivablesTrade million) £6.8 million, 2010: Subordinated loan (principal stock £1.9 of Short term cash deposits Financial liabilities: Overdraft million) £546.6 million, 2010: Bank loans (principal £527.1 of

122 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 123 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

– – % % £m £m 4.79 4.79 Level 3 Level 3 Level 2.345 2.435 2.345 2.435 Fixed rate Fixed rate

£m £m (9.8) Level 2 (12.5) Level 2 Level

31.5.2011 31.5.2011 15.3.2022 31.5.2011 31.5.2011 15.3.2022 Termination date Termination – – £m Termination date Termination £m Level 1 Level 1 Level

Start date £m Start date £m (9.8) (12.5) 29.1.2009 29.1.2009 15.9.2008 29.1.2009 29.1.2009 15.9.2008 31.3.2010 31.3.2011 level 2: other techniqueslevel 2: for which all inputs which a significant have effect theon recorded fairvalue are observable, either directly or indirectly; and techniqueslevel 3: which use inputs which a significant have effect theon recorded fairvalue that basedare not on observable market data. level 1: quoted (unadjusted) quoted prices in active marketslevel for identical 1: assets or liabilities; − − − At 31 March 2010, the Group held three designated swaps, interest rate as a hedge March future 2010, of 31 interestAt cash flows, for which the Group had firm commitments. Theswapswere to usedconvert variable interestto a payments rate basis.fixed termsrate Thethese of swapswere follows: as GBP 62.5 million GBP 62.5 million million swap was designated asThe highly £100.0 effective. million The swaps effective. were not two £62.5 Notional amount Notional Notional amount Notional GBP 100.0 million 20. Financial instruments continued Cash flow hedgesswap – interest rate the Group held three designated swaps, interest rate as a hedge future of interest cash flows, March 2011, 31 At for which the Group has firm commitments. Theswapswere to usedconvert variable interestto a payments rate basis.fixed termsrate Thethese of swapswere follows: as Liabilities measured at fair value March ended 2011 31 Year Allother financial assets and liabilities are carriedat amortised cost. − − − (q) Fair value hierarchy The Group uses the following hierarchy for determining and disclosing the fair value financial of instrumentsby valuation technique: GBP 62.5 million GBP 62.5 million GBP 62.5 These hedges were designated as highly effective. Interest rate swap Interest rate March ended 2010 31 Year GBP 100.0 million GBP 100.0 Interest rate swap Interest rate During the year to 31 March 2011, there were no transfers between level 1 and level 2 fair value measurements, March During 2011, 31 the year to and no transfers and out into level of 3 fair value measurements. £m £m £m

1.4 As at at As As at 15.8 14.0 51.9 70.0 12.9 140.3 173.3 (111.1) 31.3.2010 31.3.2010 31.3.2010 31.3.2010 (110.7) 31.3.2011 (2,354.4) (2,262.4) (2,347.4) (2,303.5) – – – – – – £m £m £m 4.4 Other Other (6.9) (6.6) 11.0 51.9 70.0 (12.9) (19.8) . As at 31 March 31 at As . non-cash non-cash non-cash non-cash 31.3.2011 movements movements £m £m 7.3 7.2 (1.4) (1.1) 20.9 19.9 81.0 (33.0) (14.4) (21.3) (37.1) (144.8) Cash flow flow Cash Cash flow flow Cash

pages 71 to 84 to pages 71 £m £m As at at As As at at As 15.4 15.8 14.0 92.3 1.4.2010 1.4.2010 1.4.2009 1.4.2009 173.3 160.6 (111.1) (111.7) (2,386.3) (2,354.4) (2,262.4) (2,229.7)

Financial investments million) million, 2009: £2,347.2 Loans (principal £2,319.8 of 21. Authorised21. and issued share capital

continued Notes to the to Notes consolidated financial statements and the conditions for vesting can be found in the directors’ remuneration report remuneration on directors’ the in found canbe vesting for conditions the and The Northumbrian Water Group plc Employee Trust, through Northumbrian Water Share Scheme Trustees Limited, Limited, Scheme Trustees Share Northumbrian through Water Trust, Employee plc Group TheNorthumbrian Water ordinary pence shares 10 in the Company for use under the Company’s 914,518) currently (2010: holds 765,962 LTIP the of features main the of Details LTIP. underthe beenawarded conditionally have shares these of All LTIP. Allotted, called up and fully paid: million ordinary pence shares each 10 of 518.6 Cash and cash equivalents Authorised: million700 ordinary pence shares each 10 of Short term cash deposits Financial investments Loans (principal of £2,317.3 million, 2010: £2,319.8 million) £2,319.8 million, 2010: Loans (principal £2,317.3 of Analysis of net debt as at March 31 2010 Non-cash movements on the loans principal to relate uplift on index linked borrowings and amortisation loan of issue costs offset the amortisation by Non-cash debt of fair value movements for the year. on finance leases relate the inceptionto new finance of leases theon acquisitionof plant and machinery duringtheyear. Finance leases (principal of £110.7 million, 2010: £111.1 million) £111.1 million, 2010: Finance leases (principal £110.7 of million) and the carrying £2,430.9 The difference value of million between (2010: the principal value £2,428.0 of million) and a £14.7 million) million are unamortised (2010: £2,465.5 issue costs £14.3 of million (2010: £2,458.1 million) in excess the original of £49.3 loan proceeds reflectthe to fairvalue millionof loans (2010: credit £44.4 of subsidiaries by owed acquired in 2003. Cash and cash equivalents Short term cash deposits million) million, 2009: £111.6 Finance leases (principal £111.1 of 22. Additional cash flow information Analysis of net debt as at March 31 2011 2011, the share price of the ordinary 10 pence shares in the Company was 332.2 pence (2010: 283.1 pence). the share price 283.1 the ordinary of pence shares 10 pence in the Company (2010: was 332.2 2011,

124 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 125 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk % £m 6.1 5.2 3.7 3.4 3.4 85.3 31.3.2010 31.3.2010 £m 222.3 31.3.2011 The employer contribution was assessed rate using the projected unit method and the following actuarial assumptions: The future service contribution jointly rate payable members by and the employers December from 31 was 2007 pensionable of on average with salaries. the employers22.6% paying Members’ 15.3%. contributions are 7.3% The the most value assets that date recent of At actuarial valuation the December scheme of 31 was at 2007. million and the funding level was 106.1%. £732.3 amounted to The assets the NWPS of are held separately from those the Group of in independently administered funds. 24. Pensions and other post-retirement benefits The Group operates a defined benefit pension scheme, Northumbrian PensionWater Scheme (NWPS or the providingscheme), benefits based on final 1,908pensionable 2011 active 31members March remuneration at to 2,033). (2010: In addition these to commitments, the Group has longer term expenditure plans, which include meet investment to shortfalls in performance and condition, provide and for new demand to and growth within and the water sewerage business. Expenditure contracted for 23. Financial commitments Non-cash movementson the principal loans to relate uplift on index linked borrowings and amortisation loan of issue costs offset the amortisation by Non-cash debt of fair value movements for the year. on finance leases relate the inceptionto new finance of leases theon acquisitionof plant and machinery duringyear. the 22. Additional cash flow information continued The difference between million) and the carrying million the principal £2,458.8 (2009: value £2,430.9 of value of million) and a million £15.4 (2009: million) are unamortised million £2,498.0 (2009: issue£2,465.5 costs £14.7 of million) in excess the original of million £54.6 (2009: loancredit proceeds £49.3 of reflecttheto fairvalue of loans subsidiaries by owed acquired in 2003. Post-retirement increasesPay Pension increases Price inflation Following the 2004 actuarial valuation the employers had prepaid contributions December the scheme to 31 up to The scheme actuary2010. recommended that regular contributions should recommence from 1 January 2011. the Group made an alternative make new proposal, to However, which was accepted the NWPS by Trustees, These payments comprise March 2015. 31 to millioncapital cover the period to injections 1 January £70.0 of 2011 employers’ contributions and the deficitrecovery funding assumed thein finaldetermination. totalling Amounts million been have £22.9 paid in the period, which million of £0.5 was paid a jointly by controlled The entity. million which, along with other payments million an of estimated £1.9 was paid in April 2011 remaining £47.1 earlyrelating to retirements, will bring contributions total million. the scheme A full to actuarial next £49.0 year to hasvaluation commenced. the scheme December of as 31 at 2010 Pre-retirement £m n/a n/a 23.0 20.7 70.7 27.2 66.6 14.3 (14.7) 4.7% 3.7% 3.7% 5.5% 499.3 663.4 (796.5) (133.1) 31.3.2010 31.3.2010 31.3.2010

% 7.5 4.5 6.0 0.5 5.5 3.9 return rate of PCMA/PCFA00 expected 31.3.2010 31.3.2010 Long term

– £m 3.9 20.7 23.0 63.9 71.6 62.1 (46.0) 4.5% 3.5% 2.8% 3.5% 2.8% 5.5% 511.8 713.3 (759.3) 31.3.2011 31.3.2011

– % 7.3 4.3 5.8 3.8 5.5 return rate of PCMA/PCFA00 31.3.2011 expected expected Long term 2 1

Including promotional salary scale. of PCMA00/PCFA00115% (year of birth with medium cohort improvements). – Life expectancy for a member aged 65 – male (years) – Life expectancy for a member aged 65 – female (years) RPI inflationRPI inflationCPI Pension increases RPI linked to Pension increases CPI linked to Discount rate Mortality assumptions Equities The fair valuethe assets of in the NWPS, the present value the liabilities of in the scheme and the long term March were: returnexpected of 31 at rate Notes: 1. 2. Government bonds Property Cash schemeLoan to from Company fair value assets of Total Corporate bonds Present value liabilities of Deficit has been reference set the by yield to on AA MarchThe corporate 2011 discount bonds 31 at (AA rate 15 over extrapolated yearsyears) that date, at which forward a duration reflect 18 to of the durationexpectedtheof benefit payments. The return expected of on equities rate represents premium the a 3% yield of on long term Government The gross redemption The yield long on index linked UK Government was 0.7%. stocks Marchbonds 2011. 31 at to forallow an inflation risk term inflationimplied rate theseby whichyields has3.6% is beenreduced 0.1% by premium. Mortality been have rates tables, based applying on the PA00 medium cohort adjustment 115% of loading mortality to based rates on the year birth of the membership. of Pay increasesPay A qualified usingactuary, revised assumptionsthat are hasconsistent updated19, thewith requirements of IAS Investments been have valued, for this purpose, at the actuarial valuation described March 2011. above as 31 at fair value. The additional disclosures defined regarding benefit the Group’s scheme as required 19 Employee underIAS Benefits, financialandthe relevant impact statements theon are set Group’s out below. 24. Pensions and other post-retirement benefits continued The 389). scheme also has defined a (2010: contribution section which 460had active members31 March2011 at Members salary, with of employers or 5% contributing can or choose contribute either at 7% 4% to either 6%, 3%, depending8% on the member contribution Thecontributions rate. the defined paid to contribution sectiontheby million). £0.6 Group in million the year totalled £0.8 (2010:

continued Notes to the to Notes consolidated financial statements

126 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 127 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk £m £m £m 1.7 1.1 4.5 9.9 4.6 0.1 9.9 4.6 0.6 36.1 14.5 36.1 42.7 (31.6) (80.5) (31.6) (28.5) 209.0 177.4 176.3 796.5 796.5 598.0 710.8 (176.3) (668.1) 31.3.2010 31.3.2010 31.3.2010 31.3.2010 31.3.2007 31.3.2007 £m £m £m 0.6 0.4 0.1 0.4 (6.5) (2.2) 74.0 56.2 10.7 63.3 43.3 13.9 13.5 43.3 13.5 90.5 (93.4) (45.5) (45.5) (63.3) (31.2) 759.3 759.3 796.5 666.7 (576.2) 31.3.2008 31.3.2011 31.3.2011 £m 18.7 478.6 (598.0) (119.4) (205.3) 31.3.2009 – £m 663.4 177.4 (796.5) (133.1) 31.3.2010 31.3.2010 – £m 10.7 (46.0) 713.3 (759.3) 31.3.2011 Changes in the present value the defined of benefit pension obligationsare analysed as follows: Cumulative amounts recognised since adopting the standard Net actuarial gains History experience of gains andlosses: Recognised in (income receivable)/finance costs payable Recognised in the statement comprehensive of income: Actual return on scheme assets Less expected return on scheme assets Other actuarial gains and losses Expected return on planassets Interest cost on plan obligations Past service cost Recognised in operating costs in arriving profit at on ordinary activities before interest Recognised in the income statement: Current service cost The amounts recognised in the income statement and in the statement comprehensive of income for the year are analysed as follows: 24. Pensions and other post-retirement benefits continued The valuation the scheme of liabilities has taken account legislative of changes which mean that future statutory deferred revaluations and pension increasesAs will a consequence, CPI. be linked to increases CPI been have applied for deferred pensions in all sections the scheme of those and sections to where the scheme rules link increases pension the Government’s to increase orders. This has given a reduction rise to in the actuarial valuation the liabilitiesof million. around of £36.0 At 31 March 31 At Actuarial (gain)/loss on obligations Benefits paid Present value funded of defined benefit obligations Contributions plan by participants At 1 AprilAt Past service cost Interest cost on plan obligations Fair value assets of Current service cost Present value defined of benefit obligation Experience adjustments arising on plan liabilities (Deficit)/surplus Experience adjustments arising on plan assets £m 4.2 0.1 31.6 (28.5) 663.4 478.6 177.4 31.3.2010 31.3.2010 £m 0.1 10.7 45.5 24.8 (31.2) 713.3 663.4 31.3.2011

At 31 March 31 At The effect increasing of the assumed life expectancies one by year increase would be to the value liabilities of by around 2.8%. The disclosures been have prepared using the mortality assumptions formal for the adopted 2007 valuation – namely the PCMA/PCFA00 tables, loading mortality applying to a medium rates cohort adjustment with a 115% based on the year birth of the membership. of These assumptions imply an assumed life expectancy for a member years) for females. 23.0 years) for males years (2010: and 23.0 20.7 years (2010: 20.7 of Marchaged 2011 65 31 at There is also uncertainty around life expectancy for the UK population. The value current of and future pension benefits will depend on longhow they are assumedto be in payment. A reduction in the net discount will rate increase the assessed value liabilities, of as a higher value is placed on benefits paid thein A future. rise thein net discount will an rate have opposite effectof similar magnitude. The million. would change the liabilities around by overall £14.8 effect a change of in the net discount 0.1% of rate The costs a pension of arrangement require estimates regarding future experience. The financial assumptions reporting used for IAS 19 are the responsibility These the directors of the Company. assumptions of reflect market conditions the at balance sheet Changes date. in market conditions whichresult in changes in the net discount (essentiallyrate the difference between the discount and the rate assumed increases of rates salaries, of deferred pension revaluation or pensions can a significant have in payment), effect thevalueon theof liabilities reported. Sensitivity assumptions to key IAS 1 requires disclosure the sensitivity of the results the of methods to and assumptions used. Contributions plan by participants Benefits paid The Group through its subsidiary, AquaGib, also operates a non-contributory defined benefit scheme. The deficit The Group million). made £2.8 contributions million (2010: under was £2.1 local GAAP, March 2011, 31 at the defined million) to £0.8 benefit pension scheme. million (2010: amounting £1.0 to Actuarial gain on plan assets Expected return on plan assets Contributions employer by At 1 AprilAt 24. Pensions and other post-retirement benefits continued Changes in thefair value plan of assets are analysed as follows:

continued Notes to the to Notes consolidated financial statements

128 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 129 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

3 29% 24% 2.1% 4.7% Number 4,724 31.3.2010 31.3.2010 31.3.2010 414,679 272.50p (238,686) (123,734) 1,190,034 1,242,293 3

21% 28% 1.5% 4.0% 31.3.2011 328.70p 4,649 Number 31.3.2011 378,503 (351,299) (148,556) 1,242,293 1,120,941 Share price award at Expected FTSE Index volatility 250 Risk free interest rate Expected option life (years) of The expected these life of options is based on historical data and is necessarily not indicative patterns exercise of The expected volatility occur. that may reflectsthe assumptionthatthe historicalvolatility is indicativeof future trends, which also may necessarily not be the actual outcome. Dividend yield Expected share price volatility Outstanding 1 April at The following table illustrates the movements in conditional share during awards the year. Granted during the year 25. Incentive Long Term Plan directors executive and senior managers receive, may the at discretion the Remuneration of Under the LTIP, Committee, annualconditional shares can Further of awards be found in the in Company. the details the LTIP of remunerationdirectors’ report. Forfeited/lapsed during the year Exercised Outstanding March 31 at Exercisable March 31 at The fair valueconditional of share granted awards was estimated using the Monte-Carlo model. The significant theinputs model to were as follows: For the conditional awards outstanding as at 31 March 2011, the weighted average remaining contractual life is For the conditional outstanding awards March 2011, as 31 at years). 1.8 years (2010: 1.7 The weighted average share price at the date of exercise for the conditional share awards is 324.79 penceThe weighted average share price for the exercise conditional of the at date share is awards 324.79 pence). 268.71 (2010: The weighted average exercise price throughout the year was £nil (2010: £nil). TheThe £nil). fair weighted average value price exercise conditional of throughout share the year was £nil (2010: million). £0.1 grantedawards during the year was £nil (2010: £m 4.7 0.1 (2.7) 14.9 (14.9) Number 241.0 (242.9) (1,805) 31.3.2010 31.3.2010 31.3.2010 31.3.2010 143,201 117,687 134,397 (107,078) £m 4.7 0.2 (2.7) 14.9 (14.9) 241.4 Number (243.2) (3,383) 31.3.2011 31.3.2011 (95,155) 160,182 143,201 115,519 , under SIC 12, two companies, under are consolidated SIC 12, as special purpose entities.

Outstanding March 31 at The summarised combined financial thestatementsof special purpose entities follows: are as Bakethin Finance plc was established for the purpose issuing of guaranteed May 2004, secured Eurobonds. On 12 Bakethin Finance million plc issued guaranteed of £248.0 secured bonds maturing January Bakethin 2034. Finance plc used the proceeds the bond of issue make Reiver a loan to to Finance Limited fund to the consideration given that company Northumbrian by to Limited for the Water securitisation the cash of flows receivable fromthe EA under Resources the Water Operating Agreement Kielder relating to transfer Water scheme. The assignment isa period for 30 of years. 26. Special purpose entities underAs noted accounting policy 1(b) The principal special purpose entity is Bakethin Holdings Limited, the shares in whichare owned Bakethin by TheCharitable other special Trust. purpose entity is Bakethin Finance which plc, is a wholly owned subsidiary of Bakethin Holdings Limited. Balance sheet: Investments Current liabilities Current assets Non-current liabilities Net assets Finance costs payable Income statement: Finance costs receivable Outstanding 1 April at The following table illustrates the movements in conditional share during awards the year. 25. Incentive Long Term Plan continued Share Incentive Plan The SIP scheme provides one free matching share every for three shares purchased an employee. by Shares for the SIP are purchased and dividends market at price theTrustee by are paid in cash directly participants. to

continued Notes to the to Notes consolidated financial statements Granted during the year Exercised Forfeited during the year

130 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 131 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

£m £m 8.2 8.7 1.2 0.2 0.2 1.6 owed to Amounts 31.3.2010 31.3.2010 related party £m £m 0.6 0.5 0.2 0.5 2.1 1.4 owed by Amounts 31.3.2011 related party £m 9.6 party 10.2 Purchases from related £m 0.1 0.1 Sales to to Sales related party . Trading transactions 27. Related27. parties the Group transactions, enteredDuring into in the ordinary the year, course business, of with other related parties. and entered trading into balancesTransactions outstanding March between 31 at the Group and its associates and joint ventures, are as follows: Related party: Jointly controlled entities 2011 Remuneration management of key personnel The remuneration the directors of is includedwithin the amounts disclosed Further below. information about the remuneration individual of directors is provided in the audited part remuneration the directors’ of report on pages Outstanding balances due from related parties are expected be settled to within 60 and days amounts due to related parties are in respect leasing of arrangements, where the amounts will owed specifically relate termstheto the lease.of At 31 March 2011, the Group had a short term cash deposit with the Northumbrian March 2011, Pension 31 At Scheme Water of million). £14.7 £nil (2010: 2010 Purchases million) in respect from £3.3 jointly controlled capital of entities purchases include million £2.5 (2010: £6.2 million) million) respectin of operating leases, million£6.3 (2010: £0.1 million(2010: under finance leases,£0.1 million) respectin in respect£0.6 otherof costs purchases. of payable under finance million (2010: leases and£0.7 84 80 to Post employmentPost benefits Share based payments 28. Post balance sheet event million through a US private placement the Group borrowed £100.0 facility year with a 10 April 2011, On 14 millionmaturityOn loans Northumbrian the two same to £62.5 a coupon at date, 5.82%. of Services Limited, were repaid. maturing in May 2011, Short term employee benefits

select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; whetherstate applicable United Kingdom Accounting Standards been have subject followed, any material to departures disclosed and explained in the financial andstatements; prepare the financial statements theon going concern basis unless it is inappropriateto presume thatthe Company will continue in business. − − − − Company requires law the prepare directors to financial statementsfor each Under financial law thatthe year. directors elected prepare have to the financial statements in accordance with United Kingdom GenerallyAccepted Accounting Practice (United Kingdom Accounting Standards and applicable Under the Company law). Law, directors must approve the not financial statements unlessthey are satisfied that they a give true and fair of view affairs of the state the Company of and the profit of or losstheof Companyforthat period. In preparingthose financialthe statements, directors required are to: The directors are responsible for keeping adequate accounting records that are sufficientto show explainand the transactionsCompany’s and disclose with reasonable accuracy any at time the financial positiontheof Company enableand to ensure them to that the financial statements comply thewith Companies2006.Act They are also responsible for safeguarding the assets the Company of and hence for taking reasonable steps for the prevention and detection fraud of and other irregularities. The directors are responsible for preparing the annual report and the financial statements in accordance with applicable and law regulations. − − − −

Statement directors’ of responsibilities in relation to theto parent Company financial statements

132 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 133 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk . The financial , the directors are

Companies Act 2006; and the information given in the report Directors’ and business review for the financialyear for whichthe financial statements are prepared is consistent with the parent Company financial statements. the part the remuneration Directors’ of report be audited to has been properly prepared in accordance with the give a true affairs and March fair the Company’s of view 2011; the state of as 31 at beenhave properly prepared in accordance with UnitedKingdom Generally Accepted Accounting and Practice; beenhave prepared in accordance with the requirements the Companies of Act 2006. − − − − − − − Opinion on other matters prescribed by the Companies Act 2006 In our opinion: Respective responsibilities of directors and auditors As explained morefully in the Statement responsibilities directors’ of set out on page 132 Opinion on financial statements In our opinion the parent Company financial statements: − − − This report is made members, in solely accordance the Company’s as the to a body, of with Chapter Part 3 of 16 Companies Act 2006. Our audit work has been undertaken members the Company’s might so to that we state reportthose matters them the fullest in are an to required we auditor’s and state for no other extent to purpose. To do accept not we permitted or assume law, responsibility by anyone otherthan to the Company and the members for our auditCompany’s work, as for this a body, report, or for the opinions formed. have we 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 causedby This includesfraud or error. an assessment whether of: the accounting policies are appropriate the parent to circumstancesCompany’s and been have consistently applied and adequately disclosed; the reasonableness of significant accounting estimates the by made overalldirectors; and the presentationthe of financial statements. reporting framework that has been applied in their preparation is applicable and law United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). responsible for thepreparation the parent of Company financial statements forand being satisfied that they give a true Our and responsibility fair view. audit is to the parent Company financial statements in accordance with applicable and law International Standards on Auditing (UK and Ireland). Those standards require comply us to with the Auditing Ethical Practices Standards Board’s for Auditors. Independent auditors’ report to the members of Northumbrian Water Group plc auditedhave the parentWe Company financial statementsof Northumbrian Water Group forplcyear the ended which comprise the parent Company balance March 2011 sheet31 10 and the 1 to related notes

Company financial statements Reportthe of auditors on the

adequate accounting records or returns been not the have adequate parent by for our kept Company, audit been not have received from branches visited not us; by the parent Company financial statements andthe parttheremuneration of Directors’ report to be audited are innot agreement with the accounting records and returns; certain disclosures remuneration directors’ of specified by or law are made; not received not have we all the information and explanations require we for our audit.

− − − − continued Debbie O’Hanlon (Senior statutory auditor) For and on behalf of Ernst LLP & Young Statutory Auditor Newcastle upon Tyne 2011 May 31 Other matters reported have We separately on the Group financial statementsof Northumbrian Water Group forplc theyear Marchended 2011. 31 Matters on which we are required to report by exception report nothing to have We in respectthe following of matters where the Companies Act 2006 requires report us to in our opinion: if, you to − − − −

Company financial statements Reportthe of auditors on the

134 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 135 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk £m 4.3 (2.0) (2.8) 12.0 16.3 47.8 51.9 13.5 544.2 446.5 544.2 (491.9) 31.3.2010 31.3.2010 1,036.1 1,022.6 1,022.6 £m 3.5 (1.7) 59.1 62.6 84.1 51.9 (93.2) (30.6) 580.8 446.5 580.8 (490.0) 31.3.2011 1,070.8 1,101.4 1,101.4 4 5 6 9 9 9 7 8 Notes Heidi Mottram Chief Executive Officer

Creditors: amounts falling due within one year Cash bank at Equity shareholders’ funds Sir Derek Wanless Approved by the Board on 31 May 2011 and signed on its behalf by: May 2011 Approved the Board by on 31 Chairman Share premium account Profit Profit and loss account Fixed assets Investments in subsidiary undertakings

As at 31 March 2011 March 31 at As Company balance sheet Treasury sharesTreasury Total assetsTotal less current liabilities Net current (liabilities)/assets Creditors: amounts falling due after more than one year Current assets receivableDebtors: within one year Net assets Capital and reserves Called up share capital

3. Profit attributable to members of the parent Company million). £67.7 The profit dealt with thein financial£106.9(2010: million of statements the parent Company is 1. Accounting1. policies Basis(a) of accounting accounting and law Kingdom applicable United accordance with in been prepared have Thefinancialstatements Accounting 18: FRS of requirements the with accordance in been reviewed policieshave Theaccounting standards. financial Company’s the to relation in relevant be policiesto accounting following consider the Thedirectors Policies. of statements financial consolidated the includedin are financialstatements TheCompany’s statements. Northumbrian the Company Group Accordingly, plc. has Water taken advantage from the exemption of publishing LLP for non-auditFees Ernst services paid & Young to the Companyto itself are disclosed not in the individual financial thestatementsof Company because Group financial statementsare prepared which are required to disclose such fees on a consolidated basis. 2. Auditors’ remuneration £95,000). (2010: was £97,000 remunerationAuditors’ for the year March ended 2011 31 (d) Interest bearing loans and borrowings Allloans and borrowings are initially the at amount stated the net of proceeds, being fair value the consideration of received issue net of costs associated with the borrowing. Finance costs (including issue the are taken costs) to income statement the the term debt over of a constant at on the balance rate sheet carrying amount. The carrying amount is increased the finance by charges amortised andreduced by payments made respectin theof accounting period. (c) Taxation(c) Corporation tax is based on thefortheyear profit as adjustedfor taxation purposes usingof taxthe rates enacted theat balance sheet Provision is made date. for deferred tax in respect all of timing differences originated that have but reversed not the at balance sheet that will date result in an or less, obligation a right pay more, pay tax to to in future periods. Deferred tax is calculated the at tax that are rates expected apply to in the periods in which timing differences are based expected reverse, to on tax and rates enacted laws or substantively enacted the at balance sheet Deferred date. tax assets are recognised only the extent that the directors to consider that it is more likely than that there not will be suitable taxable profits from whichthe futurereversal theof underlyingtiming differences can be deducted. Notes to the to Notes Company financial statements (b) Fixed asset investments Fixed asset investments are their at stated purchase less cost, any provision for impairment. The financial statements been have prepared on a going concern basis which assumesthatthe Company will adequatehave funding meet its to liabilities the as fall they due in the foreseeable March 2011 future. As 31 at The directors million). have net currentCompany had assets net £13.5 current of liabilities million (2010: £30.6 of reviewed cashrequirements flow and are confident that they will be to able meet thesefrom available.funds the directors believeAccordingly, it is appropriate prepare to the financial statements on a going concern basis. a profit and loss account and cash flow statement and from disclosing related party transactions with its wholly- its party with related transactions disclosing from and statement flow cash and account loss and profit a 29 FRS by otherwise required information the disclosing from exempt also is subsidiaries.TheCompany owned included, is Company the which in financialstatements, consolidated the as Disclosures, FinancialInstruments: Disclosures. FinancialInstruments: 7 underIFRS Group the for disclosures equivalent provide

136 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 137 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk £m £m 4.0 0.3 4.3 78.8 31.3.2010 31.3.2010 1,022.6 1,101.4 £m 3.3 0.2 3.5 31.3.2011 loans instruments Holding investments of and and sewerage services Water Holding finance of services water Waste services water Waste services water Waste services water Waste Water and sewerage services Water services water Waste Aid funded project work Business activity Business 75 67 100 100 100 100 100 100 100 100 Proportion Proportion nominal of value of issued shares held by Group (%) Ordinary shares £1 of Ordinary shares £1 of Ordinary shares £1 of Ordinary shares £1 of Ordinary shares £1 of Ordinary shares £1 of Ordinary shares £1 of Ordinary shares £1 of Ordinary shares £1 of Ordinary shares £1 of Description of shares held England and Wales England and Wales Scotland Scotland Scotland Scotland Gibraltar England and Wales Englandand Wales Belgium Country of incorporation or or incorporation of Country registration and operation Limited Finance plc Services plc Levenmouth Treatment Services Limited Limited Operations Limited Limited Projects Limited Northumbrian Water Northumbrian Water Caledonian Environmental Caledonian Environmental EnvironmentalAyr Services EnvironmentalAyr Services AquaGib Limited Name of undertaking Northumbrian Services During the year, the CompanyDuring increased the year, its shareholding Caledonian in both Environmental Services plc and Caledonian a nominal at Environmental Services cost. 100% Levenmouth to Treatment Limited from 75% 5. Debtors At 1 AprilAt 2010 Additions March 31 At 2011 Additions in the year represent the acquisition from a shares of in a subsidiary Ltd., Water Atlantic company, subsidiary Three Rivers company, Finance Ltd. Northumbrian Water SA Agrer NV Allsubsidiaries listed above are indirectly held. The directors consider give full that to particulars all of subsidiary and associated undertakings would a statement lead excessive of to length. A full list the Company’s of subsidiaries is latest attached annual the Company’s return filed to at Companies House. 4. Investments in subsidiary undertakings Amounts subsidiary by owed undertakings Other Amounts subsidiary by owed undertakings include amounts receivable for the provisional surrender tax of losses million). £2.3 million (2010: amounting £1.6 to – £m £m £m £m

2.6 0.2 2.8 51.9 70.0 491.9 491.9 31.3.2010 31.3.2010 31.3.2010 31.3.2010 31.3.2010 £m £m £m £m 0.1 0.1 93.2 51.9 93.0 70.0 490.0 490.0 . As at 31 March 31 at As . 31.3.2011 31.3.2011 31.3.2011 31.3.2011 pages 71 to 84 to pages 71

6. Creditors: amounts falling due within one year

continued Notes to the to Notes Company financial statements and the conditions for vesting can be found in the directors’ remuneration report remuneration on directors’ the in found canbe vesting for conditions the and The Northumbrian Water Group plc Employee Trust, through Northumbrian Water Share Scheme Trustees Limited, Limited, Scheme Trustees Share Northumbrian through Water Trust, Employee plc Group TheNorthumbrian Water ordinary pence shares 10 in the Company for use under the Company’s 914,518) currently (2010: holds 765,962 LTIP the of features main the of Details LTIP. underthe beenawarded conditionally have shares these of All LTIP. Accruals and deferred income Creditors:7. amounts falling due after more than one year Allotted, called up and fully paid: million ordinary pence shares 10 of 518.6 Authorised: million700 ordinary pence shares 10 of 8. Authorised and issued share capital Amounts subsidiary to owed undertakings The loan bears LIBOR. interest of linked The to a rate loan will continue until such time as terminated by mutual agreement. Loans are repayable as follows: whollyNot repayable withinyears five Amounts subsidiary to owed undertakings Trade creditors Trade 2011, the share price of the ordinary 10 pence shares in the Company was 332.2 pence (2010: 283.1 pence). the share price 283.1 the ordinary of pence shares 10 pence in the Company (2010: was 332.2 2011,

138 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 139 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk £m 0.1 (0.3) (0.3) 47.0 67.7 47.8 84.1 (66.7) (70.3) 106.9 Profit and loss account account loss – – – – – – – £m Share account account premium 446.5 446.5 446.5 – – – – – £m 0.3 0.3 (2.3) (2.0) (1.7) shares shares Treasury Treasury 9. Reserves Profit fortheyear Profit Share-based payment At 1 AprilAt 2009 Exercise of LTIP awards Exercise LTIP of Dividends paid At 31 March 2010 31 At fortheyear Profit Dividends paid Exercise of LTIP awards Exercise LTIP of The Company is party a cross guarantee to arrangement with other Group companies in respect bank of million in respect thefacilities. arrangement of Overdrafts£27.2 amounted outstanding March to 2011 31 at The directors million). do expect not £0.9 any loss arise to as a result this arrangement. of (2010: The Company is in guarantor the respect EIB to borrowings of Northumbrian by Limited. The Water loan principal million). £362.4 million (2010: amounted £344.7 to outstanding March 2011 31 at 10. Commitments10. The Company hasissued letters continuing of support subsidiary to companies with net liabilities amounting to These £nil). million) and £8.3 subsidiary net current liabilities £nil companies million of (2010: (2010: are £11.9 expected meet their to working capital requirements from operating cash flows. At 31 March 31 At 2011 .

) . www.capitashareportal.com Share portal ( You can manage your shareholding shareholding your manage can You our of website the through online, by Registrars, Capita registrar, portal. share the for registering online secure, free, provides This shareholding. your to access include: Facilities Electronic communications This register allows your email to you address enable to receive to you shareholder communications such as annual reports via the internet rather than post. by Account enquiry can access your personalYou shareholding, including share transaction dividend history, payment history obtain shareholdingand an to up-to-date valuation. Amendment of standing data This change allows to you your registered postal address and change add, or delete dividend mandate instructions. can also download fromYou this forms site such as change address, of transfer stock and dividend mandates and buy and sell shares in the Company. use these any of facilities, pleaseTo Capita log on to Registrars’ website www.capitashareportal.com at If you have any queries have you If about the above facilities, please contact the Capita share portal helpline on pence (calls per 664 cost minute 10 0391 plus 0871 or network extras) overseas 8639 3367, +44 (0)20 emailby [email protected] at Interim dividend payment AGM Interim Management Statement Ex-dividend date Record date Final dividend payment Half-yearly announcement Ex-dividend date Record date

January January27 2012 28 July 28 August August 10 August 12 September 09 September November 30 November December December 14 December16 July July 28 Financial calendar 2011 Shareholder information Shareholder

140 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 141 Financial statements

Capita share dealing services Shareholder analysis

Capita Registrars provides a low cost share 2011 statements financial and report Annual plc Group Water Northumbrian Number of shareholders by size of holding dealing service. Further information is available at as at 31 March 2011 www.capitadeal.com, or by telephoning 0871 664 0445 (calls cost up to 10 pence per minute plus network 2 1 extras). This enables you to deal in the shares of the 6 Company and other companies for which Capita acts 8 34 Shareholders with 1–1,000 shares as registrar, provided you are already a shareholder in Shareholders with 1,001–5,000 shares the relevant company, and it offers the share deal Shareholders with 5,001–10,000 facility to its shareholders. shares Shareholders with 10,001–100,000 shares International payment services 49 Shareholders with 100,001–1,000,000 shares Capita Registrars has partnered with Travelex, the Shareholders with over 1,000,000 world’s largest specialist provider of commercial shares international payment services, to provide a service that will convert your sterling dividends into your local Breakdown of shareholdings by type currency at a competitive rate. They can either arrange as at 31 March 2011 for these funds to be sent to you by currency draft or 2 can pay them direct into your bank account. For further 2 information telephone +44 (0)20 8639 3405 (from 6 outside the UK) or 0871 664 0385 (from within the UK) 27 between 9.00am and 5.30pm in the UK. Calls cost 10 pence per minute plus network extras. Individuals Ontario Teachers’ Pension Plan Board ShareGift Nominee accounts 63 You may donate your shares to charity free of Investment trusts, pensions funds and charge through ShareGift. Further details are other institutions available at www.sharegift.org.uk or by telephoning Banks and bank nominees +44 (0)20 7930 3737. Disability Discrimination Act Dividend re-investment plan If you wish to receive a copy of our report on audio The Company receives occasional requests from tape, in braille or in a large text version, please shareholders wishing to receive their dividends in the telephone us on +44 (0)191 301 6701, or email us form of shares instead of cash. There are costs involved at [email protected]. in providing this service, and at present it would not be cost effective. This issue is kept under regular review. For general queries about your shares, please contact Capita Registrars: Beneficial owners of shares with The Registry ‘information rights’ 34 Beckenham Road Please note that beneficial owners of shares who have Beckenham been nominated by the registered holder of those Kent BR3 4TU shares to receive information rights under section 146 Tel: 0871 664 0300 (calls cost 10 pence per minute plus of the Companies Act 2006 are required to direct all network extras) communications to the registered holder of their shares From overseas: +44 (0)20 8639 3399 rather than to the Company’s registrar, Capita Fax: +44 (0)1484 600 911 Registrars, or the Company. Email: [email protected] Web: www.capitaregistrars.com www.nwg.co.uk . . www.fsa.gov.uk/pages/consumerinformation Details any share of dealing facilities that the Company endorses willbe included in company mailings. More detailed information on this or similar activity can be found on our Consumer Information section at General Counsel and Company Secretary Martin Parker Registered office Northumbrian Group plc Water Northumbria House Abbey Road Pity Me 5FJ Durham, DH1 0845 604 7468 Tel: Group websites www.nwg.co.uk www.nwl.co.uk www.eswater.co.uk www.nw-ss.co.uk www.nwpropertysolutions.co.uk www.visitkielder.com www.agrer.com Northumbrian Water main switchboard 0845 604 7468 Tel: Northumbrian Water customer queries 1100 Customer services: 0845 717 Customer 5566 accounts: 0845 733 Essex & Suffolk Water customer queries Customer services: 0999 0845 782 Customer 0111 accounts: 0845 782 If you deal you If with an unauthorisedyou firm, will not be eligible receive to payment under the Financial Services Compensation Scheme. The can FSA be contacted by completing an online form http://www.fsa.gov.uk/ at Pages/Doing/Regulated/Law/Alerts/form.sthml . ; and and contacting the firm usingthe details

make sure get you the correct name the person of and organisation; check are that they properly authorised the FSA by before getting visiting involved by www.fsa.gov.uk/ register/ on the register; report either the matter the FSA calling to by 0845 or visiting www.fsa.gov.uk/pages/606 1234 consumerinformation if the calls persist, hang up. − − − − It isIt just not the novice that has investor been duped many the victims of in this way; had been successfully investing for several years. Shareholders are advised be veryto wary any unsolicited of advice, offers buy to shares a discount at or offers free of company reports. receive you If any unsolicited investment advice: Annual General Meeting The Notice Meeting, of information about to the AGM and the proxy cardvoting are be held July on2011 28 enclosed with these financial statements. Shareholder questions and special needs requests should be addressed Secretariat to our at registered office 6701, 301 address, raised telephone by on +44 (0)191 or sent email by [email protected] to Warning to shareholders – boiler room scams In recent years, many companies become have aware that their shareholders received have unsolicited phone calls or correspondence concerning investment matters. These are typically from overseas based who target‘brokers’ UK shareholders, offering sell to them what often turn be out worthless to or high risk shares in US or UK investments. These operations are These cancommonly ‘brokers’ known as ‘boiler rooms’. be very persistent and extremely persuasive, and a 2006 survey the Financial by Services Authority (FSA) has reported that the average amount lost investors by is around £20,000. − − − − To requestTo financial statements and other Company literature please contact Communications: 6734 301 +44 (0)191 Tel: Email: [email protected] For general shareholder queries please contact Secretariat: 6701 301 +44 (0)191 Tel: 6705 301 Fax: +44 (0)191 Email: [email protected]

continued Shareholder information Shareholder

142 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk

Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk 143 Notes Notes

144 Financial statements Northumbrian Water Group plc Annual report and financial statements 2011 www.nwg.co.uk This annual report has been printed using vegetable based inks on uncoated recycled paper stock. All paper stock used for the production of this annual report is environmentally-friendly ECF (elemental chlorine free) wood free paper and board with a high content of selected pre-consumer recycled material and post-consumer reclaimed material. This product is completely bio-degradable and recyclable. www.nwg.co.uk

Northumbrian Water Group plc

Northumbria House Abbey Road Pity Me Durham DH1 5FJ

Tel: 0845 604 7468 Fax: 0191 301 6202

Registered in England & Wales Registered number 4760441