SOUTH STAFFORDSHIRE PLC STAFFORDSHIRE SOUTH REPORT AND ACCOUNTS 2004 ACCOUNTS AND REPORT

REPORT AND ACCOUNTS 2004 CONTENTS

1 Highlights 2 Chairman‘s Statement 6 Operational Review 17 Financial Review 19 Operating and Financial Analysis 22 Corporate and Social Responsibility 24 Board of Directors 26 Directors’ Report 28 Corporate Governance 31 Remuneration Report 36 Directors and Advisors 37 Statement of Directors’ Responsibilities 38 Independent Auditors’ Report 40 Consolidated Profit and Loss Account 41 Consolidated Balance Sheet 42 Company Balance Sheet 43 Supplementary Statements 44 Consolidated Cash Flow Statement 45 Notes to the Consolidated Cash Flow Statement 46 Notes to the Accounts 67 Four Year Summary 68 Shareholder Analysis 68 Financial Calendar HIGHLIGHTS

• Listing of South Staffordshire Plc on 6 April 2004 following demerger from Homeserve

• Results for the year ahead of expectations

• 5% increase in regulated water supply operating profits which represents 80% of the Group

• Levels of service and efficiency amongst highest in the water industry

• Final Business Plan submitted to OFWAT for 2005-2010 price review. Final determination in December 2004 will provide five years of certainty

• Expanded customer base in the Echo customer management business

2004 Turnover £72.8m Profit before tax £14.5m Earnings per share 83.1p Dividend per share 46.0p Net debt £94.1m

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 1 CHAIRMAN’S STATEMENT

was, as expected, 14% lower. Regulated water supply performed well increasing operating profits by 5% to £16.8m (2003: £16.0m). However, as explained in the Listing Particulars sent to shareholders in relation to the demerger, operating profits in our non-regulated businesses reduced to £4.1m (2003: £5.4m). This was a combination of no major licence sale of our Rapid software (which in 2003 amounted to £1.2m) and Underground Pipeline Services being affected by the planned lower levels of activity for South Staffordshire David Sankey Water, its main customer. This has been partly offset by EXECUTIVE CHAIRMAN growth in Echo. As expected the interest charge increased to £6.3m (2003: £4.6m) to reflect the full year impact This is the first annual report of the newly listed South of the £85m index-linked bond issued in August and Staffordshire Plc following its demerger from Homeserve September 2002. plc (formerly South Staffordshire Group Plc) on 6 April 2004. Earnings per share for the year amounted to 83.1p. The Board is proposing a final dividend per share of 34.4p, The Group comprises South Staffordshire Water, a which combined with the interim dividend of 11.6p paid regulated water supply business which has been on an inter-group basis to Homeserve plc, makes a total supplying water to the Midlands for 150 years, together dividend for the year of 46.0p. This total dividend of with the complementary non-regulated activities of Echo, £5.9m is covered 1.8 times by earnings of £10.5m. Rapid, Underground Pipeline Services and Aqua Direct. The demerger from Homeserve has created a distinct Net debt at 31 March 2004 of £94.1m (2003: £93.2m) business profile and identity for South Staffordshire and comprises debt in the regulated business of £105.7m, provides greater focus for the business and management. being 66% of its regulated asset value of £161m, and cash It allows the Group to maintain its own appropriate capital in the non-regulated businesses of £11.6m. structure and dividend policy, thus providing a distinct investment case for investors seeking a stable income REGULATED WATER SUPPLY stream with some growth opportunities. South Staffordshire Water, our regulated water supply business, represents approximately 80% of the Group’s The past year has been a successful one for the newly turnover and operating profits. It supplies clean listed Group with the regulated water business continuing water, but not sewerage services, in the Midlands to to provide amongst the highest levels of service and a population of 1.2 million and to 38,000 commercial efficiency in the industry as measured by OFWAT, coupled customers. Of the 22 water companies in England and with low charges. The Echo customer management Wales, South Staffordshire Water had the second lowest business continues to expand its customer base outside average annual household bill at £89 for 2003/4, 20% its core utility business. below the national average. The Company was assessed by OFWAT as second in the industry for levels of services GROUP RESULTS in 2002/3. Provisional results submitted to OFWAT show a Our results for the year ended 31 March 2004 are ahead higher score for 2003/4, whilst water quality is expected to of expectations and provide a sound base for the future. remain at 99.9% compliance. In the year ended 31 March 2004 turnover (including share of joint ventures) reduced by 1% to £72.8m (2003: The past year has seen continued efficiency savings, £73.3m). Profit before tax of £14.5m (2003: £16.8m) despite increased pumping and repair costs caused by

2 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 the dry summer, and the operating cost base has been four year contract with South Staffordshire Water in reduced by 17% in real terms since 1998. The Company competitive tender for mains renewal, although activity is ranked second in the industry by OFWAT for operating will remain low until the start of the next five year review efficiency. period in 2005.

The Final Business Plan in respect of the Periodic Review EMPLOYEES of prices by OFWAT for the five years from 2005 to 2010 I would like to thank all managers and staff for their was submitted to OFWAT on 7 April 2004. This proposes hard work in achieving this successful year and for their a 40% uplift in mains renewal activity at an additional support during the demerger process. On a very sad cost of £2m per annum, capital expenditure of £104m note, David Penna, the Managing Director of South for the five year period (net of capital contributions), Staffordshire Water, died on 17 December 2003. David broadly in line with the past five years, and an increase was just 54 and had made a significant contribution to in water charges of 19.4% in real terms over the five year the business in his seven years as Managing Director. period. This is one of the lowest proposed increases in the He will be greatly missed by everyone in the Group and industry on what is already one of the lowest charges. throughout the water industry. It is a testimony to the strong team which David built that the business has NON-REGULATED ACTIVITIES continued to achieve such a good performance. Echo provides outsourced customer contact management and billing activities for water utility and non-water DIVIDEND POLICY industry customers. Rapid provides development and The proposed dividend for the year ended 31 March 2004 implementation of customer contact and billing software has been based on a dividend cover of 1.8 times, in line for the UK water industry. Underground Pipeline Services with historic dividends paid on an inter-group basis. It is repairs and replaces water mains, principally for South the Directors’ intention to grow future dividends broadly Staffordshire Water. Aqua Direct is a spring and mineral in line with earnings. water business. These businesses represent approximately 20% of Group turnover and operating profits, generally PROSPECTS operate on long term contracts and are closely related to The Directors will continue to work with OFWAT to ensure the water business in expertise and technical skills. that a satisfactory outcome to the Periodic Review of prices for the period to 2010 is achieved during the Echo has maintained high levels of performance in its coming year. customer service, billing and debt recovery activities for its water industry clients - South Staffordshire Water, The Group’s strategy is to continue to operate the Severn Trent Water and South West Water. In addition, it regulated water business as efficiently as possible and has continued to expand its customer base by providing to achieve stable profit growth whilst maintaining its specialist call centre services to other clients outside the high service standards and low charges. In addition, the water sector such as OneBill Telecom and JD Williams, Group intends to grow its profitable and cash generative part of the N. Brown Group. Rapid continues to generate non-regulated businesses in a low risk manner in order recurring revenues from maintenance and ongoing to create additional value for shareholders. Overall the system enhancements for its existing clients. Group should benefit from the stable and predictable returns from the regulated water supply business being In May 2004 Aqua Direct completed construction of supplemented by growth in the non-regulated activities. a bottling plant to supply mineral water bottled at source to retailers. This complements the existing D B Sankey tankering operation which supplies soft drinks bottlers. EXECUTIVE CHAIRMAN Underground Pipeline Services has recently won a 25 May 2004

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 3 South Staffordshire Water continues to perform exceptionally well, delivering a combination of value for money, excellent quality and high levels of service and efficiency.

“We are very proud of our achievement in having the second highest levels of service and being the second most efficient company in the industry, with bills 20% below the national average.”

Jack Carnell MANAGING DIRECTOR, SOUTH STAFFORDSHIRE WATER

4 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 SOUTH STAFFORDSHIRE WATER PROVIDES HIGH LEVELS OF CUSTOMER SERVICE

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 5 OPERATIONAL REVIEW

REGULATED WATER SUPPLY Our domestic customers continued to pay the second South Staffordshire Water continues to perform lowest charge in England and Wales with an annual exceptionally well in the UK Water Industry delivering a household bill of £89 (20% below the national average) combination of value for money, excellent quality and which, when combined with Severn Trent’s sewerage high levels of service and efficiency. charge, which we collect on their behalf through our contract with Echo, means that our domestic customers The last few years have seen significant change in the benefit from the lowest overall charge in England and business and 2003/4 continued this trend. As a result of Wales. In addition, our large industrial clients enjoy the cost saving and efficiency initiatives, the Company has lowest volumetric rates in the country. improved its operating cost efficiency from seventeenth in the industry in 1999/00 to second in 2002/3 as The year saw another excellent result for water ranked by OFWAT. This has been achieved through a quality with compliance again being over 99.9%. Our combination of consolidating four area offices into our demanding targets for leakage have continued to be head office, outsourcing customer service and laboratory achieved. analysis, reductions in staffing and management of over 30% and increased use of automation and technology. Capital investment in the year amounted to £26m (net of We are very proud of this achievement which is a contributions). This was primarily on major mainlaying reflection of the hard work put in by managers, staff schemes associated with the increased capacity of our and all of our suppliers and contractors with whom second largest treatment works at Seedy Mill, which was we work so closely. Cost savings last year amounted upgraded last year, and with enhancements to supply to a further 0.7% in real terms, including outsourcing security. This level of expenditure will reduce significantly of microbiological analysis, together with continued in 2004/5, the final year of the current five year review progress on the implementation of the operational job period, before increasing to historic levels in 2005/6. management system. Further savings are planned, but these will be at a significantly lower level than achieved The weather and water resources saw an unusual year. historically and will be hard to achieve without affecting Last October the country had seen several months of future levels of service. lower than average rainfall and had only moderate reservoir stocks, however by February 2004 a period of Levels of service to our customers remain excellent, extensive rainfall had returned these stocks to normal. with the Company placed in second position across the The Company has a wide variety of water resources Industry in 2002/3 using OFWAT’s overall performance available and for the time of year the resource position is assessment (which measured overall performance on currently very healthy. levels of service, leakage, water quality and supply resilience). We have now been in the top three for each 2003 was the 150th anniversary of the Company which of the last four years. The provisional results submitted was originally incorporated on 4 August 1853. To to OFWAT show that performance has improved further celebrate this event, the Company was delighted to host during the year ended 31 March 2004. a luncheon at Blithfield Hall attended by HRH the Earl of Wessex. The day was a fitting reflection of 150 years of water supply and business growth.

6 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 SOUTH STAFFORDSHIRE WATER WATER QUALITY COMPLIANCE CONTINUES TO BE OVER 99.9%

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 7 OPERATIONAL REVIEW

PERIODIC REVIEW OF PRICES At this level of expenditure and with the level of price The past year has seen considerable activity in relation increases included in the Plan, South Staffordshire Water to the Periodic Review of charges for the five year period would expect to be broadly cash neutral over the five from 2005 to 2010. The Company’s Draft Business Plan year period after taking into account dividends paid at a was submitted to OFWAT in August 2003 and the Final cover of 1.8 times earnings. The Plan includes a cost of Business Plan on 7 April 2004. capital assumption of 5.9%, including a small company premium of 0.7%, based on the actual debt costs of the The Plan confirms South Staffordshire Water’s intention Company for its index-linked bond and its assumed level to deliver best value for money to its customers. The of gearing over the review period. strategic objectives are to maintain existing high levels of customer service and satisfaction, supply security and South Staffordshire Water is one of the most efficient water quality, whilst increasing asset renewal activity businesses in the industry and will continue to seek particularly of our underground mains and continuing to efficiency improvements over the next five year review offer one of the lowest bills in the industry. period. Savings of 0.7% per annum have been included in the Plan and are assumed to be shared equally The Plan includes a price increase on South Staffordshire between the Company and its customers. Certain Water’s current low charges of 19.4% in real terms over operating cost increases outside the direct control of the five-year period, including 9.7% in the first year. This the Company, such as pension contributions and power compares to the proposed industry average increase of costs, are also included in the Plan. approximately 30% over the five years. The draft determination of prices for 2005 to 2010 is As part of the Plan, South Staffordshire Water proposes expected to be received from OFWAT on 5 August 2004. to increase the rate of water mains renewal by 40% The final determination will be made on 2 December compared to the current five year period (an additional 2004, for implementation in April 2005, and will provide capital expenditure of £2 million per annum) as part certainty for the five years to 2010. of a long term policy to replace underground assets and in response to the increasing level of burst mains experienced in recent years. Additional maintenance expenditure is also needed for above ground assets with an 8% uplift compared to the average for the last 10 years. However, following the successful completion of the large programme of works for water quality and resources in the current five-year review period to 2005, the Company will be able to reduce investment in these areas. The Plan therefore contains a capital expenditure programme for the five years of £120 million (£104 million net of capital contributions receivable of £16 million), compared with £116 million for the current five- year period.

8 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 SOUTH STAFFORDSHIRE WATER HAS THE SECOND LOWEST LEVEL OF HOUSEHOLD CHARGES

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 9 OPERATIONAL REVIEW

AQUA DIRECT UNDERGROUND PIPELINE SERVICES Based near Lichfield, Aqua Direct provides tankered Underground Pipeline Services repairs, maintains and spring water from its Elmhurst Spring and Maple Spring replaces water mains and undertakes small diameter sources to UK soft drinks manufacturers. 2003/4 has main laying, principally through the use of sub- seen the customer base expand and develop with many contractors. Approximately 90% of the business is for household name branded drinks using our spring water. South Staffordshire Water through long term contracts We have also provided tankered spring water to music won in competitive tender. festivals and concerts. The business has successfully tendered for water mains The dry summer of 2003 left a number of water rehabilitation services for South Staffordshire Water companies stocks at low levels. With reliable and ample for the period 2004 to 2008, extendable to 2010. This water resources, Aqua Direct was able in a number work has an estimated value of around £14m for the six of instances to tanker relief supplies direct to their year period to 2010, although increased activity is not consumers. expected until the start of the five year period. When combined with the ongoing maintenance and repair Towards the end of 2003 Aqua Direct started the contract with South Staffordshire Water this forms a solid construction of a fully automated still and carbonated base from which to grow. mineral water bottling plant. This plant was commissioned in May 2004 and will supply bottled water The business also has contracts with a number of local to UK supermarkets sold under their brands. In addition, authorities within the Midlands area for carrying out it will provide emergency bottled supplies to South reactive repairs to underground leaks. This is being Staffordshire Water and other water utilities. A smaller slowly expanded to broaden the range of services plant will also be commissioned this year to supply the offered and its customer base. growing office water cooler market. Additionally, it provides pipe condition assessment Whilst still at an early stage of development, Aqua Direct services to other water companies using various represents a good opportunity for the future. techniques including non destructive testing. Opportunities exist to develop this service as water companies seek to learn more about the condition of their underground assets.

10 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 UNDERGROUND PIPELINE SERVICES PRINCIPALLY PROVIDE MAINTENANCE SERVICES TO SOUTH STAFFORDSHIRE WATER

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 11 Echo continues to provide high levels of service to its utility clients, whilst successfully expanding its customer base outside the water sector.

“A number of new clients including OneBill Telecom and JD Williams have been secured in the year and we are confident of future growth in our customer base.”

John Catling MANAGING DIRECTOR, ECHO MANAGED SERVICES

12 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 ECHO MANAGED SERVICES PROVIDES BILLING AND DEBT RECOVERY SERVICES TO A NUMBER OF WATER COMPANIES

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 13 OPERATIONAL REVIEW

ECHO • Customer satisfaction surveys the design, delivery Echo provides outsourced customer contact and analysis of telephone or e-commerce based management, billing and debt recovery activities for customer satisfaction programmes. the regulated business of South Staffordshire Water and for Severn Trent within South Staffordshire Water’s In addition to Green Flag, Spring Recruitment and East licensed area of supply. Echo also has a 50/50 joint Devon and District council, new clients secured within venture with South West Water Ltd (Echo South West) the year include JD Williams, part of the N. Brown for the provision of similar customer contact, billing Group (the UK’s leading direct marketing company) and debt recovery services to the regulated water and and OneBill Telecom, in addition to a number of other waste water business of South West Water Ltd. The shorter term contracts. joint venture continues to provide efficiencies and improved levels of customer service to South West Echo will continue to focus on the delivery of high Water and should begin to contribute to profits over levels of service, billing and debt recovery for its clients the next 18 months. These three utility customers within the water industry. In addition it will continue represent 90% of Echo’s turnover and provide a base to expand its customer base by offering specialist upon which the business can be grown. services to other clients, with a number of clients already secured for the new financial year. Echo also offers customer management services for mid-size and large organisations, allowing them to RAPID acquire, retain and grow new customers. The main Rapid developed the customer contact management products and services include: software for South Staffordshire Water and sold licences to a number of other UK water companies. • Inbound contact management handling all types of In 2003 it was operationally merged with Echo to inbound customer contact including telephone, maximise and capitalise upon the strengths of both e-mail, and post. businesses.

• Outbound telebusiness management of targeted For the past year, Rapid has continued to support telebusiness campaigns to an existing customer the billing of 2.4 million UK customers through its base, providing additional contact channels within client base of South Staffordshire Water, South West direct marketing campaigns. Water, Hartlepool Water and Bristol and Wessex Billing Services (a joint venture billing operation between • Debt collection utilising the latest technology and Bristol Water and Wessex Water). significant experience (gained from managing debt recovery services in the water industry) to provide Throughout next year, Rapid will continue to support bespoke solutions. and develop the software to meet the needs of our existing clients. The sales and implementation cycle • Attraction/Recruitment and Retention solutions for the Rapid billing software is typically spread over in today’s competitive market for the recruitment a 12 month period and although we do not expect and retention of the highest quality team members, any significant licence fee revenue for the year to Echo offer a number of solutions, including initial March 2005, we will continue to benefit from the attraction campaigns, call screening, on-line existing revenue streams of maintenance and bespoke competency based interviews, assessment centres development. and interview booking.

14 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 ECHO MANAGED SERVICES PROVIDES A RANGE OF CUSTOMER MANAGEMENT SERVICES OUTSIDE OF THE UTILITY SECTOR

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 15 The outcome of the periodic review of water charges in December 2004 will provide certainty to the regulated business for the five years to 2010.

“The results for the year are ahead of expectations, with operating margins maintained at 29% and provide a sound base for the future growth of the Group”

Adrian Page GROUP FINANCE DIRECTOR, SOUTH STAFFORDSHIRE PLC

16 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 FINANCIAL REVIEW

Operating profits from non-regulated activities were £4.1m (2003: £5.4m) and reflect the reduced turnover from the lack of a major new licence sale for Rapid and lower activity for Underground Pipeline Services, partly offset by growth in Echo.

Group profit before tax was £14.5m (2003: £16.8m). This includes the full year impact of the £85m index- linked bond (issued in August and September 2002) on the Group’s interest charge, which totalled £6.3m, Adrian Page compared to £4.6m in 2003. GROUP FINANCE DIRECTOR The results presented are based on merger accounting GROUP RESULTS principles which reflect the results of the Group as if it Group turnover (including share of joint venture) had been in its current structure throughout the two for the year was £72.8m (2003: £73.3m). Turnover years ended 31 March 2004. increased in the regulated water supply business by £1.6m (2.7%) to £60.4m. This reflects the increase in DEMERGER RPI of 2.65% used to increase charges for the year and The professional fees and other costs relating to the the Company’s k factor of -1%, coupled with marginally demerger have been borne in full by Homeserve plc. higher demand from measured customers. The directors do not expect any significant increase in costs as a result of being a stand alone quoted group. Non-regulated external turnover was £12.4m (2003: £14.5m). This reduction in turnover is principally due TAXATION to the expected absence of a major new licence sale of The total tax charge for the year was £4.0m, compared Rapid software (2003: £1.2m) and a £1m reduction in to £4.4m in 2003, including current tax of £2.7m and the turnover of Underground Pipeline Services arising a discounted deferred tax charge of £1.3m, which, as from the planned lower levels of mains renewal activity expected, was at an effective tax rate of 27.4%. This for South Staffordshire Water and the impact of a one effective rate is expected to be broadly maintained in off large external contract in 2003. This has been partly the coming year. offset by 6% growth in Echo’s turnover to £11.6m from increased sales to its non-utility customers. DIVIDENDS The Board is proposing a full year dividend of £5.9m Operating profit of £20.9m (2003: £21.4m) is at a which represents a dividend cover of 1.8 times. The margin of 29% and was, as expected, 2.5% lower. board believes the dividend provides a healthy financial Operating profit from regulated water supply increased return to its shareholders while retaining sufficient by £0.7m (4.7%) to £16.8m. This reflects the continued reserves for further investment and growth. The focus on improvements in operating efficiency and an regulated water business has declared a dividend for increase in profit on disposal of fixed assets of £0.4m the year of £4.2m, which represents 71% of the total to £0.5m in the regulated business, partly offset by an Group dividend. increase in the depreciation charge of £0.6m.

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 17 FINANCIAL REVIEW

CASH FLOW AND DEBT PENSIONS The Group achieved a cash inflow of £0.7m during The Group continues to account for pension costs for the year (2003: inflow of £13.2m). The difference from its final salary scheme in accordance with SSAP 24 2003 was largely due to the net inflow of £18.7m from and makes the transitional disclosures required by the issue of the index-linked bond and the related FRS17. The latest actuarial valuation performed for the restructuring dividend in 2003. purposes of FRS17 showed a deficit, after deferred tax, of £8.7m (2003: £7.8m) in the sub fund of the Water The Group generated an operating cash inflow of Companies Pension Scheme for the employees of both £31.4m, an increase of 4.3% on 2003, reflecting South Staffordshire and Homeserve. This deficit is not working capital improvements. The net cash outflow considered reflective of the ongoing funding of the from interest increased by £1.4m to £3.8m, primarily scheme following a recent interim actuarial valuation, resulting from the full year impact of the index-linked however pension contributions have been increased bond. from 9.6% to 16.3% of remuneration from April 2004.

The net cash outflow on capital expenditure (after Following the demerger, a separate independent capital contributions) totalled £25.5m, exceeding 2003 sub fund has been created for Homeserve and the by £5.2m. This was predominantly within the regulated employees, assets and liabilities relating to Homeserve water supply business and includes a number of are in the process of being transferred out of the mainlaying projects, the construction of the new existing sub-fund. An interim actuarial valuation at 30 bottling plant and the purchase of the Echo call centre November 2003 reported a deficit of £2.9m in the sub building. fund on an ongoing actuarial basis. It is anticipated that South Staffordshire will retain approximately 85% In March 2004, the Group received a net cash inflow of the deficit calculated on an ongoing basis. of £8.4m following the issue of new shares to its then parent Homeserve. After settling certain inter-company A P Page balances this resulted in a net increase in cash of £2.9m. GROUP FINANCE DIRECTOR 25 May 2004 At 31 March 2004 net debt stood at £94.1m (2003: £93.2m). Net debt within the regulated business totalled £105.7m representing 66% of Regulated Asset Value of £161m, with cash in the non-regulated businesses of £11.6m.

The Group now has total bank facilities and bond financing in place of £118.0m. The majority of this financing is long term reflecting the nature of the assets acquired in the regulated water supply business. The fixed coupon rate on the bond reduces the Group’s exposure to short term interest rate increases, with inflation risk on the cost of the bond being effectively hedged against regulated water supply revenues, which are linked to inflation.

18 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 OPERATING AND FINANCIAL ANALYSIS

GROUP OPERATING PROFIT GROUP OPERATING PROFIT 2003/4 2000/1 - 2003/4

25 20%

20 £m

15

80% 10 00/1 01/2 02/3 03/4 Year

Regulated Water Supply Non-Regulated Activities

WATER SUPPLY AND CUSTOMER SERVICE AVERAGE HOUSEHOLD WATER BILL PERFORMANCE RATINGS 2002/3 2003/4

290 170

150 g 280 tin 130 Ra 270

£ 110 260 ormance 90

Perf 250 70

240 50

Other Water Companies Other Water Companies South Staffordshire Water South Staffordshire Water

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 19 The Group has a clear strategy to make a significant contribution to environmental sustainability. South Staffordshire Water and Echo have both achieved Investors in People accreditation.

“Our employees are key to our business and I would like to thank them all for their hard work in achieving this successful year”

David Sankey EXECUTIVE CHAIRMAN, SOUTH STAFFORDSHIRE PLC

20 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 PROTECTION OF NATURAL REGENERATION AS PART OF THE STRATEGY ON ENVIRONMENTAL SUSTAINABILITY

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 21 CORPORATE AND SOCIAL RESPONSIBILITY

The Company acknowledges the growing importance active involvement of employees in health and safety of environmental and social issues within a business brings positive benefits to the business. This approach framework. It is recognised that the Group’s future developed over the years in the former Group is set to success will depend in part in taking into account continue in South Staffordshire Plc post demerger. the interests of all the stakeholders in our business including employees, customers, shareholders and In addition to growing internal health and safety the wider community. The Group is committed to expertise, the Group has committed to retaining the improving its corporate responsibility activities and consultancy service of the former Group’s Health and will continue to report on them. Safety Advisor to provide support and expert technical and legal advice to Directors and senior managers. EMPLOYEES This will primarily focus on the implementation of Our employees are key to the success of our business management systems to protect the health and safety and South Staffordshire Water and Echo have of employees and ensure consistency with statutory maintained their Investors in People accreditation. requirements.

The Group has a policy of equal opportunities and Each of the Group’s businesses has appointed a Board non-discrimination. Every reasonable effort is made member to act as champion for health and safety at to provide disabled people with equal opportunities Board level, and to oversee arrangements for the for employment, training and promotion, taking into effective co-ordination and implementation of account their particular aptitudes and abilities. South consistent practices which meet or exceed statutory Staffordshire Water has been awarded a certificate in requirements. The involvement of employees is critical recognition of it being Positive about Disabled People. to the success of any health and safety programme, and this is achieved through the establishment of Communication is particularly important and team employee forums. briefings are held monthly in the majority of the Group’s businesses to keep employees informed The Group has continued to demonstrate a about new developments. Newsletters and special commendable health and safety record over the years, publications are also used to communicate within the with a steadily declining trend in the Reportable businesses and across the Group. Incident Rate as illustrated in the chart opposite, which is based upon data from all the businesses A Savings Related Share Option Scheme will be now comprising South Staffordshire Plc. A recent launched over the next four months across the Group levelling out of the declining trend and an increase to involve employees in the performance of the Group. of four in the number of incidents last year (all of All Group employees have access to a pension scheme. which were relatively minor) still places the Group in a commendable position in comparison with the utility All employees have regular performance and sector as a whole. development reviews. Training continues to be of great importance to ensure that all employees have Health and safety has always been seen as the right skills to perform to their maximum ability. fundamental to the success of the Group’s business activities, and the development of effective health HEALTH & SAFETY and safety management systems and good working The Group remains committed to high standards of practices will continue to be promoted at all levels health and safety across its business activities, in the throughout the Group. belief that strong leadership at Board level and the

22 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 TOTAL RIDDOR-REPORTABLE INCIDENTS PER 1,000 The effectiveness of the Company’s strategies for EMPLOYEES 1995-2004 the management and use of energy have been 26.2 recognised by the Institute of Energy which awarded the Company recognition under the Energy Efficiency Accreditation Scheme, which is managed by the 19.6 National Energy Foundation.

15.3 15.5 In line with national objectives, the Company has taken significant steps forward in the management 12.9 12.3 of its two SSSI sites, with Blithfield Reservoir and its 10.5 9.2 surrounding 205 acres of woodland now having a 7.9 8.8 comprehensive five-year management plan, while at Hayley Green, effective management will be achieved 95 96 97 98 99 00 01 02 03 04 through a farm business tenancy with Worcestershire Wildlife Trust. CUSTOMERS All of the businesses are committed to providing This year has also seen the Company further develop excellent service to both commercial and domestic relationships with tenants of its landholdings with, customers. Within the non-regulated activities, for example, the establishment of a Countryside building long term relationships with customers is Stewardship Scheme at its Blithfield Reservoir estate. key to the future success and stability of the business. Many other significant achievements have been Without high levels of service, customers would not be made during the year including the implementation retained. of a scheme designed to restore levels and flows in Blakedown Brook, expansion in the distribution of the South Staffordshire Water was rated second overall Company’s water efficiency information, and extensive in the water industry for levels of service last year support for a wide range of Community and Education and is constantly reviewing its activities to ensure initiatives. that it maintains its high standards. There is a Special Services Scheme for customers who require additional COMMUNITY & CHARITABLE GIVING assistance and bills are available in braille, large print The Group is committed to assisting charities that and on audio cassette if required. have a direct impact on the communities in which its businesses operate. It supports the Air Ambulance ENVIRONMENT both financially, by charitable donation and practically, The Group has a clear strategy to make a significant by providing office space. Other organisations contribution to environmental sustainability. The supported by the Group include the Princes Trust, operational activities of Group companies have varying Lichfield Cathedral and Walsall Hospice. environmental demands and we therefore prioritise attention to those activities with the largest impact. We also encourage employees to support charities of their choice and they can contribute to those charities South Staffordshire Water publishes a comprehensive in a tax efficient manner through Give As You Earn Environment Report detailing a wide range of the Scheme. In addition, employees of South Staffordshire Company’s environmental activities. Work is underway Water are particularly active in their fundraising efforts on reviewing and updating the water efficiency for Water Aid, the official charity for the water industry plan and bio diversity action plan. The Company that is dedicated exclusively to the provision of safe has continued to improve its energy efficiency. domestic water to the world’s poorest people.

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 23 BOARD OF DIRECTORS

1 2

3 4

5 6

7

24 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 BIOGRAPHICAL DETAILS

1 DAVID BALDWIN SANKEY (60) MA, EXECUTIVE 2 ADRIAN PETER PAGE (38) BSc (Hons), ACA, GROUP CHAIRMAN FINANCE DIRECTOR & COMPANY SECRETARY A Non-Executive Director of South Staffordshire Finance and Regulation Director of South Group Plc from 1982 to 2004, he is a Non- Staffordshire Water since September 2002 and Executive Director of Eliza Tinsley PLC and Senior Company Secretary of South Staffordshire Independent Director of James Beattie PLC. For Group Plc from 1998 to 2004 having ten years until 2002 he was a venture capitalist, previously been Finance Director. He was initially as a Director of SUMIT Equity Ventures and previously with ACT Group plc and KPMG. then of Murray Johnstone Private Equity Limited.

3 DR. JACK CARNELL (47) PhD, BSc (Hons) MANAGING 4 JOHN HOWARD CATLING (43) MIDM, MANAGING DIRECTOR OF SOUTH STAFFORDSHIRE WATER PLC DIRECTOR OF ECHO MANAGED SERVICES LTD Appointed Managing Director of South Appointed Managing Director of Echo in February Staffordshire Water in January 2004, following 2003. Previously a customer service Director within four years as Deputy Managing Director. He has the N. Brown Group responsible for contact centres 30 years experience in the water industry with across a multi-site operation and General Manager South Staffordshire Water, and he is the Midlands with Freeman’s Home Shopping. President of the Institute of Water Officers.

5 RICHARD PANTON CORBETT (66), NON EXECUTIVE 6 MICHAEL HUGHES (58), NON EXECUTIVE DIRECTOR DIRECTOR Until 2002 he was Executive Vice President of GPU A Non-Executive Director of South Staffordshire Group International Operations Group, an international Plc from 1993 to 2004, he is a Non-Executive Director power systems business that included Midlands of Haynes Publishing Group PLC, Tex Holdings PLC Electricity plc. He was Chief Executive of Midlands and SPG Media Group PLC. He was Chairman of the Electricity plc from 1993 to 2002 following a long Alternative Investment Market of the London Stock career in GEC. Exchange up until April 1998, and an Executive Director of Singer and Friedlander from 1973 to 1998.

7 ROGER GABB (65), NON EXECUTIVE DIRECTOR He is the Executive Chairman of Western Wines Ltd, a £100m turnover business which he has built up over 20 years to supply wine to the UK supermarket sector. His earlier career included introducing Volvic mineral water into the UK and a period with Distillers Company as European Brand Manager.

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 25 DIRECTORS’ REPORT

The Directors have pleasure in presenting their Report In accordance with the Companies Act 1985 and the and Accounts for the year ended 31 March 2004. Articles of Association, at the first Annual General Meeting of the Company, all Directors will retire PRINCIPAL ACTIVITIES AND REVIEW OF BUSINESS from office, and being eligible, offer themselves for The Group is engaged in water supply to domestic, re-election. industrial and commercial customers and complementary non-regulated activities. Details of The beneficial interests of the Directors in the shares of Group activities are set out in the Chairman’s Statement the Company on 6 April 2004 following the demerger and the Operational Review on pages 2 to 15. are set out in the Remuneration Report. The Directors’ beneficial shareholdings in Homeserve plc as at 31 The Group was listed on the London Stock Exchange March 2004 are shown on page 51. on 6 April 2004 following the demerger from Homeserve plc. FINANCIAL RESULTS AND DIVIDENDS The Group’s results are shown in the consolidated CHANGE OF COMPANY NAME profit and loss account on page 40. The Directors On 17 February 2004 the Company changed its name are recommending the payment on 1 July 2004, of from South Staffordshire Water Holdings Limited to a final dividend of 34.4p per share (2003: 37.7p) to South Staffordshire Plc. shareholders on the register at close of business on 4 June 2004, making a total dividend for the year of DIRECTORS 46.0p per share (2003: 53.9p, before restructuring Details of the Directors who held office at 25 May 2004 dividend). are given on page 24 and 25. FIXED ASSETS The directors who held office during the year and Capital expenditure before contributions on tangible subsequently are as follows: fixed assets, including infrastructure renewals, amounted to £31.2m (2003: £26.0m) during the year. Dr J Carnell Mr J H Catling † ANNUAL GENERAL MEETING Mr R P Corbett*† There will be proposed at the Annual General Meeting Mr R Gabb*† a general authority for the Directors to allot shares Mr M Hughes*† up to a maximum nominal amount (“the Section 80 Mr A P Page∆ Amount”) and the Directors’ authority to issue shares Mr D M Penna‡ for cash without applying the statutory pre-emption Mr D B Sankey † rights up to a maximum nominal amount (“the Section Dr E A Swarbrickº 89 Amount”).

* Non-Executive Further details on the resolutions to be proposed † Appointed 6 April 2004 at the Annual General Meeting can be found in the ∆ Appointed 4 December 2003 Shareholder Circular. º Resigned 4 December 2003 ‡ Deceased 17 December 2003 DONATIONS All charitable donations were borne by the ultimate parent company.

26 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 PAYMENT OF CREDITORS The Group’s policy is to pay suppliers in line with the terms of payment agreed with each of them when contracting for their products or services. Trade creditors at 31 March 2004 represent 84 days of purchases during the year (2003: 88 Days) for the Group and nil for the Company. This calculation is distorted by the higher than average level of capital expenditure incurred during February and March and reflected in year-end creditors.

SUBSTANTIAL SHAREHOLDINGS As far as the Directors are aware, no person had a beneficial interest in 3% or more of the voting share capital at 12 May 2004 except for the following:

Ordinary Percentage Shares Holdings

AMVESCAP PLC 2,079,684 16.33 Barclays plc 881,162 6.92 Fidelity Investment Services Ltd 768,836 6.04 HBOS Group plc 500,657 3.93 Wesleyan Assurance Society 486,143 3.82 Aviva plc 396,811 3.12

AUDITORS A resolution proposing the reappointment of Deloitte & Touche LLP as auditors will be put to the Annual General Meeting.

By Order of the Board

A P Page COMPANY SECRETARY 25 May 2004

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 27 CORPORATE GOVERNANCE

As at the 31 March 2004 the Company was an and judgement and there are no relationships or unlisted subsidiary of Homeserve plc (formerly South circumstances that are likely to affect their independent Staffordshire Group Plc). As such, Homeserve plc was judgement or independence from management subject to the Combined Code and Listing Rules during The Board has considered the new 2003 (FRC) Code the year then ended. definition of an Independent Non-Executive Director in making this assessment. The Non-Executive Directors Despite the Company not being listed during the year it together bring considerable experience and diversity of has made the following disclosures relating to its current business knowledge to the Company. and ongoing application of the Combined Code. The Board has carefully considered the appointment The Directors of South Staffordshire Plc, as a newly of a Senior Independent Non-Executive Director but listed company, are committed to the high standards has concluded that this would not be appropriate at of governance as set out in the Principles of Good present given the Non-Executive representation and Governance and Code of Best Practice, which together the likely reversion of David Sankey to Non-Executive are the basis of the Combined Code. Going forward the Chairman within an eighteen-month period. It is the Board will apply the new 2003 (FRC) Code with flexibility intention of the Board to review the appointment of and common sense. a Senior Independent Non-Executive Director on a regular basis and to make an appointment when it is The Financial Reporting Council (FRC) in the UK issued considered appropriate. a new Combined Code (the new 2003 (FRC) Code) in response to the Higgs Review on Non-Executive David Sankey as an Executive Director is not Directors and the Smith Review on Audit Committees. independent within the meaning of the new 2003 (FRC) The Company will report on compliance with the new Code in his role as Chairman. The Board considers that 2003 (FRC) Code in 2005. there is a clear division of responsibilities between the Chairman and the other Executive Directors, together DIRECTORS with the strong mix of Independent Non-Executive Prior to the demerger from Homeserve plc and at 31 Directors that make the appointment of an Executive March 2004, the Board was comprised of Mr Page and Dr Chairman appropriate for the Company. Carnell as Directors. Post demerger the Board comprises four Executive Directors and three Non-Executive The members of the Remuneration, Nomination and Directors. Full details of the Board are shown on pages Audit Committees will comprise all three Non-Executive 24 and 25. Directors.

Non-Executive appointments will be for a fixed term of DIRECTORS’ REMUNERATION three years (subject to retirement by rotation) and would The Non-Executive Directors’ fee levels and the not normally, as a matter of policy, be renewable more Executive Directors’ remuneration levels were set as part than twice. of the demerger process based on recommendations from Monks Partnership. Going forward the Non- As set out in the Company’s new Articles of Association Executive fees and Executive Director remuneration all Directors are subject to retirement by rotation and levels will be determined by the Remuneration will submit themselves for re-election at least once every Committee. This area of policy and practice including three years. terms and conditions of service is dealt with in full in the Remuneration Report on pages 31 to 35. The The Executive Directors consider the three Non- Remuneration Report will be put to a shareholder vote Executive Directors to be independent in character at the AGM.

28 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 FUNCTIONS OF THE BOARD AND COMMITTEES financial statements of the Company, including changes The Board is responsible for the Group’s strategy, to accounting policy, reviewing financial reporting direction, management and for monitoring the progress procedures and risk management systems, reviewing of attaining its objectives. This will include regularly and approving internal audit activities, recommending reviewing the Group’s financial performance. the appointment of the external auditor and monitoring the latter’s independence, performance and Ten Board meetings will be held each year with effectiveness and approving the nature and scope of additional meetings held as necessary. All Board external and internal audits. members are provided with sufficient information in advance of any Board meeting to allow time for The Nomination Committee is comprised of the three preparation in order to ensure they can properly Non-Executive Directors and David Sankey, who discharge their duties. also chairs the committee. The Committee will lead the process for new appointments to the Board and A schedule of matters reserved for the Board was for making recommendations regarding succession adopted in April 2004 based on ICSA Best Practice. planning for both Executive and Non-Executive However, the Board maintains a flexible approach Directors. The Committee will meet on an ad hoc basis. to Board matters with the delegation of power to a committee being used for specific routine purposes. RELATIONS WITH SHAREHOLDERS The three Committees detailed below have adopted full Meetings will take place regularly with the Company’s Terms of Reference based upon ICSA Best Practice. largest institutional investors.

The Board has established a formal procedure for The Board is available at the AGM to answer questions Directors wishing to seek independent legal and other on all aspects of the Group. Proxy votes will be professional advice. No such advice was sought during announced at the AGM following the show of hands. the year. The Board also has access to the advice and services of the Company Secretary. The Board has considered the recommendation within the Code that the AGM notice be sent to BOARD COMMITTEES shareholders at least twenty working days before the The Remuneration Committee is comprised of the meeting but has decided to remain compliant with three Non-Executive Directors and chaired by Michael the Companies Act requirements. This is in line with Hughes. The Committee will meet annually or more the notice period served last year by Homeserve plc. often if required. The Committee will be responsible The Company believes that it would provide continuity for setting and approving remuneration policies and for its shareholders if it announces its Preliminary amounts, including share options and share incentive Results, sends the Annual Report and AGM notice plans for Senior Executives including the Executive to shareholders, holds the AGM and pays the final Directors. The Committee will also advise on the dividend within three months of the year end. To contracts for Executive Directors including contract allow additional time for the notice period would termination terms. The Committee has access to the delay payment of the final dividend and would not services of independent advisors as required. be advantageous to shareholders, however, the Board believes that this notice period should remain under The Audit Committee is comprised of the three Non- review. Executive Directors and chaired by Panton Corbett. The Committee will meet at least twice a year and more frequently if required. The Committee is responsible for reviewing and monitoring the integrity of the

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 29 CORPORATE GOVERNANCE

ACCOUNTABILITY AND AUDIT The responsibilities of the Directors and auditors in the A review of the Group’s position and prospects is set area of financial reporting are set out on pages 37 to 39. out in the Chairman’s Statement, Operational Review Members of the Audit Committee are set out on page and Financial Review on pages 2 to 19. 29. The Committee will normally meet to review the interim and annual accounts, to monitor the adequacy The Board of Directors has final responsibility for and effectiveness of internal controls and to agree audit the system of internal control and for reviewing its strategy. effectiveness, including taking reasonable steps for the safeguarding of the assets of the Group and for The Board is of the opinion that the external auditors’ preventing and detecting fraud and other irregularities. performance, effectiveness and fees during the year are Such a system can nonetheless provide only reasonable satisfactory. The Board does not believe that the value and not absolute assurance against misstatement or of non-audit services provided to the Group by the loss. external auditors is substantial.

There is an established internal control framework that GOING CONCERN will be continually reviewed and updated taking into The Directors consider that it is appropriate to prepare account the nature of the Group’s operations. This the accounts on a going concern basis. This is based process includes the identification, evaluation and upon a review of the Group’s budget for 2004/5, the management of the significant risks faced by the Group. three year operating plan and investment programme, together with the committed borrowing facilities The Board believes that the Internal Audit available to the Group. arrangements put in place as part of the demerger process are appropriate to the size and complexity of COMPLIANCE STATEMENT the business. Internal Audit will report directly to the In the future the Board believes that the Company will Audit Committee. comply with the provisions of the Code except with regard to the appointment of a Senior Independent For the year ending 31 March 2005, a defined Non-Executive Director and the period of notice of the organisation structure for the Group exists with clear AGM. lines of accountability and appropriate division of duties. The Group’s financial regulations specify authorisation limits for individual managers, with all material transactions being approved by the Board. In addition, formal treasury policies are in place. Three- year business plans, annual budgets and investment proposals for each business and for the Group will have been formally prepared, reviewed and approved by the Board. Financial results and cash flows, including a comparison with budgets and forecasts, are due to be reported to the Board monthly with variances being identified and used to initiate action. Risk management is discussed at Board level both in terms of the Group and the businesses on a regular basis. The key risks for each business and the Group have been identified together with the controls to monitor, reduce and mitigate against their potential impact.

30 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 REMUNERATION REPORT

This report has been prepared, subject to the exceptions POLICY ON REMUNERATION OF EXECUTIVE DIRECTORS detailed below, in accordance with the Directors’ Remuneration Report Regulations 2002 and The Listing TOTAL LEVEL OF REMUNERATION Rules of the Financial Services Authority. A resolution The Remuneration Committee aims to ensure that to approve the report will be proposed at the Annual the remuneration packages offered are competitive General Meeting. and designed to attract, retain and motivate Executive Directors of the right calibre. As part of Due to the demerger from Homeserve plc on 6 April the demerger process Monks Partnerships 2004 and the introduction of the Company’s shares to undertook a review of Executive remuneration and the Official List on that date, details of the Directors’ the Board have followed their recommendations. emoluments, pension arrangements, shareholdings and share options to be awarded have been provided THE MAIN COMPONENTS for the ongoing Directors. The Directors believe this The main components of the remuneration will provide a more useful analysis for shareholders package for Executive Directors are basic salary, than to only publish information in respect of the benefits, annual bonus and long term incentives as Directors who held office throughout the year. The follows: necessary disclosures to meet the Companies Act 1985 requirements are provided in note 5 to the accounts on a. BASIC SALARY page 51. The present salary of each Director was agreed upon the recommendations of Monks Partnership UNAUDITED INFORMATION during the demerger process. Future salary will be determined by the Remuneration Committee taking REMUNERATION COMMITTEE into account performance of the individual and the The Board whilst ultimately responsible for the Group, together with experience, responsibilities and approval of Executive remuneration, has delegated the marketability. The basic salary will be determined by responsibility for determining the remuneration levels taking into account appropriate consultant reviews and conditions of service of Executive Directors to the and levels of pay across the Group. The Executive Remuneration Committee. Directors have entered into new Service Agreements subject to 12 months written notice by either party, The Committee comprises each of the Boards’ Non- except for Mr Sankey who has 3 months notice. Executive Directors (shown on page 25) and meets annually or more frequently as required. No Executive b. BENEFITS Director sits on the Committee, although the Executive Pensions, company car, medical insurance, holidays Chairman can attend and advise on Executive Director and other benefits are in line with those provided remuneration (but takes no part in the discussion on his at Executive Director level in similar businesses. It is own remuneration). Company policy that benefits in kind are included in pensionable earnings where they are of a contractual The remuneration of Non-Executive Directors is nature on the basis that the benefits are taxable determined by the Board as a whole, based on outside income in the hands of the employee. advice and a review of current practices in other companies.

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 31 REMUNERATION REPORT

c. ANNUAL BONUS that specific performance targets are met. These The annual bonus is designed to drive the targets are as follows: performance of the Group and encourage real year on year growth in profitability. No annual bonus is Annual Average % of paid unless there is superior performance as a result EPS Growth Awards Vesting of the achievement of challenging criteria, these RPI + 3% 100% 2 criteria being: RPI + 2% 66 3 % 1 RPI + 1% 33 3 % • Growth in Group profit before tax for Mr Page and Less than RPI + 1% 0% growth in operating profit of South Staffordshire Water for Dr Carnell and of Echo for Mr Catling. If none of these conditions are met at the end of the three-year performance period the options will lapse • Measurable personal targets which relate to the (i.e. there will be no retesting of the performance part of the business that the Director has conditions). responsibility for. Going forward it is the intention of the Remuneration Given the performance-related nature of bonus Committee that in any one year, the Executive arrangements, it is Company policy to include the Directors and key Senior Executives will receive an bonus element of remuneration within pensionable award under either the ESOP or the LTIP, but not earnings. under both. The Remuneration Committee will review annually what it considers to be the most The maximum bonus payable to full-time Executive appropriate incentive arrangements at that time, but Directors for achievement of annual financial results anticipates using the LTIP as its primary long-term and personal objectives is 50% of basic salary. The incentive arrangement going forward. level of award for delivering ”on-target” performance will be 35% of basic salary. The maximum award under the LTIP rules will be one times annual salary. This limit will not be exceeded d. LONG TERM INCENTIVES unless the Remuneration Committee determines Long term incentives will be provided through a that exceptional circumstances exist, and in any Long Term Incentive Plan (LTIP) and Executive Share event will not exceed two times annual salary. Option Plan (ESOP), subject to the approval of the However, it is proposed that the usual annual award two schemes at the AGM on 25 June 2004. The that will be made under the LTIP will normally be schemes are designed to encourage and reward 75% of basic salary for the three Executive Directors, continuing improvement in the Group’s performance with awards of up to 35% of salary to the Directors of over the longer term and its participants are the subsidiary companies and 20% of salary to other key Executive Directors and other Senior Executives who Senior Executives. are best placed to influence performance. The LTIP award will vest three years from the date of The Executive Directors and key Senior Executives award provided the performance conditions have will receive a one-off award under the ESOP in been met. The Remuneration Committee believes addition to the award under the LTIP in 2004 (see that the following basket of performance measures below). This ESOP award is designed to replicate, as is the most appropriate for the first award under the far as possible, the arrangements that were in place LTIP in order to reflect the key business drivers for prior to the demerger. Options in respect of this the Group and to incentivise participants to enhance one-off award will only be exercisable to the extent shareholder value.

32 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 Up to 40% of the award will vest based on annual and providing a sustainable and growing dividend average EPS growth on a sliding scale as follows: yield. TSR will be averaged across a period of three months before the date on which the performance Annual Average % of Total period ends, in order to calculate the proportion of EPS Growth Award Vesting the award vesting. This is in keeping with normal RPI + 5% 40% of award market practice and is a practical adjustment RPI + 2% 20% of award to smooth out the impact of short-term market Less than RPI + 2% 0% of award influences and to provide a more robust measure of the performance of the Group. This performance measure is designed to reflect the Company’s strategy of growing the non-regulated COMPANY POLICY ON CONTRACTS OF SERVICE businesses and as an incentive to achieve a All Directors’ contracts of service require one year’s notice satisfactory outcome to the Periodic Review. The of termination by the Company, except for Mr Sankey Remuneration Committee believes that these targets who has three months notice as an Executive Director. are particularly challenging for a regulated utility Liquidated damage provisions in contracts are limited to based Group. the payment of one year’s remuneration, three months in the case of Mr Sankey. Notice periods and payments Up to 20% of the award will vest based on the are not extendable in takeover situations. Company’s OFWAT Levels of Service rating on a sliding scale as follows: COMPANY PENSIONS POLICY REGARDING EXECUTIVE % of Total DIRECTORS Industry position Award Vesting The Company policy is to offer Directors membership 1 20% of the Water Companies Pension Scheme. The scheme 10 2% is a funded, Inland Revenue approved, final salary, occupational pension scheme, its main features are: Provided the Group has achieved sound underlying financial performance, up to 40% of the award will i. a normal retirement age of 60 vest based on the Company’s Total Shareholder ii. pension at normal retirement age of one half of Return (TSR) against a comparator group consisting final pensionable salary and a tax free lump sum of of the three other quoted water only companies one and half times final pensionable salary, subject (Bristol, Sutton & East Surrey and Dee Valley) and to completion of 40 years service; five quoted water and sewerage companies iii. life assurance of five times pensionable salary or (Severn Trent, United Utilities, Kelda, Pennon and basic salary as applicable; Northumbrian). In line with market practice, awards iv. pension payable in the event of ill health; and will vest on a sliding scale as follows: v. spouses pension on death.

South Staffordshire If the benefits provided under the scheme are restricted Plc TSR Relative to % of Total as a result of the earnings cap the Executive will receive a Comparator Group Award Vesting cash sum equal to 20% of the amount by which his basic First place 40% of award salary exceeds the earnings cap so long as he undertakes Median (i.e. fifth place) 14% of award to invest that cash sum in a pension arrangement. Below Median 0% of award In respect of Mr Page only, provision is made via a funded unapproved retirement benefit scheme and the Measuring comparative TSR recognises the Company provides compensation for the tax impact of importance of the Company outperforming its sector the contribution to this scheme.

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 33 REMUNERATION REPORT

PERFORMANCE GRAPH As at 31 March 2004, the Company was not listed on the London Stock Exchange and therefore there is no share price data to present. It is intended to produce a performance graph in the 2005 Remuneration Report for the period from listing to 31 March 2005.

AUDITED INFORMATION

DIRECTORS’ EMOLUMENTS Directors’ emoluments for the year ended 31 March 2004 for the ongoing Directors of the Company were as follows:

Basic Total Salary Benefits Bonus Emoluments £’000 £’000 £’000 £’000 Executive D B Sankey* 55 — — 55 A P Page* 114 22 55 191 J Carnell 85 9 20 114 J H Catling 95 14 19 128

Non-Executive R P Corbett* 24 — — 24 M Hughes — — — — R Gabb — — — —

Total 373 45 94 512

* The remuneration of Mr Page, Mr Sankey and Mr Corbett was paid by Homeserve plc.

Disclosures required by the Companies Act 1985 of the emoluments for the Directors of the Company who served during the year can be found on page 51.

DIRECTORS PENSIONS Four of the ongoing Directors were members of the Company’s defined benefit pension scheme during the year. The following Directors had accrued entitlements under the scheme as follows:

Accrued pension Increase Accrued pension Transfer 31 March in accrued 31 March value of 2004 pension in year 2003 increase £’000 £’000 £’000 £’000 J Carnell 40 5 35 46 R P Corbett 12 2 10 17 A P Page 18 — 18 2 D B Sankey 18 8 10 58

34 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 The following table sets out the transfer value of the Directors’ accrued benefits under the scheme calculated in a manner consistent with “Retirement Benefit Scheme-Transfer Values (GN 11)”, published by the Institute of Actuaries and the Faculty of Actuaries.

Transfer value Contributions Increase in transfer Transfer value 31 March made by the value in the year 31 March 2004 Director net of contributions 2003 £’000 £’000 £’000 £’000 J Carnell 431 6 104 321 R P Corbett 126 — 29 97 A P Page 127 — 11 116 D B Sankey 137 — 74 63

The transfer values disclosed above do not represent a sum paid or payable to the individual Director, instead they represent a potential liability of the pension scheme.

Mr Page was also a member of a money purchase scheme. Contributions paid by the Company amounted to £28,000.

DIRECTORS’ SHAREHOLDINGS The beneficial interests of ongoing Directors as at the date of demerger, 6 April 2004, together with those of their families, in the shares of the Company were as follows: Ordinary shares 2004 J Carnell 1,661 J H Catling — R P Corbett — R Gabb 3,776 M Hughes — A P Page 5,025 D B Sankey 1,000

Details of the proposed share options to be allocated as a one off award to replicate share options prior to the demerger under the Executive Share Option Plan are as follows: Number of new options A P Page 32,400 J Carnell 10,000 J H Catling 4,000

Details of the share options held by Directors holding office at the end of the year in the Homeserve plc SAYE Scheme and Executive Share Option Schemes are shown on page 52.

The Company’s Register of Directors Interests, which is open to inspection at the Registered Office, contains full details of Directors’ shareholdings and share options.

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 35 DIRECTORS AND ADVISORS

DIRECTORS David Baldwin Sankey Jack Carnell John Howard Catling Adrian Peter Page Richard Panton Corbett Roger Gabb Michael Hughes

SECRETARY Adrian Peter Page

REGISTERED OFFICE Green Lane, Walsall, West Midlands WS2 7PD Telephone: 01922 638282 Registered in England, Number 4295398.

STOCKBROKERS Cazenove & Co. Ltd 20 Moorgate, London EC2R 6DA.

FINANCIAL ADVISORS N M Rothschild & Sons Limited New Court, St Swithins Lane, London EC4P 4DU.

FINANCIAL PR ADVISORS College Hill 78 Cannon Street, London EC4N 6HH

AUDITORS Deloitte & Touche LLP Four Brindleyplace, Birmingham B1 2HZ.

LEGAL ADVISERS Martineau Johnson St Phillips House, St Phillips Place, Birmingham B3 2PP

Wragge & Co LLP 55 Colmore Row, Birmingham B3 2AS.

BANKERS HSBC Bank plc 130 New Street, PO Box 68, Birmingham B2 4JU.

Royal Bank of Scotland plc 2 St Phillips Place, Birmingham B3 2RB.

REGISTRARS Computershare Investor Services PLC PO Box 82, The Pavilions, Bridgwater Road, Bristol BS99 7NH.

36 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The following statement, which should be read in The Directors have responsibility for keeping conjunction with the auditors’ statement of their accounting records which disclose with reasonable responsibilities set out on the following pages, is made accuracy at any time the financial position of the with a view to distinguishing for shareholders the Company and the Group and which enable them to respective responsibilities of the Directors and of the ensure that the accounts comply with the Companies auditors in relation to the accounts. Act 1985.

The Directors are required by the Companies Act 1985 The Directors have responsibility for taking such steps to prepare accounts for each financial year which give a as are reasonably open to them to safeguard the assets true and fair view of the state of affairs of the Company of the Company and the Group and to prevent and and the Group as at the end of the financial year and detect fraud and other irregularities. the profit or loss of the Group for the financial year. The Directors, having prepared the accounts, are In preparing these accounts, the Directors are required required to provide the auditors with such information to: and explanation as the auditors think necessary for the performance of their duty. • select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable and prudent;

• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts; and

• prepare the accounts on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 37 INDEPENDENT AUDITORS’ REPORT

INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND OF SOUTH STAFFORDSHIRE PLC (formerly South AUDITORS Staffordshire Water Holdings Limited) As described in the statement of Directors’ We have audited the financial statements of South responsibilities, the Company’s Directors are Staffordshire Plc (formerly South Staffordshire Water responsible for the preparation of the financial Holdings Limited) for the year ended 31 March statements in accordance with applicable United 2004 which comprise the consolidated profit and Kingdom law and accounting standards. They are loss account, the balance sheets, the consolidated also responsible for the preparation of the other cash flow statement, the consolidated statement information contained in the annual report including of total recognised gains and losses, the statement the Directors’ Remuneration Report. Our responsibility of accounting policies and the related notes 1 to is to audit the financial statements in accordance 26 together with the reconciliation of consolidated with relevant United Kingdom legal and regulatory shareholders’ funds. These financial statements have requirements and auditing standards. been prepared under the accounting policies set out therein. We report to you our opinion as to whether the financial statements give a true and fair view and This report is made solely to the Company’s members, whether the financial statements have been properly as a body, in accordance with section 235 of the prepared in accordance with the Companies Act 1985. Companies Act 1985. Our audit work has been We also report if, in our opinion, the Directors’ Report undertaken so that we might state to the Company’s is not consistent with the financial statements, if the members those matters we are required to state to Company has not kept proper accounting records, them in an auditors’ report and for no other purpose. if we have not received all the information and To the fullest extent permitted by law, we do not explanations we require for our audit, or if information accept or assume responsibility to anyone other than specified by law regarding Directors’ Remuneration and the Company and the Company’s members as a body, transactions with the Company and other members of for our audit work, for this report, or for the opinions the Group is not disclosed. we have formed. We read the Directors’ Report and the other information contained in the annual report for the above year as described in the contents section and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements.

38 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 BASIS OF AUDIT OPINION OPINION We conducted our audit in accordance with United In our opinion the financial statements give a true and Kingdom auditing standards issued by the Auditing fair view of the state of affairs of the Company and Practices Board. An audit includes examination, on a the Group as at 31 March 2004 and of the profit of test basis, of evidence relevant to the amounts and the Group for the year then ended, and the financial disclosures in the financial statements and the part statements have been properly prepared in accordance of the Directors’ Remuneration Report described as with the Companies Act 1985. having been audited. It also includes an assessment of the significant estimates and judgements made by the Deloitte & Touche LLP Directors in the preparation of the financial statements CHARTERED ACCOUNTANTS AND REGISTERED AUDITORS and of whether the accounting policies are appropriate to the circumstances of the Company and the Group, Birmingham consistently applied and adequately disclosed. 25 May 2004

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the financial statements.

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 39 CONSOLIDATED PROFIT AND LOSS ACCOUNT For the year ended 31 March 2004

2004 2003 Note £’000 £’000 Turnover 2 72,832 73,339 Less share of joint venture’s turnover (4,173) (4,026) Group turnover 68,659 69,313

Operating costs (net) 3 (47,549) (47,755)

Operating profit Group operating profit 21,110 21,558 Share of joint venture’s operating loss (251) (163)

Total operating profit: Group and share of joint venture 2 20,859 21,395 Net interest payable 7 (6,344) (4,613)

Profit on ordinary activities before taxation 14,515 16,782 Taxation on profit on ordinary activities 8 (3,974) (4,423)

Profit on ordinary activities after taxation 10,541 12,359

Dividends paid and proposed 9 Ordinary dividend (5,856) (6,830) Restructuring dividend – (65,000)

Retained profit/(loss) for the year 23 4,685 (59,471)

Earnings per share Basic 10 83.1p 97.5p Diluted 10 83.1p 97.5p

A statement of movements in reserves is given in note 23 to the accounts.

The results above are derived from continuing operations.

The accompanying notes are an integral part of these accounts.

40 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 CONSOLIDATED BALANCE SHEET As at 31 March 2004

2004 2003 Note £’000 £’000 Fixed assets Tangible assets 11 153,360 138,417

Current assets Stocks 15 1,047 1,259 Debtors 16 8,820 10,015 Cash at bank and in hand 1,022 871 10,889 12,145 Creditors – amounts falling due within one year Borrowings 17 (3,264) (3,836) Other creditors 18 (27,606) (29,857) (30,870) (33,693)

Net current liabilities (19,981) (21,548)

Total assets less current liabilities 133,379 116,869

Creditors – amounts falling due after more than one year Borrowings 17 (91,816) (90,190)

Provisions for liabilities and charges 20 (8,654) (7,021) Accruals and deferred income 13 (4,554) (4,352) Net assets 28,355 15,306

Capital and reserves Share capital 22 5,412 5,384 Share premium 23 10,269 1,933 Merger reserve 23 (253) (253) Profit and loss account 23 12,927 8,242 Equity shareholders’ funds 28,355 15,306

The accompanying notes are an integral part of these accounts.

The accounts were approved by the Board of Directors on 25 May 2004.

D B Sankey A P Page

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 41 COMPANY BALANCE SHEET As at 31 March 2004

2004 2003 Note £’000 £’000 Fixed assets Investments 14 5,673 5,373

Current assets Debtors 16 8,588 3,318 Cash at bank and in hand 8,000 — 16,588 3,318 Creditors – amounts falling due within one year Other creditors 18 (4,380) (3,318)

Net current assets 12,208 —

Total assets less current liabilities 17,881 5,373

Net assets 17,881 5,373

Capital and reserves Share capital 22 5,412 5,373 Share premium 23 10,269 — Profit and loss account 23 2,200 — Equity shareholders’ funds 17,881 5,373

The accompanying notes are an integral part of these accounts.

The accounts were approved by the Board of Directors on 25 May 2004.

D B Sankey A P Page

42 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 SUPPLEMENTARY STATEMENTS For the year ended 31 March 2004

Consolidated Statement of Total Recognised Gains and Losses

2004 2003 £’000 £’000

Profit for the financial year 10,541 12,359 Total recognised gains and losses relating to the year 10,541 12,359

Reconciliation of Movements in Consolidated Shareholders’ Funds

Profit for the financial year 10,541 12,359 Dividends (5,856) (71,830) 4,685 (59,471) New share capital subscribed 8,364 — Net additions/(reduction) to shareholders’ funds 13,049 (59,471) Opening shareholders’ funds 15,306 74,777 Closing shareholders’ funds 28,355 15,306

The accompanying notes are an integral part of these accounts.

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 43 CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 March 2004

2004 2003 Note £’000 £’000 £’000 £’000

Net cash inflow from operating activities (a) 31,389 30,094

Returns on investments and servicing of finance: Interest paid (3,490) (1,990) Interest element of finance lease and hire-purchase rental payments (318) (394) Net cash outflow from returns on investments and servicing of finance (3,808) (2,384)

Taxation: Corporation tax paid (2,548) (4,736)

Capital expenditure and financial investment: Purchase of tangible fixed assets (31,161) (25,353) Investment in joint ventures — (100) Sale of tangible fixed assets 859 365 Capital contributions received 4,782 4,795 Net cash outflow from capital expenditure and financial investment (25,520) (20,293)

Equity dividends paid (6,256) (72,274)

Financing: Issue of ordinary share capital 8,364 — Proceeds from bond issue — 83,712 Capital element of finance lease and hire-purchase rental payments (971) (909) Net cash inflow from financing 7,393 82,803 Increase in cash 650 13,210

The accompanying notes are an integral part of these accounts.

44 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 March 2004

(a) Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities

2004 2003 £’000 £’000 £’000 £’000 Total operating profit: Group and share of joint venture 20,859 21,395

Depreciation (non-infrastructure assets) 6,244 5,991 Depreciation (infrastructure assets) 5,485 5,016 Amortisation of capital contributions (259) (208) Profit on disposal of tangible fixed assets (691) (312) 10,779 10,487 Share of operating loss in joint venture 251 163 Decrease in stocks 212 27 Decrease/(increase) in debtors 1,195 (65) Decrease in creditors (1,907) (1,913) (500) (1,951) Net cash inflow from operating activities 31,389 30,094

(b) Reconciliation of Movement in Net Debt 2004 2003 £’000 £’000 Increase/(decrease) in cash 151 (150) Decrease in bank loans and overdraft 499 13,360 650 13,210 Debt repayments 971 909 Assets purchased under finance leases — (655) Index-linked bond - proceeds from issue — (83,712) - indexation (2,524) (1,705) Increase in net debt in year (903) (71,953) Net debt brought forward (93,155) (21,202) Net debt carried forward (94,058) (93,155)

(c) Analysis of Net Debt Balance at Balance at 1 April Non Cash 31 March 2003 Cash Flow Changes 2004 £’000 £’000 £’000 £’000 Cash at bank and in hand and bank loans and overdraft (1,951) 650 — (1,301) Irredeemable debenture stock (1,633) — — (1,633) Index-linked bond (85,417) — (2,524) (87,941) Obligations under finance leases and hire-purchase contracts (4,154) 971 — (3,183) Net debt (93,155) 1,621 (2,524) (94,058)

Non cash movements represent indexation on the index-linked bond.

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 45 NOTES TO THE ACCOUNTS

1 Statement of Accounting Policies Companies Act 1985, namely that the fair value of any non-equity consideration must not exceed 10 per The principal accounting policies are summarised cent of the nominal value of equity shares issued as below. They have all been applied consistently consideration. However, the Directors consider that throughout the year and the preceding year. in substance the consideration comprised equity share capital with no net cash impact and that the (a) Basis of Accounting alternative approach of acquisition accounting, with The accounts have been prepared under the the restatement of separable assets and liabilities to historical cost convention and in accordance with fair values, the creation of goodwill, and the inclusion the requirements of the London Stock Exchange and of post reorganisation results only would not give a applicable accounting standards. In order to show a true and fair view of the Group's results and financial true and fair view, the Company has departed from the position. The substance of the transactions was not requirements of the Companies Act 1985 in respect of the acquisition of businesses but rather a group merger accounting for group reconstructions and in reconstruction under which the ultimate shareholders respect of accounting for capital contributions. Further of the businesses transferred, and their rights relative details are provided in (b) and (f) below respectively. to the others, remained unchanged. The Directors' consider that it is not practicable to quantify the (b) Basis of Consolidation effect of this departure from the Companies Act 1985 Prior to the demerger, a group reconstruction was requirements. completed in order to transfer legal ownership of certain companies and businesses to South For the consolidated accounts, including comparative Staffordshire Plc or its subsidiaries. On 22 December figures, the adoption of merger accounting presents 2003, the Company purchased the entire issued share the Group as if it had always existed in its current capital of Echo Managed Services Limited and Rapid structure. Systems Limited from South Staffordshire Enterprises Limited, a then fellow group undertaking. In addition, (c) Joint Ventures on 27 February 2004, the Company acquired the The Group’s share of turnover and profit or loss of joint entire issued share capital of Onsite North Midlands ventures is included in the consolidated profit and Limited from, a then fellow group undertaking Onsite loss account. The Group’s share of their net assets or Resources Limited. On the same day, this new subsidiary liabilities is included in the consolidated balance sheet. purchased the trade and assets, except for cash and cash equivalents, of the underground pipeline services (d) Turnover business of, a then fellow group undertaking, Onsite Regulated Water turnover includes amounts billed Central Limited. On 2 March 2004 this new subsidiary together with an estimation of amounts unbilled at the changed its name to Underground Pipeline Services year end. Limited. In order to finance these purchases, on 3 March 2004, the Company issued 10,682 ordinary shares of £1 Software licence income is recognised within turnover each for a consideration of £4,260,000 cash. This cash once software implementation and customer was then used to settle the inter company balances acceptance are complete. Income from separate payable relating to the above purchases. software maintenance contracts is recognised evenly over the contract period to which it relates. Income In accordance with Financial Reporting Standard generated through the performance of development Number 6, the above group reorganisation has been services is included within turnover on the basis that accounted for using merger accounting principles, turnover is matched with the delivery of the service. in order to meet the overriding requirement under section 227 (6) of the Companies Act 1985 for financial Turnover of other non-regulated activities represents statements to present a true and fair view. As the amounts receivable excluding VAT, from the sale of above transactions were in two stages, they do not goods and services. meet all of the conditions for merger accounting under

46 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 (e) Tangible Fixed Assets and Depreciation (f) Capital Contributions Tangible fixed assets comprise infrastructure assets Capital contributions, which arise in the regulated water (consisting of water mains, impounding and pumped business, are treated as deferred income and amortised raw water storage reservoirs and dams), operational over the estimated useful lives of the assets concerned, structures (being pumping stations, treatment stations, except in the case of contributions towards the cost boreholes and service reservoirs) and other assets. of infrastructure assets which are not amortised. This departure from the requirements of the Companies Act Infrastructure Assets 1985 is, in the opinion of the Directors, necessary for the Infrastructure assets comprise a network of systems financial statements to show a true and fair view as it is that, as a whole, is intended to be maintained in not possible to amortise contributions to the profit and perpetuity at a specified level of service by the loss account over the lives of the fixed assets concerned, continuing replacement and refurbishment of its as infrastructure assets do not have determinable finite components. Expenditure on infrastructure assets lives. relating to increases in capacity or enhancements of the networks and on maintaining the operating capability (g) Leased Assets of the network in accordance with defined standards of Assets financed by leasing and hire-purchase service are treated as additions which are included at arrangements which transfer substantially all the risks cost. and rewards of ownership to the Group are included in tangible fixed assets, and the net obligation to The depreciation charge for infrastructure assets is pay future rentals is included in creditors. Rentals are the level of annual expenditure required to maintain apportioned between finance charges and a reduction the operating capability of the network which is of the outstanding liability for future rentals so as based on the Company’s independently certified asset to produce a constant charge to the profit and loss management plan. account based upon the capital outstanding. Operating lease rentals are charged to the profit and loss account Other Assets on a straight line basis. Other assets are stated at cost less accumulated depreciation and any provision for impairment. (h) Investments Depreciation is provided on a straight line basis to Investments held as fixed assets are stated at cost less write off the cost less estimated residual value over the amounts written off and any provision for impairment. estimated useful lives of the assets, with the exception In accordance with Section 132 of the Companies Act of land which is not depreciated. The estimated useful 1985, the cost of investments acquired from a fellow lives of assets are as follows: group undertaking by way of a share for share exchange are recorded at the higher of the nominal value of the Buildings and Service Reservoirs 50-80 years shares issued as consideration and the carrying value of Boreholes 100 years the investment in the transferring company. Fixed Plant 20–30 years Meters 15 years (i) Stocks Mobile Plant 5 years Stocks are valued at the lower of cost and net realisable Motor Vehicles 3–7 years value. Cost includes an appropriate element of Office Equipment 5–7 years overheads. Provision is made for obsolete, slow moving or defective items where appropriate.

(j) Pensions For the defined benefit scheme the cost of pension contributions is charged to the profit and loss account on a systematic basis over the average service lives of the employees, in accordance with the advice of an independent actuary. For defined contribution schemes the amount charged to the profit and loss account is the contributions payable in the year.

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 47 NOTES TO THE ACCOUNTS

(k) Research and Development Research and development expenditure is charged to the profit and loss account in the year in which it is incurred.

(l) Taxation Corporation tax payable is provided on taxable profits at the current rate. Deferred tax is provided in respect of capital allowances in excess of depreciation and all other timing differences that have originated but not reversed at the balance sheet date using the current rate of tax. The liability is discounted, using the yield to maturity on government gilts, to reflect the time value of money over the period between the balance sheet date and the date on which the timing differences are expected to reverse.

(m) Index-Linked Bond The index-linked bond is carried in the balance sheet at an amount equal to the sum of the proceeds received on issue and indexation to date, less issue costs. The premium/discount and costs of issue are amortised over the life of the bond and included in net interest payable in the profit and loss account, together with interest paid for the period and indexation.

(n) Related Party Transactions As at 31 March 2004, the Company was a directly wholly owned subsidiary undertaking of Homeserve plc, the then ultimate controlling party. As such, the Company has taken advantage of the exemption in FRS 8 "Related Party Disclosures" from disclosing transactions with other members of the group headed by Homeserve plc, as consolidated financial statements for the year ended 31 March 2004, in which the accounts of the Company and its subsidiaries are included, are publicly available. The Company has no other related party transactions requiring disclosure.

48 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 2 Segmental Information

Turnover 2004 2003 £’000 £’000 Regulated water supply 60,427 58,836 Non-regulated activities 24,691 26,590 Inter-divisional (12,286) (12,087) External non-regulated activities 12,405 14,503 72,832 73,339

Inter-divisional turnover relates to non-regulated activities charged to the regulated water supply business.

Operating Profit 2004 2003 £’000 £’000 Regulated water supply 16,774 16,028 Non-regulated activities 4,085 5,367 20,859 21,395

Net Operating Assets 2004 2003 £’000 £’000 Regulated water supply 132,792 118,959 Non-regulated activities 4,485 3,028 137,277 121,987 Net debt (94,058) (93,155) Proposed dividend (4,380) (4,780) Corporation tax (1,830) (1,725) Provisions for liabilities and charges (8,654) (7,021) Net assets 28,355 15,306

All turnover, operating profit and net operating assets arise in the United Kingdom.

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 49 NOTES TO THE ACCOUNTS

3 Operating Costs (Net) 2004 2003 £’000 £’000 Other operating income (note 6) (1,127) (817) Raw materials and consumables 3,717 3,576 Staff costs (note 4) 14,928 15,744 Depreciation (infrastructure assets) 5,485 5,016 Depreciation (non-infrastructure assets) 6,244 5,991 Other operating costs 18,302 18,245 47,549 47,755

Auditors' remuneration is analysed as follows: 2004 2003 £'000 £'000 Audit services Statutory audit 41 28 Audit related regulatory reporting to OFWAT 50 11 Other audit related reporting — 15 91 54

Tax services Compliance services 12 9 Advisory services — 1 12 10 103 64

The statutory audit fee for the Company was £1,000 (2003: £1,000).

4 Staff Costs 2004 2003 £’000 £’000 Wages and salaries 13,022 13,832 Social security costs 1,061 1,009 Pension costs 845 903 14,928 15,744

2004 2003 Number Number Average number of employees Regulated water supply 337 342 Non-regulated activities 184 185 521 527

50 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 5 Directors’ Remuneration

The remuneration of the Directors of the Company for their period of service, paid by the Group, for the year ended 31 March 2004 is set out below.

2004 2003 £’000 £’000 Emoluments 168 180

There were 2 Directors accruing benefits under defined benefit schemes (2003: 3 Directors) and 1 Director accruing benefits under a money purchase scheme (2003: 1 Director). No Directors exercised share options, or had interests under the restricted share plan that vested, during either year.

The total remuneration for the year ended 31 March 2004 of the ongoing Directors of the Company is analysed in the Remuneration Report.

The highest paid Director received emoluments of £114,000 (2003: £96,000) and had no gains on exercise of share options (2003: £nil). He is a member of a defined benefit pension scheme which provided for an accrued pension of £40,000 (2003: £35,000) and an accrued lump sum of £119,000 (2003: £105,000) at 31 March 2004.

None of the Directors had a material interest in any contract to which the Group was party during the year or the preceding year. No Director had any interests in the shares of the Company at either year end.

The beneficial interests of the Directors, who held office at the end of the year, together with those of their families, in the shares of Homeserve plc (formerly South Staffordshire Group Plc) at the beginning and end of the year are shown in the table below.

2004 2003 No of Shares No of Shares A. P. Page 25,125 18,950 J. Carnell 8,307 11,652

Details of the interests of the Directors who held office at the year end and the other ongoing Directors in the shares of the Company following the demerger are provided in the Remuneration Report.

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 51 NOTES TO THE ACCOUNTS

Details of outstanding share options, for Directors holding office at the end of the year, in Homeserve plc at the end of the year and the preceding year are shown below.

Granted During Option Date of Exercisable Scheme 31.3.04 the Year 31.3.03 Price Grant from* J. Carnell ESOS 12,500 — 12,500 £3.665 3.6.98 3.6.01 ESOS 10,000 — 10,000 £5.500 17.7.01 17.7.04 ESOS 12,500 — 12,500 £5.890 8.7.02 8.7.05 ESOS 15,000 15,000 — £4.700 1.7.03 1.7.06 SAYE 2,700 — 2,700 £3.000 22.12.99 1.2.05 SAYE 1,807 — 1,807 £4.760 16.1.02 1.2.07

A. Page ESOS 12,500 — 12,500 £3.665 3.6.98 3.6.01 ESOS 50,000 — 50,000 £4.075 30.7.99 30.7.02 ESOS 20,000 — 20,000 £3.775 23.6.00 23.6.03 ESOS 40,000 — 40,000 £5.500 17.7.01 17.7.04 ESOS 17,500 — 17,500 £5.890 8.7.02 8.7.05 ESOS 22,000 22,000 — £4.700 1.7.03 1.7.06 SAYE 3,524 — 3,524 £4.660 10.12.02 1.2.08

*As a result of the demerger, changes to the original earliest exercise date, as detailed above, have been made as follows:

Executive Share Option Schemes Options held under the 2001 Executive Share Option Plan will be exercisable for a period of 6 months following the demerger (to the extent that any performance conditions attached to the options have been satisfied), after which they will lapse.

Options held under the 1991 Executive Share Option Plan will be exercisable for a period of 12 months following the demerger (to the extent that any performance conditions attached to the options have been satisfied), after which they will lapse.

SAYE Schemes Options held under SAYE Schemes will be exercisable for a period of 6 months following the demerger (to the extent of the available proceeds of the relevant savings contracts), after which they will lapse.

As an alternative to the exercise of options, employees can continue to save until the end of their savings contracts or to withdraw their savings in the normal way.

The market price of the shares of Homeserve plc at 31 March 2004 was £6.27 (2003: £3.89 ½). During the year the price ranged from £3.85 to £6.27.

52 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 6 Other Operating Income

2004 2003 £’000 £’000 Profit on disposal of tangible fixed assets 691 312 Rental income 436 505 1,127 817

7 Net Interest Payable

2004 2003 £’000 £’000 Interest payable and similar charges Index-linked bond 5,843 3,614 Bank overdraft and other interest 116 551 Finance charges in respect of finance leases and hire-purchase contracts 318 394 Irredeemable debenture stock 67 67 6,344 4,626 Share of joint venture's interest receivable — (13) 6,344 4,613

Net interest payable includes £6,523,000 in the regulated water supply business (2003: £4,728,000).

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 53 NOTES TO THE ACCOUNTS

8 Taxation on Profit on Ordinary Activities

The tax charge for the year comprises: 2004 2003 £’000 £’000 Current tax Current year 2,534 3,738 Adjustment in respect of prior years 119 (711) Total current tax charge 2,653 3,027

Deferred tax Origination and reversal of timing differences 1,745 1,548 Increase in discount (266) (152) Adjustment in respect of prior years (158) — Total deferred tax charge 1,321 1,396 Total tax charge 3,974 4,423

The overall rate of tax for the Group, including deferred tax, based on profit before tax was 27.4% (2003: 26.4%).

The principal differences between the current corporation tax rate for the Group, based on profit before tax, and the standard rate of corporation tax are as follows:

2004 2003 % % Standard rate of corporation tax 30.0 30.0 Expenses not deductible for tax purposes (net) (0.6) — Capital allowances in excess of depreciation (11.9) (7.8) Adjustments in respect of prior years 0.8 (4.2) Current corporation tax rate for the year 18.3 18.0

9 Dividends Paid and Proposed

2004 2003 £’000 £’000 Equity interests Ordinary dividends – Interim dividend paid of 11.6p (2003: 16.2p) per share 1,476 2,050 – Proposed dividend of 34.4p (2003: 37.7p) per share 4,380 4,780 5,856 6,830 Restructuring dividend – Interim dividend paid of £nil (2003: £5.13) per share — 65,000 5,856 71,830

The 2004 interim dividend of £1,476,000 (11.6p per share) was paid to the then immediate and ultimate holding company, Homeserve plc. The 2004 final dividend of £4,380,000 (34.4p per share) will be paid, on 1 July 2004, to the shareholders of the Company on the register at close of business on 4 June 2004.

54 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 10 Earnings per Share

The calculation of earnings per share is based on profit after tax divided by the weighted average number of shares in issue during the year, taking into account the effects of the pre demerger reorganisation and the sub-division and consolidation of shares. During both years, there were no outstanding options over the Company’s shares and as such the basic and diluted earnings per share are equivalent.

The calculations of earnings per share are based on the following profits and numbers of shares:

2004 2003 £’000 £’000 Profit for the financial year and profit for earnings per share 10,541 12,359

2004 2003 Number of Number of Shares Shares Weighted average number of shares For basic earnings per share 12,678,267 12,675,200 Exercise of share options — — For diluted earnings per share 12,678,267 12,675,200

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 55 NOTES TO THE ACCOUNTS

11 Tangible Fixed Assets

Group Infra- Fixed Specialised Land and structure Plant and Operational Buildings Assets Equipment Assets Total £’000 £’000 £’000 £’000 £’000 Cost At 1 April 2003 15,746 104,272 42,175 83,833 246,026 Additions 2,340 14,294 10,701 3,826 31,161 Capital contributions received — (4,321) — — (4,321) Disposals — (570) (1,489) (40) (2,099) At 31 March 2004 18,086 113,675 51,387 87,619 270,767

Depreciation At 1 April 2003 2,487 60,089 22,996 22,037 107,609 Charge for the year 217 5,485 5,645 382 11,729 Disposals — (570) (1,323) (38) (1,931) At 31 March 2004 2,704 65,004 27,318 22,381 117,407

Net Book Value At 31 March 2004 Owned 15,382 44,444 20,456 64,827 145,109 Leased — 4,227 3,613 411 8,251 15,382 48,671 24,069 65,238 153,360

At 31 March 2003 Owned 13,259 39,956 17,877 58,370 129,462 Leased — 4,227 1,302 3,426 8,955 13,259 44,183 19,179 61,796 138,417

Infrastructure renewals expenditure and the charge to the profit and loss account have been included within infrastructure assets cost and accumulated depreciation respectively. The net book value of infrastructure assets is stated net of capital contributions. The balance of capital contributions at 31 March 2004 and movements in the year are set out in note 13 below.

Tangible fixed assets financed by leasing and hire-purchase contracts amounted to £11,893,000 (2003: £12,280,000) less accumulated depreciation of £3,642,000 (2003: £3,325,000). Depreciation charged to the profit and loss account for the year in respect of leased assets amounted to £559,000 (2003: £564,000). Tangible fixed assets include freehold land of £1,916,000 (2003: £1,752,000) which is not subject to depreciation.

The Company had no tangible fixed assets at either year end.

12 Capital Commitments

Group capital commitments outstanding at 31 March 2004 were £1,004,000 (2003: £9,466,000). The Company had no capital commitments at either year end.

56 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 13 Capital Contributions

Group Infrastructure Other Assets Assets £’000 £’000 Balance at 1 April 2003 52,244 4,352 Capital contributions received 4,321 461 Disposals (283) — Amortised in year — (259) Balance at 31 March 2004 56,282 4,554

Capital contributions in respect of other assets are included in accruals and deferred income.

The Company had no capital contributions at either year end.

14 Investments

Company Shares in Subsidiary Undertakings £’000 Cost and net book value At 1 April 2003 5,373 Additions 300 At 31 March 2004 5,673

Additions relate to the purchase of Echo Managed Services Limited and Rapid Systems Limited from South Staffordshire Enterprises Limited. The purchases have been treated as a group reconstruction as defined by FRS 6 and as such these subsidiaries have been consolidated using the merger accounting method of consolidation.

As at 31 March 2004 the Company’s principal subsidiary undertakings and joint venture, all of which are incorporated in the United Kingdom and all of which have only ordinary shares in issue, were as follows:

Proportion of Shares Held Nature of Principal Business Direct Indirect South Staffordshire Water PLC 100% Water supply

Echo Managed Services Limited 100% Customer management Echo South West Limited 50% Customer management joint venture Rapid Systems Limited 100% Development, sale and maintenance of software

Underground Pipeline Services Limited 100% Repair, maintenance and replacement of water mains

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 57 NOTES TO THE ACCOUNTS

15 Stocks

Group 2004 2003 £’000 £’000 Stores and raw materials 742 801 Work in progress 305 458 1,047 1,259

The Company had no stocks at either year end.

16 Debtors Group Company 2004 2003 2004 2003 £’000 £’000 £’000 £’000 Amounts recoverable within one year Trade debtors 5,089 7,040 — — Other debtors 457 85 8 — Amounts owed by joint venture 100 100 — — Amounts owed by Group undertakings — — 8,580 3,318 Prepayments and accrued income 3,036 2,732 — — 8,682 9,957 8,588 3,318 Amounts recoverable after more than one year Other debtors 138 58 — — 8,820 10,015 8,588 3,318

17 Borrowings

Group 2004 2003 £’000 £’000 Amounts falling due within one year Bank loans and overdraft 2,323 2,822 Obligations under finance leases and hire purchase contracts 941 1,014 3,264 3,836

Amounts falling due after more than one year Index-linked bond 87,941 85,417 Irredeemable debenture stock (note 19) 1,633 1,633 Obligations under finance leases and hire-purchase contracts: Payable between one and two years 715 924 Payable between two and five years 1,527 2,014 Payable after five years — 202 91,816 90,190

58 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 South Staffordshire Water PLC issued an £85,000,000 3.75% Retail Price Index-linked unsecured bond, £75,000,000 on 22 August 2002 and £10,000,000 on 26 September 2002. The bond is repayable in 2025 and is included in the balance sheet at an amount equal to the sum of the proceeds received on issue and indexation to date, less unamortised issue costs.

The obligations under finance leases and hire purchase contracts are secured on the assets to which they relate.

The Company had no borrowings at either year end.

18 Other Creditors

Group Company 2004 2003 2004 2003 £’000 £’000 £’000 £’000 Amounts falling due within one year Trade creditors 10,990 10,350 — — Payments received in advance 5,965 5,921 — — Other creditors 4,021 6,676 — — Proposed dividends 4,380 4,780 4,380 3,318 Corporation tax payable 1,830 1,725 — — Other taxation and social security 420 405 — — 27,606 29,857 4,380 3,318

19 Irredeemable Debenture Stock

Group 2004 2003 £’000 £’000 3½% 476 476 4% 627 627 5% 500 500 1,603 1,603 Net premium on irredeemable debenture stock 30 30 1,633 1,633

The Company had no irredeemable debenture stock at either year end.

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 59 NOTES TO THE ACCOUNTS

20 Provisions for Liabilities and Charges

Group Share of Deferred Joint Venture Tax Net Liabilities Total £’000 £’000 £’000 At 1 April 2003 6,903 118 7,021 Profit and loss account charge 1,321 251 1,572 Amounts acquired with tangible fixed assets 61 — 61 At 31 March 2004 8,285 369 8,654

The Group’s share of gross assets and gross liabilities in joint ventures was £685,000 (2003: £1,106,000) and £1,054,000 (2003: £1,224,000) respectively.

An analysis of deferred tax is set out in note 21.

The Company had no provisions for liabilities and charges at either year end.

21 Deferred Tax

Group 2004 2003 £’000 £’000 Deferred tax is provided as follows: Accelerated capital allowances 16,111 14,493 Other timing differences 31 (132) Undiscounted provision for deferred tax 16,142 14,361 Discount (7,857) (7,458) Discounted provision for deferred tax 8,285 6,903

There is an unprovided deferred tax liability of £520,000 (2003: £520,000) on capital gains rolled over into other assets of the Group. This will crystallise if the Company sells the assets into which the gain has been rolled into.

The movement in the discount of £399,000 comprises a credit to the profit and loss account of £266,000 and £133,000 acquired with tangible fixed assets.

The Company had no deferred tax at either year end.

22 Share Capital

Group 2004 2003 £’000 £’000 Authorised 47,058,824 ordinary shares of 42.5p each (2003: 5,383,893 ordinary shares of £1 each) 20,000 5,384

Issued and fully paid 12,733,200 ordinary shares of 42.5p each (2003: 5,383,893 ordinary shares of £1 each) 5,412 5,384

60 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 Company 2004 2003 £’000 £’000 Authorised 47,058,824 ordinary shares of 42.5p each (2003: 5,373,211 ordinary shares of £1 each) 20,000 5,373 Issued and fully paid 12,733,200 ordinary shares of 42.5p each (2003: 5,373,211 ordinary shares of £1 each) 5,412 5,373

In accordance with the principles of merger accounting, the increase in Group share capital over Company share capital as at 31 March 2003, represents the shares that would have been issued as consideration, had the businesses that are being consolidated using merger accounting been transferred from associated undertakings as at that date. Similarly, the share premium generated of £1,933,000 in the Company from these transactions has, in the Group balance sheet, been assumed to have been generated as at 31 March 2003.

Group Company Ordinary Ordinary Share Capital Share Capital £’000 £’000 Balance at 1 April 2003 5,384 5,373 Shares issued in the year 28 39 Balance at 31 March 2004 5,412 5,412

By ordinary resolution passed on 3 March 2004, the authorised share capital of the Company was increased to 20,000,000 ordinary shares of £1 each by the creation of 14,626,789 ordinary shares of £1 each ranking pari passu in all respects with the existing shares of the Company. On the same day, the Company issued 30,744 new ordinary shares of £1 each. 10,682 of these shares were issued for cash of £4,260,000 that was immediately used to settle balances payable relating to the transfer of various businesses and subsidiaries from associated undertakings outside the Group headed by the Company. Accordingly, as stated above, in accordance with the principles of merger accounting, it is assumed that these shares were in issue as at 31 March 2003. The remaining 20,062 shares of £1 each were issued for £8,356,000 generating a share premium of £8,335,938.

In addition, by ordinary resolution passed on 3 March 2004 following the above, each ordinary share of £1 each was subdivided into 40 ordinary shares of 2½p each and then every 17 such ordinary shares of 2½p each were consolidated into 1 ordinary share of 42½p.

On 31 March 2004, the Company issued 18,013 ordinary shares of 42½p each for cash at their nominal value.

23 Reserves

Group Share Merger Profit and Premium Reserve Loss Account £’000 £’000 £’000 At 1 April 2003 1,933 (253) 8,242 Premium on shares issued 8,336 — — Retained profit for the year — — 4,685 At 31 March 2004 10,269 (253) 12,927

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 61 NOTES TO THE ACCOUNTS

Company Share Profit and Premium Loss Account £’000 £’000 At 1 April 2003 — — Premium on shares issued 10,269 — Retained profit for the year — 2,200 At 31 March 2004 10,269 2,200

As provided by Section 230 of the Companies Act 1985, the Company has not presented its own profit and loss account. The Company’s profit for the financial year was £8,056,000 (2003: £70,368,000).

24 Financial Liabilities

The Group’s financial liabilities included below comprise borrowings and creditors falling due after more than one year. These do not include short term debtors and creditors. The main purpose of these financial instruments is to raise finance for the Group’s operations. It is, and has been throughout the period under review, the Group’s policy that no trading in financial instruments shall be undertaken. The Group’s policy in respect of cash and borrowings, is to maintain flexibility with a balance between fixed and floating rates and long and short term debt.

Interest Rate Risk Profile 2004 2003 £’000 £’000 Retail Price Index-linked bond 87,941 85,417 Fixed rate financial liabilities 4,816 5,787 Floating rate financial liabilities 2,323 2,822 95,080 94,026

The revenues of the regulated water supply business are linked to the Retail Price Index and provide an effective hedge against the index-linked element of the interest charge on the long-term Retail Price Index-linked bond. The Group’s remaining debt was weighted towards floating interest rates and short-term debt.

The Group is not subject to any material foreign exchange risk.

For all debt, assets and liabilities, the book values and fair values (based on market values) are not materially different, except for the £85,000,000 index-linked bond, the fair value of which, based on market value at 31 March 2004 was £99,634,000 (2003: £89,939,000).

62 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 Fixed Rate Financial Liabilities Weighted Weighted average average period for which interest rate rate is fixed % years 2004 Sterling 7.9 3.1 2003 Sterling 8.3 3.9

The floating rate financial liabilities comprise sterling denominated bank loans and overdrafts that bear interest at rates based on LIBOR. The Group’s cash balances earn interest at floating rates linked to LIBOR.

Maturity of Financial Liabilities

The maturity profile of the Group’s financial liabilities at 31 March was as follows: 2004 2003 £’000 £’000 In one year or less, or on demand 3,264 3,836 In more than one year, but not more than two 715 924 In more than two years, but not more than five 1,527 2,014 In more than five years, but not more than twenty — 202 In more than twenty years 89,574 87,050 95,080 94,026

Borrowing Facilities

The Group has various borrowing facilities available to it. The undrawn committed facilities available at 31 March 2004 and following the demerger in respect of which all conditions precedent have been met were as follows:

2004 2003 £’000 £’000 Expiring in one year or less — 8,000 Expiring in more than one year but not more than two years 10,000 8,300 Expiring in more than two years 20,000 — 30,000 16,300

25 Pension Retirement Benefits

The Group operates a number of funded pension schemes for the benefit of its employees. The Group participates in the Water Companies Pension Scheme, by way of a separate sub-fund, which provides benefits based on final pensionable pay. Certain employees of the Homeserve plc group were also members of this sub-fund at 31 March 2004. As a result of the demerger, a separate sub-fund has been established within the scheme for the Homeserve plc group of companies. Assets and liabilities relating to the Homeserve group are in the process of being transferred out of the existing sub-fund. The Group also operates a defined contribution Money Purchase Plan Pension Scheme. The assets of these schemes are held separately from those of the Group, being invested by discretionary fund managers.

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 63 NOTES TO THE ACCOUNTS

The contributions to the defined contribution schemes are charged against profits as incurred. The amount charged to the profit and loss account for the defined benefit scheme is the estimated regular cost of providing the benefits accrued in the year, adjusted to reflect variations from that cost.

The regular cost of the defined benefit scheme is calculated so that it represents a substantially level percentage of current and future pensionable payroll. Variations from regular cost are charged or credited to the profit and loss account over 13 years, being the estimated average remaining working life of Scheme members. The regular cost and the variations are determined by a qualified actuary on the basis of triennial valuations, using the current unit method for death in service benefits and the projected unit method for other benefits.

The most recent actuarial valuation at 1 April 2002 showed the market value of the Group’s sub-fund as £121.3 million, and that the actuarial value of those assets represented 113% of the benefits that had accrued to members after allowing for expected future increases in earnings.

As required by SSAP 24, the figures included in the accounts in respect of the defined benefit pension scheme are based on the 1 April 2002 actuarial valuation. This does not take into account any impact of the fall in general stock market values since that date. Any such impact will be reflected in the next SSAP 24 valuation as at 1 April 2005 based upon which subsequent pension costs will be determined until the adoption of FRS 17.

The assumptions which have the most significant effect on the results of the valuation are those relating to the rate of return on investments and the rates of increase in salaries, wages and pensions. The valuation at 1 April 2002 assumed that equity returns would be 7.2% per annum, that salary and wage increases would average 4.8% per annum and that present and future pensions would increase at the rate of 2.8% per annum.

In accordance with the recommendations of the actuary, the amount charged to the Group's profit and loss account for the defined benefit scheme in 2004 was £791,000 (2003: £866,000) representing an employer’s contribution rate of 9.6%. The amount charged to the profit and loss account for the defined contribution scheme in 2004 was £54,000 (2003: £37,000).

The employer's contribution rate from 1 April 2004 is to be increased to 16.3%.

Financial Reporting Standard 17

Additional disclosures regarding the Group’s defined benefit pension scheme are required under the transitional provisions of FRS 17. At 31 March 2004, the scheme was a multi employer pension scheme and, as such, it is not reasonably practicable for the Group to identify its share of the underlying assets and liabilities of the scheme as at that date. As approximately 85% of the sub-fund's active members are employees of the Group, the FRS 17 disclosures made in the consolidated financial statements of Homeserve plc for the year ended 31 March 2004 have been set out below. However, the information presented represents that for the whole sub-fund and not the proportion relating to the Group. It is anticipated that following completion of the separation of the assets and liabilities relating to the Homeserve group, the Group's sub-fund will retain approximately 85% of the deficit calculated on an ongoing basis. The disclosures relate to the third year of the transitional provisions. They provide information, which will be necessary for full implementation of FRS 17 in due course. The Accounting Standards Board has delayed the mandatory full implementation of the Standard, which will not now be required before 2005.

The actuarial valuation described above has been updated at 31 March 2004 by a qualified actuary using revised assumptions that are consistent with the requirements of FRS 17. Investments have been valued for this purpose at market value.

64 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 The major assumptions used were as follows:

31 March 31 March 31 March 2004 2003 2002 % % % Rate of increase in salaries 4.9 4.5 4.8 Rate of increase in pensions 2.9 2.5 2.8 Discount rate 5.5 5.6 6.1 Inflation 2.9 2.5 2.8

The market value of the assets in the scheme, the present value of the liabilities in the scheme and the expected rate of return at the balance sheet date were:

2004 2003 2002 Expected Expected Expected rate of rate of rate of return return return per annum Valuation per annum Valuation per annum Valuation % £’000 % £’000 % £’000 Equities 7.9 52,756 7.5 38,702 8.3 40,047 Bonds/gilts 4.7 66,989 4.5 61,050 5.2 76,847 Corporate bonds — 5.6 5,046 6.1 2,309 Property — 6.0 1,172 6.7 1,506 Cash 4.6 (603) 3.8 4,116 5.2 830 Market value of assets 119,142 110,086 121,539 Present value of scheme liabilities (131,586) (121,186) (106,179) (Deficit)/surplus in the scheme (12,444) (11,100) 15,360 Related deferred tax asset/(liability) 3,733 3,330 (4,608) (Deficit)/surplus after deferred tax (8,711) (7,770) 10,752

Had FRS 17 been implemented in full throughout the financial year the following amounts would have been charged to the consolidated profit and loss account of Homeserve plc:

2004 2003 £’000 £’000 Amounts included within operating profit: Current service cost 2,518 2,500 Past service cost — 1,400 2,518 3,900 Amounts included as finance (charge)/income: Expected return on scheme assets 6,051 7,500 Interest on scheme liabilities (6,716) (6,400) (665) 1,100

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 65 NOTES TO THE ACCOUNTS

In addition, the following amounts would have been recognised in the statement of total recognised gains and losses:

2004 2003 £’000 £’000 Actual return less expected return on scheme assets 6,899 (15,200) Experience gain on scheme liabilities 3,727 1,000 Effect of changes in assumptions relating to the present value of scheme liabilities (9,982) (10,500) Actuarial gain/(loss) 644 (24,700)

The movement in the scheme (deficit)/surplus during the year was as follows:

2004 2003 £’000 £’000 (Deficit)/surplus in the scheme brought forward (11,100) 15,360 Current service cost (3,238) (3,100) Contributions 1,915 1,640 Past service cost — (1,400) Finance (charge)/income (665) 1,100 Actuarial gain/(loss) 644 (24,700) Deficit in the scheme carried forward (12,444) (11,100)

The impact of FRS 17, if implemented in full throughout the financial year, would have been to increase the amount charged to the Homeserve plc consolidated profit and loss account by £1,973,000 (2003: £1,611,000) and to reduce the reserves of the Homeserve plc group at 31 March 2004 by £8,711,000 (2003: £7,770,000) from £110,532,000 (2003: £101,606,000) to £101,821,000 (2003: £93,836,000).

The following disclosures, relating to amounts charged in the statement of total recognised gains and losses, will be built up over time as a five year history:

2004 2003 % of scheme % of scheme assets/liabilities £’000 assets/liabilities £’000 Actual return less expected return on scheme assets 5.8% 6,899 (13.8%) (15,200) Experience gains on scheme liabilities 2.8% 3,727 0.8% 1,000 Loss due to changes in assumptions underlying the present value of scheme liabilities (7.6%) (9,982) (8.7%) (10,500) Actuarial gain/(loss) 0.5% ,644 (20.4%) (24,700)

26 Post Balance Sheet Events

On 6 April 2004 the Company, and its subsidiary undertakings, were demerged from the group headed by Homeserve plc (formerly South Staffordshire Group Plc). This was effected by the entire share capital of the Company being transferred to the shareholders of Homeserve plc as a dividend in specie. For every 5 shares of 10p each held in Homeserve plc each shareholder received 1 ordinary share of 42½p each in the Company. On 6 April 2004, the Company's shares were admitted to the official list of the United Kingdom Listing Authority (UKLA) and became available for trading on the London Stock Exchange's market for listed securities.

66 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 FOUR YEAR SUMMARY

2004 2003 2002 2001 £’000 £’000 £’000 £’000 Turnover Regulated water supply 60,427 58,836 59,126 58,347 Non-regulated activities 24,691 26,590 22,541 14,304 Inter-division (12,286) (12,087) (13,472) (8,590) 72,832 73,339 68,195 64,061

Operating profit Regulated water supply 16,774 16,028 15,190 14,776 Non-regulated activities 4,085 5,367 4,688 3,969 20,859 21,395 19,878 18,745

Net interest payable (6,344) (4,613) (1,014) (1,052) Profit before tax 14,515 16,782 18,864 17,693

Retained profit/(loss) 4,685 (59,471) 6,973 6,168

Earnings per share 83.1p 97.5p 121.1p 99.4p

Average number of employees 521 527 540 605

Capital investment 31,161 26,038 28,681 20,511

Net assets 28,355 15,306 74,777 67,804

Net debt 94,058 93,155 21,202 17,832

SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004 67 SHAREHOLDER ANALYSIS As at 6 April 2004

Number of Number of % of Total % of Shares Shareholders Shareholders Shares 1–1,000 1,559 78.6% 3.4% 1,001–10,000 306 15.4% 7.4% 10,001–100,000 92 4.6% 24.4% 100,001–200,000 13 0.7% 14.5% 200,001–300,000 5 0.3% 9.6% over 300,000 9 0.4% 40.7% 1,984 100.0% 100.0%

Unit Trusts 39.4% Pension Funds 6.3% Private Investors 6.0% Insurance Companies 9.3% Investment Trusts 1.4% Other 37.6% 100.0%

At 31 March 2004, the entire ordinary share capital of the Company was held by Homeserve plc. The table above shows the shareholder analysis as at 6 April 2004, the first day of trading of the Company’s shares on the London Stock Exchange following the demerger.

FINANCIAL CALENDAR

2004

25 June Annual General Meeting 1 July Final dividend for the year ended 31 March 2004 to be paid November/December Interim results for the six months ending 30 September 2004 to be announced

2005

4 January Interim dividend for the year ending 31 March 2005 to be paid May Preliminary announcement of results for the year ending 31 March 2005 June 2005 Report and Accounts circulated

Regulatory Accounts

South Staffordshire Water PLC is required to publish additional financial information relating to the “Appointed Business” as a water supply company in accordance with its Instrument of Appointment from the Secretary of State for the Environment. A copy of this information is available by application to the Company Secretary at Green Lane, Walsall, WS2 7PD.

68 SOUTH STAFFORDSHIRE PLC REPORT AND ACCOUNTS 2004

SOUTH STAFFORDSHIRE PLC STAFFORDSHIRE SOUTH REPORT AND ACCOUNTS 2004 ACCOUNTS AND REPORT

South Staffordshire Plc Green Lane Walsall West Midlands WS2 7PD

T. 01922 638282 F: 01922 638283 www.south-staffordshire.com