Northumbrian Water Group plc is an independent company quoted on the FTSE 250 Index of the London Stock Exchange. The Group principally works in the provision of water supply and waste water services. Our mission: To be the national leader in the provision of sustainable water and waste water services. Contents Overview Financial statements 01 Highlights 82 Report of the Auditors on the Group 02 NWG at a glance financial statements 04 Measuring performance 84 Consolidated income statement 06 Chairman’s statement 85 Consolidated statement of comprehensive income Directors’ report and business review 86 Consolidated statement of changes in equity 08 Introduction 87 Consolidated balance sheet 10 Business strategy 88 Consolidated cash flow statement 12 Operating environment 89 Notes to the consolidated financial 22 Financial performance statements 32 Operational performance 126 Statement of directors’ responsibilities in 50 Risks and resources relation to the parent Company financial 56 Appendix to the directors’ report and statements business review 127 Report of the Auditors on the Company 58 Board directors’ biographies financial statements 129 Company balance sheet Corporate governance 130 Notes to the Company financial statements 60 Corporate governance report 134 Shareholder information 68 Directors’ remuneration report 81 Statement of directors’ responsibilities in relation to the Group financial statements This annual report has been printed using vegetable based inks on silk and uncoated recycled paper stock. All paper stock used for the production of this annual report is environmentally-friendly ECF (elemental chlorine free) wood free paper and board with a high content of selected pre-consumer recycled material and post-consumer reclaimed material. This product is completely bio-degradable Outer cover designed by Blumilk and recyclable. Telephone +44 (0)191 232 4401 www.blumilk.com Highlights Overview Highlights NWG at a glance Revenue: > Revenue increase mainly reflects the uplift in tariffs to support (2009: £694.1m) ongoing high capital investment > Continued high levels of customer satisfaction £704.7m performance Measuring > Decreased interest charges reflecting lower RPI on index linked bonds (£29.0 million), offset by increased pension financing costs Profit before interest: (2009: £273.6m) (£10.3 million) and higher net interest payable (£3.1 million) > Entire electricity requirement procured through to March 2015 statement Chairman’s £275.8m > Funds in place to meet all the requirements of the business to the end of 2011 (cash and short term deposits at 31 March 2010 Profit before tax: £189.1 million) (2009: £152.7m) > Capital investment in the period of £207.6 million (2009: £228.9 million) on regulatory outputs, including an extended sewer £170.2m flooding programme > Started work to increase capacity at Abberton Reservoir in Essex Profit/(loss) for the year: (2009: (£11.9m)) > Proposed final dividend of 8.85 pence (2009: 8.50 pence) per share to be paid on 10 September 2010, giving a full year ordinary dividend of 13.24 pence (2009: 12.79 pence) per share, an £122.9m increase of 3.5% > The conclusion and acceptance of the price review to March 2015; current progressive dividend policy with annual real growth of 3% continues over next regulatory period Revenue £m Profit before tax £m Dividend per share pence 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006* 2007 2008 2009 2010 800 200 15 700 694.1 704.7 13.24 670.4 170.3 170.2 12 12.79 600 633.5 150 12.07 591.5 147.8 152.7 11.27 10.56 500 130.3 9 400 100 300 6 200 50 3 100 *2006 excludes special dividend of 2.82 pence. 01 Overview NWG at a glance Highlights NWG at a glance Our mission is to be Northumbrian Water Group plc Northumbrian Water Group plc (NWG or the Company) owns a number of the national leader companies which, together with NWG, form the Group. The largest of these in the provision of companies, Northumbrian Water Limited (NWL), is one of the 10 regulated performance Measuring sustainable water and water and sewerage businesses in England and Wales. The emphasis waste water services. given to NWL throughout this report, reflects its importance to the overall performance of the Group. Northumbrian Water Limited statement Chairman’s NWL operates in the north east of England, where it trades as Northumbrian Water, and in the south east of England, where it trades as Essex & Suffolk Water. Northumbrian Water currently provides water and sewerage services to 2.7 million people and Essex & Suffolk Water provides water services to 1.8 million people. NWG revenue £m Water and waste water contracts 8.6 NWG controls a number of special purpose companies which have water 38.3 657.8 and waste water contracts in Scotland, Ireland and Gibraltar. Other SA Agrer NV (Agrer) carries out project work in developing countries through a number of overseas aid funded agencies. NWL Water and waste water contracts Other Cautionary statement This annual report contains certain statements with respect to the future operations, performance and financial condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those forecast. Such statements reflect knowledge and information available at the date of preparation of this annual report and the Company undertakes no obligation to update such statements. Nothing in this annual report should be construed as a profit forecast. Certain regulatory performance data contained in this annual report is subject to regulatory audit. 02 Overview North east England Northumbrian Water provides water Berwick and sewerage services to 2.7 million people in the north east of England. The major population centres of Tyneside, Wearside and Teesside are Highlights in our area but we also serve large rural areas in Northumberland and Alnwick County Durham (provision of waste water services only in Hartlepool). Kielder NWG at a glance Morpeth Newcastle River Tyne Hexham Gateshead performance Measuring Derwent Sunderland Head Ofce Durham River Wear Hartlepool Cow Green statement Chairman’s Darlington River Tees Middlesbrough Norwich Great Yarmouth South east England Norwich Essex & Suffolk Water provides water Great Yarmouth services to two separate supply areas. We serve a population of 0.3 million in Lowestoft our Suffolk area, which is mainly rural with the biggest towns being Great Lowestoft Yarmouth and Lowestoft. SUFFOLK AREA Barsham Our Essex area, which has a Barsham SUFFOLK AREA Southwold population of 1.5 million, is part rural Walpole and part urban with the main areas of Southwold population being in Chelmsford, Walpole Southend and the London Boroughs of Barking and Dagenham, Havering and Redbridge. Aldeburgh Aldeburgh Ipswich Ipswich Colchester ESSEX AREA Abberton Colchester Clacton ESSEX AREA Abberton Langford Clacton Chelmsford Langford Hanningeld Chelmsford Hanningeld Brentwood Southend Romford Basildon Brentwood Barking Southend Romford Basildon Tilbury Barking Tilbury 03 Overview Measuring performance Highlights NWG at a glance NWL performance against non-financial KPIs summary (unaudited) North (N) Target Target Target Performance South (S) 2010/11 2009/10 achieved Current year Previous year performance Measuring Customer satisfaction Overall service (%) N/S 91 90 ✗ 88 88 Value for money (%) N/S 87 85 ✗ 83 84 Customer – levels of service Properties at risk of low pressure N 256 274 ✓ 260 271 statement Chairman’s S 55 126 ✓ 40 40 Properties subject to unplanned N 1,700 3,000 ✗ 8,6711 8,278 interruption of six hours or more S 1,100 2,000 ✓ 1,434 3,353 Properties subject to hosepipe bans at any time N/S 0 0 ✓ 0 0 during the year Properties subject to sewer flooding (other causes) N 150 150 ✗ 281 286 Properties at risk of sewer flooding (once in 10 N 688 76 ✗ 397 559 years or twice in 10 years) Billing contacts responded to (within N 99.3 99.2 ✓ 99.4 99.2 five working days) (%) S 99.3 99.2 ✓ 99.4 99.6 Written complaints responded to N n/a 99.8 ✓ 99.9 99.9 (within 10 working days) (%)2 S n/a 99.8 ✓ 99.9 99.7 Bills based on meter readings (%) N 99.9 99.95 ✗ 99.92 99.90 S 99.9 99.95 ✗ 99.93 99.95 All telephone lines busy (%)2 N n/a 0.05 ✗ 0.17 0.07 S n/a 0.25 ✓ 0.07 0.06 Abandoned telephone calls (%)2 N n/a 3.00 ✗ 7.43 3.43 S n/a 2.00 ✗ 4.31 1.95 Water DWI Mean Zonal Compliance (%) N 99.85 99.90 ✓ 99.91 99.92 S 99.95 99.98 ✗ 99.82 99.99 DWI Operational Performance Index (%) N 99.65 99.65 ✗ 99.58 99.67 S 99.98 99.98 ✗ 99.97 99.98 Distribution Maintenance Index (%) N 99.70 99.70 ✗ 99.21 99.52 S 99.85 99.85 ✓ 99.94 99.96 Environment Sewage treatment works (%) N 100 99.7 ✓ 100 100 Bathing waters Mandatory Standard (%) N 100 100 ✓ 100 100 Pollution incidents (category 1, 2 and 3) N 102 89 ✗ 114 94 Employees Employee turnover (rolling %)3 N/S – Industry – 6.5 6.4 average 9.2 Lost time reportable accidents N/S 4.3 10 ✓ 5.7 6 (per 1,000 employees) Sickness absence (%) N/S 2.85 2.85 ✗ 3.18 2.94 Notes: 1. Performance affected by two major bursts in Tyne & Wear and Northumberland. 2. New Service Incentive Mechanism (SIM) measures have been introduced by Ofwat for 2010/11. These are being piloted and monitored during 2010/11, whereupon appropriate targets will be set. 3. No target set, data for information. 04 Measuring Chairman’s Overview Highlights NWG at a glance performance statement 05 Janus Chairs, Kielder & Forest Water Park Overview Chairman’s statement Highlights NWG at a glance The water industry cannot be immune from economic difficulties facing the UK.