Annual Report and Financial Statements for the Year Ended 31 March 2013
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Annual Report and Financial Statements for the year ended 31 March 2013 Affinity Water Limited (formerly Veolia Water Central Limited) Registered Number 2546950 Saffron Walden Harwich Stevenage Luton Clacton-on-Sea Harlow Watford LONDON Woking Guildford Dover Folkestone Contents Statutory Financial Statements Saffron Walden 4 Business highlights 5 Directors and advisers Harwich Stevenage 6 Chairman’s statement Luton 8 Chief Executive’s business review Clacton-on-Sea 26 Directors’ report Harlow 34 Ownership and corporate governance 44 Remuneration report Watford 50 Independent auditor’s report 52 Profit and loss account 53 Statement of total recognised gains and losses LONDON 54 Note of historical cost profits and losses 55 Balance sheet 56 Cash flow statement Woking 57 Notes to the cash flow statement 58 Notes to the financial statements Guildford Regulatory Financial Statements Dover Folkestone 94 Certificates of compliance 96 Independent auditor’s report 99 Historical cost profit and loss account 100 Historical cost statement of total recognised gains and losses 101 Historical cost balance sheet 103 Reconciliation between statutory accounts and regulatory accounts 105 Current cost profit and loss account 106 Current cost cash flow statement 107 Notes to the current cost cash flow statement 108 Notes to the current cost financial information 120 Licence condition F – paragraph 7 activity cost analysis 124 Licence condition F – paragraph 7 activity cost analysis (2011/12 restated) 128 Accounting separation trial 2012/13 130 Areas of supply www.affinitywater.co.ukAffinity Water 3 Business highlights 2012/13 Financial Revenues £288 million Profit after tax £43 million Net cash from £140 million operations Investment in assets £103 million Operational Average water 877 megalitres per day supplied Population supplied c 3.48 million Treatment works 101 operated Length of mains 16,549 kilometres Infrastructure stability Stable Non-infrastructure Stable stability Water quality (2012) 99.95% mean zonal compliance 1,024 (including 196 in our shared Employees services business) “ On behalf of the Board, I would like to thank all our people for their hard work and achievements in a year of significant change and challenges” 4 Affinity Water Directors and advisers Board of Directors Dr Philip Nolan Richard Bienfait Andrew Dench Executive Chairman Chief Executive Officer Non-executive Baroness Buscombe Duncan Bates Yacine Saidji Independent non-executive Chief Financial Officer Non-executive Dr Jeffrey Herbert Antonio Botija James Wilmott Independent non-executive Non-executive Non-executive Fiona Woolf CBE Kenton Bradbury Company Secretary Independent non-executive Non-executive Tim Monod Board Commitees *Denotes chairmanship of committee Audit Committee Regulation Committee Kenton Bradbury* Richard Bienfait* Jeffrey Herbert Duncan Bates Yacine Saidji Kenton Bradbury Baroness Buscombe Nomination Committee Yacine Saidji Dr Philip Nolan* Fiona Woolf Kenton Bradbury James Wilmott Remuneration Committee Dr Philip Nolan* Kenton Bradbury James Wilmott Registered Office Bankers Tamblin Way Barclays Bank Plc Hatfield HSBC Bank Plc Hertfordshire Lloyds TSB Bank Plc AL10 9EZ National Australia Bank Limited Royal Bank of Canada Registered Auditors Royal Bank of Scotland Plc Ernst & Young LLP Santander UK Plc 1 More London Place London SE1 2AF Registered Number 2546950 Affinity Water 5 Chairman’s statement I am delighted to join the Board of Affinity We have been working to prepare our business plan Water and present its first annual report and for the next regulatory period which will run from financial statements for the year ended 31 2015 to 2020. We welcome Ofwat’s commitment to March 2013. This follows the unification of placing greater responsibility on water companies the water supply businesses of Veolia Water to develop their plans in consultation with their customers, and to rewarding companies whose Central Limited, Veolia Water East Limited business plans are well balanced and well evidenced and Veolia Water Southeast Limited under and provide a fair outcome for customers. We are a single instrument of appointment on 27 committed to placing customers at the heart of our July 2012 and the adoption of the Affinity future plans and have established an Water identity on 1 October 2012. independently-chaired Customer Challenge Group Affinity Water supplies water to 3.5 million people to advise, challenge and support us as we develop in the South East of England, an area which the our plans to ensure they reflect customers’ priorities. Secretary of State has determined to be of serious We have recently launched a consultation of our water stress. Over the past eighteen months we business plan called “Let’s talk water” using a have been working with the Environment Agency, specially designed website www.talkwater.co.uk. other regulators and neighbouring water This consultation is aimed at engaging with our companies as part of the Water Resources in the customers and local stakeholders, testing with South East group to support the strategic planning them our priorities and our plans, in particular our of water resources for the South East of England for preferred plan to install around 500,000 new the next 25 years. This regional collaboration has meters over the next five years on a compulsory allowed us to develop our draft Water Resources basis. We plan to install these meters on a Management Plan – a plan which aims to manage community by community basis and, whilst doing our water resources over the next 25 years in the so, reducing leakage on our network and promoting most effective and efficient manner – whilst taking water efficiency with our customers. We believe responsibility for the impact we have on our local this approach will demonstrate our commitment to environment. We published our draft Water be the leading community focused water company. Resources Management Plan for consultation in May 2013. The ownership of the company changed on 28 June 2012. A consortium of infrastructure investors, led Our draft Water Resources Management Plan by Infracapital Partners II and Morgan Stanley includes our plans to reduce our daily water Infrastructure Partners acquired the business from abstraction over the next five years by 55 million Veolia Environnement S.A. Our new owners view litres per day (‘MLD’) and over the next 25 years by their investment in our business on a long-term 77MLD. This represents nearly six per cent of our basis and they have the ability to finance the resource base. With the Environment Agency’s investment our business needs to make in the support, we believe this is necessary to reduce the future. In February 2013 we raised long-term debt environmental impact our current abstraction has finance issuing corporate bonds which replaced the on certain chalk streams and river catchments. existing short-term arrangements. There are very limited cost effective alternative sources of water for our supply area. We therefore The governance of our business has been a priority plan to replace these lost water resources by for me since joining the Board. Our Board is reducing leakage and working with customers to committed to the highest standards of governance reduce consumption through metering and and is supportive of the principles of good corporate promoting water efficiency and bringing in new governance set out in the UK Corporate Governance supplies from neighbouring companies. Code and the Walker Guidelines. Following the change in ownership last summer, new governance arrangements were put in place and these continue to evolve. A number of recent improvements have been made, with further improvements planned in the coming year. 6 Affinity Water During the year, our financial performance in terms of operating efficiency has improved significantly. We reduced the cost of our operations by £6m in “ We believe this approach the year and our annual operating costs are now £12m lower than at the start of this current will demonstrate our regulatory price control period. This includes £0.9m commitment to be the of efficiencies achieved from the unification of our businesses. Our customers will benefit from these leading community cost savings in price limits from 2015. We also focused water company” incurred one off operating costs in the year relating to the rebranding, the unification of the business and management of the drought. Overall our operating costs for the year remained in line with last year. In order to continue to improve our service to customers, we have invested £6m more than we were funded during the first three years of the current price control period, including an additional 18km of mains renewed. Furthermore, customers are already benefiting from the operational efficiencies we have achieved to date through the decrease, in real terms, of average bills. We continue to place the safety and health of our people and the public at the top of our priorities. Whilst we have seen a reduction in the frequency of reportable accidents, our overall safety performance needs to continue to improve. The improvement of our business in terms of customer, operational and financial performance is due to the hard work of our loyal and committed people. On behalf of the Board, I would like to thank all our people for their hard work and achievements in a year of significant change and challenges. Philip Nolan Chairman 10 July 2013 Affinity Water 7 Chief Executive’s business review At Affinity Water, we are committed to being the leading community-focused water company. We aim to provide our customers with the best possible water service, using our expertise and knowledge for the benefit of the environment and the community. We have pursued five strategic priorities in order to be successful in our ambition. The five priorities provide the direction for change and improvement within our whole business: 1. To demonstrate great asset management – 5. To obtain a favourable AMP6 determination – making best use of our assets is critical to the for the past eighteen months we have been success of our business.