NORTHUMBRIAN WATER LIMITED ANNUAL REPORT AND FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 MARCH 2020

Registered company no: 02366703 2 ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2020

CONTENTS PAGE STRATEGIC REPORT

STRATEGIC REPORT 3

Chairman’s statement 4 Chief Executive Officer’s review 6 Business overview 10 Section 172 Statement 19 Performance review 21 Financial performance and structure 54 Risk report 57

GOVERNANCE REPORT 64

Chairman’s introduction 65 Senior Independent Non-Executive Director’s report 67

Corporate governance 69 GOVERNANCE REPORT Remuneration Committee report 88 Directors’ report 100

FINANCIAL STATEMENTS 105

Income statement 106

Statement of comprehensive income 107

Balance sheet 108

Statement of changes in equity 109 Cash flow statement 110

Notes to the Financial Statements 111

Independent auditor’s report to the members of Northumbrian Water Limited 142 STATUTORY FINANCIAL STATEMENTS

STRATEGIC REPORT STRATEGIC REPORT 3

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT CHAIRMAN’S STATEMENT

Governance report. which are setout indetail in our Corporate governance arrangements wehave in place, balance well,assisted by very the robust Chairman, Ibelieve the Board strikes the required meeting duties asdirectors. our fiduciary As interests ofallour stakeholders fairly, whilst dutyof the BoardIt isaprimary to balance the sustainable waterand wastewaterservices. – to bethe national leaderin the provision of Company’s vision, however, remains the same high expectations cancontinue to bemet. Our eachyear,performance so thatour customers’ the Company’s employees, to deliver improved with. Asaresult, the Board challenges itself and expectations of everyone and weserve work responsibilities and muststrive to meet the high The Company therefore significant carries very of water. only available supplier customers, weare the that, for most of our Company) recognises Limited (NWL/the WaterNorthumbrian The Board of A JHunter

and rightly expectof us. thatour customershigh quality services need over the longer term to provide the reliable and resilience required to ensure thatitcancontinue enable NWLto maintain the sustainable financial term, it unanimously agreed thatthe not FDdoes Company remains financially viable in the short accurately. Although the Board considers thatthe exposed, whichare often difficult to forecast NWL operates, and the varied risks to whichitis context of the complex environment in which The Board assessedthe FD in detail,in the flooding. projects to enhance resilience and reduce sewer key elements ofour Plan,including critical for 2020–25(FD),prices Ofwatrejected several customers’ wishes, in its Final Determination of best interests for the long to term. Contrary our the investment weproposed isinour customers’ by detailed analysis confirming thatas supported effective manner, asweevidenced to Ofwat,and enabled usto deliver on those fronts in acost confident that our Business Planwould have remain two of our key priorities. We were and ensuring the resilience should of our services our firmbelief thatprotecting the environment extensive work with customers thatthey shared Itwasclearfromservice. our detailedand to our customers alongside real improvements in committed to offering significant bill reductions including 91%customer Our Plan support. by the positive very response our Planreceived, other key stakeholders and wewere encouraged with our customersconducted in partnership and collaborativevery and consultative exercise, We submitted our Planin August 2018. This wasa our 2020-25Business Plan(our Plan). to lay solid foundations forthe coming years in commitments but, importantly, wehave also tried deliveredperformance against existing describes in her Review our continued strong Our Chief Executive Officer (CEO), Heidi Mottram, Strategic Report. progress on these themes issetout laterin this detailed overview of our work and andperformance other key factors. Amore addition to health and safety, financial measures related to these strategic themes in against abalancedperformance scorecard of each meeting the Board hasreviewed Competitiveness, People and Communities. At five strategic themes: Customer, Environment, Our strong is underpinned performance by our STRATEGIC REPORT 4

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT Statements interesting and helpful. I hope and you Financial find our AnnualReport future. in May this year. We wishthem both wellfor the Board atthe end of 2019and Chris steppeddown between 2013and 2020.Frank retired from the and 2019and Chris Johns asFinance Director as aNon-Executive Director (NED)between2011 the valuable contributions made by Frank Frame Officer, and express the Board’s appreciation for joined us on 29June 2020asChiefFinancial Finally, Iwould like to welcome Mike Porter, who tremendous challenges posed by Covid-19. commitment thisyear, given the and inparticular thank allour employees for their dedication and initiative and hard work. Iwould like to sincerely depends entirely on their continued engagement, that are our ‘front-line’ and NWL’s performance Notwithstanding the CMAappeal,it is our people March 2021. we expectto know the outcome no laterthan process isunderway asIwritethis statement and Competition and Markets Authority (CMA). This asked Ofwatto refer it forredetermination by the February 2020,the Company rejected the FDand Therefore, asameasure on 14 of lastresort, Chairman A JHunter

STRATEGIC REPORT 5

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT the leadersin our industry. towards this vision during 2019/20,and remain one of I amdelighted thatwehave progress made further of sustainable and waterand wastewaterservices, Our vision is to bethe national leaderin the provision OFFICER’S REVIEW CHIEF EXECUTIVE

informed and engaged, using daily email updates communication channels to keep our people essential work safely. We utilised multiple workers could continue to out their carry measures to ensure that our operational and field with government guidance, aswelltaking teamstoand work support from home, in line and wewere able to quickly enable our customer Keeping our employees safe wasour firstpriority, the face of the pandemic. customers in with this essential public service have come together to continue to provide our incredibly proud ofhow our teamsand partners wastewater hasperhaps never beenso clear. Iam delivering cleanwaterand safely taking away During this time of the vital importance COVID-19 it hascreated. how wehave responded to the manychallenges impact of the current Covid-19 pandemic and the year ahead, Iwould like to talkabout the are most proud ofthisyear and look forward to But before Ireview some of the achievements we H Mottram customers and communities. key safely, services and look afterour employees, develops and ensure that wekeep delivering our continue to respond to government guidance asit The Covid-19 situation is not over yet and wewill welfare phone callsto vulnerable, isolated people. essential food and prescriptions, and making in our communities. This included delivering business to orgiven the help opportunity others work of the either trained other to parts support with those who on their could not normal carry We chose asabusiness not to furlough anystaff, Covid-19 crisis. inhelping pullthrough the country part the customers, employees and communities asour page 7).Thispledge commits usto our supporting businesses to sign the ‘C-19Business Pledge’ (see Recognising this wewere one of the first responsibility into even sharperfocus. impact of the pandemic hasbrought this enhance the environment wealldepend on. The our communitiescontribution and to support for customers,service but also to make awider Our purpose is not only to deliver this essential flushed down the toilet. toilet roll other should materials shortages, not be as ‘Bin The Wipe’ to reinforce that,even during We have built on other customer messages such Register toServices reflect their circumstances. signed up 4,000extracustomers to our Priority customers with affordability issues. We also customers and apply our social tariffsto 2,000 were able to offer payment breaks to over 6,000 through direct communications to customers. We existing ‘Water without the campaign Worry’ for many of our customers and webuilt on our We understand how difficult this time hasbeen up. interactive formats to encourage employee take the Health&Wellbeing Guide were delivered in tools to bring our people together. Guides suchas to share vital information and avariety of online STRATEGIC REPORT 6

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT the COVID-19 pandemic Making available OVER £1,000,000of support during OUR C-19PLEDGE This matches our commitment asone of the firstsignatories of the C-19 Business Pledge STRATEGIC REPORT 7

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT Innovation Festival in2019,and also held ajoint Weterm performance. hosted our third Innovation remains key to improving our long making. pleasedvery with the real progress weare target of being net zero carbon by 2027,but I’m have now setourselves areally challenging commitment to sourcing renewable energy. We generating energy from sewage sludge and considerable margin, through our investment in reduce greenhouse gas emissions by 2020 by a passionately. We met our previous target to something we,asanindustry, care about embedded in the environment and it is conference earlier this year. Our business is Water UK’s Delivering a Zero Carbon Water Sector I waspleased to have to the speakat opportunity will look to build on thisover the coming year. areas with different innovative approaches. We results where wehave targeted three hot spot been really impressed by some of the early customer behaviour to avoid blockages and Ihave the Wipe campaign is aimed atchanging failures our customers canexperience. OurBin sewer flooding, which is one of the worst service wehaveperformance, continued to focus on While wecontinued our strong environmental Counts’ message. Loos’ campaign to our existing ‘Every Drop the way onwaterefficiency adding our ‘Leaky and smell of our water. We have continued to lead in reducing contacts related to the appearance regions and continuing long termimprovements leakage targets again inboth of our operating of our targets in our waterbusiness, meeting our We madesteadyimprovements across almost all customer experience (C-MeX). deliver against, the new more holistic measure of top priorities. Ibelieve this setsus upwellto deliver whatour customers have told usare their best practice approaches and tailoring them to With our Just AddYou approach, we’re taking unrivalled customer experience is our people. assetinprovidingchoose, butour most important to engage withour customers inthe way they These systemsgive usamuch improved platform efforts. project and business teams for their tremendous people and Iwould like to personally thankthe and learninghuge amount from of effort our major change programme thishasrequired a launched our new digital platforms. Aswithany and planning systemand, atthe same time, we’ve billing systemwith our new operational contact implementation of our new customer contact and few years. This year wefollowed the programme in our customer teams over the past We have beenthrough amajor transformation OUR PERFORMANCEIN2019/20 North EastBest Placesto WorkNorth awards. work operating in our northern region atthe delighted to be recognised asthe top place to unrivalled customer experience. We were play to achieve our vision and to deliver an experience atwork, to they understand the part we aspire for allof our people to have agreat Through our Great PlaceTo Work strategy (GPTW) hard work thatour people putin every single day. achievements isthatthey are the result of the The common theme running through allof these work on solutions. real life challenges for people around the world to launching our Amplify platform and opening up Weour services. have also gone global this year, better understand our customers’ experience of business, suchasour Digital Twin to help us coming through into practical usewithin our delighted to see ideas from our earlier events Innovate Eastevent withAnglian Water. Iam STRATEGIC REPORT 8

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT

CEO H Mottram CBE beyond. Ihope and you Financial find Statements our AnnualReport helpful and informative. complacent and are focused on delivering the ambitious goals we’ve set for the next five years and We are proud of the improvements wehave madeover the pastfive years, but weare never ambitions, butour plans are already underway. flooding in order to meet our stretching CommitmentsPerformance (PCs)and industry-leading we know wehave to improve across our performance other areas such aswaterquality and sewer environmental where performance, wehave strongly beenperforming for anumber of years. Equally We know weare building on strong foundations in many areas, suchasleakage and our them, whichare setout on page16 firmly on delivering against theefforts outcomes which our customers told uswereto so important deliver for anunrivalled them. Our goals are service ambitious and so weneed to push on and put our This will not distractusfrom our focus which remains, asalways, on our customers and continuing to refer its FDto the CMA. FD did not adequatelyreflect what our customers said were their priorities and weasked Ofwat to significant bill reductions weset out asa result. However, our Board decided unanimously thatOfwat’s engagement wehadwith over 400,000customers in developing it,and of the ambitious goals and We are now entering the next five year cycle of our sector. Iam still extremely proud of OurPlan,the LOOKING FORWARD All ofthese documents are available onour websitesat. clear and transparent and deliver against the commitments inOur Assurance Plan. Data Assurance: explaining Summary how weensure thatthe isaccurate, informationwereport the communitiesweserve. : presentingOur ContributionReport the social,environmental and economic impactwehave on version. we deliver to ourcustomers and ourbusiness Outcomes. There isalsoanaccessible summary made inourBusiness Plan for2015-20and how weare continuallystriving to improve the services setting outhowAnnual Performance wehave Report: againstthe performed commitments we We have alsopublished: to provide ourstakeholders witheasilyaccessible information onourperformance and governance. and Financial StatementsThis AnnualReport isjustone ofasuitedocuments wehave published

of this report. www.nwg.co.uk . STRATEGIC REPORT 9

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT water and wastewaterservices. Our vision is to bethe national leaderin sustainable BUSINESS OVERVIEW structure and ownership of NWGis provided on page54 Water of the Northumbrian GroupNWL is part (NWGor the Group). Further information about the trading asEssex&Suffolk Water (ESW). Water only to and waterservices Northumbrian (NW), our customers in the south eastof England, We provide to waterand wastewaterservices our customers eastof England, in the north trading as services only inHartlepool. services and County Durham. We provide wastewater well asthe large ruralareas of Northumberland centres of Tyneside, Wearside and Teesside as 2.7 millionpeople in the major population NW supplies to waterand wastewaterservices Every day wesupply 1.1 billion litres of water of this report. • • • • • • • We operateand maintain: Yarmouth and Lowestoft. the largest towns being Great Suffolk area is mainly ruralwith Havering and Redbridge. Our Barking and Dagenham and and the London Boroughs of centres of Chelmsford, Southend and includes the main population urban ruraland part area is part 0.3 millioninSuffolk. OurEssex 1.6 millionpeople inEssexand toESW supplies waterservices

30,106km of sewers. and 1,007 sewagepumping stations; 410 sewagetreatment works; 26,200km of water mains; 341 water service reservoirs;341 waterservice 394 waterpumping stations; 53 watertreatment works; We employ over 3,000people STRATEGIC REPORT 10

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT OUR HIGHLIGHTS

target deliver challenging net zero Programme underway to BY 2027 NET ZEROCARBON event with Anglian Water to Innovation and firstjoint leadingIndustry approach INNOVATE EAST FESTIVAL PLUS THIRD INNOVATION the environment Benefitting customers and ENERGY TO RENEWABLE SLUDGE CONVERTED 100% OFSEWAGE difficult circumstances customersand supported in Kept running essential services COVID-19 CUSTOMERS THROUGH SUPPORTING launched during the year New customer websites THINK DIGITAL awards. East Best Placesto Work places to work atthe North Number 1inthe Top 50 NORTH EAST WORK INTHE BEST PLACETO Women of the Year Awards. EastBusiness2019 North YEAR EMPLOYER OFTHE Water Mark assessment company infirstCCWater Top waterand sewerage BY CCWATER SEWERAGE COMPANY RATED TOPWATER& Ethisphere list company inthe world on Only waterand wastewater COMPANIES MOST ETHICAL ONE OFWORLD’S STRATEGIC REPORT 11

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT BUSINESS MODEL

OUR VALUES t e o ith h o h We o Water is life Everyliving cellon earthneedsaterto survive Thesingle most essential env We We r We co We our ext ingredient forhuman life to thrive,is cleandrinking aterOurork is instrumental in x u a o espo u CUSTOMER inn e expectati p ONE TEAM bette cellent r CREATIVE ppr n FOCUSED r c o RESULTS c r ETHICAL a c cust

d est o obectives ai peratio o i DRIVEN tak a a b s corporate c r ommi e ovati a nsist int ommuni m c r r u o tri oac h m nsibili l

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ent a a r t ns t t n a o t h n h ies n n o i , ess n - d l n e a e fulfilling our basichuman needsandprotecting thesource of life. d d y l d o r s r g l e , f n t atio o o a OUR PURPOSE n our c c s s o tak t o f su Our n eate cus n O ate al t e inue

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STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT environment. have alasting positive impact onthe natural loss of naturalresources, our activities should to recreation. Going beyond compensating for preventing flooding and improving public access reducing pollution, generating renewable energy, the significant contribution wecanmake to environment within our regions. We recognise of indicators designed to protect and improve the We hold ourselves to account on anambitious set depend on. Valuing the natural capitaland ecosystems we ENVIRONMENT WE ARESTEWARDSOFTHE considering the legacyweleave. targets to matchour ambition, always long term. We seteffective and sustainable change and making the right decisions for the requires innovation, anticipating and instigating Safeguarding the supply for future generations communities enjoy excellent public health. and remove and treat wastewatersothatour practical purpose is to supply safe cleanwater, We are the caretakers of waterin our regions. Our vital to public health. Delivering reliable and resilient that services are and protecting the source of life. is instrumental infulfilling our basic human needs human life to thrive, is clean drinking water. Ourwork to The survive. single most essentialingredient for Water is life. Every needs water living cellon earth OUR PURPOSE

WE ARECUSTODIANSOFWATER

individual needs. customer thatthey are specialby focusing on problem, keep our promises and show each confidence in whatwedo. We own acustomer’s our customers to always have complete and trust people know what is expectedof them, and want designing they the services receive, whileour fullyin our business, to participate supported our brand, values and culture. Ourcustomers are andindustry beyond. Customer is core service to We strive to leadin customer inour own service every time. Giving unrivalled customer experiences WORLD-CLASS CUSTOMERSERVICE WE ARECOMMITTEDTODELIVERING living out our purpose, vision and values. responsibly. Our people are held to account for intelligence, empowering our people to behave We our leadersto develop support high emotional culture and value diverse perspectives and skills. personal fulfilment. We foster ahigh performing Working withasenseof purpose gives our people Empowering people to know their purpose. LEADERS WE ENABLEEXTRAORDINARY serve. impact the wellbeing ofthe communities we regions helps usto understand and positively face. Working, living and volunteering in our andwater poverty reducing anyworries they vulnerable people inour society by eliminating public value. We are driven to protect the most expectations of usasabusiness thatdelivers mostwhat matters to them and their listening to our customers so weunderstand We are integral to our communities, always contribution to society. Demonstrating our value and making awider FLOWS THROUGHOURCOMMUNITIES WE ARETHELIFEBLOODTHAT

STRATEGIC REPORT 13

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT practical terms. what westand for inhistorical, ethical, emotional and We wantour purpose statement to effectively convey FORWARD TAKING OURPURPOSE

communicates this ethos. statement to ensure it fullyencapsulates and also identified how weshould look at our purpose continues to drive our business effectively, and Through this we have confirmed that our purpose and more recently the C-19Business Pledge. is Purpose, through the SocialMobility Pledge (CBI), Business in the Community (BiTC), and This including the Confederation of British Industry driving purpose across the business sector, have also engaged with organisations thatare can demonstrate weare leading inthis area. We companies are addressing purpose to ensure we reporting guidance, butconsidering how other best practice, looking not just atcorporate Over recent months wehave reviewed further demonstrating to allhow wedeliver public value. continues to fitwith our Vision and Values, now but into the future. This will ensure it customers, stakeholders and employees not only We wantto besure it resonates with our we will put these actions into place. immediate response to the Covid-19 pandemic, and relevant.powerful Aswemove beyond our stakeholders and customers on how to keep it statement, and to consult withour employees, members inthe business to examine our purpose involving senior executive leadersand board Our next stepswillbeto out detailedwork carry STRATEGIC REPORT 14

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT OUR OUTCOMES:2015-2020

THEME COMPETITIVENESS ENVIRONMENT REPUTATION CUSTOMER COMMUNITIES PEOPLE • • theirwater. • • Weprovideareliableand sufficientsupplyofwater. • • generationsinachangingworld. • • • • • • • • Weareanefficientandinnovativecompany. • • • OUTCOME • We provideexcellentserviceandimpressourcustomers. We provideasewerageservicethatdealseffectivelywithsewageandheavyrainfall. Our customersarewellinformedabouttheservicestheyreceiveandvalueof Our customersconsidertheservicestheyreceivetobevalueformoney. We supplyclean,cleardrinkingwaterthattastesgood. We areacompanythatcustomerstrust. We workinpartnershiptowardscommongoals. We areproudtocontributethesuccessoflocalcommunities. Our workplacesarehealthyandsafe. We areseenasagreatplacetowork. Our peopleactinlinewithourvalues. Our peoplearetalented,committedandinspiredtodelivergreatservicescustomers. and investors. Our financesaresound,stableandachieveafairbalancebetweencustomers We protectandenhancetheenvironmentindeliveringourservices,leadingbyexample. environment andwildlife. We helpimprovethequalityofriversandcoastalwatersforbenefitpeople, We deliverwaterandsewerageservicesthatmeettheneedsofcurrentfuture STRATEGIC REPORT 15

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT to deliver anunrivalled customer experience. deliver apackageofmeasures our aim to support customers wantfrom usis changing too. We will Our customers’ expectations are rising, and what EXPERIENCE CUSTOMER UNRIVALLED OUR OUTCOMES:2020-25 environment within our regions. leadership, and to protect and improve the stewards of the environment to demonstrate environmental activities, building on our role as We willcreate astepchange in our ENVIRONMENT IMPROVING THE

about how to runour business. and by making the right long-term decisions by anticipatingservices change, planning ahead, We willcontinueto deliver reliable and resilient SERVICES RESILIENT RELIABLE AND

within our regions. leadership and make awider contribution to life record, to usthatwedemonstrate it is important As aresponsible business withastrong track OUR REGIONS ECONOMIES IN SUCCESSFUL BUILDING access to anunrivalled customer experience. circumstances, and they should allhave equal for allof our customers, whatever their Water shouldand sewerage be services affordable SERVICES AND INCLUSIVE AFFORDABLE physical climates. advances and changing political and of rising customer expectations, technological unrivalled experiences within the context essential if weare to continue to deliver Super-charging our innovation culture is INNOVATION LEADING IN STRATEGIC REPORT 16

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT operate within astrict regulatory environment. as alicensedwaterand wastewaterundertaker, we We provide to essential services our customers and, OUR STAKEHOLDERS of customers into f new websites and customer hascreated app customer engagemen social media and faceto on anongoing basis, through workshops, surveys, We have continued to customers accepting our Business Plan. workshops and focus groups, with 91%of means including design sprints, co-creation help our shape Business Planthrough various engaged with over 400,000of our customers to the bestways for usto business they would most like to weprovide,about the services which areas of the understand whatmatters most to 2020-25 Price Review (PR19),helping us to development of our Business Planstrategy for the Customer wasfundamental to participation CUSTOMER VOICE experience. with allof our stakeholders in our con our business Outcomes. W continue to needs of our many stakeholders to interests are represented by the Consumer On anational and regional customers’ basis, could beimproved. where and performance outcomes for customers T more formal meetings with management. workshops events and partnership aswell research, attend customer participation engagement on matterssuchassocial tariffs informs our approach to the Company on behalfof our customers. It from experts T Register.Priority Services Age UKevents to Customer Zone atour Innovation Fest Ashington andLeigh-on-Sea (seepage30),the this yearincluded our Whole Town Approach in able to ef It is very importan It is very urther engagementurther channelsan hrough this it prov he Water Forum brings together arange of forts to forts engagement activit actquickly to pr pr ovide anunrivalled customer v ovide agreat and deliver service arious stakeholders to website enhancement shar t to ides challenge on areas i en t vehicle. Th us thatweunderst ncorporate feedback f ies which have taken e matters such asour en cust faceusing gage with our customers gage with them. We e engage proactive omer research and i d wehave been cust nfluence and e launch of our ensur Fl challen o, our s. Examp ival and tin omers

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thatwe

place rom th ge ly e

les (D-MeX) performance measures.(D-MeX) performance Developer Measure Services of Experie discuss readiness for the new C-MeXand round table on and waterpoverty wealso During the year, their ChiefExecutive attended a meetings and attending r customers, aswellholding liaison quarterly and vulnerable engage on how wesupport customer literature with them befo Council for Water (CCWater). We share and review importance ofmaintain importance Weservice. engage on Ofwat regulates prices and levels of customer CONTEXT GOVERNMENT ANDREGULATORY the pastyear hasbee (N N and local suchasthepartnerships partnerships worked collaboratively through catchment en consultations, regular account manage Performance Report (APR) andrespondin through formal processes, suchasour Annual confidence ofour customers. Thi Wastewater Management Planning. addition to compliance, pollution en T attended our Innovation Festival. schemes. Inaddition, The DWIChief Inspector addition to andperformance promote good practice, in operational and strat drinking waterquality and weengage atboth an T stories. resilience, customer and water participation v 2019 wehosted the Ofwat ChiefExecutive on a in theand marketplace participating for ideas. In need to re Of visit to isit to he Environment Agency (EA)regulates he Drinking Water In IntegratedDrainage Partnership orthumbrian form and future price controls as IDP). One particular areaIDP). of One engagement particular over wat’s key campaigns covering innovation, vironmental discharge performance, vironmental protection and weliaise on our ou Inn dem r Innovation Festival and Chair on a ovate East. r r e eviewing specific improvement on gular reviews, performance we have strate strong e n in relation to W and sewerflooding. In gic level to review spectorate (DWI) monitors key issues such asmarket ing e also egional public meetings. th STRATEGIC REPORT g overnance and the e trustand par s is achieved ticipated in re publication well asthe Drainag nce ment calls m g t

et to o e and

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STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT psychological health checks. mental health firstaiders, fire safety officers and approaches to health, safety and welfare, suchas the year wecarriedout joint initiatives and a joint framework for Healthand Safety (H&S).In teams, joint recruitmentdelivery campaigns and governance groups, integratedprogramme and co-operation. This involves joint framework with our supply chain, based around collaboration possible, weimplemented anew operating model programme asefficiently and effectively as (Asset Management Plan)capital investment To meet the challenges of delivering our AMP6 the People heading on pages42to 49. detail in the Performance Review section, under diversity. Ourapproach is described inmore staff benefits to values and behaviours and subjects from health, safety and wellbeing and communications. This covers awide range of briefings, director roadshows and regular internal of communication channels, suchasteam Employee Relations Framework and via arange We engage withour employees both through our PARTNERS OUR PEOPLEANDSUPPLYCHAIN as wellissues such asthe flushability of wipes. campaigns suchasRefilland DropEvery Counts investment. Coverage in the year included schemes, environmental and community such asthe local impacts of capitalinvestment messaging. Thiscovers awide range of subjects releases, casestudies and social media messages to our customers through news We work withthe media to help communicate Performance Review. under the Communities heading of our websites, and is summarised on pages50and 51 availabledetail in OurContribution Report, on our Ouractivity in thisareawe serve. is explained in build strong relationships with the communities corporate socialresponsibility commitments and organisations and to charities deliver our We work closely with many non-government discuss planning and regulatory issues. East and ajoint conference with developers to developing underground assetmapin the North Activities inthe year on included our partnership mitigation and economic development matters. matters such asplanning, flooding risk level aswellmore technicalmeetings on authorities through regular meetings atasenior our sector. We also work closely withlocal wedeliverthe and services the key issues facing events, to ensure there is agood understanding of through conference briefings sitevisits and party We engage withgovernment and policy makers, CIVIL SOCIETY investors. customers and other stakeholders, including debt achieve afairbalance between them and our interests ofour shareholders and weseekto We are conscious of our dutyto act in the best INVESTORS STRATEGIC REPORT

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STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT Companies Act2006. members asawhole, assetout in Section 172of the the successof the Company for the benefit of its The Directors ofthe Company have adutyto promote SECTION 172STATEMENT Board’s strategyfor the PR19Business Plan, This long term perspective underpinned the resources and drainage management planning. view to betaken on matterssuchaswater The nature of our business requires along term LONG-TERM PLANNINGHORIZON • • • • year, and how describes the Board has: describes how the Board hasoperated during the The Governance on pages64to Report 104 HOW THEBOARDOPERATES thisduty.performing 172(1)(a) to of the Companies Actwhen (f) have hadregard to the matterssetout insection Regulations 2018to describehow the Directors the Companies (Miscellaneous Reporting) accordance with new requirement established by Section 172(1)Statement hasbeenprepared in and other mattersdescribed in the section. This needs of, and impact on, our many stakeholders In doing so, the Directors must have regard to the on page12. that the vision,corporatethemes and values aligned to the purpose,asvisualisedinthe business model Water Forum stakeholder group, regulators, employees, supplier and The Board other partners. ensured development ofthe PR19Business Plan,with responses from over 400,000 customers and wellasthe out on The Board hasdiscussedand refined the Company’s purpose statement and the updated version isset Key Decision–Purpose Statement and stakeholder needs. make decisions thataddress diverse customer strong independent membership, enabling it to th actions; and trust and ensures accountability for their transparency and governance which engenders dem Company’s business over the long term; tak culture reflect the needs of allthose it serves; and values, and is satisfied thatthese and its estab e range of skills and experience, including en fullresponsibility of for the allaspects onstrated leadership and anapproach to lished the Company’s purpose, strategy page 13 . Thiswasinformed by the extensive consultationprocess carriedoutinthe

and 103 . explained in the viability statement on page102 resilience over atenyear time horizon as whilst also considering longer term financial of the business through arolling five year plan, The Board closely monitors the financial position platforms. and the increasing reliance on global data risks were considered related to plastics pollution sources. This year, two additional longer term considers horizon scanning from reports external year, most recently in November 2019,which the Strategic Risk Register iscarried out each longer-term strategic risks. Adetailed review of facingand the uncertainties business including committee (R&CSC), monitors the principal risks The Board, through its Risk &Compliance Sub- ambitious goals set out inthe Business Plan. value from innovation of delivery to support Board discussion of how the Company is getting towards thatgoal. Another example wasthe by 2027,and additional investment in solar power of thedelivery commitment to becarbon neutral an updatedenergy strategywhich will underpin Business Plan. One example wasthe approval of strategies for the ambitious goals setout in the During the year, the Board considered delivery Decision –CMAReferral below). the PR19Draftand Final Determinations (see Key and beyond’, and shapedthe Board’s responses to which wascalled‘Living water:Ourplan 2020-25 17 and 18.Engagement with our stakeholders was these groups in OurStakeholder section on pages and wedescribe how weengage proactively with The Company hasawide range ofstakeholders STAKEHOLDER ENGAGEMENT STRATEGIC REPORT

19

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT 2020, in accordance with their duties under S172of the Companies Act. term successof the Company for the benefit of its members asawhole during the year ended 31March The Directors ofNWLconsider, both individually and together, thatthey have actedto promote the long S172 DUTY interest to eachof our key stakeholder groups. balanced across view of performance mattersof Thisoperational provides performance. a safety, finance, customer, regulation and also through management on health reports and Competitiveness, People and Communities, and themes ofCustomer, Environment, acrosswhich tracksperformance our corporate the balanced scorecard (seepages22and 23 a widerange of subjectsateachmeeting through The Board reviews across company performance of the business. Board with afirst-hand assessment of the culture engage with the workforce and to provide the Independent NED(INED),, MFay, designated to customers, asdescribed on page74, with one steps to engage directly withemployees and employee data. However, the Board also takes key risks, suchasdatasecurity of customer and healthoperational performance, and safety and regular in respect reports of customer service, at anoperational level, the Board receiving Much of the stakeholder engagement takes place scorecard (seepage22and 23). which the Board monitors through the balanced stakeholders across awide range of measures, commitments to deliver improved to service Board agreed stretching performance and Through other partners. this process, the Water Forum stakeholder, regulators, employees more than400,000customers our aswell beyond’, which wasshapedby responses from central to ‘Living water:Our plan 2020-25and employees and the communities weoperate in. balanced scorecard. These measures align directly to benefit customers, the environment, our 2020/21, 60% of benefits under the schemes will relate to non-financial measures taken from the delivering benefits for customers and other key stakeholder groups. In both cases,witheffect from term and long term incentive plans for senior executives, in order to provide greater alignment to The Board, through its Remuneration Committee, hasagreed changesto the structuresof both short its Key Decision–Alignment ofRemuneration to Stakeholder Benefits were their priorities. and long termresilience but felt strongly thatthe FDfell of whatcustomers wellshort clearly stated sustainability. The Board took account of the tradeoff betweenlower customer billsin the short-term and priorities of customers, or the need for long term operational, environmental and financial deliverable and resilient for the future. The Board agreed thatthe FDdidnot properly reflect the views priorities were efficient costs and assurance wouldbe thatwaterand wastewaterservices robust, taking account of the views of more than400,000customersand other stakeholders. Ourcustomers’ key review. Thisfollowed discussions ataseriesof Board meetings. The Business Planwasdeveloped In February 2020,the Board decided unanimously to askOfwatto refer its PR19FDto the CMAfor Key Decision–CMAReferral ), ), • • • • • the Board during the year included: Examples of stakeholder matters considered by

ensure transparency insupply chains of Slavery and HumanTrafficking statement to value of innovation and approval partnerships extension of long term framework agreements, Suppliers: new contract awards including and information on Community matters pages); and contracts(seepages50to 52formore community when approving capitalprojects matters and the impacts on the local Community: consideration ofsustainability information on Employee matters); Strategy (seepages42to 49 for more against the Everyone Home Safe Every Day leading and lagging indicators and progress each meeting, including against performance is the first matter considered by the Board at Employees: the health and safety of employees information on Environment matters); targets (seepages34to 38formore on arange of environmental performance emissions by 2027and monitored performance energy strategy to deliver net zero carbon Environment: the Board approved the updated information on Customer matters); income pensioners (see pages25to 33 for more engagement on socialtariffs, especially for low in new to digital platforms and extend efforts of new systems, the benefits from investment on customer due to service the implementation Customers: term impacts updates on the short STRATEGIC REPORT 20

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT range of our strategic themes. of Key Performance Indicators (KPIs) covering the full Business Planand goals, weuseabalanced scorecard In order to measure of the delivery Company PERFORMANCE REVIEW

albeit narrowly insome cases.We show ( when doesn’t our performance meet our targets, all of our PCsand weare always disappointed and value for money. However, weaim to achieve including leakage, discolouration, mains bursts customermany of our important targets, period, and shown year on year improvement on the majority targets of our performance in the We are pleased thatonce againwehave achieved price review. of Success(MoS) and PCsweagreed inthe PR14 against theour performance Outcomes, Measures pages 22to 23 The top section of the Performance table on promise inthatyear, ( we have met against our our performance (with ablue header block) shows ) where wehave not met ) where ( butnotour performance incurred apenalty, and The new targets are listed on page24. matterstothe most our customers. important reduced the number of key indicators to focus on wide number of metrics in our business, wehave and PCssetin our PR19FD. Though wetracka Scorecard for 2020/21,taking account of the MoS We have reviewed and revised our Balanced Communities Outcomes. targets under our Competitiveness, People and against our our performance internalreports The bottom section (with agreen header block) have incurred apenalty. ) where wehave not met and our performance STRATEGIC REPORT 21

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT ACTUAL PERFORMANCEAGAINSTTHEKPITARGETS table continued…

SCORECARD MEASURE Water mainsbursts poor waterpressure Properties experiencing hours supply formorethan3 Interruptions towater Leakage –ESW Leakage –NW We provideareliableandsufficientsupplyofwater odour oftapwater Satisfaction withtasteand complaints Discoloured water compliance Overall drinkingwater We supplyclean,cleardrinkingwaterthattastesgood survey –WaterESW CCWater valueformoney survey –SewerageNW CCWater valueformoney survey –WaterNW CCWater valueformoney money survey NWL independentvaluefor Our customersconsidertheservicestheyreceivetobevalue formoney keeping customersinformed Independent surveyon score satisfaction, netpromoter Domestic customer survey customer satisfaction Independent overall Mechanism (SIM) Ofwat ServiceIncentive We provideexcellentserviceandimpressourcustomers CUSTOMER no. ofburstmains score (outof100) no. ofcomplaints no. ofcomplaints average minutes/ no. ofproperties score (outof10) score (outof10) property UNITS Ml/day Ml/day score % % % % % PERFORMANCE 2018/19 2018/19 99.949 3,853 09:12 136.3 1,060 2,594 64.2 85.9 +43 200 8.2 8.7 71 78 75 93

<=4,586 <=05:00 <=2,908 <=137 <=987 <=216 >=7.9 >=8.2 >=73 >=84 >=83 >=94 <=66 >=32 >=90 100 PC

PERFORMANCE STRATEGIC REPORT 22 2019/20 99.915 2,817 06:08 134.8 2,349 63.2 +40 862 220 n/a 8.1 8.6 76 84 79 93

ACHIEVED n/a

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT

Greenhouse gasemissions We protectandenhancetheenvironment discharge compliance Sewage treatmentworks compliance Bathing waterquality Capital Value(RCV) Gearing: netdebttoRegulatory COMPETITIVENESS SCORECARD MEASURE 3) Pollution incidents(category We helpimprovethequalityofriversandcoastalwatersfor the benefitofpeople,environmentandwildlife ENVIRONMENT SCORECARD MEASURE Sewer collapses(TDS) Sewer collapses (TDS) Properties floodedinternally network (TDS) externally –transferred Properties flooded Repeat sewerflooding Properties floodedinternally externally Properties flooded We provideasewerageservicethatdealseffectivelywithsewage andheavyrainfall RCV Regulated gearing:netdebtto Interest cover trust index Employee engagement– PEOPLE Lost timereportableaccidents external survey Employee engagement– Ethisphere COMMUNITIES no. ofproperties no. ofproperties no. ofproperties no. ofproperties no. ofproperties no. failingworks no. sufficient awarded/not awarded number ktCO2e number number number UNITS UNITS score times % % % PERFORMANCE PERFORMANCE One toWatch awarded 2018/19 2018/19 2018/19 2018/19 2,967 67.2 66.8 148 246 124 902 n/a 3.6 33 59 59 49 60 0 7

<=2,931 <=1,318 awarded TARGET <=77.5 <=496 <=228 <=186 <=150 <=115 >=2.4 <=84 <=58 >=34 <=70 >=65 <=3 PC n/a 0

PERFORMANCE PERFORMANCE STRATEGIC REPORT 23 awarded 2019/20 2019/20 3,102 1,001 67.8 67.2 139 205 139 n/a 4.0 33 63 63 50 75 62 2 7

ACHIEVED ACHIEVED n/a

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT MEASURES ANDKPITARGETSFOR2020/21

Lost timereportableaccidents Employee engagementindex PEOPLE Interest cover Regulated gearing:netdebttoRCV Gearing: netdebttoRCV COMPETITIVENESS Internal sewerfloodingincidents Repeat sewerfloodingincidents Interruptions tosupply>3hours D-MeX: Developerservicesmeasureofexperience C-MeX: Customerservice C-MeX: Customerexperience CUSTOMER SCORECARD MEASURE Trust -BITCPlatinumPlus/EthisphereCCWater COMMUNITIES Leakage (ESW) Leakage (NW) ENVIRONMENT Compliance RiskIndex(CRI)I Pollution events(Category1&2) Discharge permitcompliance SCORECARD MEASURE Greenhouse gasemissions awarded position position position number number number number ktCO2e UNITS UNITS mm:ss score times Ml/d Ml/d % % % % STRATEGIC REPORT 24 awarded 2020/21 2020/21 <=05:24 <=126.5 TARGET TARGET <=77.5 <=56.4 <=57.2 <=285 >=2.4 Top 2 Top 2 Top 2 >=65 <=70 <=46 >=99 <=3 <=2 <=1

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT CUSTOMER ranked 1out of 17for the qualitative score. water companies wewere pleased very to be the shadow year, basedon datashared between in the top position forD-MeXacross the AMP. For shadow this reporting year. Our ambition is to be principles to C-MeXand hasalso operated in appointments and variations. Thisapplies similar developers, self-lay providers and those with new developer customers, services including property D-MeX, assessing thatweprovide the service to developer measure services of experience, A separatemeasure hasbeenintroduced asa companies overall. shadow year, weranked 5out of17water is to beinthe top 2companies for C-MeX. For the of its FD.updated guidelines aspart Ourambition understand the new metric, and Ofwatpublished opportunity, to help companies and Ofwatto for 2019/20,with noyear’ reward or penalty C-MeXhasoperated inour ‘shadow performance. customers’ widerexperience and perception of broader and more representative measure of addition to received, assessing service this is a customer measure of experience (C-MeX).In For future years, Ofwathasintroduced anew rewardoutperformance of 1.9% of retail revenue. 2018/19 and wewere pleased to receive apositive for theperformance four years from 2015/16to of its PR19FD,As part OfwatassessedSIM experiences of dealing with usover recent years. Ofwat hasusedits SIMto measure our customers’ CUSTOMER EXPERIENCE our customers” and impressservice “We provide excellent meet our customers developing needs. and Inclusivity strategies to help uscontinue to refreshing our Unrivalled Customer Experience models. We are developing these ideasand changes and providing leading edge thinking and thinking inorder to reflect these nuanced more and different things and we’re evolving our Customers in 2020and beyond are looking for responsibility. experience andof service, corporate social customers expectin 2020and beyond, in respect ensuring wewere aware of whatbusinesses and from anumber of key east’companies, ‘north speakers from across anumberof industries and our Innovation Festival, bringing together key ran anUnrivalled Customer Experience sprint at benchmarking principles and measurements. We understand some of their international working withorganisations like KPMGto Customer UKCSI Services’ asabenchmark, and line with bestpractice,using the Instituteof We continue to work to evolve our thinking in things thatmattermost to them. encourage customers to talkwithusabout the share more about our inclusivity strategies and to Wipe’ message. We’ve also usedit asavehicle to campaigns, to sewerflooding and our ‘Bin the water efficiency, and our DropEvery Counts in, such askey of our strategies in areas like parts understanding whatour customers are interested a proven model to engage more widely in better engage and inform them. Flo hasalso been and, asaresult, developed webpages specific to to understand the needs of our studentcustomers Newcastle, Durham universities and Northumbria groups. For example, we’ve attended events at engagement vehicle, Flo, to reach different customer base,using our mobile customer We have continuedto engage across our Business Plan. customers through the development of our PR19 informed by engagement with over 400,000 Unrivalled Customer Experience strategy and engage with us. This is encapsulated in our every one of our customers, whenever they an unrivalled customer experience to eachand changing needs is key to our successin providing Understanding our customers’ preferences and however they choose to contact us. whatever their circumstances orneeds, and customer experience to eachand every customer, Our clearambition is to provide anunrivalled EXPERIENCE UNRIVALLED CUSTOMER STRATEGIC REPORT 25

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT February 2020. new customer app,whichwelaunched in transactions coming through the website and our March 2020wesawarecord numbers of website, responding to customer suggestions. In enhancements to the customer experience on the go live wehave worked to implement over 100 feel and customer feedback hasbeengreat. Since new websites have acompletely new look and andself-serve engage withus in anew way. Our access to channels of choice and the ability to our digitalisation strategy, to give customers journeys and experiences. This is akey of part agile platform with completely new customer websites inOctober 2019,moving to anew and This culminated in the launch of our new with AgeUK. retired of our link and weengaged with aspart to working customers to customers who have experience ‘future customer’ groups, to students, working withcustomers from school work engage with different customer groups for this, and online digital challenges. We’ve aimed to testing, online forum engagement to testideas A-B testing, digital focusgroups, customer of channels, including face-to-face interviews, with colleagues and customers through anumber and engagement across the year. We’ve engaged one where we’ve driven significant improvement Unrivalled Customer Experience Strategy and Think Digital is akey component of our overall as wellincustomer feedback. meetings with CCWater and other stakeholders improvements have beenrecognised in our capabilities. We are also pleased thatthese beginning to seethe benefits of the increased as weworked through the changes, and are now We invested in extrastaff,training and support termimpacts on performance.saw some short and took some time to stabilise, during which we involved asteeplearning for our people curve of future-proofed and integrated systems from disparate legacysystems to anholistic suite any significant change programme, the transition new Customer Care and Billing system. Aswith Experience), including the implementation of our change programme, ONCE(Our NewCustomer considerable investment in our transformational Over the pastfew years wehave committed a DIGITAL TRANSFORMATION basis. Ofwat and continue to engage on anongoing the development of our PR19Business Planto engaged with more than400,000customers during informed weprovide. about the services We supplied with allthe information they need to feel have told usthatthey were satisfied thatthey are them wellinformed and 93%of our customers Our customers to keep tellusthatit is important alongside leading UKbusinesses. and our strong positive score of +40ranksus that exists betweenacompany and its customers, Score to measure customer advocacy, the loyalty As analternative indicator, weuseNetPromoter this remains astrong result and wellabove our PC. our score fell slightly in the year from 8.7 to 8.6, byout quarterly anindependent company. Though Our own customer satisfaction research is carried and the value for money of those services. customer satisfaction with the we services provide wetrackvariousperformance, measures of experience and, in addition to our C-MeX Our aim is to deliver anunrivalled customer VALUE FORMONEY CUSTOMER SATISFACTIONAND remaining above our PC. money score reduced marginally to 8.1 out of 10, independent surveys for which the value for circumstance below. We also commission work customers to support in vulnerable keep bills ataffordable levels and wedescribe our in our NWregion.services We continueto strive to disappointed not to achieve our PCfor water inour NWarea,wastewater services butwere measures, in our ESWarea forwaterservices and achieved our PCagainst two out of three of these water only, where average bills are higher. We and in our ESWregion,sewerage services, for scores in both our NWregion, for waterand were delighted to seesignificant increases in our about the value for money provided. of services We CCWater carries out research with customers offer good value for money. to help usassesswhether our customers thinkwe influencing our future plans. We usetwo surveys area where they would like to beinvolved in money to them, important and is very this is akey Our customers have also told us thatvalue for to bevalue for money” theythe services receive “Our customers consider STRATEGIC REPORT 26

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT it. customers and provide to those support who need will allow usto proactively check eligibility for our schemes.eligible for our financial This support Economy Act to identify customers who would be able to make use of the powerswithin the Digital for Workthe Department and Pensions (DWP)to be net income. We have beenworking actively with where their waterbills represent more than3%of discount of up to 50%for low income households building on our existing tariff whichprovides a include those in receipt of pension credits, We extended our affordability tariffin2019/20to need to work through their finances. can provide them with the breathing spacethey our customers are seeking debtadvice so thatwe agreement with StepChange weknow whichof advice. Withthe benefit of our datasharing assist our customers to receive holistic debt with the debtcharity StepChange wecontinue to our customers. Through our strong partnership Strategy, which wedeveloped with inpartnership circumstances, assetout in our Inclusivity customerssupport who are in vulnerable number of arrangements inplace already to research We and partnership. delivery have a National Energy Action (NEA) in aninnovative across our supply areas, working withthe charity We have committed to eradicatewaterpoverty VULNERABLE CIRCUMSTANCES SUPPORTING CUSTOMERSIN the value of water” theyservices receive and informed about the “Our customers are well energy bills. customers save money on both their waterand developingpoverty new ways to support thecontinue to work support with NEAon water income and expenditure initiative. Inaddition, we schemes and weare exploring adigital banking on automating online eligibility for support are also working withour credit reference partners how wepromote our affordability schemes. We our customer digital twin project to help target will enable usto focus on proactive and support DWP to extend the datasharing initiatives which bills inthe country. We will continue to work with committed to the largest reduction in customer Looking ahead, inour Business Planwe STRATEGIC REPORT 27

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT JUST ADDYOU expectations are rising allthe time. toits importance everyday life. Ourcustomers’ We are passionate about water, and understand • • • • • chosen by our customers: them on the and five focus our service priorities We asked our customers to whatwasimportant people help our customers every day. showcase the diverse and brilliant ways our that, so wealso created ‘JustAddYou’ to without every one of our team playing in apart can’t give our customers anunrivalled experience is to everyday life. However, weknow thatwe remind our customers water just how important campaign across our regions, ‘JustAddWater’, to In 2019welaunched our externalcustomer great job, and thatthey matterto us. We wantour customers to know we’ve done a get itright firsttime is than moreever. important creating unrivalled experiences. Making sure we can do more on our customer focus, consistently We’re proud of whatwedo already butknow we

Keep our promises. communities; and Be proud to promote our great work in local Make it easyfor them; ‘Own’ the customer’s problem; to us; Show eachcustomer thatthey’re important

really proud of, eachand every time. delivering aworld thatwecanbe classservice with acustomer means wecanmake sure weare and using the SixPillars,whenever weengage By understanding our five customer priorities, great customer to is really us. service important do and being recognised by our customers for Our customers are of everything atthe we heart • • • • • • positive change in their businesses. These are: leading companies around the world indriving Six Pillars provide aframework thatsupports Pillars of customer experience excellence. The a model developed by KPMGNunwood; the Six every time, we’ve taken some great learning from delivering anunrivalled customer experience To complement these, and in to support

Empathy –relating to acustomer’s experience. to acustomer’s specific needs; and Personalisation –understanding and adapting achieve their objectives quickly and easily; –enablingTime customers and effort to expectations; Expectations –understanding and exceeding Resolution –putting issuesright quickly; Integrity –demonstrating trustworthiness; STRATEGIC REPORT 28

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT systems. treatment and distribution processes and investing inimprovements to our water catchment management activities through to supply system, from protecting rawwaterby our have beenworking end to end through our water delivering our long termplans to achieve this. We water quality even and have further been random basis, weare committed to improving duetoperformance samples being taken on a Whilst wedo expectsome variation in risk to health. to note thatnone of the failures represented a failures from over 86,000tests,and it isimportant To putthis in context, thisrepresented only 58 compliance remains extremely high at99.915%. poor tastesand smells. Ouroverall drinking water is safe to drink and free of colour and particles, quality standards setby the DWI,to ensure thatit The waterwesupply must meet the stringent WATER QUALITY zero score over time. supply system. Ourambition is to drive towards a no failure of any standard within the entire water calculation and aperfect score is zero, indicating assessment of waterquality. The CRIis arisk customer taps,to make amore exacting through watertreatment works, networks and information from the whole source to tapjourney, water quality in 2017 calledthe CRI. uses This The DWI introduced a new measure of drinking Pennine-PeatLIFE project. catchment projectssupporting such asthe and delivering on-farm improvements, and funding events for farmers and land managers, Activities inthe year have included hosting and the waterenvironment for our customers. funding inorder for usallto make adifference to and this hasallowed usto pool our activityand Local Authorities, the EAand NaturalEngland, including Riverspartners, and Wildlife Trusts, ESW regions. We work with awiderange of the nine Catchment in our NWand Partnerships have continued our extensive engagement with improve the waterenvironment and in 2019we have become anessential way of working to approach. Over the years Catchment Partnerships longer termthrough our catchment management improve over waterqualityperformance the We are continually evolving our processes to tastes good” drinking water that “We supply clean, clear performance in theperformance sector. 2019, which represents upperquartile contacts wereceived reduced from 1,060to 862in with acustomer’s own plumbing. The number of comes from, or how it is treated, or even issues network, achange inwhere acustomer’s water maintain good hygiene in our watersupply occur asaresult of the useof chlorine to perceive different tastesor odours. Thiscan quality butoccasionally some of our customers The drinking waterwesupply high is of avery plans for 2020-25. for our discolourationsupport, management identified a new programme ofwork, withDWI continue our improvement journey wehave accumulation of discolouration material. To managing our networks to reduce the improvements atour water treatment works and still more to do. We are continuing to make companies inthe industry, werecognise there is our PC. However, when wecompare to other fifth year ina row wehave betterthan performed contacts, compared to 2,594contacts in 2018,the improvedperformance in 2019to further 2,349 significant improvement over this time. Our more thantenyears now and have seena discoloured watercomplaints in our NWarea for We have beenworking to reduce the number of TASTES GOOD CLEAN CLEARWATERTHAT sufficient supply of water” “We provide areliable and supply equipmenttemporary where possible. aspossible, usinginterruptions asshort based staffto refocus our commitment to keeping through refresher training to our fieldand office seconds in 2019/20.This hasbeenachieved fromproperty over 9minutes to 6minutes 8 reduced the average interruption time per After achallenging year in 2018/19,wehave supply in the over industry anumber ofyears. amongst the lowest levels of interruptions to is core to whatwedo and wehave delivered Delivering areliable supply of waterto customers RELIABLE WATERSUPPLY STRATEGIC REPORT 29

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT property registerproperty atthe end of the year. leaving on the 220properties low pressure pressure for 947customers during the year, pressure and take action. We have improved the customers who are not receiving sufficient pressures in the network so thatwecanidentify We proactively monitor and investigate water water pipes and cause bursts. are high pressure shocks thatreduce the life of by bettermanaging ‘pressure transients’ which reducehow wecouldburstsin further the future progressing withaninnovative project looking at across our operational areas. We have also been replaced almost 70km of distribution mains network of waterpipeseachyear. In2019/20we rate weinvest inreplacing sections of our vast 3,853 to 2,817.Inorder to maintain astable burst The numberof watermains burstsreduced from more easily. to allowleakage portal customers to leaks report imaging to help locate leaksand our online taken over recent years, including using satellite by the innovativesupported actions wehave operating regions. was This performance achievingcomfortably our PClevel ineachof our averaged 134.8Ml/din NWand 63.2 Ml/din ESW, significant reduction in burstmains. Leakage relatively mild weather over the year and a leakage throughout the year, aidedby the We have maintained our focus on managing and heavy rainfall” effectively with sewage thatdealsservice “We provide asewerage customer satisfaction. was agreat successinterms of engagement and Theaffordability co-ordinated support. approach message and Water Without The Worry customer added our Bring Your OwnBottle environmental Every Drop Counts waterefficiency message, we in whatever way wecould. Inaddition to our community in a‘one-stop shop’ to offer our help on-Sea, Essex,presenting ourselves in their towns of Ashington, Northumberland and Leigh- programme. We delivered the programme in the campaigns in acommunity-focused and targeted Whole Town Approach to deliver multiple key network, in 2019weadaptedand enhanced our In addition to reducing waterlost from our WATER EFFICIENCY consumption. ambitious goal of reducing percapita helping to improve waterefficiency towards our addition to saving our customers money, weare toilet isleaking and repair itforthem if itis. In whereservice wehelp customers identify if their 23Ml of watereachday. We have introduced a approximately 105,000homes wasting around 200 and 400litres aday. For equatesto NWL this households have aleaking toilet wasting between know from research thatbetween5%and 8%of in the year wasour ‘LeakyLoo’ programme. We Another waterefficiency campaign welaunched STRATEGIC REPORT 30

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT CCTV programme. planning, betteruseof dataand anincreased focused teams, improved operational the core themes of customer communication, tactical plan includes around interventions near The terminterventions. flooding sewer was developed to identify and deliver effective our business plan, asewerflooding tactical plan achieve the commitments wehave madewithin to reduce the riskof sewerflooding and to help sewer flooding for the next five years. In order We have challenging agreed further targets on in this area. improvefurther our sewerflooding performance to improve eachyear and will this help usto mapping of our transferred network continues slightly. Sewerageinvestigations, surveying and our ownership afew years ago missing the PC the network of drainsand sewerstransferred into achieved their PC,with externalflooding from Four out of our five sewerflooding measures or suffering repeat flooding increase slightly. see the flooding number of properties externally reduced from lastyear, wewere disappointed to total flooding number of properties internally has in thisarea.performance Asaresult, whilethe periods of wetweather, whichhasimpacted our number of months where wehave hadsustained Over the pastyear wehave experienced a remains one of our highest business priorities. our customers canexperience and reducing this Sewer flooding is one failures ofthe worst service SEWER FLOODING

previous year and wellbelow the PCs. collapses remained atsimilar low levels to the flooding or pollution. The number of sewer damage or age, andthird this cancause party collapse, which canbedue to ground movement, Occasionally the structure of asewercan strategy for managingdelivery sewerflooding. our longertactical plan willsupport term service occurring which are within our control. The we work to help reduce the number of incidents planning isidentifying improvements inthe way problems identified on the network. Operational to incidents, investigate root causesand fix technical and operational resources to respond newly created focused teams include amix of avoid blockages causedby misuse of sewers.Our campaign (seecasestudy on page32)aims to Communications, including our ‘Bin The Wipe’ STRATEGIC REPORT 31

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT BIN THEWIPE network hasreduced. see if the number of wipes ending up in our sewer wastewater teamis monitoring the network to surveys to reinforce behaviour changes and our out followcarrying upcommunication and rather thanflushing them down the toilet. We are gave eachhousehold abin to puttheir wipes in flushing wipes cancause sewerflooding and We visited allhouses in this area to explain how of households did not have a bin in any bathroom. During our research wefound thatmore thanhalf Redcar –The BigBinGiveaway by wipes inour sewernetwork. aim of reducing the amount of blockages caused areas; Stockton Newcastle, and Redcarwiththe we also launched three targeted pilots inhot spot the Wipe’. Alongside this overarching campaign, new customer behaviour change campaign ‘Bin environment. InNovember 2019welaunched our protects customers, their homes and the create sustainable, behavioural change that However, the problem persists and wewantto only put‘toilet paper, peeand poo down the loo’. Historically, wehave tried to encourage people to the toilet. people to dispose of allwipes in bins,not down packet cancontribute to this problem, so wewant wipes thathave the word “flushable” on the want to stop thathappening. Even brands of environment, in rivers or even beaches, and we into customers’ homes or to flood into the These blockages cancausesewage to backup caused by people flushing wipes. our sewernetwork, approximately 64%of which are We have to cleanout 15,000blockages ayear from #BinTheWipe. authorities who have re-affirmed for their support includinga widerange of partners, local engagements. We’ve from hadcontinued support 450,000 people and drawing more than36,500 campaign with our posts reaching more than We have seenastrong to our social media start communications campaign. ofan integrated‘influencers’ aspart use to cleantheir faceusing social media messages about alternative products people can campaign inseven Newcastlepostcodes, sharing specific make upfocused ‘Bin the Wipe’ used for removing make up. We launched a wipe blockages wehave to clearhave been Research hasshown thatover 50%of the wet Newcastle –Getting into good make uphabits stage process. directly with those customers through afive from backto specific houses. We then engage identify which direction the wipes have travelled network on its spikes and allows the teamto porcupine equipment, whichcatches wipes in the work to pinpoint offending streets using our team are now out proactive carrying and reactive blockages causedby wetwipes. Ourwastewater have beenflooded inthe area because of wipes. We also shared of houses that imagery technology to pinpoint which houses are flushing monitoring the sewersin the area, using smart this area to letthem know wewould be 2020wewroteIn January to allthe households in Stockton –Making blockages amoment ofchange STRATEGIC REPORT 32

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT of betterthantheirperformed PCfor the three ESW, were implemente the wastewaternetwork and waternetwork in operational matters,and below ground assetson this programme, covering customer contact for deliver both improved and systems proce programme is building Our Intelligent Management Asset (iAM) our assets. Asset Management, demonstrating thatwef have company-wide accreditation to the interests of current and future customers. and investing between operational and long-term main a changing world” and future generations in meet the needs of current that sewerage services “We deliver waterand available inour AP More detail on our assethealthperformance three year rolling basi suffered anaverage of works discharge compliance failures and have but wehadazero PC for the three year period 2017/18to measures for betterthantheir waterperformed Similarly, on wastewaterthree out of four of our f failure rateand, though wehave ave overall drinking wat period 2017/18to T average basis. assess our on performance athree-year rolling the long-term ste water and wastewater. Asassethealth is about on two assets, based effectiveness of our long-term We use the concept of AssetHealthto ASSET HEALTH Covid-19 pandemic. year. Th we manage our asse and enhanced dataand analytics to best practice in the long-term manageme delayed until summer aresult 2020as of our assets,which me We adopt anintegrated approach to INTELLIGENT ASSETMANAGEMENT ailures in the year. hree out of four of compliance, wedid have asmall number of e roll out for waternetwork in NWwas i n new att assets 2019/20.However, our PCfor wardship of our assets,we PCtarget for treatment sewage R our measures for water e . t bask ans finding the right balance s. The firsttwo r compliance is setatazero s. one failure each ye o d successfullyduring the n this approachn this and will ets of measures, for stewar he right time, in m i p ISO55001 ry high levelry mprove how dship of our assessthe 2019/20, hases of anaging the tenance sses nt of ar on a year is ollow W

e

www.nwgourplan.co.uk on thiscanbefound in our Business Planat across allof our business areas. More information understanding riskand resilience challenges integrated and systematicapproach to to achieve resilience inthe round by taking an Resilience Framework provides astructure for us corporate, financial and operational aspects. Our complexity of our business systems across effective way to show the interdependency and developed our own Resilience Framework, an position of strength in the future wehave future. To demonstrate thatweare moving to a continue to challenge our business into the in today’s world, suchasclimate change, will We understand thatexist thatthe uncertainties improvement since 2015. flooding incidents demonstrates a magnitude of for both internalfloodingperformance and repeat management plan. Our sewerflooding year planning horizon of our waterresources all of our waterresource zones across the full40 and wehave asecurity ofsupply index of 100%in company. Our waterresources are secure very We have astrong trackrecord asaresilient resilience of their waterand wastewaterservices. increasingly interested in the reliability and from our research thatour customers are our customers and the environment. We know where afailure could have significant impacts on We manage alarge and complex base asset RESILIENCE FRAMEWORK STRATEGIC REPORT

33

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT the environment and wildlife. water beaches for the in the benefit country of people, operations, and to have the bestrivers and bathing to have zero pollutions asaresult of our assets and We are committed to meeting our ambitious goal ENVIRONMENT

pollution to incidents 2025. further setting out our ongoing commitment to reducing Pollution Incident Reduction Planon our website, the number of incidents. We have published a Group to and target effectively our efforts reduce pollution through our Pollution Best Practice focus isto constantlyexamine allaspectsof company-wide zero-tolerance approach. Our improving our pollution through performance our programme. We are continuously learning and of our transformative pollution management hasbeenachievedThis performance asaresult 2019, assistedby our Water Rangers programme. of incidentshigh proportion to the EA,80%in our PC. We continue to proactively a self-report incidents remained broadly stable and wellbelow distribution network. 3 The number of category near awatercourse and the other from our water down from 9in 2016. One wasrelated to asewer 1 and 2pollution incidents remains low at2, pleased thatthe numberof more serious category number of these pollution incidents occur. We are the riskof this happening but arelatively small We continue to focus our attention on reducing environmental harm. escape into watercourses and the seacausing power outages, untreated sewage cansometimes as from blockages, mechanical breakdowns or we have problems in our sewerage system,such 30,000km of sewersacross the NWregion. When We manage and maintain anetwork of almost POLLUTION INCIDENTS or animals. from agriculture, urbanpollution and from birds affected by anumberof sources, suchasrun-off happen aswerecognise seawaterqualitycan be by the EA,working to make inpartnership this waters being categorised as‘Sufficient’ or better is to contribute to allof the region’s bathing be amongst the cleanest in the country. Ouraim Our bathing watersinthe NWregion continue to COMPLIANCE BATHING WATERQUALITY Business Plan. including investigatory investment in our PR19 improve the seawaterquality at Cullercoats, committed to working to withour partners issues. Wenumber of third party remain network together withthe resolution of a measures and remedial of our works on parts This hasincluded precautionary undertaking that hasruled out anumberof potential factors. investigation programme hasbeencarried out Cullercoats. Since September 2017,anextensive the localised decline in bathing waterquality at and local authority to understand the reasons for We continue to with work the EA inpartnership second year. Tyneside,North for was classifiedas‘Poor’ a one of our bathing waters,atCullercoats in 34 achieving the highest standard. However, the ‘Good’ or ‘Excellent’ standard, with25out of All barone of our bathing waters achieved either environment and wildlife” benefit of people, the coastal watersfor the quality of rivers and “We help to improve the STRATEGIC REPORT 34

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT and potentialresulting pollution incidents. works in order to prevent permit non-compliance intervening more frequently atour descriptive descriptive permits. Our operators are also works with numeric permits and those with works. These systemshave beenadopted both at compliance risk across allofour treatment that allows us to understand real-time Effectiveness –seecasestudy on page36),atool DRIVE (Dynamic Risk Index and Visit systems, TriM (trigger management system)and operational management and early warning rivers. To do this, wewillbuild on our innovative ‘Good’ Water Framework Directive statusin our our obligations inworking towards meeting new and tighter consent standards and to satisfy We are continuing our planning to meet future weather events impacts. and third party against achallenging background of extreme have twodischarge permit failures in2019, zero failures in 2018,but were disappointed to strongvery discharge compliance record, with bathing watersspecific to our region. We have a the waterquality and ecology of the rivers and taking into account required whatis to protect permits for eachofour sewagetreatment works, These standards are specified in environmental discharged into rivers, estuaries and the sea. The EAsetsstrictstandards for effluent DISCHARGE COMPLIANCE SEWAGE TREATMENTWORKS challenge our performance. industrial developments and climate change will pressures of increasing population, new housing, operational control. We are also aware thatthe increases the emphasis efficient on very to adoptnew treatment technologies and existing permit standards, which will require us challenges and standards, aswelltightening legislation changes. This will introduce new We know thatfuture permits will tighten as Northumberland, Tyne, Wear and Tees. acrosscatchment east,in partnerships the north environment. We are working within four based approach to managing the water river waterquality, acatchment- supporting the sustainable necessary improvements in continuing to work to inpartnership attain We are continually evolving our processes and leading by example” delivering our services, the environment in “We protect and enhance STRATEGIC REPORT 35

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT EFFECTIVENESS) INDEX ANDINTERVENTION DRIVE (DYNAMICRISK measured and focused way. and targeting resources towards risks in amuch more need at identifying, to predicting bemuch smarter as striving for industry-leading cost efficiency, we becoming increasingly demanding, atthe same time standards are performance delivery of service In abusiness where customer levels service and technical experts. understanding hasalso reduced dependence on judgements. The increased level of operational deterioration trends rather thanindividual with discussions basedon assetfailure ratesand change to clear, evidence-based decision making, The DRIVE approach hascreated acultural • • • • • to create anintegratedbusiness process which: isolation. The challenge for our Drive project was of doing whatthey were designed to doin Systems and processes are capable usuallyvery those actions. who hasthe capacity and capabilityto out carry determine when weneed to acton it and identify known to us. The challenge hasbeento capture it, information weneed to run our business is We have always believed thatmost of the

mitigate against these risks. their responsibilities to execute action plans to workflow to ensure thatpeople understand communicated aclearenterprise-wide before they and impact on performance; needs to befocused to address these risks created asingle business view of where effort these measures to allow usto calculaterisk; added assethealth and criticality weightings to the assetand operational systemlevel; combined these to create leading indicators at second across our operational business; the vast amount of datapoints generated every identified the key operational measures from risk across the business. a common approach to managing operational wastewater networks and watersupply to create from wastewatertreatment into waterand The DRIVEframework hasnow beenextended focus onspecific issues. underlyingscorerisk todue improvedoperational compliance aswella30%reduction in through industry-leading sewagetreatment The result hasbeen improved performance STRATEGIC REPORT 36

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT emissions-free, and lower cost, energy. number of our siteswhich will provide towith athird develop party solar power ata travel. We have also signed outline agreements provide reducing insight and support business implemented anew travel booking process to treatment works and pumping stations, and meters tosmart help monitor energy usage atour In the lastyear wehave installedover 500new commitment to offshore wind power. renewable electricity, including along term digestion plants and power allour sites using two thermal hydrolysis advanced anaerobic sewage treatment to produce renewable energy at energy, weuse100%of the sludgeremaining after underlying consumption. Inrespect of renewable assets are allroutinely applied to drive down our management and investment inenergy efficient use of dataanalytics, site energy audits, trigger in optimisation tools, suchasAquadapt, and the Our focus onenergy efficiency included investing generation. energy efficiency and renewable energy This wasachieved through atwin focus on achieve thisgoal ahead of schedule in 2018/19. against a2008baseline. We were delighted to greenhouse gas(GHG)emissions by 35%by 2020 management plan with the aim of reducing our Ten years ago wecommitted to acarbon James Bevan inaseries of speeches in 2019. increasing, assetout by EAChief Executive Sir resources becoming scarcer and demand planning, facing upto the challenge of water realise thatin the pastyear and in our future adaptation and mitigation. We have sought to positive contribution to both climate change means wehave significant potential to make a risks facing our business (seepage us and our customers, and is one of the principal climate challenges change to presents particular with the naturalenvironment, means that The nature of our business, with our interaction CLIMATE CHANGE 61). Italso anaerobic digestion plant to produce gas. including allfood wastebeing taken to alocal zero waste basis,withno wastegoing to landfill, Our Innovation Festivals already operate on a contribute to the circular economy in our regions. operations, and working to with partners re-using or recycling 90%of wastefrom Our commitment on waste will mean eliminating, localsupporting economies. pound, to aswell reduce transportation, spend in our operating areas to 60pin every have committed to increase the amount we do. We are extending thisto our supply chain, and help monitor and reduce the amount of travel we biofuels, while weintroduced anew systemto electric vehicles and are investigating the useof vehicle fleetgreen with the addition of our first grid. We have begun the process of turning our hydropower sites thatcannot beconnected to the storagebattery and the production of hydrogen in through solar generation, pilots of large scale to explore renewable energy opportunities In terms of carbon emissions, weare continuing by 2025 have committed to creating zero avoidable waste ahead of the government target. Inaddition, we of achieving net zero carbon by 2027,three years have and have gone further astep setachallenge commitment to benet zero carbon by 2030.We and share experience asthey work to deliver on a sector came together to discuss the challenge conference. Representatives from across the Delivering aZero Carbon Water Sector opened conference, anindustry-wide Water UK’s In March our Chief Executive, Heidi Mottram Net Zero Emissions STRATEGIC REPORT 37

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT sustainable drainage. EasttogetherNorth withthe EAto promote Lead Local Flood Authorities across the flooding. Ouraward-winning NIDPbrings 13 industry-leading approaches to reduce the of risk On the wastewaterside, weare also using Powerhouse.Northern sustainableand growth supporting in the Water protecting Resources North, resilience planning across EasternEngland, and collaborative approach to waterresources both Water Resource East,which is pioneering a operating areas aswell. We in play afull part contribute to resilience inneighbouring We recognise thatthis putsusinaposition to rivers Tyne, Wear and Tees. System –agiant pipeline thatcanfeed into the flexibility provided by the Kielder Transfer reserves available from Kielder Reservoir, and the Eastoperating areaNorth is largely due to the The security of supplies for customers in our forms akey of our caseatCMA. part resilience of supplies in thisway and this scheme customer for investing to support enhance the reservoirs to bekept in balance. There wasstrong additional flexibility and allow our two key Essex transfer scheme thatwould provide distribution. Inour PR19Planweproposed anew where it is required for treatment and circumstances, on our abilityto move waterto availability there are constraints, under certain Essex region hasrobust waterresource securityin Essex. However,further although our in2014provides Reservoir expansion of Abberton In our southern operating area the completed year drought scenario. also demonstrated our resilience to a1in 200- across the full40-year planning period. We have supply index in allof our waterresource zones demonstrated thatwehave 100%securityof Our Water Resource Management Planhas element ofour PR19Business Plan. areas and how they interact. Resilience wasakey resilience challenges across allof our business systematic approach to understanding risk and in the round by taking anintegrated and provides astructure for usto achieve resilience integrity of our assets.OurResilience Framework impact on waterresources resilience and the Over the longer term, climate change could Resilience

key of our caseatCMA. part flooding enhancement scheme formsanother for amore proactive approach. This sewer previously and reflects strong customer support which haveproperties experienced flooding which is focused on preventing repeat flooding at creep. This isdistinct from programme our base due to climate change and the effect of urban increased risk of sewerflooding for the firsttime programme to address whichare properties at We included inour PR19business plan a predict and resolve incidents before they occur. and temperature in our sewers,helping usto technology enabling usto measure depthflow weather events, and deploying fibre-optic sensor assess how our assetswillrespond to extreme including utilising Digital Twin technology to We are using innovation to manage flood risk, STRATEGIC REPORT 38

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT COMPETITIVENESS customers and investors” fair balance between stable and achieve a “Our finances are sound, Structure section laterin thisreport. detailed inthe Financial Performance and The financial of the performance Company is FINANCIAL PERFORMANCE page 32). changing customer behaviours (see casestudy on priority register and how to reduce flooding by increasing the number of customers on the plastics when there is aninterruption to supply, big challenges like reducing the useof single use challenge basedapproach so focus is on solving supply chain, eco-system and beyond. This is a ofcreativity our employees, and expertise our management platform thatis harnessing the In 2019welaunched Amplify which is anidea innovative company” “We are an efficient and usual. innovative new ideas so it becomes business as business and driving the implementation of are spreading innovative culture across the innovation across the business. These employees innovation ambassadors thatare enabling the business plan. Centralto this are the enabling focuson the big challenges laidout in innovation pipeline and process which is This year seenthe has creation of arobust environment thatwelive and work in. to improve the lives of our customers and the which is open to future change and the potential and empowered our people to develop aculture everyone’s responsibility. We have engaged with turning ideasinto business value, and thatthisis We believe thatinnovation is the process of INNOVATION capital and digital twins. of four themes: leakage,social purpose, natural nine sprintsand three hackswithin the context from overparticipants 250organisations. We held embraced open innovation, attracting based on our Innovation Festival format. We event hadits own character, butwasbroadly Ipswich, afirstofitskind for the industry. The East, with Anglian Water over three days in In September 2019weheld ajoint event, Innovate achieving areach of 3.6m people. people thanever with Twitter messaging, into the business. In2019wereached more generatingover 132ideas back 6,000participants either way. To date,our festivals have attracted reputation for being innovative is enhanced in, some of which happenwithout us. Our from the event, manyof which weget involved innovation ecosystem. There are lots offs of spin The festival places usfirmlyatthe epicentre of an Map. boundaries, such asthe Common Underground that require collaboration across organisational technique to great effect to drive forward ideas of work inaweek’. Weworth have used this to rapidlyprogress existing ideas, or ‘a year’s new ideasto improve our business. We also useit Clearly the main purpose of the event is to create c.£5m. contribution isestimated to beworth activities. The professional value of this services not beable to tapinto in business asusual breadth and depthof experience thatwewould organisations. This diversity represents ahuge we hadmore than3,000people join usfrom 734 from acrossattract participants the globe. In 2019 become firmly-established and as industry-wide festivals are the focal point. The events have We drive innovation allyear round, butour INNOVATION FESTIVALS STRATEGIC REPORT 39

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT into reality. analysis data,and now thisis being progressed mobile unit which would provide real time anaerobic digesters. The winning ideawasa generating more renewable energy from our automatic flushing and probe system and improving customer complaint handling to an covered adiverse range of subjectsfrom directors ina‘Dragon’s Den’ style. The ideas to pitch theiropportunity ideato apanel of ideas, the individuals and teams were given the an investment of up to £250,000.For the bestfive allows our employees to say how they would use continued our InvestQuest competition, which to haveopportunity their ideas listened to and we thatour people haveIt isimportant the INVESTQUEST • • • • • over the lastyear are given below: developments. Some examples of our activities early sight of latestthinking and product These innovation have partnerships given us individuals our innovation to support initiatives. strong relationships with organisations and the outside world. Accordingly, wehave built combine our people and ideas with those from We are atour bestand most innovative when we INNOVATION PARTNERSHIPS RESEARCH AND water supply systems and biogas production; apace, focusing on developing digital twins of Our work on Digital Twins has also continued Birtley sewagetreatmentBirtley works; the BE:WISE wastewater research facility atour reducing urbanflood risk,and the expansion of investigate the role of green infrastructure in a post-graduate research engineer to Newcastle University with the appointment of We have with also continued our partnership resilience in their communities; working withaffected people to increase flood Knowledge Transfer which is Partnership, continued withour Innovate UK-funded withDurhamOur partnership University has social media; reading written comments and feedback on experience when ofweare NWL,particularly interpret how our customers feel about their intelligence artificial to linguistics to help us to We are collaborating with Wordnerds, applying sewers, helping reduce the risk of flooding; down the flow ofrain waterfrom roofs into drain pipe, which slowsincluding asmart number of early stageproof of concept projects Andrew Turner Innovation Limited, on a We regularly work with inventor in residence, their other members. open innovation challenges incollaboration with the Energy Innovation Centre to run aseries of regional basis. Most recently, with wepartnered for collaboration to tackleshared needs on a we share knowledge and look for opportunities Powergrid(NGN), Northern and Yorkshire Water) Innovation Group GasNetworks (with Northern Through our membership of the Cross Utility Wastewater Director, Richard Warneford. Research,Industry whichis chaired by our including playing anactive role in UKWater colleagues across the waterand utilities sector, We work also closely with in partnership • cable connection. central GISdatabase,without requiring awi-fi or quickly accessand upload crucial datafrom our and to allow fieldtechniciansand engineers to representation of buried assetsfor technicians 5G to power augmented reality to provide a3D issues ahead of time. We are also looking to use identify anyunusual patternsto flagpotential monitor their home’s watersupply and flow to a home watermaintenance app,for consumers to The firstset of trials will focus on areas including simultaneously, adding valuable second opinions. allows to join multiple one experts call time dataand instructions. The technology also teams through complex tasksby relaying real- technicians to remotely guide on the ground reality technology allows experienced Eastregion.the 5G-enabled North augmented supply areas and across the wastewaterservices logistical challenge ofmaintaining waterin our and competencies in order to manage the business werequire arange of technical skills revolutionise the way weoperate. Across our to harness the power of 5Gconnectivity to and conducted aseriespartners of initial 5Gtrials In December2019,wejoined forces with telecoms THE POWEROF5G our customers and stakeholders. and ensure thatdigital twins create value for digital twins to shapethe national landscape this group of developers, owners and usersof Digital Twin Hub.We are pleased to work with NWG is afounder member of the national

STRATEGIC REPORT 40

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT open innovation. We love new ideas thatwill MacOscar, said: “We believe whole-heartedly in At the launch, our HeadofInnovation, Angela the challenges. ideas and anyone canregister in and take part backing and funding to develop and trialthe best promising ones. There is potential financial with usersand pickupand run with the most company and they monitor responses, engage Each challenge from is owned by the anexpert within the Amplify website. interact with other innovators and creators all ideas, pitch their products, askquestions and work on these problems, people cansuggest the world to and help try solve them. Aswellas challenges and then open them up to the rest of together. We of post big aseries real life big problems, pitch new ideas and innovate across the globe cancome together to help solve Amplify is ashared spacewhere anybody from innovation floodgates to the whole world. sharing platform ‘Amplify’, opening the of this wehave launchedAs part anew ideas and industries together to look atbig problems. example of how webring manypeople, companies solved together and our Innovation Festival is agreat practise where wecan.Alot of problems are better to usto important It isvery work with and share best PLATFORM LAUNCHED GLOBAL INNOVATION

register on the websiteto join the discussion. challenges should visit amplifynwg.co.uk and Anyone interested in our in taking part customers during aninterruption. when providing emergency water supplies to company caneliminate the useof plastic bottles single use plastics. Specifically, how the water Our firstchallenge wasbasedaround reducing perfect opportunity. in front of big companies like ours. Thisis the they struggle to get their ideas off the ground or medium sized companies and inventors who say Over the years we’ve heard from lots of small and to solve big problems.” mind from across the world and to work together to connect with every innovator and creative about Amplify, the newest tool thatwill allow us outside of the box. That’s whywe’re so excited the rules,doing things differently and innovating completely. We’ve seenthe benefits of breaking when wefind them, wewillbackthem make adifference to our customers’ lives and STRATEGIC REPORT 41

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT the change from SIMto C-MeX. session wasfocused onour customer and service held a ‘Teamtalk Takeover’ where the whole activities to bring the message to life. In2019we of apackincluding videos and interactive leaders cascadeto their teams with the support areas of focus. Afterasession with our CEO, our comes together to and discuss performance key Our bi-monthly Teamtalk events ensure everyone they play to achieve our vision and outcomes. It’s thatpeople understand important the part engagement withallstaff. with the relevant director allowing direct Mottram, attends allof the roadshow sessions vision and progress towards this. Our CEO, Heidi for our people toopportunity understand our Our annual employee roadshows provide an and Yammer. e-bulletin, and digital tools suchasour intranet briefings two every months, our weeklyH2info director roadshows, structured Teamtalk range of communication channels including Employee Relations Framework and through a engage with our employees through our Manager, OurValues and OurShared Story. We based on the four themes of MyVoice, My engagement through programme, our GPTW We have continuedto develop our employee place to work” “We are seenasagreat people feel proud to work here. most recent employee survey that72%of our from the 84%of employees thattook inour part empowered to bethe bestthey canbe.We know workplace where everyone canthrive and feel confident thattheir voice is heard and have a bypeople their are managers, feel supported have aninclusive and diverse culture where our unrivalled customer experience. We aspire to purpose, vision, outcomes and to deliver theyunderstand the play part to achieve our future, to have agreat experience atwork and to Our aspiration is for allof our people, current and GREAT PLACETOWORK PEOPLE

according to the basiccost of living for the UK. hourly ratesetindependently and calculated Company earnsatleastthe Living Wage, an which means thatevery employee in the Employer with the Living Wage Foundation, We continue to beaccredited asaLiving Wage different ideas to consider. given uswhatwewanted,areas to focus on and way welisten and collaborate. The audit has welcome new people into the business and the strength includedparticular how werecruit and centric employer.” Two areas identified asbeing a an employee, customer and environmentally Their conclusions were “it is evident thatNWGis comprehensive culture audit of the business. Work Institute to aBest Workplaces undertake In December2019,weasked the Great Placeto just missed. Trust Index score of 65%or more, which weonly we also revised our target measure to achieving a plans. The change in survey provider meant that and involve employees increating local action here. Managers receive the results for their teams employees to tellushow they feel about working the firsttime. This provides for anopportunity employeeIn 2019,weusedthe GPTW survey for to customers” to deliver great services committed and inspired “Our people are talented, STRATEGIC REPORT 42

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT targets again in2019/20. 2018/19, and laid the groundwork to deliver our conditions and still meet our leakagetargets for to dealwith extremely challenging weather team who usedarange of innovative approaches Special recognition wasmade to the Leakage suffered aserious accident while on holiday. they providedsupport to two colleagues who Scheduling (south) teamforthe One Team Our overall winners were the Planning and celebrate the bestacross the five categories. year wehold aViVa awards ceremony to each month to the top nominations and every have gone the extramile. Prizes are awarded that they feel have done great aparticularly job or Anyone cannominate anyone in the business demonstrating our values and behaviours. in 2019nominating and teams colleagues for still aspopular asever with circa 1,700employees going the extramile. Now inits ninth year it is you to our employees for doing agreat job or and Values),(Vision is our way of saying thank Our employee awards scheme, known asViVa OUR VALUESANDBEHAVIOURS

people retire. is fitfor the future and retain knowledge as talent already in the business to ensure everyone employer with the future workforce, develop the focused to raiseour profile and as an industry an sustainably.deserve, NWGAcademyactivities are our customers they the service expectand knowledge and talentweneed to continue to give plan of activities to ensure wehave the skills, a difference. Our NWGAcademyis astrategy and chance to achieve their goals potential and make people have to the develop, opportunity have the asset and weare committed to making sure that We recognise thatour people are our greatest NWG ACADEMY andshortlisting interviews. recruitment and selection process including our Leadership behaviours to inform our appraisal process and midyear reviews and using continued to embedthese through our annual vision of being national leader. We have achieve our medium-term goals and deliver our we allneed to demonstrate to enable usto across the Company to identify the behaviours We developed ‘OurBehaviours’ with our people with our values” “Our people actin line customers. experiences for our internaland external place to work and unrivalled customer people with confidence whilst delivering a great enable our managers to leadand managetheir excellence in their leadership roles and aims to provide our managers with afoundation of business needs. This hasbeendesigned to the Company hascontinued to evolve to meet Programme for allnew people managers within Our Leadership and Management Development and build trusted relationships withtheir teams. our managersto bethesupport best they canbe We continue to look for ways wecandevelop and procurement process. development across our supply chain through our including how wepromote relevant skills present. Ourcontribution is audited eachyear, toand shortages improve the future aswell asthe people and help address sector-wide skills gaps ensures thatwelook wider thanjustour own organisations inaProcurement Skills Accord Our involvement withother utility sector proud of. has resulted in aqualification they canallbe the business to another level and their hard work has equipped them to take their contribution in engineering behind whythey do whatthey do their understanding ofthe science and many years and aftercompleting the programme programme have beenworking intheir roles for day. Manyofthe people involved in the provide clean,clearwaterto our customers every demonstrating thatour people are competent to These Standards are recognised by DWIas Licence to OperateStandards for competence. the first in the waterindustry to achieve the personal development hasresulted inNWLbeing For some of our Water production team,their management or waterengineering. improvement projects. Others have focused on to and usetheir new skillsonbusiness increasing datathattechnology gives usaccess strategic and operational benefits from the about dataintelligence to help maximise the and grow during 2019.Some have beenlearning our existing employees to the learn opportunity Apprenticeship programmes have given 110of STRATEGIC REPORT 43

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT research to are women. important campaign to focus on the themes weknow from value across allroles, and our #waterwomen is aplaceindustry where females canaddreal social media to demonstrate thatthe water attractive to women aswellmen. We’ve used positive stepsto ensure thatour roles are improving our gender balance and are taking predominantly male.We are committed to diverse backgrounds, our business iscurrently whilst wework hard to attractpeople from perceptions of careers and roles persist and We operate inanenvironment where traditional GENDER DIVERSITYAT31MARCH2020 our people canbethemselves and do their besteachday. very need for improving to graspthisopportunity through performance creating anenvironment where all making betterdecisions and successfullyinnovating and evolving. Ifweare to achieve our vision, we Research shows thatdiverse organisations better, consistently perform attracting great people, come from awide range ofbackgrounds, and our workforce needs to reflect that. We recognise the value of diversity and and importance inclusion inour workforce. Ourcustomers DIVERSITY ANDEQUALOPPORTUNITIES

Full company Executive LeadershipTeam(ELT) Board NAME better access and support the LGBTbetter accessand support community. amongst ethnic minorities and with Stonewall to develop anattraction strategy to raise our profile work with us,wehave with Vercida partnered to sure they to are comfortable bethemselves at different personal characteristics and to make To encourage more applications from people with of their roles being operational. maths roles, and 33%of apprentices, despite most involved in science, technology, engineering and undergraduates in 2019were female, the majority development programmes where 67%of our One area of successhasbeenrecruitment to our FEMALE 1,005 6 2 STRATEGIC REPORT 44 MALE 2,079 6 9

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT job applications of the from community allparts employees are treated with respect. We welcome all our current employees and potential PolicyOur Equal Opportunity seeksto ensure that share their stories. maths careers inthe region came and to support working inscience, technology, engineering and the funand educational activities. Women STEAM career. Circa 1,300young people joined in encourage young people to seriously consider a schools, colleges and universities, wasto culmination of ayear of outreach activitywith at the 2019NWGInnovation Festival, the Engineering, and Maths(STEAM)activities Arts The objective of our Science, Technology, East Business Women of the Year Awards. awarded Employer of the Year at the 2019North local businesses. We were delighted to be role models, through collaboration with other networking and highlight female opportunities EastHubenables us tothe WISENorth promote BeingUtility Skills Partnership. regional leadon and Engineering) campaign and the Energy and work closely withthe WISE(Women inScience are to reallyexternal partners us. We important To drive real change our relationships with OPPORTUNITIES (continued) DIVERSITY ANDEQUAL

into employment. offer work experience and create apathway and understanding to do more to find ways to Disability Confident isbuilding our network Disabilities group and our involvement with Partnership’s SpecialEducational Needsand work EastLocal Enterprise with the North process withprofessional medical advice. Our Occupational health physicians assist this to their roles and/or effective redeployments. practicable, by providing appropriate adjustments to remainsupported inemployment, wherever employees develop disabilities, they are people with disabilities and, where existing We welcome employment applications from religion or belief, gender or sexual orientation. age, ability, status,race, marital or partnership employees are treated equally, regardless of their and it is our intention thatalljob applicants and STRATEGIC REPORT 45

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT • • • • • Over the next year, wewillfocus on: policies this. to support We willcontinueto updateon our progress and who by our are benefits programme. supported framework for an inclusive and diverse workforce place to work. Thatincludes creating a We are constantly working to make NWLagreat access the besttalentpossible. all colleagues who want it, and to make sure we issues, enabling progression and development for change, through understanding the underlying remain committed to meaningful and sustainable diversity, weknow there is more wecando. We average. Although weare proud of our work on from 2018,and weare now below the ONS Our mean and median pay gaps have reduced median woman compared to the median man. difference betweenthe hourly pay ratefor the compared to men. The median pay gap is the difference in the average hourly pay for women The mean gender pay gap the is percentage the same or asimilar job. woman receiving the same pay forperforming same asequalpay, which isabout amanand working forthe same organisation. It’s not the average hourly pay for allthe men and women The gender pay gapis the difference betweenthe inclusion atalllevels of our organisation. know thatwehave to do more to improve reducing, butweare not complacent and we to make progress and our gender pay gapis which is available on our websites. We continue figures in our Gender March Pay 2020, Report employees. We published our gender pay gap and equaltreatmentopportunity for allof our We are committed to the principle of equality of GENDER PAYGAPREPORT

balance ismore challenging. Focusing where on departments gender and involvement ininitiatives suchas EUSkills; equality inthe Utility sector, through our Engaging in the widerconversation about talent; the business to female inspire and support Utilising role models from inside and outside genders; for senior rolesshortlists have abalance of Continuing to ensure that,wherever possible, Providing more coaching and mentoring; We are now below the ONSfigure of 17.3%. NWG MEDIANGENDERPAYGAP2019 NWG MEANBONUSGAP2019 last year. Our Meangender pay gaphasreduced by 5%on NWG MEANGENDERPAYGAP2019 PAID ABONUS PROPORTION OFMENANDWOMEN NWG MEDIANBONUSGAP2019 25.9% 23.2% Females Males STRATEGIC REPORT 46 -42.6% 16.8% 7.7% 0%

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT them ator below the lower quartile. All employees whose standard hourly rateplaces BAND A PAY QUARTILESBYGENDER quartile. them above median but ator below the upper All employees whose standard hourly rateplaces BAND C quartile. them ator below median but above the lower All employees whose standard hourly rateplaces BAND B 544 383 618 783 783 783 400 239 165 OVERALL TOTAL them above the upperquartile. All employees whose standard hourly rateplaces BAND D 2117 572 Females Males 3132 783 STRATEGIC REPORT 47 1015 211

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT improve safety on sites. discuss anyissues,concerns or ideasonhow to encourages employees to talkabout safety and what wecando betteron our sites. It also looking atwhat’s working welland finding out This shows thatour managers are visible and safety visits, completing over 1,000in the year. We extended also our programme of managers’ last year. right, and completed 3,221safety conversations indicator when someone isdoing something only stop unsafe behaviour but alsoasapositive employees to have safety conversations to not compared to the previous year. We encourage almost 30,000‘60second checks’, ahuge increase within the business and our people carried out We continued to work on our safety awareness healthy and safe” “Our workplaces are Everyone Home Safe Every Day. behaviour and help usachieve our aspiration of components of our safety plan to encourage safe we need to keep on learning. These are allvital people, asafe way of doing things, safe places and four fundamental things right. We need safe To have atrulysafe organisation weneed to get a lost time accident. period of time -almost 100days -without having previous year and weexperienced our longest improvedperformance significantly onthe and customers.chain partners OurSafety day, which extends to our employees, supply make sure thateveryone goes home safe every It isour aspiration and ethical responsibility to HEALTH ANDSAFETY

workshops are available to allemployees. and symptoms, and personal resilience conversations with their people and spot signs awareness training to equip them to have for allpeople managersto receive mental health health. We anew have programme also started people who may bestruggling withtheir mental Health First Aidersacross the business to support over the lastyear have trained over 30Mental have continued our focus on mental health and Physiotherapy for physical health. service We Assistance Programme for mental health and our suchasour Employeeinternal wellbeing support people by ensuring their teamsare aware of our Our network of Wellbeing our Champions support awareness campaigns. wellbeingas quarterly weeksand monthly mental (energy and resilience) challenges, aswell physical (weight loss and physical activity) and challenges for individuals or teams focusing on our annual wellbeing calendar wehold wellbeing feedback wereceive from employees. of Aspart and is driven by our top reasons for absence and and wellbeing programme continues to evolve choices. Our‘Live Well, Work Well, Be Well’ health mental health and make informed lifestyle where people canmaintain good physical and We are committed to providing anenvironment WELLBEING STRATEGIC REPORT 48

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT one point. accurately how deepthe network is atany planner about to dig, would beable to know our aim isthatin future, anyfieldworker or the latest new technology. Thanksto the Zstick, shapes and sizes and it’s not just about utilising This shows thatinnovation comes in alldifferent for our customers. work fasterand potentially withlessdisruption the pipe safely and quickly, and complete the equipment they may need to help dig and locate jobs knowing inadvance of anyspecialist cables. Itwill enable usto despatchteams to helping them to avoid accidentalstrikes to live This information willkeep our people safe by 15,000km long network ofwaterpipes. develop and recalibrate a3Dmodel of the entire ofapilot project.as part The dataisusedto measured and recorded from over 2,000locations normal or deepand this information being is categorise the excavation aseither shallow, green and red coloured bands on the tool our teams how deeply apipe is buried.The blue, placed into open excavations, helps to indicate to The Zstick, is acolour-coded stick which, when position, and that’s how the Zstick wasborn.” assets, but thiswillhelp us measure the Z knownotherwise the as Xand Yposition, of our We already know the widthand the height, the ever-increasing number of fibres and cables. and roads the spaceisbeing over crowded with the depthofour pipes, underneath our pavements said: “It’s more thanever thatweknow important Paddy Garrett our AssetSystems Team Leader, our networks. underground waterand across sewerpipes workers capture and record the depthof Innovation Festival backin July 2019,to help The ‘Zstick’idea wasfirstdiscussedat our regions’ roadworks infuture. pipes, to keep our workers safe and speedupthe helps measures the depthof underground water We have invented asimple butinnovative tool which THE POWEROFZ

STRATEGIC REPORT 49

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT want usto do. our local communities andsupport is something they We to know our customers it is important thatwe COMMUNITIES

important part of the community. part important seriously, and our customers agree thatweare an operating areas. We take this responsibility of the households and businesses in our few organisations to have arelationship withall extensive, and webenefit from being one ofthe Ourreachservices. into communities is environment alldepend on how wedeliver our their economic prosperity, and the surrounding which weoperate. The health of our customers, We of the communities are in anintegralpart of local communities” contribute to the success “We are proud to thatmeet localpartnerships community needs. around issues and long important standing engaging and helping to educate young people localvolunteering, events, important supporting community programme, thatincludes employee over the years wehave developed anextensive of our communities andsee ourselves aspart suppliers to benefit our regional economies. We our direct investment through tradewith local activities have a‘ripple effect’, going farbeyond have told usare to most them. important Our communities inareas thatour customerssupport We useour skills, assetsand experience to this. contribution to life within our regions to support areas and weserve essential wemake awider us to contribute to the economic wellbeing of the tocommunities and their success. Itis important We know wecanhave apositive impact on our organisations across our communities. volunteered their 989 time supporting community. In2019,42%of our people environment and the general wellbeing of the designed to have animpact oneducation, the employees have to give. The programme is ourwealth of knowledge, skillsand expertise We know our communities canbenefit from the working hours community initiatives. to support have to the give opportunity aminimum of 15 immensely proud of. Every year eachof our team to usand important is somethingis very weare employeeOur ‘JustanHour’ volunteering scheme EMPLOYEE VOLUNTEERING 2,000 patrols. our volunteer Water Rangers carried out over working inthe water environment. In2019 anyissues they alsoreport seewhenpartners Riverwaterways. guardians and catchment any issues spotted on regular patrols along our ground inthe community and awareness raise of volunteers who actasour eyes and earson the up in2014,consists of trained customer Our award-winning Water Rangers initiative, set WATER RANGERS in2020. part with manymore having to thetake opportunity in aPoweredparticipated by Water workshop, Darlington. In2019over 27,500young people Foundation and Mowden Park Rugby Club in Foundation of Light in Sunderland, EssexCricket Foundation, MFC Foundation in Teesside, Newcastle EaglesCommunityour partners interactive educational workshop delivered with our supply areas, have benefited from the Thousandspartnerships. of young people across engaging and funway through our sporting hydrated and avoiding drinksin an sugary young of people staying the importance well running for manyyears, and isdesigned to teach Our Powered by Water campaign hasbeen POWERED BYWATER STRATEGIC REPORT 50

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT communities. investment in wildlife and people across our helping to enable, anamazing £5.6million regions. Thishasresulted of, and in usbeing part leverage 12times thatamount in funding into our invested over £470,000which hasbeenusedto 126projectsBranch Out fund and hassupported providing £60,000in funding. Since 2013,our 21Branch Outprojects2019/20 wesupported safely remove wastewater in the future. In continue to supply top quality drinking waterand essential for ustoday and to make sure wecan communities. Ahealthy natural environment is benefit the naturalenvironment and their local Our Branch Out fund helps to deliver projects that BRANCH OUT NEA, and on page27 our catchment partnerships withStepChangeaffordability and partnerships, elsewhere suchasour customer in this report, haveMany of those partnerships beendescribed progressive and sustainable. influencing waterpolicy and regulation to be national and global strategic partnerships, Weand of local, charters. are atrustedpartner through joint steering groups, codesof practice our customers. are governed Our partnerships achieve the shared to goals thatare important with those whose values align with ours to Strategysetsout howOur Partnership wework towards common goals” “We work in partnership difference to our customers’ lives. faced by our business, and together make a of addressing the challenges and opportunities we are able to share the costs, risks and benefits working with other stakeholders, inpartnership approach asawaterand wastewaterprovider. By workingPartnership is anessential aspectof our PARTNERSHIPS . • of the highlights are shown below. which isavailablereport, on our websites. Some environment and society in Our Contribution influence and impact in the widereconomy, the on and our reporting performance also report We look beyond our annualfinance and COMMUNITY PARTNERSHIPS • • • • • • • •

their bills more affordable; 30,624 customers to receiving make support non-governmental organisations; environmental, community and charitable £859,696 financial contribution to 989 organisations supported; community projects giving 13,992hours; 42% of our people volunteered to support employability activity; 13,000 young through people our supported over 1,200‘RefillStations’; WaterAid; sanitation through our fundraising for 12,000 people given accessto cleanwaterand ecological sites; and over 850,000visitors to our historical and to help protect our rivers. over 2,000patrols by 78waterranger volunteers STRATEGIC REPORT 51

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT THE FUTUREOFWATER WORKING TOGETHERFOR June 2019. as anot for profit, independent company back in Water Resources wasofficially established East(WRE) East such asresponding to climate change and know wefacesome significant challenges in the companies and organisations going forward. We to working in collaboration with the other water excited of WREand to looking beapart forward Eliane Algaard, our Water Director said:“We are over the coming months. Council. Other organisations are expectedto join Authorities inSuffolk) and Norfolk County Programme Board (on behalfof allLocal Lincolnshire County Council; Suffolk Growth National Farmers′ Union; RWEGeneration; Essex and Suffolk Water; Severn Trent Water; the Anglian Water; Affinity Water; Cambridge Water; formed by acollaborative comprising partnership up asanindependent legalentity. Thishasbeen resource management, butisthe first set itselfto development of anational framework for water planning groups of working the EA′s aspart WRE is one offive regional water resource need to enhance the environment in this region. England′s finite watersupply, combined with the growth willcontinue to have on Eastern impact thatclimate change and population The focus of WREissimple; recognising the company boundaries. be moved around the region, irrespective of water interconnectingfurther pipes to enable waterto risk. These by new reservoirs willbesupported enhance fenland and conservation reduce flood the regions watersupply, agriculture, support to benefit the whole regional economy to bolster rainfall and floods. This watercould then be used reservoirs, capturing excess waterfrom winter encouraged to develop multi-sector waterstorage of one setof pilots,As part land owners will be Capital benefits. and account for environmental and Natural water management and willseekto maximise on the links betweenland management and catchments inthe region. These pilots will focus of pilotdelivery projects within water-stressed The next phase of WRE′s work will focus on the deliver positive solutions for our customers.” this way to achieve our common goals and sense for watercompanies to come together in supply and benefit the wider region. It makes to protectopportunities and enhance our water population growth, butthere are also STRATEGIC REPORT 52

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT REPUTATION 17025. analysis accreditation to the demanding ISO Management and our sampling and laboratory Environmental Management; ISO55001Asset company-wide accreditation to: ISO14001 Our assurance framework builds upon our that there were no significant issues to report. reporting anykey findings. This confirms that what assurance wehave carried out on our data our suite of annualreporting which describes ofpublished aspart aDataAssurance Summary information of appropriate quality. We have our obligations and commitments and providing stakeholders, setting out how weintend to meet following consultation withcustomers and published governance and assurance arrangements. We high level of trust and confidence in our We have worked hard to give our customers a only four UKbasedcompanies onthe list. World’s Most Ethical Company list and one of company inthe world to beincluded in this year’s standards of integrity. We’re the only water recognising companies fortransparency and practices for ethicsand compliance globally, Ethisphere institute. Ethisphere promotes best the ‘most ethicalcompanies’ in the world by the we are proud to have again beennamed asone of Our reputation is extremely to usand important TRUST differences are between the two areas. better understand the scoring and seewhere the that were combined in this assessment so wecan companies. We will look at the previous reports and Suffolk area wewere 8thfor wateronly water and sewerage companies and in our Essex area wewereIn our Northumbrian 1stof the 11 performance. and companies have beenranked to show overall including trust, hasbeenassessedand graded simple table. Every area of performance, highlight how companies are ina performing numbers and to operational performance information on customers’ views, complaint assessment, using previously published CCWater hasintroduced itsWater Mark WATER MARK customers cantrust” “We are acompany that Our Assurance Planfor2019/20, business-tracker-insights-report www.bitc.org.uk/report/2019-20-responsible- Covid-19 pandemic. and whatthey could mean in the context of the practice examples from the 2019/20Tracker cycle which summarises the key findings and best The hasbeenpublished national insights report healthy ecosystems and net zero carbon. whole in responsible business practice, including Utilities benchmark group and the asa cohort meaning thatweare leading our Energy and delighted to thatwescored report 81%overall, across all24different sectors We taking part. are pilot year. This year wewere one of 94companies first companies inthe to take part Tracker in its the environment. Lastyear wewere one of the business within communities performance and fairly assessand benchmark their responsible measurement tool thatallows organisations to The BiTC Responsible Business Tracker is a TRACKER® BiTC’s RESPONSIBLEBUSINESS perception they of the service receive from us. into whatour customers opinion is and their against other companies and gives usaninsight tothe seehow opportunity weare performing shareholders and regulators. gives Thisreport us are rising, along with those of our stakeholders, however weknow our customers’ expectations generally they satisfied withthe service received, showsThe report thatmost customers were STRATEGIC REPORT 53

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT AND STRUCTURE FINANCIAL PERFORMANCE * Companies listed on The Stock Exchange of Hong Kong Limited. 2019 it ceasedto have acontrolling interest in the with effectwith other from parties, 30December of contractual arrangements enteredvirtue into Company hasbeeninformed by CKHHthat,by with CKHutchison Holdings Limited (CKHH). The Note 25describes the Company’s relationship (NHH) retail activities in England and Scotland. trading subsidiary, carries out Non-household venture company, Wave Ltd.which,through its companies. NWGLalso owns 50%of ajoint holding company forother non-regulated trading Commercial Solutions Limited, which actsasa NWGL hasone other direct subsidiary, NWG WaterNorthumbrian Group Limited (NWGL). NWL is awholly of owned subsidiary GROUP STRUCTURE Business Thrive Northumbrian Northumbrian Water Limited 40% subsidiaries financing Limited CK Hutchison Holdings Limited*

Holdings Limited* NWG Commercial Solutions Limited CK Infrastructure Holdings Limited 40% c.72% Northumbrian Northumbrian Infrastructure Water Group subsidiaries Hutchison Limited trading Company’s Instrument of Appointment (Licence). in accordance withthe provisions of the Ultimate Controller to undertakings the Company CKHH, CKI,BTL and NWGLhave provided Association. Foundation Limited under NWGL’s of Articles Holdings Limited (CKI)and Li KaShing Business Thrive Limited (BTL), CKInfrastructure above NWGLrepresents the economic rights of shown.unless otherwise The 40%/40%/20%split holding companies, which are wholly owned shows the2020. Theprincipal chart intermediate and the upstream linksto CKHHasat31March belowThe shows chart the structure of the Group standards. Company asdefined by the applicable accounting

Foundation Limited STRATEGIC REPORT 54 20% Li KaShing subsidiary Wave Ltd trading 50%

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT reduction to 17%which hadbeenpreviously decision by government to reverse the planned deferred taxfrom 17%to 19%.Thisreflected the charge is dueprimarily to arestatement of 2019: £5.5m). The significant increase in the year ended 31March 2020was£58.9m (31 March profit before tax.The deferred taxcharge for the The increase in the charge mainly reflects higher March 2020was£38.9m (31March 2019:£33.6m). The current taxcharge for the year ended 31 was £246.4m (31March 2019:£207.9m). before taxation for the year ended 31March 2020 derivatives compared to the previous year. Profit movements on the market valuation of on index-linked bonds, and smalleradverse The reduction of £18.5m relates to lower accretion ended 31March 2020(31 March 2019:£130.9m). Net interest payable was£112.4m inthe year cost efficiencies. capital investment programme, offset by partially staff salaries and depreciation charges from pandemic on our customers, and increases in a result of the economic impact of the Covid-19 additional baddebtrisk on household revenue as £11.3m includes aprovision of £6.5mto reflect £541.6m (31March 2019:£530.3m). The increase of costs, for the year ended 31March 2020were Operating costs, including capitalmaintenance Agreement (WROA). under the Kielder Water Resources Operating regulated revenue related to the recovery of costs inflation of 3.2%, and an increase in non- factor’ of 0.1%plus Retail Prices Index (RPI) controls for 2015-20,which increased by a‘K the revenue allowance from the FDof price an increase in wholesale charges, setinline with March 2020 (31 March 2019: £869.1m). This reflects Revenue was£900.4m for the year ended 31 to the new standard isexplained in note 1(r). adopted inthe year and the impact of transition new accounting standard, was IFRS16Leases, the Financial Statements on pages111to 118 accounting policies are summarised innote 1to (IFRS) with reduced disclosures. The key StandardsInternational Financial Reporting StandardReporting (FRS) 101,reflecting cost basis in accordance with Financial Statements have beenprepared on anhistorical set out on pages106to 110 . The Financial of changes in equity and cashflowstatement are comprehensive income, balance sheet, statement The Company’s income statement, statement of remained betterthanthe target for the year. toreported eachBoard meeting. These KPIsall facilities and regulatory gearing, which are covenants underpinning our committed bank scorecard on page23 The financialin our balanced KPIswe report FINANCIAL PERFORMANCE reflect the financial . A Financial Statements. applied inthe year, isexplained in note 8to the dividend policy, and how the policy hasbeen in respect of the year ended 31March 2020.The dividends have beenproposed, approved or paid ended 31March 2020(31 March 2019:£130.0m). No comprised the total of dividends paid in the year March 2019waspaidin April 2019and that A finaldividend of £65.0m for the year ended 31 £148.6m (31March 2019:£168.8m). Profit for the year ended 31March 2020was provided innote 7to the Financial Statements. enacted. Further detailsof the net taxcharge are Bran Sands. We completed also our second gasto grid plant at water treatment works, Newcastle. which serves ESW, and progress on the upgrade of Horsley wastewater network and for waternetwork in systems under our iAM programme, for successful first phase of implementation of new Significant investments in the year included the development activity inour areas of operation. treatment compliance and new to support sewer flooding, to improve waterand wastewater to reduceour assetbase,in particular the risk of Inaddition wehaveserve. continued to enhance inthewater and areas wastewaterservices we ensure the continued provision of sustainable related to the maintenance of our assetbaseto £279.5m). Around £187m of this investment March 2020were £280.4m (31March 2019: Total fixed assetadditions in the year ended 31 CAPITAL INVESTMENT 0.242%. for atenor of 20years, withacoupon of CPIplus principal of £100m on aforward settlement basis Water Finance plc (NWF).Thiswasissued ata through its financing Northumbrian subsidiary linked issuance, asaUKprivate placement In July2019,the Company placed itsfirstCPI- extended to December 2024. the year, the maturity dateofthis facility was liquidity, wasundrawn at31March 2020. During which is for the purpose of maintaining general Our committed five year bankfacility of £450m, 31 March 2020was4.22% (31 March 2019:4.19%). nominal ratefor the Company for the year ended issuance, described below. The blended average the £100m Consumer Prices Index (CPI)linked The slight increase in index-linked debtreflected rate basis, afterallowing for hedging instruments. average real rateof 1.27%and 1%onavariable average rateof 4.44%, 38%index-linked at an remained largely unchanged with 61%fixed atan The Company’s long-term debtstructure CAPITAL STRUCTUREANDLIQUIDITY STRATEGIC REPORT 55

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT statement on pages102to 103. on our financial resilience in our viability outcome oftheuncertain CMAreview. We report outlook to CreditWatch negative to reflect the of the CMAreview process. S&Pupdated its extended the review period pending the outcome of the regulatory ring-fence. Moody’s has company, NWGL,whilst recognising the strength reflects itsview on the gearing level of our parent outlook) from Moody’s. The Moody’s outlook Standard &Poor’s (S&P) and Baa1(negative credit ratings of BBB+ (negative outlook) from The Company retains strong investment grade target level of70.0%. Regulatory gearing was67.2%, also below our remaining betterthantarget. comfortably Interest cover improved from 3.6 to 4.0, also 67.2% to 67.8%, remaining wellwithin target. excludes loans receivable, increased slightly from financial covenant for the committed facilityand The gearing KPI,which ismeasured perthe relationship banks,which mature in2024. facilities, provided by agroup of five key £450m (31 March 2019: £440m)of undrawn bank than three months. At 31March 2020, NWLhad bank agreement availability period of no less with avalue of no lessthan£50m and witha standby committed bankborrowing facilities The Company’s policy is to have available Liquidity risk existing facilities in place. the European Investment Bank (EIB)about the of new borrowing and prompt discussions with sources of funding, increase the associated cost the credit rating would likely restrict future investment gradecredit ratings. Areduction in efficiently, the Board’s aim is to retain prudent regulated business. Inorder to raise thisfinance to fund the long-term assetsrequired by the finance on a regular basis, to beprincipally used a result, wemust rely upon raising additional financedcash by internally generated sources. As obliged to incur issuchthatwecannot bewholly The level of capitalexpenditure which NWLis Funding risk policy prohibits their usefor speculation. of thisprocess, buttheused aspart treasury summarised below. Onoccasion, derivatives are with treasury activities are managed, whichare treasury policies setout how the risks associated within treasury policies setby NWGL. The strategy of the Company which isdetermined The Board is responsible for the financing TREASURY POLICIES

would not have asignificant effect. it is estimated thata1%rise in interest rates rate risk. Onthe basisof the Company’s analysis, Company’s policy is to acceptadegree of interest principally comprises interest rateexposure. The The Company’s exposure to market price risk Market pricerisk currency riskof committed future purchases. £4.3m) for the purpose of hedging the foreign exchange contracts of £1.8m (31March 2019: March 2020,the Company hadforward foreign be covered assoon asthey are identified. At 31 sterling equivalent of atranslation nature, should equivalent of atransactional nature, or £3m currency exposure in excess of£100,000sterling The Company’s policy is thatanyforeign Foreign currency risk out the Company’s baddebtpolicy. debt. Note 1(o) of the Financial Statements sets of incomeaccounts for asignificant proportion or customer credit risk asno individual customer of published credit ratings. There is no material to eachcounterparty. These limits take account with and setsalimit forthe maximum exposure the Company caninvestwhich counterparties basis. The treasury policya short-term specifies The Company invests surplus cashwith bankson Credit risk variable ratedebt. interest. Index-linked borrowings are treated as borrowings of the Company were atfixed rates of At 31March 2020,61%(31 March 2019:63%)of the 50% of its borrowings atfixed rates of interest. The Company’s policy is to keep aminimum manage its exposure to interest ratefluctuations. generate the desired interest profile and to interest and, on occasion, usesderivatives to It borrows atboth fixed and variable rates of a mixture of retained profits and borrowings. The Company finances its operations through Interest rate risk STRATEGIC REPORT 56

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT RISK REPORT reduction. an action plan to achieve the desired risk is below the current managedrisk score, setout controls. We also setatarget risk and, where this and internal assurance provided over the assessed. Anassurance map details the external documented and the effectiveness of the control management controls and responsibilities are and managed basis,producing arisk score. The and consequence criteria on bothanunmanaged Each risk assessedagainst is defined likelihood consistency ofapproach. basis toon aquarterly share learning and ensure risk register.departmental Risk champions meet area of responsibility and record these in a identification and assessment of risks for their each area of the business co-ordinate the risk across the business. Risk champions within process for identifying, analysing and evaluating The Risk Management Framework sets out our model. R&CSC, and is managed through acorporate risk Framework, which hasbeenendorsed by the management is setout in our Risk Management appropriate. The Company’s approach to risk and thatremedialreported action is taken as risks are appropriately controlled, managed and management and internalcontrol, ensuring that The ELT implements policies on risk Governance Report. the R&CSCduring the year, is setout in the and mitigating risk, and the work by undertaken The Board’s approach to monitoring, managing balance betweenriskaversion and opportunities. environment and it aims to ensure anappropriate balanced view of allof the risksinthe operating Board’s viewof acceptable riskisbasedon a and determines the appropriate risk appetite. The within the Company, by the R&CSC, supported The Board setsthe tone for riskmanagement RISK MANAGEMENTFRAMEWORK pages 102to 103. resilience, assetout in our viability statement on been considered in our assessment offinancial order of priority. These principal have risks also mitigating these risks. The risks are not setout in in more detail, along withour approach to 59 to 63then describeseachof the principal risks increasing, stable or reducing. The table on pages and anindication of whether the risk is the current exposure of eachof the principal risks summarised on the heat mapbelow. This shows The conclusions of this assessment are Sub-committee. and the Strategic Risk Register identified by the highest ratedrisks on our Corporate Risk Register solvency or liquidity, taking account of both the threaten its business model, future performance, the Company, including those thatwould robust assessment of the principal risks facing The R&CSC,on behalfof the Board, carried out a UNCERTAINTIES PRINCIPAL RISKSAND risks annually, most recently in November 2019. sub-group of the Board reviews these strategic are captured inaStrategic RiskRegister and a assessed within the corporate risk model. These foreseeable, butnot with sufficient clarity to be We definestrategic risks asthose which are meeting of the R&CSC. reviewed monthly by the ELT and ateach in thereported Corporate Risk Register. This is threshold are classedas‘significant risks’ and are with amanaged risk score above adefined Those risk registers risksin the departmental STRATEGIC REPORT 57

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT

government, hasclearly demonstrated the lockdown measures implemented by Covid-19 the pandemic and, inparticular However, the unprecedented impact of the had beenconsidered to berelatively moderate. be aprincipal risk. This was because the impact register buthasnot previously beenconsidered to identified historically within the Company’s risk The riskassociated with apandemic hasbeen Impact of pandemic K. Financialperformance J. Pensioncontribution I. changes H. Regulat Informationmanagement G. Cybersecurity/ F. E. Impactofpandemi D. C. W B. Cust A. Health&Saf Ef Fu Wa Compliance Financial Operational Risk decreasin Risk stable Risk increasing fe nding andliquidity ater servicefailur stewater servicefailur ct ofclimatechange omer trustandconfidenc ory andpolitical ety g c e s e e

Impact Likelihood BD A on principal risks of the business. This is described decided thatthis should beaddedto the an occurrence. Asaresult, the R&CSChas potential scaleand wide-ranging effect of such page 60. G F I H J C STRATEGIC REPORT 58

EK

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT OPERATIONAL RISKS water thattastes good We supplyclean, cleardrinking supply ofwater We provideareliableandsufficient reservoir. contamination ofaservice works, lossofpowersupplyor strategic watermainortreatment causes, includingthefailureofa This couldhavemanypotential supplied. supply orforunfitwatertobe could causeeitheramajorlossof A probleminourwatersystem Water servicefailure can trust We areacompanythatcustomers they receivetobevalueformoney Our customersconsidertheservices impress ourcustomers We provideexcellentserviceand and confidenceinourbusiness. could damageourcustomers’trust public perceptionofourreputation media coverageresultinginapoor customer experienceornegative deliver aconsistentlyunrivalled everything wedoandfailureto Our customersareattheheartof Customer trustandconfidence Our workplacesarehealthyandsafe are acutelyconscious. staff andsupplychainofwhichwe risk tothehealthandsafetyofour that thereisasignificantinherent construction workplacesmeans The natureofouroperationaland Health &safety DESCRIPTION OFRISK

physical security measures. network throughauthorisation and We restrictaccesstoourtreated water These areregularlytested. incidents, downtoasitespecific level. continuity plansinplacefor managing We havewelldevelopedbusiness asset healthmeasures. asset managementthroughanumberof We monitortheeffectivenessofour long-term managementofourassets. that wefollowbestpracticeinthe a company-widebasis,demonstrating 55001 (AssetManagement)certifiedon replacement ofourassets.WeareISO process forthemaintenanceand We operatearisk-basedprioritisation supply areas. eradicate waterpovertyacrossour further throughourcommitmentto affordability tariffs.Weplantotakethis StepChange partnershipandnew through ourInclusivityStrategy, customers invulnerablecircumstances, We continuetoimproveoursupportfor offer toourcustomers. systems andthedigitalexperiencewe improvements inourcustomerfacing We haveinvestedinsignificant Business Planfor2020-25. our customershelpedtoshape active participationandover400,000of continue toinvolvecustomersthrough what wasreallyimportanttothem.We customers sothatwecouldunderstand strategy wasco-createdwithour Our unrivalledcustomerexperience our OHSAS18001certification. and thisisexternallyauditedaspartof management throughouttheCompany, responsibilities forimplementationand system definescleararrangementsand Our healthandsafetymanagement culture. safety andcreatingagreat our focusonimprovingbehavioural improvement. Thisisunderpinnedby targets aresettodrivecontinuous and Board.Long-termplanning high priorityatallmeetingsofourELT Health andsafetymattersaregivena further. and weareworkinghardtoimprovethis safe workplace,butnotcomplacent, our recordofmaintainingahealthyand is ourhighestpriority.Weareproudof contractors andmembersofthepublic The healthandsafetyofourstaff, MITIGATION

No change. expectations). increasing customer against abackgroundof continuous improvement No change(focuson continuous improvement). No change(focuson CHANGE FROMPRIORYEAR STRATEGIC REPORT 59

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT

heavy rainfall deals effectivelywithsewageand We provideasewerageservicethat supply ofwater We provideareliableandsufficient impress ourcustomers We provideexcellentserviceand potential impactsonPCs. delivery ofcapitalinvestmentand operating costs,impactson revenue fromcustomers,increased Financial risksincludereduced normally. customers andabilitytofunction measures impactingonour lockdown orsocialdistancing Also, impactofanextended services tocustomers. the Company’sabilitytodeliver financial consequencesincluding people, service,operationaland number ofbusinessareaswith result inasignificantimpacton pandemic outbreak.Thiscould Unavailability ofstaffduetoa Impact ofpandemic heavy rainfall deals effectivelywithsewageand We provideasewerageservicethat or collapses. consequences ofsewerblockages misconnected propertiesandthe severe weatherevents, network capacitytocopewith causes, includinginsufficient This couldhavemanypotential or floodingofcustomerproperties. significant environmentalpollution system couldcauseeither A probleminourwastewater Wastewater servicefailure DESCRIPTION OFRISK

appropriate adjustments. Covid-19 riskassessmentsandwith operational activities,takingaccountof home, aswellmaintaining service teamstoworkremotelyfrom large partsofourcustomerandsupport We havebeenabletoquicklyenable pandemic. been updatedthroughCovid-19 continuity plansinplacewhichhave We havewelldevelopedbusiness lockdown conditions. to operateeffectivelyevenunderstrict has demonstratedthatwecancontinue Our responsetotheCovid-19pandemic capacity. investment toincreasenetwork analysis, floodingmitigationand the network,realtimemonitoringand proactive maintenanceandcleaningof We arealsoinvestingsignificantlyin deliver SuDS. Rangers andworkingwithpartnersto such as‘LoveYourDrain’andWater local communitiesthroughinitiatives We engagewithourcustomersand to tackletherootcauses. programme withmultipleworkstreams and haveapollutionmanagement preventing pollutionandsewerflooding We continuetoinvestheavilyin asset healthmeasures. asset managementthroughanumberof We monitortheeffectivenessofour long-term managementofourassets. that wefollowbestpracticeinthe a company-widebasis,demonstrating 55001 (AssetManagement)certifiedon replacement ofourassets.WeareISO process forthemaintenanceand We operatearisk-basedprioritisation MITIGATION

No change. New principalrisk CHANGE FROMPRIORYEAR STRATEGIC REPORT 60

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT COMPLIANCE RISKS

can trust We areacompanythatcustomers Systems Directive. under theNetworks&Information May notcomplywithobligations Information Regulations(EIR). (GDPR) orEnvironmental General DataProtectionRegulation breach oftheDataProtectionAct, Sensitive datacouldbereleasedin attack orfailureofcybersecurity. lost asaresultofmalicious Key businesssystemscouldbe Cyber security DESCRIPTION OFRISK changing world current andfuturegenerationsina services thatmeettheneedsof We deliverwaterandsewerage heavy rainfall deals effectivelywithsewageand We provideasewerageservicethat supply ofwater We provideareliableandsufficient urbanisation. growing populationandongoing This maybeexacerbatedby integrity ofourassets. resources resilienceandthe change couldimpactonwater Over thelongerterm,climate sewer flooding. disrupting watersupplyorcausing customer servicethrough conditions whichcouldimpacton may causemorevolatileweather In theshortterm,climatechange Effect ofclimatechange DESCRIPTION OFRISK protection andEIR. dedicated teamcoveringsecurity,data This activityissupportedbya developed tofurthermitigatetherisks. protection actionplanhasbeen awareness briefings.Atenpointdata controls, laptopencryptionand Data isprotectedthroughaccess of alocalfailure. fail-over tootherhardwareintheevent back-up andrecovery,also infrastructure whichincludesfull We haveimplementedaresilient supported bybriefingsandtraining. procedures anduserawareness, facing systemsandclearpolicies additional levelsofsecurityforweb- software andhardwareaccesscontrols, business. Thisisdeliveredthrough controls andculturethroughoutthe improvement ofinformationsecurity our commitmenttothecontinuous Our InformationSecuritypolicysetsout MITIGATION interact. of ourbusinessareasandhowthey risk andresiliencechallengesacrossall systematic approachtounderstanding the roundbytakinganintegratedand structure forustoachieveresiliencein Our ResilienceFrameworkprovidesa resilience issueswellinadvance. term solutionstofuturepotential Management Plan,andidentifylong planning, suchasourWaterResource climate changeinourlong-term We considerthelonger-termimpactsof in therisksabove. and wastewaterbusinessesaresetout risks ofservicefailuresonourwater Our approachtomitigatingshort-term MITIGATION

No change. CHANGE FROMPRIORYEAR flooding. especially inrelationtosewer Increasing riskovertime, CHANGE FROMPRIORYEAR STRATEGIC REPORT 61

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT FINANCIAL RISKS

customers andinvestors achieve afairbalancebetween Our financesaresound,stableand committed facilities. breaching financialcovenantson Liquidity riskcouldarisedueto funding, duetoBrexit. of EIBasasourcelowcost credit ratingdowngradeortheloss could increaseasaresultof uncertainty. Futureborrowingcosts acceptable ratesduetomarket inability toaccessfuturefundingat A keyfundingriskwouldbean Funding andliquidityrisk DESCRIPTION OFRISK customers andinvestors achieve afairbalancebetween Our financesaresound,stableand in policy. could introducesignificantchanges A changeinfuturegovernment CMA. uncertain asaresultofreferralto Outcome ofPR19processremains framework. predictability oftheregulatory confidence inthestabilityand risk andreturnorreduceinvestor impact adverselyonthebalanceof regulatory methodologycould Changes totheLicenceor Regulatory andpoliticalchanges DESCRIPTION OFRISK customers and investors achieve afairbalancebetween Our financesaresound,stable and pension deficit. service obligationsortorepair the contributions, foreitherongoing Risk ofincreasedemployer measures ofgearing. balance sheetliabilitiesandsome market conditions,increasing 31 December2019)asaresultof defined benefitpensionscheme(at the nextactuarialvaluationofour Risk ofincreasedpensiondeficitat Pensions

MITIGATION values. excellent performance,behavioursand This riskisalsomitigatedbyour well-informed. Water UK,toensurethatanydebateis stakeholders, bothdirectlyandthrough We continuetoengagewithallpolitical plans. opportunity tosetoutandsupportour review ourPR19FDprovidingafurther The CMAreferralwillindependently regular directdialogue. responding toformalconsultationsand current pricereviewprocessby engaged withOfwatthroughoutthe Externally driven,butwehaveactively MITIGATION 25 yearrollingtermofourLicence. long-term natureofourbusinessand covenant remainsstrong,reflectingthe December 2016.Ouremployer benefit pensionscheme,asat31 actuarial valuationofourdefined contributions fromourmostrecent We haveanagreedscheduleof our planoveratenyeartimehorizon. 103 Our viabilitystatementonpages102to manage ourfinancialplansaccordingly. investment gradecreditratingsand We arecommittedtomaintainingour covenants forthesefacilities. substantial headroominthefinancial March 2020,andwemaintain facilities, whichwasfullyundrawnat31 £450m ofstandbycommittedborrowing this timehorizon.Thisissupportedby our financingstrategyaccordinglyover borrowing requirementsandweplan Our fiveyearplansidentifyfuture treasury risks(seepage56). policies whichsetouthowwemanage The Boardhasapprovedtreasury reports onthefinancialresilienceof

in progress. No change.Actuarialvaluation CHANGE FROMPRIORYEAR after UKGeneralElection. Reduced politicaluncertainty referral. uncertainty throughCMA Increased regulatory CHANGE FROMPRIORYEAR Covid-19 impacts. process toexittheEUand markets asaresultoftheUK’s to uncertaintyinfinancial Risk remainsheighteneddue STRATEGIC REPORT 62

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT

15 July 2020 H Mottram, CEO By order of the Board service. against these risks and ensure continuity of made appropriate preparations to mitigate fromrely Europe. on transportation We have are conscious thatsome of our supply chain does Whilst NWLoperates entirely within the UK,we restrictions being placed on trading withthe EU. stakeholders to review potential impacts of government, our supply chainand other explained above. We have engaged with other thanin relation to future EIB funding as but does not consider this to beaprincipal risk, European Union (EU)without atradeagreement, which could result from the UKleaving the The R&CSChasconsidered risks to the business BREXIT RISK customers andinvestors achieve afairbalancebetween Our financesaresound,stableand resilience ofthebusiness. impact thelongtermfinancial concluded thatitwouldadversely PR19 FDtotheCMAasit The BoardaskedOfwattoreferthe increasing gearing. inflation coulddepressRCV, A sustainedperiodoflowCPI(H) efficiency commitments. interest ortaxafailuretodeliver adverse movementsoncosts, This couldresultfromsignificant shareholder returns. plans couldimpactonexpected A failuretodeliverourfinancial Financial performance DESCRIPTION OFRISK

MITIGATION our planoveratenyeartimehorizon. 103 reportsonthefinancialresilienceof Our viabilitystatementonpages102to plans. opportunity tosetoutandsupportour review ourPR19FDprovidingafurther The CMAreferralwillindependently plans. evidence supportingourexpenditure Assessment, includingadditional Plan inthelightofOfwat’sInitial We resubmittedourPR19Business fixed rates,providingcertainty. more than50%ofourborrowingson reported monthlytoELT.Wemaintain and capitalexpenditureprogressis efficiency actionsforbothoperating We areimplementingarangeof

CHANGE FROMPRIORYEAR referral process. uncertainty throughtheCMA PR19 FDandcontinued Increased, duetooutcomeof STRATEGIC REPORT 63

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT GOVERNANCE REPORT 64 STRATEGIC REPORT

GOVERNANCE REPORT GOVERNANCE REPORT STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 65 CHAIRMAN’S INTRODUCTION

The Board of NWL recognises that the Company has a very important role in the lives and wellbeing of its customers and that it is a privilege to be entrusted to provide essential public services to millions of customers. STRATEGIC REPORT

We also have key will be at least as high as in previous years and environmental higher wherever appropriate. responsibilities and we As a private company with NWL’s ownership are a significant employer structure, we believe it is consistent with good and buyer of goods and corporate governance for there to be significant services. The NWL Board shareholder representation on the Board, understands and accepts including the Chairmanship. However, we accept its responsibilities and that there needs to be an appropriate balance. listened carefully to the A J Hunter Currently, there are four INEDs and four further views of our many NEDs (including me as Chairman). This year we stakeholders throughout intend to appoint an additional INED which will the preparation of our Plan. As I explain in my make INEDs the largest single group on the statement at page 4, the Company asked Ofwat to Board. refer its FD of the 2019 Price Review to the CMA for a redetermination and the outcome of this The INEDs play a very significant role in the process will be known in due course. The Board functioning of the Company and are instrumental remains fully committed to ensuring that NWL in all aspects of the Board’s work, taking a leading continues to provide excellent customer service, role on the various Committees, which the Board and is ethical and fair in its relationship with all relies on. The Committees are effectively led by GOVERNANCE REPORT stakeholders. the INEDs (within agreed parameters) and handle a very significant volume of important work and Corporate governance requirements continue to present options and proposals to the Board. evolve and, last year, Ofwat prescribed four new objectives (the 2019 Objectives) which it expects Our four current INEDs are highly experienced, us to meet. These are set out on pages 74 to 80 capable and independently-minded professionals below, where we have also explained how we with a diverse range of experience and talents. meet them. The 2019 Objectives have now been Working with the other NEDs, they scrutinise the incorporated into each company’s Licence. Along performance of management in meeting agreed with most others in the sector, NWL consented to goals and objectives and monitor the reporting of the change, noting Ofwat’s acknowledgement performance. We believe our current governance that companies will have scope to demonstrate arrangements, with strong INED leadership, compliance in different ways. That flexibility is ensure that there is always sufficient consistent with the view of the Financial independent membership and judgement on the Reporting Council (FRC) that there is no ‘one- Board, further supporting the Board and its size-fits-all’ version of corporate governance. Committees in making high quality decisions that address diverse customer and stakeholder The 2019 Objectives are now the primary needs. This independent voice will be further governance framework against which NWL will expanded when we appoint a fifth INED later this report, but the Board has agreed that it would also year. Moreover, in accordance with common be appropriate to report compliance with the governance practice, all four current INEDs will Wates Corporate Governance Principles for Large step down by the end of 2021 and be succeeded by Private Companies (the Wates Principles). NWL new appointees, which will allow new talent and has, in prior years, reported compliance with the experience to be brought to the Board. UK Corporate Governance Code. Whilst we will STATUTORY FINANCIAL STATEMENTS now focus on the 2019 Objectives and the Wates Principles, our standards of corporate governance GOVERNANCE REPORT 66

As I explained in last year’s report, the Board I am pleased to report that our recent Board functions as an integrated whole. All Directors evaluation exercise delivered very positive have the same legal responsibilities and each feedback on how the Board operates. We again Director understands his or her individual engaged Professor Giovanna Michelon (a responsibility to act in the best interests of the specialist in corporate governance and social Company, as well as the importance of the responsibility) to facilitate the exercise and her service provided to our customers and our report concludes that the Board and its environmental responsibilities. All Directors play Committees are working effectively, as evidenced a full part in Board meetings and shape the by healthy and challenging discussions, an Company’s strategy, as well as ensuring that appropriate and balanced mix of expertise and customers’ interests are fully considered in any competencies and the high quality work carried investment and operational decisions. The out by the Committees. These findings are

composition of the Board ensures a sound entirely consistent with my own view of how well STRATEGIC REPORT balance of experience, knowledge and the Board works, on behalf of all the Company’s independence and that decision making is not stakeholders. dominated by any single group. Paul Rew, our Senior INED, sets out in his report (on pages 67 to 68) how the INEDs are fully involved in all the main aspects of NWL’s governance and, throughout the year, were invited to, and participated in, all the Board meetings of our holding company, NWGL (except A J Hunter in relation to NHH retail business). Chairman In practice, the Company complies with the 2019 Ofwat Objectives and, with very few exceptions, the supporting Provisions. The effective arrangements which the Board and its Committees have in place to ensure such compliance are explained in some detail below in the Corporate Governance Report (on pages 64 to 104). GOVERNANCE REPORT STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 67 SENIOR INDEPENDENT NON-EXECUTIVE DIRECTOR’S REPORT

As Senior Independent Non-Executive Director

(SINED) I am pleased to be able to describe the role of STRATEGIC REPORT NWL’s INEDs, and the key role played by the INEDs in the Board Committees and Sub-committee.

I am happy to endorse the flooding. Moreover, the overall package did not, Chairman’s explanation of in the Board’s opinion, put the Company on a the key role which the sustainable footing to meet the very stretching INEDs continue to play in targets set by Ofwat in an increasingly NWL’s governance, challenging operating environment. assurance and decision The Board therefore agreed, unanimously, to ask making. I chair the Audit Ofwat to refer the FD to the CMA for Committee (AC), the redetermination, which is in progress. In order to R&CSC and the CMA Paul Rew support the Board in managing the CMA referral, Board Sub-group and I the Board established the CMA Board Sub-group, chaired the PR19 Board which includes all the INEDs, the Executive Sub-group, which I explain below. Fellow INEDs Directors and professional advisers. This Sub- sit on all these bodies, as well as on the group developed the Company’s Statement of Remuneration and Nomination Committees. Case for approval by the Board and submission to INEDs are in the majority on the AC, the R&CSC,

the CMA and the outcome is awaited. GOVERNANCE REPORT the Remuneration Committee and the Nomination Committee. Although the INEDs are not members of the NWGL Board, we have been present at its Board We are therefore fully involved in all the main meetings this year, which has continued to aspects of NWL’s governance and the Board is encourage a cohesive approach at both Boards satisfied that this enables it to ensure that sound and given us full transparency. We have not, governance is maintained. however, received papers relating to the NHH In my recent reports I have explained the role of retail market or been present when that has been the PR19 Board Sub-group, which provided under discussion. integrated support to the Board as a whole in The INEDs have again all taken part in extensive driving forward and assuring preparation of our sessions with management on business risk and Plan. The PR19 Board Sub-group was fully customer service, have met from time to time involved in all aspects of the development of our without management or the other Directors being Plan and all members reviewed and challenged present (with and without the Company’s both the overall strategy and the detailed auditors) and attended seminars arranged by submissions, as well as the re-submissions Ofwat and other events relating to the water following Ofwat’s Initial Assessment of Business sector. Beyond the formal work of the Board and Plans. On the ground, INEDs were involved in its various committees, we have also continued customer focus groups, meetings of the Water to develop a broader insight into the work of the Forum and other stakeholder groups. Company through other channels such as NWL’s As the Chairman explains in his statement (at Innovation Festival, customer focus groups, page 4), the Board did not consider that Ofwat’s meetings on environmental issues, the Water FD for 2020–25 adequately reflected the clear Forum, chairing internal sprints, and through guidance provided by our customers and other discussions with Directors and staff at informal STATUTORY FINANCIAL STATEMENTS stakeholders. This manifested in the events. disallowance by Ofwat of schemes to enhance water supply resilience and reduce sewer GOVERNANCE REPORT 68

In conclusion, I and the other INEDs believe that the Board and Committees have sufficient independent membership, and this will be enhanced by the appointment of a fifth INED this year. Our INEDs, through their leading role in the Committees, continue to exert significant influence in setting the direction which the Board takes in all key areas of strategy and business planning, monitoring, governance and reporting. STRATEGIC REPORT

P Rew Senior Independent Non-Executive Director GOVERNANCE REPORT STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 69 CORPORATE GOVERNANCE

BOARD MEMBERSHIP H Mottram (CEO) joined the Board in 2010, when A J Hunter (Non- she was appointed as CEO Executive Chairman) of NWL and NWGL. Ms joined the Board in Mottram is a Non- October 2011. Mr Hunter Executive Director of is Deputy Managing Centrica plc, Vice-Chair of Director of CKI, which is the North East Local listed on The Hong Kong Enterprise Partnership, a STRATEGIC REPORT Stock Exchange and is a H Mottram member of the CBI Board substantial shareholder and Vice-Chair of A J Hunter in the Group. Mr Hunter is Newcastle University Council. Ms Mottram was an Executive Director of named North East Business Executive of the Year Power Assets Holdings Limited, a listed company. in 2017 recognising her significant contribution to He has been an Executive Director of CKI since business in the north east of England. She was December 2006 and Deputy Managing Director awarded an OBE in 2010 for services to the rail since May 2010. Mr Hunter acted as the Chief industry and a CBE in 2018 for services to the Operating Officer of CKI from December 2006 to water industry and business community. May 2010. Prior to his appointment to the board of Power Assets Holdings Limited in 1999, Mr Key strengths: Leadership, corporate overview, Hunter was Finance Director of the Hutchison infrastructure and customer service. Property Group. He holds a Master of Arts degree, a Master’s degree in Business Administration and is a member of the Institute of Chartered C I Johns (Finance Accountants of Scotland and of the Hong Kong Director) joined the Board Institute of Certified Public Accountants. Mr in 2013, having served Hunter chairs the Remuneration Committee and as Finance Director of Nomination Committee. NGN, which is also part of the Cheung Kong Group, Key strengths: Leadership, strategic overview, since 2005. Before joining finance and infrastructure.

NGN, Mr Johns, who is a GOVERNANCE REPORT Chartered Accountant, C I Johns held senior financial P Rew (Senior management positions Independent Non- in the financial services sector, in both Yorkshire Executive Director) joined and London. Mr Johns’ previous positions include the Board in 2010. Mr Rew being Head of Finance and Accounting within the is a Chartered Accountant UK lending operations of Provident Financial plc, and was a partner in and a senior management role in the Financial PricewaterhouseCoopers Reporting and Control Group of Morgan Stanley. LLP (PwC) from 1987 Mr Johns stepped down from the Board on 30 until 2010, where he was May 2020. lead partner for a diverse P Rew range of FTSE 100 clients Key strengths: Finance and infrastructure. and for PwC’s UK energy, utilities and mining sector practice. Mr Rew is a Non-Executive Director of the Care Quality Commission and chairs its Audit Committee. He was formerly a Non-Executive Director of the Met Office and of Defra. Mr Rew chairs the AC, R&CSC and the CMA Board Sub-group, and chaired the PR19 Board Sub-group. He is also a member of the Remuneration Committee and Nomination Committee.

Key strengths: Finance, risk and STATUTORY FINANCIAL STATEMENTS corporate governance. GOVERNANCE REPORT 70

A C Jones (Assets and Dr S Lyster (Independent Assurance Director) joined Non-Executive Director) the NWL Board in 2004. An joined the Board in 2006. economist by background, A lawyer by training, Dr Mr Jones holds an MBA Lyster qualified in both the with distinction from UK and the USA and is the Warwick and has extensive author of the leading legal experience in dealing with textbook on international government and regulatory wildlife law. Dr Lyster was A C Jones Dr S Lyster bodies. Mr Jones is a Chief Executive of LEAD Chartered Environmentalist International from 2005 and worked as a government economist and to 2011. Before joining LEAD, he was Director

economic consultant before joining the water General of The Wildlife Trusts and previously STRATEGIC REPORT industry. He has held non-executive positions at worked for World Wildlife Fund for nine years, a number of water industry organisations and where he was responsible for its global policy is currently Chair of PNE Group, a social work on international conventions. He is enterprise company. Chairman of Conservation International-UK, a Trustee of Kilverstone Wildlife Conservation Key strengths: Economic regulation and Trust and the Rural Community Council of Essex, corporate planning. and a Council member of World Land Trust. In July 2014, Dr Lyster was appointed to the Board of Natural England and, in 2020, was appointed M Fay (Independent Non- a member of Essex County Council’s Climate Executive Director) joined Action Commission. He is a Deputy Lieutenant the Board in 2010. Ms Fay for the County of Essex. Dr Lyster is a member was Managing Director of of the CMA Board Sub-group, AC, Remuneration Tyne Tees Television until Committee, Nomination Committee and R&CSC. December 2003 when she became Chair of One North Key strengths: Conservation, the environment East, a position she held and law. until August 2010, and was Deputy Chair of The Sage M Fay Gateshead until March 2018. M A B Nègre (Independent Ms Fay is Deputy Chair Non-Executive Director) of Governors of the University of Sunderland, joined the Board in 2006. GOVERNANCE REPORT Chair of South Tyneside Council’s Economic Mr Nègre was, between Regeneration Board, Chair of the Customs House April 2000 and April 2001, South Shields and a Non-Executive Director the CEO of the former of the Tyne and Wear Passenger Transport Northumbrian Water Group Executive (which trades as ‘Nexus’). She was plc and the chief corporate awarded a CBE in 2010 for services to regional representative of its parent development and is a Deputy Lieutenant for M A B Nègre company, Suez, in the UK. Tyne and Wear. Ms Fay is a member of the CMA Mr Nègre was a founding Board Sub-group, Remuneration Committee and Director of NWGL when it Nomination Committee. acquired the Group from Suez SA in 2003 and listed it on the London Stock Exchange (LSE). He Key strengths: Corporate overview and currently chairs Ecofin Vista Hedge Fund and customer service. Ecofin Global Renewable and Infrastructure Fund and is a Non-Executive Director of LSE-listed Investment Trust EGL plc. Mr Nègre is a member of the CMA Board Sub-group, AC and R&CSC. Key strengths: Strategy, utilities and infrastructure. STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 71

F R Frame (Non-Executive D N Macrae (Non- Director) joined the Board Executive Director) joined in November 2011, having the Board in October been appointed by Li Ka 2011, and represents CK Shing Foundation Limited, Infrastructure Holdings a company limited by Limited, where he holds guarantee and a charity, the position of Head of which is a substantial International Business. shareholder in the Group. Mr Macrae has over 25 D N Macrae F R Frame A lawyer by profession, Mr years’ experience in the Frame served as Deputy infrastructure investment Chairman of The Hongkong and Shanghai field and holds a Bachelor’s and a Master’s degree

Banking Corporation; as Chairman of South China in Philosophy, Politics & Economics. He is a STRATEGIC REPORT Morning Post Limited and The Wallem Group member of the Remuneration Committee and Limited; and as a Director of The Weir Group plc, Nomination Committee. Swire Pacific Limited, The British Bank of the Key strengths: Finance, infrastructure and Middle East, Edinburgh Dragon Trust plc and corporate overview. Baxter International Inc. He holds the degrees of Master of Arts and Bachelor of Laws. Mr Frame retired from the Board on 31 December 2019. L S Chan (Non-Executive Key strengths: Corporate overview and law. Director) joined the Board in 2016, having been appointed by CKH, and H L Kam (Non-Executive has been an Executive Director) joined the Director of CKI since Board in October 2011, January 2011 and Chief having been appointed by Financial Officer of CKI Cheung Kong (Holdings) since January 2006. Mr Limited (CKH), a wholly- Chan joined Hutchison L S Chan owned subsidiary of Whampoa Limited, CK Hutchison Holdings which is a substantial Limited of which he is shareholder of CKI, in January 1992 and has been H L Kam the Deputy Managing with the Cheung Kong Group since May 1994. Director. Mr Kam is also Mr Chan is a fellow of the Hong Kong Institute GOVERNANCE REPORT Group Managing Director of CKI, a position he of Certified Public Accountants, a fellow of the has held since its incorporation in May 1996. Association of Chartered Certified Accountants He is the Deputy Managing Director of CK Asset and also a member of the Institute of Certified Holdings Ltd., President and Chief Executive Management Accountants (Australia). He is a Officer of CK Life Sciences Int’l. (Holdings) Inc., as member of the Audit Committee. well as Chairman of Hui Xian Asset Management Key strengths: Finance, infrastructure and Limited, which manages Hui Xian Real Estate corporate overview. Investment Trust, a listed real estate investment trust. Mr Kam holds a Bachelor of Science degree in Engineering and a Master’s degree in Business Administration. Key strengths: Leadership, strategic overview, finance and infrastructure. STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 72

ATTENDANCE AT BOARD MEETINGS Attendance at the five additional Board meetings There were five scheduled meetings during the held during the year was as follows: year and five shorter additional meetings. The Board considered this sufficient to enable it to NAME ATTENDANCE discharge its duties effectively, and will meet out of the agreed cycle for time-critical matters or A J Hunter 5 significant matters that arise as necessary. P Rew 5

Attendance at the five scheduled meetings during H Mottram 5 the year was as follows: C I Johns 5

NAME ATTENDANCE A C Jones 5 STRATEGIC REPORT

A J Hunter 5 M Fay 5

P Rew 5 Dr S Lyster 4

H Mottram 5 M A B Nègre 5

C I Johns 5 F R Frame 3

A C Jones 5 H L Kam 1

M Fay 5 D N Macrae 5

Dr S Lyster 5 L S Chan 4 M A B Nègre 4

F R Frame 4

H L Kam 4

D N Macrae 5

L S Chan 5 GOVERNANCE REPORT STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 73

CORPORATE GOVERNANCE they are independent, notwithstanding that they STATEMENT have served on the Board for more than nine years. However, all four existing INEDs will step The Boards of the Company and its holding down over the course of 2020 and 2021 and be company, NWGL, are committed to high succeeded by new appointees, which will standards of corporate governance. Ofwat has allow new talent and experience to be brought to now embedded the 2019 Ofwat Objectives in the the Board. Company’s Licence, to ensure that governance is The Chairman ensures that the Board works sound and that the Company’s Directors, acting in a collegiate way, in the best interests of the as such, act independently of parent companies. Company and its stakeholders, and that each The arrangements and functioning of the Board, Director has an equal voice. All members of the its Committees, Sub-committee and Sub-groups Board are content that the balance of the Board is adhere to the Wates Principles and the 2019 appropriate, but welcome the decision to appoint STRATEGIC REPORT Ofwat Objectives, with the latter being subject an additional INED during 2020. The Directors to the minor exceptions explained below. As have all been able to allocate sufficient time to set out above, there are currently four INEDs, a the Company to discharge their responsibilities further four NEDs (including the Chairman) and effectively. two Executive Directors. These arrangements, As the Chairman says in his introduction with strong INED input which is expanded (on pages 65 to 66), the INEDs, within agreed upon in the section below on meeting the 2019 parameters, effectively lead the work of the Ofwat Objectives, ensure that there is sufficient Committees, which hold very full meetings with independent challenge and judgement on the considerable workloads, to prepare the ground for Board. Moreover, the Company will appoint an the Board. additional INED during 2020, making INEDs the largest single group on the Board. There is a clear division of responsibilities between the Chairman and CEO. This has been The Chairman comments in his introduction set out in writing and agreed by the Board. to the Governance Report (on pages 65 to 66) on the balance of the Board, which functions The Company has put in place Directors’ and as an integrated whole, and the quality and Officers’ insurance cover for the benefit of all contribution of the INEDs: P Rew, S Lyster, Directors of the Company. In addition, NWGL M Fay and M A B Nègre. Their biographical entered into a Deed of Indemnity on 21 March details are set out on pages 69 to 71 above. They 2017 to provide Directors of NWGL and its were appointed on the recommendation of the subsidiaries further protection against

Nomination Committee of Northumbrian Water potential liability. GOVERNANCE REPORT Group plc, when it was independently listed. The Board has rigorously reviewed the re- appointment of the INEDs and determined that STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 74

BOARD LEADERSHIP, (ii) The Board makes sure that the Company’s TRANSPARENCY AND GOVERNANCE – strategy, values and culture are consistent with THE 2019 OFWAT OBJECTIVES (AND its purpose. SUPPORTING PROVISIONS) The Board has reviewed and discussed the We explain below how we meet the Objectives Company’s strategy, values and culture and is and supporting Provisions on board leadership, satisfied that these are consistent with the transparency and governance as published by purpose. The Board recognises that the Ofwat in January 2019. Company’s strategy needs to reflect the Company’s purpose, as well as customers’ long Objective 1 term priorities and to take account of Ofwat’s emphasis on public value. NWL’s purpose The Board of the Appointee establishes the statement is therefore underpinned by key STRATEGIC REPORT company’s purpose, strategy and values, and is principles which demonstrate that NWL: satisfied that these and its culture reflect the needs of all those it serves. (a) provides a reliable, resilient, safe and high quality water and wastewater service for all; Our comments below on compliance with the relevant supporting Provisions explain how the (b) intends to leave the environment in a better Company meets this Objective: condition for the next generation;

(i) The Board develops and promotes the (c) is committed to keeping water affordable Company’s purpose in consultation with a wide including for those on low incomes; and range of stakeholders and reflecting its role as (d) acts in the long-term interests of society a provider of an essential public service. and the environment while still providing The Board’s purpose statement (set out on page the very best service for customers today. 13) has been informed by the very extensive consultation exercise conducted in preparation (iii) The Board monitors and assesses values for the submission of the Company’s PR19 Business Plan, as well as continuous broadly and culture to satisfy itself that behaviour based consultation in the normal course of throughout the business is aligned with the business and Ofwat’s emphasis on the need for Company’s purpose. Where it finds companies to embed a “public value” ethos. misalignment it takes corrective action. The consultation underpinning the PR19 (a) The Board has received and discussed Business Plan was comprehensive, with detailed feedback on an extensive employee GOVERNANCE REPORT responses from more than 400,000 customers engagement survey conducted by “Best as well as from our Water Forum, or regulators, Companies”. This provided a comprehensive employees, suppliers and partners. insight into the alignment of behaviour There is, of course, a comprehensive and throughout the business with the purpose. continuous programme of engagement with The survey findings were positive but there customers and full details are set out in the are always areas where there is scope to Company’s APR. improve engagement. Line managers are being supported to develop action plans to This open and consultative culture is a key further improve engagement and ensure element of how the Company does business. It alignment of behaviour with the purpose. is also maintained through a very broad Engagement will be re-assessed later in the programme of engagement, including regular year to measure the improvement achieved engagement at Chief Executive level with local and identify any further steps required. authorities across our operating areas, and participation in regional and national business (b) The Board has designated one of the INEDs, organisations. The Company also hosts M Fay, to engage with the workforce and to numerous site visits by MPs, civil servants, and provide the Board with a first-hand senior regulators to encourage open and assessment of the culture of the business. transparent debate about the challenges faced Mrs Fay has fed back to the Board on her by the sector and to enable the Company to experience of employee roadshows and understand their respective concerns and other site visits and a programme of virtual priorities. (and, if safe, physical) visits will be arranged during 2020. As explained on page 14, the Company intends

to review its purpose statement over the (c) P Rew, S Lyster and M A B Nègre (INEDs) STATUTORY FINANCIAL STATEMENTS coming year, drawing on extensive further have attended employee roadshows and the work with senior executives, board members, Innovation Festival and fed back their views employees, customers and other stakeholders. to the Board. GOVERNANCE REPORT 75

(d) The Human Resources team is reviewing The Standing or Executive Committees can Company policies and procedures to ensure take decisions not delegated to specific that these properly reflect the Company committees between Board meetings. All purpose and to embed it where this is Directors receive notice of Standing Committee appropriate. meetings and may participate if they wish. Decisions taken by the Standing or Executive (iv) Annual reporting explains the Board’s Committees are reported at the next Board activities and any corrective action taken. It meeting. The Company’s Board meets at least also includes an annual statement from the five times each year. Board focusing on how the Company has set During the year, the Board received regular its aspirations and performed for all those it detailed updates from the Executive Directors serves. on each aspect of the Company’s work. There The Board receives detailed reports from the are also regular reports on each Board agenda STRATEGIC REPORT Executive Directors in advance of Board on customer service, operational performance, meetings, covering each aspect of the health and safety, management of key business Company’s activities. risks, the investment programme and regulatory matters. There is a strong focus on The Chairman leads the Board and ensures the Company’s success in delivering its key that all items on the Board agendas are outcomes, as explained in the Strategic Report. discussed openly and that all Directors have an The Chairman of the AC, R&CSC and Sub- opportunity to express their views. He groups reports fully to the Board on their work. encourages constructive challenge, so that In addition, the following significant matters ideas and proposals are tested and explored were considered by the Board, as a matter of fully. The Board recognises that customers’ sound governance: interests are best served when the Company is flexible and innovative, so the ELT is always (a) the Annual Report and Financial encouraged to think laterally and consider a Statements; range of solutions for each issue. (b) the annual business plan; The Board makes key strategic decisions, (c) data security; approves the annual budget and notes the medium-term business plans. It also approves (d) decisions on tariffs; key regulatory submissions and very (e) approval of several significant capital significant investments or expenditure which projects;

is not in the normal course of business. GOVERNANCE REPORT Investments which form part of projects within (f) review of performance commitment targets approved business plans are authorised by the and related investment priorities; and Committees below Board level. Although this (g) matters relating to PR19, including formal framework is very effective, the ELT addressing Ofwat’s Initial Assessment of takes great care to ensure that matters which Plans, the Draft Determination and FD and relate to the quality of the Company’s services the decision to ask Ofwat to refer the FD to to customers, leakage, water quality and the CMA for redetermination. environmental performance are discussed fully by the Board. A Board statement as detailed above is included in NWL’s APR for the year ended 31 March 2020. STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 76

Objective 2 Although certain limited matters (such as extensions of directors’ appointments, large The Appointee has an effective Board with full contract awards and significant borrowing responsibility for all aspects of the Appointee’s arrangements) are referred to the NWGL business for the long term. Board, this is regarded as a formality. The NWL clearly meets this Objective. The Board sets, NWGL Board accepts that the NWL Board is implements and supports the Company’s vision, required to have full responsibility for all values, standards and strategy and ensures aspects of the regulated company’s business compliance with policies and legal and regulatory and, to that end, has never rejected a obligations. We comment below on compliance recommendation of the NWL Board. with the relevant objectives: (ii) Board committees, including but not limited (i) The regulated company sets out any to audit, remuneration and nomination STRATEGIC REPORT matters that are reserved to shareholders or committees, report into the board of the parent companies (where applicable) and regulated company, with final decisions explains how these are consistent with the made at the level of the regulated company. board of the regulated company having full responsibility for all aspects of the regulated All the NWL Board Committees report into the NWL Board and final decisions are made company’s business, including the freedom at that level. to set, and accountability for, all aspects of the regulated company’s strategy. (iii) The board of the regulated company is fully focused on the activities of the regulated Although proper regard is given to the company; takes action to identify and interests of shareholders, in accordance with company law, NWL’s Board has full manage conflicts of interest, including responsibility for all aspects of the those resulting from significant Company’s business, including the freedom shareholdings; and ensures that the to set, and accountability for, all aspects of influence of third parties does not NWL’s strategy. This is evidenced by the fact compromise or override independent that the PR19 Business Plan and actions judgement. taken in response to the Draft and Final Determinations were developed and The Board is absolutely focused on the approved entirely by the NWL Board. sustainable, long-term success of NWL. Any conflicts of interest are declared and The Company has adopted terms of Directors do not speak or vote on matters GOVERNANCE REPORT reference which set out the matters reserved where a potential conflict arises. to the Board for approval and matters which are, or can be, delegated to the Committees, It is a key principle of the Cheung Kong Sub-committee, Sub-groups and group of companies that the boards of management. These are published on the companies within the group manage their Company’s website. own affairs. Whilst support and assistance is provided when asked for, it is recognised The Company has also adopted financial that local management have hands-on approval rules which set out the knowledge of the operational business and authorisation processes and financial limits of customers’ needs and priorities. The to be applied to financial transactions within non-NWL interests of the shareholders are, the Company. The terms of reference and therefore, never a factor in decision-making financial approval rules are reviewed at the NWL Board and this approach is periodically by the Board. regularly re-affirmed by the NEDs in the clearest possible terms. STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 77

Objective 3 risks which are foreseeable but with a high degree of uncertainty. The Board of the Appointee’s leadership and approach to transparency and governance An explanation of principal risks, and our engenders trust in the Appointee and ensures approach to mitigating these risks, is accountability for their actions. provided on pages 57 to 63. Our comments below on the relevant supporting provisions explain how the Company meets this (iv) Details of board and committee Objective. The provisions require publication of membership, number of times met, the following in a clear and accessible manner: attendance at each meeting and where relevant, the outcome of votes cast. (i) An explanation of group structure.

This is provided at page 54. Details of Board and Committee STRATEGIC REPORT membership and meetings and attendance (ii) An explanation of dividend policies and is set out at page 72. No votes were held at dividends paid, and how these take account any relevant meeting and all decisions of delivery for customers and other were reached by consensus. obligations (including to employees). (v) An explanation of the company’s executive The dividend policy, and how the policy pay policy and how the criteria for awarding has been applied in the year, is explained short and long-term performance related in note 8 to the Financial Statements. elements are substantially linked to (iii) An explanation of the principal risks to the stretching delivery for customers and are future success of the business, and how rigorously applied. Where directors’ these risks have been considered and responsibilities are substantially focused on addressed. the regulated company and they receive remuneration for these responsibilities from The Board has ultimate responsibility for elsewhere in the group, policies relating to risk management and determines this pay are fully disclosed at the regulated appropriate risk appetite. The Board’s view company level. of acceptable risk is based on a balanced

assessment of all of the risks in the A detailed explanation of the Company’s operating environment and aims to ensure executive pay policy is provided in the an appropriate balance between risk

Remuneration Committee Report on pages GOVERNANCE REPORT aversion and opportunities. The Board 88 to 99, including how the criteria for the monitors the management of risks and short-term incentive plan have significant approves major decisions affecting the linkage to benefits for our customers and Company’s risk profile. The Board is the wider environment. The Remuneration supported in this by the R&CSC, from which Committee Report also explains changes it receives regular and detailed reports. which took effect from 2020 to further

increase the proportion of performance- The Board requires management to identify related executive pay aligned to delivering and assess the impact of risks to the benefits for our customers, in both the business using a corporate risk model. In short-term and long-term incentive plans. addition, during the year, a Sub-group of the Board carried out a review of strategic risks, which are potentially high-impact STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 78

Objective 4 complex organisations. The Board is satisfied that Mr Rew continues to demonstrate a fully The Board of the Appointee and its committees independent approach and to offer are competent, well run, and have sufficient constructive challenge. independent membership, ensuring they can make high quality decisions that address diverse All four INEDs were appointed under the auspices customer and stakeholder needs. of NWL’s Nomination Committee while NWGL Our comments below on the relevant supporting (then Northumbrian Water Group plc) was a provisions explain how the Company meets separately-listed company with no relationship this Objective. with the current shareholders. As part of her recent review of the effectiveness (i) Boards and committees have the of the Board and its Committees and Sub- appropriate balance of skills, experience,

committee (as detailed on page 79), Professor STRATEGIC REPORT independence and knowledge of the Michelon paid particular attention to the company. Boards identify what customer independence of the INEDs and whether their and stakeholder expertise is needed in the long tenure may have raised concerns that the boardroom and how this need is addressed. Board’s decisions are the outcome of group thinking. She has assessed this aspect by The Board has determined that the following interviewing both INEDs and other members of Directors are independent, notwithstanding the Board. The interviews specifically covered that they have served on the Board for more board dynamics during challenging decisions than nine years: taken over the year, to understand how consensus was reached. Professor Michelon concluded that • M A B Nègre (appointed in 2006). Mr Nègre has the Board’s capacity to work cohesively, and reach no prior connections with the Group’s consensus is not attributable to individual shareholders. He is a very experienced directors, and the INEDs in particular, lacking director and brings to the Board an excellent opinions or independent thinking. On the understanding of the business coupled with contrary, she noted that it is not unusual for sound commercial judgement. The Board is Directors to have divergent points of view to start satisfied that he continues to demonstrate a with, but through discussions in which pros and fully independent approach and to contribute cons are considered and evaluated, each Director a constructive and challenging perspective to is able to share their own personal view before a Board discussions. consensual conclusion is reached. In Professor • Dr S Lyster (appointed in 2006). Dr Lyster has Michelon’s expert opinion, all INEDs demonstrate no prior connections with the Group or its the required level of independence to continue to GOVERNANCE REPORT shareholders. He is a very experienced perform their roles effectively and contribute to a director, with particular expertise in wildlife, healthy and constructive debate. conservation and environmental matters, The NWL Board therefore has an excellent which are central to the Company’s work. He balance of skills, experience, independence and lives in the Company’s Essex and Suffolk knowledge of the Company. The Executive supply area. The Board is satisfied that Dr Directors have very significant experience in the Lyster continues to demonstrate a fully water sector and other utilities, whilst the INEDs independent approach and to offer valuable make full use of their individual professional constructive challenge. expertise and personal interests to make a • M Fay (appointed in 2010). Mrs Fay has no significant contribution to addressing the needs prior connection with the Group or its of all stakeholders and customers. For example, subsidiaries. She is a very experienced Dr Lyster is a board member of Natural England director, with very strong connections to with a strong interest in the environment and customers in the Company’s north-eastern long-term resilience. This role is directly relevant service area, where she has lived throughout to NWL’s position as a custodian of the her life. The Board is satisfied that she environment and Dr Lyster brings an expertise in continues to demonstrate a fully independent environmental protection as well as an approach and to constructively challenge and understanding of stakeholder perspectives in this bring fresh and innovative perspectives to area. Similarly, P Rew was a Non-Executive Board discussions. Director of Defra until 2018, enabling him to bring • P Rew (appointed in 2010). Mr Rew has no prior extensive knowledge of environmental matters connections with the Group or its and stakeholders to his role at NWL. M A B Nègre shareholders. He brings expertise in finance, brings first class knowledge of the global utilities STATUTORY FINANCIAL STATEMENTS risk, corporate governance and compliance sector, whilst M Fay champions customers and and has very significant experience as an has excellent contacts across NWL’s north audit committee chairman in substantial and eastern operating area. GOVERNANCE REPORT 79

The Board therefore believes that the Board and (iv) There is an annual evaluation of the Committees, Sub-committee and Sub-groups performance of the board. This considers have sufficient independent membership to meet the balance of skills, experience, the objective but, as outlined above, a fifth INED independence and knowledge, its diversity, will be appointed during 2020 to further how stakeholder needs are addressed and strengthen the independent voice on the Board. how the overarching objectives are met. In preparation for the recruitment of further The approach is reported in the annual INEDs during 2020 and 2021, the Board has report and any weaknesses are acted on conducted a skills audit to ensure that the Board and explained. has all the required expertise, including that relating to customers and other stakeholders. There is an annual, independently- This work has guided the planning of the INED conducted, evaluation of the performance STRATEGIC REPORT recruitment campaign. of the Board. In each of the last three years Although INEDs are not yet the largest single this has been conducted by Professor group, they have a strong, influential and Giovanna Michelon, a specialist in effective voice. Professor Michelon’s Board corporate governance and social performance review has confirmed that, on the responsibility, and very good results basis of her interviews with Directors, the INEDs achieved. assess problems and express judgement independently of the shareholders and Since 2018, Professor Michelon (a specialist management. She reports that there is no in corporate governance and social evidence that the long tenure may have impaired responsibility) has conducted independent their individual independent thinking, whereas annual evaluation processes to assess the their extensive experience and deep knowledge Board’s effectiveness in collectively of the Company allow them to act as critical working for the long-term success of the friends, speaking their minds with constructive Company and fulfilling its three key roles of scepticism and professionalism. setting the strategic direction of the Company, monitoring management The non-independent NEDs bring extensive performance and providing support and knowledge and experience of global advice. Professor Michelon had no infrastructure, finance and governance. connection with NWL prior to conducting (ii) INEDs are the largest single group on the the 2018 evaluation. P Rew is an advisory board. board member of the business school at which Professor Michelon was employed GOVERNANCE REPORT At the time of publishing this report, there until May 2019 but was not involved in her are an equal number of INEDs and NEDs on appointment. the NWL Board. As confirmed in this report, the Company intends to recruit a fifth INED Professor Michelon’s 2020 report concluded during 2020 so that INEDs are the largest that the Board as a whole is able to reach single group, going forward. consensus, yet divergent opinions exist and constructive discussions are used by (iii) The chair is independent of management Directors to share their views, highlight and investors on appointment and pros and cons and consider all relevant demonstrates objective judgement matters. She further states that the throughout their tenure. There is an explicit evidence gathered during the review division of responsibilities between running process does not suggest that group the board and executive responsibility for thinking is a problem of this Board. More specifically: running the business.

(a) All participating Directors were clearly The Chairman was not independent of satisfied with the mix of skills and investors on appointment, when the experience of both executive and non- Company had a single ultimate controlling executive (and independent) Directors, shareholder. The Chairman has with the secretarial support and quality demonstrated objective judgement of documentation and Board minutes; throughout his tenure, as well as an empowering approach which has (b) The Chairman’s leadership style was

encouraged all directors to participate fully described as “inclusive and engaging” STATUTORY FINANCIAL STATEMENTS in Board discussions. and able to create an atmosphere where all Board members feel comfortable to comment and are very appreciative of GOVERNANCE REPORT 80

other people’s opinions during the There is a majority of INEDs on the AC, meetings; Nomination Committee and Remuneration Committee. The latter (c) The risk management process led by the two Committees are chaired by the Board and its committees was felt to be Company’s Chairman, which the Board very detailed and thorough, and its considers appropriate in the context of strengths were tested in response to the the Company’s ownership structure. recent Coronavirus emergency

confirming a solid system; and The INEDs play a leading part in the (d) Board members fully understand the Board committees and sub- Company’s strategic positioning and its committees. Importantly, the AC is public service role; stakeholder chaired by the SINED and three of the

engagement activities are taking place four members are INEDs. The R&CSC STRATEGIC REPORT regularly and the key issues in the is, similarly, chaired by the SINED and competitive/institutional environments all three members are INEDs. Professor and the culture of the Board are aligned Michelon has described the AC and with the values of the organisation. R&CSC focus on ensuring that NWL has the resilience and long-term financial Recommendations in the 2020 report and operational stability to provide focused mainly on the nomination process customers with a reliable service and for the new INEDs. meet the expectations of other (v) There is a formal, rigorous and stakeholders. More specifically, the AC transparent procedure for new and R&CSC deliver much of the appointments which is led by the preparatory work on the Annual Report nomination committee and supports the and Financial Statements and APR, overarching objective. review the work of the internal audit function, review risk management and

advise the Board on risk appetite and There is such a procedure in place. The monitoring compliance with covenants current recruitment campaign will and management of debt. At the AC, involve a leading executive search there is a particular focus on matters agency to ensure that candidates are which directly impact customers, such drawn from as wide a pool as practicable as Guaranteed Standards of Service and will be consistent with the highest compliance, whilst the R&CSC held

standards of best practice. GOVERNANCE REPORT ‘deep dives’ during the year on cyber (vi) To ensure there is a clear understanding security and the Company’s Intelligent of the responsibilities attached to being Asset Management programme. The a non-executive director in this sector, AC and R&CSC report fully and frame companies arrange for the proposed, proposals on all these matters for the final candidate for new non-executive Board to consider. Therefore, in addition to their direct input to the appointments to the regulated company Board, the influence of the INEDs and board to meet Ofwat ahead of a formal their contribution to the running of the appointment being made. Company, through the AC and R&CSC, The Company will adhere to this. is very significant and highly valued. (vii) There is a majority of independent members on the audit, nomination and remuneration committees and the audit and remuneration committees are independently led.

STATUTORY FINANCIAL STATEMENTS

GOVERNANCE REPORT 81

AUTHORISATION OF DIRECTORS’ PR19 BOARD SUB-GROUP/CMA CONFLICTS OF INTEREST BOARD SUB-GROUP Directors have a statutory duty, under s175 of As reported in NWL’s last two Governance the Companies Act 2006, to avoid a situation Reports, given the critical importance of our Plan in which they have, or could have, a conflict of proposals, the Board formed a dedicated PR19 interest with the Company’s interests. However, Board Sub-group to provide integrated support there is no breach of this duty if the Board has to both the Board and management in producing authorised the matter in question. The Articles and assuring NWL’s Business Plan. permit Directors (other than the Director having The PR19 Board Sub-group worked closely with the interest in question) to authorise any the Company’s full Board, the ELT and relevant situation giving rise to a known or potential senior managers below that level, as well as conflict. A register of the interests which have

external assurance providers and the Board STRATEGIC REPORT been authorised is maintained by the Company approved the submission of the PR19 Business Secretary and is available at every Board meeting. Plan on 18 July 2018.

WORK OF THE COMMITTEES On 31 January 2019, Ofwat published its PR19 Initial Assessment of Business Plans. The Details of the work of the PR19 Board Sub- Company was disappointed not to receive group, CMA Board Sub-group, AC, R&CSC and ‘enhanced’ status and was required to revise Nomination Committee are set out below. some elements of its Plan and the revised Plan During the year, in addition to her review of the was submitted on 1 April 2019. effectiveness of the Board, Professor Michelon also conducted a review of the effectiveness Ofwat published the PR19 FD on 16 December 2019 of the AC and the R&CSC. The evaluation was and this was discussed by the NWL Board on a conducted by means of a questionnaire and number of occasions, culminating in the Board’s a number of one-to-one interviews, following request to Ofwat on 14 February 2020 to refer which Professor Michelon produced a written the PR19 FD to the CMA for redetermination. In report. The main findings were as follows: order to support the Board in managing the CMA referral the Board established the CMA Board • Directors were satisfied with the composition Sub-group, which includes all the INEDs, the and chairmanship of the AC and R&CSC; Executive Directors and professional advisers. • Meeting arrangements were deemed The Sub-group has met regularly to discuss the satisfactory and efficient; referral and to carefully review the Company’s submissions to the CMA, on behalf of the Board.

• Oversight of external audit, risk management The Company’s Statement of Case was approved GOVERNANCE REPORT and internal controls and assurance is by the full Board prior to submission. considered to be excellent; • The AC and R&CSC are working appropriately despite an increasing workload; and • The quality of feedback to the Board is high. Professor Michelon also advised that it is important to maintain training and technical updates and to ensure that the number and timing of meetings is kept under review. STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 82

AUDIT COMMITTEE REPORT management, and ensuring these are Introduction by the Chairman of the Committee, consistent with those set out in note 1(q) to the P Rew Financial Statements on pages 116 to 117; The role of the AC is to assist both Executive • reviewing the appropriateness of accounting Directors and NEDs of NWL and its subsidiaries policies and evidence supporting the going (the NWL Group) to discharge their individual and concern basis for the Financial Statements and collective responsibilities in relation to: recommending approval of the Financial Statements to the Board; • ensuring the financial and accounting systems of each NWL Group company are providing • reviewing and monitoring the effectiveness of accurate and up-to-date information on its the audit process, taking into consideration current position; relevant UK professional and regulatory

requirements; and STRATEGIC REPORT • ensuring the published Financial Statements of the NWL Group companies represent a true and • approving the external auditor’s fees for both fair reflection of this position; audit and non-audit services, by reference to the agreed policy (see further details below). • ensuring the integrity of the Company’s regulatory reporting systems and the accuracy The Committee monitors the independence of the of its regulatory reports; and audit through different reviews and actions including: • assessing the integrity of internal financial controls. • confirmation that the auditor is, in its professional judgement, independent of the The Committee also maintains oversight of NWL Group; internal and external auditors. I have worked with the members of the Committee and with • obtaining from it an account of all relationships management and key advisors to produce an which may affect the firm’s independence and action plan for the Committee, setting out the the objectivity; business to be addressed at each meeting. This • rotation of the lead audit partner every five plan is dynamic and is updated throughout the years. NWL’s current lead audit partner first year. The members of the Committee are updated signed the Annual Report in 2016 and will rotate regularly on developments in financial reporting after the 2020 audit; requirements and on any changes in NWL’s regulatory environment. • maintaining a policy regarding the engagement of the auditor to conduct non-audit work and

Members of the Audit Committee monitoring the level of audit fees compared to GOVERNANCE REPORT The members of the AC are P Rew (Chairman), Dr non-audit fees (see further details below); S Lyster, M A B Nègre and L S Chan. • considering audit tender requirements, being The CEO, Finance Director, Assets and Assurance tenders every 10 years and mandatory rotation Director, Internal Audit Manager and the external after 20 years. Deloitte was first appointed in auditor normally attend the Committee’s respect of the 2012 Annual Report; meetings by invitation and M Parker is Secretary • considering new accounting standards and to the Committee. Other senior managers, reviewing their applicability to the Company; independent technical auditors and advisers are invited to attend as appropriate. • reviewing the approaches taken to bad debt and taxation provisioning as well as unbilled The work of the Audit Committee revenue recognition; and During the year, and up to the date of approval of • reviewing reporting from management or the these Financial Statements, the AC assisted both external auditor on the accounting judgements Executive Directors and NEDs to discharge their associated with property, plant and equipment, individual and collective responsibilities. Its work and assumptions taken regarding valuing included the following: financial instruments and the defined benefit External Audit pension scheme liability. • reviewing the draft Financial Statements and In addition, the Committee considers the APR, considering reports from the external effectiveness of the external audit, and considers auditor setting out the audit approach and plan, the level of experience, industry knowledge and significant audit risks and conclusions on the expertise of the audit team, and its delivery of

NWL Group’s internal controls and risk appropriate challenge in a knowledgeable and STATUTORY FINANCIAL STATEMENTS management; constructive manner. • considering the key areas of judgement in the Financial Statements, reviewing reports from GOVERNANCE REPORT 83

Non-Audit Fees Internal audit reports reviewed by the Committee during 2019-20 included: The Company has adopted a formal policy on the provision of audit services, which was updated with effect from 1 April 2017, to reflect the FRC’s • April 2019 Revised Ethical Standards 2016. Process Review – Sewer flooding The policy provides for general pre-approval of a range of services which are generally regarded Financial Accounting as audit related, where the fees are equal to or less than £50,000. It also sets out a broad range of Wholesale services prohibited activities. Services which are not prohibited, but which have Process Review – Service Reservoirs and Water not been pre-approved and in respect of which Tower Inspection Programme STRATEGIC REPORT the fee is equal to or less than £50,000 can be • June 2019 approved by the AC Chairman, who reports such approval to the AC. If the fee for such services will Process Review - Appointments exceed £50,000 the approval of the AC is required. The policy imposes a cap on non-audit fees equal to 70% of average audit fees for the previous three • August 2019 years. Process audit – Customer Complaints and Where Deloitte LLP is engaged to provide non- Account Queries audit services, this results from its extensive knowledge on NWL’s business and the sector • January 2020 generally, as well as demonstrating the required Asset Investment expertise and capability to provide good value for money. Procurement – General policies, purchasing cards and payment terms Non-audit related work undertaken by Deloitte LLP in 2019-20 amounted to fees of £14,000, which Procurement – Building Maintenance represents 6% of total fees paid to Deloitte LLP. Customer Accounts The fees paid are set out in note 3 to the Financial Statements on page 119. The non-audit work in CKI/CKHH audit report – GDPR and its 2019-20 comprised provision of assurance on application within the Customer team and third party contracts. sewerage network maintenance GOVERNANCE REPORT The AC also holds in camera sessions with the In addition, at each of its scheduled meetings the audit partner. Committee received reports detailing progress with implementing recommendations previously Having considered the effectiveness and raised by internal audit and is satisfied that independence assessments above, the AC management has taken appropriate steps to agreed to recommend to the Board that Deloitte implement the recommendations raised. continues as external auditor. The Chair of the Committee, independent of Internal Audit management, maintains regular and direct The NWL Group operates a blended model for contact with both the internal and external its internal audit function. Under this model, auditor, allowing open dialogue and feedback. the internal audit team conducts the majority The Committee has considered the effectiveness of the work, including core financial controls of internal audit. There was also an external and regulatory reporting reviews. Reviews of assessment completed by the Chartered Institute specialist technical areas are outsourced to firms of Internal Auditors during 2018/19 which overall with appropriate experience and qualifications noted that the function “clearly meets the when felt necessary. expectations of its stakeholders”. The Committee The Committee reviews and approves the internal is satisfied that the current model described audit plan for the year. Its review is designed to above remains appropriate for the Group. ensure that focus is given to the areas of highest risk for the NWL Group and that the audit work focuses on key controls. STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 84

Work with other assurance providers Attendance at the five AC meetings during the year was as follows: Support with data assurance work for the principal regulatory reporting (including the APR, NAME ATTENDANCE Water Resource Management Plan and PR19 in the year) was provided by Deloitte for financial P Rew 5 tables and PwC or our Internal Audit team for Dr S Lyster 5 non-financial tables. Our overall approach to assurance of regulatory M A B Nègre 5 data has been approved by the Committee and is L S Chan 1 described below: N Herrington (as alternate for L S Chan) 4 • business as usual assurance for our ongoing data capture and measurement processes; STRATEGIC REPORT • each piece of data must be provided by the nominated data provider and reviewed before being audited. This is controlled by a workflow system; and • additional independent technical assurance was procured (from PwC as our External P Rew Technical Auditor) to examine areas that were Chairman of the Audit Committee identified as being higher risk as defined by our regulatory data risk management framework as approved by the Committee. Our approach is described in our draft and final assurance plans with the results being described in our Data Assurance Summary annually. Reports from Deloitte, PwC and Internal Audit are received and reviewed by the Committee. Further compliance and other matters • reviewing and commenting on the APR,

including the underlying assurance, reviewing GOVERNANCE REPORT evidence to support the Condition F6A.2A certificate (statement of sufficiency of financial resources) and long-term Viability Statement and recommending their approval to the Board; • approving arrangements for monitoring compliance with the Company’s procedures designed to prevent bribery, having regard to the Bribery Act 2010 and the code of conduct ‘Our Way at NWG’, including receiving reports on any whistleblowing allegations; • management of tax compliance matters and other tax issues, including Base Erosion and Profit Shifting and renewing NWL’s Advance Thin Capitalisation Agreement and discussing other key matters with HMRC; and • reviewing the Company’s Long Term Viability Statement. The AC Chairman reports formally to the NWL Board following each AC meeting, and its minutes are circulated to both NWL and NWGL Boards. STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 85

RISK & COMPLIANCE systems and processes are embedded in the SUB-COMMITTEE REPORT organisation and are reviewed regularly by the Board, its Committees and Sub-committee. The Introduction by the Chairman of the annual review confirmed that the risk Sub-committee, P Rew management and internal control systems have The role of the Sub-committee is to assist both operated effectively through the year and that Executive and NEDs to discharge their individual there have been no significant failings or and collective responsibilities in relation to weaknesses. assessing the scope and effectiveness of the NWL Group’s risk management systems and the During the year, and up to the date of approval of integrity of its internal financial controls. these Financial Statements, the work of the R&CSC included the following: Members of the Risk & Compliance STRATEGIC REPORT Sub-committee • reviewing reports at each meeting on the The members of the R&CSC are P Rew (Chairman), top-rated managed risks and priorities for Dr S Lyster and M A B Nègre. assurance (being those risks with the biggest reduction between the business (gross) and The work of the Risk & Compliance managed (net) risk scores), representing key Sub-committee control areas for the Company; The ELT implements policies on risk management • reviewing high impact, low likelihood risks and internal control and ensures that risks are which have a rare to unlikely likelihood of appropriately identified and managed within the occurrence but a potentially catastrophic level business, to ensure that the Company’s resources of impact; and capacity to deliver services as required by customers remain resilient. This approach is set • reviewing the management of specific areas of out in a Risk Management Framework, which has risk in relation to a major business change been endorsed by the R&CSC. The ELT reviews the project iAM and business continuity approach to risk management in detail every year arrangements; and reviews the significant risks every month. • advising the Board on risk appetite and Any significant issues are reported by the CEO to exposure and reviewing risk assessment the Board. Senior management implements policies on risk management and internal control. processes as well as keeping the effectiveness of the risk and internal control management The R&CSC, on behalf of the Board, has performed systems under review;

a robust assessment of the principal risks facing • monitoring compliance with covenants and GOVERNANCE REPORT the Company, including those that would threaten treasury risks; its business model, resilience, future performance, solvency or liquidity. These • reviewing management of customer debt; principal risks, and how they are managed, • “deep dives” on cyber security and the iAM are described on pages 57 to 63 in the programme; and Strategic Report. • reviewing the risk and control framework and The internal control framework supports the risk reporting. management process, ensuring that risks are Attendance at the three scheduled R&CSC appropriately managed, that controls are effective meetings during the year was as follows: and that appropriate remedial action is taken where identified. Risks are mapped against the providers of assurance, whether this be NAME ATTENDANCE management, internal or external assurance. The P Rew 3 Board is supported by the AC in monitoring the effectiveness of the internal control framework Dr S Lyster 3 with primary assurance being provided by the internal audit team. M A B Nègre 3

The R&CSC, on behalf of the Board, has carried out The Sub-committee holds a special meeting with an annual review of the effectiveness of the other members of the Board each year to conduct Company’s risk management and internal control a separate Strategic Risk review exercise. systems. This review confirmed that the The Board is able to monitor the impact of

Company has strong systems of internal control STATUTORY FINANCIAL STATEMENTS and robust processes in place to enable it to environmental, social and governance matters on identify, evaluate and manage the risks it faces the Company’s business, to assess the impact of and to ensure that its obligations are met. These significant risks on the business and to evaluate methods of managing these risks through reports GOVERNANCE REPORT 86

it receives from the AC and the R&CSC. Principle Three – Director Responsibilities The board and individual directors should have a clear understanding of their accountability and responsibilities. The board’s policies and procedures should support effective decision- making and independent challenge. The Company has in place clear corporate governance practices which provide clear lines of P Rew accountability and responsibility. The members Chairman of the Risk & Compliance of the ELT have clearly defined responsibilities Sub-committee and levels of authority are set out in Financial

Approval Rules (as explained in the comments in STRATEGIC REPORT relation to Objective 2 of the 2019 Ofwat NOMINATION COMMITTEE Objectives on page 76. The Board’s approach to conflicts of interest and the relationship between The Nomination Committee has wide-ranging the Company and its owners is also explained in terms of reference which are available on the that section of the Report. Company’s website. The members during the year were A J Hunter (Chairman), P Rew, M Fay, The Chairman and Company Secretary discuss Dr S Lyster and D N Macrae. The Committee met governance processes from time to time to once formally during the year, principally to confirm they remain fit for purpose and consider discuss the recruitment of a fifth INED and the initiatives which could strengthen governance. plan for the existing four INEDs to step down Details of the Board Committees are set out in the during 2020/21 and be succeeded by new comments on Ofwat’s 2019 Objective 4, on pages appointees. There were further ad hoc 78 to 80. discussions as required through the year. Details of processes which are in place to ensure systems and controls are operating effectively COMPLIANCE WITH THE and that information provided to the Board is WATES PRINCIPLES robust are set out throughout this document and The Board considers that it complies in the Company’s APR and Data Assurance substantially with the relevant provisions of the Summary. Wates Principles, through the corporate Principle Four – Opportunity and Risk governance arrangements described in detail GOVERNANCE REPORT above, and the further arrangements set out A board should promote the long-term below. sustainable success of the company by identifying opportunities to create and preserve Principle One – Purpose and Leadership value, and establishing oversight for the An effective Board develops and promotes the identification and mitigation of risks. purpose of a company, and ensures that its The Company is a long term business and values, strategy and culture align with that ensuring its long term sustainable success is a purpose. key driver underpinning the work of the Board and Committees, as described in detail in this Please see the comments on compliance with Report. The Board’s approach to oversight of the Objective 1 of the 2019 Ofwat Objectives, on pages identification and mitigation of risks is detailed 74 to 80. in the Risk Report on pages 57 to 63. Principle Two – Board Composition Principle Five – Remuneration Effective board composition requires an effective A board should promote executive remuneration chair and a balance of skills, backgrounds, structures aligned to the long-term sustainable experience and knowledge, with individual success of a company, taking into account pay directors having sufficient capacity to make a and conditions elsewhere in the company. valuable contribution. The size of a board should be guided by the scale and complexity of the A detailed explanation of the Company’s company. executive pay policy is provided in the Remuneration Committee Report on Please see the comments on compliance with pages 88 to 99.

Objective 4 of the 2019 Ofwat Objectives, on pages STATUTORY FINANCIAL STATEMENTS 74 to 80. GOVERNANCE REPORT 87

Principle Six – Stakeholder Relationships and Engagement Directors should foster effective stakeholder relationships aligned to the company’s purpose. The board is responsible for overseeing meaningful engagement with stakeholders, including the workforce, and having regard to their views when taking decisions. Details of the Company’s extensive stakeholder engagement programme are set out on pages 17 to 18. STRATEGIC REPORT CODE OF CONDUCT The Group has a code of conduct, ‘Our Way at NWG’, covering its relationships with customers, employees, suppliers, local communities, shareholders, other investors and regulators. This document provides clear guidance to employees in relation to personal conduct, conflicts of interest, the anti-bribery policy and a number of other matters. As part of the annual staff appraisal system, all employees are required to confirm that they have seen the code of conduct GOVERNANCE REPORT STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 88 REMUNERATION COMMITTEE REPORT

The following report has been produced in • agreeing STIP payments for the 2019 calendar accordance with section 35A of the Water year, including reviewing performance against Industry Act 1991. It also has regard to the the balanced scorecard measures; requirements of the Large and Medium-sized • agreeing the level at which the LTIP award in Companies and Groups (Accounts and Reports) respect of the 2019 calendar year would vest; (Amendment) Regulations 2013 in respect of directors’ remuneration reporting for quoted • considering and agreeing changes to the STRATEGIC REPORT companies, albeit in the context of a company structures of the STIP and LTIP, which increased which is not a listed public limited company. the proportion of measures delivering benefits for customers and other stakeholders, other than shareholders, to 60%; ANNUAL STATEMENT • setting performance targets for the STIP for The work of the Remuneration Committee Executive Directors and senior managers for comprises the adoption of principles and the 2020 calendar year in accordance with the standards in relation to executive remuneration revised structure, reflecting all of the corporate and benefits, as well as agreeing individual themes in our balanced scorecard to deliver remuneration packages. All decisions regarding benefits for all stakeholders and ensuring that Directors’ remuneration are taken by the targets are set at stretching levels aligned to Remuneration Committee, other than where industry-leading performance; and stated. • setting performance targets for the LTIP Members of the Remuneration Committee scheme for the award in respect of the 2020 The members of the Remuneration Committee calendar year in accordance with the revised during the year were A J Hunter (Chairman), P structure, reflecting a sub-set of the balanced Rew, M Fay, Dr S Lyster and D N Macrae. H scorecard measures which deliver benefits for Mottram attends Committee meetings but does our stakeholders. not participate in discussions relating to her own Decisions in respect of pay awards and STIP and remuneration. There is a majority of INEDs in LTIP were made in January 2020 before the GOVERNANCE REPORT accordance with the Ofwat Principles. outbreak of the Covid-19 pandemic. The The work of the Remuneration Committee Committee will consider at its meetings during 2020/21 whether or not it would be appropriate to The Remuneration Committee met twice during make any adjustments to Directors’ remuneration the year, in May 2019 and January 2020. All in the light of the impact of Covid-19. members attended the meetings. The Committee discussed and agreed changes to the structures of the Short Term Incentive Plan (STIP) and Long Term Incentive Plan (LTIP), to take effect from 2020. This will increase to 60% the proportion of performance-related executive pay aligned to delivering benefits for our customers across our stretching balanced scorecard targets. The changes are described in A J Hunter more detail on pages 98 to 99. Chairman of the Remuneration Committee Set out below is a brief summary of the work of the Committee: • reviewing Executive pay and Non-Executive Directors’ fees, taking account of market data, and agreed annual pay awards to take effect from 1 January 2020;

• considering an assurance report from the STATUTORY FINANCIAL STATEMENTS Internal Audit Manager on performance against targets reflected in the 2019 STIP and LTIP; GOVERNANCE REPORT 89

DIRECTORS’ REMUNERATION POLICY In addition to reviewing each constituent The policy of the Remuneration Committee is to element, the Remuneration Committee reviews pay no more than necessary to attract and retain the remuneration packages as a whole to ensure good quality directors, and to ensure that policy is that they remain appropriate in terms of aligned with market practice. For Executive structure and quantum. In 2012 the Remuneration Directors the reward policy is designed to achieve Committee restructured the remuneration of the a balance between attraction, reward for Executive Directors, with advice from Hay Group, performance and retention, and salaries are independent external reward consultants. This based on relevant market benchmarks, which are resulted in a reduction in the value of reviewed typically every three years. For Non- performance related STIP and LTIP awards, offset Executive Directors, fees paid reflect market by an adjustment to basic pay. The Remuneration practice for similar sized companies, and may be Committee is satisfied that this balance between enhanced for roles leading Board Committees. fixed and performance related remuneration STRATEGIC REPORT remains appropriate. Executive Directors A significant proportion of remuneration is linked The remuneration of the Executive Directors to Company performance through the short-term comprises: and long-term incentive plans, with 50% of the • basic salary; CEO’s maximum remuneration being linked to performance and around 40% for the other • benefits in kind; Executive Directors, as illustrated on page 92. • a performance related STIP; The remuneration policy is designed to • annual LTIP awards; and incentivise performance across all the full range of the Company’s strategic themes and not to • pension benefits. over-emphasise short-term financial gains. The following table describes the policy in more detail, explaining the purpose of each component, how the policy operates and, for the variable elements of remuneration, the maximum amount payable and how performance is assessed. GOVERNANCE REPORT STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 90

PURPOSE OPERATION PERFORMANCE MAXIMUM PAYABLE ASSESSMENT

Basic salary

Basic salaries are set at a Basic salary is reviewed The basic salaries payable to Fixed annual amount level to attract and retain annually based on Directors of NWL are not determined annually by Directors with the individual contributions, directly linked to specific the Remuneration leadership capabilities to periodic benchmarking to standards of performance in Committee. deliver the Company’s the external market and connection with the carrying vision of being the with regard to the out of functions of a ‘relevant national leader in the expected pay award for undertaker’. There is no provision of sustainable other groups of variable performance related

water and wastewater employees. element. STRATEGIC REPORT services and to reflect the external market.

Benefits in kind

Other employment Benefits provided to There is no variable Fixed annual amount set benefits provided in the Executive Directors performance related element. in accordance with the accordance with the comprise car and fuel Company’s policies on Company’s policy on allowances, healthcare provision of benefits to all provision of benefits to all and professional staff. staff. subscriptions.

STIP

The purpose of the STIP The STIP is assessed on The STIP is structured with The maximum STIP is to focus on delivering a calendar year basis. three elements, determined payable, as a percentage key business performance Awards are paid in cash by the Remuneration of basic salary, is 70% for targets in the year. with no deferral, other Committee: the CEO and 50% for the than for specific reasons, other Executive Directors. The performance targets • up to 50% payable on such as a performance are firmly linked to NWL’s financial targets; metric not being finalised strategic themes at the point of award. • up to 40% payable on (customer, environment, balanced scorecard competitiveness, people A clawback applies in the targets; and GOVERNANCE REPORT and communities) as event that results on reported in the balanced which the STIP is paid are • up to 10% payable on scorecard. Stretching subsequently found to be performance against targets are set which are inaccurate or there has personal targets. aligned to the Company’s been relevant misconduct The Chairman retains the vision of being the on the part of the right to award an additional national leader in the employee. discretionary bonus to the provision of sustainable CEO, taking account of water and wastewater overall performance. services. The structure will change in 2020/21 to: • up to 40% payable on financial targets; and • up to 60% payable on balanced scorecard targets. STATUTORY FINANCIAL STATEMENTS

table continued... GOVERNANCE REPORT 91

PURPOSE OPERATION PERFORMANCE MAXIMUM PAYABLE ASSESSMENT

LTIP

Our LTIP is structured The LTIP is a cash The LTIP is structured with The maximum LTIP payable, as differently from others based award, with 50% related to delivery of a percentage of basic salary, is in the sector and is deferred payment. expected distributions to 50% for the CEO and 30% for designed to operate Group shareholders in line with the other Executive Directors. Vesting of the LTIP is as a modest retention the Board approved plan and based on performance mechanism only. 50% related to achievement in the first calendar year of the Group profit after tax after award. Payment target. For each element, there is deferred until the

will be no vesting if less than STRATEGIC REPORT completion of four 97.5% of the target value is years from the start achieved, increasing on a of the performance sliding scale to 50% vesting if period. 100% of the target is achieved and 100% vesting if 105% of the target is achieved. The structure will change in 2020/21 to: • up to 40% payable on financial targets; and • up to 60% payable on balanced scorecard targets.

Pension

Pension benefits are The Company operates There is no variable H Mottram left the NWPS in 2016 provided at a level the Northumbrian performance related element. and receives additional salary to reflect market Water Pension Scheme payments in lieu of pension expectations. (NWPS or the Scheme) contributions. which has defined C I Johns participates in the benefit and defined defined contribution section of contribution sections. the NWPS, making an employee GOVERNANCE REPORT The defined benefit contribution of 8% of basic section closed to salary (under a salary sacrifice new entrants on 31 arrangement) and receiving an December 2007. employer contribution of 15% of More details of the salary, up to the annual pension NWPS are provided in contribution taxation limit, and note 23 of the Financial additional salary payments in lieu Statements. of pension contributions. A C Jones participated in a defined benefit section during the year, making an employee contribution of 8% of pensionable salary (under a salary sacrifice arrangement) and receiving an employer contribution equivalent to 25.5% of pensionable salary. Benefits are calculated on a career average revalued earnings basis with future accrual at 1/45th of salary per annum. A C Jones stopped being an active member of the NWPS during the year and now receives additional salary payments in lieu of pension contributions. STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 92

ILLUSTRATION OF For H Mottram, 50% of maximum remuneration is REMUNERATION POLICY linked to Company performance through the STIP and LTIP. For C I Johns and A C Jones, the The graphs below show for each Executive equivalent proportions are 40%. Director, for the proportion of their remuneration For the purposes of the graph, the expected level borne by the Company: of performance for the STIP has been assumed to • the base level of remuneration, which is not achieve 60% of the maximum potential value and dependent upon performance and comprises the LTIP has been assumed to achieve 50% of the basic salary, benefits in kind and pension; maximum value, though awards are dependent upon actual performance. • the expected level of remuneration, reflecting a typical level of performance against targets for Information on actual awards for the STIP and

the STIP and LTIP; and LTIP in respect of 2019 is provided on pages 94 to STRATEGIC REPORT 96. • the maximum level of remuneration, if all STIP and LTIP performance targets were fully achieved.

H MOTTRAM £k

Base 100% 424 %ge Salary, benefits & pension

Expected 64% 23% 13% 665 %ge STIP

Maximum 50% 29% 21% 855 %ge LTIP 0 300 600 900 GOVERNANCE REPORT £’000

C I JOHNS £k

Base 100% 229 18% Expected 73% 9% 315

Maximum 60% 25% 15% 381

0 300 600 900 £’000 A C JONES £k

Base 100% 332 18% Expected 73% 9% 455

Maximum 60% 25% 15% 550 STATUTORY FINANCIAL STATEMENTS

0 300 600 900 £’000 GOVERNANCE REPORT 93

NON-EXECUTIVE DIRECTORS

FEES OTHER COMPONENTS OF REMUNERATION ELSEWHERE IN REMUNERATION THE GROUP

The Company’s policy is that the The Non-Executive Directors do not The INEDs do not receive any other Independent Non-Executive receive benefits in kind and do not remuneration from the Company, Directors receive fees for their participate in the STIP, LTIP or the Group or its shareholders. duties. The level of fees is set by pension schemes operated by the In respect of the Non-Executive reference to the market. Company. Directors appointed by the Group’s An additional fee is paid to the Chair shareholders, F R Frame received of the Audit Committee to reflect the the same base fee for performing his

additional responsibilities and time duties as a Director of both the STRATEGIC REPORT commitment involved. Company and NWGL. This fee is shared with NWL paying a 30%

proportion and NWGL paying the remaining 70%. The other Non- Executive Directors receive no remuneration from the Company.

SERVICE CONTRACTS CONSIDERATION OF The service contracts of Executive Directors have SHAREHOLDER VIEWS a notice period of six months from either side. The Remuneration Committee comprises two The contracts do not contain any specific shareholder-appointed Directors and three INEDs. provisions related to payment for loss of office. In the context of a private company with NWL’s Any such payments would be at the discretion of ownership structure, this ensures that the views the Remuneration Committee and would take of the shareholder are taken into account when account of the contractual notice period and any setting executive remuneration, whilst also STIP payments considered to have been earned. maintaining a strong independent presence on LTIP awards will typically lapse, although the the Committee. Remuneration Committee may approve payment of outstanding LTIP awards if a Director is CONSIDERATION OF EMPLOYMENT GOVERNANCE REPORT considered to be a ‘good leaver’, for example upon CONDITIONS ELSEWHERE IN retirement. THE COMPANY INEDs are engaged on a contract for services with a notice period of six months from either side. No The Remuneration Committee reviews Directors’ payment is made for loss of office other than pay on an annual basis, taking account of market accrued fees. trend information and pay awards for the wider workforce in the Company. Whilst Directors’ The other NEDs do not have service contracts remuneration is not specifically consulted on with the Company, and receive no payment from with employees, in general, annual pay awards the Company. for Directors reflect the target pay awards for the workforce, which are subject to consultation APPROACH TO REMUNERATION under the Company’s Employee Relations ON RECRUITMENT Framework. The incentive pay arrangements for executives are not mirrored elsewhere, but are Newly appointed Directors are remunerated in considered to be relatively modest in comparison accordance with the policy set out in this report. with market comparisons. Service contracts for new Directors have a notice Directors’ remuneration packages are period of six months from either side. benchmarked against market data on a periodic basis, typically every three years, with support from external advisers. The salary benchmarking is reviewed annually for senior managers and every three years for the wider workforce. STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 94

DIRECTORS’ REMUNERATION IN 2019/20 (AUDITED)

The table below shows the total remuneration paid by the Company to Directors during the year, along with comparative information for the previous year. The table has been produced in accordance with the requirements of Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013.

SALARIES BENEFITS IN STIP LTIP PENSION TOTAL AND FEES KIND £’000 £’000 £’000 £’000 REMUNERATION £’000 £’000

2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019

£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 STRATEGIC REPORT

H Mottram 375 366 9 9 158 192 44 41 40 583 651

C I Johns 193 189 8 10 46 47 14 27 25 274 285

A C Jones 283 276 13 19 65 67 20 44 26 405 408

M Fay 48 47 ------48 47

F R Frame 11 14 ------11 14

Dr S Lyster 48 47 ------48 47

M A B Nègre 48 47 ------48 47

P Rew 65 62 ------65 62

1,071 1,048 30 38 269 306 78 112 91 1,482 1,561

The table shows only the proportion of BENEFITS remuneration borne by the Company. For two of Taxable benefits provided to the Executive the Directors, H Mottram and C I Johns, NWL paid Directors comprise car and fuel allowance, 70% of their remuneration and NWGL paid the healthcare and professional subscriptions. The GOVERNANCE REPORT remaining 30%. For F R Frame, NWL paid 30% of values are not significant in the context of overall his remuneration and NWGL paid the remaining remuneration. 70%. For the other Directors reported in the table, NWL paid 100% of their remuneration. STIP The Executive Directors receive salary payments in lieu of employer pension contributions. These The STIP for the 2019 calendar year was payments are reported under the pension structured by the Committee in accordance with heading in the table. the policy outlined above, as follows: • up to 50% payable on balanced scorecard BASIC SALARY financial targets; Basic salary is set by reference to market data • up to 40% payable on balanced scorecard and trends. non-financial targets; and For the calendar year 2019, senior executives • up to 10% payable on performance against were awarded an annual increase in their basic personal targets. salaries of 2.5%. This was the same as the level awarded to other senior managers, but less than that awarded to other employees of 2.8%. For the calendar year 2020, senior executives were awarded an annual increase in their basic salaries of 2.5%. This was the same as the level awarded to other senior managers and other employees. STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 95

The balanced scorecard measures and targets, and performance against the targets in the year, are shown in the table below. These targets are internal measures set at stretching levels so as to drive year on year performance improvements on a path to deliver our ‘national leader’ vision. This means that they are often more stretching than the regulatory PCs reported in the Performance Review section on pages 22 to 23.

SCORECARD MEASURE TARGET PERFORMANCE ACHIEVED % OF TOTAL % OF TOTAL AWARDED STIP POTENTIAL

Customer

Customer satisfaction

- SIM qualitative score >=4.65 4.5 no - 3 STRATEGIC REPORT

- SIM quantitative score <=75 94.19 no - 1

Water supply interruptions <=3:45 9:12 no - 4 >3 hours (average minutes per property)

Mean zonal compliance >=99.97 99.94 no - 4

Repeat sewer flooding <=60 60 yes 4 4 (properties)

Environment

Leakage (Mld)

- NW <=134 136.3 no - 2

- ESW <=66 64.2 yes 2 2

Pollution incidents <=1 1 yes 4 4 category 1 & 2

Sewage treatment works >=99 98.84 no - 4 failing consent GOVERNANCE REPORT

Competitiveness

Group Earnings Before budget not achieved no - 25 Interest and Taxes (EBIT)

Group cash available for budget achieved yes 25 25 distribution

People

Employee engagement >=80 67 no - 4 score

Lost time reportable <=3 7 no - 4 accidents (no.)

Communities

Ethisphere award awarded yes 4 4

Total STIP related to balanced scorecard 39 90

The personal targets related to the delivery of strategic objectives relevant to each Director’s role. A number of these targets related to NWL’s performance as a relevant undertaker. In assessing overall STATUTORY FINANCIAL STATEMENTS performance, the Committee takes into account the Company’s position in Ofwat reports. For the CEO, in addition to the STIP calculation explained above, a further discretionary award was made by the Committee to reflect the Board’s continued satisfaction with the CEO’s performance. This remained within the limit of the overall potential maximum STIP award. GOVERNANCE REPORT 96

The total STIP awards for 2019 were as follows: PENSION Pension arrangements operated in accordance STIP MAXIMUM STIP with the policy outlined on page 91. awarded STIP (% AWARDED (out of OF BASIC (% OF A C Jones was an active member of the defined 100%) SALARY) BASIC benefit section of the NWPS until January 2020, SALARY) therefore the pension value shown in the table on page 94 has been calculated in accordance with H Mottram 62.4% 70% 43.7% the 2013 Regulations and represents the C I Johns 48.0% 50% 24.0% estimated increase in the capital value of his pension in the year. A C Jones 48.0% 50% 24.0%

PERCENTAGE CHANGE IN CEO STRATEGIC REPORT LTIP REMUNERATION A cash LTIP was awarded by the Committee in The table below shows the change in 2019, structured in accordance with the policy remuneration for 2019/20 compared to 2018/19 for outlined above, as follows: the CEO and for other employees. In order to make a meaningful comparison, other employees • up to 50% payable on achievement of the Group includes only those who have been employed for profit after tax target; and the full two year period and excludes senior • up to 50% payable on delivery of expected management whose remuneration is set by the distributions to Group shareholders. Remuneration Committee. STIP has been compared to the annual bonus paid to the senior The scheme related to the period January 2019 to management cohort. December 2022. Performance targets were assessed in the first year of the scheme with CHANGE IN CEO CHANGE payment deferred until early 2023, after the end REMUNERATION IN OTHER of the four year scheme period. EMPLOYEES’ REMUNERATION The Committee assessed the performance against the scheme criteria in January 2020 and Salaries and fees 2.7% 4.6% determined that neither Group profit performance or Group distributions should vest. The Benefits in kind 0.9% (0.7%)

Committee therefore approved that the 2019 LTIP GOVERNANCE REPORT should vest at 0%. STIP / annual bonus (18.2%) (4.0%) The total LTIP awards for 2019 were as follows:

LTIP MAXIMUM LTIP awarded LTIP (% AWARDED (out of OF BASIC (% OF BASIC 100%) SALARY) SALARY)

H Mottram 0% 50% 0%

C I Johns 0% 30% 0%

A C Jones 0% 30% 0% STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 97

CEO PAY RATIO other employees. The table below shows this The Companies (Miscellaneous Reporting) information produced in accordance with the Regulations 2018 introduced new legislation in legislation. respect of reporting ratio of CEO pay compared to YEAR METHOD 25TH PERCENTILE MEDIAN PAY RATIO 75TH PERCENTILE RATIO RATIO

2020 Option A 20:1 16:1 12:1

2019 Option A 22:1 17:1 14:1 STRATEGIC REPORT

The Company has chosen Option A (as set out in have been calculated based on the estimated the said Regulations) for calculating the pay ratio employer contributions as applying the method on the basis that it represents the most complete set out in section 229 of the Finance Act 2004 for data set. The employees representing each of the all members would not be practical. Under Option percentiles were based on the full year A, the value of the full-year remuneration of each remuneration of staff employed throughout the relevant employee is listed in order from lowest year. The pension cost for those employees in the to highest and the values at the 25th, 50th and defined benefit section of the pension scheme 75th percentile points identified.

£000 25TH PERCENTILE MEDIAN PAY 75TH PERCENTILE EMPLOYEE EMPLOYEE EMPLOYEE

Salary component of pay and benefits 20 28 39

Total pay and benefits 29 38 48

CEO REMUNERATION OVER TIME RELATIVE IMPORTANCE OF SPEND GOVERNANCE REPORT Since the current remuneration policy was put in ON PAY place in 2012, the basic salary of the CEO has The table below shows total staff costs and increased by the same as, or less than, the dividends paid for the current and prior years, average pay award for the majority of employees and the year on year change. each year, which has been targeted to ensure we keep pace with the general cost of living. Over the 2020 2019 CHANGE same period, the maximum potential bonus £’M £’M % available under the STIP and LTIP has remained a Staff costs (note 5) 150.1 144.7 3.7% constant proportion of salary and the actual bonuses awarded have increased year on year by Dividends (note 8) 65.0 130.0 (50.0%) less than 2%. STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 98

CHANGES TO FUTURE REMUNERATION POLICY At its meeting in January 2020, the Remuneration Committee agreed to revise the structures of the STIP and LTIP, taking effect from 2020, to increase the proportion of performance-related executive pay which is aligned to delivering benefits for our customers. For the STIP the 10% proportion related to personal targets will be removed and the proportion linked to non-financial balanced scorecard measures will increase to 60%. The Remuneration Committee will review the structure annually and may choose to revise the individual measures within the STIP to reflect appropriate performance objectives but the 60% weighting for customer-focused measures will not be reduced. For the LTIP, the proportion linked to financial metrics, Group profit after tax and Group distributions, will be reduced to 40% with the remaining 60% linked to customer and environmental balanced scorecard measures. STRATEGIC REPORT STIP The balanced scorecard targets for 2020/21 are shown in the table below, in accordance with the revised policy. These are internal measures set at stretching levels so as to drive year on year performance improvements on a path to deliver our ‘national leader’ vision.

SCORECARD MEASURE TARGET %OF TOTAL STIP POTENTIAL

Customer

C-MeX experience top 2 company 2.5

C-MeX customer service top 2 company 2.5

D-MeX experience top 2 company 5

Unplanned interruptions >3 hours (mm:ss per property) 1 <=5:24 5

Compliance risk index (number) 1 <=2 5

Repeat sewer flooding (number) 1 <=46 2.5

Internal sewer flooding (number) 1 <=285 2.5 GOVERNANCE REPORT Environment

Leakage – NW (Mld) 1 <=126.5 2.5

Leakage – ESW (Mld) 1 <=56.4 2.5

Discharge permit compliance (EPA 1) >=99% 5

Pollution incidents category 1 & 2 1 <=1 5

Greenhouse gas emissions (ktCO2e) 1 <=57.2 5

Competitiveness

Group EBIT budget 20

Group distributions budget 20

People

Employee engagement score (Trust Index) (%) >=65 5

Lost time reportable accidents (number) <=3 5

Communities

BITC Platinum Plus/Ethisphere/CCW ‘Most Trusted Water Company’ awarded 5

Total 100 STATUTORY FINANCIAL STATEMENTS

1 Where stretching targets are set which are designed to achieve industry leading performance, the Remuneration Committee has agreed that if the target score is not achieved but actual performance is at an industry leading level and has shown an improvement on prior year performance, the target will be deemed to have been achieved. GOVERNANCE REPORT 99

LTIP 2020 The LTIP targets for the 2020 scheme are shown in the table below, in accordance with the revised policy. These are internal measures set at stretching levels so as to drive year on year performance improvements on a path to deliver our ‘national leader’ vision. This means that they are often more stretching than the regulatory PCs reported in the Performance Review section on pages 22 and 23.

SCORECARD MEASURE TARGET % OF TOTAL LTIP POTENTIAL

Customer & Environment

C-MeX customer service top 2 company 10 STRATEGIC REPORT Unplanned interruptions >3 hours (mm:ss per property) <=5:24 10

Compliance risk index (number) <=2 10

Internal sewer flooding (number) <=285 10

Leakage – NW (Mld) <=126.5 5

Leakage – ESW (Mld) <=56.4 5

Pollution incidents category 1 & 2 <=1 (cat 2) 10

Competitiveness

Group profit after tax budget 20

Group distributions budget 20

Total 100 GOVERNANCE REPORT STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT 100 DIRECTORS’ REPORT

DIRECTORS The Company’s response to the pandemic is The Directors who served during the year, and to described in the CEO Review. Both the going the date of signing, are listed on pages 69 to 71 of concern statement and viability statement, on the Governance Report. pages 102 to 103 of this Directors’ Report, explain how the impacts of the pandemic have been taken into account in making the judgements set DISCLOSURES PROVIDED out in the statements. IN THE STRATEGIC REPORT STRATEGIC REPORT Future developments which may impact on the STATEMENT OF CORPORATE Company are described in the CEO’s Report and GOVERNANCE ARRANGEMENTS in the Strategic Report. The Company’s corporate governance Our approach to research and innovation is arrangements are described on pages 86 to 87 of described in the Performance Review section of the Governance Report. In accordance with the our Strategic Report under the Competitiveness requirements of our Licence, we report our heading and the costs of research and corporate governance arrangements against the development are disclosed in note 3 of the 2019 Objectives set by Ofwat. We also report Financial Statements. compliance with the Wates Principles, which are Our policies in respect of the employment of appropriate for large privately owned companies. disabled persons are set out in the Performance Review section of our Strategic Report under POLITICAL DONATIONS Diversity and Equal opportunities on pages 44 to 45. NWL does not support any political party and we do not, directly or through any subsidiary, make Information on results and dividends and capital what are commonly regarded as donations to any structure and equity are contained in the political party or other political organisation. Financial Performance and Structure section of However, the wide definition of donations in the the Strategic Report. Our policies in relation to Political Parties, Elections and Referendums Act the use of financial instruments and treasury 2000 covers activities which form part of the operations are set out in the same section under

necessary relationship between the Company GOVERNANCE REPORT the ‘Treasury policies’ heading. and political parties and political organisations. The Companies (Miscellaneous Reporting) These activities include attending party Regulations 2018, effective for years beginning on conferences, as these provide the best or after 1 January 2019, set out revised opportunity to meet a range of stakeholders, both requirements for reporting on engagement with national and local, to explain our activities, as employees, suppliers, customers and others in a well as local meetings with MPs, MEPs and their business relationship with the Company. Our agents. During the year, no external costs were approach to stakeholder engagement is set out in associated with these activities, however, the Our Stakeholders section of our Strategic Company representatives attended the party Report on pages 17 to 18, and summarised on our conferences of the Labour and Conservative S172 Statement on pages 19 to 20. parties. Further information in relation to employee engagement is set out in the Performance Review section of our Strategic Report under the People heading on pages 42 to 49.

EVENTS AFTER THE BALANCE SHEET DATE Although the Covid-19 pandemic started before the end of the financial year, with lockdown restrictions commencing in the UK on 24 March

2020, the impacts of the pandemic have STATUTORY FINANCIAL STATEMENTS continued since the balance sheet date and up to the signing of the financial statements. GOVERNANCE REPORT 101

ENERGY AND CARBON REPORTING Having reached our previous target two years We set out our carbon management plan in 2009 early, we have now set a new ambitious target for with the aim of reducing our GHG emissions by the future and have committed to achieving net 35% by 2020 against a 2008 baseline of 303 zero emissions by the end of 2027. This will be ktonnes. We achieved this target two years early delivered through a combination of further in 2018/19 as a result of our investment in investment in renewable energy and green renewable energy and improved energy vehicles and continued focus on using energy efficiency, along with lower emissions linked to more efficiently. grid electricity. Our approach to reducing energy DIRECTORS’ INDEMNIFICATION emissions is described in more detail in the Performance Review section of our Strategic The Company has maintained Directors’ and Report under the Environment heading on pages Officers’ (D&O) insurance cover throughout the 34 to 38. year to 31 March 2020, provided under group-wide STRATEGIC REPORT D&O insurance placed by CKHH. Our total net operational GHG emissions for the year ended 31 March 2020 reduced further to 139 On 21 March 2017 NWGL entered into a deed of ktonnes CO2e (31 March 2019: 148 ktonnes CO2e), indemnity to grant the Directors of NWGL and its which was 54% lower than the 2008 baseline. This subsidiaries further protection against liability included 94 ktonnes CO2e resulting from the to third parties, subject to the conditions set purchase of electricity and 37 ktonnes CO2e out in the Companies Act 2006, and this remains arising from the use of fuels. A total of 532 million in place. kWh of energy was consumed for these purposes. DIRECTORS’ STATEMENT The protocol that we use for measuring our As required under s418 of the Companies Act emissions is based on the Carbon Accounting 2006, so far as each current Director is aware, Workbook developed and updated annually by the there is no relevant audit information of which consultants Ricardo, on behalf of the water the Company’s auditor is unaware and each industry, and published by UK Water Industry Director has taken all the steps that he or she Research. This is founded on international and ought to have taken as a Director in order to make Defra protocols but includes additions that are himself or herself aware of any relevant audit specific to the water industry. For the first time information and to establish that the Company’s this year, we have obtained external assurance on auditor is aware of that information. our emissions reporting to ISO 14064 standard. Our energy supply deal and power purchase AUDITOR agreement with Ørsted provides the company Pursuant to s487 of the Companies Act 2006, GOVERNANCE REPORT with energy from wind farms around the UK and Deloitte LLP is deemed to be re-appointed as the is guaranteed to be emissions free. New protocols Company’s auditor for the ensuing year. on reporting of emissions from electricity means that we can reflect that in our reporting. On this basis our emissions in 2019/20 were just 62 FINANCIAL STATEMENTS ktonnes CO2e. PREPARATION AND GOING CONCERN In addition to absolute emissions we also monitor The Directors confirm that, in their opinion, the the emissions intensity of our operations using Company has sufficient financial resources and three measures, one relating to the water service facilities available to enable it to carry out its and two for wastewater. These measures can be activities for at least the next 12 months. volatile depending upon levels of rainfall and Accordingly, they continue to adopt the going pumping requirements. concern basis in preparing the Annual Report and Financial Statements. In arriving at their ANNUAL OPERATIONAL GHG 2019/20 2018/19 decision, the Directors have taken into account: INTENSITY RATIO • the financial strength of the Company at the balance sheet date and financial performance, Emissions/Ml of water 144 163 which is in line with expectations and reviewed at each Board meeting, most recently Emissions/Ml of sewage treated 185 208 (flow to full treatment) in July 2020; • the key financial ratios over the next 12 month Emissions/Ml of sewage treated 378 361 planning horizon, as reflected in investment (water distribution input)

grade credit ratings; STATUTORY FINANCIAL STATEMENTS

Figures in kgCO2e/MI • the fact that the Company has in place £450m of committed bank facilities as back up liquidity, maturing in December 2024, which GOVERNANCE REPORT 102

was undrawn at 31 March 2020; and five years and (2) the longer-term view beyond five years assumes that the 2024 price review will • the Company’s formal governance and risk provide a sufficient rate of return to enable the management arrangements which are Company to finance its functions for the period monitored by the Audit Committee, R&CSC and 2025-30. The Directors have assessed the future Board. prospects of the Company and consider that the The Directors have taken specific account of the Company should be able to manage its business impacts of the Covid-19 pandemic when making risks, continue to operate and meet its liabilities this assessment. The Board has received regular as they fall due over the ten years to March 2030 updates on the operational impacts on the given the long-term nature of the business. business and the business continuity In arriving at their conclusion, the Directors have arrangements in place to ensure continuity taken into account: provision of service. The Board has also received STRATEGIC REPORT regular assessments of the financial risks arising • the Licence which is in place on a rolling 25 from the pandemic and has noted the impact on year basis; cash flows from reduced payments from • revenue from wholesale and household retail household customers and non-household price controls to March 2025 provided by the business closures. However, these are not 2019 FD by Ofwat, an assumption which is material in the context of the £450m liquidity subject to revisions by the CMA; arrangements noted above. • the financial strength of the Company at the balance sheet date and the fact that the VIABILITY STATEMENT Company has a £450m undrawn committed When considering longer-term viability, the bank facility as back up liquidity, maturing in Directors note that, in their opinion, the PR19 FD December 2024 with the intention of extending has resulted in a lower cost of capital, significant until 2030 in due course; totex challenge, stretching PC targets and an • the key financial ratios over the planning asymmetric penalties and incentives mechanism horizon of the Company’s financial forecast to which represents a significant challenge to March 2025 and extended forecast to March financeability in AMP7. There is also lower 2030, as reflected in investment grade credit financial headroom available for management of ratings; downside shocks and there is likely to be pressure on projected credit ratings, as reflected • the Board’s flexible dividend policy; and in the current negative outlooks, and additional • the principal risks and uncertainties facing the GOVERNANCE REPORT financial mitigations required in downside Company and the mitigating controls, as scenarios to support long term viability. This described on pages 57 to 63, which are impact underpins the Board’s decision to appeal monitored by the Audit Committee, R&CSC the FD to the CMA and, while the Board are and Board. confident in the Company’s case, uncertainty around the CMA redetermination has been The Directors have chosen a period of ten years considered in the assessment of financial to March 2030 to assess the viability of the resilience Company to align with the business planning process for the regulatory price review period to There is also additional uncertainty on the March 2025, and the next price review period to economic impact of the current Covid-19 March 2030. Whilst the Directors do not believe pandemic. In addition to the short-term impacts that it is possible to test financial resilience of the Covid-19 pandemic being considered in the beyond March 2025 to the same level of robust going concern assessment, the Directors note detail, given uncertainty of revenue and returns that the longer-term impacts remain uncertain past this point, they have performed an and work to assess the Company’s financial assessment of viability beyond five years against exposure is ongoing. Estimates have been an extended plan applying reasonable included in the scenario analysis to reflect the assumptions for the next price review which observed impacts to date. includes a sufficient rate of return to enable to Financial forecasts over longer-term timeframes Company to finance its functions.. are inherently subject to more risk that the The financial forecast has been stress tested assumptions adopted will not be realised. As set under a number of plausible and severe adverse out above, the Directors have confirmed that the scenarios. The scenarios were selected by the business remains a going concern. In considering Board after considering the principal risks and STATUTORY FINANCIAL STATEMENTS the longer-term viability, the Directors note (1) the uncertainties facing the Company, as set out on uncertainties referred to above and that the pages 57 to 63 of the Strategic Report, and the key downside stress test scenarios would place economic and financial variables which could pressure on projected credit ratings in the next impact on the forecast. The combined impact of GOVERNANCE REPORT 103

multiple scenarios has also been tested. the Company’s investment grade credit rating or liquidity position at risk a range of mitigation The stress tests were assessed in the context of measures would be adopted, including NWL’s overarching financial objective of application of the Board’s flexible dividend policy. maintaining prudent investment grade credit While outperformance of the FD allowance would ratings from S&P and Moody’s, and the Board’s also help mitigate such an outcome, the Directors commitment to retaining regulatory gearing of no do not consider this to be a key mitigating factor more than 70%. Whilst the viability statement given the level of challenge and stretch implied relates specifically to NWL, both rating agencies by the FD. take account of NWGL metrics in their methodologies, therefore, the impact on both The Board engaged Deloitte LLP to provide third NWL and NWGL financial plans have been party assurance, in the form of agreed upon considered. procedures performed on the calculations and stress testing of the plan, to provide independent STRATEGIC REPORT The scenarios tested were: assurance on the impact of the stress testing • lower CPIH inflation, leading to reduced scenarios on the forecast. allowed revenue and RCV and therefore lower

profitability and higher gearing; FAIR, BALANCED AND • increased future borrowing rates for new and UNDERSTANDABLE refinanced debt, increasing interest charges and reducing interest cover metrics; The Directors consider that the Annual Report and Financial Statements, taken as a whole, is • increased defined benefit pension scheme fair, balanced and understandable and provides deficit and revised schedule of contributions, the information necessary for stakeholders to resulting in increased contribution payments assess the Company’s performance, business and higher gearing under rating agency model and strategy. In reaching this conclusion, methodologies; the Board has taken advice from the Audit • impact of a credit rating downgrade, causing Committee which has considered the process by increased borrowing costs and potentially which the Annual Report and Financial triggering refinancing of existing debt and; Statements has been produced as well as reviewing and commenting on the Report. • higher operating and capital investment cost, causing increased net debt and gearing and reduced profitability;

• impact of a major incident crystallising one of GOVERNANCE REPORT the principal risks identified onpages 57 to 63, causing a significant cash outflow and increased net debt and gearing; and • reduced Outcome Delivery incentive (ODI) rewards or increased ODI penalties as a result of performance not achieving targeted levels of performance, reducing future revenues. A number of combined scenarios were also tested. These were determined by considering which scenarios were most likely to occur in combination. The combined scenarios tested were: • adverse economic conditions, comprising reduced indexation and increased borrowing costs; • external impacts, comprising increased pension payments and credit rating downgrade; and • shortfall in operational performance, comprising higher totex, major operational

incident and reduced ODI rewards or increased STATUTORY FINANCIAL STATEMENTS penalties. To the extent that any of these scenarios, in isolation or combination, would place retention of GOVERNANCE REPORT 104

DIRECTORS’ RESPONSIBILITIES The Directors are responsible for keeping STATEMENT adequate accounting records which are sufficient to show and explain the Company’s transactions The Directors are responsible for preparing the and disclose with reasonable accuracy at any Annual Report and the Financial Statements in time the financial position of the Company and to accordance with applicable law and regulations. enable them to ensure that the financial Company law requires the Directors to prepare statements comply with the Companies Act 2006. Financial Statements for each financial year. They are also responsible for safeguarding the Under that law the Directors have elected to assets of the Company and hence for taking prepare the Financial Statements in accordance reasonable steps for the prevention and detection with UK Generally Accepted Accounting Practice of fraud and other irregularities. (UK Accounting Standards and applicable law), The Directors are responsible for the including FRS 101 Reduced Disclosure STRATEGIC REPORT maintenance and integrity of the corporate and Framework. Under company law the Directors financial information on the Company’s website. must not approve the Financial Statements Legislation in the UK governing the preparation unless they are satisfied that they give a true and dissemination of financial statements may and fair view of the state of affairs of the differ from legislation in other jurisdictions. Company and of the profit or loss of the Company for that period. In preparing these Financial Statements, the By order of the Board Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether applicable UK Accounting Standards have been followed, subject to any M Parker, material departures disclosed and explained in Company Secretary, the Financial Statements; and 15 July 2020 • prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue GOVERNANCE REPORT in business.

Registered office STATUTORY FINANCIAL STATEMENTS Northumbria House, Abbey Road, Pity Me, Durham, DH1 5FJ Registered in England and Wales Registered no: 02366703

STATEMENTS FINANCIAL STRATEGIC REPORT 105

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT FINANCIAL STATEMENTS 106 INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2020

NOTE 2020 £’m 2019 £’m

Continuing operations

Revenue 2 900.4 869.1

Operating costs 3 (541.6) (530.3)

Operating profit 358.8 338.8 STRATEGIC REPORT

Finance costs 6 (112.4) (130.9)

Profit before taxation 246.4 207.9

Taxation 7(a) (97.8) (39.1)

Profit for the year attributable to the shareholder of the Company 148.6 168.8 GOVERNANCE REPORT STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 107 STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 2020

NOTE 2020 £’m 2019 £’m

Profit for the year 148.6 168.8

Items that will not be reclassified subsequently to profit and loss: STRATEGIC REPORT

Actuarial gain / (loss) 23 17.0 (20.6)

Deferred tax related to actuarial gain / loss 7(b) 0.5 3.5

Items that may be reclassified subsequently to profit and loss:

(Loss) / profit on cash flow hedges taken to equity (1.0) 2.1

Deferred tax on items charged to equity that may be reclassified 7(b) 0.4 (0.4)

Other comprehensive income / (loss) 16.9 (15.4)

Total comprehensive income for the year attributable to the 165.5 153.4 shareholder of the Company GOVERNANCE REPORT STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 108 BALANCE SHEET AT 31 MARCH 2020 (REGISTERED NUMBER 02366703)

NOTE 2020 £’m 2019 £’m

Non-current assets

Intangible assets 9 90.6 74.7

Property, plant and equipment 10 4,573.4 4,452.3

Financial investments 11 160.9 160.9

4,824.9 4,687.9

Current assets STRATEGIC REPORT

Inventories 12 4.2 3.6

Trade and other receivables 13 244.4 182.9

Short-term cash deposits 27.0 5.0

Cash and cash equivalents 4.7 -

280.3 191.5

Total assets 5,105.2 4,879.4

Current liabilities

Trade and other payables 14 (170.0) (177.7)

Borrowings 15 (41.3) (51.2)

Provisions 17 (0.1) (0.2)

(211.4) (229.1)

Non-current liabilities

Borrowings 15 (2,916.0) (2,824.3) GOVERNANCE REPORT

Provisions 17 (0.9) (0.9)

Deferred tax liabilities 7(d) (467.0) (409.0)

Pension liability 23 (84.1) (108.5)

Hedging instruments 19 (44.1) (42.2)

Grants and deferred income 18 (506.1) (490.3)

(4,018.2) (3,875.2)

Total liabilities (4,229.6) (4,104.3)

Net assets 875.6 775.1

Capital and Reserves

Share capital 20 122.7 122.7

Cash flow hedge reserve (10.5) (9.9)

Profit and loss account 763.4 662.3

Equity attributable to the shareholder of the Company 875.6 775.1

Approved by the Board of Directors on 15 July 2020 and signed on their behalf by: H Mottram STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 109 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MARCH 2020

CASH FLOW SHARE HEDGE RETAINED TOTAL CAPITAL RESERVE EARNINGS EQUITY NOTE £’m £’m £’m £’m STRATEGIC REPORT At 1 April 2018 122.7 (11.6) 640.6 751.7

Profit for the year - - 168.8 168.8

Other comprehensive income and expense - 1.7 (17.1) (15.4)

Total comprehensive income and - 1.7 151.7 153.4 expense for the year

Dividends 8 - - (130.0) (130.0)

At 31 March 2019 122.7 (9.9) 662.3 775.1

Profit for the year - - 148.6 148.6

Other comprehensive income and expense - (0.6) 17.5 16.9

Total comprehensive income and - (0.6) 166.1 165.5 expense for the year

Dividends 8 - - (65.0) (65.0)

At 31 March 2020 122.7 (10.5) 763.4 875.6

Other comprehensive income and expense taken Other comprehensive income and expense taken GOVERNANCE REPORT to the cash flow hedge reserve arises from the to retained earnings arises from actuarial cumulative amount of gains or losses on hedging revaluations, and associated deferred tax, on the instruments, and associated deferred tax, taken Company’s defined benefit pension scheme taken directly to equity under the hedge accounting directly to equity. provisions of International Accounting Standard (IAS) 39. STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 110 CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MARCH 2020

2020 £’m 2019 £’m

Operating activities

Reconciliation of profit before interest to net cash flows from operating activities

Profit on ordinary activities before interest 358.8 338.8

Depreciation and impairment losses 143.3 137.9

Other non-cash charges and credits (13.6) (15.1)

Net credit for provisions, less payments (0.1) (0.2) STRATEGIC REPORT Difference between pension contributions paid and amounts recognised in the income (9.6) (8.8) statement

Capital grants received 14.9 11.6

Increase in inventories (0.6) (0.5)

Increase in trade and other receivables (50.1) (22.1)

Increase in trade and other payables 1.2 14.2

Cash generated from operations 444.2 455.8

Interest paid (96.9) (97.5)

Income taxes paid (61.0) (39.2)

Net cash flows from operating activities 286.3 319.1

Investing activities

Interest received 3.3 3.3

Proceeds on disposal of property, plant and equipment 1.1 3.3

Short term cash deposits (22.0) 87.0

Purchase of property, plant and equipment and intangible assets (247.6) (254.5) GOVERNANCE REPORT

Net cash flows from investing activities (265.2) (160.9)

Financing activities

New borrowings 99.4 10.0

Dividends paid to equity shareholders (65.0) (130.0)

Repayment of borrowings (46.0) (37.5)

Payment of principal in respect of leases (4.3) (3.4)

Net cash flows from financing activities (15.9) (160.9)

Increase / (decrease) in cash and cash equivalents 5.2 (2.7)

Cash and cash equivalents at start of year (0.5) 2.2

Cash and cash equivalents at end of year 4.7 (0.5)

Cash and cash equivalents at end of year 4.7 (0.5)

Short term cash deposits 27.0 5.0

Total cash, cash equivalents and short term cash deposits 31.7 4.5

Additional cash flow information is included in note 21. STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 111 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2020

1. ACCOUNTING POLICIES NWL is incorporated in the UK under the The Financial Statements have been prepared on Companies Act 2006. The Company is a private a going concern basis, having considered the company limited by shares and is registered in principal risks and uncertainties, which assumes STRATEGIC REPORT England and Wales. The address of the that the Company will have adequate funding to Company’s registered office is shown onpage meet its liabilities as they fall due in the 104. The nature of the Company’s operations and foreseeable future. As at 31 March 2020, the its principal activities are set out in the Strategic Company had net current assets of £68.9m (2019: Report on page 10. net current liabilities of £37.6m). The Directors These Financial Statements are presented in have reviewed cash flow requirements and other pounds sterling and all values are rounded to the factors, as described in the going concern nearest one hundred thousand pounds (£0.1m) statement on pages 101 and 102 of the Directors’ except where otherwise indicated. Report. Accordingly, the Directors believe it is appropriate to prepare the financial statements These Financial Statements are separate on a going concern basis. financial statements. The Company is exempt from the preparation and delivery of consolidated financial statements under the terms of section (B) REVENUE 400 of the Companies Act 2006, because it is included in the Group Financial Statements of Revenue, which excludes Value Added Tax, NWGL (see note 25). represents the income receivable in the ordinary course of business for services provided within the UK. In accordance with IFRS 15 Revenue from (A) BASIS OF ACCOUNTING Contracts with Customers revenue is recognised These Financial Statements have been prepared as performance obligations to the customer are in accordance with FRS 101, incorporating the satisfied. GOVERNANCE REPORT Amendments to FRS 101 issued by the FRC in The Company’s principal source of revenue is July 2015 and the amendments to Company law from water and wastewater charges to customers, made by The Companies, Partnerships and which are recognised over the period which the Groups (Accounts and Reports) Regulations 2015. services are provided. For volumetric charges to The Company adopted the new accounting measured customers, revenue is recognised as standard IFRS 16 Leases in the period. The the service is supplied. For measured charges amended accounting policy is explained below in which have not yet been billed, an accrual is note 1(g) Leases. The approach adopted to made based on an estimate of consumption. transition to the new standard, and the impact on Wholesale charges for non-household customers the Financial Statements, is described in note 1(r). are estimated on the basis of market information provided by MOSL. As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available A secondary source of revenue is contributions to under that standard in relation to financial capital investment, particularly from developers. instruments, standards not yet effective and related party transactions. The Financial Statements have been prepared under the historical cost convention, with the exception of financial instruments held at fair value through profit and loss. STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 112

1. ACCOUNTING POLICIES (continued) Where assets are constructed by a developer and adopted by NWL at no cost to the Company, the For contributions related to the connection of assets are recognised in the balance sheet at new properties to the Company’s networks, their fair value on the date of the transfer and an comprising infrastructure charges, new equivalent value is recognised in deferred connection charges, requisitioned mains and income, in accordance with IFRIC 18 Transfers of sewers and adopted assets, the Company Assets from Customers. The fair value is based on considers that these activities form a combined the average cost to the Company of constructing performance obligation that is not distinct from an equivalent asset. the ongoing provision of water and wastewater services through the new connection. On this Upon their initial recognition, right-of-use assets basis, these contributions are recognised as are valued at the initial measurement of the deferred income and amortised to the income corresponding lease liability (note 1(g)), less lease statement over the expected useful life of the payments made at or before the commencement STRATEGIC REPORT connection, per note 1(f). day, any lease incentives received and any initial For other contributions to capital investment, direct costs. They are subsequently measured at most significantly mains and sewer diversions, cost less accumulated depreciation and the Company considers that the performance impairment losses. Right-of-use assets are obligation is satisfied upon completion of the presented as a separate line in Note 10. investment, which will typically be the point at Freehold land is not depreciated. Other assets are which the associated asset is brought into use. depreciated evenly over their estimated On this basis, these contributions are recognised economic lives, which are principally as follows: in full in the income statement upon satisfaction of the performance obligation. Contributions Freehold buildings 30-60 years received before the performance obligation is Operational structures, plant 4-92 years satisfied are recorded as receipts in advance. and machinery Infrastructure assets (see below) 4-200 years (C) INTANGIBLE ASSETS Fixtures, fittings, tools 4-25 years Intangible assets, primarily comprising computer and equipment software, are recognised at cost less accumulated amortisation and any provision for impairment. The carrying values of property, plant and Computer software is amortised evenly over its equipment are reviewed for impairment if events estimated economic life of 2 to 25 years. or changes in circumstances indicate the Intangible assets in development are not carrying value may not be recoverable and are GOVERNANCE REPORT amortised until commissioned. Amortisation is written down immediately to their recoverable charged to the income statement through amount. Useful lives and residual values are operating costs. reviewed annually and, where adjustments are required, these are made prospectively. (D) PROPERTY, PLANT Right-of-use assets are depreciated over the AND EQUIPMENT shorter period of lease term and useful life of the underlying asset. The depreciation starts at the Property, plant and equipment, including assets commencement date of the lease. in the course of construction, comprise infrastructure assets (being mains and sewers, Assets in the course of construction are not impounding and pumped raw water storage depreciated until commissioned. reservoirs, dams, sludge pipelines and sea outfalls) and other assets (including properties, vehicles and above ground plant and equipment). Purchased property, plant and equipment are included at cost less accumulated depreciation and any provision for impairment. Cost comprises the aggregate amount incurred and the fair value of any other consideration given to acquire the asset and includes costs directly attributable to making the asset capable of operating as intended. STATUTORY FINANCIAL STATEMENTS

FINANCIAL STATEMENTS 113

1. ACCOUNTING POLICIES (continued)

Infrastructure assets The Company assesses whether a contract is or contains a lease, at the inception of a new Infrastructure assets comprise a network of contract and recognises a right-of-use asset and systems being mains and sewers, reservoirs, a corresponding lease liability with respect to all dams and sea outfalls. lease arrangements in which it is the lessee, Expenditure on infrastructure assets which except for short-term leases (defined as leases enhances the asset base is treated as fixed asset with a lease term of 12 months or less). For these additions while maintenance expenditure which leases, the Company recognises the lease does not enhance the asset base is charged as an payments as an operating expense on a straight- operating cost. line basis over the term of the lease.

Infrastructure assets are depreciated evenly to The lease liability is initially measured at the STRATEGIC REPORT their estimated residual values over their present value of the lease payments that are not estimated economic lives, which are principally paid at the commencement date, discounted by as follows: using the rate implicit in the lease. If this rate cannot be readily determined, the lessee uses its Dams and impounding reservoirs 150 years incremental borrowing rate. Water mains 100 years Lease payments included in the measurement of Sea outfalls 60 years the lease liability comprise: Sewers 200 years • fixed lease payments (including in substance fixed payments), less any lease incentives Dedicated pipelines 4-20 years receivable; • variable lease payments that depend on an (E) FINANCIAL INVESTMENTS index or rate, initially measured using the Financial investments are stated at their index or rate at the commencement date; purchase cost, less provision for diminution in • the amount expected to be payable by the value (note 11). lessee under residual value guarantees; • the exercise price of purchase options, if the (F) GRANTS AND CONTRIBUTIONS lessee is reasonably certain to exercise the options; and Grants are recognised at their fair value where there is reasonable assurance that the grant will • payments of penalties for terminating the GOVERNANCE REPORT be received and all attaching conditions will be lease, if the lease term reflects the exercise of complied with. Revenue grants are credited to the an option to terminate the lease. income statement in the period to which they The lease liability is presented within Borrowings relate. in the Balance sheet and as a separate line within Grants and contributions related to the note 15. connection of new properties to the Company’s The lease liability is subsequently measured by networks, comprising infrastructure charges, new increasing the carrying amount to reflect interest connection charges, requisitioned mains and on the lease liability (using the effective interest sewers and adopted assets, are recognised as method) and by reducing the carrying amount to deferred income and amortised to the income reflect the lease payments made. statement over the expected useful life of the connection, as explained in note 1(b). The Company remeasures the lease liability (and makes a corresponding adjustment to the related Other grants and contributions to capital right-of-use asset) whenever: investment, most significantly mains and sewer diversions, are recognised in full in the income • the lease term has changed or there is a statement upon satisfaction of the performance significant event or change in circumstances obligation to the customer, which is the point at resulting in a change in the assessment of which the associated asset is brought into use. Up exercise of a purchase option, in which case to this point, any contributions received are the lease liability is remeasured by discounting reported as receipts in advance. the revised lease payments using a revised discount rate;

(G) LEASES • the lease payments change due to changes in STATUTORY FINANCIAL STATEMENTS an index or rate or a change in expected The Company has adopted IFRS 16 with effect payment under a guaranteed residual value, in from 1 April 2019 (note 1(r)). which cases the lease liability is remeasured FINANCIAL STATEMENTS 114

1. ACCOUNTING POLICIES (continued)

by discounting the revised lease payments finance costs. using an unchanged discount rate (unless the Actuarial gains and losses on experience lease payments change is due to a change in a adjustments and changes in actuarial floating interest rate, in which case a revised assumptions are recognised in full in the period discount rate is used); or in which they occur in the statement of • a lease contract is modified and the lease comprehensive income. modification is not accounted for as a separate The costs of the defined contribution section are lease, in which case the lease liability is charged to the income statement in the period remeasured based on the lease term of the they arise. modified lease by discounting the revised lease

payments using a revised discount rate at the (J) TAXATION STRATEGIC REPORT effective date of the modification. Current tax The Company did not make any such adjustments during the periods presented. Current tax liabilities are measured at the amount expected to be paid to the taxation authorities. Variable rents that do not depend on an index or The tax rates and tax laws used to compute the rate are not included in the measurement of the amounts are those that are enacted or lease liability and the right-of-use asset. The substantively enacted by the balance sheet date. related payments are recognised as an expense in the period in which the event or condition that Deferred tax triggers those payments occurs and are included Deferred tax is provided using the liability in operating costs in the Income Statement. method on temporary differences at the balance sheet date between the tax bases of assets and (H) INVENTORIES liabilities and their carrying amounts for financial reporting purposes. Inventories are stated at cost less any provision necessary to recognise damage and Deferred tax liabilities are recognised for all obsolescence. Inventory is charged at average taxable temporary differences except: cost upon use. • where the deferred tax liability arises from the initial recognition of goodwill or of an asset or (I) PENSION COSTS liability in a transaction that is not a business combination and, at the time of the transaction, GOVERNANCE REPORT The Company is the principal employer of the affects neither the accounting profit nor NWPS, which has both a defined benefit section taxable profit or loss; and and a defined contribution section. • in respect of taxable temporary differences The cost of providing benefits under the defined associated with investments in subsidiaries benefit section of the Scheme is determined where the timing of the reversal of the using the projected unit credit method, which temporary differences can be controlled and it attributes entitlement to benefits to the current is probable that the temporary differences will period (to determine current service cost) and to not reverse in the foreseeable future. the current and prior periods (to determine the Deferred tax assets are recognised for all present value of defined benefit obligation) and is deductible temporary differences and unused tax based on actuarial advice. Past service costs are losses to the extent that it is probable that taxable recognised in the income statement on a straight profit will be available against which the line basis over the vesting period or immediately deductible temporary differences and unused tax if the benefits have vested. When a settlement losses can be utilised except: (eliminating all obligations for benefits already accrued) or a curtailment (reducing future • where the deferred tax asset relating to the obligations as a result of a material reduction in deductible temporary difference arises from the scheme membership or a reduction in future the initial recognition of an asset or liability in entitlement) occurs, the obligation and related a transaction that is not a business plan assets are re-measured using current combination and, at the time of the transaction, actuarial assumptions and the resultant gain or affects neither the accounting profit nor loss recognised in the income statement during taxable profit or loss; and the period in which the settlement or curtailment

• in respect of deductible temporary differences STATUTORY FINANCIAL STATEMENTS occurs. Net interest is calculated by applying the associated with investments in subsidiaries discount rate to the net defined asset or liability. where the timing of the reversal of the The service cost is disclosed in manpower costs temporary differences can be controlled and it and the net interest expense is disclosed within is probable that the temporary differences will FINANCIAL STATEMENTS 115

1. ACCOUNTING POLICIES (continued) reverse in the foreseeable future and taxable requirements for hedge accounting as prescribed profit will be available against which the under IFRS 9. The Company has not applied temporary differences can be utilised.The hedge accounting criteria under IFRS 9 on a carrying amount of deferred tax assets is retrospective basis. Existing derivative financial reviewed at each balance sheet date and instruments, if eligible for hedge accounting, reduced to the extent that it is no longer continue to apply the hedging criteria under the probable that sufficient taxable profit will be provisions of IAS 39. Any new instruments will available to allow all or part of the deferred tax apply IFRS 9. asset to be utilised. Unrecognised deferred tax Derivative financial instruments are measured at assets are reassessed at each balance sheet fair value, which is considered to be the price that date and are recognised to the extent that it

would be received to sell an asset or paid to STRATEGIC REPORT has become probable that future taxable profit transfer a liability in an orderly transaction will allow the deferred tax asset to be reflecting the credit risk of the counterparties in recovered. the principal (or most advantageous) market Deferred tax assets and liabilities are measured at under market conditions as at the balance sheet the tax rates that are expected to apply to the date. period when the asset is realised or the liability is The fair value of forward exchange contracts is settled, based on tax rates (and tax laws) that calculated by reference to current forward have been enacted, or substantively enacted, at exchange rates for contracts with similar the balance sheet date. maturity profiles. The fair value of interest rate Deferred tax is recognised in the income swaps and inflation swaps are determined by statement, except when it relates to items that reference to market values for similar are recognised in other comprehensive income or instruments. directly in equity, in which case the deferred tax Hedging transactions undertaken by the is also recognised in other comprehensive Company are classified as either fair value income or directly in equity. hedges when they hedge the exposure to changes in the fair value of a recognised asset or liability, (K) FOREIGN CURRENCY or cash flow hedges where they hedge exposure to variability in currency cash flows that is either All transactions denominated in foreign attributable to a particular risk associated with a currencies are translated into sterling at the recognised asset or liability or a forecast actual rates of exchange ruling at the date of transaction. GOVERNANCE REPORT transaction. Foreign currency balances are translated into sterling at the rates of exchange In relation to fair value hedges which meet the ruling at the balance sheet date. Exchange gains conditions for hedge accounting, any gain or loss or losses are recognised in the profit and loss from re-measuring the hedging instrument at fair account in the period incurred. value is recognised immediately in the income statement. (L) RESEARCH AND DEVELOPMENT In relation to cash flow hedges to hedge firm currency commitments which meet the Research and development expenditure is conditions for hedge accounting, the portion of charged to the income statement in the period in the gain or loss on the hedging instrument that is which it is incurred. determined to be an effective hedge is recognised directly in the cash flow hedge reserve and the (M) DERIVATIVE FINANCIAL ineffective portion is recognised in the income INSTRUMENTS statement. When the hedged firm commitment results in the The Company utilises interest and inflation rate recognition of a non-financial asset or a non- swaps, gilt locks and forward exchange contracts financial liability then, at the time the asset or as derivative financial instruments. liability is recognised, the associated gains or A derivative instrument is considered to be used losses that had previously been recognised in the for hedging purposes when it alters the risk cash flow hedge reserve are included in the initial profile of an underlying exposure of the Company measurement of the acquisition cost or other in line with the Group’s risk management carrying amount of the asset or liability. For all

policies. Derivative financial instruments are other cash flow hedges, the gains or losses that STATUTORY FINANCIAL STATEMENTS stated at their fair value. are recognised in the cash flow hedge reserve are transferred to the income statement in the same Hedge accounting is employed in respect of those periods in which the hedged firm commitment derivative financial instruments fulfilling the FINANCIAL STATEMENTS 116

1. ACCOUNTING POLICIES (continued) affects the income statement. (P) BORROWING COSTS For derivatives that do not qualify for hedge Borrowing costs are generally expensed as accounting, any gains or losses arising from incurred. Borrowing costs that are directly changes in fair value are taken directly to the attributable to the acquisition or construction of income statement. an asset that necessarily takes a substantial time to prepare for its intended use are capitalised Hedge accounting is discontinued when the while the asset is being constructed as part of the hedging instrument expires or is sold, terminated cost of that asset. or exercised, or no longer qualifies for hedge accounting. At that point in time, any cumulative Capitalisation ceases when the asset is gain or loss on the hedging instrument substantially ready for its intended use or sale. If STRATEGIC REPORT recognised in the cash flow hedge reserve is kept active development is interrupted for an in the cash flow hedge reserve until the forecast extended period, capitalisation is suspended. transaction occurs. If a hedged transaction is no When construction occurs piecemeal, and use of longer expected to occur, the net cumulative gain each part ceases upon substantial completion of or loss recognised in the cash flow hedge reserve that part, a weighted average cost of borrowings is transferred to the income statement. is used.

(N) INTEREST BEARING LOANS AND (Q) SIGNIFICANT ACCOUNTING BORROWINGS JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY All loans and borrowings are initially stated at the amount of the net proceeds, being fair value In the process of applying the accounting of the consideration received net of issue costs policies, the Company is required to make certain associated with the borrowing. Finance costs judgements, estimates and assumptions that it (including issue costs) are taken to the income believes are reasonable based on the information statement over the term of the debt at a constant available. Actual results may have a significant rate on the balance sheet carrying amount. The risk of causing a material adjustment to the carrying amount is increased by the finance carrying amounts of assets and liabilities within charges amortised and reduced by payments the next financial year. made in respect of the accounting period. The The significant accounting judgements were: carrying amount of index linked borrowings increases annually in line with the relevant RPI, • the estimation of income for measured water GOVERNANCE REPORT with the accretion being charged to the income and sewerage services supplied but not billed statement as finance costs payable. Other at the end of the financial period. Consumption borrowing costs are recognised as an expense by measured domestic customers is billed in when incurred. arrears on quarterly or six-monthly cycles. Revenue is estimated and accrued using a Realised gains and losses that occur from the defined methodology based upon historical early termination of loans and borrowings are usage and the relevant tariff per customer. taken to the income statement in that period. Consumption by non-household properties is Net debt is the sum of all loans and borrowings billed to the relevant retailer under the terms of less cash and cash equivalents, short- term cash the Wholesale Contract and may be either in deposits, financial investments and loans advance or in arrears. Revenue billed in arrears receivable. is estimated by reference to wholesale market settlement reports, adjusted for any additional (0) BAD DEBT PROVISIONING information obtained after a settlement report has been run; The bad debt provision is calculated by applying a • the estimation of uncertain tax provisions, range of percentages to debt of different ages. which are assessed on advice from These percentages also vary between different independent tax advisers and the status of categories of debt. Higher percentages are ongoing discussions with the relevant tax applied to those categories of debt which are authorities; and considered to be of greater risk and also to debt of greater age. • the asset lives assigned to property, plant and equipment, details of which can be found in

STATUTORY FINANCIAL STATEMENTS note 1(d) above.

FINANCIAL STATEMENTS 117

The significant accounting estimates were: applying expected recovery rates to debts outstanding at the end of the accounting period. • those assumptions used in arriving at the These recovery rates take into account the age of defined benefit pension scheme assets and the debt, payment history and type of debt. liabilities under IAS 19. These key assumptions and their possible impact are disclosed in note Higher provisioning percentages are applied to 23; and categories of debt which are considered to be of greater risk, including those with a poor payment • the bad debt provision, which is determined by history as well as to those of greater age. Bad debt estimating expected credit losses based on the provisioning rates are reviewed annually to Company’s historical experience of reflect the latest collection performance data irrecoverable debts. Debt is segmented from the Company’s billing system. Actual according to the age of the debt, payment amounts recovered may differ from the estimated

history and type of debt (eg. current or previous STRATEGIC REPORT levels of recovery which could impact on occupier). Higher provisioning percentages are operating results. applied to categories of debt which are considered to be of greater risk, including those A comparison of the provision against historical with a poor payment history as well as to those collection rates is carried out at the end of each of greater age. Bad debt provisioning rates are year. This indicated a slight deterioration in the reviewed annually to reflect the latest longer term recovery of debt. In addition, an collection performance data from the assessment has been made of the potential Company’s billing system. Potential impacts of impact of Covid-19 on the economic forward-looking macro-economic factors on circumstances of our household customers, in collectability are also considered. A reduction relation to outstanding debt at the balance sheet of 0.1% in the long term collection rate would date. This assessment was based on cash flow increase the provision by £5.9m. trends observed after the balance sheet date and third party modelling of the potential economic Consider forward looking macro-economic impacts of Covid-19. Based on this assessment, an factors and conclude on appropriate loss rates additional provision of £6.5m has been made. The Company’s detailed bad and doubtful debts Accordingly, the provision has increased from provision policy has remained unchanged during £85.6m at 31 March 2019 to £104.4m at 31 March the year and has been consistently applied in the 2020. As well as the additional Covid-19 provision current and prior periods. The bad debt provision and adjustment for historical collection rates, this is charged to operating costs to reflect the reflects aging of outstanding debt less debt Company’s assessment of the risk of non written off. recoverability of debtors. It is calculated by GOVERNANCE REPORT STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 118

(R) TRANSITION TO NEW ACCOUNTING STANDARDS IN THE PERIOD

IFRS 16 Leasing Former finance leases The Company adopted IFRS 16 with effect from 1 For leases that were classified as finance leases April 2019 and has applied the standard under IAS 17, the carrying amount of the leased retrospectively with the cumulative effect assets and obligations under finance leases recognised at the date of initial application. Prior measured applying IAS 17 immediately before the years have not been restated. date of initial application has been reclassified to right of use assets and lease liabilities The Company has made use of the practical respectively without any adjustment. expedient available on transition to IFRS 16 not to reassess whether or not a contract is or contains

Impact of initial application of IFRS 16 STRATEGIC REPORT a lease. Accordingly the definition of a lease under IAS 17 will continue to be applied to those The weighted average incremental borrowing rate leases entered into before 1 April 2019. applied to lease liabilities recognised in the Balance Sheet on 1 April 2019 is 2.6%. The Company has applied the definition of a lease as set out in IFRS 16 to all lease contracts entered The table below shows the operating lease into or changed on or after 1 April 2019. commitments disclosed under IAS 17 as at 31 March 2019 discounted using the incremental Former operating leases borrowing rate at the date of initial application and the lease liabilities recognised in the Balance IFRS 16 has changed how NWL accounts for Sheet on 1 April 2019: leases previously classified as operating leases under IAS 17. In applying IFRS 16 to these leases, £’m NWL has: Operating lease commitment at • recognised right of use assets and lease 12.6 31 March 2019 liabilities in the Balance Sheet, initially measured at the present value of future lease Effect of discounting the above amount (9.0) payments, with the right of use asset adjusted by any prepayments or accruals in accordance Lease liabilities recognised at 1 April 2019 3.6 with IFRS 16:C8(b)(ii); and • recognised depreciation of right of use assets The Company has recognised £3.6m as right of and interest of lease liabilities in the Income

use assets in respect of former operating leases. GOVERNANCE REPORT Statement. The Company has used the following practical expedients when applying the cumulative catch up approach to former operating leases: • applied a single discount rate to portfolios of leases with reasonable similar characteristics; and • elected not to recognise right of use assets and lease liabilities to leases for which the lease term ends within 12 months of the date of initial application. STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 119

2. REVENUE AND SEGMENTAL INFORMATION The Directors consider that the Company has a single class of business, the provision of water and wastewater services. All revenue is generated from within the United Kingdom. Appointed business revenue is generated from the regulated activities of the Company, defined in its licence of appointment, necessary to fulfil its duties as a water and sewerage undertaker under the Water Industry Act of 1991. Non-appointed revenue is generated from the non-regulated activities of the Company.

2020 2019

Household Non Household Total Household Non Household Total £’m £’m £’m £’m £’m £’m STRATEGIC REPORT Wholesale Water 346.8 95.43 442.1 339.4 97.2 436.6

Wholesale Wastewater 246.4 78.1 324.5 237.5 79.2 316.7

Retail 59.8 - 59.8 59.6 - 59.6

653.0 173.4 826.4 636.5 176.4 812.9

Other appointed business 30.9 31.2

Total appointed business 857.3 844.1

Non appointed business 43.1 25.0

Total revenue 900.4 869.1

3. OPERATING COSTS 2020 £’m 2019 £’m

Materials and consumables 21.0 19.9

Manpower costs (note 5) 150.1 144.7 GOVERNANCE REPORT Own work capitalised (43.7) (41.0)

Costs of research and development 0.8 0.9

Operating lease payments - 2.4

Bad debt charge 21.7 12.4

Inventories recognised as an expense 2.8 3.4

Other operating costs 246.6 252.5

Depreciation of property, plant and equipment 134.0 129.7

Amortisation of intangible assets 9.3 8.2

Profit on disposal of property, plant and equipment (1.0) (2.8)

Total operating costs 541.6 530.3

Auditor’s remuneration in respect of the statutory audit of the Financial Statements initially accrued amounted to £154k (2019: £219k), including fees for a financing subsidiary, NWF, of £7k (2019: £6k). The prior year costs included fees related to the implementation of new accounting standards and a new customer billing system. Fees of £78k (2019: £61k) were incurred in respect of the APR, including the audit of the Regulatory Accounting Statements, and agreed upon procedures in respect of additional regulatory information, the statement of sufficiency of financial resources and facilities and financial resilience stress testing. STATUTORY FINANCIAL STATEMENTS Fees of £14k (2019: £158k) were incurred for non-audit services comprising provision of assurance on third party contracts. The prior year costs included work in respect of PR19 submissions and some consultancy support. FINANCIAL STATEMENTS 120

4. DIRECTORS’ EMOLUMENTS

(a) Directors’ remuneration (b) Highest paid Director The remuneration of the Directors of the The amounts for remuneration shown in note Company was as follows: 4(a) include the following in respect of the highest paid Director: 2020 2019 £’000 £’000 2020 2019 £’000 £’000 Emoluments 1,482 1,565 (including benefits in kind) Emoluments (including benefits 583 651 in kind)

For those Directors holding office with both NWL STRATEGIC REPORT and NWGL, or contributing significantly to the The highest paid Director left the defined day to day operations of NWGL, costs are contribution section of the NWPS at the apportioned between the companies to reflect the beginning of the year ended 31 March 2017, level of activity carried out for each company. therefore no payments were made to the Scheme This note reflects only the proportion of costs in either the current or prior year. charged to NWL. One of the Directors was a member of a defined benefit section of the Scheme, where the Company makes contributions towards the cost, during the year but stopped being an active member before the year end (2019: 1). One of the Directors at 31 March 2020 was a member of a defined contribution section of the Scheme where the Company makes contributions towards the cost (2019: 1). The Directors’ remuneration policy and a detailed report showing total remuneration for each Director, for the year to 31 March 2020, are set out in the Remuneration Committee Report on pages 88 to 99 of the Governance Report. GOVERNANCE REPORT STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 121

5. EMPLOYEE INFORMATION The total employment costs of all employees (including Directors) were as follows:

2020 £’m 2019 £’m

Gross costs charged to the profit and loss account:

Wages and salaries 82.9 81.9

Social security costs 9.1 8.9

Other pensions costs 20.2 18.7

112.2 109.5 STRATEGIC REPORT

Costs recharged to other Group companies:

Wages and salaries 2.3 2.3

2.3 2.3

Net costs charged to the profit and loss account:

Wages and salaries 80.6 79.6

Social security costs 9.1 8.9

Other pensions costs 20.2 18.7

109.9 107.2

Costs charged to capital schemes:

Wages and salaries 30.3 28.4

Social security costs 3.2 3.1

Other pensions costs 6.7 6.0 GOVERNANCE REPORT 40.2 37.5

Total employee costs 150.1 144.7

The average monthly number of employees during the year was made up as follows:

2020 2019

Water and waste water services 1,295 1,561

Customer services and meter reading 643 569

Other regulated activities 1,081 927

Non regulated activities 89 89

3,108 3,146 STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 122

6. NET FINANCE COSTS

2020 £’m 2019 £’m

Finance costs payable:

Bank overdrafts and loans 11.3 13.0

Receivable in respect of derivatives (4.5) (4.9)

Payable to subsidiary Group company 85.7 85.2

Payable to other Group company 0.1 -

Amortisation of discount, fees, loan issue costs and other financing items 2.1 2.3 STRATEGIC REPORT

Accretion on index linked bonds 25.9 30.2

Interest cost on pension plan obligations 2.3 2.2

Obligations under leases 2.6 3.1

125.5 131.1

Less amounts capitalised on qualifying assets (10.6) (8.5)

114.9 122.6

Fair value losses on derivative financial instruments 0.7 11.5

Total finance costs payable 115.6 134.1

Finance income receivable:

Bank deposits (0.2) (0.3)

Receivable from Group companies (3.0) (2.9)

Total finance costs receivable (3.2) (3.2) GOVERNANCE REPORT

Net finance costs payable 112.4 130.9 STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 123

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

2020 £’m 2019 £’m

Current tax:

UK current income tax charge at 19% (2019: 19%) 26.7 18.4

Adjustments in respect of prior periods (7.5) (4.1)

Payable in respect of group relief for the year 15.2 16.5

Adjustments in respect of prior period group relief 4.5 2.8 STRATEGIC REPORT

Total current tax 38.9 33.6

Deferred tax:

Origination and reversal of temporary differences in the year at 19% 4.7 4.5 (2019: 19%)

Impact of increase in rate of UK corporation tax 51.9 -

Adjustments in respect of prior periods 2.3 1.0

Total deferred tax 58.9 5.5

Tax charge in the income statement 97.8 39.1

The rate of UK corporation tax for the current year was 19%. The reduction to 17% with effect from 1 April 2020 included in Finance Act 2016 has been cancelled. Accordingly, deferred tax has been restated from 17% to 19% and all movements have been calculated at the higher rate. Tax losses have been provisionally claimed as group relief from other group companies in the current year, for which payment is being made at the full rate of tax. GOVERNANCE REPORT Net prior year adjustments mainly reflect a revision to the estimate for corporate interest restrictions and the benefit of improved capital allowances claims (including R&D).

(b) Tax relating to items charged outside the income statement

2020 £’m 2019 £’m

Deferred tax:

Actuarial gains / (losses) on pension scheme 3.2 (3.5)

Impact of increase in rate of UK corporation tax (3.7) -

Financial instruments (0.2) 0.4

Impact of increase in rate of UK corporation tax (0.2) -

Tax credit in the statement of comprehensive income (0.9) (3.1) STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 124

7. TAXATION (continued) (c) Reconciliation of the tax charge

2020 £’m 2019 £’m

Profit on ordinary activities before tax 246.4 207.9

Profit on ordinary activities multiplied by standard rate of corporation tax of 19% (2019: 19%) 46.8 39.5

Effects of:

Expenses not deductible for tax purposes 0.2 1.1

Non-taxable gains and amortisation of capital sums (1.5) (1.9) STRATEGIC REPORT Depreciation in respect of non-qualifying items 1.2 1.2

Impact on deferred tax of change in current tax rate 51.9 -

Deferred tax movement not at current tax rate for the year - (0.5)

Adjustments in respect of prior periods (0.8) (0.3)

Transfer pricing adjustments (0.8) (0.8)

Balancing payment payable 0.8 0.8

Total tax charge 97.8 39.1

The effective rate of tax for the year was 39.7% (2019: 18.8%). The increase of 20.9% is mainly explained by the restatement of deferred tax from 17% to 19%.

(d) Deferred tax

ACCELERATED RETIREMENT FAIR VALUE TAX DEFERRED BENEFIT HEDGING BUSINESS DEPRECIATION INCOME OBLIGATIONS INSTRUMENTS COMBINATIONS OTHER TOTAL

£’m £’m £’m £’m £’m £’m £’m GOVERNANCE REPORT

At 1 April 2018 462.2 (57.3) (17.3) (5.5) 5.4 7.1 394.6

Adoption of IFRS 15 - 12.0 - - - - 12.0

Charge/(credit) in the 7.1 (2.8) 2.2 (2.1) (0.1) 1.2 5.5 income statement

Charge/(credit) in other comprehensive - - (3.5) 0.4 - - (3.1) income

At 31 March 2019 469.3 (48.1) (18.6) (7.2) 5.3 8.3 409.0

Charge/(credit) in the 64.6 (9.6) 2.9 (0.7) 0.5 1.2 58.9 income statement

Credit in other comprehensive - - (0.5) (0.4) - - (0.9) income

At 31 March 2020 533.9 (57.7) (16.2) (8.3) 5.8 9.5 467.0

(e) Factors that may affect future tax charges STATUTORY FINANCIAL STATEMENTS The Company expects to continue to incur high levels of capital expenditure during the 2020-25 regulatory review period which, under current tax legislation, should result in claims for tax reliefs in excess of depreciation. FINANCIAL STATEMENTS 125

8. DIVIDENDS

2020 £’m 2019 £’m

Equity:

Dividends paid:

Final dividend paid for the year ended 31 March 2019 of 53.00p (year ended 31 March 2018: 53.00p) per share on an 65.0 65.0 aggregated basis

Interim dividend paid for the year ended 31 March 2020 of nil (year ended 31 March 2019: 53.00p) per share on an - 65.0

aggregated basis STRATEGIC REPORT

Total dividends paid in the year 65.0 130.0

Dividends proposed:

Final dividend proposed for the year ended 31 March 2020 of nil (year ended 31 March 2019: 53.00p) per share on an - 65.0 aggregated basis

Total dividends proposed - 65.0

Dividend Policy Application of Policy The Board has a policy which takes into account The Company typically pays an interim dividend the principle of incentive based price cap during the year and a final dividend after the year regulation, including operating and investment end, once the Directors have reviewed the performance. When declaring dividends, the financial position of the Company at the balance Directors consider the Company’s five-year plan sheet date. and give due consideration to business In April 2019, the Board approved the payment of performance, the prospects of the Company and a final dividend in respect of the year 2018/19. In the principal risks facing the business. reaching this decision, the Board took account of Specifically, the Board determines the level of the Company’s financial position at 31 March dividend declared by reference to: 2019, cumulative financial performance in AMP6 GOVERNANCE REPORT and Medium Term Plan projections, which • the Company’s ability to finance its functions; remained compatible with investment grade • the Company’s cumulative financial credit ratings. The Board also took into account performance and past outperformance; and the principal risks facing the business; good • maintaining the Company’s investment grade performance against most performance credit ratings. commitments with no significant service failures to customers; positive ongoing employee The Directors also have regard to: engagement and payments made under the • the Company’s operational performance and schedule of contributions for the NWPS. the level of service provided to its customers; No dividends have been proposed, approved or and paid in respect of the year ended 31 March 2020. • employees’ interests and, specifically, In deciding this, the Board has taken into account compliance with the pension deficit repair plan the impact of the PR19 FD on the financial agreed with the Pension Trustee in respect of position of the Company over a five year time the NWPS, as submitted to the Pensions horizon, especially in relation to the Company’s Regulator. credit ratings and regulatory gearing; the need to retain financial resilience in order to be able to deliver the Company’s Business Plan commitments for stakeholders; and the uncertainty associated with the impacts of the Covid-19 pandemic on the Company’s future cash flows.

STATUTORY FINANCIAL STATEMENTS

FINANCIAL STATEMENTS 126

9. INTANGIBLE ASSETS

ASSETS IN SOFTWARE DEVELOPMENT TOTAL £’m £’m £’m

Cost:

At 1 April 2019 97.4 29.7 127.1

Additions - 23.9 23.9

Transfers 33.2 (31.9) 1.3

At 31 March 2020 130.6 21.7 152.3

Amortisation: STRATEGIC REPORT

At 1 April 2019 52.4 - 52.4

Charge for the year 9.3 - 9.3

At 31 March 2020 61.7 - 61.7

Carrying value:

At 31 March 2020 68.9 21.7 90.6

At 31 March 2019 45.0 29.7 74.7

Cumulative borrowing costs capitalised in the cost of intangible assets amount to £5.2m (2019: £4.0m). The capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation was 4.43% (2019: 4.30%). GOVERNANCE REPORT STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 127

10. PROPERTY, PLANT AND EQUIPMENT

OPERATIONAL FIXTURES, FREEHOLD STRUCTURES, FITTINGS, ASSETS IN THE LAND AND INFRASTRUCTURE PLANT AND TOOLS AND COURSE OF BUILDINGS ASSETS MACHINERY EQUIPMENT CONSTRUCTION TOTAL £’m £’m £’m £’m £’m £’m

Cost:

At 1 April 2019 158.0 2,877.7 3,044.5 223.4 223.3 6,526.9

Additions 3.6 13.2 0.3 - 239.4 256.5

Schemes STRATEGIC REPORT 2.4 81.7 125.7 6.7 (216.5) - commissioned

Reclassifications - - (2.1) 0.8 - (1.3)

Disposals - (3.3) (2.4) - - (5.7)

At 31 March 164.0 2,969.3 3,166.0 230.9 246.2 6,776.4 2020

Depreciation:

At 1 April 2019 63.3 407.8 1,416.0 187.5 - 2,074.6

Charge for the 4.0 28.9 93.5 7.6 - 134.0 year

Disposals - (3.3) (2.3) - - (5.6)

At 31 March 67.3 433.4 1,507.2 195.1 - 2,203.0 2020

Carrying value: GOVERNANCE REPORT

At 31 March 2020 96.7 2,535.9 1,658.8 35.8 246.2 4,573.4

At 31 March 2019 94.7 2,469.9 1,628.5 35.9 223.3 4,452.3

Right of Use Assets included above:

Additions in 3.6 - - - - 3.6 the year

Depreciation charge for the 0.4 0.5 0.7 - - 1.6 year

Carrying value at 3.2 43.3 10.6 - - 57.1 31 March 2020

Carrying value at - 43.8 11.3 - - 55.1 31 March 2019

Operational structures, plant and machinery include an element of land dedicated to those assets. It is not possible to separately identify the value of all land assets. Cumulative borrowing costs capitalised in the cost of property, plant and equipment amount to £55.5m (2019: £46.1m). The capitalisation rate used to determine the amount of borrowing costs STATUTORY FINANCIAL STATEMENTS eligible for capitalisation was 4.43% (2019: 4.30%). FINANCIAL STATEMENTS 128

11. FINANCIAL INVESTMENTS

LOANS TO GROUP COMPANIES £’m

At 1 April 2019 and 31 March 2020 160.9

(a) Loans to Group Companies In May 2004, the Company made a loan of In May 2004, the Company made a loan of £1.5m £159.0m to Northumbrian Services Limited, to Bakethin Holdings Limited, maturing in maturing in January 2034. Following a January 2034. The interest on the loan is restructuring of the NWGL group, this loan was capitalised and at 31 March 2020 the balance was reassigned to NWGL in March 2016 at a variable £1.9m (2019: £1.9m). interest rate of LIBOR plus 1% calculated on twice STRATEGIC REPORT yearly payment dates. The Boards of NWL and NWGL have agreed to settle this loan before its maturity date. It is currently envisaged that this legacy intercompany loan arrangement will be settled in 2020.

(b) Subsidiaries The Company’s interests in subsidiaries at 31 March 2020 were as follows:

COUNTRY OF PROPORTION OF INCORPORATION OR NOMINAL VALUE OF REGISTRATION AND DESCRIPTION OF ISSUED SHARES HELD NAME OF UNDERTAKING OPERATION SHARES HELD BY COMPANY (%) BUSINESS ACTIVITY

Northumbrian Water Ordinary shares Holding of finance England and Wales 100 Finance plc of £1 instruments

Ordinary shares Special purpose Reiver Finance Limited England and Wales 100 of £1 financing vehicle

Ordinary shares GOVERNANCE REPORT Reiver Holdings Limited England and Wales 100 Holding company of £1

The registered office of all subsidiaries listed Holdings Limited. The principal activity of above is Northumbria House, Abbey Road, Pity Bakethin Finance Plc is as a special purpose Me, Durham DH1 5FJ. Holdings are direct other financing vehicle. than Reiver Finance Limited which is indirect. The registered office of the two quasi-subsidiaries The Company also has two quasi-subsidiary is c/o Wilmington Trust SP Services (London) special purpose entities, Bakethin Holdings Limited, Third Floor, 1 King’s Arms Yard, London, Limited, which is wholly owned by Bakethin United Kingdom, EC2R 7AF. Charitable Trust, and Bakethin Finance Plc, which is a wholly owned subsidiary of Bakethin STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 129

12. INVENTORIES

2020 £’m 2019 £’m

Raw materials and consumables 4.2 3.6

13. TRADE AND OTHER RECEIVABLES

2020 £’m 2019 £’m

Trade receivables 205.2 170.2 STRATEGIC REPORT

Doubtful debt provision (104.4) (85.6)

Income tax recoverable 11.2 -

Amounts owed by other Group companies 2.9 2.9

Other receivables 15.7 5.7

Prepayments and accrued income 113.8 89.7

244.4 182.9

Amounts owed by other Group companies includes interest of £0.1m (2019: £0.2m) in respect of the financial investment of £159.0m in note 11(a). This loan has a variable interest rate of LIBOR plus 1% calculated on twice yearly payment dates and matures in January 2034. The remaining amounts owed by other Group companies include £2.4m due from NWG and £0.4m due from fellow subsidiary companies, which are due on demand with no fixed repayment date and bear no interest.

14. TRADE AND OTHER PAYABLES

2020 £’m 2019 £’m GOVERNANCE REPORT Trade payables 29.1 26.1

Amounts owed to other Group companies 7.4 11.4

Taxation and social security 3.1 3.5

Income tax payable - 7.1

Other payables 33.5 34.2

Accruals and deferred income 96.9 95.4

170.0 177.7

Included in amounts owed to other Group companies is £5.9m (2019: £9.7m) payable in respect of tax losses surrendered to the Company. The remaining amount of £1.5m is owed to NWG and is due on demand with no fixed repayment date and bears no interest. STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 130

15. LOANS AND BORROWINGS

NOTE 2020 £’m 2019 £’m

Current:

Bank overdrafts - 0.5

Current instalments due on external borrowings 15(a) 36.9 46.7

Current instalments due on leases 16 4.4 4.0

41.3 51.2 STRATEGIC REPORT Non-current:

Non-current instalments due on external borrowings 15(a) 501.9 530.4

Non-current instalments due on internal borrowings 15(b) 2,355.5 2,237.0

Non-current instalments due on leases 16 58.6 56.9

2,916.0 2,824.3

(a) External borrowings NWF issued £60m Guaranteed Index Linked Loans wholly repayable within five years amount to Eurobonds in January 2006, maturing January 2041, £18.6m (2019: £38.6m). with a real coupon of 1.6274%. The issue was guaranteed by the Company who received the issue Loans not wholly repayable within five years amount proceeds by way of an inter-company loan of to £520.2m (2019: £538.5m) and bear interest rates in £60.0m. Indexation accretion during the year the range 1.47% to 5.35%. amounted to £2.4m (2019: £2.7m). The fair value loss on the Company’s outstanding NWF issued two £100m Guaranteed Index Linked interest rate and RPI swaps in the year to 31 March Eurobonds in June 2006 with real coupons of 2020 was £2.9m (2019: loss of £12.6m) in relation to 1.7118% and 1.7484% and with maturities of 2049 and interest rate swaps with a notional principal of 2053 respectively. Both issues were guaranteed by £350.0m (2019: £350.0m). the Company who received the issue proceeds by way of two inter-company loans of £100.0m. GOVERNANCE REPORT (b) Internal borrowings Indexation accretion during the year amounted to NWF issued £200m and £150m Guaranteed £8.1m (2019: £9.1m). Eurobonds in February 1998 and September 2001 respectively, maturing February 2023, with an annual NWF issued £360m Guaranteed Eurobonds in coupon of 6.875%. The issues were guaranteed by the January 2012, maturing January 2042, with an Company who received the issue proceeds by way of annual coupon of 5.125%. The issue was guaranteed inter-company loans of £194.2m and £163.2m by the Company who received the issue proceeds respectively. Finance costs allocated during the year by way of an inter-company loan of £339.3m. amounted to £0.2m (2019: £0.2m). Amortisation of Finance costs allocated during the year amounted loan issue receipts during the year amounted to to £0.7m (2019: £0.7m). £0.3m (2019: £0.3m). NWF issued £300m Guaranteed Eurobonds in NWF issued £250m and £100m Guaranteed October 2016, maturing October 2026, with an Eurobonds in December 2002 and December 2004, annual coupon of 1.625%. The issue was guaranteed maturing April 2033 with an annual coupon of 5.625%. by the Company who received the issue proceeds Both issues were guaranteed by the Company who by way of an inter-company loan of £297.6m. received the issue proceeds by way of inter-company Finance costs allocated during the year amounted loans of £246.6m and £100.8m respectively. Finance to £0.2m (2019: £0.2m). costs allocated during the year amounted to £0.2m NWF issued £300m Guaranteed Eurobonds in (2019: £0.2m). October 2017, maturing October 2027, with an NWF issued £150m Guaranteed Index Linked annual coupon of 2.375%. The issue was guaranteed Eurobonds in September 2005, maturing July 2036, by the Company who received the issue proceeds with a real coupon of 2.033%. The issue was by way of an inter-company loan of £298.2m. guaranteed by the Company who received the issue Finance costs allocated during the year amounted STATUTORY FINANCIAL STATEMENTS proceeds by way of an inter-company loan of £149.1m. to £0.3m (2019: £0.3m). Indexation accretion during the year amounted to £6.2m (2019: £7.0m). Finance costs allocated during the year amounted to £0.2m (2019: £0.2m) FINANCIAL STATEMENTS 131

15. LOANS AND BORROWINGS (continued) NWF issued £100m Guaranteed Index Linked Private Placement notes in October 2019 with a coupon of CPI plus 0.242%, maturing October 2039. The issue was guaranteed by the Company who received the issue proceeds by way of an inter-company loan of £99.6m. Indexation accretion during the year amounted to £0.5m.

16. LEASES

(a) Lease obligations under IFRS 16 years, at which point there may be an increase in At 1 April 2019, the Company adopted IFRS 16 and rental payments. There are no purchase options has applied the standard retrospectively with the or escalation clauses in respect of these leases STRATEGIC REPORT cumulative effect recognised at the date of initial and the terms of renewal are governed by application (note 1(r)). Prior years have not been Landlord and Tenant legislation. There are no restated. restrictions imposed by these lease arrangements. There are no contingent rents, The Company holds leases in respect of land and escalation clauses or material renewal or buildings, and to acquire plant, machinery and purchase options. The leases impose no motor vehicles. restrictions in respect of dividends or raising Land and building rent reviews are triggered by additional debt. The obligations are as follows: the lessor and typically take place every 3 to 5

MATURITY ANALYSIS: 2020 £’m

Year 1 4.4

Year 2 3.7

Year 3 3.0

Year 4 2.2

Year 5 1.5

Onwards 48.2 GOVERNANCE REPORT

63.0 STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 132

16. LEASES (continued)

(b) Finance lease and operating lease commitments under IAS 17 Leases previously classified as finance leases under IAS 17:

2019 £’m

Future minimum lease payments due:

Within one year 6.0

In the second to fifth years inclusive 18.9

After five years 70.9 STRATEGIC REPORT

95.8

Less:

Finance charge allocated to future periods (34.9)

Present value of minimum lease payments 60.9

Present value of minimum lease payments:

Within one year 4.0

In the second to fifth years inclusive 10.6

After five years 46.3

60.9

Leases previously classified as operating leases under IAS 17:

The future minimum rentals payable under non-cancellable operating leases:

2019 £’m GOVERNANCE REPORT

Not later than one year 0.5

After one year but not more than five years 1.0

After five years 11.1

12.6 STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 133

17. PROVISIONS

£’m

Pension provision for former employees:

At 1 April 2019 1.1

Utilised during the year (0.1)

At 31 March 2020 1.0

Analysed as: STRATEGIC REPORT Current 0.1

Non-current 0.9

1.0

The provision mainly represents outstanding It is not currently possible to estimate the pension liabilities for pensions that have been financial effect and likely timing of any awarded on a discretionary basis, mainly to associated outflow of some matters, given that former employees of water companies which some are in early stages of discussion, the limited have since merged with the Company. These likelihood of the claims against the Company pension liabilities have been calculated by an being successful, or the potential range of independent actuary, using the same actuarial possible outcomes, and accordingly no provision assumptions as applied to the defined benefit has been made in the Financial Statements. No pension scheme, and are expected to be paid reasonably possible financial outcome that would over the remaining lives, which is approximately be significant to the Financial Statements has three years. been identified in relation to these remaining matters at the date of the issue of these Financial In the ordinary course of business, the Company Statements. is sometimes subject to claims and potential litigation, whether from regulatory bodies, individuals or particular groups, related to one off GOVERNANCE REPORT matters. The Directors consider that, where it is possible to be estimated, a reasonable and appropriate position has been taken in reflecting such items in these financial statements in note 14 and the note above.

18. GRANTS AND DEFERRED INCOME

CAPITAL GRANTS AND PROCEEDS FROM KIELDER CONTRIBUTIONS SECURITISATION TOTAL £’m £’m £’m At 1 April 2019 383.6 106.7 490.3

Additions 28.4 - 28.4

Amortised during the year (5.5) (7.1) (12.6)

At 31 March 2020 406.5 99.6 506.1

The Kielder securitisation involved the assignment of the right to the future income stream associated with the Kielder WROA until 2034 to Reiver Finance Limited, a subsidiary company, in return for consideration of £212.1m. This capital sum is amortised to the income statement of the Company over STATUTORY FINANCIAL STATEMENTS the life of the assignment. FINANCIAL STATEMENTS 134

19. FINANCIAL INSTRUMENTS

2020 £’m 2019 £’m

Financial liabilities / (assets) that are designated and effective as hedging instruments carried at fair value:

Interest rate swaps 13.2 10.9

Power forward contracts - 1.3

Foreign exchange contracts (0.1) (0.3)

Financial liabilities / (assets) carried at fair value through profitand loss:

Interest rate swaps 31.0 30.4 STRATEGIC REPORT

Power forward contracts - (0.1)

44.1 42.2

At 31 March 2020, the Company held the following interest rate swaps, designated as hedges of future interest cash flows, used to convert variable rate interest payments to a fixed rate basis:

NOTIONAL AMOUNT START DATE TERMINATION DATE INDEX LINKED RATE

£100.0m 15 September 2008 15 March 2022 4.79%

£150.0m 15 October 2015 15 October 2025 2.36%

At 31 March 2020, the Company held the following interest rate swaps, designated as hedges of future interest cash flows, used to convert fixed rate interest payments to an index linked rate basis:

NOTIONAL AMOUNT START DATE TERMINATION DATE INDEX LINKED RATE

£150.0m 15 October 2015 15 October 2025 (0.42%)

£100.0m 22 June 2017 22 June 2027 (1.10%) GOVERNANCE REPORT At 31 March 2020, the Company held the following forward exchange contracts, designated as hedges of expected future purchases for which the Company has firm commitments. The forward currency contracts are being used to hedge the foreign currency risk of the firm commitments. The terms of these contracts are as follows:

CURRENCY BOUGHT MATURITY EXCHANGE RATE TRANSACTION VALUE £’m

EUR 2,980 9 April 2020 1.0932 -

USD 1,245,000 17 April 2020 1.2620 1.0

USD 1,240,404 30 April 2020 1.4293 0.8

1.8 STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 135

19. FINANCIAL INSTRUMENTS (continued) At 31 March 2019, the Company held the following forward exchange contracts, designated as hedges of expected future purchases for which the Company has firm commitments. The forward currency contracts are being used to hedge the foreign currency risk of the firm commitments. The terms of these contracts are as follows:

CURRENCY BOUGHT MATURITY EXCHANGE RATE TRANSACTION VALUE £’m

USD 1,245,000 4 April 2019 1.4550 0.9

USD 1,112,000 31 May 2019 1.2645 0.9

USD 1,245,000 13 March 2020 1.4600 0.8 STRATEGIC REPORT USD 1,240,404 30 April 2019 1.4069 0.9

USD 1,240,404 30 April 2020 1.4293 0.8

4.3

20. SHARE CAPITAL

2020 £’m 2019 £’m

Authorised:

122,650,000 Ordinary Shares of £1 each (31 March 2019: 122.7 122.7 122,650,000)

Allotted, called-up and fully paid:

122,650,000 Ordinary Shares of £1 each (31 March 2019: 122.7 122.7 122,650,000)

NWL is a company limited by shares. GOVERNANCE REPORT STATUTORY FINANCIAL STATEMENTS Analysis of net debtasat31March 2020 21. ADDITIONALCASHFLOWINFORMATION risk of committed future purchases. for the purpose of hedging the foreign currency foreign exchange contracts of£1.8m (2019:£4.3m) At 31 March 2020the Company held forward (b) Foreign currency commitments of the business. for new demand and growth inthe regulated part maintain the health of the assetbaseand provide investment to deliver business outcomes, has longer termexpenditure plans, including In addition to these commitments, the Company (a) Capitalcommitments Analysis of net debtasat31March 2019

22. FINANCIALCOMMITMENTS Leases Loans payable Short termcashdeposits Loans receivable Cash andcashequivalents and equipmentintangibleassets Contractual commitmentsfortheacquisitionofproperty,plant Finance leases Loans payable Short termcashdeposits Loans receivable Cash andcashequivalents NOTE NOTE 16(b) 16(a) 15 11 15 11 AT 1 APRIL AT 1APRIL AT 1 APRIL AT 1APRIL (2,709.6) (2,614.5) (2,814.1) (2,810.1) disclosures are necessary. scope of IFRS9and therefore no further purchase agreement contract is not within the use exception’ applies, meaning thatthe power CPI. The Company hasconcluded thatthe ‘own fixed commodity price, increasing annually by demand. The agreement is for a10year term ata meet around 25%of the Company’s energy energy from anoffshore wind farm which will agreement with Ørsted, to purchase renewable In 2018/19the Company signed apower purchase (c) Power purchase agreement 160.9 160.9 (60.9) (59.5) 2019 2018 92.0 (0.5) £’m £’m 5.0 2.2

CASH FLOW CASH FLOW (21.9) (58.8) (53.4) (87.0) 22.0 27.5 (2.7) £’m £’m 2020 £’m 4.3 5.2 3.4 - -

120.2 MOVEMENTS MOVEMENTS MOVEMENTS MOVEMENTS NON-CASH NON-CASH NON-CASH NON-CASH STRATEGIC REPORT 136 OTHER OTHER OTHER OTHER (33.2) (36.3) (26.8) (31.5) (6.4) (4.8) £’m £’m ------31 MARCH 31 MARCH 31 MARCH 31 MARCH 2019 £’m (2,764.7) (2,709.6) (2,894.3) (2,814.1) 160.9 160.9 (63.0) 145.3 (60.9) 2020 2019 27.0 (0.5) £’m £’m AT AT AT AT 4.7 5.0

STATUTORY FINANCIAL STATEMENTS GOVERNANCE REPORT STRATEGIC REPORT FINANCIAL STATEMENTS 137

23. PENSIONS NWL participates in the Group defined benefit Employers’ contributions (including associated pension scheme, NWPS, providing benefits to 1,117 company contributions) of £30.0m were paid in active members at 31 March 2020 (2019: 1,200). the year to 31 March 2020, of which £12.2m related The assets of the NWPS are held separately from to deficit reduction. For the year to 31 March 2021 those of the Group in independently administered employers contributions are projected to be funds. £29.9m, including £12.5m in respect of deficit reduction. The most recent actuarial valuation of the NWPS was at 31 December 2016. At that date, the value of Since 1 June 2019, the Company has participated assets amounted to £954.6m and the liabilities in the LifeSight master trust, a defined were £1,245.2m, resulting in a deficit of £290.6m contribution pension arrangement for non-

and a funding level of 76.7%. The next actuarial associated employers. Prior to 1 June 2019, the STRATEGIC REPORT valuation has commenced and will be dated as at Company contributed to the defined contribution 31 December 2019. section of the NWPS. Defined contribution members and assets were transferred from the Under the revised schedule of contributions the NWPS to LifeSight during 2019. There were 1,989 future service contribution rate, jointly payable by active members in defined contribution pension members and the employers, remained at 29.4% arrangements at 31 March 2020 (2019: 1,957). of pensionable salaries until 31 December 2017. Members can choose to contribute either 3%, 4% With effect from 1 January 2018, the employers’ or 5% of salary, with employers contributing at contribution was set at £12.3m per annum, either 6%, 7% or 8% depending on the member increasing annually by RPI. Employee contribution rate. The contributions paid to contribution rates remained at between 6% and defined contribution pension arrangements by 8% of pensionable salary, dependent upon which the Company in the year totalled £6.7m (2019: section of the Scheme the employee is a member £6.0m). of. The Company operates a salary sacrifice scheme under which members can elect for the The additional disclosures regarding the defined Company to pay employee contributions on their benefit scheme as required under FRS 101 and the behalf in place of salary. The Company will relevant impact on the Financial Statements are continue to pay the employer NI savings resulting set out below. A qualified actuary, using revised from the salary sacrifice arrangement as assumptions that are consistent with the additional employer contributions to the Scheme. requirements of FRS 101 has updated the actuarial valuation described above as at 31 March 2020. In addition, the employers continue to make Investments have been valued, for this purpose, at deficit reduction payments of £11m per annum, GOVERNANCE REPORT fair value. with effect from 1 April 2015, increasing annually by RPI. Deficit reduction payments will increase by £2.6m per annum with effect from 1 April 2021. The deficit reduction payments have been set with the objective of removing the deficit by 31 March 2031, which has been the Company’s long-term aim. STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 138

23. PENSIONS (continued)

FRS 101 ACTUARIAL ASSUMPTIONS: 2020 2019

Discount rate 2.35% 2.40%

Pay increases1 3.00% 3.15%

Price inflation (RPI) 2.50% 3.15%

Price inflation (CPI) 2.00% 2.05%

Pension increases linked to RPI 2.50% 3.15%

Pension increases linked to CPI 2.00% 2.05% STRATEGIC REPORT

Mortality assumptions2

- Life expectancy for a member aged 65 - female (years) 24.2 23.8

- Life expectancy for a member aged 65 - male (years) 22.4 22.0

1. including promotional salary scale 2. scheme specific bespoke ‘Vitacurves’ which reflect the characteristics of the Scheme membership

The fair value of the assets in the NWPS and the present value of the liabilities in the Scheme are shown below:

2020 £’m 2019 £’m

Equities 218.4 293.1

Corporate bonds 100.0 47.0

Government bonds 483.6 466.5

Property related funds 47.8 56.6

Cash 19.5 15.4 GOVERNANCE REPORT

Other 151.3 152.2

Total fair value of assets 1,020.6 1,030.8

Present value of liabilities (1,104.7) (1,139.3)

Deficit (84.1) (108.5)

The amounts recognised in the income statement and in the statement of comprehensive income are analysed as follows:

RECOGNISED IN THE INCOME STATEMENT: 2020 £’m 2019 £’m

Current service cost 16.4 15.6

Administration cost 2.3 1.9

Past service cost 1.5 1.2

Recognised in operating costs in arriving at operating profit 20.2 18.7

RECOGNISED IN THE INCOME STATEMENT: 2020 £’m 2019 £’m STATUTORY FINANCIAL STATEMENTS Net interest cost on plan obligations 2.3 2.2

Recognised in finance costs 2.3 2.2 FINANCIAL STATEMENTS 139

23. PENSIONS (continued)

RECOGNISED IN THE STATEMENT OF COMPREHENSIVE INCOME: 2020 £’m 2019 £’m

Changes in demographic assumptions _ 21.5

Changes in financial assumptions 26.2 (81.4)

Return on assets (excluding amounts included in finance costs) (12.9) 40.0

Other actuarial gains / (losses) 3.6 (0.9)

Net actuarial gains / (losses) 16.9 (20.8)

Contributions made by associated company 0.1 0.2 STRATEGIC REPORT

Net actuarial gains / (losses) 17.0 (20.6)

Changes in the present value of the defined pension obligations are analysed as follows:

2020 £’m 2019 £’m

At start of period 1,139.3 1,083.6

Current service cost 16.4 15.6

Administration cost 2.3 1.9

Past service cost 1.5 1.2

Interest cost 26.8 28.1

Contributions by plan participants 0.1 0.1

Benefits paid (51.9) (52.0)

Remeasurement:

Changes in demographic assumptions _ (21.5) GOVERNANCE REPORT

Changes in financial assumptions (26.2) 81.4

Other actuarial (gains) / losses (3.6) 0.9

At end of period 1,104.7 1,139.3

Changes in the fair value of plan assets are analysed as follows:

2020 £’m 2019 £’m

At start of period 1,030.8 989.3

Interest income on scheme assets 24.5 25.9

Contributions by employers (including associated company) 30.0 27.5

Contributions by plan participants 0.1 0.1

Benefits paid (51.9) (52.0)

Return on assets (excluding amounts included in finance costs) (12.9) 40.0

At end of period 1,020.6 1,030.8 STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 140

23. PENSIONS (continued)

Nature of benefits, regulatory framework and with the Company, is to invest the majority of the other entity’s responsibilities for governance of Scheme’s assets in a mix of equities and the Scheme corporate and government bonds, in order to The Scheme is a registered defined benefit strike a balance between: scheme subject to the UK regulatory framework • maximising the returns on the Scheme’s assets; for pensions, including the scheme specific and funding requirements. The Scheme is operated under trust and as such, the Trustee of the • minimising the risks associated with lower Scheme is responsible for operating the Scheme than expected returns on the Scheme’s assets. and it has a statutory responsibility to act in The Trustee is required to regularly review its accordance with the Scheme’s Trust Deed and investment strategy in light of the revised term STRATEGIC REPORT Rules, in the best interest of the beneficiaries of and nature of the Scheme’s liabilities. During the the Scheme, and UK legislation (including Trust year, the Trustee chose to de-risk part of its law). The Trustee has the power to set the equity allocation. contributions that are paid to the Scheme. Sensitivity to key assumptions Risks to which the Scheme exposes the Company The costs of a pension arrangement require The nature of the Scheme exposes the Company estimates regarding future experience. The to the risk of paying unanticipated additional financial assumptions used for FRS 101 reporting contributions to the Scheme in times of adverse are the responsibility of the Directors of the experience. The most financially significant risks Company. These assumptions reflect market are likely to be: conditions at the balance sheet date. Changes in • members living for longer than expected; market conditions which result in changes in the net discount rate (essentially the difference • higher than expected actual inflation and between the discount rate and the assumed rates salary increase experience; of increases of salaries, deferred pension • lower than expected investment returns; and revaluation or pensions in payment), can have a significant effect on the value of the liabilities • the risk that movements in the value of the reported. Scheme’s liabilities are not met by corresponding movements in the value of the There has been no change in the methodology Scheme’s assets. used to assess the impact of changes in

assumptions. Approximate adjustments were GOVERNANCE REPORT Asset-liability matching strategies used by the made to the defined benefit obligations reflecting Scheme or the Company the mean term of the liability. The Scheme does not currently use any asset- liability matching strategies. The Trustee’s current investment strategy, having consulted

Impact of changes in assumptions compared with actuarial assumption for the NWPS:

Actuarial value of liabilities on 31 March 2020:

£’m

0.25% reduction in discount rate 1,155.5

0.25% increase in inflation 1,151.4

1 year increase in life expectancy 1,143.4

Maturity profile of the defined benefit obligation for the year ended 31 March 2020:

NUMBER OF MEMBERS LIABILITY SPLIT (%) DURATION (YEARS)

Active members 1,404 41 24 STATUTORY FINANCIAL STATEMENTS Deferred members 1,193 14 21

Pensioners 3,163 45 12 FINANCIAL STATEMENTS 141

24. RELATED PARTY DISCLOSURES 25. ULTIMATE PARENT UNDERTAKING AND CONTROLLING The Company is a wholly owned subsidiary of NWGL, whose publicly available consolidated PARTY Financial Statements include the Company. The Company’s immediate parent undertaking is Accordingly, the Company is exempt under the NWGL, which is incorporated in England terms of FRS101 from disclosing transactions and Wales. with other members of the Group headed by NWGL. The Company has been informed by the former ultimate parent and controlling party, CKHH Transactions with related parties outside of the (incorporated in the Cayman Islands) that by NWGL group comprised purchases of £13.7m virtue of contractual arrangements entered into (2019: £11.4m) and sales of £150.3m (2019: £158.1m). with other parties, with effect from 30 December

As at 31 March 2020 £17.9m (2019: £26.8m) is 2019, it ceased to have a controlling interest in STRATEGIC REPORT owed from these companies in respect of sales or the Company and, as required by the applicable rebates, and £nil (2019: £0.2m) is owed to these accounting standards, it has ceased accounting companies in respect of purchases. for the Company as a subsidiary from that date. The Company acquires vehicles from Vehicle The results of the Company prior to 30 December Lease and Service Limited, an associated 2019 are consolidated in the financial statements company, on a lease basis. During the year, new of CKHH. The Directors of the Company consider leases of £3.3m (2019: £4.8m) were entered into that CKHH was the ultimate parent and and capital repayments of £3.7m (2019: £3.4m) controlling party of the Company prior to 30 were made. The year end lease creditor was December 2019. £11.6m (2019: £12.0m). The Directors of the Company consider that, with The companies with which NWL had effect from 30 December 2019, NWGL has become transactions during the year, included in the the ultimate controlling party of the Company. above balances, were as follows: The parent undertaking of both the largest and • Anglian Water Business (National) Limited; smallest group of undertakings for which group • CKI; Financial Statements are drawn up, and of which the reporting company is a member, is NWGL. • Eastern Power Networks; Copies of NWGL’s group Financial Statements will • Hutchison Whampoa (Europe) Limited; be available in due course from its registered office at Northumbria House, Abbey Road, Pity • NGN;

Me, Durham DH1 5FJ. GOVERNANCE REPORT • NWG Business; • UK Power Networks (Operations) Limited; and • Vehicle Lease and Service Limited. STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 142 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF NORTHUMBRIAN WATER LIMITED

REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS STRATEGIC REPORT

OPINION The financial reporting framework that has been In our opinion the Financial Statements of NWL: applied in their preparation is applicable law and United Kingdom Accounting Standards including • give a true and fair view of the state of the FRS 101 “Reduced Disclosure Framework” (United company’s affairs as at 31 March 2020 and of its Kingdom Generally Accepted Accounting profit for the year then ended; Practice). • have been properly prepared in accordance with United Kingdom Generally Accepted BASIS FOR OPINION Accounting Practice including Financial Reporting Standard 101 “Reduced Disclosure We conducted our audit in accordance with Framework”; and International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities • have been prepared in accordance with the under those standards are further described in requirements of the Companies Act 2006. the auditor’s responsibilities for the audit of the • We have audited the financial statements financial statements section of our report. which comprise: We are independent of the company in • the income statement; accordance with the ethical requirements that are relevant to our audit of the financial • the statement of comprehensive income; statements in the UK, including the FRC’s Ethical Standard, and we have fulfilled our other ethical

• the balance sheet; GOVERNANCE REPORT responsibilities in accordance with these • the statement of changes in equity; and requirements. • the related notes 1 to 25. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

SUMMARY OF OUR AUDIT APPROACH

KEY AUDIT The key audit matters that we identified in the current year were: MATTERS • Classification of capex, opex and capitalised overheads; • Provision for bad and doubtful debts; • Revenue recognition (valuation of unbilled revenue accrual);and • Going concern and impact of Covid-19. Within this report, key audit matters are identified as follows: Newly identified Increased level of risk Similar level of risk Decreased level of risk

MATERIALITY The materiality that we used in the current year was £9.1m which was determined on the basis of profit before tax adjusted for movements in certain derivatives charged to the income statement in the year.

SCOPING Audit work to respond to the risks of material misstatement was performed directly by the audit STATUTORY FINANCIAL STATEMENTS engagement team.

SIGNIFICANT Changes in our approach were limited to adding a new key audit matter in relation to the going CHANGES IN concern assumption. This is due to the Covid-19 pandemic that has had a significant impact on OUR APPROACH the UK and a number of countries throughout the world. FINANCIAL STATEMENTS 143

CONCLUSIONS RELATING TO GOING CONCERN, PRINCIPAL RISKS AND VIABILITY STATEMENT

GOING We have reviewed the directors’ statement in note 1 to the financial Going concern is CONCERN statements about whether they considered it appropriate to adopt the the basis of going concern basis of accounting in preparing them and their preparation of the identification of any material uncertainties to the company’s ability to financial continue to do so over a period of at least twelve months from the statements that date of approval of the financial statements. assumes an entity We considered as part of our risk assessment the nature of the will remain in company, its business model and related risks including where operation for a relevant the impact of the Covid-19 pandemic and Brexit, the period of at least

requirements of the applicable financial reporting framework and the 12 months from STRATEGIC REPORT system of internal control. We evaluated the directors’ assessment of the date of the company’s ability to continue as a going concern, including approval of the challenging the underlying data and key assumptions used to make financial the assessment, and evaluated the directors’ plans for future actions statements. in relation to their going concern assessment. We confirm that we We state whether we have anything material to add or draw attention have nothing to in relation to that statement that would be required by Listing Rule material to report, 9.8.6R(3) if the company had a premium listing and report if the add or draw statement is materially inconsistent with our knowledge obtained in attention to in the audit. respect of these matters.

PRINCIPAL Based solely on reading the directors’ statements and considering Viability means the RISKS AND whether they were consistent with the knowledge we obtained in the ability of the VIABILITY course of the audit, including the knowledge obtained in the company to STATEMENT evaluation of the directors’ assessment of the company’s ability to continue over the continue as a going concern, we are required to state whether we time horizon have anything material to add or draw attention to in relation to: considered appropriate by the • the disclosures on pages 57 to 63 that describe the principal risks, procedures to identify emerging risks, and an explanation of how directors. these are being managed or mitigated; We confirm that we

have nothing GOVERNANCE REPORT • the directors’ confirmation on page 57 that they have carried out a robust assessment of the principal and emerging risks facing the material to report, company, including those that would threaten its business model, add or draw future performance, solvency or liquidity; or attention to in respect of these • the directors’ explanation on pages 102 and 103 as to how they matters. have assessed the prospects of the company, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

We also report whether the directors’ statement relating to the prospects of the company that would be required by Listing Rule 9.8.6R(3) if the company had a premium listing is materially inconsistent with our knowledge obtained in the audit. STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 144

KEY AUDIT MATTERS Key audit matters are those matters that, in our which had the greatest effect on: the overall audit professional judgement, were of most strategy, the allocation of resources in the audit; significance in our audit of the financial and directing the efforts of the engagement team. statements of the current period and include the These matters were addressed in the context of most significant assessed risks of material our audit of the financial statements as a whole, misstatement (whether or not due to fraud) that and in forming our opinion thereon, and we do we identified. These matters included those not provide a separate opinion on these matters.

CLASSIFICATION OF CAPEX, OPEX AND CAPITALISED OVERHEADS

Key audit matter The water industry is capital intensive and pipeline assets require regular maintenance STRATEGIC REPORT description and upgrades. There is an inherent risk in the industry that costs included in property, plant and equipment are not capital in nature and/or are not in line with the capitalisation criteria of IAS 16. Annual capital expenditure across PPE and intangibles spend was £280.4m for the year ended 31 March 2020 (2019: £269.6m), together with significant spend on maintenance costs. The classification of expenditure on capital assets also includes the allocation of overheads to capitalised amounts, which is judgemental in nature and the amount capitalised as intangibles. Given the level of capital expenditure forecast by the company and the prior year adjustment in relation to intangible assets being classified to PPE, it is important that appropriate policies are agreed in advance and adhered to. The capitalised labour costs were £43.7m for the year to 31 March 2020 (2019: £41.0m). Given the value involved in fixed asset additions, there being a degree of complexity in what can be capitalised and the allocation to either intangible or tangible assets, we deemed this as a potential fraud risk for our audit. Further details are included within the Strategic Report on page 55 and also notes 1(d), 9 and 10 to the financial statements.

How the scope of our • We obtained an understanding of management’s relevant controls over the

audit responded to the processing of accounting entries associated with capital and operating expenditure; GOVERNANCE REPORT key audit matter • We reviewed the appropriateness of the Company’s capitalisation policies and its approach to determining which costs should be capitalised and which expensed; • We compared the actual capitalised expenditure incurred in the period with regulatory targets and make enquiries of management to understand any under/over spend; • We performed substantive testing on both capitalised and expensed amounts to assess whether these are classified in accordance with the company’s policies and IAS 16; • We continued to challenge and understand the levels of capitalisation by comparing amounts capitalised by department in the current and prior years; • We performed testing over the completeness of intangibles and additions to this balance given the prior year error noted in 2019; • We tested a sample of capitalised overheads by agreeing to timesheets and project plans to assess whether capitalisation was appropriate and there is consistent application of the policy year on year; and • We assessed whether any there are impairment indicators or underutilised assets exist which would require an impairment to be recognised.

Key observations The results of our procedures were satisfactory. We concluded that the classification of capex, opex and capitalised overheads are appropriate. STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 145

PROVISION FOR BAD AND DOUBTFUL DEBTS

Key audit matter As stated in the critical accounting judgements and key sources of estimation description uncertainty in note 1(o) of the Annual Report, the value of the bad debt provision is calculated by applying a range of percentages to debt of different ages with higher percentages applied to different categories of debt depending on an assessment of the level of risk of default. There is a significant customer base, and regulations do not allow NWL to interrupt water supply to domestic customers. The valuation of the bad debt provision is sensitive to the specific percentages applied which are judgemental. At 31 March 2020 the bad debt provision was £101.8m104.4m (2019: £85.6m) and is therefore a significant balance. Of this £101.8m104.4m, we note an increase of £6.5m in the current year due to Covid-19 and expected bad debts as a result.

The provision is based on assumptions made on the forecast and historic collectability STRATEGIC REPORT of debts across both invoiced amounts and accrued revenues. There is a significant customer base and regulations do not allow NWL to interrupt water supply to domestic customers. The provision for bad and doubtful debts is significantly large and subject to high amount of management judgement and hence we have considered this to be a key audit matter. Due to the complexity in calculating the provision, particularly in the current year with the additional considerations around Covid-19, we deemed this as a potential fraud risk for our audit. Further details are included within the financial performance section of the Strategic Report, note 1(o) and 13 to the financial statements.

How the scope of our • We obtained an understanding of management’s relevant controls surrounding the audit responded to the estimate; key audit matter • We compared the assumptions made by management in calculating the provision to evidence provided from historical collection data; • We tested any bad debt write offs and utilisation of the provision during the year; • We tested the accuracy of the aged debtor balance and the ageing categories applied; • We assessed the reasonableness of any judgements made in respect of likely future events, including the effects of Covid-19 on debt collectability; GOVERNANCE REPORT • We tested a sample of credit notes raised to determine whether any were as a result of an event known but not appropriately provided for; • We tested a sample of bills included within the bad debt provision to assess the accuracy of the provision and ageing profile; • We compared current and prior year bad debt provision balances to assess completeness; • We challenged managements assumptions relating to amounts provided in response to Covid-19, referencing external market information where appropriate; • We performed sensitivity analysis on the provision to assess the impact of changes in the cash collection rate; and • We reviewed the receivables ageing report to help assess whether overdue debtors are appropriately provided for.

Key observations The results of our procedures were satisfactory. We have concluded that management’s judgements are appropriate, including the additional £6.5m provision made during the year for Covid-19, and that the provision for bad and doubtful debts was appropriately stated. STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 146

REVENUE RECOGNITION (VALUATION OF UNBILLED REVENUE ACCRUAL)

Key audit matter The nature of NWL’s business is such that it is not possible to read all water meters at description year-end. An estimate is therefore made of the unbilled revenue at the year-end. At 31 March 2020 this measured income accrual was £110.3m (2019: £85.8m). Management estimates the amount of water and sewerage services that have been supplied to customers and not billed at year end, based on historic water consumption and default consumption rates. The revenue attributable to this unbilled revenue at year end is accrued. The accrual is both material and judgemental and is therefore considered to be a key audit matter. Towards year-end management were unable to physically visit customers’ houses due to the UK-wide lockdown and so fewer meter readings were taken than in a normal

year. The result of this has been a decrease in meter readings of 53,337 in the year, STRATEGIC REPORT taking the percentage of unread metres in the year from 13% to 40% which has increased management judgement and estimation included within the balance as at 31 March 2020 compared to previous periods. Given the value of the accrual, the quantum of data and the level of estimation involved in calculating it, we deemed this as a potential fraud risk for our audit. Further details are included within notes 1(b), 2 and 13 to the financial statements.

How the scope of our • We obtained an understanding of management’s relevant controls over the unbilled audit responded to the revenue accrual; key audit matter • We performed substantive testing of the accrued revenue calculation and make an assessment of the appropriateness of accounting estimates made by management; • We re-performed management’s retrospective review on the March 2019 balance; • We reviewed the accrued revenue balance for any potential recoverability issues by tracing a sample to subsequent bill and cash payment; and • We performed substantive analytical procedures on the year-end balance by forming an expectation compared to the prior year.

Key observations The results of our procedures were satisfactory. We concluded that the valuation of the GOVERNANCE REPORT unbilled revenue accrual is appropriate and concurred with management on the judgements adopted. STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 147

GOING CONCERN AND IMPACT OF COVID-19

Key audit matter During the year there has been the emergence of a global pandemic of a new strain of description Coronavirus. The virus, and responses taken by organisations and governments to manage its spread in markets to which the company is exposed have led to increased volatility and economic disruption. Management have ensured that the measurement of assets and liabilities reflects only the conditions that existed at the reporting date and as part of their going concern review have performed procedures to assess the financial and operational impacts of Covid-19, including: • An assessment of operational resilience of NWL, challenging internal control and governance, critical business functions ensuring ongoing water supply is maintained

throughout the crisis; STRATEGIC REPORT • An assessment of certain key sources of estimation uncertainty and critical judgements such as the bad debt provision as discussed above; • Considerations of solvency and liquidity projections, including an assessment of the effects on short term and long term cash flow. In order to fully assess the above, management have made a number of judgements and considered a range of factors. Management have also ran an extensive series of sensitivity analyses, taking into account a number of outcomes and the potential responses to these. Management have placed particular focus on the credit ratings and regulatory gearing, as these are relevant to assessing the covenants in the group’s financing arrangements. From the considerations undertaken, management believes that the company continues to be a going concern due to having robust plans in place to manage liquidity in the short and longer term as well as the stable solvency position of the wider Northumbrian Water Group. Management has made disclosures throughout the annual report and financial statements to reflect the results of its assessment, in line with applicable accounting standards, the company law and corporate governance code provisions. Due to the inherent management judgement in the financial statement disclosures, particularly those relating to going concern, and the increased level of audit effort, we considered these to be a key audit matter. Further details are included in note 1a of the financial statements. GOVERNANCE REPORT

How the scope of our • We assessed management’s projected cash flows, which include the impact of audit responded to the Covid-19, and have performed sensitivity anlaysis; key audit matter • We challenged management’s estimations and judgements used in the forecasting of future cash flows used in the assessment of the company’s liquidity; • We obtained an understanding of relevant controls implemented when forecasting cash flows; • We assessed the operational impact of Covid-19 on the company and have analysed management’s assessment of the ability of the company to continue as a going concern; • We considered whether plans are in place to allow the company to assess whether a continued supply of water to customers throughout the impact of the pandemic, including any emergency repair works required; • We reviewed the most recent Board minutes and regulatory correspondence to identify items of interest; • We evaluated management’s assessment of the impact of the significant business developments, including the spread of Covid-19 and the resulting actions taken by the UK Government; • We evaluated management’s assessment of the impact of recent events on the carrying value of the Company’s assets and liabilities including intercompany receivables; and

• We assessed the disclosure made by management in the financial statements. STATUTORY FINANCIAL STATEMENTS

Key observations The results of our procedures were satisactory. We concluded that the adoption of the going concern basis of accounting and the disclosures related to the potential impact of Covid-19 and in respect of the company’s ability to continue as a going concern are appropriate. FINANCIAL STATEMENTS 148

OUR APPLICATION OF MATERIALITY We define materiality as the magnitude of planning the scope of our audit work and in misstatement in the financial statements that evaluating the results of our work. makes it probable that the economic decisions of Based on our professional judgement, we a reasonably knowledgeable person would be determined materiality for the financial changed or influenced. We use materiality both in statements as a whole as follows:

MATERIALITY £9.1m (2019: £10.3m)

BASIS FOR DETERMINING 5% of adjusted pre-tax profit. This was adjusted to take account of derivative MATERIALITY valuation movements charged to the income statement in the year. This has been STRATEGIC REPORT excluded due to the level of volatility of such derivative valuation movements, in order to provide a consistent basis year on year. This approach is also consistent with prior year.

RATIONALE FOR THE Adjusted pre-tax profit was selected as the appropriate measure on which to BENCHMARK APPLIED determine materiality as it is considered an area of focus for the users of the accounts.

Adjusted PBT £182.2m

Materiality £9.1m

Audit Committee reporting GOVERNANCE REPORT threshold £0.5m

Performance materiality Error reporting threshold We set performance materiality at a level lower We agreed with the Audit Committee that we than materiality to reduce the probability that, in would report to the Committee all audit aggregate, uncorrected and undetected differences in excess of £0.5m (2019: £0.5m), as misstatements exceed the materiality for the well as differences below that threshold that, in financial statements as a whole. Performance our view, warranted reporting on qualitative materiality was set at 70% of materiality for the grounds. We also report to the Audit Committee 2020 audit (2019: 70%). In determining on disclosure matters that we identified when performance materiality, we considered the low assessing the overall presentation of the financial number of corrected and uncorrected statements. misstatements in the prior years, our cumulative knowledge of the company and low turnover within management or key accounting personnel STATUTORY FINANCIAL STATEMENTS FINANCIAL STATEMENTS 149

AN OVERVIEW OF THE SCOPE OF • Audit committee reporting – the section OUR AUDIT describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or Scoping Our audit was scoped by obtaining an • Directors’ statement of compliance with the UK understanding of the entity and its environment, Corporate Governance Code – the parts of the including internal control, and assessing the directors’ statement that would be required if risks of material misstatement. Audit work to the company had a premium listing relating to respond to the risks of material misstatement the company’s compliance with the UK was performed directly by the audit engagement Corporate Governance Code containing team. provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not Our consideration of the control environment properly disclose a departure from a relevant We involved our IT specialists to assess relevant provision of the UK Corporate Governance Code. STRATEGIC REPORT controls over the company’s IT systems. As planned and reported to the Audit Committee, we We have nothing to report in respect of these adopted a fully substantive testing approach in matters. the current and prior years.

RESPONSIBILITIES OF DIRECTORS OTHER INFORMATION As explained more fully in the directors’ The directors are responsible for the other information. The other information comprises responsibilities statement, the directors are the information included in the annual report responsible for the preparation of the financial other than the financial statements and our statements and for being satisfied that they give a auditor’s report thereon. true and fair view, and for such internal control as the directors determine is necessary to enable the Our opinion on the financial statements does not cover the other information and, except to the preparation of financial statements that are free extent otherwise explicitly stated in our report, from material misstatement, whether due to fraud we do not express any form of assurance or error. conclusion thereon. In preparing the financial statements, the directors In connection with our audit of the financial are responsible for assessing the company’s statements, our responsibility is to read the other ability to continue as a going concern, disclosing information and, in doing so, consider whether as applicable, matters related to going concern the other information is materially inconsistent and using the going concern basis of accounting

with the financial statements or our knowledge GOVERNANCE REPORT unless the directors either intend to liquidate the obtained in the audit or otherwise appears to be materially misstated. company or to cease operations, or have no realistic alternative but to do so. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. In this context, matters that we are specifically required to report to you as uncorrected material misstatements of the other information include where we conclude that: • Fair, balanced and understandable – the statement given by the directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the company’s position and performance, business model and strategy, is materially inconsistent with our knowledge

obtained in the audit; or STATUTORY FINANCIAL STATEMENTS

FINANCIAL STATEMENTS 150

AUDITOR’S RESPONSIBILITIES FOR MATTERS ON WHICH WE ARE THE AUDIT OF THE FINANCIAL REQUIRED TO REPORT BY STATEMENTS EXCEPTION Our objectives are to obtain reasonable assurance Adequacy of explanations received and about whether the financial statements as a accounting records whole are free from material misstatement, whether due to fraud or error, and to issue an Under the Companies Act 2006 we are required to auditor’s report that includes our opinion. report to you if, in our opinion: Reasonable assurance is a high level of • we have not received all the information and assurance, but is not a guarantee that an audit explanations we require for our audit; or conducted in accordance with ISAs (UK) will • adequate accounting records have not been always detect a material misstatement when it kept by the Company, or returns adequate for STRATEGIC REPORT exists. Misstatements can arise from fraud or our audit have not been received from branches error and are considered material if, individually not visited by us; or or in the aggregate, they could reasonably be expected to influence the economic decisions of • the Company Financial Statements are not in users taken on the basis of these financial agreement with the accounting records and statements. returns. A further description of our responsibilities for We have nothing to report in respect of these the audit of the Financial Statements is located matters. on the FRC’s website at: • Directors’ remuneration www.frc.org.uk/auditorsresponsibilities. This description forms part of our Auditor’s Report. Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors’ remuneration have not REPORT ON OTHER LEGAL AND been made. REGULATORY REQUIREMENTS We have nothing to report in respect of these matters. OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES USE OF OUR REPORT ACT 2006 This report is made solely to the company’s

In our opinion, based on the work undertaken in members, as a body, in accordance with Chapter 3 GOVERNANCE REPORT the course of the audit: of Part 16 of the Companies Act 2006. Our audit • the information given in the Strategic Report work has been undertaken so that we might state and the Directors’ Report for the financial year to the company’s members those matters we are for which the Financial Statements are required to state to them in an auditor’s report prepared is consistent with the Financial and for no other purpose. To the fullest extent Statements; and permitted by law, we do not accept or assume responsibility to anyone other than the company • the Strategic Report and the Directors’ Report and the company’s members as a body, for our have been prepared in accordance with audit work, for this report, or for the opinions we applicable legal requirements. have formed. In the light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report or the Directors’ Report.

Anthony Matthews FCA (Senior statutory auditor) for and on behalf of Deloitte LLP Statutory Auditor Newcastle Upon Tyne United Kingdom STATUTORY FINANCIAL STATEMENTS 15 July 2020 Northumbrian Water Limited Northumbria House Abbey Road Pity Me Durham DH1 5FJ www.nwg.co.uk