Understanding our finances November 2020 Contents Glossary of key Affinity Water at a glance 3 water industry terms Chief Financial Officer’s introduction 4 AMP – Asset Management Plan Ml/d – Megalitres per day PR – Periodic Review Our shareholders 5 The five-year price control period covered by The amount of water used in one day. The price determination process undertaken Understanding our group structure 6 a company’s Business Plan. AMP6 ran from One megalitre is equal to one million litres. by Ofwat ahead of each new AMP. The PR19 2015-20 and AMP7 runs from 2020-25. process has set price controls for AMP7. Our investment 7 MZC – Mean Zonal Compliance C-MeX – Customer Measure A measure of water quality compliance RCV – Regulatory Capital Value Understanding our borrowings 8 of Experience derived from monitoring samples taken The economic value of the regulated business, A measure of customer service levels used from customers’ taps. as determined by Ofwat’s price control regime. Understanding our bills 9 by Ofwat in AMP7. Our rewards and penalties 11 ODI – Outcome Delivery Incentive RORE – Return On Regulated Equity CCW – Consumer Council for Water The mechanism for financial rewards and A financial metric used by Ofwat to determine Understanding our executive remuneration 13 The regulator tasked with investigating penalties which underpins the Performance the profitability of the regulated company. customer complaints relating to service, Commitments submitted in a company’s Understanding our taxes 14 price and value for money. Business Plan. SIM – Service Incentive Mechanism Frequently asked questions 16 A measure of customer service levels used CRI – Compliance Risk Index Ofwat – Water Services by Ofwat in AMP6. A measure of water quality compliance Regulation Authority designed to illustrate the risk arising from The economic regulator of the water industry. Totex – Total Expenditure treated water compliance failures. The sum of operational expenditure and PC’s – Performance Commitments capital expenditure. D-MeX – Developer Measure Outcomes agreed with Ofwat during the Purpose of this report of Experience Periodic Review process that reflect customers’ WRMP – Water Resources A measure of developer service levels used views and priorities. Management Plan The purpose of this report is to help our customers by Ofwat in AMP7. A long-term plan detailing how a water and stakeholders understand our finances and PCC – Per Capita Consumption company will maintain a sustainable balance corporate governance arrangements. This includes DWI – Drinking Water Inspectorate The amount of water used by each person, between future demand and supply of water. our ownership and group structure, how we fund our The regulator ensuring compliance with usually measured in litres per day. business and how we spend our customers’ money. drinking water quality regulations. We recognise the importance of ensuring that our customers can trust the service we provide, and we must ensure that they are confident that we are operating in a way which is responsible, accountable and transparent. 2 | Glossary of key terms Understanding our finances Affinity Water at a glance We are the largest water-only Our purpose supply company in the UK, owning and managing the water Royston Our purpose is to provide Saffron Walden assets and network in an area high quality drinking water and of approximately 4,500km2 to take care of our environment split over three supply regions Hitchin for our communities now and in the future. in the South East of England. Luton Stort Stevenage Dunstable Luton We supply on average 925 Ml/d to over Lee Bishop’s Stortford Stansted Manningtree Harwich We aim to achieve our 3.6 million people. Pottersheath Horsley Cross purpose by: Harpenden Welwyn Hertford Garden City We operate 95 water treatment works Wivenhoe • Providing sustainable water Hatfield Harlow Brett Hemel Essendon for this generation and to ensure that our water is of the Frinton Hempstead St.Albans Roestock highest quality, distributing our water the next Clacton through a network of over 16,700km Misbourne Colne Potters Bar Epping Amersham • Looking after beautiful of mains pipes. Watford Bushey landscapes everyone Rickmansworth Clay Lane Lee Edgeware Pinn Stort Harwich can enjoy. Colchester Brett Harrow Our vision Clacton- Our purpose links to our vision Pinn Chelmsford on-Sea Uxbridge Northolt both through explicit reference MisbourneColne to the communities that we Our vision is to be the UK’s leading Iver serve and also by creating community-focused water company. Heathrow Pinn Romford Elham Feltham significant public value. It reflects the importance we place on Staines LONDON Dover Egham our people working within and for the Dour Ramsgate Sellindge Through investing capital in Chertsey communities of customers we serve. Wey Folkestone Weybridge the environment, we will Addlestone Hythe By understanding and responding to the create economic value to the Wey Ashford Dour regions we serve. needs of different community groups, we Woking Crawley Dover are accountable to them at a local level for how well we provide our services. Lydd Key Brighton Lydd Airport Dungeness Affinity Water Offices 3 | Affinity Water at a glance Understanding our finances Chief Financial Officer’s introduction Welcome to our second report aimed at We operate as a regional monopoly, This means that all employees across helping our customers to understand so our prices are tightly controlled by our business share a common focus and our finances, including: an independent regulator – Ofwat. are accountable for delivering against our high customer and operational • our ownership and group structure; Our forecast average annual household performance targets. bill for 2020/21 is £163, the equivalent • our investment and borrowings; 70,000 of just 45 pence per day, which we think During the year, work has commenced households now • our bills; represents great value for money. on liquidating our Cayman Islands entity • our executive remuneration; and which was previously used as a financing supported by our • our taxes. We have worked hard to keep our bills subsidiary until it was substituted with social tariffs low across AMP7 whilst maintaining a a UK subsidiary in January 2019. We are a business with a long-term outlook. high quality and trusted service, with In AMP7 we plan to invest £1.44bn in our our forecast average bill reducing by 6.9% Although we have always been clear that wholesale business, to keep water flowing in real terms from a 2019/20 baseline. having a Cayman Islands entity within across each of our eight communities, our group structure did not avoid UK tax whilst protecting our environment and the We plan to introduce a Customer or bring any tax benefit, we decided to availability of clean, reliable drinking water Assistance Fund by the end of this substitute the company with a UK entity for future generations. financial year to provide assistance to to simplify our group structure and to We plan more of our customers in vulnerable improve transparency. to invest Like most companies within our industry circumstances by understanding and we are financed through shareholder capital prioritising their needs. £1.44bn and debt finance. We can help to keep in our wholesale customers’ bills affordable by managing We already support more than 70,000 business our long-term debt and keeping the cost households with our social tariffs and of our debt low. our projections suggest that the number of customers receiving support will Our gearing is calculated as the ratio increase to 82,000 customers by 2025 between our net debt (the total of our with the new Customer Assistance Fund. I am extremely proud that in March 2020, borrowings less cash) and our RCV (the we were re-accredited with the Fair Tax economic value of our regulated business, Our policy for executive director pay Mark, which recognises that we pay the as determined by Ofwat). At 31 March 2020, continues to be aligned to the company’s right amount of corporation tax, at the our gearing was 79.2%. performance whilst ensuring the cost right time and in the right place. Our of water remains affordable. forecast average We aim to reduce our gearing during AMP7. annual household Stuart Ledger We will do this by restricting dividends to Annual bonus plan targets continue to bill for 2020/21 is our shareholders, instead re-investing the be aligned for the executive director, Chief Financial Officer majority1 back into our business for the senior manager, selected manager benefit of customers. and company-wide schemes. £163 4 | Chief Financial Officer’s introduction 1 All returns from our business will be re-invested after servicing certain group financing costs Understanding our finances Our shareholders On 19 May 2017, the Affinity Water group was acquired by a consortium Allianz Capital Partners is the Allianz Engaging with Group’s in-house investment manager comprising DIF, HICL Infrastructure plc and Allianz Capital Partners. In June our shareholders 2017, HICL Infrastructure plc subsequently sold down 3.4% of its interest to for alternative equity investments. The investment focus is on infrastructure a small group of co-investors, comprising UK local authority pension funds. and renewables as well as private To maintain transparency equity funds. Allianz Capital Partners’ about our governance and the Our three main shareholders are long-term international investors, bringing a wealth of investment strategy is targeted to involvement of our shareholders knowledge to our Board gained from their portfolios of similar infrastructure investments generate attractive, long-term and stable in our business, we set out the across the world. They play a vital role in supporting the investment we need to make, returns while diversifying the overall matters we will consult them but do also seek reasonable, stable returns on their investment. investment portfolio for the Allianz about in our ‘Consulting with Group insurance companies.