Final Business Plan 2010-15

RNS Number : 2274Q

Northumbrian Water Group PLC

07 April 2009

7 April 2009

Northumbrian Water Group plc

(the Company or the Group)

Final Business Plan 2010-15

The Group's principal subsidiary, Northumbrian Water Limited (NWL), has submitted its Final Business Plan (the plan) to the Water Services Regulation Authority (Ofwat).

The plan covers water and sewerage services for the five years to March 2015 for operations in both the North East and Essex & Suffolk. The plan will be used by Ofwat as the basis for setting draft price limits in July 2009. Customers and other stakeholders will have the opportunity to comment on draft price limits before they are finalised in November 2009.

Managing Director John Cuthbert said, "There have been a number of significant and unavoidable changes since we published our draft plan, including increased tax charges and business rates. The economic recession is also having an impact, with reduced water use resulting in the requirement for higher charges to recover our costs.

Given these changes, it is inevitable that water and sewerage bills will be higher than we proposed in our draft plan. Whilst this will be unwelcome news for customers, we have done all we can to manage the impact of increased costs. We have used central estimates to ensure risk is shared fairly. We have also phased prices to avoid a large increase in 2010/11, which we believe would have been unacceptable.

Our bills in the North East will remain amongst the lowest in England and Wales and those in Essex & Suffolk will continue to be relatively low considering the investment required to maintain water supplies in this dry part of the country.

We believe our plan represents excellent value for money and will allow the business to continue to deliver top class services in the North East and in Essex & Suffolk."

The plan proposes an average annual price increase over the five years of 3.4%.

Change in average K from draft to final business plan (%)

Average K in draft plan - submitted to Ofwat in August 2008	1.3

Externally driven changes (such as tax and business rate increases)	1.0
Changes to economic forecasts (such as reduced demand)	0.9
Other changes (such as higher depreciation charges)	0.2

Average K in final plan	3.4

Our plan will deliver important benefits for customers. NWL plans to invest a total of £1.27 billion from 2010/11 to 2014/15. Whilst mandatory investment to improve drinking water and environmental quality has reduced relative to the previous five years, increases are included to:

enhance asset maintenance to safeguard our current high levels of service;
address property flooding from sewers;
alleviate discoloured water complaints; and
ensure there are sufficient water resources in Essex.

It is essential that NWL is able to finance this future investment and a key financial assumption in the plan is the cost of capital. This is unchanged from the draft business plan proposal of 4.7% real, post tax, significantly lower than at the 2004 price review (5.1%).

The following table represents the profile of the proposed average price increases for each of our two operating areas and ensures the business achieves appropriate financial ratios in each of the five years to finance its operations.

Average price increases, not including inflation (%)

North East	2010/11	2011/12	2012/13	2013/14	2014/15	Average
Water	6.2	6.2	6.2	0	0	3.7
Sewerage	3.5	3.5	3.5	0	0	2.1
Total	4.6	4.6	4.6	0	0	2.8

Essex & Suffolk
Water	8.2	8.2	8.2	0	0	4.9

Our proposals result in average household bills as shown in the table below.

Average household bills, 2007/08 prices (£)

1999/00

2009/10

Forecast

2014/15

North East (water and sewerage)

303

297

322

Essex & Suffolk (water)

162

166

195

NWL has taken a balanced view of risk throughout the plan. It believes the plan represents excellent value for money, allowing it to continue to deliver a high standard of service to customers and an appropriate return to investors.

By 2014/15 households will pay on average (2007/08 prices):