Half Yearly Report

RNS Number : 8850C

Northumbrian Water Group PLC

23 November 2009

 



23 November 2009

NORTHUMBRIAN WATER GROUP PLC

HALF-YEARLY FINANCIAL REPORT FOR THE SIX MONTHS ENDED

30 SEPTEMBER 2009

Northumbrian Water Group plc (NWG or the Group) presents its half-yearly report for the six months ended 30 September 2009.

HIGHLIGHTS 2009

Financial highlights		Six months to 30.9.2009 £m	Six months to 30.9.2008 £m	Change £m	Change %
Continuing operations
Revenue		351.2	347.7	3.5	1.0
Profit on ordinary activities before interest		139.3	138.6	0.7	0.5
Profit before tax		87.0	77.1	9.9	12.8
Profit/(loss) for the period1		63.1	(64.5)	127.6	n/a
Net debt		2,250.0	2,174.0	76.0	3.5
Pro forma Group RCV (mid-year value)2		3,339.2	3,340.3	(1.1)	-
Continuing operations
Basic earnings/(loss) per ordinary share1		12.15p	(12.45p)	24.60p	n/a
Adjusted EPS3		12.85p	10.84p	2.01p	18.5%
Ordinary dividend proposed		4.39p	4.29p	0.10p	2.3%

Notes:

1 Includes deferred tax charge £3.6 million (2008: £123.5 million)

2 Pro forma Group RCV comprises Northumbrian Water Limited's (NWL) Regulatory Capital Value (RCV) plus the net debt 

  in respect of the PFI contracts and the Kielder securitisation

3 Excludes deferred tax charge £3.6 million (2008: £123.5 million)

• Revenue increased by 1% but continues to be affected by the economic downturn
  
  

• Continued high levels of customer satisfaction
  
  

• Regulated capital investment in the period of £108.7 million (2008: £109.3 million) is meeting regulatory targets and includes an extended sewer flooding programme
  
  

• Funds in place to meet the requirements of the business for the next two years (Cash and short term deposits at 30 September £215.5 million)
  
  

• Ordinary interim dividend of 4.39 pence (2008: 4.29 pence) per share to be paid on 
  29 January 2010
  
  

• Ofwat's draft determination proposals allow average annual household bills to rise, in real terms, by £3 over the five year period with an investment programme of £1.2 billion (2007/08 prices). Ofwat's final determination will be published on 26 November 2009

Managing Director John Cuthbert said, "Over the last six months the Group has produced good financial and operational results against a difficult economic background. Group companies continue to deliver against regulatory and contractual obligations. 

Income and costs at Northumbrian Water Limited have been adversely affected in the period by business closures in the north east and this has partially offset the growth from tariff increases. Following the draft determination published in July, representations have been made to the industry regulator, Ofwat, and the final determination on the price limits to apply for the five years from April 2010 will be published on 26 November."

For further information contact:

Northumbrian Water John Cuthbert, Managing Director Chris Green, Finance Director  Alistair Baker, Communications & PR Manager	0191 301 6419
Pelham PR Chelsea Hayes Archie Berens	020 7337 1509

Interim management report

NWG's financial performance

Revenue for the six months to 30 September 2009 was £351.2 million (2008: £347.7 million).  Water and sewerage charges at the Group's principal subsidiary, Northumbrian Water Limited, were increased by 3% (in line with the November 2008 Retail Price Index) but that revenue growth has been partially offset by reductions in non-household revenue, as a consequence of the current economic downturn.

Operating costs increased by £2.8 million (1.3%) to £211.9 million, principally reflecting the bad debt charge (£1.7 million) relating to the closure of a major customer at Bran Sands on Teesside. Further increases on salary costs, abstraction and rates have been partially offset by lower capital maintenance charges and efficiencies.

Profit on ordinary activities before interest for the six months was £139.3 million (2008: £138.6 million).  Finance costs have decreased by £9.3 million largely reflecting the following non-cash movements; deflation of the principal on the index linked bonds (£14.5 million) and a reduction in the interest cost of pension plan obligations (£1.3 million) were partially offset by a reduction in the expected return on pension assets (£6.4 million).

Profit on ordinary activities before tax for the six months increased to £87.0 million (2008: £77.1 million) principally due to the lower interest charges. The current tax charge of £20.3 million (2008: £18.1 million) reflects increased profitability and the timing of relief for prepaid pension contributions.

The deferred tax charge of £3.6 million (2008: £123.5 million) is significantly lower due to the one-off charge of £117.2m in 2008, following the withdrawal of industrial buildings allowances in the Finance Act 2008.

The effective tax rate for the period was 28% (2008: 32% - excluding the one-off deferred tax charge of £117.2 million).

Capital structure

The Group has not entered into any new debt facilities during the period and its capital structure and gearing ratios remain largely unchanged from those reported in our preliminary results on 3 June 2009.  

The pro forma Group RCV includes £215.7 million (March 2009: £215.6 million) and £108.5 million (March 2009: £110.8 million) for the Kielder securitisation and PFI contracts respectively. Adding these to NWL's estimated mid-year RCV of £3,015.0 million (March 2009: £2,998.0 million), results in a pro forma Group RCV of £3,339.2 million (March 2009: £3,324.4 million).

The Group's gearing on this pro forma RCV basis is stable at 67%, with net debt increasing by £20.3 million to £2,250.0 million over the six months.  

Gearing at NWL, and for the regulated business, is also stable at 62% and 60%, respectively. Net debt increased over the period by £22.2 million to £1,866.5 million.  The Group and NWL's regulated business debt structure also remain largely unchanged with 75% (NWL: 71%) fixed at an average rate of 5.80% (NWL: 5.96%), 19% (NWL: 22%) index linked at an average real rate of 1.85% (all NWL) and 6% (NWL: 7%) on a variable rate basis.  The blended average rate for the Group and NWL's regulated business for the six months to 30 September 2009 was 5.32% and 5.17% (2008: 6.15%, 6.17%), respectively.

Total cash and short term cash deposits available to meet the requirements of the business for the next two years amounted to £215.5 million at 30 September 2009.  The Group also has additional undrawn committed facilities of £75 million.

Cash interest covers at both the Group and NWL are expected to remain stable over the year.

Definitions of gearing, net debt and cash interest cover are disclosed in the March 2009 annual report and financial statements, a copy of which is available on the Group's website at www.nwg.co.uk

Northumbrian Water Limited

Revenue was £328.5 million for the six months to 30 September 2009 (2008: £326.1 million). The 0.7% increase is mainly due to a 3.0% inflationary increase in water and sewerage charges partially offset by reductions in demand for both services. In particular, non-household revenue has been affected by the economic downturn including closures by a number of major customers on Teesside.

Operating costs increased from £190.1 million to £192.2 million, principally reflecting a one-off bad debt charge relating to the closure of a major customer (£1.7 million). Further increases in salaries, energy costs, abstraction and rates have been partially offset by reductions in capital maintenance charges and efficiencies.

Energy costs for the period are £2.5 million higher than the same period last year reflecting advance purchases made before the market softened. NWL has taken advantage of lower prices to procure its full electricity needs for both 2009/10 and 2010/11, together with 28% for the following year.  The full year forecast for energy costs is £36.1 million (2008/09: £38.8 million) with costs forecast to fall further for 2010/11 to £30.0 million.

Profit on ordinary activities before interest for the period was £136.3 million (2008: £136.0 million).

Capital investment in the regulated business for the period was £108.7 million (2008: £109.3 million) and is on target to meet regulatory outputs.  Capex outperformance on the quality programme is more than offset by increased investment on non-infrastructure for waste water, including the advanced anaerobic digestion plant at Bran Sands on Teesside. The capital programme has also been extended in response to extensive sewer flooding in recent years.

Excellent customer service remains at the heart of our business. Our regular research with customers this year confirms an overall satisfaction rating of 89% (2008: 90%), and, in addition, 84% (2008: 85%) of customers believe we provide value for money.

Our 'right first time every time' approach is becoming more deeply engrained into our business culture. Closely aligned to Ofwat's forthcoming regulatory changes to measuring customer service, it focuses on ensuring customers receive an efficient and effective service that meets their expectations.  The deployment of hand held terminals to our field workforce as part of the work management programme is integral to 'right first time every time'.

The quality of drinking water continues to be excellent. Compliance with the Drinking Water Inspectorate's (DWI) standards in our northern operating area remains above 99.9%. In our southern operating area, as is being found in other parts of the country, compliance is slightly lower at 99.8% following the detection of a pesticide using a new analytical technique.  We have agreed a legal undertaking with DWI to promote sustainable farming practice and improved catchment management to reduce the levels of this pesticide in water courses.

NWL's southern operating areas are in the driest part of the country. Unlike other parts of the country, these areas have been particularly dry through the summer and autumn.  Reduced industrial demand due to the economic downturn, coupled with customers continuing to respond positively to requests to use water wisely, has alleviated what would have been a more difficult position regarding water supply.

Experience this year further emphasises the necessity to increase water resource.  The Abberton Scheme will meet this need as well as mitigating some of the effects of a changing climate and increasing population.  Preparatory work on the Scheme commenced in the summer and the major construction work on the reservoir is planned to start in January 2010.

Water resources in NWL's northern operating area remain robust and no new sources will be required in the foreseeable future.

Commissioning of the newly constructed advanced anaerobic digestion plant at Bran Sands is now underway and biogas from the process is now generating electricity. Full gas production and electricity generation should be achieved by March 2010.  The new plant will require a lower level of manning and consultation on a reduction of around 30 posts is well advanced. As part of the ongoing review of efficiency, a similar number are likely to leave in other parts of the business.

All sewage treatment works met the required standards, a continuation of last year's performance. All 34 bathing waters in the north east passed the required mandatory standard and 30 of these met the more demanding guideline standard. The European Commission is currently challenging the UK Government over its interpretation of the Waste Water Treatment Directive using Whitburn in the north east as one of the test cases. The bathing water at Whitburn has passed the mandatory standard every year since the directive was introduced and met the guideline standard seven years out of nine.

Severe storms over two days in July caused widespread sewer flooding throughout the northern region. We continue to invest additional capital to address sewer flooding and schemes to remove a further 280 properties from internal flooding risk registers in the current year are progressing well.  This will take the total properties addressed to 776 for 2005-2010, more than double the number allowed in Ofwat's last price review.

We have, in partnership with The Met Office and Environment Agency, installed the region's first weather radar station at High Moorsley near Sunderland. The radar, which was commissioned in the summer this year, will provide more accurate and timely rainfall data. This will result in improved flood warnings, a better understanding of the impact of rainfall and aid the design of flood relief schemes.
  Water and waste water contracts

Revenue for the Group's water and waste water contracts was £18.9 million for the six months to 30 September 2009 (2008: £19.1 million) and profit on ordinary activities before interest was £4.4 million (2008: £3.9 million).  The slight decrease in revenue over the period is due to lower tariffs at Caledonian Environmental Services in respect of gas indexation mitigated, in part, by increases over the remaining contracts. The increase on profit on ordinary activities before interest is principally due to a reduction in operating costs at AquaGib, partially offset by the lower revenue.

All contracts are performing well, in line with expectations.

Financial Calendar
2009
23 November	Half-yearly announcement
16 December	Ex-dividend date
18 December	Record date
2010
29 January	Interim dividend payment
1 February (provisional)	Interim Management Statement
2 June	Preliminary results announcement
29 July (provisional)	Interim Management Statement
29 July (provisional)	AGM
11 August	Ex-dividend date
13 August	Record date
10 September	Final dividend payment
30 November	Half-yearly announcement
15 December	Ex-dividend date
17 December	Record date

Principal risks and uncertainties

The key risk for the business is the outcome of the PR09 (periodic review of prices), the process by which Ofwat sets limits on the prices which NWL can charge customers for the five years from 1 April 2010.  Following the receipt of the draft determination, a meeting with Ofwat took place on 30 September. This was NWL's final opportunity to make representations and to clarify specific company issues to the regulator before the announcement of the final determination on 26 November 2009.

The current economic climate is having an impact on revenues, particularly those from industrial and commercial customers and those associated with the housing market.  We continue to monitor the uncertain situation very carefully and representations have been made to Ofwat following the announcement of the draft determination.

Our treasury policies limit the amount of cash we deposit with particular banks and financial institutions. The minimum investment criteria cover credit rating and asset size, including sovereign and political risk. Current market conditions have resulted in closer monitoring of counterparties.

There are further risks and uncertainties which may affect the Group from time to time and these were disclosed in the March 2009 annual report and financial statements. However, their impact is not considered to be material to the business over the next six months.  Pensions

The Group operates both a defined benefit pension scheme, which closed to new entrants on 31 December 2007, and an occupational defined contribution arrangement which began on 1 January 2008.

The deficit (under IAS19) of the defined benefit scheme has decreased from £119.4 million, at 31 March 2009, to £103.1 million at 30 September 2009.  This is due to the recovery of the assets of the scheme (£127.2 million) which has more than offset a significant increase in the liabilities (£110.9 million). The increase in the liabilities was principally due to the reduction in the discount rate assumption to 5.5% (March 2009: 6.1%) as a result of the fall in yields of AA rated bonds over the period.

The triennial actuarial valuation of the final salary scheme as at 31 December 2007 is complete and the formal report and certificates were signed in November 2008. The valuation resulted in a surplus of £42 million (6%) on an 'ongoing' basis, which takes into account the prepaid contributions (in 2006 and 2007) for the period up to 31 December 2010.  While the actuarial valuation incorporates longer term forecasts and assumptions, the prevailing market conditions are difficult and we will continue to monitor the situation carefully. 

Dividend

The Board has declared an interim dividend for the period of 4.39 pence per share (2008: 4.29 pence). This dividend will be paid on 29 January 2010 to shareholders on the register at the close of business on 18 December 2009. The Group's dividend cover (on a proposed basis) for the period, excluding deferred tax, was 2.9x.  The interim dividend includes average inflation of nil% (2008: 3.6%) based on the six months actual Retail Price Index to September 2009 and the forecast movement to March 2010.

The dividend is consistent with the policy announced by the Board in June 2005 to maintain a progressive dividend policy with real increases of around 3% p.a. during the current regulatory period.

Retirement of Managing Director

Earlier this year, the Board announced that I had informed them of my intention to retire next year. A sub-committee of the Nominations Committee, led by the Chairman, is progressing the appointment of a successor and an announcement will be made in due course.

Outlook

The Group continues to emphasise the efficient delivery of high standards of operational and service performance. Funding to support that emphasis, for both our operational and capital investment needs, is in place for the next two years. Current economic conditions continue to be challenging and, with efficiency initiatives such as advanced anaerobic digestion and our work management programme, we are well placed to respond.

Northumbrian Water Limited will receive Ofwat's final determination on 26 November.

John Cuthbert

Managing Director

20 November 2009

  Interim consolidated income statement

Six months ended 30 September 2009

	Notes	Six months to 30.9.2009 £m	Six months to 30.9.2008 £m	Year to 31.3.2009 £m
Continuing operations
Revenue	2	351.2	347.7	694.1
Operating costs		(211.9)	(209.1)	(420.5)
Profit on ordinary activities before interest	2	139.3	138.6	273.6
Finance costs payable	3	(72.6)	(91.8)	(183.5)
Finance income receivable	3	20.2	30.1	61.8
Share of profit after tax of jointly controlled entities		0.1	0.2	0.8
Profit on ordinary activities before taxation	2	87.0	77.1	152.7
- current taxation	4	(20.3)	(18.1)	(32.1)
- deferred taxation	4	(3.6)	(123.5)	(132.5)
Profit/(loss) for the period		63.1	(64.5)	(11.9)
Attributable to:
Equity shareholders of the parent Company		62.9	(64.5)	(12.7)
Minority interests		0.2	-	0.8
		63.1	(64.5)	(11.9)
Basic earnings/(loss) per share attributable to ordinary equity holders of the parent Company	5	12.15p	(12.45p)	(2.45p)
Diluted earnings/(loss) per share attributable to ordinary equity holders of the parent Company	5	12.13p	(12.44p)	(2.45p)
Adjusted earnings per share for profit attributable to ordinary equity holders of the parent Company (excluding deferred tax)	5	12.85p	10.84p	22.05p
Ordinary dividend proposed per share	6	4.39p	4.29p	8.50p
Dividend paid per share	6	8.50p	8.07p	12.36p

  Interim consolidated statement of comprehensive income

Six months ended 30 September 2009

			Six months to 30.9.2009 £m	Six months to 30.9.2008 £m	Year to 31.3.2009 £m
Profit/(loss) for the period			63.1	(64.5)	(11.9)
Other comprehensive income
Actuarial gains/(losses)			22.8	(94.5)	(207.8)
Profit/(losses) on cash flow hedges taken to equity			1.3	-	(11.7)
Translation differences			-	-	0.9
Transferred to the income statement on cash flow hedges			-	(0.1)	(0.1)
Tax on items charged or credited to equity			(6.8)	26.6	61.5
Total other comprehensive income/(loss)			17.3	(68.0)	(157.2)
Total net comprehensive income/(loss) for the period			80.4	(132.5)	(169.1)

Attributable to:
Equity shareholders of the parent Company			80.2	(132.5)	(169.9)
Minority interests			0.2	-	0.8
			80.4	(132.5)	(169.1)

Interim consolidated statement of changes in equity

Six months ended 30 September 2009

	Equity share capital £m	Share premium reserve £m	Cash flow hedge reserve £m	Treasury shares £m	Currency translation £m	Retained earnings £m	Total equity £m	Minority interests £m	Total £m
At 1 April 2008	51.9	446.5	1.0	(0.8)	0.1	(8.6)	490.1	1.7	491.8
Profit for the period	-	-	-	-	-	(12.7)	(12.7)	0.8	(11.9)
Other comprehensive income	-	-	(8.6)	-	0.9	(149.5)	(157.2)	-	(157.2)
Total comprehensive income	-	-	(8.6)	-	0.9	(162.2)	(169.9)	0.8	(169.1)
Shares purchased	-	-	-	(1.7)	-	-	(1.7)	-	(1.7)
Share-based payment	-	-	-	-	-	0.5	0.5	-	0.5
Exercise of LTIP awards	-	-	-	0.2	-	(0.2)	-	-	-
Equity dividends paid	-	-	-	-	-	(64.0)	(64.0)	(0.1)	(64.1)
At 31 March 2009	51.9	446.5	(7.6)	(2.3)	1.0	(234.5)	255.0	2.4	257.4
Profit for the period	-	-	-	-	-	62.9	62.9	0.2	63.1
Other comprehensive income	-	-	0.9	-	-	16.4	17.3	-	17.3
Total comprehensive income	-	-	0.9	-	-	79.3	80.2	0.2	80.4
Share-based payment	-	-	-	-	-	0.3	0.3	-	0.3
Equity dividends paid	-	-	-	-	-	(44.0)	(44.0)	-	(44.0)
At 30 September 2009	51.9	446.5	(6.7)	(2.3)	1.0	(198.9)	291.5	2.6	294.1

At 31 March 2008	51.9	446.5	1.0	(0.8)	0.1	(8.6)	490.1	1.7	491.8
Profit for the period	-	-	-	-	-	(64.5)	(64.5)	-	(64.5)
Other comprehensive income	-	-	(0.1)	-	-	(67.9)	(68.0)	-	(68.0)
Total comprehensive income	-	-	(0.1)	-	-	(132.4)	(132.5)	-	(132.5)
Share-based payment	-	-	-	-	-	0.2	0.2	-	0.2
Equity dividends paid	-	-	-	-	-	(41.8)	(41.8)	-	(41.8)
At 30 September 2008	51.9	446.5	0.9	(0.8)	0.1	(182.6)	316.0	1.7	317.7

Interim consolidated balance sheet

As at 30 September 2009

		Note	30.9.2009 £m	30.9.2008 £m	31.3.2009 £m
Non-current assets
Goodwill			3.6	3.6	3.6
Other intangible assets			64.2	64.2	64.2
Property, plant and equipment		7	3,453.2	3,318.0	3,388.2
Investments in jointly controlled entities			3.3	3.4	3.8
Financial assets			13.4	14.7	14.0
Amounts receivable relating to consortium relief			1.7	1.7	1.7
			3,539.4	3,405.6	3,475.5
Current assets
Inventories			3.2	3.5	3.2
Trade and other receivables			129.7	121.1	131.7
Short term cash deposits			43.8	-	160.6
Cash and cash equivalents		8	171.7	396.0	108.8
			348.4	520.6	404.3
Total assets			3,887.8	3,926.2	3,879.8
Non-current liabilities
Interest bearing loans and borrowings			2,456.6	2,473.7	2,465.3
Provisions			2.4	2.6	2.5
Deferred income tax liabilities			606.9	622.4	596.5
Pension liability		9	103.1	5.0	119.4
Other payables			7.7	8.7	8.1
Grants			216.8	212.8	215.6
			3,393.5	3,325.2	3,407.4
Current liabilities
Interest bearing loans and borrowings			23.6	112.5	49.2
Provisions			0.2	0.2	0.2
Trade and other payables			155.9	161.6	147.8
Interest rate swaps			10.4	-	11.7
Income tax payable			10.1	9.0	6.1
			200.2	283.3	215.0
Total liabilities			3,593.7	3,608.5	3,622.4
Net assets			294.1	317.7	257.4

Capital and reserves
Issued capital			51.9	51.9	51.9
Share premium reserve			446.5	446.5	446.5
Cash flow hedge reserve			(6.7)	0.9	(7.6)
Treasury shares			(2.3)	(0.8)	(2.3)
Currency translation			1.0	0.1	1.0
Retained earnings			(198.9)	(182.6)	(234.5)
Equity shareholders' funds			291.5	316.0	255.0
Minority interests			2.6	1.7	2.4
Total capital and reserves			294.1	317.7	257.4

Interim consolidated cash flow statement

Six months ended 30 September 2009

	Note	Six months to  30.9.2009 £m	Six months to 30.9.2008 £m	Year to 31.3.2009 £m
Operating activities
Reconciliation of profit before interest to net cash flows from operating activities
Profit on ordinary activities before interest		139.3	138.6	273.6
Depreciation		51.1	50.4	100.7
Other non-cash charges and credits		(2.3)	(3.5)	(4.3)
Net charge for provisions, less payments		(0.1)	(0.2)	(0.3)
Difference between pension contributions paid and amounts recognised in the income statement		4.4	4.0	7.9
(Increase)/decrease in inventories		-	(0.1)	0.2
Decrease/(increase) in trade and other receivables		1.9	2.1	(8.6)
Increase/(decrease) in trade and other payables		3.1	0.2	(0.3)
Cash generated from operations		197.4	191.5	368.9
Interest paid		(48.7)	(51.1)	(120.6)
Income taxes paid		(16.3)	(12.7)	(29.6)
Net cash flows from operating activities		132.4	127.7	218.7
Investing activities
Interest received		8.2	8.2	12.0
Capital grants received		4.4	6.4	11.2
Proceeds on disposal of property, plant and equipment		0.1	1.0	1.2
Dividends received from jointly controlled entities		0.6	0.6	0.8
Short term cash deposits		116.8	-	(160.6)
Maturity of investments		0.7	0.9	1.7
Purchase of property, plant and equipment		(123.8)	(112.9)	(231.8)
Net cash flows from investing activities		7.0	(95.8)	(365.5)
Financing activities
New borrowings		-	141.1	141.4
Purchase of treasury shares		-	-	(1.7)
Dividends paid to minority interests		-	-	(0.1)
Dividends paid to equity shareholders		(44.0)	(41.8)	(64.0)
Repayment of borrowings		(11.2)	(11.0)	(95.9)
Payment of principal under hire purchase contracts and finance leases		(4.8)	(4.6)	(7.0)
Net cash flows from financing activities		(60.0)	83.7	(27.3)
Increase/(decrease) in cash and cash equivalents		79.4	115.6	(174.1)
Cash and cash equivalents at start of period		92.3	266.4	266.4
Cash and cash equivalents at end of period	8	171.7	382.0	92.3
Cash and cash equivalents at end of period		171.7	382.0	92.3
Short term cash deposits	8	43.8	-	160.6
Total cash and cash equivalents and short term deposits		215.5	382.0	252.9

  Notes to the interim financial statements

1.   Basis of preparation

The interim financial statements for the six months to 30 September 2009 have been prepared in accordance with International Accounting Standard (IAS) 34 'Interim Financial Reporting'. The interim financial statements do not include all the information and disclosures required in the annual report and financial statements and should be read in conjunction with the Group's annual report and financial statements as at 31 March 2009.  The annual report and financial statements of the Group are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU).

The accounting policies and methods of computation adopted are the same as those applied in the annual report and financial statements for the year ended 31 March 2009, except for the adoption of those standards and interpretations listed below which are required to be followed in the Group's annual report and financial statements for the year ending 31 March 2010:

• IAS 1 Presentation of Financial Statements (revised)

• IAS 32 Presentation of Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation

• IAS 23 Borrowing Costs (revised)

• Improvements to IFRS May 2008

• IFRS 2 Share-based Payments - Vesting Conditions and Cancellations

• IFRS 8 Operating Segments 

• IFRIC 15 Agreements for the Construction of Real Estate

The adoption of IAS 1 Presentation of Financial Statements (revised) has required the 'Reconciliation of movements in equity', previously disclosed in note 22 to the annual report and financial statements for the year ended 31 March 2009, to be presented as a primary statement entitled 'Interim consolidated statement of changes in equity'. In addition, the 'Consolidated statement of recognised income and expense' has been replaced with the 'Interim consolidated statement of comprehensive income'.

In adopting IFRS 8 Operating Segments, the Group concluded that the operating segments and the measures of revenue, segment profit, segment assets and liabilities were the same as the business segments determined in accordance with IAS 14 Segment Reporting.

In adopting IAS 23 Borrowing Costs (Revised), the Group has amended its accounting policy and, from 1 April 2009, now capitalises borrowing costs on qualifying assets.  In the current period interest capitalised amounted to £0.5 million.

In addition, IFRIC 18 Transfers of assets from customers has not been applied in the interim financial statements as it has not yet been endorsed by the EU and its effective date is uncertain. Subject to EU endorsement it is expected that IFRIC 18 will be applied in preparing the annual report and financial statements for the year ending 31 March 2011.

The adoption of IAS 32 Presentation of Financial Statements, Improvements to IFRS May 2008, IFRS 2 Share-based Payments and IFRIC 15 Agreements for the Construction of Real Estate do not have a material impact on the Group.

The results for the year ended 31 March 2009 have been extracted from the annual report and financial statements which have been delivered to the Registrar of Companies.  The independent auditors' report on those financial statements was unqualified and did not contain a statement under section 237 (2) or (3) of the Companies Act 1985.  The financial information contained in the interim financial statements does not constitute statutory accounts as defined in Section 435 of the Companies Act 2006.

The figures for the above periods are unaudited and do not constitute statutory accounts.  However, the auditors have carried out a review of the figures to 30 September 2009 and their report is set out in the independent review report.

The operations of the Group are not subject to material seasonality or cyclicality.  There have been no changes in related party transactions since the last annual report and financial statements for the year ended 31 March 2009 that have a material effect on the Group's financial position or performance for the period.

This report was approved by the Board of Directors on 20 November 2009.

2.   Segmental analysis of revenue and profit on ordinary activities before interest

Revenue
				Northumbrian Water Limited £m	Water and waste  water contracts £m	Other £m	Total £m
Six months ended 30 September 2009
Segment revenue				328.5	18.9	6.7	354.1
Inter-segment revenue				-	-	(2.9)	(2.9)
Revenue to external customers				328.5	18.9	3.8	351.2
Six months ended 30 September 2008
Segment revenue				326.1	19.1	5.5	350.7
Inter-segment revenue				-	-	(3.0)	(3.0)
Revenue to external customers				326.1	19.1	2.5	347.7
Year ended 31 March 2009
Segment revenue				647.0	39.8	13.0	699.8
Inter-segment revenue				-	-	(5.7)	(5.7)
Revenue to external customers				647.0	39.8	7.3	694.1

All revenue represents services provided.

3.  Finance costs payable/(income receivable)

		Six months to  30.9.2009 £m	Six months to 30.9.2008 £m	Year to 31.3.2009 £m
Finance costs payable on debentures, bank and other loans and overdrafts		57.8	61.5	122.8
Amortisation of discount, fees, loan issue costs and other financing items		(2.2)	(2.4)	(4.9)
(Amortisation)/accretion of index linked bonds		(3.3)	11.2	22.4
Interest cost on pension plan obligations		18.1	19.4	38.5
Finance costs payable on hire purchase contracts and finance leases		2.2	2.1	4.7
Total finance costs payable		72.6	91.8	183.5
Expected return on pension plan assets		(16.0)	(22.4)	(44.3)
Finance income receivable		(4.2)	(7.7)	(17.5)
Net finance costs payable		52.4	61.7	121.7

4.      Taxation

		Six months to  30.9.2009 £m	Six months to 30.9.2008 £m	Year to 31.3.2009 £m
Current tax:
Current tax charge at 28%		20.9	18.0	33.0
Income tax reported in equity on cash flow hedges		-	0.1	0.1
Adjustment in respect of prior periods		(0.6)	-	(1.1)
UK corporation tax		20.3	18.1	32.0
Overseas tax		-	-	0.1
Total current tax		20.3	18.1	32.1
Deferred tax:
Origination and reversal of temporary differences in the year at 28%		3.7	5.7	13.8
Impact of Industrial Buildings Allowance abolition		-	117.2	117.2
Income tax reported in equity on cash flow hedges		-	-	(0.1)
Adjustment in respect of prior periods		(0.1)	0.6	1.6
Total deferred tax		3.6	123.5	132.5
Tax charge in the income statement		23.9	141.6	164.6

5.   Earnings per share

Basic earnings per share (EPS) is calculated by dividing the (loss)/profit attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares in issue during the period. Treasury shares held are excluded from the weighted average number of shares for basic EPS.

Six months to:	Earnings 30.9.2009 £m	Weighted average number of shares 30.9.2009 million	Earnings per share 30.9.2009  pence	Loss 30.9.2008 £m	Weighted average number of shares 30.9.2008 million	Loss per share 30.9.2008 Pence
Basic EPS	62.9	517.6	12.15	(64.5)	518.2	(12.45)
Diluted EPS	62.9	518.6	12.13	(64.5)	518.6	(12.44)

The weighted average number of shares for diluted EPS is calculated by including the treasury shares held.

Adjusted EPS is considered by the directors to give a better indication of the Group's underlying performance due to the volatile and non-cash nature of deferred tax.  From 2009/10, the Group has removed the credit in respect of the amortisation of debt fair value as this is no longer considered material. The credit for the six months to 30 September 2009 is £2.6m (2008: £2.8m) and would have an impact on the adjusted EPS of 0.50 pence per share (2008: 0.54 pence per share).

Six months to:	Earnings 30.9.2009 £m	Weighted average number of shares 30.9.2009 million	Earnings per share 30.9.2009  pence	(Loss)/ earnings 30.9.2008 £m	Weighted average number of shares 30.9.2008 million		(Loss)/ earnings per share 30.9.2008  pence
Basic EPS	62.9	517.6	12.15	(64.5)	518.2		(12.45)
Deferred tax	3.6		0.70	123.5			23.83
Amortisation of debt fair value	-		-	(2.8)			(0.54)
Adjusted EPS	66.5	517.6	12.85	56.2	518.2		10.84
Year to:				(Loss)/ earnings 31.3.2009 £m	Weighted average number of shares 31.3.2009 million	(Loss)/ earnings per share 31.3.2009  pence
Basic EPS				(12.7)	518.0	(2.45)
Diluted EPS				(12.7)	518.6	(2.45)
Basic EPS				(12.7)	518.0		(2.45)
Deferred tax				132.5			25.58
Amortisation of debt fair value				(5.6)			(1.08)
Adjusted EPS				114.2	518.0		22.05

6.   Dividends paid and proposed

The Board has declared an ordinary interim dividend for the period of 4.39 pence per share (2008/09: 4.29 pence).  The dividend will be paid on 29 January 2010 to shareholders on the register at the close of business on 18 December 2009.

			Six months to  30.9.2009 £m	Six months to 30.9.2008 £m	Year to 31.3.2009 £m
Declared and paid during the period:
Equity dividends on ordinary shares:
Interim dividend for 2008/09: 4.29p			-	-	22.2
Final dividend for 2008/09: 8.50p (2007/08: 8.07p)			44.0	41.8	41.8
Dividends paid			44.0	41.8	64.0
Proposed dividend for the period:
Interim dividend for 2009/10: 4.39p (2008/09: 4.29p)			22.7	22.2	-
Final dividend for 2008/09: 8.50p			-	-	44.0

7.   Property, plant and equipment

Additions for the six months to 30 September 2009 were £116.2 million (2008: £112.1 million).

8.   Cash and cash equivalents

For the purposes of the consolidated cash flow statement, cash and cash equivalents comprise the following:

			Six months to  30.9.2009 £m	Six months to 30.9.2008 £m	Year to 31.3.2009 £m
Cash at bank and in hand			69.6	41.4	40.0
Short term deposits			102.1	354.6	68.8
			171.7	396.0	108.8
Bank overdrafts			-	(14.0)	(16.5)
Cash and cash equivalents			171.7	382.0	92.3

			Six months to  30.9.2009 £m	Six months to 30.9.2008 £m	Year to 31.3.2009 £m
Short term cash deposits > 3 months			-	-	120.8
Short term cash deposits < 3 months			43.8	-	39.8
			43.8	-	160.6

Short term cash deposits of £43.8 million (2008: £nil, March 2009: £39.8 million), with a maturity of less than three months represent amounts on deposit at fixed rates with the Northumbrian Water Pension Scheme.

9.   Pensions

The deficit (under IAS19) of the defined benefit scheme has decreased from £119.4 million, at 31 March 2009, to £103.1 million at 30 September 2009. This is mainly due to the recovery of the assets of the scheme (£127.2 million) which has more than offset a significant increase in the liabilities (£110.9 million).

The deficit on the pension scheme was calculated based on the following assumptions.

			Six months to  30.9.2009	Six months to 30.9.2008	Year to 31.3.2009
Pay increases1			4.2%	4.5%	4.0%
Pensions increases			3.2%	3.5%	3.0%
Price inflation			3.2%	3.5%	3.0%
Discount rate			5.5%	6.5%	6.1%
Mortality assumptions2,3
- Life expectancy for a member aged 65 - female (years)			22.9	22.8	22.9
- Life expectancy for a member aged 65 - male (years)			20.6	20.4	20.6

Notes:

• Including promotional salary scale.

• 115% of PCMA/PCFA00 and PMA/PFA00.

• PCMA/PCFA00 (year of birth with medium cohort improvements).

Sensitivity to assumptions

A reduction in the net discount rate will increase the assessed value of liabilities, as a higher value is placed on benefits paid in the future. A rise in the net discount rate will have an opposite effect of similar magnitude. The overall effect of a change in the net discount rate of 0.1% would change the liabilities by around £13.0 million.

There is also uncertainty around life expectancy for the UK population. The value of current and future pension benefits will depend on how long they are assumed to be in payment.

The disclosures have been prepared using the mortality assumptions adopted for the 2007 formal valuation - namely the PCMA/PCFA00 tables, applying a medium cohort adjustment with a 115% loading to mortality rates based on the year of birth of the membership. These assumptions imply an assumed life expectancy for a member aged 65 at 30 September 2009 and 31 March 2009 of 20.6 years for males and 22.9 years for females.

The effect of increasing the assumed life expectancies by one year would be to increase the value of liabilities by around 3%.  Responsibility Statements

We confirm that to the best of our knowledge: 

a) the interim financial statements have been prepared in accordance with IAS 34;

b) the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

c) the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and changes therein). 

By order of the Board

John Cuthbert Managing Director

Chris Green Finance Director

20 November 2009

  Independent review report to Northumbrian Water Group plc

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2009 which comprises Interim Consolidated Income Statement, Interim Consolidated Statement of Comprehensive Income, Interim Consolidated

Statement of Changes in Equity, Interim Consolidated Balance Sheet, Interim Consolidated Cash Flow Statement and the related notes 1 to 9. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. 

This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements (ISRE) 2410 (UK and Ireland) 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

Directors' Responsibilities 

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority. 

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRS as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union. 

Our Responsibility 

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. 

Scope of Review 

We conducted our review in accordance with ISRE 2410 (UK and Ireland), 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. 
 Conclusion 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2009 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority. 

Ernst & Young LLP

Registered Auditor

Newcastle upon Tyne

20 November 2009

 

END

 

 

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