ANNUAL REPORT 2017 - South Staffordshire · Welcome to South Staffordshire Plc’s Annual Report...

ANNUAL REPORT 2017

2

Front cover and aboveSeedy Mill UV Treatment Plant project

South Staffs Water, supported by its partners including SSI Services, completed the installation of one of the UK’s largest UV clean water treatment plants at Seedy Mill Treatment Works.

Underground wet contact tanks were converted into two dry chambers, each housing two UV reactors. The project was completed to schedule whilst still ensuring that Seedy Mill remained operational, with all water leaving the site now being treated by UV.

More details about this project can be found in the Strategic Report on pages 13 and 21.

Welcome to South Staffordshire Plc’s

Annual Report 2017

Group Highlights 4

Strategic Report 6Executive SummarySouth Staffs WaterSSI ServicesEchoCorporate Social ResponsibilityFinancial Review

Governance 44Board of Directors and Executive TeamDirectors’ ReportCorporate Governance Report and Committee ReviewsDirectors’ Responsibilities Statement

Statutory Accounts 58Independent Auditor’s ReportConsolidated Profit & Loss AccountConsolidated Balance SheetCompany Balance SheetConsolidated Statement of Changes in EquityCompany Statement of Changes in EquityConsolidated Statement of Comprehensive IncomeConsolidated Cash Flow StatementNotes to the Consolidated Cash Flow StatementNotes to the Financial Statements

Contact Details 88

4

Annual Report 2017

Group Highlights

Award winning collaboration to install UV plant at Seedy Mill Treatment Works

Echo’s RapidXtra supports 8 water companies in retail market opening

Continued high performance by South Staffs Water in ‘Interruptions to Supply’ measure

No RIDDOR accidents

5

Group Highlights Strategic Report Governance Statutory Accounts Contact Details

Echo shortlisted for 19 Industry awards, winning four All Group

Health and Safety targets again met or exceeded

Disappointing performance on complaints in South Staffs Water

Over £60k raised for WaterAid

Strong organic growth across SSI Services

Turnover increased by 5.6% to £248m

6

Annual Report 2017

Strategic ReportExecutive Summary

Group overview, strategy and business modelSouth Staffordshire Plc is a highly respected integrated services group of businesses. The Group includes a regulated water supply company, South Staffs Water, comprising two operational regions, South Staffs and Cambridge, and also two non-regulated service divisions, SSI Services and Echo.

The Group’s strategy remains to continue to grow by providing high levels of service quality, while remaining price competitive in all of its operations, through driving continuing business improvement and operational efficiency, as well as maintaining a safe and enjoyable working environment. Details of how this strategy is implemented across the Group and the individual divisional strategies, business models and plans are provided throughout the Strategic Report.

South Staffs WaterSouth Staffs Water has again achieved good performance against most of its Outcome Delivery Incentives, with pleasing results in water quality, interruptions to supply, encouraging and enhancing biodiversity, as well as providing support for customers in debt. There was also the successful completion of a significant investment in a water quality enhancing UV plant at one of its main treatment works.

The business has, however, encountered some disappointments during the year, particularly in its Service Incentive Mechanism (SIM) score – the water industry customer service measure. Efforts to drive efficiency to ensure that customers continue to experience great service at a fair price have had an unfortunate impact on the overall customer experience, in this period resulting in an increase in complaints. South Staffs Water is making significant efforts to reverse this, the benefits of which can already be seen so far in the 2017/18 year, with improvements in the SIM score achieved.

During the year, preparations for the launch of the Non-Household retail market were a key area of focus for the business. A readiness program was delivered, to ensure that our operations were in place for the 1 April 2017 ‘go live’; when South Staffs Water exited the Non-Household retail market by transferring its related assets and operations to a sister company SSWB Limited. This company was then transferred to Pennon Water Services, as part of a joint venture between South Staffordshire Plc and Pennon Group Plc.

South Staffs Water is now working to deliver the remainder of its AMP6 commitments, as well as preparing for PR19, which demands a level of innovation, flexibility and responsiveness not previously seen in the water industry.

EchoThroughout the year, Echo’s Rapid business has helped all of its clients, both retail and wholesale, to successfully comply with the new requirements for Non-Household retail competition, as well as interact with the market operator and compete effectively in the new environment. However, whilst this was a significant success for Echo, our clients understandable focus on Non-Household retail competition led to reductions in other work for Rapid. Echo continues to monitor developments to ensure its clients remain compliant and competitive.

Echo’s debt recovery solution focuses on the customer experience, and the business continues to be awarded new contracts, putting the business in a strong position within its core sector, UK utilities.

The business is particularly proud to have been shortlisted for 19 industry awards across a variety of customer service and debt collection award programmes, four of which it won.

7


SSI ServicesOverall, the division has experienced an encouraging year, seeing organic growth; including an increase in demand for its specialist skills and technologies, along with the successful completion of some important client projects. The division is now seeing the benefits of its risk management plan and is less reliant on individual customers and the water industry five-year AMP cycle. The division’s excellent Health and Safety performance saw a reduction in the All Injury Accident rate by 52%, reflecting the significance the divison, and the Group as a whole, places on Health and Safety.

The Mechanical and Electrical business had an excellent year, securing four new frameworks that mean the business now has twelve secured frameworks with eight major clients.

During the year, a decision was taken to integrate the businesses of Onsite Specialist Maintenance, Perco and IWS’s Pipeline Services into OnSite, which is intended to bring economies of scale, greater clarity surrounding the business’ market offering, improved customer experience and brand awareness.

Real benefits are expected be realised in the future, as the new structure is established.

SSI Services is set to continue its success and grow in the existing markets in which it operates, targeting further organic revenue growth whilst seeking further cost efficiencies, including smarter working processes and systems through continuing investment in technology.

FinancialThe Group outperformed key financial targets, including challenging budgets for turnover, profitability, cash flow and net debt. Overall, Group turnover increased by 5.6% in the year to £248.0m, with as budgeted, EBITDA of £81.9m (before infrastructure renewals - see reconciliation on page 37) remaining largely in line with the previous year. Operating profit for the year was £43.8m (2016: £47.5m before exceptionals). Capital investment of £44.2m (2016: £35.9m) was completed in addition to investment in infrastructure renewals of £8.7m (2016: £7.5m) in the year.

EmployeesAs always, the success of the Group could not be achieved without the hard work and dedication of our employees. We thank them for their continued support and commitment to the Group.

The Health and Safety of our employees is of prime importance, and we are pleased to once again report that each business met, or exceeded, their targets for reduction in accidents. It is pleasing to note that no RIDDOR accidents were recorded across the Group, compared to seven during the previous year. Going forward, each business unit has been tasked with setting a business plan to achieve a minimum of 10% improvement on 2016/17’s Health and Safety performance.

OutlookOverall, through its ability to efficiently provide high quality services at competitive prices, the Group remains in a strong position to continue its work in maximising the opportunities available to it, while preparing for the undoubted challenges ahead.

8

South Staffs WaterContinued high performance in Interruptions to Supply

Successful completion of one of the UK’s largest UV clean water treatment plants

Annual Report 2017

Introduction of a new social tariff, ‘Assure’

9


In a year of challenge, South Staffs Water continues its focus on providing the highest quality water, while remaining affordable, to our customers.

Annual Report 2017

10

11

OverviewSouth Staffs Water is a water only company, supplying around 1.6 million customers in the South Staffordshire and Cambridge regions.

The water industry is undergoing unprecedented transformation. With complex challenges including deregulation, environmental pressures and significant changes in the demands of the UK population the business is developing a new flexibility in how it operates that means it can respond quickly and adapt as necessary to take full advantage of the new landscape.

Underpinned by significant customer engagement, the new Outcome Delivery Incentive (ODI) targets included in the plan have been designed to deliver what is important to our customers. This is captured within five Outcomes and 15 specific ODIs, covering all aspects of operations from water quality, secure and reliable supplies, customer services and environmentally sustainable operations to fair customer bills.

Alongside the ODIs, there are seven business targets, including a focus on readiness for competition, employee satisfaction, as well as safety and wellbeing.

of these was undertaken at the Seedy Mill treatment works. A multimillion pound investment created the second largest clean water UV (Ultraviolet) treatment plant in the UK. The resulting benefit of enhanced water quality and compliance will be replicated with additional investment in the coming year, including the installation of UV treatment at our largest treatment works.

Fair and affordable bills for all of our customersSouth Staffs Water’s household customers continue to enjoy some of the lowest bills in England and Wales. We are committed to maintaining affordability of bills, as well as supporting our most vulnerable customers with a range of help when they need it most. During the year, we exceeded our performance commitment in providing extra help to over 23,000 customers in debt, helping them to manage their water accounts and take control of their consumption.

Our range of solutions for customers that struggle with bills expanded with the introduction of the new “Assure” social tariff. It offers a discount of up to 80% on bills, subject to eligibility which is based on income and expenditure. During the year 4,066 customers were signed up to the Assure tariff. In addition, we are seeing real benefit to some of our most


Together, they provide a real focus for delivery as we meet the challenges and opportunities this five year period presents, while still ensuring that excellent customer service, alongside a reliable, high quality water supply with affordable bills, remains at the heart of everything we do.

The highest quality water, today and tomorrowThe single most important area of our operation is ensuring the water we supply to customers every day is of the highest quality. Improving the quality of our water beyond simply meeting regulatory commitments is a principal objective for the business, with an aim to achieve 100% water quality compliance and an improved customer perception of our water through appearance, taste and odour. The business aspires to an unrestricted, uninterrupted supply of water of the highest possible quality.

Following a challenging period in the previous year, we have seen an improvement in our acceptability of water measure, both in terms of our compliance score and in a reduced number of customer contacts about water quality, driven by investments in the business’ assets and processes.

Quality driven investment was undertaken across our assets including a number of borehole refurbishments. The most significant

12

“We continue to find better ways to listen to our customers and respond to what we hear from them.”

91%satisfaction score for value for money

and affordability

vulnerable customers in providing sensitive face to face assistance to them in their own homes. We plan to expand on this valuable work in the year ahead.

Excellent customer service, every timeAt South Staffs Water we recognise the importance of responding to lifestyle changes, offering greater choice and flexibility in how customers can access information and make contact with us. The expansion of the online account management service, MyAccount, into our Cambridge region was a key stage in the continued expansion of our digital offering.

However, in the last year there has been some negative impact on the customer experience as a result of changes in billing services, as well as some of our operations in the field and contact centre. Whilst these changes will deliver long-term sustainable efficiencies and improvements, the short-term effect in the first half of the year was a deterioration in our level of customer service. As a result, we were not in our targeted upper quartile position of Ofwat’s SIM measure for the year. As a result of this, significant efforts in training of staff, along with a review of our processes and systems, were made to reverse this trend and ensure that we are consistently delivering the quality of service our customers expect. We were pleased to see our SIM performance start to improve in the latter half of the year, and correspondingly complaint numbers began to glide back towards their traditional low levels.

We continue to find ways to better listen to our customers and respond to what we hear from them. More in-depth, regular research has been put in place to better understand customers’ current and future needs, as well as their views of our services.

The results are being used to inform business decisions which match with what customers have told us they value. We will also involve them in the shaping and creation of a future services.

These research findings are being complemented by contributions from the new Independent Water Customer Panel, who meet quarterly. On the panel there are representatives from the Environment Agency, CCW water and other members with a variety of skills and expertise within public and private sectors. They use their skills and expertise to actively challenge how we as a Company, engage with our customers and perform as a business. This has been a significant achievement for us this year. In addition, one of the South Staffs Water Independent Non-Executive Directors attends the panel to compliment attendance by Senior Management and to ensure that the appropriate actions are being taken based on the meeting outcomes. We welcome the independent and challenging contribution the panel brings.

South Staffs Water has commenced publishing in year performance results, initially for our South Staffordshire region, on our website. These are unaudited but in a format which customers can easily follow.

Secure and reliable supplies, now and in the futureWater efficiency is fundamental to safeguarding supplies and the business remains committed to helping customers change the way they value and use water every day through an ongoing programme of educational engagement.

We have maintained a strong performance on minimising supply interruptions, and will continue to focus on ensuring that our pipes and networks are well maintained

Annual Report 2017

13

Completion of one of the UK’s largest UV clean water treatment plantsSeedy Mill is South Staffs Water’s second largest surface water treatment works. There have been numerous modifications and extensions to the facility but it was still principally operating using the same technology and processes since its initial construction in the 1950s.

As part of our commitment to the highest water quality standards, we chose to design and retro-fit a state-of-the-art UV treatment technology into the existing structure, in collaboration with Integrated Water Services and the UV technology supplier, atg UV Technology, whilst keeping the works operational. The proven, regulated and environmentally friendly UV

technology ensures water is free from harmful organisms, and means less chlorine is needed, reducing the risk of issues with taste and odour.

Underground wet contact tanks were converted into two dry chambers in separate phases to keep the plant operational, each housing two UV reactors, with each containing 30 glass tubes, making the facility one of the

“We have maintained a strong performance on minimising supply interruptions this year.”

and that decisions regarding our infrastructure place us in the best possible position to provide secure and reliable supplies.

The benefits of addressing challenges in this area are increasingly evident. We will continue to work closely with the Environment Agency to maintain practices that are environmentally responsible, as well as develop appropriate partnerships that will provide innovative solutions.


Successful collaboration with the University of Cambridge will, this coming year, see completion of Phase 1 of the award-winning £1 billion North West Cambridge development, supplying 3,000 homes, 2,000 student rooms and other community facilities from the UK’s largest rainwater recycling scheme. We see this as a living example of how future developments in a water scarce area which is also seeing continued and significant population growth should be approached.

largest UV water treatment plants in the UK. A project of this scale would normally take two and a half years but it was completed in just ten months. The speed of the construction did not negatively impact on Health and Safety, with eight main contractors and sub-contractors, over 90 suppliers and 200 plus craftsmen and technicians on site with no lost time injuries.

14

“The recruitment of seven apprentices in the year represents a commitment to investing in future talent.”

99.98%water quality

compliance

Connecting with our communitiesSouth Staffs Water aims to make a positive difference, developing strong and lasting partnerships with the communities in which we live and work through education about water usage and efficiency, as well as enhancing biodiversity and charitable support.

We have an ambitious target to deliver at least 400 days of support in our communities through initiatives including an education programme, biodiversity projects and our employee volunteering scheme. This remains a challenge as, whilst we have made a difference in supporting schools, charities and other organisations, we ended the year on a total of 222 days.

A change in how we approach engagement with schools has been introduced during the year. We believe that by switching from a location based offering in the South Staffs region alone to an outreach service in both regions, we are better placed to meet the demands of educational institutions, allowing us to increase our work in this area.

Environmentally sustainable operationsThe business understands and recognises the impact of its operations and is dedicated to protecting our environment. We work hard to maintain our good long-term track record on leakage and ensure we continue to meet our targets. This includes fitting additional flow meters to automatically monitor consumption, and so support our leak detection performance improvements.

Our active approach to catchment management as a long-term solution to improving the quality of raw water includes developing partnerships with key stakeholders, undertaking relevant research, participating in initiatives, and acting as an education resource.

Our new SPRING Environmental Protection Scheme has built on previous success to further support arable farmers in the Blithe catchment area. Grants are made available by the Company towards the costs of voluntary on-farm infrastructural improvements and agricultural management schemes designed to protect the environment and improve water quality, such as contour cropping and pesticide sprayer washdown.

We also work to deliver innovative projects that will enhance biodiversity across our region. The first round of funding from our PEBBLE fund (Projects that Explore Biodiversity Benefits in the Local Environment) has rewarded applications ranging from creating a wildlife walk, and clearing scrubland, to supporting a school keen to raise awareness of the environment and local wildlife among pupils.

Valuing our peopleWe are committed to making South Staffs Water a great place to work with a safe, positive, and rewarding working environment. We maintained our performance on accidents in the workplace last year and continue to place a strong focus on ensuring the highest employee safety standards, with a target to further reduce accidents in the coming year.

The recruitment of seven apprentices in this year represents a commitment to investing in future talent and a recognition of the importance of succession planning. The apprentices each have a mentor to support them as they gain experience from rotating across the wholesale division of the business alongside gaining formal qualifications.

Annual Report 2017

15

Our annual employee survey plays an important role in helping us to understand the feelings and motivations of our people, with the results providing direction for change and improvement in areas such as training and development.

Readiness for Open WaterThis year saw a focus on ensuring our systems, processes and organisational structures were in place for Non-Household retail business opening up for competition in April 2017. Robust preparation ensured both the risks and opportunities associated with the significant changes were identified and planned for appropriately, with the business meeting all compliance requirements at Go Live.

On 1 April 2017, South Staffs Water transferred its Non-Household retail operations and related assets to SSWB, a fellow Group company. On the same day, South Staffordshire Plc transferred its shares in SSWB to Pennon Water Services (PWS), in return for a 20% equity share in PWS. South West Water transferred its Non-Household retail operations to PWS on the same day, therefore forming a joint venture between South Staffordshire and the quoted Pennon Group to operate in the Non-Household retail market.

Our Future FocusMuch of our future activity is mapped out, and so, we must continue to focus on ensuring that the predicted benefits of our planned investments are fully realised. However, AMP6 and the period beyond demand a degree of flexibility and responsiveness not previously seen in the water industry. To meet our commitments, we need to demonstrate a combination of collaboration, innovation, long-term planning and careful investment.


The biggest single challenge we face is finding the best way to consistently deliver high quality water at great value with excellent service for future generations, as well as today’s customers, in a sustainable way. We have to consider this whilst not ignoring the significant economic, social and environmental challenges this presents. We have begun significant planning to be able to submit our next five year business plan to the economic regulator, Ofwat, in September 2018. Amongst other matters, it will lay out what we plan to do to ensure our network of pipes, reservoirs, pumping stations and water treatment facilities are fit for the future, as well as how this will be paid for.

To ensure we get it right, we will need to work with everyone who is affected by water use in our region – from big business owners and housing developers to customers in our communities and other stakeholders. We will work to share our ideas, listen to the opinions and ideas of other, learning from them to form a plan together. That way, we can be sure that the commitments and measures we include in our plan truly reflect what is important to our customers.

“To meet our commitments, we need to be collaborative, innovative and flexible.”

New ‘Assure’ social tariff introduced to support vulnerable customers

16

SSI ServicesWork on one of UK’s largest UV clean water treatment processes complete

Strong Health and Safety culture resulting in a significant 52% reduction in the All Injury Accident rate

Organic growth across all areas of the division

Annual Report 2017

17


18

SSI Services is set to continue its success, working smarter to increase efficiency and safety.

Annual Report 2017

19

OverviewSSI Services is the Group’s specialist infrastructure contracting division. We provide a broad range of specialist infrastructure based services, including design and installation, testing and repair, as well as long-term maintenance. Our main focus is on the management of client risk and legislative needs, principally in regulated environments, providing added value using specialist skills, equipment and technologies.

We have developed a very broad customer base across both the public and private sectors, from all major water utilities, industrial processing companies, infrastructure providers, government agencies and local authorities through to major contractors and facilities management (FM) companies. Historically, we have mainly worked in the water and wastewater sector, however to diversify, as well as to manage risk and demand we are now increasingly operating in the water hygiene, rail, power generation, industrial and construction markets. Our strategy continues to be to deliver these services through a number of specialist operating companies using a nationwide mobile operation, along with maintaining strong, long-term relationships with our customers by providing value for money with quality services at competitive prices.

A successful yearOur objective in 2016/17 was to build on the growth and stability of the successful trading concluded in the previous year, whilst also restructuring the division so as to create a consistent team approach. The substantial growth in both revenue and profit has been achieved organically, with only one small acquisition, that of Green Compliance Water Division by IWS, Water Hygiene being completed in October 2016.

The division is now less reliant on the water industry five-year AMP expenditure cycle, with increased revenue now being generated outside of this sector, in line with our risk mitigation plan. This is set to continue and makes the division more resilient.

Clean Water ServicesThe Clean Water business includes two operating units – IWS Mechanical and Electrical (M&E) Services and Hydrosave, which provides water management services, with a number of common clients across the two businesses.


The division has around 1,900 employees, all of whom are key to our success, with the majority operating remotely and in often challenging environments. Health and Safety is therefore at the heart of our businesses, and we continue to focus on developing a strong Health and Safety based culture across all of our businesses. The hard work and commitment of all of our employees has enabled the division to achieve all of its safety targets, whilst noting that further improvement can still be made. Importantly, the division suffered no RIDDOR reportable events during the year, compared to three in 2015/16, with the All Injury Accident rate reducing by 52%.

SSI Services is made up of three business areas, Clean Water, OnSite and Water Hygiene. In addition, Omega Red, which provides lighting protection and electrical earthing services, also trades as part of SSI Services. During the year, a decision was taken to integrate Onsite Specialist Maintenance, Perco and IWS’s Pipeline Services into OnSite, which was completed in August 2016. This integration will bring economies of scale, greater clarity surrounding our market offering, improved customer experience and brand awareness.

20

“OnSite’s Rail division is now recognised as a highly respected operator in this specialist sector.”

52%reduction in All Injury Accident rate

The M&E business has had an excellent year with significant growth mainly attributable to the full year impact of the Essex and Suffolk Water framework contract and growth at both our Accrington and Dorchester depots. Throughout the year, the business has managed to secure four new frameworks, meaning that it now has twelve secured frameworks with eight major clients from which to source work, reducing reliance on any single client.

Hydrosave also had a very good trading year. The mainstream Leak Detection contracts have performed strongly, and the newly formed Test Inspect Consult consultancy arm has also performed well during the year, being set to enter the Gas sector in the coming year, providing access into this highly specialised area as we aim to grow our consultancy offering.

OnSiteOnSite, which offers specialist wastewater services, including flow monitoring, sewer rehabilitation and CCTV surveys, had a very busy year. The Rail division that was formed organically in 2014/15 delivered a number of schemes throughtout the year and is now recognised as a highly respected operator in this very specialist sector. The Flow Monitoring department contributed to the year-on-year growth by securing a significant project from a new client, that is set to continue into 2017/18. Further capital has been invested into the business to purchase new plant and equipment so as to support this growth, taking full advantage of years 3 and 4 of the water sector’s AMP period, when activity levels are anticipated to be high.

The Sewer Lining division experienced a good year whilst also targeting increased revenue outside of the traditional water sector market in order to lessen the impact of the water sector’s AMP cycle on the business.

OnSite Specialist Maintenance had a challenging year, due to varying work types. However, a new 3-year framework has been secured within the year, with activity levels increasing at the end of 2016/17, which is encouraging for the year ahead. OnSite Trenchless also experienced a challenging year, due to two schemes that did not deliver in line with expectations. However, the introduction of additional management resource towards the end of the year has yielded positive results.

The changes made within Pipeline Services during previous years have proved to be successful. The five-year contract with South Staffs Water continues to perform well and in line with our expectations. Additional projects with various clients also performed in line with our plan. With the integration into OnSite completed in August 2016, real benefits should be realised in the future as the new structure takes hold.

Water HygieneIWS Water Hygiene is a market leading provider of legionella control services and water hygiene risk assessment, maintenance and remedial works, together with a comprehensive water treatment service, servicing a wide range of customers including local authorities, housing associations and FM companies. The business offers a 24 hours a day, 365 days a year national mobile service supported by the use of technology, which we continue to invest in.

Annual Report 2017

21

IWS collaborates with South Staffs Water at Seedy MillSeedy Mill is South Staffs Water’s second largest treatment works and, in order to meet current standards, IWS was contracted to support the installation of a new UV treatment process.

The project aimed to improve the disinfection process whilst keeping it operational and providing sufficient water to customers. This was complex as there was little available space and very limited hydraulic headroom.

It was decided to install the new UV system inside the existing two halves of the contact tanks, which would be converted into dry chambers to house the new equipment. With IWS, South Staffs Water and the main equipment

supplier all working collaboratively, this involved decommissioning the contact tanks, removing the roof and making major structural alterations. The new UV plant was then installed with the necessary pipework, instrumentation and control measures. The final design is both innovative and effective using a syphon downstream of the UV system to instantaneously prevent forward flow of water in the event of a problem with the UV reactors.

“We are committed to maintaining our high standard of Health and Safety and environmental performance.”

Revenue growth within the year was positive, but gross profit margins came under pressure in the middle of the year. Important strides have been taken to implement our new mobile working solution which should improve productivity in 2017/18. The acquisition of Green Compliance Water Division in October 2016, which has now been fully integrated into IWS, will provide the business with greater scale and operational density.


Looking aheadDue to the division’s commitment to deliver a service in line with our customers’ expectations, which has allowed us to build long-term relationships with our customers based on trust, SSI Services is set to continue its success and grow in the existing markets in which we operate. We are targeting further organic revenue growth in 2017/18, which means that we need to further develop and tighten our commercial controls and maintain operational efficiency through smarter working systems, whilst maintaining our high standard of Health and Safety and environmental commitments.

South Staffs Water has several other UV projects to complete in AMP6 and the lessons learned have been invaluable. Whilst the other projects may not have the same time constraints, they will benefit from both the technical lessons regarding the UV systems and the design parameters, which are critical.

22

Echo13 contract awards including new clients and existing client extensions

RapidXtra supports all eight clients to be compliant and ready on time for the Non-Household water retail market opening

Annual Report 2017

Shortlisted for 19 industry awards, winning four

23


Annual Report 2017

Echo’s innovative and cost effective solutions have supported new and existing clients, both within and outside the water sector.

24

25


OverviewEcho is a specialist outsourced provider of complex multi-channel customer contact services, comprehensive debt and revenue management solutions, as well as being the developer of the UK’s market leading water billing and customer information software, RapidXtra. Echo’s strength is combining best practice specialist services and solutions with highly skilled and knowledgeable people.

The past year has seen both changing and challenging market conditions. In the water industry, companies have focused on delivery and compliance with the opening of the new Non-Household retail market. In the household market, high customer service aspirations, along with protecting revenues, remain pressing against a backdrop of cost to serve constraints and increased regulatory scrutiny around customer affordability and vulnerability. This changing landscape, characterised by consolidation among incumbents, new market entrants and the first steps towards a multi-utility market, has led to both challenge and opportunity for Echo.

Tightening regulations within the debt services sector and the growing focus on treating customers fairly continue to change the debt market. As debt levels continue to rise across the UK, customers’ ability to pay this debt has reduced, making it more difficult for companies to collect what is owed to them.

In the outsourced contact centre industry, competition remains fierce, placing pressure on profit margins. The marketplace is increasingly polarised, with those that innovate, embrace new technologies and become customer-centric continuing to prosper, while others face further challenges. The trend of returning contact centre services on-shore continues, as businesses seek competitive advantage through service excellence.

Despite these conditions, Echo’s ability to offer innovative and cost-effective solutions to meet client challenges has led to both new business and extended relationships with existing clients.

Our expertise once again received recognition, with the division shortlisted for 19 awards across a variety of customer service and debt collection award programmes. Winning four of these is a particular highlight, including the Utility Sector’s Customer Facing Team of the Year and the South West’s Outsourced Contact Centre of the Year.

Our people, our greatest assetPeople are key to delivering great service on behalf of our clients. During the year, we focused on engagement and communication, with our annual employee engagement survey incorporating Echo’s values for the first time to measure how they have started to become embedded within the business. Results were shared

with employees, with focus groups meeting across all sites to deliver any required improvements. The Employee Voice forum was created, with elected employee representatives meeting Senior Management bi-monthly to help make Echo an even better place to work.

Market leading customer billing in an evolving marketEcho’s billing and customer information solution, RapidXtra, continues to hold a market leading position within the UK water sector. The past year was challenging and extremely busy as we navigated evolving market and regulatory requirements to successfully assist all eight of our water company clients, including both wholesalers and retailers to become fully compliant with and ready on time for the opening of the Non-Household retail market.

RapidXtra Retail successfully provided all the additional required functionality to comply with the new regulations, interact with the market operator and compete effectively in the new environment. As the Non-Household retail market evolves, we are closely monitoring developments, reacting swiftly to any regulatory changes, allowing our clients to remain compliant and competitive. Planned upgrade releases will add yet more enhancements to our clients’ customer service and billing

26

“Echo’s offering leverages the importance of the customer experience throughout the debt recovery process.”

19 industry

awardshortlistings

capabilities, ensuring RapidXtra remains the solution of choice to service our customers.

With vast experience in retail billing programme deployment and delivery, as well as a deep understanding of the water sector and its regulatory requirements, RapidXtra is perfectly placed to be the first choice option for any new market entrants, and we continue to monitor the market closely and engage with new entrants, offering expert support and services to meet their market entry strategies.

Innovative end-to-end customer-centric collections servicesThe challenges of supporting vulnerable customers, ascertaining customers’ ability to pay and ensuring fair outcomes for all are key concerns, as well as to the sector and to Echo. Strong data, tailored strategies and positive customer engagement are all key debt recovery strategies. We are in a strong position here with the business able to provide both debt management expertise and customer service excellence.

The last year has seen both innovation and growth, as we continued to build on the strength of our end-to-end debt recovery service. As well as being successfully authorised by the Financial Conduct Authority, Echo’s office-based debt operations were successfully integrated into our Bristol site, aligning customer experience and debt activities closer than ever before.

Recognising that debt is just another part of the customer journey, Echo’s offering leverages the importance of customer experience, with a customer service mind-set throughout the debt recovery process, championing the importance of early intervention and a collaborative approach between in-house teams and external providers. This provides a strong platform for growth, with a continued focus on customer service excellence.

We continue to expand our field-based propositions, with activities widening beyond traditional debt collection work to include revenue protection activities and customer affordability, as well as vulnerability visits, focused around building long-term sustainable relationships with customers.

As our solution continues to strengthen, it places us in a strong position in our core sector, UK Utilities. Echo secured a number of new clients during the year, including a strategically important contract with a ‘big six’ energy provider to provide field-based meter tampering and energy theft investigation services. Also, our first energy client award in Ireland, providing field-based debt collection services, provides a solid foundation to support our strategic objective of growth in both Northern Ireland and the Republic of Ireland.

Customer contact service excellenceThe English water sector has seen a year of challenge and evolution as water companies balanced service performance in the household sector with the operational demands of readiness for the opening of the Non-Household retail market.

Echo continued to assist South Staffs Water to embed and promote their customer digital service offerings, as well as supporting and developing a number of innovative offerings such as the ‘Assure’ social tariff. In Northern Ireland, we successfully implemented the last of three key contract project milestones for Northern Ireland Water, delivering new technologies and functionality. Echo also secured a new metering and billing contract with Northern Ireland Water to undertake field and office based data reconciliation activities.

Echo Bristol continues to provide multi-channel customer contact services to public and private sector organisations; offering end-to-

Annual Report 2017

27

end capabilities, from entry level bureau through to comprehensive, analytics-enabled multi-channel programmes. Despite the highly competitive landscape, we won a number of new clients during the year, as well as maintaining and expanding relationships with existing clients. The Bristol operation focuses on service excellence, using insight, experience and expertise to add further value; evolving and improving customer experience and exceeding clients’ expectations.

Looking to the futureThis next year promises, once again, to be rich in opportunities across Echo’s core divisions. We remain focused on sustainable growth within core markets, as well as across our service and software portfolio.

As UK water follows energy into deregulation, with the possibility


RapidXtra Retail supports water market opening RapidXtra is already used by over one third of water companies across England and Wales. In the past year, Echo has supported the water sector to ensure that each of its Rapidxtra clients’ billing systems was capable of communicating with the market and was compliant with the new Non-Household market regulations.

Our RapidXtra team successfully navigated evolving market requirements whilst delivering the Retail Ready Roadmap; supporting both wholesale and retail clients to operate and compete effectively in the new environment.

Echo worked closely with retailers Anglian Water Business, South Staffs Water Business, Yorkshire Water, Source for Business (the trading brand for Pennon Water Services), WaterPLus and Water2Business, as well as wholesalers Pelican Business Services, South Staffs Water and South West Water; assisting them successfully through to full market go-live in April 2017.

The hard work does not stop there, with the RapidXtra team continuing to keep a close eye on the evolving market in order to react quickly to any regulatory changes, enabling clients to remain compliant and competitive. Planned upgrade releases of RapidXtra Retail will continue to add yet further enhancements to clients’ customer service and billing capabilities.

of household market opening on the horizon, the opportunity for companies to offer a true multi-utility customer proposition has arrived. New partnerships within the water sector, cross-utility developments and the growing demand for white labelled solutions all present opportunities for Echo. We will continue to develop products and services, positioning ourselves as the true customer engagement specialist for the new sector; delivering both customer engagement improvements and cost efficiencies.

Continued investment in, and the development of, RapidXtra remains a key focus; ensuring our solution continues to lead the way in the market. Echo will continue to grow its debt collection and revenue management proposition, widening field-based services and targeting deeper market penetration across

key industry sectors. For contact centre services, the focus remains on developing and delivering multi-channel value driven propositions.

Echo’s new Leadership Behaviour Framework will be rolled out into the employee performance management lifecycle, placing equal emphasis on how we do things as well as what we do. By staying true to our values, we will provide customer-led solutions for clients. Through the expertise, knowledge and understanding of our people, we will collaborate to deliver an enriched customer experience; protecting clients’ brands as if they were our own. Echo will pursue opportunities to add new clients, expand services provided to existing clients, as well as identify and acquire businesses aligned with Echo’s strategy, ultimately adding value to its client base.

28

Corporate SocialResponsibility

Record-breaking fundraising for WaterAid at annual ball

No RIDDOR accidents across the Group

New PEBBLE biodiversity scheme launched

Annual Report 2017

29


30

Annual Report 2017

The Group is committed to supporting its local communities.

31

OverviewThe Group has had a particularly successful year in managing the Health and Safety of its employees, and continuing to focus on the environment and prevention of pollution. The Group is committed to supporting it’s local communities and supporting fundraising events. Customers are also at the centre of the Group’s activities. CSR has and remains a priority for the Group.

EmployeesThe health, safety and wellbeing of our employees is central to the growth and success of South Staffordshire Plc. We ensure it remains a safe and enjoyable Group to work for, by providing a positive and inclusive working environment.

- Health and SafetyGood progress has been made to steer the Group to further develop the Health and Safety culture, and each business met or improved their targets for reduction in accidents. The headline figure being, no RIDDOR accidents, compared to seven in the previous year.

The Health and Safety Strategy Forum led by the Group Chief Executive and supported by the Head of Group Health and Safety, continues to oversee activities in this important area of the business.

The success is due to each business closely monitoring their own performance, against their own

Business Safety Plan, which contains business specific targets for, different measures of accidents, accident rates, hazards identified, Director and Line Manager Audits, as well as local initiatives aimed at addressing identified areas of risk.

New Business Safety Plans have been developed for 2017/18 and focus on accountability. These plans are divided into departmental plans and managers are responsible for the delivery of specific parts of the overall plan.

The accident/incident database has been further developed to include Hazard Reporting, and accident investigation training has been rolled out to approximately 300 managers and supervisors, these are just a couple of the initiatives which were undertaken during the year.

Effective leadership, commitment and employee engagement enabled us to achieve our Health and Safety milestones, which were met or improved on for the third year in succession. In order to maintain the momentum, annual milestones have been set for 2017/18, with a minimum of 10% improvement on 2016/17’s performance.

The majority of our businesses have external accreditation for their health, safety and environmental management systems. Many Group companies also hold ISO 9001 quality management and OHSAS 18001 Occupational Health and

Safety management accreditations, and are part of the Safe Contractor schemes.

Employees have access to specialist occupational health advisors, who can provide proactive health surveillance and advice in order to keep our employees fit and healthy. Employee assistance programmes are also available across the Group; our employees can get free advice and counselling on any issues, whether its work related or personal.

- Training, development and engagementSouth Staffs Water is committed to providing a safe, positive and rewarding working environment. The annual employee survey plays an important role in helping understand the feelings and motivations of the employees. The results provide direction for change and improvement in areas such as, training and development and the working environment.The recruitment of seven apprentices, each with a mentor, during the year, represents a commitment to investing in future talent.

Echo launched an Employee Voice Forum to drive communication and engagement, in addition to driving actions to make Echo a great place to work, the forum also focuses on local and national charity days/events. So far they have supported, Depression Awareness Week, No Smoking Day, Learning at Work Week and National


32

Walking Month. A wellness policy has also been launched, to support employees in promoting a happier healthier wellbeing.

SSI Services have periodic reviews of individuals, to identify and ensure that appropriate qualifications and accreditations are in place to carry out their duties, in accordance with legislation and customer requirements. Approximately 120 managers and supervisors have completed the Training for Success programme, which covers all aspects of leadership and management. Existing apprentice programmes will be strengthened by the development of an Engineering Apprenticeship Programme in late 2017.

- Equality and fair treatmentWe are committed to providing a positive working environment, free from discrimination and/or unfair treatment. Every effort is made to provide equal opportunities for employment, training and promotion, having regard to employees’ particular aptitudes and abilities, regardless of their gender, race, age or disability. If an employee were to become disabled, we would endeavour to keep them in the workforce, by making reasonable adjustments to their role or working environment, or looking for redeployment opportunities within the Group.

Human rights are not considered to be a material risk for the business, due to existing regulatory requirements in the UK and the nature of our supply chain.

EnvironmentAs a Group, we have several environmental projects on going. South Staffs Water continues management of the previously established wildflower meadow areas at Sedgley Beacon, and the translocated grassland area at Fleam Dyke. It launched the PEBBLE fund, awarding grants totalling £26,500

to ten projects aiming to improve biodiversity across the South Staffs and Cambridge regions. SSI Services is ISO 14001 accredited, which covers the environmental aspects and impacts that relevant to the activities it carries out. The division is working towards reducing its carbon footprint and that of its customers, by the regionalisation of the business and the minimisation of fuel usage.

CommunitiesThe key event in our fundraising calendar was WaterAid’s Sparkles & Suits Ball. More than 200 guests attended from across the Group, the wider supply chain and other stakeholders. A total of nearly £44,000 was raised as a result of sponsorship, monetary and gift donations and fundraising on the night, significantly beating last year’s total. Support for the charity continued during their ‘GoBlue4Water’ activity on World Water Day in March 2017.

Each of our businesses have provided support to their local communities and organised or attended fundraising events:

• Group Services provided 13 days of employee time to support a local hospice (Acorns)

• South Staffs Water Employee Volunteer Scheme provides staff with up to three days’ paid time per year to participate in work that will make a positive difference in their communities. They also encourage communities to access their sites that are open to the public, to help increase knowledge of the work the company does. A highlight of the year was opening the Maplebrook pumping station in Burntwood as part of the national initiative, Heritage Open Days. Although no longer functioning, the Grade II listed building is one of the few remaining pumping stations in England to retain original triple expansion steam engines in situ.

Annual Report 2017

Male 18

Female 5

Directors and Executives

Senior Management

Male 32

Female 8

Other Employees

Male 2108

Female 646

Analysis of Group employees by gender

33

• Echo supported the Macmillan Cancer cake sale, Children in Need and Save the Children, to name a few. They also participated in events for local charities, their Belfast site continues to support local animal shelters, and in Walsall, food is regularly donated from our contact centre to a local homeless shelter. Finally, Echo launched an employee volunteering scheme, piloting the scheme in Bristol, giving employees a paid day off to support local volunteering programmes.

• SSI Services is a nationwide division, and so it encourages employees to support their local charities, specifically in areas relating to schools and learning. SSI Services also supports the Robert Harley award, which is made once a year to employees who have shown commitment to delivering great service and who have gone the extra mile for the success of the division. The winner is awarded with £500 to donate to a charity of their choice.

CustomersThe Group is concentrating on customer satisfaction, service quality and building long-term relationships with customers, all of which are imperative to the future success of the Group.

The Water Customer panel is made up of an impartial board of customers. Stakeholders and experts who act on behalf of customers to keep check on how South Staffs Water operates. They are responsible for looking at communication, ensuring the commitments outlined in the business plan are met and challenging performance to be sustainable, affordable and cost-effective.


Sparkles & Suits ball is a record-breaking successSouth Staffs Water’s key fundraising event in support of WaterAid, the Sparkles & Suits Ball, enjoyed fantastic support with over 200 guests from businesses across the Group and the wider supply chain.

As a result of sponsorship, monetary and gift donations and fundraising on the night, a total of nearly £44,000 was raised, significantly beating last year’s total of £25,000.

Support for the charity has continued, with businesses from across the Group getting involved in the annual Fly Fishing competition at Blithfield, as well

as WaterAid’s ‘GoBlue4Water’ activity, marking World Water Day in March 2017.

Echo took part in the Institute of Customer Service’s (ICS) National Customer Service Week in October 2016; the ICS spent an engagement day in the Bristol Operation. This was to embed the ICS principles and values within the operation with this focus on customer service by Echo being rewarded with a number of awards.

34

Financial ReviewChallenging budgets for turnover, profitability, cash flow and net debt outperformed

Increase in capital investment by £7m

Annual Report 2017

Significant liquidity headroom maintained

35


Annual Report 2017

The Group again exceeded its challenging financial targets, indicating another strong and disciplined financial performance.

36

GROUP TURNOVER

£205m£225m

£239m £235m£248m

2013 2014 2015 2016 2017

37

OverviewThe Group monitors its financial performance through its success in achieving or outperforming certain targeted Key Performance Indicators. In the year ended 31 March 2017, the Group outperformed key financial targets including challenging budgets for turnover, profitability, cash flow and net debt.

Group turnover increased by 5.6% to £248.0m in the year (2016: £234.9m). Turnover generated by South Staffs Water remained broadly in line with the previous year at £123.7m (2016: £123.9m), with the real reduction in the appointed wholesale turnover (k factor of -0.9% from the PR14 Final Determination) being offset by the allowed wholesale inflationary (RPI) increase of 1.05%. External turnover from the non-regulated service businesses grew by £13.3m to £124.3m (2016: £111.0m), with demand in SSI Services increasing through the year as key customers continued to deliver their investment plans with encouraging operational performance on important framework contracts and projects.

Group EBITDA (excluding infrastructure renewals) of £81.9m was, as expected, largely in line with the previous year (2016: £82.0m) - see table opposite. There was an increase of £0.5m in the non-regulated businesses reflecting the higher level of operational activity in SSI Services, as noted above, offset by an expected reduction in EBITDA for South Staffs Water (£0.6m) mainly

due to, as budgeted, higher power costs (principally pass through charges) compared to 2015/16. Group operating profit was £43.8m (2016: £47.5m before exceptional items), with the expected reduction largely reflecting the higher level of depreciation charges (£2.3m) deducted from EBITDA following the significant investment in, and subsequent growth of the fixed asset base, both in South Staffs Water and the non-regulated businesses, along with a higher level of infrastructure renewals expenditure in South Staffs Water (£1.2m). Operating profit for South Staffs Water (after allocation of central items) was £34.2m (2016: £37.1m, before the exceptional operating item) with non-regulated operating profit of £9.6m (2016: £10.4m).

As expected, there was a marginal increase in net finance charges in the year (£0.3m) to £12.6m, largely due to the increase in non-cash

indexation on index-linked debt in South Staffs Water (£0.2m). However, these charges were lower than had been budgeted, reflecting stronger than planned cash flows, and therefore lower net debt achieved throughout the majority of the financial year.

Overall, Group profit before tax was £31.2m (2016: £35.1m, before exceptional items).

TaxThe tax charge for the year decreased to £2.1m (2016: £2.5m) with the reduction partly reflecting lower pre-tax profits in the year.

In both years the main drivers for the tax charge being less than the statutory rate of 20% comprised group relief claimed from intermediate holding companies without payment (2017: £2.5m, 2016: £2.7m) and the inclusion of a deferred tax credit


2017£’000

2016£’000

Operating profit* 43,786 47,455

Depreciation 27,261 24,991

Infrastructure renewals 8,736 7,510

Amortisation of goodwill 4,422 4,328

Amortisation of capital contributions (2,318) (2,283)

EBITDA (before infrastructure renewals) 81,887 82,001

Reconciliation of operating profit to reported EBITDA(before infrastructure renewals)

* Before exceptional items.

38

(2017: £2.4m, 2016: £4.3m) arising from the revaluation of deferred tax liabilities for future tax rate changes. A reduction in the future UK corporation tax rate from 18% to 17% was substantively enacted in October 2016 and will take effect in April 2020, and therefore deferred tax balances were reduced accordingly during the year ended 31 March 2017. Reductions in the rate of corporation tax from 20% to 18% were enacted in the year ended 31 March 2016 and in that year deferred tax balances were reduced accordingly.

The Group’s approach to tax is explained on page 42.

Prior Year Exceptional ItemsIncluded within the total Group operating profit for the previous year was a non-cash exceptional operating cost credit of £3.6m relating to the reduction in the 2015/16 year in the book value of liabilities relating to the South Staffordshire Section of the Water Companies Pension Scheme. This non-recurring and significant reduction in the liabilities arose as a result of the cessation of future accrual of the defined benefits within the scheme during the 2015/16 year.

Also, during the previous year, South Staffs Water sold the contractual rights to future rental income relating to a number of its sites. This sale generated proceeds, as well as a profit of £4.6m which has also been disclosed in the comparative profit and loss account as exceptional as it is not of an operating nature and due to the non-recurring nature of the sale and the significance of the proceeds and the profit generated.

Cash flow and DividendsThe Group continues to place significant emphasis on its cash flow. Group cash flow from operating activities was £64.6m

(2016: £64.6m), including lower year-on-year investment required in working capital, which was also lower than the budget set at the start of the year, offset by the expected year-on-year increase in infrastructure renewals expenditure. Capital investment (excluding infrastructure renewals, net of contributions, disposals and capital creditor movements) increased to £33.1m (2016: 27.9m) due mainly to increased capital investment by South Staffs Water in the second year of the new AMP6 investment period, along with increased investment in the non-regulated businesses to support the sales growth in the year and the expected further growth in this new financial year. Overall, free cash flow (cash flow from operations less interest, tax and capital expenditure) of £24.6m (2016: £30.3m), was ahead of our target. Total dividends paid and proposed in the year were £29.6m (2016: £33.2m) with the reduction from 2015/16 largely reflecting the prior year distribution of the exceptional proceeds on disposal of rental income rights received during that year (£4.6m).

Financing, Net Debt and LiquidityGroup net debt reported for covenant purposes at 31 March 2017 amounted to £350.8m with the increase from 31 March 2016 (£339.9m) being largely due to the increase in the value of index-linked debt in South Staffs Water due to indexation for the year of £3.9m and higher levels of net capital investment of £7.0m (net of contributions and before infrastructure renewals). This net debt value is fully reconcilled to the value used for statutory accounting reporting purposes in the notes to the consolidated cash flow statement on page 66 along with a detailed analysis of the Group’s net debt.

In South Staffs Water, net debt for covenant reporting purposes was £219.7m (2016: £213.4m) being 63.2% (2016: 64.3%) of its Regulated

“Group invests over £44m in its capital base.”

Turnover

increasedby 5.6% to £248m

Annual Report 2017

39

Asset Value (RAV) of £347.6m (2016: £332.0m), representing the PR14 Final Determination RAV uplifted for actual inflation. This ratio reflects the impact of better than expected free cash generation in the year and higher than anticipated inflation (RPI) at the end of the year, which impacts the value of RAV. The expectation for this ratio is in the region of 66%.

The Group and South Staffs Water have maintained, and continue to forecast to maintain, significant headroom in respect of all borrowing covenants which include both interest cover and leverage covenants. Standard and Poor’s continues to rate South Staffs Water as BBB+, well within investment grade.

At 31 March 2017, the Group had available £25.0m of undrawn bank facilities (2016: £31.0m), in addition to its cash balances of £12.6m (2016: £13.8m), providing significant liquidity headroom of £37.6m (2016: £44.8m).

On 18 July 2017, South Staffordshire Plc refinanced a bank facility of £20m that was due to mature in December 2017 with a new five-year £20m bank facility.

Risk ManagementThe Directors acknowledge that risks exist in all businesses with the Group’s approach to risk reflecting its status as a Group comprising a regulated business, with a long-term water supply license, and also non-regulated activities operating in regulated markets.

As part of its normal activities, the Board of Directors, assisted by the Senior Management team, regularly carry out robust assessments of the principal risks facing the Group, including those risks that have the potential to threaten individual business models, future operational

or financial performance, solvency and liquidity. There is regular monitoring of the Group’s risk management and material internal control systems to review their continuing relevance to the Group’s businesses and their effectiveness, ensuring that appropriate risk management activities are in place or are planned to mitigate the risks identified. It is accepted that risks can emerge and change quickly, therefore risk identification and mitigation activities will need to be able to respond to this and that, at any given point in time, enhancements to mitigating actions may be required in response to changes.

Risks are assessed both on a gross basis (likelihood and consequence before mitigating controls) and a net basis (likelihood and consequence after mitigating controls) so that the Directors and the Senior Management team can properly assess the overall significance of the risk and the estimated effectiveness of mitigating actions, as well as if further actions are required.

The Directors accept that not all risks can be mitigated entirely, but aim to ensure that risk management activities reduce the overall estimated impact of risks, on a net basis, to a level that is considered to be acceptable and that do not impact on the long-term viability of the Group and its businesses. The Directors believe that the most significant risk areas currently faced by the Group along with the related mitigating actions are summarised below with no significant changes in the ratings assigned to each risk from the previous year.

Details of the Group’s principal financial risks are provided in note 28 to the accounts.


Non-regulated Service Businesses 22%

South Staffs Water 78%

Analysis of Group operating profit

40

Annual Report 2017

Hea

lth a

nd s

afet

y*

The risks to the health, safety and wellbeing of the Group’s employees, contractors and members of the public that may be impacted by the Group’s operations.

Continuing to improve Health and Safety in a practical and sensible manner is a top priority for the Group, and is regularly reported to both the Board and Executive Management.

A Group Health and Safety Executive Committee is in place to drive Health and Safety strategy and culture, encouraging training, targeted focus on identifying hazards, prompt reporting, best practice policy and improving behaviours.

On a day-to-day basis, Health and Safety is operated and managed within each of the Group’s businesses. Annual plans including targets are produced, which focus operational efforts on areas which have the greatest impact on or risk to Health and Safety performance in each business. Monthly Health and Safety statistics are published and discussed to further drive focus and performance.

Wat

er q

ualit

y#

The risk that South Staffs Water is unable to meet its legal and regulatory obligations for the supply of clean, safe drinking water or that water quality is not of an acceptable standard.

Each year South Staffs Water carries out thousands of water samples taken from treatment works, reservoirs and homes across its areas of supply to monitor quality and respond to any matters arising from the sample results. As part of our Drinking Water Safety Plan activities we undertake catchment monitoring. The results of water quality testing are regularly reported to both the Board and Executive Management.

South Staffs Water has sought to mitigate the risk of water quality failures at one of its key operational sites, Seedy Mill Treatment Works through investment in a multi-million pound project to install a new UV water treatment facility. Since April 2016, all water leaving Seedy Mill has been subject to this additional treatment process.

Investigations as to the most appropriate long-term solution have been carried out at our Hampton Loade water treatment facility during the year, with another UV treatment solution planned to commence in this new 2017/18 year. Alongside this is a continued commitment to invest in our borehole facilities across our estate.

Regu

lato

ry e

nviro

nmen

t an

d co

mpe

titio

n#

The risk for South Staffs Water of non-compliance with, or the inability to respond to, a regulatory environment which is complex and changing, and the risk of these changes having a detrimental impact on the success and financial position of the business and the Group.

The business has a dedicated regulation team that is focused on keeping abreast of regulatory changes, compliance with regulations, and advising the business of changes so that it can respond effectively. This team, along with members of the Board and Executive Management regularly attend focused water sector briefings and technical events to ensure that knowledge in this important area is up to date. Professional advice is taken on matters where it is considered that this will add value. Regulatory matters and changes are regularly reported to the Board and Executive Management.

Ass

et q

ualit

y an

d m

aint

enan

ce#

The risk of failure of key infrastructure and other assets or processes which may result in South Staffs Water’s inability to provide a continuous supply of clean, safe drinking water.

The business is committed to a major investment programme over the five year asset management period (AMP) to continue to maintain and enhance its asset and infrastructure base so that it is able to meet demand and ensure customers continue to receive a high quality, reliable water supply and very high standards of customer service.

Risks Description Mitigation

PRINCIPAL GROUP RISKS

41


Avai

labi

lity

of a

dequ

ate

wat

er re

sour

ces#

The risk that, due to inadequate water resources, South Staffs Water is unable to meet its legal and regulatory obligations for the secure and resilient supply of water.

South Staffs Water is creating the next version of its Water Resources Management Plan for the period 2020 to 2045, and beyond. This considers the impact that housing and industrial development, climate change and the potential for drought may have on both the water supply and the local environment.

The business is actively involved in the design process for the new “Water Resources” price control to be introduced in April 2020, which introduces “upstream” market reform and abstraction reform. Data is being collected to determine the environmental impact of increasing abstraction at sources where licences are due to be renewed in 2018.

Long-term planning is underway to identify options for the future of Hampton Loade and Seedy Mill in the West Midlands. This includes a full range of demand management, resources and trading options. A similar review is underway in Cambridge to address growth and licence restriction.

South Staffs Water has invited customers to share opinions on how they think water resources should be managed in the future. These views will form part of future water resource plans. The business is actively engaging with WREA (Water Resources East Anglia) to identify regional water resource solutions. Exploration of more extreme drought impacts has commenced which may identify the need for wider and more innovative options to be developed.

Cust

omer

ser

vice

# The risk of failure to maintain industry leading customer service levels to ensure that our operations are delivering what customers require.

An action plan is in place to deliver continued improvements to customer service (measured primarily by SIM scores) in South Staffs Water. These scores are used as the measure of performance in this important area, with the target being to be in the top quartile of the sector for SIM performance.

Customer engagement is continuing with a new Customer Challenge Group (Customer Panel). This was launched in April 2016 providing scrutiny and challenge to South Staffs Water.

Secu

rity

and

ava

ilabi

lity

of

info

rmat

ion

and

syst

ems*

The risk that the security over the Group’s information and assets is breached, and the risk to the Group of the loss of key systems.

Risk mitigation initiatives include:• Segmentation of information system infrastructure.• Removing single points of failure from within systems, processes and

infrastructure.• Moving from a disaster recovery to a business continuity infrastructure.• Raising staff awareness of the risks and how to respond to them.

Controls in these important areas are being progressively improved, with a Group-wide initiative to develop information security policies, controls, practices, procedures and awareness. The Group IT operation, which is responsible for the security of the Group’s IT networks, is currently going through the process of becoming ISO 27001 certified, and is also seeking to become accredited against the Cyber Essentials technical controls. The Group IT operation has been strengthened by the appointment of a Group Information Security Controller to further drive risk identification, management and mitigation in information security. Monitoring practices are also being enhanced to identify unusual behaviour or activity that could indicate a security risk.

Risks Description Mitigation

* Affects all of the Group’s operations.# Affects South Staffs Water’s operations.

42

Annual Report 2017

Group Approach to TaxThe following statement complies with the requirements of Finance Act 2016 for large groups to make their tax strategies available to the public.

The South Staffordshire Plc Group (‘the Group’) takes seriously its legal and social responsibilities for meeting its tax obligations. The Group currently has no material operations outside the United Kingdom, and therefore the following has specific reference to UK taxation, although the same principles are applied in other jurisdictions where applicable.

The Group is committed to complying with tax laws in a responsible manner, balancing its obligations to the Government and the public with its duty to manage its affairs efficiently in order to deliver cost-effective services to its customers while generating an economic return to its investors. The Group makes timely and accurate tax returns that reflect its fiscal obligations to the Government.

In particular, the Group:• Will not engage in aggressive

tax planning that is not linked with commercial and economic activity;

• Will not engage in artificial tax arrangements;

• Will seek to maintain a transparent and collaborative relationship with HM Revenue & Customs, principally through the Group’s Customer Relationship Manager;

• Will seek independent professional tax advice on material matters where the application of tax law is complex or uncertain.

The Group will make use of applicable tax incentives provided by the Government within the framework outlined above. These may include, for example, preferential rates of capital allowances or enhanced tax relief for research and development costs and certain designated capital assets that add efficiency to the Group’s operations. Such incentives have been put in place to encourage appropriate business investment.

It should be noted that, for the Group’s regulated water supply business, such incentives will generally have the effect of reducing its customers’ water bills under the funding model adopted by the economic water sector regulator, Ofwat.

In addition to corporation tax, the Group contributes significantly to the UK Exchequer by means of a number of other taxes and levies, including but not limited to:• Employment taxes, National

Insurance and the Apprenticeship Levy

• Carbon taxes and other energy-related taxes and levies

• Fuel duty and other vehicle-related taxes

• Business rates• Stamp duty on property and share

transactions• Regulatory charges and licences

such as water abstraction charges

The Group’s approach to risk management applies to tax as it does to other business areas. This includes identifying, assessing and managing tax risk across the entire Group, with significant issues escalated to the Group Chief Financial Officer, Group

Chief Executive and/or the Board for consideration. The Group Internal Audit function will review significant risk areas where considered appropriate.

The Group has identified economic uncertainty as a risk area. This includes risk in relation to the possibility of unexpected tax law and policy changes by the Government. The Group carefully monitors published tax legislation, guidance and policy documents to ensure it can assess the compliance requirements and the economic implications for the Group. The Group will engage with HM Revenue & Customs where its tax position is likely to be materially affected by such policy changes.

Long-Term Viability and Financial ResilienceThe Group has prepared a detailed business plan which states its long-term strategic objectives and operational plans and the key business issues that the Group faces both now and those anticipated in the future and how the Group proposes to address these issues.

As part of this business planning process, the Group has assessed its future prospects and, as part of this assessment, has prepared operational forecasts including expectations of its performance in important operational matters. The Group has also prepared consolidated financial forecasts for the three-year period to 31 March 2020, which reflect the stated strategic objectives and operational plans, and include but are not limited to trading forecasts with

43


turnover, operating and capital maintenance costs along with cash flow projections including operating cash flows, the planned investment programme, tax and finance related cash flows. The level of net debt is also projected through the period and is compared to the level of gearing as permitted in the Group’s borrowing covenants as is its interest cover.

In order to assess the long-term viability and financial resilience of the Group to possible changing circumstances, sensitivity analysis has been applied to these financial forecasts to assess the impact on profitability, cash flows, liquidity, borrowing capacity and compliance with borrowing covenants of severe but plausible adverse changes to important assumptions made within these base projections, including those that are outside of the control of the Group. They include an increase in the required level of capital investment and operating costs (including those arising from principal risk events occurring - see principal risks above) and the level of inflation. The Directors have selected these assumptions as they believe it is these that could most significantly impact on the longer term viability of the Group and that could most materially deviate from the Group’s base assumptions over the longer-term.

The period to 31 March 2020 covered by the assessment is considered to be appropriate for a Group of this size, complexity and structure.

Based on the business plan, the related long-term financial projections and associated sensitivity analysis detailed above the Board of Directors has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of assessment to 31 March 2020. This expectation is based on the assumption that the Group continues to maintain its existing access to capital markets to fund its required investment programme and provide sufficient liquidity and, as such, have prepared the financial statements on a going concern basis.

The Strategic Report on pages 6 to 43 is approved on behalf of the Board of Directors.

A PageGroup Chief Executive29 September 2017

44

1. Jesús Olmos Non-Executive Chairman & KKR Representative

Appointed as a Director in July 2013 following the acquisition of the Group by KKR’s Global Infrastructure Fund. Mr Olmos joined KKR in 2009 and is the Global Co-Head of KKR’s Infrastructure business. Prior to joining KKR, Mr Olmos was a member of the Executive Board at Endesa, S.A., Spain’s leading electric utility and largest private electric utility in Latin America.

2. Adrian Page Group Chief Executive

Appointed as Group Chief Executive in January 2013, having been Group Finance Director since April 2004. Previously Group Finance Director of South Staffordshire Group Plc from 1998 to 2002. Prior to this Mr Page was with ACT Group and KPMG. Mr Page is also a Director of South Staffordshire Water PLC and the Water Companies Pension Scheme Trustee Company.

3. Ram KumarNon-Executive Director & KKR Representative

Appointed as a Director in July 2013 following the acquisition of the Group by KKR’s Global Infrastructure Fund. Mr Kumar joined KKR in 2009 and is a Director in the European Infrastructure team. He is also a Director of South Staffordshire Water PLC. Prior to joining KKR, he worked at Goldman

Sachs for nearly seven years across mergers and acquisitions, leveraged and structured finance and infrastructure investments.

4. Roger AmmounNon-Executive Director & Co-investor Representative

Appointed as a Director in July 2013. Mr Ammoun is a member of the Private Markets Investment Department and the Global Investment Council at Grosvenor, specialising in energy, infrastructure, and renewable investments, primarily in Europe.

5. Satoru TamiyaNon-Executive Director & Mitsubishi Corporation Representative

Appointed as a Director in April 2016, following Mitsubishi Corporation’s investment in the Group. Mr Tamiya is Head of the Business Development Team within the Water Business Department of Mitsubishi Corporation. Prior to taking this role, Mr Tamiya performed a number of roles within power generation and renewable energy businesses of Mitsubishi.

Annual Report 2017

Board of Directors

1.

3.

4.

5.

2.

45


Executive Team1. Adrian Page Group Chief Executive

Appointed as Group Chief Executive in January 2013, having been Group Finance Director since April 2004. Previously Group Finance Director of South Staffordshire Group Plc from 1998 to 2002. Prior to this Adrian was with ACT Group and KPMG. Adrian is also a Director of South Staffordshire Water PLC and the Water Companies Pension Scheme Trustee Company.

2. Phil NewlandManaging Director of South Staffs Water

Appointed Managing Director of South Staffs Water in April 2014 having previously been Managing Director of Echo since April 2006. Prior to joining Echo, Phil was a Management Consultant with Automatic Data Processing (ADP) and Terence Chapman Associates.

3. Dave TaylorManaging Director of SSI Services

Appointed Managing Director of SSI Services in May 2015, having been the Managing Director and founder of Onsite Specialist Maintenance, formerly Data Contracts, for several years before moving into a divisional role at SSI Services as Commercial Director in January 2015.

4. Nigel BakerManaging Director of Echo

Appointed as Managing Director of Echo in April 2014 having been Operations Director since October 2005. Prior to working with Echo, Nigel worked with Barclays Stockbrokers and Charles Schwab Europe.

5. Jason GoodwinGroup Chief Financial Officer and Company Secretary

Appointed in October 2007, having joined the Group as Group Financial Controller in March 2004. Jason is responsible for the Group’s central support services operation, which includes Group Finance and IT services. Jason is also Company Secretary and a member of the Governance Committee for the South Staffordshire Group Pension Plan. Prior to this Jason spent over six years with Deloitte.

1.

3.

4.

5.

2.

46

Appointed

Mr J Olmos* (Chairman) 30 July 2013

Mr A Page (Group Chief Executive) 4 December 2003

Mr R Kumar* 30 July 2013

Mr R Ammoun* 30 July 2013

Mr S Tamiya* 28 April 2016

* Denotes a Non-Executive Director

The Directors have pleasure in presenting their Annual Report, together with the audited Group financial statements, for the year ended 31 March 2017.

Major corporate transactionsThere were no major corporate transactions occurring in the year ended 31 March 2017. Details of an acquisition made during the year are provided in note 27 to the financial statements.

Subsequent eventsOn 1 April 2017, South Staffordshire Water PLC transferred its Non-Household retail operations and related assets to SSWB Limited, a subsidiary of South Staffordshire Plc and therefore exited the Non-Household retail water market.

On the same day, South Staffordshire Plc subsequently transferred the entire share capital of SSWB Limited to Pennon Water Services Limited (PWS), a subsidiary of Pennon Group Plc (the parent of South West Water Limited), in return for a 20% equity share in PWS for South Staffordshire Plc. Also on 1 April 2017, South West Water Limited transferred its Non-Household retail operations and related assets to PWS forming the joint venture (PWS) between South Staffordshire Plc and Pennon Group Plc to operate in the Non-Household retail market.

Business reviewThe Strategic Report on pages 6 to 43 provides detailed information relating to the Group, its strategy and the operations of its businesses, future developments and the financial results and position for the year ended 31 March 2017.

Details of the principal risks and uncertainties facing the Group are set out in the Strategic Report on pages 40 to 41.

Financial resultsThe Group’s turnover was £248.0m (2016: £234.9m) with operating profit before exceptional items of £43.8m (2016: £47.5m) and profit before tax and exceptional items of £31.2m (2016: £35.1m). The Group’s financial results and position are explained in more detail in the Financial Review section of the Strategic Report on pages 34 to 43 and shown in the consolidated profit and loss account, consolidated balance sheet and consolidated cash flow statement on pages 60 to 65.

DirectorsDetails of the Directors who held office during the year and subsequently are provided in the table below.

No Director had any material interest in any contract of significance with the Company or Group during the year under review.

The Company maintains directors’ and officers’ liability insurance in respect of legal action that might be brought against its Directors and officers. To the extent permitted by law, the Company indemnifies each of its Directors and other officers of the Group against certain liabilities that may be incurred as a result of their positions within the Group.

Retirement and re-election of DirectorsIn accordance with the Companies Act 2006 and the Articles of Association, Mr Page and Mr Ammoun will retire by rotation and being eligible will offer themselves for re-election.

Corporate social responsibilitySouth Staffordshire Plc regards compliance with relevant environmental laws, the adoption of responsible social and ethical standards and the health, safety, well-being and development of its employees, including disabled persons, as integral to its businesses. A report of the Group’s practices and activities in this regard is provided on pages 28 to 33.

Corporate governanceA detailed report on corporate governance is set out on pages 48 to 52.

Financial and treasury riskDetails of the Group’s policy in respect of financial and treasury risk are provided in note 28 to the financial statements.

Fixed assetsCapital expenditure before contributions from third parties and excluding infrastructure renewals during the year amounted to £44.2m (2016: £35.9m).

Annual Report 2017

Directors’ Report

47


Payment of suppliers and commercial arrangementsThe Group’s policy is to pay suppliers in line with the terms of payment agreed with each of them when contracting for their products or services. Group trade creditors at 31 March 2017 represent 59 days of purchases during the year (2016: 55 days). The Group is not reliant on any single commercial arrangement.

No political donations were made during the financial year (2016: Nil).

Going concernThe Directors consider each year the appropriateness of the assumption of preparing the financial statements on a going concern basis. This is based upon a review of the Company’s and the Group’s business plan. This includes the budget, financial forecasts to 31 March 2020 (and the related sensitivity analysis performed on these forecasts), the investment programme, the forecast compliance with borrowing covenants and other key financial metrics. Also considered is the availability of undrawn

borrowing facilities and surplus cash to provide liquidity and the Group’s strong track record of renewing or replacing its borrowing facilities when they mature. On 18 July 2017, South Staffordshire Plc refinanced a bank facility of £20m that was due to mature in December 2017 with a new five-year £20m bank facility.

The Group’s business activities, together with the factors likely to affect its future development, performance and position, are set out in the Strategic Report from pages 6 to 27. The financial performance and position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review of the Strategic Report on pages 34 to 43. After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence over the period covered in the financial forecasts. Accordingly, they continue to adopt the going concern basis in preparing the accounts. Additional details in

respect of the long-term viability and financial resilience of the Group are provided in the Financial Review section of the Strategic Report on pages 34 to 43.

Independent auditorIn accordance with the Companies Act 2006, the Directors confirm that, as far as they are aware, there is no relevant audit information of which the Company’s auditor is unaware and that the Board has taken all reasonable steps to make itself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information.

A resolution proposing the reappointment of Deloitte LLP as auditor will be put to the Annual General Meeting.

By Order of the Board

J R GoodwinCompany Secretary29 September 2017

BOARD OF DIRECTORS AND ADVISORS

Board of Directors Jesús Olmos - Chairman

Adrian Page

Ram Kumar

Roger Ammoun

Satoru Tamiya

Secretary Jason Goodwin

Registered Office Green Lane, Walsall, West Midlands, WS2 7PD and Number Telephone: 01922 638282 Registered in England, Number 4295398

Auditor Deloitte LLP

2 New Street Square, London, EC4A 3BZ

48

Principles of Corporate GovernanceThe Group seeks to apply the principles of the UK Corporate Governance Code (“the UK Code”), where considered applicable to a private, unlisted group including a regulated company. The Directors consider the Annual Report and financial statements to comply with the Walker Guidelines for Disclosure and Transparency in Private Equity. The Group regularly monitors corporate governance and reporting best practice, as well as the applicability of any developments, to the Group. Any changes to the Group’s governance and reporting arrangements considered appropriate are implemented within agreed timescales.

South Staffordshire Water PLC continues to apply the principles of its own Corporate Governance Code (the “SSW Code”), which supports Ofwat’s published principles on board leadership, transparency and governance and which draws on

certain principles of the UK Code that may be applicable to a privately owned regulated company. A copy of the SSW Code can be found on South Staffs Water’s website (www.south-staffs-water.co.uk).

As the immediate parent company of South Staffordshire Water PLC, South Staffordshire Plc and its Board of Directors recognise the responsibilities that come from providing a public service, the Company is therefore fully committed to maintaining high standards of leadership, transparency and governance as a parent of a regulated business. The Company maintains an open dialogue with all of its subsidiaries and fully supports South Staffordshire Water PLC in complying with its statutory and regulatory obligations, including but not limited to the SSW Code, and ensuring that it can make strategic and sustainable decisions that are in the long-term interests of the regulated business.

The Board can also confirm, on behalf of KKR Infrastructure Limited, that it, as the ultimate controlling party of the Group, also fully supports these Holding Company Principles from Ofwat and it will continue to apply high standards of board leadership and governance.

There have been no material changes to Corporate Governance arrangements in the Group during the year, although additional disclosure has been made in the 2017 Annual Report in respect of the group structure, risk management, biographies of the Board, the roles of Board Committees and remuneration of the Executive Director and the wider Executive Team. The Board confirms that, to the best of its knowledge, there are no issues or risks at the Group level which may negatively impact on South Staffordshire Water PLC.

Details of how the Group preserves value over the long-term, business models and how these and the group strategy are delivered are provided within the Strategic Report.

Annual Report 2017

Corporate Governance Report

WH

O A

RE O

UR INVESTORS?

75%

25%

The global infrastructure fund of KKR & Co L.P. which acquired a controlling interest in

the Group from Alinda Capital Partners in July 2013, along with its co-investors

Mitsubishi Corporation, a global integrated trading business, which acquired a 25% equity interest in the Group through its investment in one of the Group’s Jersey

registered holding companies in March 2016

49


KKR Infrastructure Ltd(registered in Cayman)

KKR Global Infrastructure fund, together with its

co-investors

Selena Luxco Sàrl (registered in Luxembourg)

Jersey Registered Holding Companies*

Other UK Registered Holding Companies

South Staffordshire Plc

South Staffs Water SSI Services##

Mitsubishi Corporation(registered in Japan)

Omega RedGroup

* Jersey registered holding companies are UK resident for tax purposes.# Ultimate holding company in the UK.

% represents economic equity interest held.

** Joint venture established on 1 April 2017.## Omega Red is managed within the SSI Services division.

Hydriades IV Limited#

(registered in the UK)

75%25%

100%

Echo Office Watercoolers

Pennon Water Services (Joint

Venture)**

100% 100% 100% 20%90%

100%

KKR & Co. L.P.(registered in USA)

100%

WHAT DOES OUR GROUP STRUCTURE LOOK LIKE?

50

Group structureA diagram detailing the Group structure is provided above. The Group is controlled by the Global Infrastructure Fund of the investment business KKR & Co. L.P. (KKR), which is quoted on the New York Stock Exchange, and which holds a majority controlling interest in the Group, together with certain co-investors of KKR. The KKR Infrastructure Fund is controlled and managed by its General Partner, KKR Infrastructure Limited, a company registered in the Cayman Islands (the “Holding Company”).

South Staffordshire Plc, as the immediate parent company of South Staffordshire Water PLC, ensures that it understands the duties and obligations of a regulated company, including Condition P of its licence. It is managed through its detailed knowledge of all of its subsidiaries and the water industry. Even though some Directors sit on both Boards, South Staffordshire Water PLC acts, with the support of the Company, as if it were a separate listed company. South Staffordshire Plc has processes in place to provide South Staffordshire Water PLC with information that it requires about the wider Group. South Staffordshire Plc provides management, professional and administrative support services to South Staffordshire Water PLC and other subsidiaries on a cost basis. There is no direct interaction between South Staffordshire Water PLC and the Holding Company.

There are a number of UK registered intermediate holding companies above South Staffordshire Plc in the Group structure, headed by Hydriades IV Limited, the ultimate holding company registered in the UK. There are also intermediate holding companies above Hydriades

IV Limited which are registered in Jersey but which are resident in the UK for tax purposes. In March 2016, Mitsubishi Corporation acquired a 25% equity interest in one of these companies, Selena Bidco Limited, and therefore holds a 25% equity interest in the South Staffordshire Plc Group. In line with other KKR investments in Europe, the parent of the Jersey resident companies is a company registered in Luxembourg (Selena Luxco Sàrl.). The KKR fund investing in this company is controlled and managed by the Holding Company, its General Partner. Three of the UK holding companies have loans payable to South Staffordshire Water PLC and South Staffordshire Plc, all of which bear interest which is paid in full each year. Any UK tax losses surrendered to South Staffordshire Water PLC are paid for at face value.

Details of the borrowings of the Group are provided in the financial statements, including the analysis of net debt on page 66 and the notes to the financial statements. Similarly, details of the borrowings of South Staffordshire Water PLC are provided in its own Report and Accounts.

The BoardThe Board is collectively responsible for the long-term success of the Group’s businesses. The Board comprises one Executive Director and four Non-Executive Directors. Details of the skills and experience of the Directors are contained in the Board of Directors’ biographies on page 44.

Directors may be appointed by the Company by Ordinary Resolution or by the Board. As set out in the Company’s Articles of Association, a Director appointed by the Board will hold office until the next Annual General Meeting (AGM). At each

AGM, one third of the Directors will retire by rotation and will submit themselves for re-election at least once every three years.

The Board sets standards of conduct to promote the success of the Company and the Group, provides leadership, and reviews the Group’s internal controls, risk management activities and governance structure. It approves major financial and investment decisions over senior management thresholds and evaluates the performance of the individual businesses. This includes the Group as a whole, by monitoring reports received directly from the subsidiary businesses and those prepared at a Group level. The Non–Executive Directors, headed by the Chairman, are responsible for overseeing this work, and scrutinising management performance. They constructively challenge and help develop proposals on strategy.

In conjunction with the Audit Committee, the Board is also responsible for the Group’s systems of internal control, evaluating and managing significant risks to the Company and the Group.

On joining the Board, Directors receive induction material appropriate to their needs. This may include information on the Group structure, the financing structure, the regulatory and operating framework and business models of the businesses within the Group and strategic and financial plans. The Board carries out site visits to maintain familiarity with the Group’s operations and to refresh their skills and knowledge. The Board also keeps up to date with legal and regulatory changes and developments by receiving written updates from both internal and external advisers.

Annual Report 2017

Corporate Governance Report

51


The Board maintains a flexible approach to Board matters with the delegation of power to a Committee, with precise terms of reference for specified routine purposes. Both the terms of reference and composition of the Committees are regularly reviewed to ensure their ongoing effectiveness.

The Directors are supported by an Executive Team and by other senior managers who are responsible for assisting them in the development and achievement of the Group’s strategy, and reviewing the financial and operational performance of the Group, as well as its individual businesses. Senior Management is responsible, along with the Board, for monitoring policies and procedures along with any other matters that are not reserved for the Board. There are procedures providing a regime of authorisation levels for key decision-making. Details of the skills and experience of the Executive Team are contained in their biographies on page 45.

The Board regularly considers its own performance, the performance of the individual Directors and various Committees through discussion and review of a variety of performance measures. The Board is satisfied that its membership contains an appropriate balance of different skills and experience, as well as that each Director continues to contribute effectively, allocating appropriate time and commitment to their role.

All Directors are aware of the procedure for those wishing to seek independent legal and other professional advice. The Board also has access to the advice and services of the Company Secretary, who is also responsible for monitoring corporate governance

matters. The Board is responsible for the appointment and removal of the Company Secretary. All Directors and senior management are covered by a Group Directors & Officers Insurance policy against any actions taken against them as Officers of the Group. Matters reserved for the BoardA schedule of matters specifically reserved for the Board’s decision has been adopted based on Institute of Chartered Secretaries and Administrators (ICSA) best practice.

The matters include, but are not limited to:• Approval of capital and operating

budgets• Review and approval of any

material changes to the Group’s capital structure

• Review and approval of the Group’s strategy

• Review and approval of financial reports

• Review and approval of major contracts

• Powers to delegate authority

Whilst South Staffordshire Water PLC acts as though it were a separate public listed company, a limited number of matters in respect of this subsidiary company also need the approval of the Board of South Staffordshire Plc. These include:• Material submissions to Ofwat,

particularly in respect of Price Reviews and major structural reform

• Contracts that are material either strategically or by reason of size, according to specified limits

• Appointment and removal of any Director, in its role as shareholder

• Prosecution, defence or settlement of litigation above £1 million or being otherwise material

• Material changes to pension arrangements where operated on a Group basis

Organisational structureA defined organisation structure for the Group exists with clear lines of responsibility, accountability and appropriate division of duties.

The Board sets overall strategy, and has delegated the necessary authority to management and business departments in order to deliver that strategy. This is communicated to employees by way of published policies and procedures and regular staff briefings.

The Group’s extensive financial regulations specify authorisation limits for individual managers, with all material transactions being approved by a member of the Executive Team, a member of the Board or by the Board collectively. In addition, formal treasury policies are in place. Where appropriate, commercial and financial responsibility is clearly delegated to individual business units and supported by the Board.

Board membershipSenior Executives of KKR or its affiliates and other equity investors in the Group who hold positions on the Board of the Company are Jesús Olmos and Ram Kumar (both of whom are Directors of holding companies above South Staffordshire Plc in the Group structure), Roger Ammoun and Satoru Tamiya. Ram Kumar is also a Non-Executive Director of South Staffordshire Water PLC. Adrian Page, Group Chief Executive of South Staffordshire Plc, is also a Director of South Staffordshire Water PLC and is a Director of all of

52

Annual Report 2017

Corporate Governance ReportSouth Staffordshire Plc’s subsidiaries, as well as all of the UK registered holding companies in the Group structure.

Board meetingsThe Board holds regular scheduled meetings throughout the year, and during the year ended 31 March 2017 there were four scheduled meetings of the Board.

All Board members are provided with sufficient information prior to any Board meeting to allow appropriate preparation to ensure that they can properly discharge their duties. Key information provided in these reports includes reports on operational performance, regulatory matters, Health & Safety and financial performance, in addition to a report on corporate matters and any specific items for consideration or approval.

The attendance by individual Directors at scheduled meetings of the Board during the year ended 31 March 2017 is shown in the table below.

Board CommitteesAudit CommitteeDetails of the terms of reference of the Audit Committee, its membership and activities during the year are contained in the Audit Committee review on page 53.

Remuneration CommitteeDetails of the terms of reference of the Remuneration Committee, its membership, activities during the year, the Group’s remuneration policy and the remuneration paid to the Executive Director and the Executive Team in respect of the year are contained in the Remuneration Committee review on page 55.

Nomination CommitteeDetails of the terms of reference of the Nomination Committee, its membership and activities during the year are contained in the Nomination Committee review on page 56.

Risk ManagementThe Group’s approach to risk balances the need to manage exposure to risk whilst, at the same time, aiming to continually develop the Group’s operational and financial performance.

South Staffordshire Water PLC’s approach to risk reflects its status as a regulated and licensed water

undertaking providing an essential public service. As detailed in the Strategic Report, a strong risk management and control framework is in place both in South Staffs Water and at a Group level to understand and manage identified current and emerging risks.

The non-regulated businesses operate principally in regulated environments and, as such, must also have strong risk management activities.

Risk management is discussed at Board level both in terms of the Group and its individual businesses. As detailed above, the Group’s individual businesses are required to monitor risk and its management with any changes in significant business risk and any subsequent procedures or controls to mitigate the significant risk being reported to the Audit Committee.

Further details in respect of the Group’s risk management can be found in the Financial Review section of the Strategic Report on pages 39 to 41.

Details in respect of the Company’s going concern assumptions can be found in the Long-term Viability and Financial Resilience statement presented on pages 42 and 43.

Relations with ShareholdersThere is a regular and detailed dialogue between the Executive Team and shareholders. This dialogue is achieved through regular management and Board meetings that shareholders and the Executive Team attend, with major shareholders having representation on the Board of Directors, and through other less formal communication.

Director Role Board MeetingsAttended

Jesús Olmos Chairman 3/4

Adrian Page Group Chief Executive 4/4

Ram Kumar Non-Executive Director 4/4

Satoru Tamiya Non-Executive Director 4/4

Roger Ammoun Non-Executive Director 2/4

53


Audit Committee Review

Communications The Audit Committee receives reports from Internal Audit and the external auditor twice a year.

Members Ram Kumar and Adrian Page

Reports also received by Deloitte LLP (the Group’s external independent auditor), the Group Chief Financial Officer, the Group Internal Audit Manager and, where appropriate, other senior management.

Role and ResponsibilitiesThe main role and responsibilities of the Audit Committee are set out in written terms of reference and include:• Monitoring the integrity of

financial statements and reviewing significant financial reporting judgements contained therein

• Reviewing the Group’s internal financial controls

• Monitoring and reviewing the effectiveness of the Group’s Internal Audit function

• Recommending to the Board the appointment of the external auditor and monitoring the auditor’s independence, performance and effectiveness and approving the nature and scope of material external audits and approving the auditor’s remuneration

• Reviewing and monitoring of Group risk management processes and systems.

Work of the Audit CommitteeThe Committee review and challenge Internal Audit reports, individual papers from management, external auditor reports and the Group risk register. The Committee also reviews areas of accounting judgement and estimation and where appropriate makes comment; recommendations; and seeks further management clarification if required.

During the year, the Audit Committee received papers on and reviewed the following:• Non-Household retail competition

preparation and planning• Proposed South Staffs Water

wholesale tariffs• Review of internal controls• Group business risk register

including risk mitigation• Review of supporting data in

respect of Outcome Delivery Incentives for South Staffs Water

• Information and System Security Risk Management controls

In order to facilitate the Group’s risk management process, key risks facing each business within the Group and the Group as a whole are regularly reviewed, documented and summarised by senior management. Every six months the management teams of each business formally discuss, review, and document the relevant business risks. The objective of this process is to ensure that each management team is identifying, prioritising and rating all key business risks, and implementing and amending, where necessary, appropriate procedures and controls as required to mitigate these risks. It also allows management to highlight, document and prioritise as appropriate any outstanding actions with respect to the implementation of these procedures and controls. The Internal Audit function also

critically assesses the risks, controls and procedures identified and the rating assigned to them. This information is reviewed by the Audit Committee annually.

The Group’s external auditor, Deloitte LLP, receive Audit Committee papers and provide detailed reports regarding annual audit planning and the final results of its annual external independent audit.

The responsibilities of the external independent auditor in the area of financial reporting for 2016/17 are set out in its report on pages 58 to 59.

Financial ControlFinancial Reporting and PlanningThe Board of Directors, supported by the Audit Committee, recognises the need to present a fair, balanced, understandable and clearly defined assessment of the Group’s operational and financial performance and position, including its future prospects. This is provided by a review of the Group’s operations and performance as set out in the Strategic Report of each year’s Annual Report.

54

Annual Report 2017

Business plans, annual budgets and investment proposals for each business, and for the Group, have been formally prepared, reviewed and approved by the Board, supported by the Audit Committee. These include profit and loss, investment plans and cash flow budgets. Actual financial results and cash flows, including a comparison with budgets and forecasts, are regularly reported to the Board with variances being identified and used to initiate any action deemed appropriate. Details of the Group’s actual and forecast future compliance with its borrowing covenants are also prepared on a regular basis, and forecasts of the Group’s level of its undrawn and available borrowing facilities and cash balances for liquidity purposes are also prepared and reported to the Board.

Sensitivity analysis has been carried out on the Group’s longer term financial forecasts to ensure the Company and the Group has the ability to withstand certain severe but plausible events in order to demonstrate and provide the Board with evidence of its long-term viability and financial resilience.

Internal ControlThe Board, supported by the Audit Committee, attaches considerable importance to its system of internal control and for reviewing its effectiveness, including its responsibility for taking reasonable steps for the safeguarding of the assets of the Company and the Group and for preventing and detecting fraud and other irregularities. Such a system is designed to manage rather than eliminate the risk, and can nonetheless provide only reasonable and not absolute

assurance against misstatement or loss. There is an established internal control framework within the Group that is continually reviewed and updated, taking into account the nature of the Group’s operations, risks and its structure.

Internal AuditThe Internal Audit work covers financial and operational risk assurance, regulatory assurance, testing of legal compliance and financial controls, as well as other business commercial support work.

Due to the importance of the introduction of Non-Household competition in the Water Industry(OpenWater), the majority of Internal Audit’s activities during the year have been focused inSouth Staffordshire Water PLC.

Specific topics covered by Internal Audit during the year included but were not limited to: • Provision of assurance to support

the introduction of Non-Household retail competition

• Review of proposed South Staffs Water Non-Household wholesale charges

• Review of South Staffs Water’s household customer tariffs

• Other regulatory assurance activity

• ISO 27001 Information Security Management assurance

• Internal control reviews

The Internal Audit arrangements in operation are considered appropriate to the size and complexity of the Group, with the Audit Committee continuing to review these arrangements on a regular basis.

External Independent AuditorThe Board, assisted by the Audit Committee and the Executive Team, reviews each year the external independent auditor’s performance, independence, effectiveness and fees including the level of non-audit services and fees.

In evaluating the external independent auditor, the Audit Committee assesses the calibre of the external audit firm, the audit scope and plan which is reported to the Audit Committee in advance of the work commencing, and the level and nature of audit communication and findings including the reporting to the Audit Committee of the audit results.

The external auditors, Deloitte LLP, have been the Company’s auditor since 2002, with a change in the audit Partner occurring every 5 years for independence purposes, with the latest partner rotation occuring for the audit of the financial statements for the year ended 31 March 2016. Based on current legislation, Deloitte LLP can be re-appointed for all financial years up to and including the year to 31 March 2023. Thereafter, auditor rotation is required once every 10 years with this extendable to 20 years if a tender is conducted after 10 years.

55


Remuneration and Nomination Committee Reviews

Meetings 1

Chairman Ram Kumar (1/1)

Other Members Adrian Page (1/1)

Role of the Remuneration CommitteeThe Remuneration Committee is responsible for the Group’s remuneration policy and the setting of the remuneration packages of the Board, the Executive Team and other Senior Management. No Director is involved in determining his or her own remuneration. During the year the Remuneration Committee comprised of Ram Kumar and Adrian Page.

The key terms of reference for the Committee are to: • Agree remuneration that will

ensure that the Executive Director, the Executive Team and other Senior Management are provided

with appropriate incentives to achieve high standards of performance and successful delivery of the Group’s strategy and reward them for their individual contributions to the success of the Group

• Determine such remuneration packages and arrangements with regard to any relevant legal requirements and associated guidance and to obtain reliable, up-to-date information about remuneration in other companies for comparison purposes

• Approve the design of, and determine targets for, any performance related remuneration packages for the Executive Team and Senior Management

• Ensure that contractual terms on termination are fair and that failure is not rewarded

• Oversee any material changes in employee benefits structures throughout the Group. Ensure that remuneration packages are designed to attract, retain and motivate high-calibre senior executives

• Determine the Executive Director’s remuneration package and those of the Executive Team and other Senior Management and to set other key annual objectives.

Executive Director # Executive Team * Total

2016/17£’000

2015/16£’000

2016/17£’000

2015/16£’000

2016/17£’000

2015/16£’000

Basic Salary 231 218 566 489 797 707

Benefits 17 15 51 43 68 58

Bonus 135 143 215 201 350 344

Total Emoluments 383 376 832 733 1,215 1,109

Group Money Purchase Pension

Contributions60 61 67 53 127 114

Total Remuneration 443 437 899 786 1,342 1,223

# The Executive Director total remuneration represents an increase of 1.4%.

* Excluding the Executive Director and 2015/16 includes only part year for some members of the Executive Team appointed during that year.

REMUNERATION COMMITTEE REVIEW

56

Annual Report 2017

Role of the Nomination CommitteeConsiderable attention is given by the Nomination Committee to the composition of the Board of Directors, including reviewing the balance of skills, knowledge, gender and the level of non-executive challenge.

External search advisors can be appointed to assist the Nomination Committee where considered appropriate, but are not considered necessary in all appointments.

The key terms of reference of the Nomination Committee include:• Preparing an appropriate

specification for the relevant Board position;

• Ensuring any appointment to the Board of Directors carefully considers the balance of the Board composition; and

• Ensuring successful candidates have the necessary skills, experience, information and knowledge to fulfil their duties.

Meetings are convened as required to discuss changes or appointments to the Board of Directors. During the year no meetings were considered necessary.

NOMINATION COMMITTEE REVIEW

DiversityIn considering appointments to the Board of Directors, the Nomination Committee will consider a wide range of factors, including, but not limited to, skills, experience, competencies, gender and diversity.

Details of the number of men and women by employment category employed by the Group can be found in the Strategic Report on page 32.

Remuneration PolicyThe total remuneration package of the Executive Director, Executive Team and other Senior Management includes basic salary, benefits (including car, fuel and private medical insurance) and an annual bonus that is linked to individual business and Group targets, as well as personal performance related objectives and contributions to pension schemes. Performance related objectives are designed to encourage and reward continuing improvement in the Group’s operations, its operational and financial performance and value. Some Executive bonus arrangements allow for deferral of payment of a proportion of an awarded annual bonus subject to continued employment after two years from award.

Service ContractsThe Executive Director is employed on a service contact of no fixed term, with a notice period of 12 months by the Company and 12 months by the individual. The Executive Director is entitled to basic pay, private medical insurance, a car allowance, fuel and payments made by the Group in respect of a money purchase pension scheme, in addition to an annual performance-related bonus, which is designed to achieve long-term value creation and high standards of operational and financial performance. Further details in respect of the Executive Director’s remuneration are provided above and in note 5 to the Accounts, on page 71.

As the Non-Executive Directors (including the Chairman) are representatives of the Group’s shareholders, they do not receive any remuneration from the Group.

57


Directors’ Responsibilities StatementThe following statement, which should be read in conjunction with the independent auditor’s statement of its responsibilities set out on the following pages, is made with a view to distinguishing for shareholders the respective responsibilities of the Directors and of the independent auditor in relation to the accounts.

The Directors are responsible for preparing the Annual Report and Accounts, including the Strategic Report, the Directors’ Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with UnitedKingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), including FRS 102 “The Financial Reporting Standard applicable in the UK”. Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group and the Company for that period.

In preparing these financial statements, the Directors are required to:• select suitable accounting policies and then apply them consistently;• make judgments and accounting estimates that are reasonable and prudent;• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors of the Company and their roles are listed on page 44 of the Annual Report and Accounts.

58

Annual Report 2017

We have audited the financial statements of South Staffordshire Plc for the year ended 31March 2017 which comprise the consolidated profit and loss account, the consolidated statement of comprehensive income, consolidated and company balance sheets, the consolidated and company statements of changes in equity, the consolidated cash flow statement, notes to the consolidated cash flow statement and the notes 1 to 32. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”.

This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of Directors and auditorAs explained more fully in the Directors’ Responsibilities Statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

Scope of the audit of the financial statementsAn audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on,

or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on financial statementsIn our opinion the financial statements:• give a true and fair view of the

state of the group’s and parent company’s affairs as at 31 March 2017 and of the group’s profit for the year then ended;

• have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and

• have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on other matter prescribed by the Companies Act 2006In our opinion, based on the work undertaken in the course of the audit:• the information given in the

Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

• the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements.

Independent Auditor’s Report

59


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 and the Directors’ Report.

Matters on which we are required to report by exceptionWe have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:• adequate accounting records

have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or

• the parent financial statements are not in agreement with the accounting records and returns; or

• certain disclosures of directors’ remuneration specified by law are not made; or

• we have not received all the information and explanations we require for our audit.

Jacqueline Holdenfor and on behalf of Deloitte LLPStatutory AuditorLondon, UK29 September 2017

Annual Report 2017

60

Consolidated Profit & Loss AccountFor the year ended 31 March 2017

Consolidated Statement of Comprehensive IncomeFor the year ended 31 March 2017

2017 2016 Note £’000 £’000

Group turnover 2 247,999 234,904

Operating costs before exceptional operating item (net) 3 (204,213) (187,449)

Group operating profit before exceptional operating item 43,786 47,455

Exceptional operating item - pension curtailment gain 7 — 3,581

Total group operating profit 43,786 51,036

Exceptional profit on disposal of rental income rights 7 — 4,590

Finance charges (net) 8 (12,601) (12,313)

Profit on ordinary activities before taxation 31,185 43,313

Taxation on profit on ordinary activities 9 (2,098) (2,517)

Profit on ordinary activities after taxation 29,087 40,796

Less profit after tax of non-controlling interests 26 (87) (86)

Profit for the financial year 29,000 40,710

Earnings per share Basic and diluted 11 226.2p 317.6p

2017 2016 £’000 £’000

Profit for financial year 29,000 40,710Movement on hedging reserve 222 (2,012)Deferred tax impact of movement in hedging reserve (38) 356Actuarial gain relating to retirement benefit surplus 3,715 4,591Deferred tax impact of actuarial gain (632) (826)Exchange movements on translation of overseas operations 10 (5)Change in rate of deferred tax 277 379

Total consolidated comprehensive income for the year 32,554 43,193

The results above are all derived from continuing operations.

The accompanying notes are an integral part of these financial statements.


61

Consolidated Balance SheetAs at 31 March 2017

2017 2016 Note £’000 £’000

Fixed assets Intangible assets - goodwill 12 24,522 26,541 Tangible assets 13 505,624 488,963

530,146 515,504Current assets Stocks 17 2,520 2,272 Debtors - amounts recoverable within one year 18 76,323 64,988 Debtors - amounts recoverable in more than one year 18 94,917 97,526 Retirement benefit surplus 22 44,661 37,788 Cash at bank and in hand 12,636 13,811

231,057 216,385Total assets 761,203 731,889

Creditors – amounts falling due within one year Borrowings 19 (34,368) (8,592) Other creditors 20 (92,097) (83,654)

(126,465) (92,246)

Net current assets 104,592 124,139

Total assets less current liabilities 634,738 639,643

Creditors – amounts falling due in more than one year Borrowings 19 (350,208) (363,529) Other creditors 20 (15,185) (14,909) Accruals and deferred income 15 (138,862) (134,353) Provisions for liabilities - deferred tax 21 (42,329) (41,715)

(546,584) (554,506)

Net assets 88,154 85,137

Capital and reserves Share capital 5,449 5,449 Share premium account 10,882 10,882 Revaluation reserve 18,095 18,330

Capital redemption reserve 1 1Merger reserve (253) (253)Currency translation reserve 3 (7)Hedging reserve (7,597) (7,680)Profit and loss account 61,361 58,284

Shareholders’ funds 87,941 85,006Non-controlling interests 26 213 131

Total capital employed 88,154 85,137

A statement of movement of reserves is given in the Consolidated Statement of Changes in Equity.


The financial statements of South Staffordshire Plc, registered number 4295398, were approved by the Board of Directors and authorised for issue on 29 September 2017.

A P PageGroup Chief Executive

Annual Report 2017

62

2017 2016 Note £’000 £’000

Fixed assets Investments 16 100,991 100,738 Tangible assets 13 563 449

101,554 101,187Current assets Debtors - amounts recoverable within one year 18 9,197 9,233 Debtors - amounts recoverable in more than one year 18 57,064 70,754 Retirement benefit surplus 22 32,174 28,093 Cash at bank in hand 9,745 —

108,180 108,080

Total assets 209,734 209,267

Creditors – amounts falling due within one year Borrowings 19 (34,149) (8,702) Other creditors 20 (6,707) (9,247)

(40,856) (17,949)

Net current assets 67,324 90,131

Total assets less current liabilities 168,878 191,318

Creditors – amounts falling due in more than one year Borrowings 19 (100,375) (119,997) Other creditors 20 (1,975) (2,152) Provisions for liabilities - deferred tax 21 (5,149) (4,514)

(107,499) (126,663)

Net assets 61,379 64,655

Capital and reserves Share capital 5,449 5,449 Share premium account 10,882 10,882 Capital redemption reserve 1 1 Hedging reserve (1,010) (1,443) Profit and loss account 46,057 49,766

Shareholders’ funds 61,379 64,655

The profit in the year ended 31 March 2017 for the Company is £24,294,000 (2016: £28,652,000).

A statement of movement of reserves is given in the Company Statement of Changes in Equity.


The financial statements of South Staffordshire Plc, registered number 4295398, were approved by the Board of Directors and authorised for issue on 29 September 2017.

A P PageGroup Chief Executive

Company Balance SheetAs at 31 March 2017


63

Consolidated Statement of Changes in EquityAs at 31 March 2017

Called-up Share Capital Merger Revaluation Profit Currency Hedging Shareholders’ Non- Total Share Premium Redemption Reserve Reserve & Loss Translation Reserve Funds controlling Capital Capital Account Reserve Account Reserve Interests Employed £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Balance at 1 April 2015 5,449 10,882 1 (253) 18,565 46,242 (2) (5,866) 75,018 82 75,100Profit for the financial year — — — — — 40,710 — — 40,710 86 40,796Exchange movements on translation of overseas operations — — — — — — (5) — (5) — (5)Change in value of hedging instruments- cash flow hedges — — — — — — — (2,196) (2,196) — (2,196)Deferred tax on change in value of hedging instruments — — — — — — — 389 389 — 389Actuarial gain relating to retirement benefit surplus — — — — — 4,591 — — 4,591 — 4,591Deferred tax on actuarial gain relating to retirement benefit surplus — — — — — (826) — — (826) — (826)Amounts transferred / recycled to profit and loss — — — — (235) 235 — 184 184 — 184Deferred tax on amounts recycled to profit and loss — — — — — — — (33) (33) — (33)Changes in rate of deferred tax — — — — — 537 — (158) 379 — 379

5,449 10,882 1 (253) 18,330 91,489 (7) (7,680) 118,211 168 118,379Acquisition in the year — — — — — — — — — (37) (37)Dividends (note 10) — — — — — (33,205) — — (33,205) — (33,205)

Balance at 31 March 2016 5,449 10,882 1 (253) 18,330 58,284 (7) (7,680) 85,006 131 85,137

Profit for the financial year — — — — — 29,000 — — 29,000 87 29,087Exchange movements on translation of overseas operations — — — — — — 10 — 10 — 10Change in value of hedging instruments- cash flow hedges — — — — — — — 41 41 — 41Deferred tax on change in value of hedging instruments — — — — — — — (7) (7) — (7)Actuarial gain relating to retirement benefit surplus — — — — — 3,715 — — 3,715 — 3,715Deferred tax on actuarial gain relating to retirement benefit surplus — — — — — (632) — — (632) — (632)Amounts transferred / recycled to profit and loss — — — — (235) 235 — 181 181 — 181Deferred tax on amounts recycled to profit and loss — — — — — — — (31) (31) — (31)Changes in rate of deferred tax — — — — — 378 — (101) 277 — 277

5,449 10,882 1 (253) 18,095 90,980 3 (7,597) 117,560 218 117,778Dividends (note 10) — — — — — (29,619) — — (29,619) (5) (29,624)

Balance at 31 March 2017 5,449 10,882 1 (253) 18,095 61,361 3 (7,597) 87,941 213 88,154

The accompanying notes are an integral part of the financial statements.

Annual Report 2017

64

Company Statement of Changes in EquityAs at 31 March 2017

Called-up Share Capital Profit Hedging Shareholders’ Share Premium Redemption & Loss Reserve Funds Capital Account Reserve Account £’000 £’000 £’000 £’000 £’000 £’000 Balance at 31 March 2015 5,449 10,882 1 51,309 (1,266) 66,375

Profit for the financial year — — — 28,652 — 28,652Change in value of hedging instruments- cash flow hedges — — — — (177) (177)Deferred tax a change in value of hedging instruments — — — — 32 32Actuarial gain relating to retirement benefit surplus — — — 3,203 — 3,203Deferred tax on actuarial gain relating to retirement benefit surplus — — — (576) — (576)Change in rate of deferred tax — — — 383 (32) 351

5,449 10,882 1 82,971 (1,443) 97,860Dividends (note 10) — — — (33,205) — (33,205)

Balance at 31 March 2016 5,449 10,882 1 49,766 (1,443) 64,655

Profit for the financial year — — — 24,294 — 24,294Change in value of hedging instruments- cash flow hedges — — — — 543 543Deferred tax on change in value of hedging instruments — — — — (92) (92)Actuarial gain relating to retirement benefit surplus — — — 1,609 — 1,609Deferred tax on actuarial gain relating to retirement benefit surplus — — — (274) — (274)Change in rate of deferred tax — — — 281 (18) 263

5,449 10,882 1 75,676 (1,010) 90,998Dividends (note 10) — — — (29,619) — (29,619)

Balance at 31 March 2017 5,449 10,882 1 46,057 (1,010) 61,379


65

2017 2016 Note £’000 £’000 £’000 £’000

Net cash inflow from operating activities (a) 64,553 64,627

Corporation tax paid — (48)

Cash flows from investing activities:Purchase of tangible fixed assets (40,903) (34,478)Proceeds from sale of tangible fixed assets 1,013 1,190 Capital contributions received 6,827 5,413Interest received 5,974 6,108 Cash consideration for subsidiaries acquired (including costs) (1,964) (4,120)Cash balances of subsidiaries acquired (net) — 226Proceeds from exceptional disposal of rental income rights — 4,590

Net cash outflow from investing activities (29,053) (21,071)

Cash flows from financing activities:Interest paid (12,882) (12,465) Equity dividends paid (29,619) (33,205)Repayment of bank term loans — (26,500)Drawdown of short-term bank loans 6,000 8,200Additions to bank term loans — 30,000Bank term loan issue costs paid — (145) Capital element of finance lease and hire-purchase rental payments (174) (233)

Net cash outflow from financing activities (36,675) (34,348)

(Decrease) / increase in cash and cash equivalents (1,175) 9,160

Cash or cash equivalents brought forward 13,811 4,651Cash or cash equivalents carried forward 12,636 13,811

Purchase of tangible fixed assets relates to the cash paid out in the year in relation to fixed asset additions. The difference in that paid £40,903,000 (2016: £34,478,000) and additions in the fixed asset note of £44,235,000 (2016: £35,869,000) is due to an increase in the year of creditors due relating to capital purchases of £3,332,000 (2016: £1,391,000).

Notes to the Consolidated Cash Flow StatementFor the year ended 31 March 2017

(a) Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities 2017 2016 £’000 £’000 £’000 £’000

Total operating profit 43,786 51,036Depreciation 27,261 24,991 Amortisation of goodwill 4,422 4,328Amortisation of capital contributions (2,318) (2,283) Defined benefit pension scheme contributions (employer) (2,212) (2,194)Exceptional operating item - pension curtailment gain — (3,581)Profit on disposal of tangible fixed assets (608) (1,117)

26,545 20,144

(Increase) / decrease in stocks (227) 104Increase in debtors (9,867) (4,000)Increase / (decrease) in creditors 4,316 (2,657)

(5,778) (6,553)

Net cash inflow from operating activities 64,553 64,627

Consolidated Cash Flow StatementFor the year ended 31 March 2017

Annual Report 2017

66

(b) Reconciliation of Movement in Net Debt 2017 2016 £’000 £’000

(Decrease) / increase in cash (1,175) 9,160Increase in drawings on short-term bank loans (6,000) (8,200)

(7,175) 960

Finance lease repayments (cash) 174 233Repayment of bank term loans — 26,500Issue of bank term loans — (30,000)Payment of bank term loan issue costs — 145Bank term loan issue cost amortisation (non-cash) (266) (289)Private placement issue cost amortisation (non-cash) (94) (95)Movement on index-linked debt (non-cash) (6,269) (6,068)

Increase in net debt in the year (13,630) (8,614)Net debt brought forward (358,310) (349,696)

Net debt carried forward (371,940) (358,310)

Notes to the Consolidated Cash Flow StatementFor the year ended 31 March 2017

(c) Analysis of Net Debt Balance at Balance at 1 April Non-Cash 31 March 2016 Cash Flow Movements 2017 £’000 £'000 £'000 £’000

Cash at bank and in hand 13,811 (1,175) — 12,636Drawings on short-term bank loans (8,200) (6,000) — (14,200)

5,611 (7,175) — (1,564)

Irredeemable debenture stock (1,652) — — (1,652)Index-linked debt (net of issue costs) (212,046) — (6,269) (218,315)Bank term loans (net of issue costs) (109,082) — (266) (109,348)Private placement loan notes (net of issue costs) (40,749) — (94) (40,843)Obligations under finance leases and hire-purchase contracts (392) 174 — (218)

Net debt (358,310) (7,001) (6,629) (371,940)

Non-cash movements represent indexation, amortisation of issue costs, amortisation of the discount/premium on index-linked debt. The book value of net debt detailed above differs from the value used for covenant reporting purposes of £350,791,000 (2016: £339,903,000). Index-linked debt used for covenant reporting purposes is the indexed principal whereas, in accordance with applicable accounting standards, the book value represents amortised cost. Also, bank loans and private placement loan notes for covenant reporting purposes are reported at principal value before costs whereas the book value above includes un-amortised costs. A reconciliation of book net debt (as reported above) to net debt for covenant purposes is provided below.

31 March 31 March 2017 2016 £’000 £’000

Book net debt (as reported above) (371,940) (358,310)Exclude book premium on issue of index-linked debt 14,079 14,381Difference between long-term RPI assumption (used for book value) and actual RPI inflation (used for covenant value) 9,199 6,559Exclude unamortised issue costs (2,331) (2,729)Exclude accrued interest 202 196

Net debt reported for borrowing covenants (350,791) (339,903)

It is noted that the covenant net debt value as opposed to the book net debt value is used by stakeholders, including investors, lenders and rating agencies, to monitor key financial metrics of the Group.


67

Notes to the Financial Statements1 Statement of Accounting Policies

The principal accounting policies are summarised below. They have all been applied consistently throughout the year and to the preceding year.

(a) General Information and Basis of AccountingSouth Staffordshire Plc (the Company) is a privately owned Public Limited Company limited by shares incorporated in the United Kingdom under the Companies Act 2006 and is registered in England and Wales. The address of the Company’s registered office is shown on page 47.

The financial statements have been prepared under the historical cost convention, modified to include certain items at fair value, and in accordance with Financial Reporting Standard 102 (FRS 102) issued by the Financial Reporting Council. The functional currency of the Company and Group is considered to be pounds sterling because that is the currency of the primary economic environment in which the Company and Group operates. The Company and Group meet the definition of a qualifying entity under FRS 102, and has therefore taken advantage of the disclosure exemptions available to them in respect of financial instruments.

(b) Basis of ConsolidationThe Group accounts consolidate the accounts of the Company and its subsidiary undertakings made up to 31 March each year.

Certain group reorganisations which took place in previous years have been accounted for using merger accounting principles, in order to meet the overriding requirement under section 393 of the Companies Act 2006 for financial statements to present a true and fair view. The transactions accounted for using these principles did not meet all of the conditions for merger accounting under the Companies Act 2006, namely that the fair value of any non-equity consideration must not exceed 10 per cent of the nominal value of equity shares issued as consideration. However, the Directors consider that in substance the consideration for these transactions comprised equity share capital with no net cash impact and that the alternative approach of acquisition accounting, with the restatement of separable assets and liabilities to fair values, the creation of goodwill, as well as the inclusion of post reorganisation results only would not give a true and fair view of the Group’s results and financial position. The substance of the transactions was not the acquisition of businesses, but rather a group reconstruction under which the ultimate shareholders of the businesses transferred their rights relative to the others remained unchanged. The Directors consider that it is not practicable to quantify the effect of this departure from the Companies Act 2006 requirements.

Other business combinations have been accounted for under the acquisition method.

(c) TurnoverSouth Staffs Water turnover includes amounts billed together with an estimation of amounts for water supply services provided but remaining unbilled at the year-end and the variance to allowable wholesale income that is recoverable or payable.

Software licence income is recognised within turnover once software implementation and customer acceptance are complete unless there is an agreement to pay a rental charge for the product, in which case, turnover is recognised based on the value of the rental charge each month. Income from separate software maintenance contracts is recognised evenly over the contract period to which it relates. Income generated through the performance of software development and consultancy services is included within turnover on the basis that turnover is matched with the delivery of the service.

Contract accounting is applied to certain contracts which the Group is a party to. Where the outcome of the contract can be assessed with reasonable certainty, attributable turnover and profit are calculated on an appropriate and prudent basis, and included in the accounts for the period under review. Where a contract loss is anticipated, the entire anticipated loss is recognised immediately.

Turnover of other non-regulated activities represents amounts receivable excluding VAT, from the sale of goods and services.

(d) DividendsDividends are recognised if they have been paid or if they have been approved by the shareholders before the year-end.

(e) GoodwillGoodwill arising on acquisitions represents the excess of the fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired. Goodwill is amortised over its estimated useful life of 10 to 20 years.

(f ) Tangible Fixed Assets and DepreciationTangible fixed assets comprise infrastructure assets (including water mains, impounding and pumped raw water storage reservoirs and dams), specialist operational assets (including pumping stations, treatment stations, boreholes and service reservoirs), land and buildings, as well as other assets including fixed plant and equipment.

Infrastructure AssetsInfrastructure assets principally comprise two separate regional networks of systems that are intended to be maintained in perpetuity at a specified level of serviceability by the continuing replacement and refurbishment of their components. Expenditure on infrastructure assets relating to increases in

capacity or enhancements of the networks is treated as an addition, which is included at cost. Infrastructure renewals expenditure, which is the annual expenditure required to maintain the operating capability of the network, is not considered to represent an increase in capacity or network enhancement and is therefore not capitalised within tangible fixed assets but is expensed within operating costs for the year. In accordance with FRS 102, new infrastructure assets are depreciated on a straight line basis over their useful economic life of 100 years. The deemed cost of existing infrastructure assets determined as part of the transition to FRS 102 is being depreciated over the estimated remaining economic life of 80 years.

Other AssetsOther assets are stated at cost less accumulated depreciation and any provision for impairment. Depreciation is provided on a straight line basis to write off the cost less estimated residual value over the estimated useful lives of the assets, with the exception of land which is not depreciated. The estimated useful lives of assets are as follows:

Boreholes 100 yearsBuildings and Service Reservoirs Up to 80 yearsFixed Plant Up to 30 years Water Meters Up to 15 yearsOffice Equipment Up to 10 yearsMobile Plant Up to 10 yearsMotor Vehicles 3–7 years

(g) Capital ContributionsCapital contributions, including those in respect of infrastructure assets, are treated as deferred income and released as a credit to operating costs over the estimated useful lives of the assets concerned.

(h) Leased AssetsAssets financed by leasing and hire-purchase arrangements which transfer substantially all the risks and rewards of ownership to the Group are included in tangible fixed assets, and the net obligation to pay future rentals is included as borrowings within creditors. Rentals are apportioned between finance charges and a reduction of the outstanding liability for future rentals so as to produce a constant charge to the profit and loss account based upon the capital outstanding. Operating lease rentals are charged to the profit and loss account on a straight line basis.

(i) InvestmentsInvestments held as fixed assets are stated at cost less amounts written off and any provision for impairment. In accordance with Section 611 of the Companies Act 2006, the cost of shares acquired from a fellow group undertaking by way of a share for share exchange are recorded at the higher of the nominal value of the shares issued as consideration and the carrying value of the investment in the transferring company.

Annual Report 2017

68

(j) StocksStocks are valued at the lower of cost and net realisable value. Cost includes an appropriate element of overheads. Provision is made for obsolete, slow moving or defective items where appropriate.

(k) Foreign CurrencyTransactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date, or the rate of the relevant forward exchange contracts.

The results of overseas operations are translated at the average rates of exchange during the year, and their balance sheets at the rates prevailing at the balance sheet date. Exchange differences arising on translation of the opening net assets and results of overseas operations and on foreign currency borrowings, to the extent that they hedge the Group’s investment in such operations, are reported in the consolidated statement of comprehensive income. All other exchange differences are included in the profit and loss account.

(l) PensionsThe profit and loss charge or credit in respect of defined benefit pension schemes represent:

- The current service costs arising from active member employee services rendered during the year and the cost or credits associated with benefit changes, settlements and curtailments. These are charged or credited against operating profit.

- The net interest charge or credit on the net defined benefit deficit or surplus. This is charged or credited within finance charges (net).

Actuarial gains and losses are charged or credited directly to the consolidated statement of comprehensive income net of deferred tax. The defined benefit scheme liabilities, valued using the projected unit method and the fair value of scheme assets, are recognised in the relevant balance sheet as a net retirement benefit surplus or obligation before the related deferred tax, which is reported separately.

In accordance with the agreed policy in the Group, as the South Staffordshire section of the defined benefit Water Companies Pension Scheme is a multi-employer scheme with deferred members of the scheme being employees of a number of companies in the Group, this section is accounted for in

the individual company accounts of South Staffordshire Plc, the holding company of the participating companies in the Group. The Cambridge Water section of the defined benefit Water Companies Pension Scheme is accounted for in the accounts of Cambridge Water Plc.

In respect of the Group defined contribution schemes the amounts charged to the profit and loss account are the contributions payable in respect of the year.

(m) Research and DevelopmentResearch and development expenditure is charged to the profit and loss account in the year in which it is incurred, unless the specific criteria under FRS 102 for capitalisation of development costs have been met, in which case, the costs are capitalised and depreciated over the estimated useful life of the subsequent revenue streams.

(n) TaxationCurrent corporation tax payable is provided on taxable profits at the current rate. Deferred tax is provided in respect of capital allowances in excess of depreciation, and all other timing differences that have originated, but not reversed at the balance sheet date using future tax rates anticipated at the time of reversal that have been enacted at the balance sheet date.

(o) Financial Instruments Financial Assets All financial assets, being cash and cash

equivalents, debtors and loans receivable are measured at amortised cost. Cash and cash equivalents comprise cash at bank and in hand and short-term deposits.

Financial LiabilitiesFinancial liabilities other than derivative financial liabilities (see Hedge Accounting below) are initially measured at fair value and subsequently measured at amortised cost. The premium/discount and costs of issue are amortised over the life of the instrument, with the amortisation being included in the effective interest rate of the instrument, which is included in finance charges (net) in the profit and loss account.

(p) Hedge AccountingThe Group designates certain hedging instruments, including derivatives, as cash flow hedges. At inception of the hedge relationships, the Group documents the relationships between the hedging instruments and the hedged items, along with the Group’s risk management strategy and objectives in relation to each hedge. At the inception of the hedges, and on an ongoing

basis, the Group documents whether the hedging instruments are highly effective in offsetting changes in cash flows of hedged items.

The effective proportion of changes in fair value of hedging instruments that are designated and qualify as cash flow hedges are deferred in equity (net of tax) in a hedging reserve. The gain or loss relating to the ineffective proportion is recognised immediately in the profit and loss account. The amounts deferred in the hedging reserve are recycled to the profit and loss account in the periods when the hedged items are recognised in the profit and loss account.

Hedge accounting is discontinued when the Group de-designates the hedging relationships, the hedging instruments expire, are terminated or sold, or they no longer qualify for hedge accounting. Any cumulative gain or loss that remains in the hedging reserve at that time is recognised when hedged forecast transactions are ultimately recognised in the profit and loss account. When forecast transactions are no longer expected to occur, the cumulative gains or losses are recognised immediately in the profit and loss account.

(q) Related Party TransactionsAs of 31 March 2017, the Company was an indirectly wholly owned subsidiary undertaking of Hydriades IV Limited, the ultimate parent company in the United Kingdom. As such, the Company has taken advantage of the exemption from disclosing transactions with other members of the group headed by Hydriades IV Limited, as consolidated financial statements for this company in which the accounts of the Company and its subsidiaries are included, are publicly available. The Group has no other related party transactions requiring disclosure other than those disclosed in note 30.

(r) Exceptional ItemsThe Group separately presents certain items on the face of the profit and loss account as exceptional. Exceptional items are material items of income, gain, profit or expense that, because of their size or incidence, are presented separately to allow an understanding of the Group’s financial performance and comparison to the prior year. They are not expected to be incurred on a recurring basis. Additional details of exceptional items in the year ended 31 March 2016 are set out in note 7. There were no exceptional items in the year ended 31 March 2017.

Notes to the Financial Statements


69

Notes to the Financial StatementsPrincipal accounting judgements, estimates and assumptionsIn the application of the accounting policies, which are described above, the Directors are required to make judgements, estimates and assumptions in respect of the carrying amounts of assets and liabilities recognised in the financial statements. These are based on historical experience, future forecasts, and other factors that are considered to be relevant. It is recognised that historical experience and forecasts change over time and these judgements, estimates and assumptions are therefore reviewed, and amended where necessary, on a regular basis. However, it is also recognised that the actual outcomes may still differ from the judgements, estimates and assumptions made. Provided below are details of the principal accounting judgements, estimates and assumptions that the Directors have made when applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements.

The more significant judgements were:

Hedge accountingIn applying the Group’s interest rate hedging strategy and the corresponding hedge accounting applied in the financial statements, a judgement has been made that there will be highly probable floating interest rate payments over the term of the interest rate derivatives. Underlying this judgement is the assessment that the future refinancing of bank facilities is highly probable. The basis for this judgement includes South Staffs Water’s long-term 25-year water supply licence, its related long-term business model and regulated asset base, its ability to access capital markets including the bank debt market, its strong investment grade credit rating, and also the stability and predictability of the regulated UK water sector as a whole.

Tangible fixed assets – Determining costs which are capital in natureJudgement is required to determine whether costs incurred when work is carried out on assets of South Staffs Water are capital or revenue in nature. This work includes repairs, like-for-like replacement, new assets or replacement of assets with an element of asset enhancement or increased capacity. Identifying which element of expenditure represents capital expenditure rather than revenue expenditure, may include judgement that the South Staffs Water’s two regional infrastructure networks each represent single infrastructure assets. In order to apply the appropriate accounting, a judgement is made as to whether it is probable that the expenditure will generate future economic benefits, as well as if the costs can be measured reliably.

The key accounting estimates were:

Accrued incomeAn estimate of water consumption by metered customers of South Staffs Water since the date of the last water bill and the corresponding income that remains unbilled at the end of the year (accrued income) is required to be made each year. This estimate uses a historical water consumption rate for each customer from South Staffs Water’s billing system and applies this consumption rate to the unbilled period and the related tariff to estimate unbilled income for that period. The accrued income for metered customers as at 31 March 2017 was £14,190,000 (2016: £14,600,000).

Amortised cost of index-linked borrowingsIn order to record the Group’s index-linked borrowings at amortised cost an estimate of the long-term average inflation rate (Retail Price Index - RPI) per annum to the maturity of the instrument is required to be made. In forming this estimate, financial market data such as the long-term yields for fixed rate and index-linked (RPI) gilts is obtained and considered with the difference between these yields being the market implied long-term inflation assumption. The net book value of index-linked borrowings as at 31 March 2017 was £218,315,000 (2016: £212,046,000). A reconciliation of the book value of net debt and the value for covenant reporting purposes is provided in the notes to the consolidated cash flow statement.

Bad and doubtful debt provisionThe recoverability of trade debtors, and therefore the amount of bad and doubtful debt provision held against trade debtors in the balance sheet at each year-end, requires judgement. For South Staffs Water, this judgement requires consideration of the historical and forecast debt collection rates in respect of different categories of customers and trade debt, usually calculated as a percentage of the total amount billed in each year. This information is used in order to estimate the level of debt outstanding at the end of the year which is expected to be irrecoverable after following the processes of collection that South Staffs Water adopts. This estimate represents the year-end bad and doubtful debt provision of South Staffs Water which was £33,558,000 as at 31 March 2017 (2016: £29,790,000).

Intangible Assets - GoodwillThe outcome of the Group’s annual impairment test for goodwill is dependent on the forecast cash flows of each cash-generating unit together with key management assumptions, which are subject to inherent estimation and uncertainty including future profit growth. The total net book value of Group intangible assets as at 31 March 2017 is £24,522,000 (2016: £26,541,000).

Tangible fixed assets – Assessment of useful economic livesThere is a requirement to estimate the useful economic lives of tangible fixed assets in order to depreciate the cost or deemed cost of these assets and make an appropriate charge to the profit and loss account over that period for each asset. This estimate is based on a combination of engineering data, experience of similar assets and on the businesses forecast replacement or rehabilitation cycle and its investment plan. Industry practice is also considered as part of the overall estimate of assets lives. The total net book value of Group tangible fixed assets as at 31 March 2017 is £505,624,000 (2016: £488,963,000).

Tangible fixed assets – Deemed cost on transition to FRS 102 In order to record a deemed cost of infrastructure assets on transition to FRS 102, there was a requirement to estimate the fair value of these assets as at the transition date (1 April 2014). In line with market practice, in forming this estimate of fair value, South Staffs Water’s Regulated Asset Value as at that date was used, making deductions for net debt and the net book value of other assets and liabilities. The difference of £23,500,000 between the fair value of infrastructure assets calculated in this way and their net book value under previous UK GAAP at 1 April 2014 was recorded in the consolidated balance sheets as an increase to the book value of infrastructure assets to estimate deemed cost on transition.

Defined benefit pension schemesJudgements, assumptions and estimates are required to appropriately record the assets and liabilities of defined benefit pension schemes in the balance sheet at each period end. The Directors use the services of professional actuaries to advise on the most appropriate valuations for these assets and liabilities in accordance with the relevant accounting standard. The net accounting surplus for these assets and liabilities as at 31 March 2017 in the consolidated balance sheet is £44,661,000 (2016: £37,788,000).

Annual Report 2017

70

2 Segmental Information

Turnover 2017 2016 £’000 £’000

South Staffs Water 123,742 123,926Inter-divisional (37) (50)

South Staffs Water (external) 123,705 123,876

Non-regulated service businesses 158,854 141,787Inter-divisional (34,560) (30,759)

Non-regulated service businesses (external) 124,294 111,028

Group turnover 247,999 234,904

Operating Profit 2017 2016 £’000 £’000

South Staffs Water (before exceptional operating item) 34,159 37,062

Exceptional operating item - pension curtailment gain — 3,581

South Staffs Water 34,159 40,643

Non-regulated service businesses 9,627 10,393

Total operating profit 43,786 51,036

The Directors do not consider the turnover and operating profit of acquisitions in the year or the previous year to be material to the Group and as such these have not been separately disclosed.


Net Operating Assets 2017 2016 £’000 £’000

South Staffs Water 318,224 306,058Non-regulated service businesses 42,861 41,244

Net operating assets 361,085 347,302

Net debt (book value) (371,940) (358,310)Goodwill 24,522 26,541Loans receivable from parent undertakings in more than one year 91,250 93,740Other non-operating net liabilities (11,394) (11,811)Corporation tax payable (7,701) (8,398)Retirement benefit surplus 44,661 37,788Provisions for liabilities - deferred tax (42,329) (41,715)

Net assets 88,154 85,137

The Directors do not consider the turnover, operating profit and net operating assets arising outside of the United Kingdom to be material to the Group and as such these have not been separately disclosed.


71

3 Operating Costs before exceptional operating item (net) 2017 2016 £’000 £’000

Other operating income (note 6) (1,025) (1,683)Raw materials and consumables 27,444 26,225Staff costs (note 4) 82,429 77,374Depreciation (non-infrastructure assets) 23,789 21,552Depreciation (infrastructure assets) 3,472 3,439Infrastructure renewals expenditure 8,736 7,510Amortisation of capital contributions (2,318) (2,283)Amortisation of goodwill 4,422 4,328Own work capitalised (8,014) (7,934)Operating lease rentals: plant and machinery 189 133 other 4,192 3,296Other operating costs 60,897 55,492

204,213 187,449

The Group auditor’s remuneration is analysed as follows: 2017 2016 £'000 £'000

Fees payable to the Company's auditor for the audit of the Company's annual accounts 23 35

The audit of other Group undertakings pursuant to legislation 159 172

Total audit fees 182 207

Other services pursuant to legislation 16 15 Other services — 18 Tax services 13 20

Total non-audit fees 29 53


4 Staff Costs 2017 2016 £’000 £’000

Wages, salaries and bonuses 73,121 68,724Social security costs 6,837 6,344Pension costs 2,471 2,306

82,429 77,374

2017 2016 Number Number

Average number of employees (full-time equivalents) South Staffs Water 407 430 Non-regulated service businesses 2,187 2,065

2,594 2,495

5 Directors’ Remuneration

The remuneration of the Directors of the Company, is set out below.

2017 2016 £’000 £’000

Emoluments 383 376

No Directors holding office at 31 March 2017 (31 March 2016: Nil) accrued benefits in respect of service in the year under a Group defined benefit pension scheme during the year and 1 Director was a member of a Group money purchase pension scheme during the year (2016: 1 Director). There were £60,000 of contributions paid by the Group in respect of money purchase pension schemes in respect of Directors during the year (2016: £61,000).

The highest paid Director received emoluments of £383,000 (2016: £376,000) during the year. There were £60,000 of Group contributions in respect of money purchase pension schemes for the highest paid Director (2016: £61,000).

None of the Directors had a material interest in any contract to which the Group was party during the year or the preceding year. Further details of the remuneration of the Executive team are provided in the Remuneration Committee Review on page 55.

Annual Report 2017

72

6 Other Operating Income

2017 2016 £'000 £’000

Profit on disposal of tangible fixed assets 608 1,117Rental income 417 566

1,025 1,683

7 Exceptional Items

Included within Group operating profit for the year ended 31 March 2016 is a non-cash exceptional operating item of £3,581,000 (credit) relating to a reduction in that year in the book value of liabilities relating to a Group defined benefit pension scheme. This non-recurring item arose as a result of the cessation of future accrual of benefits within the scheme during that year. The item has been disclosed separately in the comparative year in the profit and loss account as exceptional due to its non-recurring and significant nature.

Also, during the year ended 31 March 2016, the Group sold the contractual rights to future rental income relating to a number of its sites. This sale generated a profit of £4,590,000 which was also disclosed in the profit and loss account for that year as exceptional due to the non-recurring nature of the sale and the significance of the proceeds and the profit generated. It is considered that the disposal and the related profit was not of an operating nature and as such it was recorded after operating profit.

Due to the non-recurring nature of the above, there is no profit and loss impact within the year ended 31 March 2017.

8 Finance Charges (net)

2017 2016 £’000 £’000

Interest payable and similar charges Index-linked debt (cash) 7,131 7,049 Index-linked debt (non-cash) 6,269 6,068 Bank term loan, drawings on short-term bank loans and other interest payable (net) 4,063 3,810 Private placement loan notes 1,808 1,808 Finance leases and hire-purchase contracts 1 4 Irredeemable debenture stock 68 68

19,340 18,807

Interest receivable Interest on loans to parent undertakings (5,974) (6,108)

13,366 12,699

Other finance income (net) Defined benefit pension scheme interest credit (946) (570) Amounts recycled from hedging reserve 181 184

12,601 12,313



73

9 Taxation on Profit on Ordinary Activities

The tax charge for the year comprises: 2017 2016 £’000 £’000

Current tax Current year corporation tax 4,167 5,927 Adjustment in respect of prior years (2,324) (272) Foreign tax 32 34

Total current tax charge 1,875 5,689

Deferred tax Origination and reversal of other timing differences 533 867 Impact of changes in future tax rates (2,372) (4,322) Adjustment in respect of prior years 2,062 283

Total deferred tax charge/(credit) 223 (3,172)

Total tax charge 2,098 2,517

Tax included in the consolidated statement of comprehensive income 2017 2016 £’000 £’000

Deferred tax Actuarial gain on pension scheme 632 826 Movement in hedging reserve 38 (362) Effect of change in deferred tax rate (276) (373)

Total tax charge 394 91

The adjustments to prior year current and deferred tax arise primarily as a result of the transition to FRS102 in the prior year. The change of basis of accounting for certain historical items gave rise to deferred tax temporary differences and the group has revised its estimate of the impact of this transitional adjustment.

The tax assessed on the profit on ordinary activities for the year is lower than the standard rate of corporation tax in the UK of 20% (2016 - 20%). The differences are reconciled below: 2017 2016 £’000 £’000

Profit on ordinary activities before tax 31,185 43,313

Profit on ordinary activities multiplied by standard UK corporation tax rate of 20% (2016: 20%) 6,237 8,663Expenses not deductible for tax purposes including goodwill (net) 1,031 951Deferred tax provided at lower rate (94) (88)Impact of changes in future tax rates (2,372) (4,322)Adjustments in respect of prior years (262) 11Group relief received not paid for (2,461) (2,709)Difference in foreign tax rates 19 11

Total tax charge 2,098 2,517

A reduction in the future UK corporation tax rate from 18% to 17% was substantively enacted in October 2016 and will take effect in April 2020. Deferred tax has therefore been recognised at 17% on the basis of the expected reversal period.

No deferred tax has been recognised on capital gains rolled over against the cost of acquisition of certain property and structures owned by South Staffordshire Water PLC. The gains will only come into charge if the assets are sold and not replaced by suitable qualifying assets. As the properties are essential assets of the water supply business it is regarded as unlikely that the gains will come into charge. The potential unprovided deferred tax amounts to £1,847,000 (2016: £1,879,000).

The tax impact of exceptional items reported in the year ended 31 March 2016 was an increase in the current tax charge of £918,000 and a reduction in the deferred tax credit of £645,000.


Annual Report 2017

74

10 Dividends Paid or Proposed 2017 2016 £’000 £’000

Ordinary interim dividend paid of 231.0p (2016: 259.0p) per share 29,619 33,205

11 Earnings per Share

The calculation of earnings per share is based on profit for the financial year divided by the weighted average number of shares in issue during the year. The calculations of earnings per share are based on the following profits and number of shares:

2017 2016 £’000 £'000

Profit for the financial year and profit for earnings per share 29,000 40,710

2017 2016 Number of Number of Shares Shares

Weighted average number of shares for basic and diluted earnings per share 12,819,856 12,819,856

12 Intangible Assets - Goodwill

Group £’000

Cost At 1 April 2016 49,928 Acquisitions in the year (note 27) 2,403

At 31 March 2017 52,331

Amortisation At 1 April 2016 23,387 Charge for the year 4,422

At 31 March 2017 27,809

Net Book ValueAt 31 March 2017 24,522

At 31 March 2016 26,541

Details of goodwill arising on the acquisitions made in the year are provided in note 27.



75

13 Tangible Fixed Assets Group Infra- Specialised Land and structure Fixed Plant & Operational Buildings Assets Equipment Assets Total £’000 £’000 £’000 £’000 £’000

Cost At 1 April 2016 28,533 447,401 200,996 208,315 885,245 Additions 174 9,805 20,877 13,379 44,235 Disposals (134) — (3,781) — (3,915) Acquisitions — — 250 — 250

At 31 March 2017 28,573 457,206 218,342 221,694 925,815

Depreciation At 1 April 2016 7,614 174,467 119,485 94,716 396,282 Charge for the year 492 3,472 16,597 6,700 27,261 Disposals (2) — (3,356) — (3,358) Acquisitions — — 6 — 6

At 31 March 2017 8,104 177,939 132,732 101,416 420,191

Net Book ValueAt 31 March 2017 Owned 20,469 275,040 85,135 119,782 500,426 Leased — 4,227 475 496 5,198

20,469 279,267 85,610 120,278 505,624

Net Book ValueAt 31 March 2016 Owned 20,919 268,707 81,094 112,636 483,356 Leased — 4,227 417 963 5,607

20,919 272,934 81,511 113,599 488,963

Freehold land of £2,461,000 (2016: £2,461,000) included above is not subject to depreciation.

Tangible fixed assets financed by leasing and hire-purchase contracts amounted to £12,060,000 (2016: £12,502,000) less accumulated depreciation of £6,857,000 (2016: £6,920,000). Depreciation charged to the profit and loss account for the year in respect of leased assets amounted to £221,000 (2016: £296,000).

Tangible fixed assets in the course of construction or commissioning included in the above table had a cost of £16,928,000 at 31 March 2017 (2016:

£19,725,000).

Company Land & Plant & Total Buildings Equipment £’000 £’000 £'000Cost At 1 April 2016 80 858 938 Additions — 272 272

At 31 March 2017 80 1,130 1,210

Depreciation At 1 April 2016 — 489 489 Charge for the year — 158 158

At 31 March 2017 — 647 647

Net Book Value

At 31 March 2017 80 483 563

Net Book Value

At 31 March 2016 80 369 449

Freehold land of £80,000 (2016: £80,000) included above is not subject to depreciation.

None of the tangible fixed assets of the Company were financed by finance leases or hire purchase agreements at either year end.


Annual Report 2017

76

14 Capital Commitments

Group capital commitments outstanding at 31 March 2017 were £6,700,000 (2016: £2,936,000).

The Company had no capital commitments at either year-end.

15 Capital Contributions Group Infrastructure Other Total

Assets Assets £’000 £’000 £’000

Balance at 1 April 2016 125,855 8,498 134,353Capital contributions received in the year 6,135 692 6,827Amortised in the year (1,590) (728) (2,318)

Balance at 31 March 2017 130,400 8,462 138,862

An amount is expected to be amortised in the year ending 31 March 2018 however, there is a degree of uncertainty in reliably estimating this figure based on the timing of receipts, the movement of associated projects from work in progress to completion, and general changes in the work undertaken as part of the capital programme.

The Company had no capital contributions at either year-end.



77

16 Fixed Asset Investments Company

Shares in Subsidiary Undertakings £’000

At 1 April 2016 100,738Additions to investments during the year 253

At 31 March 2017 100,991

Shares in subsidiary undertakings are stated at their cost which is equal to net book value.

As at 31 March 2017, the Company’s trading subsidiary undertakings, all of which are incorporated in the United Kingdom with the exception of Echo India Private Limited, which is incorporated in India and OnSite Utility Services Canada Limited, which is incorporated in Canada, and all of which have only ordinary shares in issue, were as follows:

Direct Indirect Ordinary OrdinaryCompany Name Shareholding Shareholding Nature of Business

South Staffordshire Water PLC 100% Regulated water supply

Aqua Direct Limited 100% Supply of spring and mineral water

SSWB Limited 100% Non-household water retail services

Office Watercoolers Limited 90% Rental of water cooling units and sale of spring water

Echo Managed Services Limited 100% Customer management

Echo Northern Ireland Limited 100% Customer management

Inter-Credit International Limited 100% Customer credit management

Grosvenor Services Group Limited 100% Customer credit management

Echo India Private Limited 100% Software development support services to UK parent company

SSI Services (UK) Limited 100% Holding company for those companies listed below

OnSite Central Limited 100% Sewer and wastewater asset inspection, relining, surveying, cleaning and flow monitoring. Clean water asset installation, repair, maintenance and refurbishment

OnSite Utility Services Canada Limited 100% Sewer and wastewater asset inspection, surveying and cleaning

Integrated Water Services Limited 100% Mechanical and electrical and water hygiene services

Hydrosave UK Limited 100% Water main leak detection services and clean water network management services

Immerse Asset Management Limited 100% Water efficiency and bill management services

Other subsidiaries of the Company as at 31 March 2017, which were all non-trading companies as at that date, were as follows:

365 Environmental Services Limited Grosvenor Legal Services Limited Rapid Systems Limited

Aquaven Limited Ion Water and Environmental Management Limited Recoup Revenue Management Limited

Brocol Consultants Limited IWS M&E Services Limited South Staffordshire Infrastructure Services

Cambridge Water Plc IWS Pipeline Services Limited South Staffordshire Water Business Limited

Cambridge Water Business Limited IWS Water Hygiene Services Limited South Staffordshire Water Holdings Limited

Data Contracts Specialist Maintenance Limited Lingard Limited Subaqua Solutions Limited

Debt Action Limited OnSite Specialist Maintenance Limited Wells Water Treatment Services Limited

Freshwater Coolers Plc Portadam Limited Woodside Environmental Services Limited

Greenacre Pumping Systems Limited Perco Engineering Services Limited

Green Compliance Water Division Limited Pump Services Limited

As at 31 March 2017, the registered address of the above subsidiaries is Green Lane, Walsall, WS2 7PD, with the exception of Aqua Direct Limited (Elmhurst Spring, Lichfield Road, Elmhurst, Lichfield, Staffordshire, WS13 8HQ), Echo Northern Ireland Limited (Capital House, Wellington Place, Belfast, Northern Ireland, BT1 6FB), Echo India Private Limited (304, 3rd Floor, Laxmi Chamber, Plot No. D-223, VikasMarg, Laxmi Nagar, New Delhi - 110092), OnSite Utility Services Canada Limited (Three Bentall Centre, Vancouver, British Columbia, Canada, V7X 1L3), Cambridge Water Plc (90 Fulbourn Road, Cherry Hinton, Cambridge, CB1 9JN) and Debt Action Limited (Capital House, 3 Upper Queen Street, Belfast Northern Ireland, BT1 6PU).


Annual Report 2017

78

17 Stocks

Group 2017 2016 £’000 £’000

Stores and raw materials 2,520 2,272

The Company had no stocks at either year-end.

18 Debtors Group Company

2017 2016 2017 2016 £’000 £’000 £’000 £’000

Amounts recoverable within one year Trade debtors 52,674 41,092 — — Other debtors 515 250 78 33 Amounts owed by Group undertakings — — 6,555 6,717 Amounts owed by parent undertakings 364 364 — — Prepayments and accrued income 22,770 23,282 2,564 2,483

76,323 64,988 9,197 9,233 Amounts recoverable in more than one year Loans receivable from parent undertakings 91,250 93,740 51,250 53,740 Amounts owed by Group undertakings — — 5,814 17,014 Other amounts owed by parent undertakings 3,667 3,786 — —

94,917 97,526 57,064 70,754

171,240 162,514 66,261 79,987

19 Borrowings Group Company

2017 2016 2017 2016 £’000 £’000 £’000 £’000

Amounts falling due within one year Short-term bank loans 14,200 8,200 14,200 8,702 Bank term loans 19,949 — 19,949 — Obligations under finance leases and hire purchase contracts 219 392 — —

34,368 8,592 34,149 8,702

Amounts falling due in more than one year Bank term loans 89,400 109,082 59,533 79,248 Index-linked debt 218,314 212,046 — — Private placement loan notes 40,842 40,749 40,842 40,749 Irredeemable debenture stock 1,652 1,652 — —

350,208 363,529 100,375 119,997

Total borrowings 384,576 372,121 134,524 128,699

The book value of the Group’s index-linked debt of £218,314,000 (2016: £212,046,000) is stated above at amortised cost in accordance with FRS 102. The indexed principal of £196,594,000 (2016: £192,706,000) is used for borrowing covenant reporting purposes. Similarly, Group gross bank loans of £109,763,000 (2016: £109,763,000) and gross private placement loan notes of £41,000,000 (2016: £41,000,000) are used for covenant reporting purposes but, in accordance with FRS 102, are stated above net of unamortised issue costs. A full reconciliation between net debt recorded in the consolidated balance sheet and net debt reported for borrowing covenant purposes is provided in the notes to the consolidated cash flow statement on page 65.

On 18 July 2017, South Staffordshire Plc refinanced a bank facility of £20m that was due to mature in December 2017 with a new five-year £20m bank facility.



79

20 Other Creditors Group Company 2017 2016 2017 2016 £’000 £’000 £’000 £’000

Amounts falling due within one year Trade creditors 41,033 32,436 327 619 Payments received in advance 26,514 25,530 — — Other creditors 15,128 15,785 2,803 5,388 Corporation tax payable 7,701 8,398 3,462 3,134 Other taxation and social security 1,721 1,505 115 106

92,097 83,654 6,707 9,247

Amounts falling due in more than one year Derivative financial liabilities 4,063 4,104 1,216 1,759 Other creditors 11,122 10,805 759 393

15,185 14,909 1,975 2,152

Derivative financial liabilities represent the market value of floating to fixed rate interest rate swaps.

21 Provisions for Liabilities

Group Deferred Tax

£’000

At 1 April 2016 41,715Profit and loss account charge 223Charge to other comprehensive income 393Amounts acquired with subsidiary undertakings (2)

At 31 March 2017 42,329

Company Deferred Tax

£’000

At 1 April 2016 4,514Profit and loss account charge 532Charge to other comprehensive income 103

At 31 March 2017 5,149

A further analysis of deferred tax is set out in note 23.


Annual Report 2017

80

22 Retirement Benefit Surplus

Group

Surplus of defined benefit pension scheme £’000

At 1 April 2016 37,788Contributions (employer) 2,212Net finance income 946Actuarial gain (net) 3,715

At 31 March 2017 44,661

Further disclosures relating to the above surplus are provided in note 29.

Company Surplus of defined benefit pension scheme

£’000

At 1 April 2016 28,093Contributions (employer) 1,778Net finance income 694Actuarial gain (net) 1,609

At 31 March 2017 32,174

23 Deferred Tax Group Company

2017 2016 2017 2016 £’000 £’000 £’000 £’000

Deferred tax liabilities are provided as follows: Accelerated capital allowances 36,881 37,375 (25) (13) Tax losses (60) (125) — — Timing differences in respect of hedging reserves (1,698) (1,838) (207) (317) Timing differences in respect of retirement benefits 7,592 6,802 5,470 5,057 Other timing differences (386) (499) (89) (213)

42,329 41,715 5,149 4,514

24 Called up Share Capital

Group and Company 2017 2016 £’000 £’000

Authorised47,058,824 ordinary shares of 42.5p each 20,000 20,000

Issued and fully paid12,819,856 ordinary shares of 42.5p each 5,449 5,449



81

25 Operating Lease Commitments

At 31 March 2017, the Group and the Company had the following annual commitments under non-cancellable operating leases:

Group 2017 2017 2016 2016 Buildings Other Buildings Other £’000 £’000 £’000 £’000Operating leases which expire: within one year 144 1,128 178 560 between two and five years 428 3,339 387 1,874

572 4,467 565 2,434

Company 2017 2016 Motor Motor Vehicles Vehicles £’000 £’000Operating leases which expire: within one year 16 24 between two and five years 53 48

69 72

26 Non-controlling Interests

2017 2016 £’000 £’000

At 1 April 131 82Profit on ordinary activities after taxation 87 86Acquisition in the year — (37)Dividends paid to non-controlling party (5) —

At 31 March 213 131

27 Acquisitions

On 12 October 2016, Integrated Water Services Limited acquired the entire issued ordinary share capital of Green Compliance Water Division Limited, a company which provides water hygiene testing and treatment services to commercial customers.

The acquisition method of accounting has been adopted.

A summary of the acquisition, including the consideration, the assets and liabilities acquired (both based on the provisional fair values), the related goodwill and the impact of the transaction on group cash flow and net debt are set out below:

Total £’000

Consideration: Cash consideration 1,800

Book value of net liabilities acquired: Tangible fixed assets 244 Stocks 21 Debtors 1,468 Cash at bank and in hand (net) — Creditors and provisions (net) (2,336)

Net liabilities (book value and provisional fair value) (603)

Goodwill on acquisition 2,403

Cash consideration paid in the year 1,800Cash acquired (net) —

Net cash outflow and increase in net debt from acquisition in the year 1,800

There was no material difference between the book value of the net liabilities acquired and their provisional fair value.


Annual Report 2017

82

The cash consideration reported above differs to that reported in the Consolidated Cash Flow Statement for the year ended 31 March 2017, due to additional cash payments including deferred and contingent consideration, made in the year to 31 March 2017 by the Group in respect of prior year acquisitions.

The above goodwill is being amortised over an estimated useful economic life of 10 years.

28 Financial Assets and Liabilities

The Group’s financial assets and liabilities include cash, loans receivable, borrowings, derivative financial assets and liabilities, trade creditors and trade debtors. Borrowings as at 31 March 2017 represent bank term loans, private placement loan notes, finance lease obligations, index-linked debt and irredeemable debenture stock. The purpose of the Group's borrowings is to finance the Group’s operations. It is, and has been throughout the year and the previous year under review, the Group’s policy that no trading in financial instruments shall be undertaken. The Group’s policy in respect of cash, loans receivable and borrowings is to maintain flexibility with both fixed and floating interest rates and long and short-term borrowings while not exposing the Group to significant risk of market movements (see below). As at 31 March 2017, derivative financial liabilities represent floating to fixed interest rate swaps used as cash flow hedges to reduce the Group’s risk to changes in LIBOR.

Interest Rate Risk Profile

Borrowings 2017 2016 £’000 £’000

Retail Price Index-linked borrowings 218,314 212,046 Fixed rate borrowings 123,113 142,875 Floating rate borrowings 43,149 17,200

384,576 372,121

The above borrowings are stated at their book value as opposed to the value used for borrowing covenant purposes. A reconciliation between book and covenant net debt is provided on page 66. The floating rate borrowings comprise sterling denominated short-term bank loans (revolving credit facilities) that bear interest at rates based on LIBOR. Fixed rate financial liabilities include fixed rate bank term loans of £15,763,000 (2016: £15,763,000) and floating rate bank term loans with principal values of £65,000,000 (2016: £85,000,000) that are effectively swapped to fixed rate by cash flow hedges using floating to fixed interest rate swaps where cash flows under the swaps have commenced. The Group's trade debtors and trade creditors are not subject to interest unless considered to be overdue.

For all financial assets and liabilities, the book values and fair values are not materially different, except for the £111,400,000 (2016: £111,400,000) Retail Price Index-linked loan which had a book value at 31 March 2017 of £172,133,000 (2016: £167,350,000), and a fair value of £328,909,000 (2016: £267,360,000) and the £35,000,000 (2016: £35,000,000) Retail Price Index-linked bond which had a book value at 31 March 2017 of £46,181,000 (2016: £44,696,000) and a fair value of £61,793,000 (2016: £46,701,000).

Fixed Rate Borrowings Weighted Weighted average average period for which interest rate rate is fixed

% Years

2017 Sterling 3.7 2.3

2016Sterling 3.8 3.3

Borrowing Facilities

The Group has various borrowing facilities available to it. The undrawn committed facilities available at 31 March 2017 were as follows:

2017 2016 £’000 £’000

Expiring in one year or less 37 — Expiring in more than one year but not more than two years 15,000 37 Expiring in more than two years but not more than five years 10,000 31,000

25,037 31,037



83

Financial Risks

The Group’s activities result in it being subject to a limited number of financial risks, principally credit risk, as the Group has financial assets receivable from third parties. Management of financial risks focuses on reducing the likely impact of risks to a level that is considered acceptable. The Group has formal principles for overall risk management, as well as specific procedures to manage individual risks.

1) Interest rate risk

Interest rate risk arises from borrowings issued at floating rates, including those linked to LIBOR and the Retail Price Index (RPI), that expose the Group’s cash flows to changes in LIBOR and RPI. Risks of increases in LIBOR are managed by limiting the value and proportion of Group borrowings that are linked to this variable rate and by entering into an appropriate value of floating to fixed interest rate swap contracts. Risks associated with increases in RPI are effectively managed by hedging against the revenues and the Regulatory Asset Value of South Staffs Water, both of which are also linked to RPI.

2) Credit risk

As is market practice, the Group grants certain customers credit on amounts due for the services it supplies, leading to limited risk over the recovery of amounts receivable from these customers. Full details of the way this risk is managed are provided below. Credit risk also includes the risk over recovery of loans receivable. This risk is managed by ensuring that loans are only made to entities with sufficient financial resources to service the interest due on the loans. The total carrying value of financial assets subject to credit risk, net of provisions, at 31 March 2017 was £148,470,000 (2016: £139,232,000).

3) Liquidity risk

Liquidity risk represents the risk of the Group having insufficient liquid resources to meet its obligations as they fall due. The Group manages this risk by regularly monitoring the maturity of credit facilities, actual and forecast cash flows and ensuring that the payment of its obligations are matched with cash inflows and availability of free cash and adequate credit facilities. The table above details the undrawn committed borrowing facilities available to the Group to manage this risk.

Security Over Assets

Obligations under finance leases and hire purchase contracts are secured on the assets to which they relate. Index-linked debt, debenture stock and bank debt issued by South Staffordshire Water PLC, is not secured on any assets. The Company’s bank loans and its private placement loan notes are secured against the shares of the Company and certain subsidiaries.

Sensitivity Analysis

The following analysis is intended to illustrate the sensitivity to reasonably possible movements in variables affecting financial liabilities being LIBOR and the long-term forecast for the UK Retail Price Index (RPI) on the pre-tax profit and loss account of the Group during the year. There is no impact on reserves other than the impact on the profit and loss account after tax.

2017 2016 £’000 £’000

RPI + 0.25% (508) (494)RPI - 0.25% 508 494LIBOR +1.00% (501) (484)LIBOR -1.00% 501 484

The impact on the pre-tax profit and loss account for the year to 31 March 2017 detailed above has been calculated by assuming that the illustrated changes to the variables occurred on 1 April 2016 and remained different to the actual variables recorded by the stated amount during the year with all other variables remaining at the actual amounts. The comparative figures have been calculated using the same methodology assuming the stated change to the variables occurred on 1 April 2015.


Annual Report 2017

84

Maturity of Financial Assets and Liabilities

The maturity profile of the Group’s financial liabilities recorded at repayment value, not book value, was as follows:

2017 2016 £’000 £’000

BorrowingsIn one year or less, or on demand 34,419 8,592In more than one year, but not more than two 72,381 20,000In more than two years, but not more than five 58,381 130,763In more than five years, but not more than twenty — —In more than twenty years 198,246 194,358

363,427 353,713Other financial liabilitiesIn one year or less, or on demand 92,097 83,654In more than one year but not more than two 2,150 702In more than two years but not more than five 2,076 3,318In more than five years but not more than twenty 10,959 10,889

Total 470,709 452,276

The table above excludes future interest payments and future indexation on financial liabilities. Index-linked borrowings of £196,594,000 (2016: £192,706,000) included in the table above are stated at the principal amount indexed by the appropriate RPI value to the balance sheet date. The estimated redemption value of index-linked borrowings at redemption in 2045 is £399,467,000 (2016: £399,467,000) and at redemption in 2051 is £139,996,000 (2016: £139,996,000).

Group debtors recoverable in more than one year of £94,917,000 (2016: £97,526,000) principally represent loans receivable from the Company's parent undertakings of £91,250,000 (2016: £93,740,000) with £15,000,000 (2016: £15,000,000) due to be repaid between two and five years and £76,250,000 (2016: £78,740,000) having no fixed repayment date.

Trade Debtors

Before accepting orders from certain customers and offering credit terms, the Group undertakes appropriate credit assessments and uses this information to determine if the order is accepted and the credit terms that will be offered. Provision is made within the trade debtor values detailed below, based on judgement by senior management, for amounts considered to be unrecoverable due either to their nature or age. Due to the varying nature of the Group’s businesses there is no single method that is applied to all trade debtors. This would not be considered appropriate with the methods applied being considered appropriate to each business. The total amount charged to the profit and loss account in the year ended 31 March 2017 in respect of such provisions was £3,801,000 (2016: £2,868,000). Total Group trade debtors (net of provisions) as at 31 March 2017 were £52,674,000 (2016: £41,092,000). The total amount of the provision included in the above, as at 31 March 2017 was £35,758,000 (2016: £31,642,000). The Group does not hold collateral over its trade debtors.

The Directors consider that debtors that are neither past due nor impaired are of a high quality and were considered, at the balance sheet date, to be fully recoverable at their gross book value. The Directors consider that the concentration of credit risk across the Group is limited due to the Group’s customer base being significant. The largest balance outstanding from any single third party at 31 March 2017 was £927,000 (2016: £1,187,000), representing 2% (2016: 3%) of the above Group net trade debtor total. Individually significant debtors are principally due from customers with investment grade credit ratings including utilities, government agencies and local authorities.

An ageing analysis of invoiced trade debtors that are past due but not impaired is provided below:

South Staffs Water <1 year 1-2 years 2-3 years 3-4 years 4-5 years >5 years Total £’000 £’000 £’000 £’000 £’000 £’000 £’000

2017 10,525 2,355 1,337 642 366 — 15,2252016 7,980 2,149 1,033 692 392 — 12,246

Non-regulated service businesses <1 month 1-2 months >2 months Total £’000 £’000 £’000 £’000

2017 5,596 1,841 4,865 12,3022016 5,679 1,407 3,245 10,331



85

Non-regulated service business’ debtors that are considered to be impaired of £2,154,000 (2016: £1,852,000) were all more than 2 months past due. An ageing analysis of debtors of South Staffs Water that are considered to be impaired is provided below:

<1 year 1-2 years 2-3 years 3-4 years 4-5 years >5 years Total £’000 £’000 £’000 £’000 £’000 £’000 £’000

2017 4,019 3,566 3,553 3,437 3,352 15,677 33,6042016 3,964 3,475 3,299 3,181 2,949 12,922 29,790

The Directors consider that the carrying value of trade and other debtors including loans receivable, net of provisions, detailed in note 18 approximates to their fair value.

29 Pension Retirement Benefits

The Group operates a number of funded pension schemes for the benefit of its employees. The Group participates in the Water Companies Pension Scheme, by way of two separate sections, which provide benefits based on pensionable pay at certain points in time (indexed as appropriate). At 31 March 2017, both of these sections had ceased future accrual of benefits with the South Staffordshire section ceasing future accrual from 1 April 2015 and the Cambridge section from 31 December 2010. The Group also operates a number of defined contribution pension schemes. The assets of all of these schemes are held separately from those of the Group, being invested by professional fund managers.

Details of the accounting policy for pension schemes are provided in note 1. As both of the sections of the defined benefit scheme are closed to future benefit accrual, from 1 April 2015 only funding deficit contributions are now being paid into the Scheme (with these being £2,212,000 in the year ended 31 March 2017 and £2,194,000 in the year ended 31 March 2016) with these contributions paid increasing the assets of the sections. No current service contributions are now paid and with effect from 1 April 2015 there is no current service cost charge to the profit and loss account. The impact of the cessation of the future accrual of the South Staffordshire section of the scheme on 1 April 2015 included a non-recurring reduction in the liabilities of the section of £3,581,000 and this was included as an exceptional operating credit item in the profit and loss account for the year ended 31 March 2016 (note 7). The amount charged to the consolidated profit and loss account for the defined contribution schemes in the year was £2,471,000 (2016: £2,306,000). A pension asset has been fully recognised for both sections at both 31 March 2017 and 31 March 2016 as the Group would benefit from a refund of any surplus assets following a complete run-off of the section (i.e. following the final benefit payment from the section). There were no overdue contributions at either year-end.

Additional disclosures regarding the Group’s defined benefit pension scheme are required under provisions of FRS 102. Valuations each year are undertaken by a qualified actuary using assumptions that are consistent with the requirements of FRS 102. The market value of investments has been calculated using the bid price.

The major assumptions used were as follows:

31 March 31 March 2017 2016 % %

Rate of increase in pensions 2.5 2.2 Discount rate 2.7 3.4 Annual inflation RPI 3.4 3.1 Annual inflation CPI 2.4 2.1

31 March 31 March 2017 2016 No. of Years No. of Years

Life expectancy of male aged 60 at accounting date 27.9 27.8


86

Annual Report 2017

The market value of the assets in the Group’s sub-funds of the scheme and the present value of these sub-funds’ liabilities at the balance sheet date were:

Valuation 2017 2017 2016 2016 % £’000 % £’000

Equities 23 70,104 30 69,172High yield bonds/gilts and debt instruments 60 180,530 53 146,939Diversified growth funds 11 31,218 11 29,450Emerging markets multi asset funds 6 18,677 6 16,278Cash/(overdraft) — 800 — (346)

Market value of scheme assets 301,329 261,493Present value of scheme liabilities (256,668) (223,705)

Surplus before deferred tax 44,661 37,788Related deferred tax liability (7,592) (6,802)

Surplus after deferred tax 37,069 30,986

Changes in the present value of the liabilities of the Group’s sub-funds of the scheme are as follows:

2017 2016 £’000 £’000

Opening present value of scheme liabilities 223,705 243,213Curtailment gain — (3,581)Interest cost 7,428 7,636Actuarial loss/(gain) 36,260 (14,359)Benefits paid (10,725) (9,204)

Closing present value of scheme liabilities 256,668 223,705

Changes in the market value of the assets of the Group’s sub-funds of the scheme are as follows:

2017 2016 £’000 £’000

Opening market value of scheme assets 261,493 270,065Interest on scheme assets 8,374 8,206Actuarial gain/(loss) 39,975 (9,768)Contributions (employer) 2,212 2,194Benefits paid (10,725) (9,204)

Closing market value of the scheme assets 301,329 261,493

The total return on assets of the Group’s sub-funds of the scheme over the year to 31 March 2017 was a gain of £48,725,000 (2016: loss of £1,237,000).

An analysis of the movement in the surplus of the Group’s sub-funds of the scheme during the year ended 31 March 2017 is provided in note 22.


87


30 Related Party Transactions

Historical agreements were put in place with a holding company in the Group structure to offset the impact on South Staffordshire Water PLC of certain hedging relationships entered into with a third party bank, on both cash flow, and the profit and loss account. The balance due from Selena Bidco Limited in respect of these transactions at 31 March 2017 was £4,030,000 (2016: £4,150,000). This amount has been recognised within debtors in the Group Consolidated Balance Sheet. In accordance with applicable accounting standards, the impact of both arrangements on the profit and loss account of South Staffordshire Water PLC and the Group have been netted off with no overall impact.

31 Events after the Balance Sheet Date

On 1 April 2017 South Staffordshire Water PLC transferred its Non-Household retail operations and related assets to SSWB Limited, a fellow group company and subsidiary of South Staffordshire Plc, and therefore exited the Non-Household retail water market. On the same day, South Staffordshire Plc subsequently transferred the entire share capital of SSWB Limited to Pennon Water Services Limited (PWS), a subsidiary of Pennon Group Plc (the parent of South West Water Limited), in return for a 20% equity share in PWS for South Staffordshire Plc. Also on 1 April 2017 South West Water Limited transferred its Non-Household retail operations and related assets to PWS therefore forming the joint venture of PWS to operate in the Non-Household retail market.

On 22 June 2017 Integrated Water Services Limited (a subsidiary of South Staffordshire Plc) acquired the entire issued share capital of G.Stow Plc, a leading

provider of borehole drilling and refurbishment services predominantly for the UK Water Sector.

32 Ultimate Controlling Party

The Company’s immediate parent undertaking is Aquainvest Acquisitions Limited. The ultimate controlling party in the United Kingdom is Hydriades IV Limited which is the largest and smallest set of accounts within which the Group is further consolidated. The ultimate controlling party is KKR Infrastructure Limited, which controls and manages, and is the General Partner of the Global Infrastructure Fund of the investment business KKR & Co L.P., which is quoted on the New York Stock Exchange.


88

Annual Report 2017

South Staffs Water

South Staffordshire PlcGroup Chief Executive: Adrian Page

Green Lane, Walsall, West Midlands, WS2 7PDTelephone: 01922 638 282

www.south-staffordshire.com

South Staffordshire Water PLCManaging Director: Phil Newland

South Staffs WaterGreen Lane, Walsall, West Midlands, WS2 7PDTelephone: 01922 638 282

www.south-staffs-water.co.uk

Cambridge Water90, Fulbourn Road, Cambridge, CB1 9JNTelephone: 01223 706 050

www.cambridge-water.co.uk

Contact Details

89


SSI Services (UK) LtdManaging Director: Dave Taylor


www.ssi-services.co.uk

Integrated Water Services LtdMechanical & Electrical ServicesManaging Director: Steve Suffolk

Water Hygiene Managing Director: Chris Brown


www.integrated-water.co.uk

SSI Services

W a t e r N e t w o r k E f f i c i e n c y

Hydrosave UK LtdManaging Director: Simon Dray

Swallow Court, Kettering Venture Park, Kettering, NN15 6XXTelephone: 01536 515 110

www.hydrosave.co.uk

OnSite Central LtdManaging Director: Alan Plante

89 Blackpole West, Blackpole, Worcester, WR3 8TJTelephone: 01905 340 054

www.onsite.co.uk

Omega Red Group*

Managing Director: Neil Shailer

Dabell Avenue, Blenheim Industrial Estate, Bulwell,Nottingham, NG6 8WATelephone: 0115 877 6666

www.omegaredgroup.com

* A subsidiary of Hydriades Limited (a parent company of South Staffordshire Plc).** Acquired in June 2017.

G.Stow Plc**

Managing Director: Antony Stow


www.gstowplc.com

90

Annual Report 2017

Echo Managed Services LtdManaging Director: Nigel Baker

Green Lane, Walsall, West Midlands, WS2 7PDTelephone: 0845 12 12 122

www.echo-ms.com

Inter-Credit International LtdManaging Director: Nigel Baker

The Quorum, Bond Street South, Bristol, BS1 3AETelephone: 01992 807 200

www.intercred.com

Echo

Grosvenor Services Group LtdManaging Director: Lloyd Birkhead

4 Rotherside Court, Rotherside Road, Eckington Business Park, Sheffield, S21 4HLTelephone: 0333 1231471

www.grosvenorservices.co.uk

91


Office Watercoolers LtdManaging Director: Ken Skelton

Waterloo House, 112-116 Anglesey CourtTowers Business Park, Rugeley, Staffordshire, WS15 1ULTelephone: 0845 60 90 902

www.office-coolers.com

Aqua Direct LtdDirector: Helene James

Elmhurst Spring, Lichfield Road,Elmhurst, Lichfield,Staffordshire, WS13 8HQTelephone: 01543 493 613

www.aqua-direct.co.uk

Office Watercoolers

Aqua Direct

South Staffordshire PlcGreen LaneWalsallWS2 7PD

Tel: +44 (0)1922 638282

www.south-staffordshire.com

ANNUAL REPORT 2017 - South Staffordshire · Welcome to South Staffordshire Plc’s Annual Report...

Documents

Transcript of ANNUAL REPORT 2017 - South Staffordshire · Welcome to South Staffordshire Plc’s Annual Report...