Bristol Water PLC 26 May 2005 BRISTOL WATER plc Bristol Water plc is a subsidiary of Bristol Water Group plc which is also reporting its results today 26 May 2005 Year ended 31 March 2005 2004 % £m £m change Turnover 70.6 70.6 - Operating profit - normal activities 18.7 19.7 -6% - exceptional restructuring costs (2.0) - na -------- -------- -------- 16.7 19.7 -15% -------- -------- -------- Profit before tax 10.1 13.5 -25% Profit after tax 8.8 11.1 -21% Earnings per ordinary share 128.1p 166.0p -23% • High service standards maintained • Operating profit before exceptional restructuring costs of £2.0m reduced by 6% - reflecting price increase of just 0.6% and lower measured consumption • Net capital investment in year £16.6m • Ofwat Final Determination of price limits 2005-10 accepted • Additional debt of £57m to be raised in June 2005 • Anticipated net debt: Regulatory Capital Value of 75% to 80% over next five years • Additional contribution of £7m to reduce pension deficit Alan Parsons Oliver Winters Andy Nield City Profile Bristol Water plc Tel: 0207 448 3244 Tel 0117 953 6407 Or contact: Bristol Water Corporate Affairs on 0117 953 6470 during office hours or 07831 453924 at any time. CHAIRMAN'S STATEMENT Introduction The last year has seen further major changes and developments for the company. New Financing In May 2005 the company announced that it planned to raise £57m of additional borrowings through the Artesian programmes. Approximately £35m of these borrowings will be utilised to finance the capital expenditure and debt maturity requirements for the current year and part of 2006/07 of the regulated water business and a contribution of £7m to reduce the deficit in the final salary pension scheme. Approximately £22m of the additional borrowings will be used to provide a loan from the company to the ultimate parent company. The parent company intends to use this loan to partially finance a £30m return to its shareholders. Should approval for the return not be obtained, the surplus funds will be used to finance this company's longer term capital expenditure, debt maturity and working capital requirements. On a pro forma basis the return of capital will increase the net indebtedness in the company from £140m at 1 April 2005 to approximately £169m, representing approximately 62 per cent and 75 per cent respectively of the company's Regulatory Capital Value (RCV) at 1 April 2005. Whilst the company will need to raise additional debt over the current regulatory period to fund its capital expenditure obligations, the Board believes that it will be able to maintain a debt to RCV ratio in the range 75 to 80 per cent over the current regulatory period. Trading Performance The results for the year are affected by a £2.0m charge in respect of the costs of a restructuring programme instigated by the Board to improve future operating efficiency. The results are considered in detail in the Operating and Financial Review. Operational Performance The company continued to deliver high quality services to customers and at the end of March had substantially delivered the key required outputs for the five year period 2000-05 as agreed with Ofwat in the 1999 Final Determination of price limits. Rainfall during the winter period was much lower than normal, but impounding reservoirs have now recovered to approximately 84% full against a normal guideline target of 93%. The difference does not represent a significant operational risk but does mean that full use of abstraction available from the Sharpness Canal will be made during the next few months to manage the rate of reservoir draw down. Ofwat's PR04 Final Determination Ofwat completed its determination of price limits for the five year period 1 April 2005 to 31 March 2010 for the company as part of the industry wide review. In December 2004, Ofwat set out its Final Determination which, after careful consideration, the Board accepted. The new price limits are expressed as K factors, which are the overall adjustments to tariffs before inflationary effects are taken into account. The limits are: 2005/06 13.8% 2006/07 2.8% 2007/08 1.5% 2008/09 0.7% 2009/10 -2.3% Although Ofwat set challenging efficiency targets, the Board believes that it will be able to deliver the relevant service outputs within the targets set. We remain determined that our consistently high standards of service to customers and quality of water supplied will remain key features of the business. The average annual household water bill for our customers in 2004/05 was £108, some 8% lower than the industry average of £117. Under the new price limits by 2009/10 the average household water bill for our customers will increase to £122 (2004/05 prices) remaining well below the expected industry average of £140. Board changes After 37 years service, Roger Wyatt, managing director of the company, will retire at the end of March 2006. We currently expect his duties to be shared between the other executives rather than seek a replacement. Moger Woolley, chairman of the ultimate parent company, will be proposed as a director at the Annual General Meeting and subject to election will become Chairman. This will allow separation of my role as Chief Executive from the Chairman's position in line with good Corporate Governance. Prospects The year again saw the delivery of high quality services to our customers. Other than this the results for the year are not representative of the future. They reflect the final year of the 2000-05 regulatory period and restructuring costs preparing for the next five year period. The new price limits agreed with Ofwat for the five year period 2005-10 will enable us to deliver the obligations set out in the PR04 Final Determination and to improve profitability and at the same time make further improvements to services to customers. Alan Parsons Chairman 26 May 2005 OPERATING AND FINANCIAL REVIEW Results Overview As previously indicated the allowed price increase under the RPI + K formula for 2004/05 was just 0.6% (RPI of 2.5% less a real price reduction of 1.9%). This is significantly lower than inflationary increases on our operating cost base and therefore operating profits were reduced. Income from our main water supply charges fell by £0.4m to £65.9m, this represents the net effect of price increases of £0.6m and new connections of £0.4m offset by lower consumption levels by metered customers during the poor summer weather compared to the previous year. Operating costs before depreciation and exceptional restructuring costs increased by £1.3m to £37.3m. The increase reflects inflation, including significantly higher energy prices, offset by further efficiency gains. Net depreciation reduced by £0.3m to £14.6m reflecting the re-lifing of meters, which reduced the charge by £0.5m offset by depreciation on new assets coming into service. The exceptional charge of £2.0m represents redundancy costs related to the restructuring programme that the Board instigated to improve the operational efficiency of the company. Operating profit before the exceptional charge reduced by £1.0m to £18.7m, and after the exceptional charge reduced by £3.0m to £16.7m. Profit before tax reduced by £3.4m to £10.1m. The tax charge for the year was £1.3m and represented 13% of profit before tax, compared to £2.4m and 18% in the previous year. Net capital investment in the year after grants and contributions from developers was £16.6m, compared to £24.5m in 2004. Ordinary dividends increased from £6.2m to £8.1m. They comprise a base element which increased from £5.9m to £6.1m together with an amount equivalent to the after tax cost of interest payable by the ultimate parent company in respect of the £47m inter-company loan made in February 2004. The inter-company loan element increased from £0.3m to £2.0m reflecting the full year effect of the loan interest. Treasury Net cash inflow from operating activities was £34.1m (2004 - £33.4m), net cash outflows from servicing of finance totalled £7.0m (2004 - £7.8m) and net capital expenditure and investment activities amounted to £16.4m (2004 - £71.6m which included the £47m intercompany loan to the ultimate parent company). Total cash inflows before management of liquid resources and financing were £1.5m (2004 - £64.9m outflow). Net borrowings decreased from £140.3m to £140.1m during the year and at 31 March 2005 represented approximately 62% of Regulatory Capital Value (RCV) at that date. Net interest charges in the year totalled £6.6m (2004 - £6.2m) and were covered 2.5 times (2004 - 3.1 times). Capital restructuring and return to shareholders In May 2005 the company announced that it planned to raise further funds under the Artesian monoline wrapped bond programmes arranged by The Royal Bank of Scotland amounting to £57m of index-linked debt. No provision has been made in these accounts for the cost of raising the funds, estimated at £0.4m. The company has agreed to advance approximately £22m of the new funds in the form of a long term interest bearing loan to the ultimate parent company. Together with other cash balances the ultimate parent company plans to use this to finance a £30m return to shareholders. The remaining approximate £35m of new funds will be used by the company to finance capital expenditure, debt maturities and working capital requirements together with a payment of £7m to reduce the deficit in the pension scheme. On a pro forma basis the new arrangements will increase the net indebtedness of the company from £140m at 1 April 2005 to approximately £169m, representing approximately 62% and 75% respectively of RCV at 1 April 2005. Pensions The last triennial actuarial valuation of the company's section within the Water Companies' Pension Scheme (WCPS) was as at 1 April 2002 and showed a net surplus on an actuarial basis of £6.3m. An updated interim valuation, for SSAP24 purposes only, was carried out as at 1 April 2003 to recognise the significant change in the funding level following the downturn in the equity markets since 1 April 2002. The interim valuation showed a net deficit of £3.0m. Since the actuarial valuation, increases in the level of cash contributions to the WCPS section effective from 1 April 2003 and 1 April 2004 have been agreed with the trustee. The estimated normal cash contributions for 2005/06 are approximately £1.6m (2004/05 - £1.4m). The next triennial actuarial valuation is due as at 1 April 2005. The valuation is currently in progress and results will be available during late summer/early autumn 2005. It is anticipated that following the valuation new increased cash contribution rates will be agreed with the trustee effective from 1 April 2006. The section is currently invested primarily in equities. The investment strategy has been carefully examined and it has been concluded that the appropriate long-term strategy is to reduce the proportion of equities with a corresponding increase in investments in bonds and other fixed income securities. In accordance with this strategy £15m of investments were switched from equities to bonds during February 2005. The appropriate transitional disclosures required under FRS17, the accounting standard on pensions, are made in the annual Report and Accounts of the company. These show that the company's pension position would under FRS17 be represented on the balance sheet as a deficit before tax of approximately £11.9m (2004 - £13.5m). After taking provisions already made within these accounts for pension liabilities, adoption of FRS17 would reduce net assets by approximately £6.7m. In connection with the proposed new financing and return to shareholders by the ultimate parent company, the company intends to make a one-off contribution to WCPS of £7m. It also intends to make additional contributions of £1m in each of the four years beginning 1 April 2006 and a further £0.9m in 2010/11. The amounts are in addition to the normal pension contributions required by the WCPS trustee. The additional contributions are conditional on the proposed £30m return to shareholders by the ultimate parent company being made. International Financial Reporting Standards The company stated in its financial statements for the year ended 31 March 2004 that it planned to adopt International Financial Reporting Standards (IFRS) for its financial statements for the year ended 31 March 2006. Following further guidance issued by the Department of Trade and Industry (DTI), as the company does not prepare consolidated accounts it will not be mandatory for the company to adopt IFRS. The company has decided at this stage not to adopt IFRS. The company will therefore continue to prepare its financial statements using UK GAAP accounting standards for the foreseeable future. The parent company, Bristol Water Group plc, which consolidates these accounts, will however adopt IFRS in its consolidated financial statements for the year ended 31 March 2006. A reconciliation to UK GAAP will be provided in those group financial statements. Monitoring the business A number of systems are used to monitor the financial and operational performance of the company including: • Monthly management accounts and budgetary control • Monthly key performance indicators • Ad hoc internal audits of business processes • Detailed Quality Assurance systems. Outlook Ofwat issued their Final Determination of price limits for the five year period 2005-10 in December 2004. After careful consideration the Board accepted the Determination. The price limits are expressed as K factors, which are the overall adjustments to tariffs before inflationary effects are taken into account. The limits are: Company business plan Final proposal Determination 2005/06 20% 13.8% 2006/07 6% 2.8% 2007/08 6% 1.5% 2008/09 0% 0.7% 2009/10 0% -2.3% The main reasons for these differences are: • A smaller capital expenditure programme of £117m compared to the £156m we proposed (2002/03 price base). This reflects the deletion of a number of schemes, mainly related to improvements to the security of supply for customers, together with more challenging efficiency assumptions. • An operating cost efficiency target of 2.5% compared to the 0.8% p.a. we proposed. • The Final Determination deals with a number of uncertainties through Ofwat's Notified Item process which could trigger interim price determinations within the period. In our business plan we had built a number of these uncertainties into the proposed K factors. Ofwat have set challenging efficiency targets, however the Board believes that it will be able to deliver the relevant service outputs within the targets set. Andy Nield Finance Director 26 May 2005 PROFIT AND LOSS ACCOUNT for the year ended 31 March 2005 2005 2004 Note £m £m Turnover 70.6 70.6 Operating costs (51.9) (50.9) Exceptional operating costs (2.0) - ------- ------- Total operating costs 2 (53.9) (50.9) ------- ------- Operating profit 16.7 19.7 Net interest payable and similar charges (6.6) (6.2) ------- ------- Profit on ordinary activities before taxation 10.1 13.5 Taxation on profit on ordinary activities 3 (1.3) (2.4) ------- ------- Profit on ordinary activities after taxation 8.8 11.1 Dividends: 4 On irredeemable preference shares (1.1) (1.1) On ordinary shares (8.1) (6.2) ------- ------- Total dividends (9.2) (7.3) ------- ------- Retained (loss)/profit for the financial year (0.4) 3.8 ------- ------- Earnings per ordinary share 5 128.1p 166.0p ------- ------- All of the turnover and operating costs relate to continuing operations. The company has no recognised gains or losses other than those included in the profit and loss account above and therefore no separate statement of total recognised gains and losses has been presented. There is no difference between the profit on ordinary activities before taxation and the retained (loss)/profit for the financial year stated above and their historical cost equivalents. BALANCE SHEET at 31 March 2005 2005 2004 Note £m £m Fixed assets Tangible fixed assets 6 195.6 193.8 ------- ------- Investment - Loan to ultimate holding company 47.0 47.0 ------- ------- Current assets Stocks 0.6 0.7 Debtors 18.5 19.6 Cash at bank and on deposit 12.0 17.4 ------- ------- 31.1 37.7 ------- ------- Creditors: Amounts falling due within one year Short term borrowings 7 (3.7) (6.9) Other creditors (24.3) (24.3) ------- ------- (28.0) (31.2) ------- ------- Net current assets 3.1 6.5 ------- ------- Total assets less current liabilities 245.7 247.3 Creditors: Amounts falling due after more than one year 7 (148.4) (150.8) Deferred income (8.6) (8.5) Provisions for liabilities and charges 8 (19.8) (18.7) ------- ------- Net assets 68.9 69.3 ------- ------- Capital and reserves Called up share capital 18.5 18.5 Share premium account 4.4 4.4 Other reserves 5.8 5.8 Profit and loss account 40.2 40.6 ------- ------- Total shareholders' funds 9 68.9 69.3 Analysed as: Equity shareholders' funds 56.4 56.8 Non-equity shareholders' funds 12.5 12.5 ------- ------- CASH FLOW STATEMENT for the year ended 31 March 2005 2005 2004 Note £m £m Net cash inflow from operating activities 10(a) 34.1 33.4 ------- ------- Returns on investments and servicing of finance Interest received 3.6 1.1 Interest paid on term loans and debentures (7.8) (5.9) Interest paid on finance leases (1.1) (1.2) Dividends paid on non-equity shares 4 (1.7) (1.1) Net costs of issue of new loans - (0.7) ------- ------- (7.0) (7.8) ------- ------- Taxation Corporation tax paid (1.9) (3.0) ------- ------- Capital expenditure and investing activities Purchase of tangible fixed assets (20.1) (28.0) Contributions received 3.7 3.4 Loan advanced to ultimate holding company - (47.0) ------- ------- (16.4) (71.6) ------- ------- Dividends paid on equity shares (7.3) (15.9) ------- ------- Cash inflow/(outflow) before management of liquid resources and financing 1.5 (64.9) Management of liquid resources being decrease/ (increase) in short term deposits 5.4 (9.4) ------- ------- Financing New term loans - 98.5 Capital element of lease repayments (1.6) (1.5) Loan repayments (5.3) (24.3) ------- ------- (6.9) 72.7 ------- ------- Increase/(decrease) in cash 10(b) - (1.6) Cash, beginning of year 1.6 3.2 ------- ------- Cash, end of year 1.6 1.6 ------- ------- NOTES TO THE ACCOUNTS 1. BASIS OF PREPARATION AND CIRCULATION These preliminary statements do not constitute the statutory accounts for the year ended 31 March 2005. The statutory accounts have been reported on by the auditors without qualification but have not yet been delivered to the Registrar of Companies. The comparative figures for 2004 have been extracted from the accounts of Bristol Water plc for the year ended 31 March 2004 upon which the auditors' report was unqualified and which have been delivered to the Registrar of Companies. The Annual Report and Accounts will be posted to shareholders on or before 24 June 2005. Copies will be available to the public from the registered office at PO Box 218, Bridgwater Road, Bristol BS99 7AU. The Annual General Meeting will be held at the Bristol Water plc Head Office, Bridgwater Road, Bristol, on Monday 18 July 2005 at 9.00 am. 2. OPERATING COSTS The directors believe that the nature of the company's business is such that the analysis of operating costs required by the Companies Act 1985 is not appropriate. As required by the Act the directors have therefore adapted the prescribed format so that disclosure of operating costs is appropriate to the company's principal business. Operating costs comprise - Operating Operating costs before Exceptional costs after exceptional operating exceptional items costs* items 2005 2005 2005 2004 £m £m £m £m Net payroll cost 10.9 1.8 12.7 9.5 Total other operating costs 26.4 0.2 26.6 26.5 Net depreciation 14.6 - 14.6 14.9 ---------- --------- --------- ------- Total operating costs 51.9 2.0 53.9 50.9 ---------- --------- --------- ------- *Exceptional operating cost - Restructuring Before the year end the Board instigated a restructuring programme to improve the operating efficiency of the company. This involves a number of redundancies, pension funding payments, asset write downs and incidental expenses. Accordingly the restructuring costs have been recognised in the profit and loss account for the year ended 31 March 2005. There were no exceptional operating costs in 2004. 3. TAXATION ON PROFIT ON ORDINARY ACTIVITIES 2005 2004 £m £m Analysis of charge for the year, all arising in the United Kingdom: Current tax Corporation tax at 30% (2004 - 30%) 1.0 3.0 Advance Corporation Tax written back (1.5) (0.7) Adjustment to prior periods 1.7 1.1 Receipts in respect of group relief 1.0 (0.4) ------- ------- 2.2 3.0 ------- ------- Deferred tax Current year movement 1.2 1.0 Adjustment to prior periods (1.8) (1.0) Effect of discounting (0.3) (0.6) ------- ------- (0.9) (0.6) ------- ------- ------- ------- Tax on profit on ordinary activities 1.3 2.4 ------- ------- The adjustment to prior periods primarily relates to the effect of the company reducing its capital allowance claim for the year ended 31 March 2003. This amendment enabled the company to write back Advance Corporation Tax (ACT) to be utilised against the resulting increased taxable profits. The ACT written back was not recognised as a deferred tax asset in the previous year. 4. DIVIDENDS 2005 2004 £m £m On non-equity shares - Irredeemable 8.75% preference shares - First half year dividend 0.5 0.5 Second half year dividend * 0.6 0.6 ------- ------- 1.1 1.1 ------- ------- On ordinary shares (equity shares) - Interim dividend paid of 47.15p (2004 - 29.10p) 2.8 1.7 Proposed final dividend of 88.0p (2004 - 74.27p) 5.3 4.5 ------- ------- 8.1 6.2 ------- ------- ------- ------- Total dividends paid and proposed 9.2 7.3 ------- ------- *Following a change in the working practices by the company's Registrars, the second half year preference dividend for 2004/05 was paid immediately prior to the year end instead of immediately after the year end. Consequently the cash flow statement includes the payment of three semi annual preference dividends this year. 5. EARNINGS PER ORDINARY SHARE 2005 2004 m m Earnings per ordinary share have been calculated as follows - On average number of ordinary shares in issue during the year - Earnings attributable to ordinary shares £7.7 £10.0 Weighted average number of ordinary shares 6.0 6.0 ------- ------- As the company has no obligation to issue further shares, disclosure of earnings per share on a fully diluted basis is not required. 6. TANGIBLE FIXED ASSETS 2005 2004 £m £m Net book value, beginning of year 193.8 184.7 Additions 20.3 28.0 Disposals 0.1 (0.3) Grants and contributions (3.7) (3.4) Depreciation (14.9) (15.2) ------- ------- Net book value, end of year 195.6 193.8 ------- ------- 7. NET BORROWINGS 2005 2004 £m £m Cash and short term deposits 12.0 17.4 Debt due within one year (3.7) (6.9) Debt due after one year (148.4) (150.8) ------- ------- Net borrowings (140.1) (140.3) ------- ------- 8. PROVISIONS FOR LIABILITIES AND CHARGES 2005 2004 £m £m Restructuring costs (see note 2) 2.0 - Deferred tax 17.8 18.7 ------- ------ 19.8 18.7 ------- ------ Provision for deferred tax comprises - 2005 2004 £m £m Accelerated capital allowances and capital element of finance leases 35.3 35.4 Deferred income (2.6) (2.5) Short term timing differences (1.0) (0.6) ------- ------- 31.7 32.3 Effect of discounting (13.9) (13.6) ------- ------- Net provision 17.8 18.7 ------- ------- 9. MOVEMENT IN SHAREHOLDERS' FUNDS 2005 2004 £m £m Beginning of year 69.3 65.5 Profit for year 8.8 11.1 Dividends (9.2) (7.3) ------- ------- End of year 68.9 69.3 ------- ------- 10. ADDITIONAL CASH FLOW INFORMATION (a) Reconciliation of operating profit to net cash inflow from operating activities - 2005 2004 £m £m Operating profit 16.7 19.7 Depreciation, net 14.6 14.9 ------ ------ Cash flow from operations 31.3 34.6 Working capital movements - Stocks 0.1 - Debtors 1.2 (2.4) Creditors 1.5 1.2 ------ ------ Net cash inflow from operating activities 34.1 33.4 ------ ------ (b) Reconciliation of net cash flow to movement in net borrowings - 2005 2004 £m £m Increase/(decrease) in net cash in year - (1.6) Cash used to repay borrowings 6.9 25.8 Cash from new borrowings - (98.5) Net costs of issue of loans - 0.7 Cash from (decrease)/increase in short term deposits (5.4) 9.4 ------- ------- Decrease/(increase) in net borrowings 1.5 (64.2) New debt not affecting cash flow (1.3) (1.3) Net borrowings at beginning of year (140.3) (74.8) ------- ------- Net borrowings at end of year (140.1) (140.3) ------- -------- 11. PENSIONS These accounts are prepared on a SSAP24 basis. An analysis of the company's pension assets and liabilities under FRS17 is set out below: 2005 2004 £m £m Market value of assets 98.2 89.9 Present value of liabilities (110.1) (103.4) ------- ------- Deficit (11.9) (13.5) Deferred taxation 3.6 4.1 ------- ------- Net pension liability under FRS17 (8.3) (9.4) ------- ------- This information is provided by RNS The company news service from the London Stock Exchange